diff --git a/raw/filings/0000008146/2014/0001193125-15-122389/filing.txt b/raw/filings/0000008146/2014/0001193125-15-122389/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..d7891ed048f9b35ea9bc577514be7878fef5ab73 --- /dev/null +++ b/raw/filings/0000008146/2014/0001193125-15-122389/filing.txt @@ -0,0 +1,3463 @@ +10-K +1 +d846754d10k.htm +10-K +10-K +Table of Contents +SECURITIES AND EXCHANGE +COMMISSION +Washington, D.C. 20549 +FORM 10-K +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31, 2015 +OR +¨ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +Commission file number 0-13200 +Astro-Med, +Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue, +West Warwick, Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: (401) 828-4000 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange +on which registered +None +None +Securities registered pursuant to Section 12(g) of the Act: +Common Stock, $.05 Par Value +(Title of Class) +Indicate by check mark if the registrant is a well-known +seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the +Act. Yes ¨ No x +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the +Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes x No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive +Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such +files). Yes x No ¨ +Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not +be contained, to the best of the registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x +Indicate by check mark whether the registrant is a large accelerated filer, an +accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ¨ +Accelerated filer ¨ +Non-accelerated filer ¨ +Smaller reporting company x +(Do not check if a smaller reporting company) +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange +Act): Yes ¨ No x +The aggregate market value of the registrant’s voting common equity held by non-affiliates at August 1, 2014 was approximately +$68,077,000 based on the closing price on the Nasdaq Global Market on that date. +As of March 27, 2015 there were 7,266,134 +shares of Common Stock (par value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2015 Annual Meeting of Shareholders are incorporated by +reference into Part III of this Annual Report on Form 10-K where indicated. +Table of Contents +ASTRO-MED, INC. +FORM 10-K ANNUAL REPORT +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3-6 +Item 1A. +Risk Factors +6-11 +Item 1B. +Unresolved Staff Comments +11 +Item 2. +Properties +12 +Item 3. +Legal Proceedings +12 +Item 4. +Mine Safety Disclosures +12 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +13-15 +Item 6. +Selected Financial Data +15 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of +Operations +15-22 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +22 +Item 8. +Financial Statements and Supplementary Data +23 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +23 +Item 9A. +Controls and Procedures +23 +Item 9B. +Other Information +23 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +24-25 +Item 11. +Executive Compensation +25 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholders +Matters +25-26 +Item 13. +Certain Relationships, Related Transactions and Director Independence +26 +Item 14. +Principal Accountant Fees and Services +26 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +27 +2 +Table of Contents +ASTRO-MED, INC. +Forward-Looking Statements +Information included in this Annual Report on +Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning +future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” “may,” “will,” and +similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our +actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in this Annual +Report on Form 10-K under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is cautioned not to +unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K. +PART I +Item 1. Business +General +Unless otherwise indicated, references to “Astro-Med,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to Astro-Med, Inc. +and its consolidated subsidiaries. +Astro-Med designs, develops, manufactures and distributes a broad range of specialty +printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies in order to acquire, store, analyze, and present data in multiple formats. Target markets for hardware and software +products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation. +The Company’s products are distributed through its own sales force and authorized dealers in the United States. We sell to customers +outside of the United States primarily through our branch offices in Canada and Europe as well as with independent dealers and representatives. Approximately 30% of the Company’s sales in fiscal 2015 were to customers located outside the United +States. +Astro-Med operates its business through two operating segments, QuickLabel Systems (QuickLabel) and Astro-Med +Test & Measurement (T&M). Financial information by business segment and geographic area appears in Note 13 to the consolidated financial statements of this Annual Report on Form 10-K. +On January 22, 2014, Astro-Med completed the acquisition of the ruggedized printer product line from Miltope Corporation, +a company of VT Systems (“Miltope”). Astro-Med’s ruggedized printer product line is reported as part of the Test & Measurement (T&M) segment. The results of the Miltope’s ruggedized printer product line +operations have been included in the consolidated financial statements of the Company since the acquisition date. Refer to Note 2, “Acquisition,” for further details. +On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies Product Group (Grass) in order to focus on its core businesses. Grass manufactured +polysomnography and electroenecephalography systems for both clinical and research use along with the related accessories and proprietary electrodes. Consequently, the Company has classified the results of operations of Grass as discontinued +operations for the fiscal 2014 period presented. Refer to Note 20, “Discontinued Operations,” in the consolidated financial statements for a further discussion. +3 +Table of Contents +The following description of our business should be read in conjunction with +“Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 15 through 22 of this Annual Report on Form 10-K. +Description of Business +Product Overview +Astro-Med leverages its expertise in data visualization technologies to design, manufacture, and market specialty +printing systems, test and measurement systems and related services for select growing markets on a global basis. The business consists of two segments, specialty printing systems and test and measurement systems, sold under the brand names +QuickLabel ® Systems (QuickLabel ® ) and Astro-Med ® +Test & Measurement (T&M). +Products sold under the QuickLabel ® brand are used in industrial and commercial product packaging and automatic identification applications to digitally +print custom labels and other visual identification marks on demand. Products sold under the Astro-Med T&M brand acquire and record visual and electronic signal data from local and networked sensors. The recorded data is processed and analyzed +and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide high-resolution ruggedized airborne printers. +Products sold under the QuickLabel brand include digital color label printers and specialty OEM printing systems as well as a full line of +consumables including labels, tags, ink, toner, and thermal transfer ribbon. In addition, QuickLabel Systems sells special software used to design labels and other identification marks for a wide variety of applications especially in the field of +packaging. QuickLabel provides training and support on a worldwide basis via highly trained service technicians. +In the color +label market, QuickLabel Systems offers a broad range of entry-level, mid-range, and high-performance digital label printers, providing customers a continuous path to upgrade to new labeling products. QuickLabel products are primarily sold to +manufacturers, processors, and retailers who label products on a short-run basis. Users can benefit from the time and cost-savings of digitally printing their own labels on-demand. Industries that commonly benefit from short-run label printing +include apparel, chemicals, cosmetics, food and beverage, medical products, and pharmaceuticals, among many other packaged goods. +Current QuickLabel models include the Kiaro! family of high-speed inkjet color label printers; the Vivo! Touch, an electrophotographic color label printer; and the QLS-4100 Xe color thermal transfer label +printer. QuickLabel also sells and supports its Pronto! family of barcode printers which utilize single color-thermal transfer label printing technology as well as an array of custom designed OEM printers. +Products sold under the Astro-Med T&M brand acquire and record visual and electronic signal data from local and networked sensors. The +recorded data is processed and analyzed and then stored and presented in various visual output formats. The Company supplies a range of products and services that include hardware, software and consumables to customers who are in a variety of +industries. +Astro-Med Test & Measurement products include the DMX 8000 portable data acquisition +system, TMX ™ high-speed data acquisition system, Dash ® 8HF-HS data recorders, +Everest ® telemetry recorders, ToughWriter ® and Miltope-brand narrow and wide format airborne printers and ToughSwitch ® ruggedized Ethernet switches. +Astro-Med’s airborne printers are used in the flight deck and in the cabin of military and commercial aircraft to print hard copies +of airport approach plates, flight itineraries, weather maps, connecting gate information, and ground communications. ToughSwitch Ethernet switches are used in military aircraft and military vehicles to connect multiple computers or Ethernet +devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flightworthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter +airborme printers for numerous aircraft made by Airbus, Boeing, Bombardier, Lockheed and others. +4 +Table of Contents +The Company’s family of portable data recorders is used in R&D +and maintenance applications in aerospace and defense, energy discovery and production operations, automotive R&D centers, and a variety of other industrial applications. The TMX ™ data acquisition system is designed for data capture of long-term testing in aerospace, automotive, and other industrial applications where the ability to monitor +high channel counts, and accept and view a wide variety of input signals, including time-stamped and synchronized video capture data and audio notation, is important. +Everest telemetry recorders are used widely in the aerospace industry to monitor and track space vehicles, aircraft, missiles and other systems in flight. +Technology +The core +technologies of Astro-Med relate to (1) acquiring data, (2) conditioning the data, (3) displaying the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. +Patents and Copyrights +Astro-Med holds a number of product patents in the United States and in foreign countries. The Company copyrights its software and +registers its brand trademarks. While we consider our patents to be important to the operation of our business, we do not believe that any existing patent, license, trademark or other intellectual property right is of such importance that its loss +or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +Astro-Med manufactures most of the products that it designs and sells. Raw materials and supplies are typically available +from a wide variety of sources. Astro-Med manufactures most of the sub-assemblies and parts in-house including printed circuit board assemblies, harnesses, machined parts, and general final assembly. Many parts are standard electronic items +available from multiple sources. Others are parts designed by us but are manufactured by outside vendors. There are a few parts that are sole source, but these parts could be sourced elsewhere with appropriate changes in the design of our product. +Product Development +Astro-Med maintains an active program of product research and development. During fiscal 2015 and 2014, we spent $5,802,000 and $5,072,000, respectively, on Company-sponsored product development. We are +committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2016 and beyond. +Marketing and Competition +The Company competes worldwide in multiple +markets. In the specialty printing field, we believe we lead the world in bench-top color label printing technology and in aerospace printers. In the data acquisition area, we believe that we are one of the leaders in portable high speed data +acquisition systems. +We retain a leadership position by virtue of proprietary technology, product reputation, delivery, +technical assistance, and service to customers. The number of competitors varies by product line. Our management believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our product +lines, but include technology, quality, service and support, distribution network, and breadth of product and service offerings. +Our products are sold by direct field salespersons as well as independent dealers and representatives. In the United States, the Company +has factory-trained direct field salespeople located in major cities from coast to coast +5 +Table of Contents +specializing in either QuickLabel or Astro-Med T&M products. Additionally, we have direct field sales or service centers in Canada, France, Germany, Mexico, Southeast Asia and the United +Kingdom staffed by our own employees. In the rest of the world, Astro-Med utilizes approximately 90 independent dealers and representatives selling and marketing our products in 60 countries. +No single customer accounted for 10% or more of our net sales in either of the last two fiscal years. +International Sales +In +fiscal 2015 and 2014, net sales to customers in various geographic areas outside the United States, primarily in Canada and Western Europe, amounted to $26,853,000 and $19,913,000, respectively. +Order Backlog +Astro-Med’s backlog fluctuates regularly. It consists of a blend of orders for end user customers as well as original equipment +manufacturer customers. Manufacturing is geared to forecasted demands and applies a rapid turn cycle to meet customer expectations. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2015 and +2014 was $12,061,000 and $14,013,000, respectively. +Employees +As of January 31, 2015, Astro-Med employed 340 people. We are generally able to satisfy our employment requirements. No employees are represented by a union. We believe that employee relations are +good. +Other Information +The Company’s business is not seasonal in nature. However, our sales are impacted by the size of certain individual transactions, which can cause fluctuations in sales from quarter to quarter. +Available Information +We make available on our website (www.astro-medinc.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, +amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the +Securities Exchange Commission (SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. +Item 1A. Risk Factors +The following risk factors should be carefully considered in +evaluating Astro-Med because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those +projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +Astro-Med’s operating results and financial condition could be harmed if the markets into which we sell our product decline or do not grow as +anticipated. +Any decline in our customers’ markets or in their general economic conditions would likely result in +a reduction in demand for our products. For example, although we have continued to experience measured progress in fiscal 2015 and 2014, as sales have increased from prior years, we are still affected by the continued global economic uncertainty as +some of our customers remain reluctant to make capital equipment purchases and are limiting consumable product purchases to quantities necessary to satisfy immediate needs with no provisions +6 +Table of Contents +to stock supplies for future use. Also, if our customers’ markets decline, we may not be able to collect on outstanding amounts due to us. Such declines could harm our results of operations, +financial position and cash flows and could limit our ability to continue to remain profitable. +Astro-Med’s future revenue growth +depends on our ability to develop and introduce new products and services on a timely basis and achieve market acceptance of these new products and services. +The markets for our products are characterized by rapidly changing technologies and accelerating product introduction cycles. Our future success depends largely upon our ability to address the rapidly +changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The success +of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate our competitors’ development of new products, and maintain high levels of +product quality and reliability. Astro-Med spends a significant amount of time and effort related to the development of our airborne and color printer products as well as our Test and Measurement data recorder products. Failure to further develop +any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results. +As Astro-Med introduces new or enhanced products, we must also successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of +older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of our existing products, or replace sales of some of our current products, +thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. Additionally, when we introduce new or enhanced products, we face numerous +risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type +or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or Astro-Med’s plans for future support of existing products may cause customers to delay purchase decisions or purchase competing +products which would adversely affect our business and operating results. +Astro-Med faces significant competition and our failure to +compete successfully could adversely affect our results of operations and financial condition. +While we do maintain a +dominant position in our markets, we operate in an environment of significant competition, driven by rapid technological advances, evolving industry standards, frequent new product introductions and the demands of customers to become more efficient. +Our competitors range from large international companies to relatively small firms. We compete on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future +performance is largely dependent upon our ability to compete successfully in the markets we currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products with +features that could adversely affect the competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, +we could lose market share and important customers to our competitors which could materially adversely affect our business, results of operations and financial position. +Astro-Med is dependent upon contract manufacturers for some of our products. If these manufacturers do not meet our requirements, either in volume or quality, then we could be materially +harmed. +We subcontract the manufacturing and assembly of certain of our products to an independent third party at +facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Loss of control over the manufacturing process; +7 +Table of Contents +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; and +• +Reduced control over delivery schedules, manufacturing yields, quality and costs. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture these products in required volumes or +fails to meet our quality standards, we will have to identify qualified alternate subcontractors or we will have to take over the manufacturing ourselves in as much as we own the designs, drawings, and bills of material for all our products. +Additional qualified subcontractors may not be available, or may not be available on a timely or cost competitive basis. Any interruption in the supply or increase in the cost of the products manufactured by third party subcontractors or failure of +a subcontractor to meet quality standards could have a material adverse effect on our business, operating results and financial condition. +For certain components and assembled products, Astro-Med is dependent upon single or limited source suppliers. If these suppliers do not meet +demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components +for our products where possible, we purchase certain components and assembled products used in the manufacture of our products from single source or limited supplier sources. If the supply of a key component or assembled products were to be delayed +or curtailed or, in the event a key manufacturing or sole vendor delays shipment of such components or assembled products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. Our business, results +of operations and financial position could also be adversely affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative +source. Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply these components or assembled products in required volumes, we will have to identify and qualify acceptable replacements or +redesign our products with different components. Alternative sources may not be available, or product redesign may not be feasible on a timely basis. Any interruption in the supply of or increase in the cost of the components and assembled products +provided by single or limited source suppliers could have a material adverse effect on our business, operating results and financial condition. +Compliance with rules governing “conflict minerals” could adversely affect the availability of certain product components and our costs +and results of operations could be materially harmed. +Beginning in 2014, SEC rules require new disclosures regarding +the use of “conflict minerals” mined from the Democratic Republic of the Congo and adjoining countries necessary to the functionality or production of products manufactured or contracted to be manufactured. There are costs associated with +complying with these disclosure requirements, including performing due diligence in regards to the source of any conflict minerals used in our products, in addition to the cost of remediation or other changes to products, processes or services of +supplies that may be necessary as a consequence of such verification activities. As we use contract manufacturers for some of our products, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through +the due diligence procedures that we implement. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if +we are unable to do so. As a result, our business, operating results and financial condition could be harmed. +Economic, political and +other risks associated with international sales and operations could adversely affect Astro-Med’s results of operations and financial position. +Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect +sales to customers +8 +Table of Contents +outside the U.S. accounted for approximately 30% of our total revenue for fiscal year 2015 and we anticipate that international sales will continue to account for a significant portion of our +revenue. In addition, we have employees, suppliers, job functions and facilities located outside the U.S. Accordingly, our future results could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Changes in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Differing protection of intellectual property; +• +Unexpected changes in regulatory requirements; and +• +Geopolitical turmoil, including terrorism and war. +Astro-Med’s profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure. +Our success depends on our ability to obtain adequate pricing for our products and services which provides a reasonable return to our +shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to +offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially +adversely affected. +We are continually reviewing our operations with a view towards reducing our cost structure, including but +not limited to downsizing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions. From time to time we also engage in restructuring actions to reduce our cost structure. If we +are unable to maintain process and systems changes resulting from cost reduction and prior restructuring actions, our results of operations and financial position could be materially adversely affected. +Astro-Med could incur liabilities as a result of installed product failures due to design or manufacturing defects. +Astro-Med could incur liabilities as a result of installed product failures due to design or manufacturing defects. Our products may have +defects despite testing internally or by current or potential customers. These defects could result in among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance or substantial +damage to our reputation. We could be subject to material claims by customers, and may need to incur substantial expenses to correct any product defects. +In addition, through our acquisitions, we have assumed, and may in the future assume, liabilities related to products previously developed by an acquired company that have not been through the same level +of product +9 +Table of Contents +development, testing and quality control processes used by us, and may have known or undetected errors. Some types of errors may not be detected until the product is installed in a user +environment. This may cause Astro-Med to incur significant warranty and repair or re-engineering costs, may divert the attention of engineering personnel from product development efforts, and may cause significant customer relations problems such as +reputational problems with customers resulting in increased costs and lower profitability. +Astro-Med could experience disruptions in, +or breach in security of our information technology system or fail to implement new systems or software successfully which could harm our business and adversely affect our results of operations. +Astro-Med employs information technology systems to support our business. During the fourth quarter of fiscal 2015, Astro-Med completed +the upgrade of its Enterprise Resource Planning (ERP) system to the Oracle JD Edwards EnterpriseOne platform. This new system went live in March 2015 for all of our U.S. operations. Any security breaches or other disruptions to our information +technology infrastructure could interfere with operations, compromise our information and that of our customers and suppliers, and expose us to liability which could adversely impact our business and reputation. In the ordinary course of business, +we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. We also collect and +store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. While we continually work to +safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches and our information technology networks and infrastructure may still be vulnerable to +damage, disruptions or shutdowns due to attack by hackers or breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events or other unforeseen events. While +we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of them to date has had a material impact. Any such events could result in legal claims or proceedings, +liability or penalties under privacy laws, disruption in operations, and damage to the Company’s reputation, which could adversely affect our business, operating results and financial condition. +Astro-Med is subject to laws and regulations; failure to address or comply with these laws and regulations could harm our business and adversely +affect our results of operations. +Our operations are subject to laws, rules, regulations, including environmental +regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the +demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our products. If we do not comply with +applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +Adverse +conditions in the global banking industry and credit markets may adversely impact the value of our investments or impair our liquidity. +At the end of fiscal 2015, we had approximately $23 million of cash, cash equivalents and investments held for sale. Our cash and cash equivalents are held in a mix of money market funds and bank demand +deposit accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterpart financial institutions +or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our financial position. Our investment portfolio consists of state and municipal securities with various maturity dates, all of which have a +credit rating of AA or above at the original purchase date; however, defaults by the issuers of any of these securities may result in an adverse impact on our portfolio. +10 +Table of Contents +Astro-Med may not realize the anticipated benefits of past or future acquisitions, divestitures and +strategic partnerships, and integration of acquired companies or divestiture of businesses may negatively impact Astro-Med’s overall business. +Astro-Med has acquired or made strategic investments in other companies, products and technologies, including our acquisition in January 2014 of the ruggedized printer product line from Miltope. We may +continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that we will be able to identify suitable acquisition opportunities. In +any acquisition that we complete we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets will not have a negative effect on operating results or other aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental effect on our business, operating results and financial +condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse effect on our reputation; and +• +Respective operations, management and personnel will be compatible. +In certain instances as permitted by applicable law and NASDAQ rules, acquisitions may be consummated without seeking and obtaining +shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in a particular acquisition, there can be no +assurance that we will properly ascertain or assess such risks. +Astro-Med may also divest certain businesses from time to +time. Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture +depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. +Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If Astro-Med is not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize expected benefits of our acquisitions, +divestitures or strategic partnerships, Astro-Med’s business, results of operations and financial condition could be adversely affected. +Item 1B. Unresolved Staff Comments +None +11 +Table of Contents +Item 2. Properties +The following table sets forth information regarding the Company’s principal owned properties, all of which are included in the +consolidated balance sheet appearing elsewhere in this report. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, USA +135,500 +Corporate headquarters, research and development, manufacturing, sales and service +*Rockland, Massachusetts, USA +36,000 +Manufacturing +Slough, England +1,700 +Sales and service +* +This facility is currently classified as “held for sale” in the Company’s consolidated balance sheet included in this report. +Astro-Med also leases facilities in various other locations. The following information pertains to each location: +Location +Approximate +Square +Footage +Principal Use +Rodgau, Germany +8,300 +Manufacturing, sales and service +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service +Elancourt, France +4,144 +Sales and service +Schaumburg, Illinois, USA +630 +Sales +Wilmington, Delaware, USA +498 +Sales +El Dorado Hills, California, USA +273 +Sales +Newport Beach, California, USA +151 +Sales +Monterrey, Mexico +97 +Sales +We believe our facilities are well maintained, in good operating condition and generally adequate to meet +our needs for the foreseeable future. +Item 3. Legal Proceedings +There are no pending or threatened legal proceedings against the Company believed to be material to the financial position or results of +operations of the Company. +Item 4. Mine Safety Disclosures +Not applicable. +12 +Table of Contents +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +Astro-Med’s common stock trades on The NASDAQ Global Market under the symbol “ALOT.” The following table sets forth the +range of high and low closing prices and dividend data, as furnished by NASDAQ, for the years ended January 31: +High +Low +Dividends +Per Share +2015 +First Quarter +$ +14.30 +$ +11.41 +$ +0.07 +Second Quarter +$ +14.35 +$ +12.59 +$ +0.07 +Third Quarter +$ +13.85 +$ +12.14 +$ +0.07 +Fourth Quarter +$ +16.50 +$ +13.24 +$ +0.07 +2014 +First Quarter +$ +10.75 +$ +9.24 +$ +0.07 +Second Quarter +$ +11.47 +$ +10.24 +$ +0.07 +Third Quarter +$ +12.75 +$ +10.64 +$ +0.07 +Fourth Quarter +$ +14.02 +$ +12.60 +$ +0.07 +Astro-Med had approximately 285 shareholders of record as of March 27, 2015, which does not reflect +shareholders with beneficial ownership in shares held in nominee name. +13 +Table of Contents +Stock Performance Graph +The graph below shows a comparison of the cumulative total return on the Company’s common stock against the cumulative total returns for the NASDAQ Composite Total Return Index and the NASDAQ +Electronic and Equipment Index for the period of five fiscal years ended January 31, 2015 as prepared by the NASDAQ OMX Global Index Group and provided by NASDAQ. The NASDAQ Total Return Composite Index is calculated using all companies trading +on the NASDAQ Global Select, NASDAQ Global Market and the NASDAQ Capital Markets. The Index is weighted by the current shares outstanding and assumes dividends reinvested. The NASDAQ Electronic and Equipment Index, designated as the Company’s +peer group index, is comprised of companies classified as electronic equipment manufacturers. +Cumulative Total Returns* +2010 +2011 +2012 +2013 +2014 +2015 +Astro-Med, Inc. +$ +100.00 +$ +103.86 +$ +119.60 +$ +153.44 +$ +216.43 +$ +240.73 +NASDAQ Electronic and Equipment Index +$ +100.00 +$ +146.37 +$ +138.74 +$ +145.42 +$ +193.82 +$ +203.35 +NASDAQ Composite Total Return Index +$ +100.00 +$ +126.93 +$ +133.60 +$ +151.14 +$ +200.01 +$ +228.60 +* +Assumes $100 invested on February 1, 2010 with reinvestment of dividends +Dividend Policy +Astro-Med began a program of paying quarterly cash +dividends in fiscal 1992 and has paid a dividend for 94 consecutive quarters. During fiscal 2015, we paid a quarterly dividend of $0.07 per share and anticipate that we will continue to pay comparable cash dividends on a quarterly basis. +Stock Repurchases +Pursuant to an authorization approved by Astro-Med’s Board of Directors in August 2011, the Company is currently authorized to +repurchase up to 390,000 shares of common stock. This is an ongoing authorization without any expiration date. +14 +Table of Contents +During the fourth quarter of fiscal 2015, the Company made the following repurchases of its +common stock: +Total Number +of Shares +Repurchased +Average +Price paid +Per Share +Total Number of +Shares Purchased as +Part of +Publicly +Announced Plans or +Programs +Maximum Number +of Shares That +May Be +Purchased +Under The +Plans +or Programs +November 2 – November 29 +— +— +— +390,000 +November 30 – December 27 +500,000 +(a) +$ +12.50 +(a) +— +390,000 +December 28 – January 31 +16,718 +(b) +$ +14.96 +(b) +— +390,000 +(a) +On December 5, 2014, the Company repurchased 500,000 shares of the Company’s common stock from the Estate of Albert W. Ondis at a price of $12.50 per share, +for an aggregate purchase price of $6,250,000. Prior to entering into this Stock Purchase Agreement, the Company obtained an opinion from an independent investment banking firm as to the fairness of the consideration paid to the Company’s +public shareholders, other than the selling shareholders. This transaction did not impact the number of shares authorized for repurchase under the Company’s current repurchase program. +(b) +During January 2015, employees of the Company delivered 16,718 shares of the Company’s common stock to satisfy the exercise price for 26,562 stock options +exercised. The shares delivered were valued at an average market value of $14.96 per share and are included with treasury stock in the consolidated balance sheet. This transaction did not impact the number of shares authorized for repurchase under +the Company’s current repurchase program. +Item 6. Selected Financial +Data +We are a “smaller reporting company” and, as such, are not required to provide this information. +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Overview +Astro-Med is a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, +store, analyze and present data in multiple formats. The Company organizes its structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. It markets and sells its products and +services through the following two sales product groups: +• +QuickLabel Systems Product Group (QuickLabel)—offers product identification and label printer hardware, software, servicing contracts, and +consumable products. +• +Test and Measurement Product Group (T&M)—offers a suite of products and services that acquire and record visual and electronic signal data +from local and networked sensors as well as wired and wireless networks. The recorded data is processed and analyzed and then stored and presented in various visual output formats. T&M products are offered in both fixed installation and portable +versions. The Company supplies a range of products and services that include hardware, software and consumables to customers who are in a variety of industries, including aerospace, automotive, defense, rail, energy, industrial, and general +manufacturing. +On January 31, 2013, the Company completed the sale of substantially all of the assets +of its Grass Technologies Product Group (Grass) in order to focus on its core businesses. Consequently, the Company has classified the results of operations of its Grass segment as discontinued operations for the fiscal 2014 period presented. +On January 22, 2014, Astro-Med completed the acquisition of the ruggedized printer product line from Miltope Corporation +(Miltope), which is engaged in the design, development, manufacture and testing of ruggedized computers and computer peripheral equipment for military, industry and commercial applications. +15 +Table of Contents +Astro-Med’s ruggedized printer product line is part of the T&M product group and is reported as part of the T&M segment. The results of Miltope’s ruggedized printer product line +operations have been included in the consolidated financial statements of the Company since the January 22, 2014 acquisition date. Miltope sales for the year ended January 31, 2015 and for the period from January 22, 2014 to January 31, 2014 +were approximately $8.3 million and $0.2 million, respectively. +Astro-Med markets and sells its products and services globally +through a diverse distribution structure of direct sales personnel, manufacturer’s representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. +Our growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as +strategic acquisitions that fit into existing core businesses. Research and development activities were funded and expensed by the Company at approximately 6.6% of annual sales for fiscal 2015. We also continue to invest in sales and marketing +initiatives by expanding the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding today’s challenging economic environment. +Results of Operations +The following table presents the net sales of each of the Company’s segments, as well as the percentage of total sales and change +from prior year. +($ in thousands) +2015 +2014 +Net +Sales +As a % of +Total Net Sales +% Change +Over Prior Year +Net +Sales +As a % of +Total Net Sales +QuickLabel +$ +59,779 +67.7 +% +21.8 +% +$ +49,065 +71.5 +% +T&M +28,568 +32.3 +% +46.3 +% +19,527 +28.5 +% +Total +$ +88,347 +100.0 +% +28.8 +% +$ +68,592 +100.0 +% +Fiscal 2015 compared to Fiscal 2014 +Astro-Med’s sales in fiscal 2015 were $88,347,000, a 28.8% increase as compared to prior year sales of $68,592,000. Domestic sales of $61,494,000 increased 26.3% from the prior year sales of +$48,679,000. International sales of $26,853,000 reflects a 34.9% increase as compared to prior year sales of $19,913,000. The current year’s international sales include an unfavorable foreign exchange rate impact of $375,000. +Hardware sales in fiscal 2015 were $38,685,000, a 36.7% increase as compared to prior year’s sales of $28,301,000. Both product +segments achieved double-digit growth in the current year, with QuickLabel’s hardware sales at $14,109,000, a 33.4% increase from prior year and T&M’s hardware sales of $24,576,000, a 38.7% increase compared to the prior year. The +primary drivers of this increase relate to increases in sales of T&M’s Ruggedized and TMX product lines and increases in sales from QuickLabel’s Kiaro! product line. +Consumable sales in fiscal 2015 were $43,568,000, representing a 20.0% increase as compared to prior year sales of $36,317,000. The key +driver of the overall increase in consumable sales for the current fiscal year was primarily traceable to the double-digit increase in both digital color printer supplies and label and tag product sales in the QuickLabel segment. The increase in +consumable product sales for the current year for T&M’s chart paper and QuickLabel’s thermal transfer ribbon products also made a contribution to the overall increase in consumable sales for the current year. +Service and other sales revenue in fiscal 2015 were $6,094,000, a 53.3% increase compared to prior year sales of $3,974,000 and was +primarily due to increases in service and parts revenue related to the newly integrated Miltope business. +16 +Table of Contents +The Company achieved $36,977,000 in gross profit for fiscal 2015 and generated a gross +profit margin of 41.9%, an increase as compared to prior year’s gross profit of $26,983,000 and related margin of 39.3%. The increase in gross profit margin for the current year is due to higher sales, lower manufacturing costs, favorable +product mix, as well as the Company’s lean manufacturing incentives. The prior year’s gross profit includes a charge of $672,000 for product replacement program costs related to a reserve established to address a non-compliant component +used in certain models of T&M’s ToughWriter printers. +Operating expenses for the current year were $29,746,000, +representing a 16.9% increase from prior year’s operating expenses of $25,450,000. Specifically, selling and marketing expenses increased 23.8% from prior year to $18,289,000 in fiscal 2015, representing 20.7% of sales, a decrease as compared +to the prior year’s 21.5% of sales. The increase in selling and marketing was primarily the result of increases in personnel costs and related benefit and commission costs, as well as increases in targeted marketing and trade show expenditures. +General and administrative (G&A) expenses increased less than one percent from prior year to $5,655,000 in fiscal 2015. The nominally higher G&A expense in the current year as compared to the prior year was primarily due to the fee for the +fairness opinion obtained in connection with the stock repurchase from the Ondis Estate. Funding of research & development (R&D) in fiscal 2015 has increased 14.4% to $5,802,000. The increase in R&D for fiscal 2015 is primarily due +to increased spending related to outside R&D design and testing for the portable data acquisition systems, as well as for certain ruggedized printers. Although R&D spending increased in the current year, the R&D spending level for fiscal +2015 represents 6.6% of net sales, a decrease as compared to prior year’s level of 7.4%. +Other expense in fiscal 2015 was +$299,000 as compared to $121,000 in fiscal 2014. This increase for the current year is primarily the result of a $251,000 write-down on the disposition of certain inventory related to the conclusion and settlement of the Transition Service Agreement +with the acquiror of Grass and a $220,000 write-down to estimated market value of the Company’s Rockland facility which is classified as an “asset held for sale” in the Company’s consolidated balance sheets for all periods +presented. +Astro-Med’s fiscal 2015 pretax income was reduced by approximately $511,000 related to stock-based +compensation expense as compared to fiscal 2014 pretax income, which was reduced by approximately $562,000 in stock-based compensation expense. +During fiscal 2015, the Company recognized income tax expense on income from continuing operations of $2,270,000 and had an effective tax rate of 32.7%. The effective tax rate was primarily impacted by +the domestic production deduction, research and development credits and foreign tax credits. This compares to an income tax expense on income from continuing operations of $175,000 in fiscal 2014 and related effective tax rate of 12.4%. Included in +the prior year income tax expense is a benefit of $500,000 related to a ASC 740 adjustment as well as foreign and state rate adjustments. +Income from continuing operations for fiscal 2015 was $4,662,000, providing a return of 5.3% on sales and generating an EPS of $0.60 per diluted share and includes an after-tax expense of $147,000, equal +to $0.02 per diluted share, related to the write-down to market value of the Company’s Rockland facility and an after-tax expense of $68,000, equal to $0.01 per diluted share, related to costs associated with the repurchase of the +Company’s common stock from the Ondis Estate. On a comparable basis, income from continuing operations for fiscal 2014 was $1,237,000, providing a return of 1.8% on sales and generating an EPS of $0.16 per diluted share and includes: +(1) an after-tax expense of $359,000, equal to $0.05 per diluted share, related to a non-compete agreement entered into with the Company’s former CEO, (2) a net after-tax expense of $205,000, equal to $0.03 per diluted share, related +to product replacement costs recognized in fiscal 2014 pertaining to replacing components on certain of T&M’s ruggedized printers after the Company discovered that one of its suppliers was using a non-conforming part in certain models and +(3) an after-tax expense of $59,000 or $0.01 per diluted share, related Miltope acquisition expenses. +Discontinued Operation +On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies +Product Group (Grass) for a selling price of $18,600,000 of which $1,800,000, held in escrow at +17 +Table of Contents +the closing date, was recognized in fiscal 2014 as part of the gain on the sale of Grass and was received in fiscal 2015. The Company has classified the results of operations of its Grass segment +as discontinued operations for the fiscal 2014 period presented. +Results for discontinued operations are as follows: +($ in thousands) +2014 +Net Sales +$ +8,401 +Gross Profit +$ +1,048 +Gain on Sale of Assets of Discontinued Operations +$ +1,800 +Income from Discontinued Operations, Net of Taxes +$ +1,975 +Segment Analysis +Astro-Med reports two segments consistent with its sales product groups: and QuickLabel Systems (QuickLabel) and Test & Measurement (T&M). Segment performance is evaluated based on the +operating segment’s profit before corporate and financial administration expenses. +The following table summarizes +selected financial information by segment. As previously noted, the Company’s Grass segment has been classified as a discontinued operation for the fiscal 2014 period presented. +($ in thousands) +Net Sales +Segment Operating Profit +Segment Operating Profit as +a % of Net Sales +2015 +2014 +2015 +2014 +2015 +2014 +QuickLabel +$ +59,779 +$ +49,065 +$ +7,259 +$ +5,154 +12.1 +% +10.5 +% +T&M +28,568 +19,527 +5,627 +2,655 +19.7 +% +13.6 +% +Total +$ +88,347 +$ +68,592 +12,886 +7,809 +14.6 +% +11.4 +% +Product Replacement Related Costs +— +672 +Corporate Expenses +5,655 +5,604 +Operating Income +7,231 +1,533 +Other Expense, Net +299 +121 +Income from Continuing Operations Before Income Taxes +6,932 +1,412 +Income Tax Provision for Continuing Operations +2,270 +175 +Income from Continuing Operations +4,662 +1,237 +Income from Discontinued Operations, Net of Taxes +— +1,975 +Net Income +$ +4,662 +$ +3,212 +QuickLabel Systems +QuickLabel Systems sales increased 21.8% in fiscal 2015 with sales of $59,779,000 compared to sales of $49,065,000 in the prior year. Both the hardware and consumables product lines contributed to the +current year increase with sales growth of 33.4% and 18.8%, respectively, from the prior year. The increases are primarily attributable to the increased demand for digital color printer supplies, as well as for label and tag and thermal transfer +ribbon products. Also significantly contributing to the current year increase was the new Kario! product line sales, which increased approximately 60.0% as compared to the prior year. QuickLabel’s current year’s segment operating profit +was $7,259,000, reflecting a profit margin of 12.1%, an increase from prior year’s segment profit of $5,154,000 and related profit margin of 10.5%. The increase in QuickLabel’s current year’s segment operating profit and related +margin is primarily due to higher sales and favorable product mix. +18 +Table of Contents +Test & Measurement +T&M’s sales increased 46.3% in fiscal 2015 to $28,568,000 from $19,527,000 in the prior year. The increase is primarily due to +the 45.5% growth in the Ruggedized printer product line related to the acquisition of the Miltope business as well as the continued increase in contract sales. Also contributing to the increase in sales was the continued increase in demand for the +high speed data recorder product line, as current year sales grew 24.5% as compared to the prior year. Repair and parts revenue was also up with contributions from the newly integrated Miltope business. T&M’s segment operating profit was +$5,627,000 in fiscal 2015, reflecting a profit margin of 19.7%, an increase as compared to the prior year’s segment operating profit of $2,655,000 and related profit margin of 13.6%. The fiscal 2015 increase in operating profit and related +margin is due to increased sales and favorable product mix. +Liquidity and Capital Resources +The Company expects to finance its future working capital needs, capital expenditures and acquisition requirements through internal funds +and believes that cash provided by operations will be sufficient to meet our operating and capital needs for at least the next twelve months. To the extent our capital and liquidity requirements are not satisfied internally, we may utilize a $10.0 +million revolving bank line of credit. Borrowings made under this line of credit bear interest at either a fluctuating base rate equal to the highest of (i) the Prime Rate, (ii) 1.50% above the daily one month LIBOR, and (iii) the +Federal Funds Rate in effect plus 1.50% or at a fixed rate of LIBOR plus an agreed upon margin of between 0% and 2.25%, based on the Company’s funded debt to EBITDA ratio as defined in the agreement. See Note 6, “Line of Credit,” +in the consolidated financial statements for additional information. As of the filing date of this Annual Report on Form 10-K, there have been no borrowings against this line of credit and the entire line is currently available. +Astro-Med’s statements of cash flows for the years ended January 31, 2015 and 2014 are included on page 36. Net cash flows +provided by operating activities were $1,491,000 in the current year compared to net cash used by operating activities of $4,462,000 in the previous year. The increase in net cash flow from operations for the current year is related to increased net +income; tax payments made in the prior year in connection with the gain on the sale of Grass; and slightly lower increased working capital requirements for the current year. The combination of accounts receivable, inventory and accounts payable and +accrued expenses increased working capital by $2,335,000 in fiscal 2015, compared to an increase of $2,402,000 in fiscal 2014, with the year over year improvement related to lower receivable and inventory turns, offset slightly by increased sales +and purchasing volume. The accounts receivable collection cycle decreased to 52 days sales outstanding at January 31, 2015 compared to 54 days outstanding at prior year end. Inventory days on hand decreased to 106 days at the end of +the current fiscal year from 113 days at prior year end. +Net cash flows provided by investing activities for fiscal 2015 were +$5,745,000, which includes $1,800,000 of cash received related to the funds held in escrow as part of the Grass sale and $2,355,000 of cash received related to the disposition of the inventory to the purchaser of Grass. Cash used for investing +activities for fiscal 2015 also included cash used for capital expenditures of $2,247,000, including $1,428,000 for information technology primarily related to the purchase and implementation of the Company’s new ERP system; $309,000 for +machinery and equipment; $307,000 for land and building improvements; $126,000 for furniture and fixtures and other capital expenditures; and $77,000 for tools and dies. +Included in net cash flows used by financing activities for fiscal 2015 were dividends paid of $2,128,000. Dividends paid in fiscal 2014 were $2,103,000. The Company’s annual dividend per share was +$0.28 in both fiscal 2015 and fiscal 2014. Also included in current year financing activities was the December 5, 2014 repurchase of 500,000 shares of the Company’s common stock at a per share price of $12.50, for an aggregate repurchase +price of $6,250,000. The purchase of these shares was from the estate of a former executive of the Company and did not impact the shares available as part of the Company’s stock buy back program. Excluding the December 5, 2014 repurchase +from the Ondis Estate and shares purchased in connection with the exercise of employee stock options, the Company has repurchased a total of 1,530,000 shares of its common stock since the +19 +Table of Contents +inception of the common stock buy back program in fiscal 1997. At January 31, 2015, the Company’s Board of Directors has authorized the purchase of an additional 390,000 shares of the +Company’s common stock in the future. +Contractual Obligations, Commitments and Contingencies +Astro-Med is subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of +matters, such as: contract and employment claims; workers compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to +ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a +material adverse effect on our consolidated financial position or results of operations. It is possible, however, that results of operations for any particular future period could be materially affected by changes in our assumptions or strategies +related to these contingencies or changes out of the Company’s control. +Critical Accounting Policies and Estimates +Astro-Med’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated +financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for +calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and +estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on the Company’s historical experience, current trends and information available from other sources, as appropriate. If +different conditions result from those assumptions used in our judgments, the results could be materially different from our estimates. We believe the following are our most critical accounting policies as they require significant judgments and +estimates in the preparation of our financial statements: +Revenue Recognition : Our product sales are recognized when +all of the following criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is +reasonably assured. When other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights +of return are not included in sales arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. When a sale arrangement involves training +or installation, the deliverables in the arrangement are evaluated to determine whether they represent multiple element arrangements. This evaluation occurs at inception of the arrangement and as each item in the arrangement is delivered. The total +fee from the arrangement is allocated to each unit of accounting based on its relative fair value. Fair value for each element is established generally based on the sales price charged when the same or similar element is sold separately. We allocate +revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on our vendor +specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue +recognition criteria for that element have been met. The amount of product revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements. +Astro-Med recognizes revenue for non-recurring engineering (NRE) fees, as necessary, for product modification orders upon completion of +agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer +acceptance for the specific milestone before recognizing revenue. +20 +Table of Contents +Infrequently, the Company receives requests from customers to hold product being purchased +from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements provided the transaction meets the following criteria: a valid business purpose for the arrangement exists; risk of ownership of the purchased +product has transferred to the buyer; there is a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the product is ready for shipment; the payment terms are customary; we have no continuing performance +obligation in regards to the product; and the product has been segregated from our inventories. +The majority of our equipment +contains embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold separately or marketed separately and its +production costs are minor as compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered non-software elements and are not subject to the industry-specific software revenue recognition guidance. +Warranty Claims and Bad Debts: Provisions for the estimated costs for future product warranty claims and bad debts +are recorded in cost of sales and general and administrative expense, respectively. The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that might impact the historical +analysis such as new product introduction for warranty and bankruptcies of particular customers for bad debts. We also periodically evaluate the adequacy of our reserves for warranty and bad debts recorded in its consolidated balance sheet as a +further test to ensure the adequacy of the recorded provisions. Warranty and bad debt analysis often involves subjective analysis of a particular customer’s ability to pay. As a result, significant judgment is required in determining the +appropriate amounts to record and such judgments may prove to be incorrect in the future. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when +the estimates are adjusted to the actual amounts. +Inventories: Inventories are stated at the lower of cost (first-in, +first-out) or market. The Company records provisions to write-down obsolete and excess inventory to its estimated net realizable value. The process for evaluating obsolete and excess inventory consists of analyzing the inventory supply on hand and +estimating the net realizable value of the inventory based on historical experience, current business conditions and anticipated future sales. We believe that our procedures for estimating such amounts are reasonable and historically have not +resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income +Taxes: A valuation allowance is established when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, +including our performance, the market environment in which we operate, length of carryforward periods, existing sales backlog and future sales projections. If actual factors and conditions differ materially from the estimates made by management, the +actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2015, the Company has provided valuation allowances for future state tax benefits resulting from certain +R&D tax credits which could expire unused. +The calculation of tax liabilities involves significant judgment in estimating +the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the +determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense +could be materially impacted. +Intangible and Long-Lived Assets: Long-lived assets, such as definite-lived +intangible assets and property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an +estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the +carrying value over the fair value, which is determined by the discounting of future cash flows. +21 +Table of Contents +Assets Held for Sale : Assets held for sale are reported at +the lower of cost or fair value less cost to sell and are subject to an impairment assessment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value is no longer recoverable based +upon the undiscounted future cash flows of the asset, the amount of impairment is the difference between the carrying amount and the fair value of the asset, less costs to sell. +Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in +circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether +further impairment testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and +strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two step process is then +performed. Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the +goodwill. Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe +that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to +publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital +expenditures, and working capital, as well as discount factors and income tax rates. +Share-Based Compensation: +Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have +estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, +employee exercise patterns (expected life of the options), the risk free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period +equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that +there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk +tolerance of different option groups. The risk-free interest rate used in the model is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is +based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted +stock awards (“RSA”) and restricted stock units (“RSU”) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the grant date of the +RSU or RSA. +Recent Accounting Pronouncements +Reference is made to Note 1 of our Consolidated Financial Statements included herein. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +The registrant is a +smaller reporting company and is not required to provide this information. +22 +Table of Contents +Item 8. Financial Statements and Supplementary Data +The consolidated financial statements required under this item are submitted as a separate section of this report on the +pages indicated at Item 15(a)(1). +Item 9. Changes in and Disagreements with Accountants on +Accounting and Financial Disclosure +None +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has +evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form +10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls +and procedures are effective at January 31, 2015 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and +communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such +term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the +preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the +inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of +changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness +of its internal control over financial reporting as of January 31, 2015. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations +of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2015, the Company’s internal control over financial reporting was +effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +This annual report does +not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting +firm pursuant to the rules of the SEC that permit the Company to provide only management’s report in this annual report. +Changes in Internal Controls over Financial Reporting +There have been no changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to affect, our +internal control over financial reporting. +Item 9B. Other Information +Nothing to Report +23 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The response to this item is incorporated by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Shareholders. +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of +the Board of Directors. +Name +Age +Position +Gregory A. Woods +56 +President, Chief Executive Officer and Director +Joseph P. O’Connell +71 +Senior Vice President, Treasurer and Chief Financial Officer +Michael M. Morawetz +55 +Vice President—International Branches +Stephen M. Petrarca +52 +Vice President—Instrument Manufacturing +Erik J. Mancyak +39 +Vice President and Corporate Controller +Eric E. Pizzuti +48 +Vice President and General Manager—QuickLabel Systems +Michael J. Natalizia +51 +Vice President and Chief Technology Officer +Mr. Woods has been a Director and Chief Executive Officer of the Company since February 1, 2014. +He was previously the Executive Vice President and Chief Operating Officer of the Company from September 6, 2012 and was appointed President of the Company on August 29, 2013. Prior to joining Astro-Med, Mr. Woods held the positions +of Managing Director of Medfield Advisors from 2010 to 2012, President of Performance Motion Devices from 2007 to 2010 and Chief Executive Officer of Control Technology Corporation from 2001 to 2007. +Mr. O’Connell joined the Company in 1996. He previously held senior financial management positions with Cherry Tree Products +Inc., IBI Corporation and Avery Dennison Corporation. Mr. O’Connell is also Assistant Secretary of the Company. He was appointed to the position of Senior Vice President in 2007. +Mr. Morawetz was appointed Vice President International Branches in 2006. He was previously the General Manager of Branch Operations +for the Company’s German subsidiary, having joined the Company in 1989. +Mr. Petrarca was appointed Vice President of +Instrument Manufacturing in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Mancyak was appointed Vice President of the Company in 2011. He also holds the position of Corporate Controller and Principal +Accounting Officer to which he was appointed in 2009. He served as Assistant Corporate Controller of the Company from 2008 to 2009 and prior to that was an Accounting Manager of the Company beginning in 2005. Prior to 2005, Mr. Mancyak was +Senior Treasury Analyst at American Power Conversion and an auditor at the international accounting firm of KPMG LLP. +Mr. Eric E. Pizzuti was appointed Vice President and General Manager of the Company’s QuickLabel System business segment on +March 9, 2012. Prior to this appointment, Mr. Pizzuti held the position of Vice President and Worldwide Director of Sales for QuickLabel Systems from March 2010 and Worldwide Director of Sales from March 2006 through March 2010. +Mr. Pizzuti has held various other positions since joining the Company in 1996. +Mr. Natalizia was appointed Vice +President and Chief Technology Officer of Astro-Med, Inc. on March 9, 2012. Prior to this appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +Code of Ethics +The +Company has adopted a Code of Ethics which applies to all directors, officers and employees of the Company, including the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Corporate +24 +Table of Contents +Controller, as supplemented by a Code of Ethical Conduct for the Chief Executive Officer and Senior Financial Officers, which meets the requirements of a “code of ethics” as defined in +Item 406 of Regulation S-K. A copy of the Code of Ethics will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on the Company’s website, (www.astro-medinc.com) , under the +heading “Our Company—Charters.” The Company will disclose any amendment to, or waiver of, a provision of the Codes for the CEO, CFO, Corporate Controller or persons performing similar functions by posting such information on its +website and filing a Form 8-K as required under the rules of the NASDAQ Global Market. +Item 11. +Executive Compensation +The response to this item is incorporated by reference to the Company’s definitive +Proxy Statement for the 2015 Annual Meeting of Shareholders. +The information set forth under the heading “Compensation +Committee Report” in the Company’s definitive Proxy Statement is furnished and shall not be deemed as filed for purposes of Section 18 of the Exchange Act, and is not deemed incorporated by reference in any filing under the Securities +Act of 1933, as amended. +Item 12. Security Ownership of Certain +Beneficial Owners and Management and Related Stockholders Matters +The response to this item is incorporated by +reference to the Company’s definitive Proxy Statement for the 2015 Annual Meeting of Shareholders. +Equity +Compensation Plan Information +The following table sets forth information about the Company’s equity compensation +plans as of January 31, 2015: +Plan Category +Number of Securities to +be Issued Upon Exercise +of Outstanding +Options, +Warrants and Rights +Weighted- +Average Exercise +Price of +Outstanding +Options, +Warrants +and +Rights +Number of Securities +Remaining Available for +Future Issuances +Under +Equity Compensation Plans +Equity Compensation Plans Approved by Security Holders +696,011 +(1) +$ +10.01 +(2) +206,339 +(3) +Equity Compensation Plans Not Approved by Security Holders +— +— +57,005 +(4) +Total +696,011 +(1) +$ +10.01 +(2) +263,344 +(1) +Includes 73,348 shares issuable upon exercise of outstanding options granted under the Company’s incentive stock option plans, 59,313 shares issuable upon exercise +of outstanding options granted under the Company’s non-qualified stock option plans under which options may be granted to officers and key employees, 2,750 shares issuable upon exercise of outstanding stock options granted under the Astro-Med, +Inc. Non-Employee Director Stock Option Plan, 520,600 shares issuable upon exercise of outstanding options granted and 40,000 restricted stock units outstanding under the Company’s 2007 Equity Incentive Plan. +(2) +Does not include restricted stock units. +(3) +Represents shares available for grant under the Astro-Med, Inc. 2007 Equity Incentive Plan. Excludes 32,245 shares issued pursuant to outstanding unvested restricted +stock awards which are subject to forfeiture. +(4) +Represent shares available for purchase under the Employee Stock Purchase Plan. +25 +Table of Contents +Additional information regarding these equity compensation plans is contained in Note 10, +“Share-Based Compensation,” in the Company’s Consolidated Financial Statements included in Item +15 hereto. +Item 13. Certain Relationships, Related Transactions and Director Independence +The response to this item is incorporated by reference to the Company’s definitive Proxy Statement for +the 2015 Annual Meeting of Shareholders. +Item 14. Principal Accountant Fees and Services +The information required by this item is incorporated herein by reference to the Company’s definitive +Proxy Statement for the 2015 Annual Meeting of Shareholders. +26 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part of this Annual Report filed on Form 10-K: +Page +Report of Independent Registered Public Accounting Firm +31 +Consolidated Balance Sheets as of January 31, 2015 and 2014 +32 +Consolidated Statements of Income—Years Ended January 31, 2015 and 2014 +33 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2015 and +2014 +34 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January +31, 2015 and 2014 +35 +Consolidated Statements of Cash Flows—Years Ended January 31, 2015 and 2014 +36 +Notes to Consolidated Financial Statements +37-57 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January +31, 2015 and 2014 +58 +27 +Table of Contents +All other schedules for which provision is made in the applicable accounting regulations of +the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Asset Purchase Agreement dated January 11, 2014 by and between Astro-Med, Inc. (the “Company”) and Miltope Corporation (d/b/a VT Miltope, a company of VT Systems), an +Alabama corporation (the “Seller”), as amended by that Amendment to Asset Purchase Agreement dated January 22, 2014, by and between the Company and the Seller (filed as Exhibit No. 2.1 to the Company’s report on Form 8-K dated January +22, 2014 and by this reference incorporated herein). +(2.2) +Asset Purchase Agreement dated January 5, 2013 by and among Astro-Med, Inc. (the “Company”), Grass Technologies Corporation (“Grass”) and Natus Medical +Incorporated (“Natus”), as amended by First Amendment to Asset Purchase Agreement dated as of January 31, 2013, by and among the Company, Grass and Natus (filed as Exhibit No. 2.1 to the Company’s report on Form 8-K dated February 4, +2013 and by this reference incorporated herein). +(3A) +Articles of Incorporation of the Company and all amendments thereto (filed as Exhibit No. 3A to the Company’s report on Form 10-Q for the quarter ended August 1, 1992 and by +this reference incorporated herein). +(3B) +By-laws of the Company as amended to date (filed as Exhibit No. 3B to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 and by this +reference incorporated herein). +(4) +Specimen form of common stock certificate of the Company (filed as Exhibit No. 4 to the Company’s report on Form 10-K for the year ended January 31, 1985 and by this +reference incorporated herein). +(10.1) +Astro-Med, Inc. Non-Employee Director Stock Plan filed as Exhibit 4.3 to Registration Statement on Form S-8, Registration No. 333-24123, and incorporated by reference +herein.* +(10.2) +Astro-Med, Inc. 1997 Incentive Stock Option Plan, as amended, filed as Exhibit 4.3 to Registration Statements on Form S-8, Registration Nos. 333-32315, 333-93565 and 333-44414, +and incorporated by reference herein.* +(10.3) +Astro-Med, Inc. 1998 Non-Qualified Stock Option Plan, as amended, filed as Exhibit 4.3 to Registration Statement on Form S-8, Registration Nos. 333-62431 and 333-63526, and +incorporated by reference herein.* +(10.4) +Astro-Med, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement filed on Schedule 14A for the 2007 annual shareholders meeting and +incorporated by reference herein.* +(10.5) +Astro-Med, Inc. Management Bonus Plan (Group III) filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended May 3, 2014, and by this +reference incorporated herein.* +(10.6) +Astro-Med, Inc. Management Bonus Plan—Vice President International Branches filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended +January 31, 2009 and by this reference incorporated herein.* +(10.7) +Astro-Med, Inc. Amended and Restated Non-Employee Directors Compensation Program filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period +ended May 3, 2014 and by this reference incorporated herein.* +28 +Table of Contents +Exhibit +Number +(10.8) +Form of Performance-Based Restricted Stock Unit Award Agreement filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended April 28, 2012 and +by this reference incorporated herein.* +(10.9) +Transition Services Agreement dated January 5, 2013 by and between the Company and Natus, as amended by First Amendment to Transition Services Agreement dated as of January 31, +2013, by and between the Company and Natus (filed as Exhibit No. 10.1 to the Company’s report on Form 8-K dated February 4, 2013 and by this reference incorporated herein). +(10.10) +Release and Non-Competition Agreement dated as of February 1, 2014 by and between the Company and Everett V. Pizzuti filed as Exhibit 10.11 to the Company’s Annual +Report on Form 10-K for the year ended January 31, 2014 and by this reference incorporated herein.* +(10.11) +Three-Year Revolving Line of Credit Agreement dated September 5, 2014 by and between the Company and Wells Fargo Bank filed as Exhibit 10.12 to the Company’s +Quarterly Report on Form 10-Q for the period ended November 1, 2014 and by this reference incorporated herein. +(10.12) +Equity Incentive Award Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods.* +(10.13) +Change in Control Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods.* +(10.14) +Stock Repurchase Agreement dated as of December 4, 2014 by and among Astro-Med, Inc. and Albert W. Ondis III, Alexis Ondis and April Ondis, each in his or her capacity as a +Co-Executor of the Estate of Albert W. Ondis filed on Form 8-K on December 4, 2014 and incorporated by reference herein. +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(101) +The following materials from Registrant’s Annual Report on Form 10-K for the year ended January 31, 2015, formatted in XBRL (eXtensible Business Reporting +Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, +(v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. Filed electronically herein. +* +Management contract or compensatory plan or arrangement. +29 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly +authorized. +ASTRO-MED, INC. +(Registrant) +Date: April 8, 2015 +By: +/ S / G REGORY A. +W OODS +(Gregory A. Woods, Chief Executive Officer) +Each person whose signature appears below constitutes and appoints each of Gregory A. Woods or Joseph P. +O’Connell, or any of them, each acting alone, his true and lawful attorneys-in-fact and agents, with full power of substitution and resolution, for such person and in his name, place and stead, in any and all capacities in connection with the +annual report on Form 10-K of Astro-Med, Inc. for the year ended January 31, 2015 to sign any and all amendments to the Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, the Securities and +Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents +and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute, may lawfully do or cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on +behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/ S / G REGORY A. +W OODS +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 8, 2015 +/ S / J OSEPH P. +O’C ONNELL +Joseph P. O’Connell +Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) +April 8, 2015 +/ S / E RIK J. +M ANCYAK +Erik J. Mancyak +Vice President and Corporate Controller (Principal Accounting Officer) +April 8, 2015 +/ S / H ERMANN +V IETS +Hermann Viets +Chairman of the Board of Directors and Director +April 8, 2015 +/ S / E VERETT V. +P IZZUTI +Everett V. Pizzuti +Director +April 8, 2015 +/ S / G RAEME +M AC L ETCHIE +Graeme MacLetchie +Director +April 8, 2015 +/ S / M ITCHELL I. +Q UAIN +Mitchell I. Quain +Director +April 8, 2015 +/ S / H AROLD +S CHOFIELD +Harold Schofield +Director +April 8, 2015 +30 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Shareholders of +Astro-Med, Inc. +We have audited the accompanying consolidated balance sheets of +Astro-Med, Inc. (the “Company”) as of January 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. Our audit also +included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial +statements and schedule based on our audits. +We conducted our audits in accordance with the standards of the Public Company +Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit +of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the +purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and +disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for +our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, +the consolidated financial position of Astro-Med, Inc. as of January 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the two years in the period ended January 31, 2015, in conformity with +U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, +the information set forth therein. +/s/ Wolf & Company, P.C. +Boston, Massachusetts +April 8, 2015 +31 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31, 2015 and 2014 +(In Thousands, Except Share Data) +2015 +2014 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +7,958 +$ +8,341 +Securities Available for Sale +15,174 +18,766 +Accounts Receivable, net of reserves of $343 in 2015 and $370 in 2014 +14,107 +11,366 +Inventories +15,582 +15,178 +Deferred Tax Assets +2,629 +1,673 +Restricted Cash +— +1,800 +Line of Credit Receivable +173 +240 +Note Receivable +255 +250 +Asset Held for Sale +1,900 +2,120 +Prepaid Expenses and Other Current Assets +4,140 +1,383 +Current Assets of Discontinued Operations +— +3,917 +Total Current Assets +61,918 +65,034 +PROPERTY, PLANT AND EQUIPMENT +Land and Improvements +904 +873 +Buildings and Improvements +10,551 +10,341 +Machinery and Equipment +25,368 +23,746 +36,823 +34,960 +Less Accumulated Depreciation +(28,444 +) +(27,368 +) +Total Property, Plant and Equipment, net +8,379 +7,592 +OTHER ASSETS +Note Receivable +256 +440 +Deferred Tax Asset +— +313 +Identifiable Intangibles +2,698 +3,400 +Goodwill +991 +991 +Other +88 +194 +Total Other Assets +4,033 +5,338 +TOTAL ASSETS +$ +74,330 +$ +77,964 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +3,155 +$ +2,374 +Accrued Compensation +3,302 +3,130 +Other Accrued Expenses +2,343 +2,310 +Deferred Revenue +621 +454 +Income Taxes Payable +148 +788 +Current Liabilities of Discontinued Operations +— +836 +Total Current Liabilities +9,569 +9,892 +Long Term Obligation +— +250 +Deferred Tax Liabilities +83 +77 +Other Long Term Liabilities +1,167 +1,131 +TOTAL LIABILITIES +10,819 +11,350 +SHAREHOLDERS’ EQUITY +Preferred Stock, $10 Par Value, Authorized 100,000 shares, None Issued +— +— +Common Stock, $0.05 Par Value, Authorized 13,000,000 shares; Issued 9,544,864 shares in 2015 and 9,291,225 shares in +2014 +477 +465 +Additional Paid-in Capital +43,589 +41,235 +Retained Earnings +39,735 +37,201 +Treasury Stock, at Cost, 2,293,606 shares in 2015 and 1,730,042 shares in 2014 +(19,591 +) +(12,463 +) +Accumulated Other Comprehensive Income (Loss), Net of Tax +(699 +) +176 +Total Shareholders’ Equity +63,511 +66,614 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +74,330 +$ +77,964 +See Notes to the Consolidated Financial Statements. +32 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED STATEMENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share Data) +2015 +2014 +Net Sales +$ +88,347 +$ +68,592 +Cost of Sales +51,370 +41,609 +Gross Profit +36,977 +26,983 +Costs and Expenses: +Selling and Marketing +18,289 +14,774 +Research and Development +5,802 +5,072 +General and Administrative +5,655 +5,604 +Operating Expenses +29,746 +25,450 +Operating Income +7,231 +1,533 +Other Income (Expense): +Investment Income +81 +72 +Other, Net +(380 +) +(193 +) +(299 +) +(121 +) +Income from Continuing Operations before Income Taxes +6,932 +1,412 +Income Tax Provision for Continuing Operations +2,270 +175 +Income from Continuing Operations +4,662 +1,237 +Income from Discontinued Operations, Net of Taxes of $777 in 2014 +— +1,975 +Net Income +$ +4,662 +$ +3,212 +Net Income per Common Share—Basic: +From Continuing Operations +$ +0.61 +$ +0.17 +From Discontinued Operations +— +0.26 +Net Income Per Common Share—Basic +$ +0.61 +$ +0.43 +Net Income per Common Share—Diluted: +From Continuing Operations +$ +0.60 +$ +0.16 +From Discontinued Operations +— +0.26 +Net Income Per Common Share—Diluted +$ +0.60 +$ +0.42 +Weighted Average Number of Common Shares Outstanding—Basic +7,612 +7,470 +Dilutive Effect of Common Stock Equivalents +222 +227 +Weighted Average Number of Common Shares Outstanding—Diluted +7,834 +7,697 +Dividends Declared Per Common Share +$ +0.28 +$ +0.28 +See Notes to the Consolidated Financial Statements. +33 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2015 +2014 +Net Income +$ +4,662 +$ +3,212 +Other Comprehensive Income (Loss), net of taxes and reclassification adjustments: +Foreign currency translation adjustments +(866 +) +(14 +) +Unrealized gain (loss) on securities available for sale +(9 +) +17 +Other Comprehensive Income (Loss) +(875 +) +3 +Comprehensive Income +$ +3,787 +$ +3,215 +See Notes to the Consolidated Financial Statements. +34 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY +For the years ended January 31 +($ In Thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Treasury +Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Shares +Amount +Balance January 31, 2013 +9,031,756 +$ +452 +$ +38,786 +$ +36,092 +$ +(11,666 +) +$ +173 +$ +63,837 +Share-based compensation +— +— +562 +— +— +— +562 +Employee option exercises +214,779 +11 +1,790 +— +— +— +1,801 +Tax benefit of employee stock options +— +— +158 +— +— +— +158 +Restricted stock awards +44,690 +2 +(61 +) +— +— +— +(59 +) +Purchases of common stock from employees +— +— +— +— +(797 +) +— +(797 +) +Dividends paid +— +— +— +(2,103 +) +— +— +(2,103 +) +Net income +— +— +— +3,212 +— +— +3,212 +Other comprehensive income +— +— +— +— +— +3 +3 +Balance January 31, 2014 +9,291,225 +$ +465 +$ +41,235 +$ +37,201 +$ +(12,463 +) +$ +176 +$ +66,614 +Share-based compensation +— +— +511 +— +— +— +511 +Employee option exercises +227,512 +11 +1,876 +— +— +— +1,887 +Tax benefit of employee stock options +— +— +107 +— +— +— +107 +Restricted stock awards +26,127 +1 +(140 +) +— +— +— +(139 +) +Purchases of common stock from employees +— +— +— +— +(878 +) +— +(878 +) +Repurchases of common stock +— +— +— +— +(6,250 +) +— +(6,250 +) +Dividends paid +— +— +— +(2,128 +) +— +— +(2,128 +) +Net income +— +— +— +4,662 +— +— +4,662 +Other comprehensive loss +— +— +— +— +— +(875 +) +(875 +) +Balance January 31, 2015 +9,544,864 +$ +477 +$ +43,589 +$ +39,735 +$ +(19,591 +) +$ +(699 +) +$ +63,511 +See Notes to the Consolidated Financial Statements. +35 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2015 +2014 +Cash Flows from Operating Activities: +Net Income +$ +4,662 +$ +3,212 +Adjustments to Reconcile Net Income to Net Cash Provided (Used) By Operating Activities: +Gain on Disposal of Discontinued Operations +— +(1,800 +) +Depreciation and Amortization +2,063 +1,279 +Share-Based Compensation +511 +562 +Deferred Income Tax Benefit +(636 +) +(636 +) +Excess Tax Benefit From Share-Based Compensation +(107 +) +(158 +) +Write-down of Asset Held for Sale +220 +— +Changes in Assets and Liabilities, Net of Impact of Acquisition and Divestiture: +Accounts Receivable +(2,741 +) +(2,588 +) +Inventories +(404 +) +(1,283 +) +Accounts Payable and Accrued Expenses +810 +1,469 +Income Taxes Payable +(1,747 +) +(3,515 +) +Other +(1,140 +) +(1,004 +) +Net Cash Provided (Used) by Operating Activities +1,491 +(4,462 +) +Cash Flows from Investing Activities: +Proceeds from Sales/Maturities of Securities Available for Sale +12,885 +10,835 +Purchases of Securities Available for Sale +(9,306 +) +(21,065 +) +Release of Funds Held in Escrow From Sale of Grass +1,800 +— +Proceeds Received on Disposition of Grass Inventory +2,355 +— +Payments Received on Line of Credit and Note Receivable +258 +373 +Additions to Property, Plant and Equipment +(2,247 +) +(1,128 +) +Acquisition of Miltope Ruggedized Printer Business +— +(6,732 +) +Net Cash Provided (Used) by Investing Activities +5,745 +(17,717 +) +Cash Flows from Financing Activities: +Proceeds from Common Shares Issued Under Employee Benefit Plans and Employee Stock Option Plans, Net of Payment of Minimum Tax +Withholdings +870 +944 +Purchase of Treasury Stock +(6,250 +) +— +Excess Tax Benefit from Share-Based Compensation +107 +158 +Dividends Paid +(2,128 +) +(2,103 +) +Net Cash Used in Financing Activities +(7,401 +) +(1,001 +) +Effect of Exchange Rate Changes on Cash and Cash Equivalents +(218 +) +522 +Net Decrease in Cash and Cash Equivalents +(383 +) +(22,658 +) +Cash and Cash Equivalents, Beginning of Year +8,341 +30,999 +Cash and Cash Equivalents, End of Year +$ +7,958 +$ +8,341 +Supplemental Information: +Cash Paid During the Period for: +Income Taxes, Net of Refunds +$ +4,566 +$ +5,085 +See Notes to the Consolidated Financial Statements. +36 +Table of Contents +ASTRO-MED, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +January 31, 2015 and 2014 +Note 1—Summary of Significant Accounting Policies +Basis of Presentation : The accompanying financial data have been prepared by us pursuant to the rules and +regulations of the U.S. Securities and Exchange Commission (SEC) and are presented in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Our fiscal year end is January 31. Unless otherwise stated, all years +and dates refer to our fiscal year. +On January 22, 2014, Astro-Med completed the acquisition of the ruggedized printer +product line from Miltope Corporation, a company of VT Systems (“Miltope”). Astro-Med’s ruggedized printer product line is part of the Ruggedized product group and is reported as part of the Test & Measurement (T&M) +segment. The results of the Miltope’s ruggedized printer product line operations have been included in the consolidated financial statements of the Company since the acquisition date. Refer to Note 2, “Acquisition,” for further +details. +On January 31, 2013, we completed the sale of substantially all of the assets of our Grass Technologies Product +Group. Consequently, we have classified the results of operations of the Grass Technologies Product Group as discontinued operations for the 2014 period presented. Refer to Note 20, “Discontinued Operations,” for further discussion. +Principles of Consolidation: The consolidated financial statements include the accounts of Astro-Med, Inc. and its +subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: +Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation. +Use of Estimates: The presentation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and +accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts and credits, inventory valuation, valuation and estimated lives of intangible assets, impairment of long-lived assets, asset held for sale and +goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic +conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates. +Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are considered to be cash equivalents. Similar investments with original maturities beyond +three months are classified as securities available for sale. Cash of $2,995,000 and $2,544,000 was held in foreign bank accounts at January 31, 2015 and 2014, respectively. +Securities Available for Sale: Securities available for sale are carried at fair value based on quoted market prices, where +available. The difference between cost and fair value, net of related tax effects, is recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity. +Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is +provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and improvements—10 to 45 years; machinery and equipment—3 to 10 years). Depreciation expense was +$1,361,000 for fiscal 2015 and $1,279,000 for 2014. +Revenue Recognition: Astro-Med’s product sales are +recognized when all of the following criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and +collectability is reasonably assured. +37 +Table of Contents +Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights of return are not included in sales arrangements. Revenue associated with products that contain +specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Discounts from list prices are recorded as a reduction to sales. Amounts billed to customers for shipping and handling fees are included +in sales while related shipping and handling costs are included in cost of sales. +The majority of our equipment contains +embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold separately or marketed separately and its production +costs are minor as compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered non-software elements and are not subject to the industry-specific software revenue recognition guidance. +Our multiple-element arrangements are generally comprised of a combination of equipment, software, installation and/or training services. +Hardware and software elements are typically delivered at the same time and revenue is recognized when all the revenue recognition criteria for each unit are met. Delivery of installation and training services will vary based on certain factors such +as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are +rendered and accepted by the customer. +We have evaluated the deliverables in our multiple-element arrangements and concluded +that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate +revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on vendor +specific objective evidence (VSOE) if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized +when the basic revenue recognition criteria for that element have been met. +Infrequently, Astro-Med recognizes revenue for +non-recurring engineering (NRE) fees for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer +acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. NRE fees have not been significant in the periods presented herein. +Infrequently, Astro-Med receives requests from customers to hold product purchased from us for the customer’s convenience. Revenue is +recognized for such bill and hold arrangements in accordance with the requirements of SEC Staff Accounting Bulletin No. 104 which requires, among other things, the existence of a valid business purpose for the arrangement; the transfer of +ownership of the purchased product; a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the readiness of the product for shipment; the use of customary payment terms; no continuing performance obligation +by us; and segregation of the product from our inventories. +Research and Development Costs: Astro-Med charges +costs to expense in the period incurred, and these expenses are shown on a separate line in the consolidated statement of income. Included in research and development expense are the following: salaries and benefits, external engineering service +costs, engineering related information costs and supplies. The Company also complies with Accounting Standards Codification (“ASC”) 985-20, “Costs of Computer Software to be Sold, Leased or Marketed” and ASC 350-40, +“Internal-Use Software” in accounting for the costs of software either developed or acquired. +Foreign Currency +Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are +38 +Table of Contents +translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues +and expenses are translated at the monthly average exchange rates. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our German subsidiary since its undistributed earnings are considered to be +permanently invested. Our net foreign exchange losses were $219,000 and $190,000 for fiscal 2015 and 2014, respectively. +Advertising: Astro-Med expenses advertising costs as incurred. Advertising costs including advertising production, trade shows +and other activities are designed to enhance demand for our products and amounted to approximately $1,717,000 and $1,236,000 in fiscal 2015 and 2014, respectively. +Health Insurance Reimbursement Reserve: Astro-Med reimbursed a portion of employee health insurance deductibles and co-payments for fiscal 2015 and 2014. The total reimbursement amounted to +approximately $129,000 and $201,000 in 2015 and 2014, respectively. We accrued approximately $20,000 and $75,000 at January 31, 2015 and 2014, respectively, for estimated outstanding reimbursements due to employees, including a reserve for +incurred but not reported amounts. +Long-Lived Assets: Long-lived assets to be held and used are reviewed for +impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the +asset and its eventual disposition. If the projected undiscounted cash flows are less these the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of +future cash flows. For both 2015 and 2014, these were no impairment charges for long-lived assets. +Assets Held for +Sale : Assets held for sale are reported at the lower of cost or fair value less cost to sell. Astro-Med’s former Grass facility in Rockland met the held for sale classification criteria as of January 31, 2015 and 2014. +This property is being actively marketed and management expects to sell the property during the upcoming fiscal year. Accordingly, the asset held for sale has been classified as a current asset. +The Company estimated the fair value of the Rockland facility using the market values for similar properties and estimated the fair value +less the cost to sell. This property is considered a Level 2 asset as defined in ASC 820, “Fair Value Measurements. ” +During the years ended 2015 and 2014, the Company recorded impairment charges of $220,000 and $779,000, respectively, related to the write-down of the Rockland facility to fair value, less cost to sell. +In fiscal 2015, the impairment charge was included in other income (expense), other, net in the consolidated statement of income. For fiscal 2014, the impairment charge was included in the income from discontinued operations in the consolidated +statement of income. +Intangible Assets: Intangible assets include the value of customer relationships and backlog +rights acquired in connection with business acquisitions and are recorded at fair value as determined by the Company. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational +basis which is representative of the assets use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss +is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying +value over its fair value. Fair value is generally determined using a discounted cash flow analysis. For both 2015 and 2014, there were no impairment charges for intangible assets. +Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, +such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether further impairment +testing is necessary. Factors that management considers in this +39 +Table of Contents +assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the +composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two step process is then performed. Step one compares +the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the goodwill. Step two compares the +implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is +appropriate because it provides a fair value estimate based upon the reporting unit’s expected long–term operating cash flow performance. In addition, the Company uses the market approach, which compares the reporting unit to +publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital +expenditures, and working capital, as well as discount factors and income tax rates. +We performed a qualitative assessment for +our 2015 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying value of the reporting units exceed their fair values. Accordingly, no further testing was performed as management +believes that there are no impairment issues in regards to goodwill at this time. +Income Taxes: Astro-Med uses the +liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using +enacted tax rates that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. +At January 31, 2015 and 2014, a valuation allowance was provided for deferred tax assets attributable to certain state R&D credit carryforwards. +Astro-Med accounts for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement +attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, +classification, interest and penalties, accounting in interim periods and disclosure. +Net Income Per Common +Share: Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares +for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2015 and 2014, there were 156,600 and 126,800 common equivalent shares that were not included in the +computation of diluted net income per common share because their inclusion would be anti-dilutive. +Allowance for Doubtful +Accounts: In circumstances where we are aware of a customer’s inability to meet its financial obligations, an allowance is established. The majority of accounts are individually evaluated on a regular basis and allowances are +established to state such receivables at their net realizable value. The remainder of the allowance is based upon historical write-off experience and current market assessments. +Fair Value of Financial Instruments: Our financial instruments consist of cash and cash equivalents, investment securities, +accounts receivable, a note receivable, a line of credit receivable and accounts payable. The carrying amount reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair +value due to the short-term nature of these items. Investment securities, all of which are available for sale, are carried in the consolidated balance sheets at fair value based on quoted market prices, when available. The note receivable is carried +in the consolidated balance sheets at fair value based on the present value of the discounted cash flows over the life of the note. +40 +Table of Contents +The Company measures assets held for sale at fair value on a nonrecurring basis and records +impairment charges when the assets are deemed to be impaired. +Share-Based Compensation : Share-based compensation +expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of +each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns +(expected life of the options), the risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted +average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. +In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different +option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average +dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (“RSA”) and +restricted stock units (“RSU”) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the grant date. +The cash flow from the tax benefits that are a result of tax deductions in excess of the compensation cost recognized for those options +(excess tax benefits) are classified as a cash inflow from financing activities and a cash outflow from operating activity. Tax deductions from certain stock option exercises are treated as being realized when they reduce taxes payable in accordance +with relevant tax law. +Recent Accounting Pronouncements: +Discontinued Operations +In April 2014, the Financial Accounting Standards +Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of +Disposals of Components of an Entity .” ASU 2014-08 limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations +and financial results. In addition, this ASU expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components +that do not meet the definition of a discontinued operation. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2014 and is to be applied prospectively. We are currently +evaluating the impact of ASU 2014-08 and do not expect it to have a material effect on the Company’s financial position or results of operations. +Revenue Recognition +In May 2014, the FASB issued ASU 2014-09, +“Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. +GAAP and International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services and is effective for public entities for interim and annual reporting periods beginning +after December 15, 2016. Early application is not permitted and entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at +the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on the Company’s consolidated financial statements. +41 +Table of Contents +Note 2—Acquisition +On January 22, 2014, Astro-Med completed the acquisition of the ruggedized printer product line from Miltope +Corporation (Miltope), which is engaged in the design, development, manufacture and testing of ruggedized computers and computer peripheral equipment for military, industry and commercial applications. Astro-Med’s ruggedized printer product +line is reported as part of the T&M segment. The results of the Miltope’s ruggedized printer product line operations have been included in the consolidated financial statements of the Company since the acquisition date. +The purchase price of the acquisition was $6,732,000 which was funded using existing cash on hand. Of the $6,732,000 purchase price, +$500,000 was held in escrow for twelve months following the acquisition date to provide an indemnity to the Company in the event of any breach in the representation, warranties and covenants of Miltope. The assets acquired consist of all of the +assets of the Miltope ruggedized printer product line excluding plant and equipment and personnel. Acquisition related costs of approximately $90,000 are included in the general and administrative expenses in the Company’s consolidated +statement of income for the fiscal year ended January 31, 2014. The acquisition was accounted for under the acquisition method in accordance with the guidance provided by FASB ASC 805, “Business Combinations.” +As part of the acquisition, Miltope and Astro-Med entered into a manufacturing services agreement under which Miltope provided transition +services and continued to manufacture printers for Astro-Med. This agreement concluded in the third quarter of fiscal 2015, as the Company has transitioned all the manufacturing to its West Warwick, Rhode Island facility at that time. +The purchase price of the acquisition has been allocated on the basis of the estimated fair value as follows: +(In thousands) +Accounts Receivable +$ +713 +Inventories +2,503 +Identifiable Intangible Assets +3,400 +Goodwill +196 +Warranty Reserve +(80 +) +Total Purchase Price +$ +6,732 +Goodwill of $196,000, which is deductible for tax purposes, represents the excess of the purchase price +over the estimated fair value assigned to the tangible and identifiable intangible assets acquired and liabilities assumed from Miltope. The carrying amount of the goodwill was allocated to the T&M segment of the Company. +The following table reflects the fair value of the acquired identifiable intangible assets and related estimated useful lives: +(In thousands) +Fair +Value +Useful Life +(Years) +Customer Contract Relationships +$ +3,100 +10 +Backlog +300 +1 +Total +$ +3,400 +Amortization expense of $702,000 has been included in the statement of income for fiscal 2015 in regards +to the above acquired intangibles. +Estimated amortization expense for the next five years is as follows: +(In thousands) +2016 +2017 +2018 +2019 +2020 +Estimated amortization expenses +$ +357 +$ +349 +$ +331 +$ +278 +$ +278 +42 +Table of Contents +The following unaudited pro forma information assumes the acquisition of Miltope occurred on +February 1, 2013. This information has been prepared for informational purposes only and does not purport to represent the results of operations that would have happened had the acquisition occurred as of the date indicated, nor of future +results of operations. +Year Ended +January 31 +(In thousands) +2014 +Net Revenue +$ +75,362 +The impact on income from continuing operations, net income and earnings per share would not have been +material to the Company for the year ended January 31, 2014. +Note 3—Securities Available for Sale +Pursuant to our investment policy, securities available for sale include state and municipal securities with various +contractual or anticipated maturity dates ranging from one month to three years. These securities are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss), net of taxes in +shareholders’ equity until realized. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification basis. A decline in the fair value of any available for sale security below cost +that is determined to be other than temporary will result in a write-down of its carrying amount to fair value. No such impairment charges were recorded for any period presented. All short-term investment securities have original maturities greater +than 90 days. +The fair value, amortized cost and gross unrealized gains and losses of the securities are as follows: +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair Value +(In thousands) +January 31, 2015 +State and Municipal Obligations +$ +15,150 +$ +26 +$ +(2 +) +$ +15,174 +January 31, 2014 +State and Municipal Obligations +$ +18,729 +$ +37 +$ +— +$ +18,766 +The contractual maturity dates of these securities are as follows: +January 31 +2015 +2014 +(In thousands) +Less than one year +$ +9,470 +$ +11,439 +One to three years +5,704 +7,327 +$ +15,174 +$ +18,766 +Actual maturities may differ from contractual dates as a result of sales or earlier issuer redemptions. +43 +Table of Contents +Note 4—Inventories +Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and +manufacturing overhead. The components of inventories are as follows: +January 31 +2015 +2014 +(In thousands) +Materials and Supplies +$ +10,600 +$ +10,722 +Work-in-Progress +765 +852 +Finished Goods +7,372 +6,798 +18,737 +18,372 +Inventory Reserve +(3,155 +) +(3,194 +) +Balance at January 31 +$ +15,582 +$ +15,178 +Included within finished goods inventory is $1,030,000 and $767,000 of demonstration equipment at +January 31, 2015 and 2014, respectively. +Note 5—Accrued Expenses +Accrued expenses consisted of the following: +January 31 +2015 +2014 +(In thousands) +Warranty +$ +375 +$ +355 +Product Replacement Cost Reserve +353 +$ +480 +Professional Fees +256 +269 +Executive Retirement Package +250 +250 +Dealer Commissions +163 +55 +Other +946 +901 +$ +2,343 +$ +2,310 +Note 6—Line of Credit +On September 5, 2014, Astro-Med entered into a new unsecured revolving line of credit agreement with Wells Fargo +Bank to replace the previous agreement which expired on May 30, 2014. The terms of the new agreement are for a three-year, $10 million revolving line of credit to be available to the Company to be used as needed for ongoing working capital +requirements, business acquisitions or general corporate purposes. Any borrowings made under the new line of credit bear interest at either a fluctuating base rate equal to the highest of (i) the Prime Rate, (ii) 1.50% above the daily one +month LIBOR, and (iii) the Federal Funds Rate in effect plus 1.50% or at a fixed rate of LIBOR plus an agreed upon margin of between 0% and 2.25%, based on the Company’s funded debt to EBITDA ratio as defined in the agreement. In addition, +the new agreement provided for two financial covenant requirements, namely, Total Funded Debt to Adjusted EBITDA (as defined) of not greater than 3 to 1 and a Fixed Charge Coverage Ratio (as defined) of not less than 1.25 to 1, both measured at the +end of each quarter on a rolling four quarter basis. As of the January 31, 2015, there have been no borrowings against this line of credit and the Company was in compliance with its financial covenants. +Note 7—Note Receivable and Revolving Line of Credit Issued +On January 30, 2012, we completed the sale of our label manufacturing operations in Asheboro, North Carolina to +Label Line Ltd. The net sales price of $1,000,000 was received in the form of a promissory note issued by Label Line Ltd. and is fully secured by a first lien on various collateral, including the Asheboro plant +44 +Table of Contents +and plant assets. The note bears interest at 3.75% and is payable in sixteen quarterly installments of principal and interest which commenced on January 30, 2013. As of January 31, +2015, $511,000 remains outstanding on this note which approximates its estimated fair value. +The terms of the Asheboro sale +also included an agreement for Astro-Med to provide Label Line Ltd. with additional financing in the form of a revolving line of credit of $600,000, which is fully secured by a first lien on various collateral, including the Asheboro plant and plant +assets. This line of credit bears interest at a rate equal to the United States prime rate plus an additional margin of two percent of the outstanding credit balance (5.25% at January 31, 2015). Although the initial term was for a period of +one-year from the date of the sale, the agreement had been extended through January 31, 2015. As of January 31, 2015, $173,000 remains outstanding on this revolving line of credit. Subsequent to fiscal 2015 year-end, the agreement was +amended to extend the term of the agreement through January 31, 2016. +Note 8—Accumulated Other Comprehensive Income (Loss) +The changes in the balance of accumulated other comprehensive income (loss) by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Unrealized Holding Gain +on Available for +Sale Securities +Total +Balance at January 31, 2013 +$ +166 +$ +7 +$ +173 +Other Comprehensive Income (Loss) +(14 +) +17 +3 +Amounts Reclassified to Net Income +— +— +— +Net Other Comprehensive Income (Loss) +(14 +) +17 +3 +Balance at January 31, 2014 +152 +24 +176 +Other Comprehensive Income (Loss) +(866 +) +(9 +) +(875 +) +Amounts Reclassified to Net Income +— +— +— +Net Other Comprehensive Income (Loss) +(866 +) +(9 +) +(875 +) +Balance at January 31, 2015 +$ +(714 +) +$ +15 +$ +(699 +) +The amounts presented above in other comprehensive income (loss) are net of taxes except for translation +adjustments associated with our German subsidiary. +Note 9—Shareholders’ Equity +On December 5, 2014, the Company repurchased 500,000 shares of the Company’s common stock from the Estate of +Albert W. Ondis for an aggregate purchase price of $6,250,000. Prior to entering into the Stock Purchase Agreement, the Company obtained an opinion from an independent investment banking firm as to the fairness, from a financial point of view, +to the public shareholders of the Company other than the selling shareholders, of the consideration paid by the Company in the transaction. The purchase was funded using existing cash on hand. This transaction did not impact the number of shares +authorized for repurchase under the Company’s current repurchase program. During fiscal 2014 the Company did not repurchase any shares of its common stock except as described below in connection with the exercise of employee stock options. +During fiscal 2015 and 2014, certain of the Company’s employees delivered a total of 62,797 and 66,828 shares +respectively, of the Company’s common stock to satisfy the exercise price for stock options exercised and related taxes. The shares delivered were valued at a total of $878,000 and $797,000, respectively, and are included in treasury stock in +the accompanying consolidated balance sheets at January 31, 2015 and 2014. These transactions did not impact the number of shares authorized for repurchase under the Company’s current repurchase program. +As of January 31, 2015, the Company’s Board of Directors has authorized the purchase of up to an additional 390,000 shares +Company’s common stock on the open market or in privately negotiated transactions. +45 +Table of Contents +Note 10—Share-Based Compensation +Astro-Med maintains the following share-based compensation plans: +Stock Plans: +Astro-Med has one equity incentive plan (the “Plan”) under which incentive stock options, non-qualified stock options, restricted stock units (“RSUs”), restricted stock awards +(“RSAs”) and other equity based awards may be granted to directors, officers and certain employees. An aggregate of 1,000,000 shares were authorized for awards under the Plan. At January 31, 2015, 206,339 shares were available +for grant under the Plan. Options granted to employees vest over four years. The exercise price of each stock option will be established at the discretion of the Compensation Committee of the Board of Directors; however, any incentive stock options +granted must be at an exercise price of not less than fair market value at the date of grant. +In fiscal year 2013, a portion +of the Company’s executive’s long-term incentive compensation was awarded in the form of RSUs (“2013 RSUs”). The 2013 RSUs were earned based on the Company achieving specific thresholds of net sales and annual operating income as +established under the fiscal 2013 Domestic Management Bonus Plan and vested fifty percent on the first anniversary of the grant date and fifty percent on the second anniversary of the grant date provided that the grantee was employed on each vesting +date by Astro-Med or an affiliate company. All such 2013 RSUs were earned and vested as of March 2014. In April 2013, the Company granted options and RSUs to officers (“2014 RSUs”). Each 2014 RSU will be earned and vest as follows: +twenty-five percent vests on the third anniversary of the grant date, fifty percent vests upon the Company achieving its cumulative budgeted net sales target for fiscal years 2014 through 2016 (the “Measurement Period”), and twenty-five +percent vests upon the Company’s achieving a target average annual ORONA (operating income return on net assets as calculated under the Domestic Management Bonus Plan) for the Measurement Period. The grantee may not sell, transfer or otherwise +dispose of more than fifty percent of the common stock issued upon vesting of the RSU until the first anniversary of the vesting date. No 2014 RSUs whose vesting is dependent upon the achievement of financial performance goals as set forth herein, +have vested as of January 31, 2015. +The Plan provides for an automatic annual grant of ten-year options to purchase 5,000 +shares of stock to each non-employee director upon the adjournment of each annual shareholders’ meeting. Each such option is exercisable at the fair market value as of the grant date and vests immediately prior to the next succeeding +shareholders’ meeting. In addition to the automatic option grant under Plan, the Company has a Non-Employee Director Annual Compensation Program (the “Program”) which provides that each non-employee director is entitled to an annual +cash retainer of $7,000 (the “Annual Cash Retainer”), plus $500 for each Board and committee meeting attended. In addition, effective August 1, 2014, the Chairman of the Board also receives an annual retainer of $6,000 and the Chair +of the Audit Committee and Compensation Committee each receive an annual retainer of $4,000 each (“Chair Retainer”). The non-employee director may elect for any fiscal year to receive all or a portion of the Annual Cash Retainer and/or +Chair Retainer (collectively the “Cash Retainer”) in the form of common stock of the Company, which will be issued under the Plan. If a non-employee director elects to receive all or a portion of the Cash Retainer in the form of common +stock, such shares shall be issued in four quarterly installments on the first day of each fiscal quarter, and the number of shares of common stock to be issued shall be based on the fair market value of such common stock on the date such +installment is payable. The common stock received in lieu of such Cash Retainer will be fully vested. However, a non-employee director who receives common stock in lieu of all or a portion of the Cash Retainer may not sell, transfer, assign, pledge +or otherwise encumber the common stock prior to the first anniversary of the date on which such shares were issuable. In the event of the death or disability of a non-employee director, or a change in control of the Company, any shares of common +stock issued in lieu of such Cash Retainer, shall no longer be subject to such restrictions on transfer. +In addition, under +the Program, each non-employee director receives RSAs with a value equal to $20,000 (the “Equity Retainer”) upon adjournment of each annual shareholders’ meeting. If a non-employee director is first appointed or elected to the Board +of Directors effective on a date other than at the annual shareholders’ +46 +Table of Contents +meeting, on the date of such appointment or election, the director shall receive a pro rata award of restricted common stock having a value based on the number of days remaining until the next +annual meeting. The Equity Retainer will vest on the earlier of 12 months after the grant date or the date immediately prior to the next annual meeting of the shareholders following the meeting at which such RSAs were granted. However, a +non-employee director may not sell, transfer, assign, pledge or otherwise encumber the vested common stock prior to the second anniversary of the vesting date. In the event of the death or disability of a non-employee director, or a change in +control of the Company, the RSAs shall immediately vest and shall no longer be subject to such restrictions on transfer. +Stock Options: +Aggregated information regarding stock options granted under the Plan is summarized below: +Number +of Shares +Option Price +Per Share +Weighted Average +Option Price Per +Share +Options Outstanding, January 31, 2014 +736,647 +$ +5.78-11.90 +$ +8.63 +Options Granted +158,600 +$ +13.46-14.20 +$ +13.99 +Options Exercised +(224,275 +) +$ +6.22-11.90 +$ +8.29 +Options Expired +(14,961 +) +$ +7.95-14.20 +$ +9.49 +Options Outstanding, January 31, 2015 +656,011 +$ +5.78-14.20 +$ +10.01 +Options Exercisable, January 31, 2015 +413,612 +$ +5.78-13.46 +$ +8.78 +Set forth below is a summary of options outstanding at January 31, 2015: +Outstanding +Exercisable +Range of +Exercise prices +Options +Weighted Average +Exercise Price +Remaining +Contractual Life +Options +Weighted Average +Exercise Price +$5.78-8.73 +314,365 +$ +7.64 +5.1 +254,516 +$ +7.54 +$8.95-13.46 +190,046 +$ +10.79 +4.3 +159,096 +$ +10.76 +$13.80-14.20 +151,600 +$ +14.00 +9.2 +— +$ +— +656,011 +413,612 +The fair value of each stock option granted was estimated on the grant date using the Black-Scholes +option-pricing model with the following weighted average assumptions: +Years Ended January 31 +2015 +2014 +Risk-Free Interest Rate +1.5%-1.62% +0.81%-0.84% +Expected Life (years) +5 +5 +Expected Volatility +21.47%-26.75% +38.07%-38.46% +Expected Dividend Yield +1.98% +2.63% +The weighted average fair value of options granted during fiscal 2015 and 2014 was $2.85 and $2.79, +respectively. As of January 31, 2015, there was $455,000 of unrecognized compensation expense related to the unvested stock options granted under the plans. The expense is to be recognized over a weighted average of two years. +As of January 31, 2015, the aggregate intrinsic value (the aggregate difference between the closing stock price of the Company’s +common stock on January 31, 2015, and the exercise price of the outstanding options) that would have been received by the option holders if all options had been exercised was $2,554,000 for all exercisable options and $3,225,000 for all options +outstanding. The weighted average remaining contractual terms for these options are 4.2 years. The total aggregate intrinsic value of options exercised during fiscal 2015 and 2014 was $1,149,000 and $706,000, respectively. +47 +Table of Contents +Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs): +Aggregated information regarding RSUs and RSAs granted under the Plan is summarized below: +RSAs & RSUs +Weighted Average +Grant Date Fair Value +Outstanding at January 31, 2014 +106,496 +$ +9.12 +Granted +7,245 +13.80 +Vested +(35,662 +) +8.75 +Expired or canceled +(5,834 +) +10.07 +Outstanding at January 31, 2015 +72,245 +$ +9.70 +As of January 31, 2015, there was $278,000 of unrecognized compensation expense related to unvested +RSUs and RSAs. +Share-based compensation expense has been recognized as follows: +Years Ended January 31 +2015 +2014 +(In thousands) +Stock Options +$ +241 +$ +192 +Restricted Stock Awards and Restricted Stock Units +270 +370 +Total +$ +511 +$ +562 +Employee Stock Purchase Plan (ESPP): +Astro-Med’s ESPP allows eligible employees to purchase shares of common stock at a 15% discount from fair market value on the date of purchase. A total of 247,500 shares were initially reserved for +issuance under this plan. Summarized plan activity is as follows: +Years Ended January 31 +2015 +2014 +Shares Reserved, Beginning +60,242 +64,231 +Shares Purchased +(3,237 +) +(3,989 +) +Shares Reserved, Ending +57,005 +60,242 +Note 11—Income Taxes +The components of income from continuing operations before income taxes are as follows: +Years Ended +January 31 +2015 +2014 +(In thousands) +Domestic +$ +5,401 +$ +537 +Foreign +1,531 +875 +$ +6,932 +$ +1,412 +48 +Table of Contents +The components of the provision for income taxes from continuing operations are as follows: +Years Ended +January 31 +2015 +2014 +(In thousands) +Current: +Federal +$ +1,666 +$ +930 +State +466 +179 +Foreign +535 +297 +2,667 +1,406 +Deferred: +Federal +(290 +) +(1,044 +) +State +(107 +) +(174 +) +Foreign +— +(13 +) +(397 +) +(1,231 +) +$ +2,270 +$ +175 +The provision for income taxes for continuing operations differs from the amount computed by applying the +statutory federal income tax rate of 34% in fiscal 2015 and 2014 to income before income taxes due to the following: +Years Ended +January 31 +2015 +2014 +(In thousands) +Income Tax Provision at Statutory Rate +$ +2,357 +$ +480 +State Taxes, Net of Federal Tax Effect +233 +(47 +) +Change in Reserves Related to ASC 740 Liability +23 +(59 +) +Meals and Entertainment +41 +38 +Domestic Production Deduction +(164 +) +(30 +) +Share-Based Compensation +(25 +) +36 +Tax-exempt Income +(24 +) +(22 +) +R&D Credits +(135 +) +(114 +) +Foreign Rate Differential +(56 +) +(26 +) +Other Permanent Differences and Miscellaneous, Net +20 +(81 +) +$ +2,270 +$ +175 +49 +Table of Contents +The components of deferred income tax expense arise from various temporary differences and +relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31 +2015 +2014 +(In thousands) +Deferred Tax Assets: +Inventory +$ +1,666 +$ +1,792 +Share-Based Compensation +572 +535 +State R&D Credits +371 +258 +Compensation Accrual +417 +493 +ASC 740 Liability Federal Benefit +304 +290 +Deferred Service Contract Revenue +235 +181 +Warranty Reserve +140 +137 +Reserve for Doubtful Accounts +116 +127 +Foreign Tax Credit +356 +213 +Other +298 +119 +4,475 +4,145 +Deferred Tax Liabilities: +Accumulated Tax Depreciation in Excess of Book Depreciation +766 +830 +Deferred Gain on Asset Held for Sale +785 +897 +Currency Translation Adjustment +36 +173 +Other +87 +78 +1,674 +1,978 +Subtotal +2,801 +2,167 +Valuation Allowance +(255 +) +(258 +) +Net Deferred Tax Assets +$ +2,546 +$ +1,909 +The valuation allowance at January 31, 2015 relates to certain state research and development tax +credit carryforwards which are expected to expire unused. The change in the valuation allowance in 2015 was a decrease of approximately $3,000 and represented a decrease in the reserve due to the utilization of research and development credits +during the current year, net of federal benefit. The change in the valuation allowance in 2014 was an increase of approximately $27,000 and represented an increase in the reserve due to the generation of research and development credits during the +current year, net of federal benefit. +The Company reasonably believes that it is possible that some unrecognized tax benefits, +accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balance of unrecognized tax benefits, +excluding interest and penalties are as follows: +2015 +2014 +(In thousands) +Balance at February 1 +$ +715 +$ +941 +Increases in prior period tax positions +— +31 +Increases in current period tax positions +87 +42 +Reductions related to lapse of statute of limitations +(95 +) +(299 +) +Balance at January 31 +$ +707 +$ +715 +If the $707,000 is recognized, $493,000 would decrease the effective tax rate in the period in which each +of the benefits is recognized and the remainder would be offset by a reversal of deferred tax assets. +50 +Table of Contents +During fiscal 2015 and 2014 the Company recognized an expense of $43,000 and $68,000, +respectively, related to interest and penalties, which are included as a component of income tax expense in the accompanying statements of income. At January 31, 2015 and 2014, the Company had accrued potential interest and penalties of +$460,000 and $416,000, respectively. +The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, +various state jurisdictions, and various foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations prior to 2010. +On September 13, 2013, the U.S. Treasury Department and the Internal Revenue Service released final regulations that provided guidance on the application of IRC Section 263(a) for amounts paid +to acquire, produce, or improve tangible property, as well as the rules for materials and supplies and proposed regulations addressing dispositions and general asset accounts. The final regulations are generally effective for tax years beginning on +or after January 1, 2014. We are currently evaluating the impact of these new regulations and do not expect them to have a material impact to our financial statements. +At January 31, 2015, the Company has indefinitely reinvested $3,909,000 of the cumulative undistributed earnings of its foreign subsidiary in Germany, all of which would be subject to U.S. taxes if +repatriated to the U.S. Through January 31, 2015, the Company has not provided deferred income taxes on the undistributed earnings of this subsidiary because such earnings are considered to be indefinitely reinvested. Non-U.S. income taxes are, +however, provided on these undistributed earnings. +Note 12—Contractual Obligations +The following table summarizes our contractual obligations: +Total +2016 +2017 +2018 +2019 +2020 +and +Thereafter +(In thousands) +Purchase Commitments* +$ +15,117 +$ +14,907 +$ +210 +$ +— +$ +— +$ +— +Operating Lease Obligations +688 +255 +225 +136 +72 +— +$ +15,805 +$ +15,162 +$ +435 +$ +136 +$ +72 +$ +— +* +Purchase commitments consists primarily of inventory and equipment purchase orders made in the ordinary course of business. +The Company incurred rent and lease expenses in the amount of $614,000 and $599,000 for the fiscal years 2015 and 2014, respectively. +Note 13—Nature of Operations, Segment Reporting and Geographical Information +The Company’s operations consist of the design, development, manufacture and sale of specialty printers and data +acquisition and analysis systems, including both hardware & software and related consumable supplies. The Company organizes and manages its business as a portfolio of products and services designed around a common theme of data acquisition and +information output. The Company has two reporting segments consistent with its sales product groups: QuickLabel Systems (QuickLabel) and Test & Measurement (T&M). +QuickLabel produces an array of high-technology digital color and monochrome label printers, labeling software and consumables for a variety of commercial industries worldwide. T&M produces data +recording equipment used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing. +Business is conducted in the United States and through foreign affiliates in Canada, Europe, Southeast Asia and Mexico. Manufacturing +activities are primarily conducted in the United States. Sales and service activities +51 +Table of Contents +outside the United States are conducted through wholly-owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit +margins as would be associated with an arms-length transaction. +On January 22, 2014, Astro-Med completed the acquisition +of the ruggedized printer product line from Miltope. Astro-Med’s ruggedized printer product line is part of the Ruggedized product group and is reported as part of the T&M segment. The results of the Miltope’s ruggedized printer +product line operations have been included from the date of acquisitions for all periods presented below. Refer to Note 2, “Acquisition,” for further details. +On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies Product Group (Grass) in order to focus on its core businesses. Consequently, the +Company has classified the results of operations of Grass as discontinued operations for the fiscal 2014 period presented. Refer to Note 20 “Discontinued Operations,” for further details. +The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies +herein. The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses. +Summarized below are the Net Sales and Segment Operating Profit (both in dollars and as a percentage of Net Sales) for each reporting segment: +($ in thousands) +Net Sales +Segment Operating Profit +Segment Operating Profit % +of Net Sales +2015 +2014 +2015 +2014 +2015 +2014 +QuickLabel +$ +59,779 +$ +49,065 +$ +7,259 +$ +5,154 +12.1 +% +10.5 +% +T&M +28,568 +19,527 +5,627 +2,655 +19.7 +% +13.6 +% +Total +$ +88,347 +$ +68,592 +12,886 +7,809 +14.6 +% +11.4 +% +Product Replacement Costs +— +672 +Corporate Expenses +5,655 +5,604 +Operating Income +7,231 +1,533 +Other Expense +299 +121 +Income from Continuing Operations before Income Taxes +6,932 +1,412 +Income Tax Provision for Continuing Operations +2,270 +175 +4,662 +1,237 +Income from Discontinued Operations, Net of Taxes +— +1,975 +Net Income +$ +4,662 +$ +3,212 +No customer accounted for greater than 10% of net sales in fiscal 2015 and 2014. +Other information by segment is presented below: +(In thousands) +Assets +2015 +2014 +QuickLabel +$ +24,874 +$ +25,306 +T&M +22,323 +17,049 +Discontinued Operations +— +3,917 +Corporate* +27,133 +31,692 +Total +$ +74,330 +$ +77,964 +* +Corporate assets consist principally of cash and cash equivalents, securities available for sale, and building held for sale . +52 +Table of Contents +(In thousands) +Depreciation and +Amortization +Capital Expenditures +2015 +2014 +2015 +2014 +QuickLabel +$ +678 +$ +639 +$ +1,408 +$ +543 +T&M +1,385 +640 +839 +585 +Total +$ +2,063 +$ +1,279 +$ +2,247 +$ +1,128 +Geographical Data +Presented below is selected financial information by geographic area: +(In thousands) +Net Sales +Long-Lived Assets +2015 +2014 +2015 +2014 +United States +$ +61,494 +$ +48,679 +$ +10,422 +$ +10,115 +Europe +18,181 +14,909 +383 +538 +Canada +3,934 +2,569 +272 +339 +Asia +1,408 +1,167 +— +— +Central and South America +1,919 +908 +— +— +Other +1,411 +360 +— +— +Total +$ +88,347 +$ +68,592 +$ +11,077 +$ +10,992 +Long-lived assets excludes goodwill assigned to the T&M segment of $1.0 million at +January 31, 2015 and 2014. +Note 14—Employee Benefit Plans +Employee Stock Ownership Plan (ESOP): +Astro-Med has an ESOP providing retirement benefits to all eligible employees. Annual contributions in amounts determined by the Company’s Board of Directors are invested by the ESOP’s Trustees +in shares of common stock of Astro-Med. Contributions may be in cash or stock. Astro-Med’s contributions (paid or accrued) amounted to $100,000 in both fiscal 2015 and 2014 and were recorded as compensation expense. All shares owned by the ESOP +have been allocated to participants. +Profit-Sharing Plan: +Astro-Med sponsors a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash +compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue +Code. +All contributions are deposited into trust funds. It is the policy of the Company to fund any contributions accrued. The +Company’s annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $294,000 and $251,000 in fiscal 2015 and 2014, respectively. +53 +Table of Contents +Note 15—Product Warranty Liability +Astro-Med offers a manufacturer’s warranty for the majority of its hardware products. The specific terms and +conditions of warranty vary depending upon the product sold and country in which the Company does business. For products sold in the United States, the Company provides a basic limited warranty, including parts and labor. The Company estimates the +warranty costs based on historical claims experience and records a liability in the amount of such estimates at the time product revenue is recognized. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the +amounts as necessary. Activity in the product warranty liability is as follows: +January 31 +2015 +2014 +(In thousands) +Balance, beginning of the year +$ +355 +$ +350 +Warranties issued +546 +447 +Settlements made +(526 +) +(442 +) +Balance, end of the year +$ +375 +$ +355 +Note 16—Product Replacement Costs +In April 2013, tests conducted by the Company revealed that one of its suppliers had been using a non-conforming +material in certain models of Astro-Med’s Test & Measurement printers. No malfunctions have been reported by customers as a result of the non-conforming material. +Upon identifying this issue, Astro-Med immediately suspended production of the printers, notified all customers and contacted the supplier who confirmed the problem. Astro-Med is continuing to work with +its customers to replace the non-conforming material on existing printers with conforming material. The estimated costs associated with the replacement program were $672,000, which was based upon the number of printers shipped during the period the +non-conforming material was used. Those costs were recognized and recorded in the first quarter of fiscal 2014 and are included in cost of sales in the accompanying consolidated statement of income for the fiscal year ended January 31, 2014. As +of January 31, 2015, the Company had expended $319,000 in replacement costs which have been charged against this reserve. The remaining reserve amount of $353,000 is included in other accrued expenses in the accompanying consolidated balance +sheet as of January 31, 2015. +Astro-Med is currently receiving power supplies with compliant materials and has resumed +printer production and shipments to customers. +Since the supplier deviated from the agreed upon specifications for the power +supply while providing certificates of conformance to the original specifications, Astro-Med received a non-refundable $450,000 settlement from the supplier in January 2014 for recovery of the costs and expense associated with this issue. This +settlement was recorded in cost of sales in the accompanying consolidated statement of income for the fiscal year ended January 31, 2014. In addition to this cash settlement, the Company will receive lower product prices from the supplier +through fiscal 2017. +Note 17—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. +Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts which constitute the Company’s customer base. The Company periodically performs on-going +credit evaluations of its customers. The Company has not historically experienced significant credit losses on collection of its accounts receivable. +Excess cash is invested principally in investment grade government and state municipal securities. The Company has established guidelines relative to diversification and maturities that maintain safety of +principal, +54 +Table of Contents +liquidity and yield. These guidelines are periodically reviewed and modified to reflect changes in market conditions. The Company has not historically experienced any significant losses on its +cash equivalents or investments. +During the years ended January 31, 2015 and 2014, one vendor accounted for 21.9% and 14.3% of +purchases, and 55.1% and 23.6% of accounts payable, respectively. +Note 18—Commitments and Contingencies +Astro-Med is subject to contingencies, including legal proceedings and claims arising in the normal course of business +that cover a wide range of matters including, among others, contract and employment claims, workers compensation claims, product liability, warranty and modification, adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable +that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company +believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, +that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the Company’s control. +Note 19—Fair Value Measurements +We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, +“Fair Value Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In +addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that +observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the +circumstances. +The fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; +quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or +liabilities +Cash and cash equivalents; accounts receivables; line of credit receivable; accounts payable, +note receivable, accrued compensation and other expenses; and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short term nature of the these instruments. +55 +Table of Contents +Assets measured at fair value on a recurring basis are summarized below: +January 31, 2015 +Level 1 +Level 2 +Level 3 +Total +(In thousands) +Money market funds (included in cash and cash equivalents) +$ +3,028 +$ +— +$ +— +$ +3,028 +State and municipal obligations (included in securities available for sale) +— +15,174 +— +15,174 +Total +$ +3,028 +$ +15,174 +$ +— +$ +18,202 +January 31, 2014 +Level 1 +Level 2 +Level 3 +Total +(In thousands) +Money market funds (included in cash and cash equivalents) +$ +4,734 +$ +— +$ +— +$ +4,734 +State and municipal obligations (included in securities available for sale) +— +18,766 +— +18,766 +Total +$ +4,734 +$ +18,766 +$ +— +$ +23,500 +For our money market funds and state and municipal obligations, we utilize the market approach to measure +fair value. The market approach is based on using quoted market prices for identical assets. +Non-financial assets measured at +fair value on a non-recurring basis are summarized below: +January 31, 2015 +Level 1 +Level 2 +Level 3 +(In thousands) +Asset Held for Sale +$ +— +$ +1,900 +$ +— +January 31, 2014 +Level 1 +Level 2 +Level 3 +(In thousands) +Asset Held for Sale +$ +— +$ +2,120 +$ +— +Asset held for sale consists of Astro-Med’s former Grass facility in Rockland, Massachusetts which is +being actively marketed for sale. In accordance with ASC 360, “Property, Plant and Equipment,” assets held for sale are written down to fair value less cost to sell and as such, the Company has recorded impairment charges of $220,000 and +$779,000, in fiscal 2015 and 2014, respectively. In fiscal 2015, the impairment charge was included in other income (expense), other, net in the consolidated statement of income. In fiscal 2014, the impairment charge was included in the income from +discontinued operations in the consolidated statement of income, as the Rockland facility was part of the Grass operations at that time. The Company estimated the fair value of the Rockland facility using the market values for similar properties +less the cost to sell. +Note 20—Discontinued Operations +On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies +Product Group (Grass) which manufactured polysomnography and electroencephalography systems and related accessories and propriety electrodes for use in both research and clinical settings. The assets sold consisted primarily of working capital +(exclusive of inventory and accounts payable related to manufacturing), the engineering, sales and support workforce, intellectual property and certain other related assets. The proceeds from the sale consisted of $18.6 million in cash, of which +$1.8 million was held in escrow following the closing date of the transaction and was received by Astro-Med in the first quarter of fiscal 2015. +56 +Table of Contents +As part of this transaction, a Transition Service Agreement (TSA) was entered into with the +purchaser pursuant to which Astro-Med agreed to provide transition services and continue to manufacture Grass products for the purchaser for a period not to exceed twelve months following the sale closing date. The Company determined that cash flows +from this activity were not significant and therefore Grass has been classified as a discontinued operation for the fiscal 2014 period presented. The TSA expired on January 31, 2014 and the Company is no longer reporting discontinued operations +in fiscal 2015. +In accordance with the terms of the TSA, the purchaser was obligated to acquire the remaining Grass inventory +upon expiration of the TSA and as such, the Company received $2,355,000 in the first quarter of fiscal 2015 from the purchaser of Grass related to the disposition of this inventory. +Any future services related to Grass since fiscal 2014 have not been, and are not expected to be material. +Results for discontinued operations are as follows: +2014 +(In thousands) +Net Sales +$ +8,401 +Cost of Sales +$ +7,353 +Gross Profit +$ +1,048 +Operating Expenses +$ +96 +Income from Discontinued Operations +$ +952 +Gain on Sale of Assets of Discontinued Operations +$ +1,800 +Income Tax Expense +$ +777 +Income from Discontinued Operations +$ +1,975 +57 +Table of Contents +ASTRO-MED, INC. +SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts(1): +(In thousands) +Year Ended January 31, +2015 +$ +370 +$ +60 +$ +(87 +) +$ +343 +2014 +$ +345 +$ +119 +$ +(94 +) +$ +370 +(1) +The allowance for doubtful accounts has been netted against accounts receivable as of the respective balance sheet dates. +(2) +Uncollectible accounts written off, net of recoveries, also includes foreign exchange adjustment. +58 \ No newline at end of file diff --git a/raw/filings/0000008146/2014/0001193125-15-122389/filing_metadata.csv b/raw/filings/0000008146/2014/0001193125-15-122389/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..3c718caeae23395d579f1a9be6714b0841c8a888 --- /dev/null +++ b/raw/filings/0000008146/2014/0001193125-15-122389/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2015-04-08,2015-01-31,2015-04-08T16:18:39.000Z,0001193125-15-122389,d846754d10k.htm,10-K,8732508,1,0,https://www.sec.gov/Archives/edgar/data/8146/000119312515122389/d846754d10k.htm,https://www.sec.gov/Archives/edgar/data/8146/000119312515122389/,2014,2014,1 diff --git a/raw/filings/0000008146/2014/0001193125-15-122389/item1.txt b/raw/filings/0000008146/2014/0001193125-15-122389/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..2f857da63b12b3a3c8e634657edcd5386aab730a --- /dev/null +++ b/raw/filings/0000008146/2014/0001193125-15-122389/item1.txt @@ -0,0 +1,100 @@ +Item 1. Business +General +Unless otherwise indicated, references to “Astro-Med,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to Astro-Med, Inc. +and its consolidated subsidiaries. +Astro-Med designs, develops, manufactures and distributes a broad range of specialty +printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies in order to acquire, store, analyze, and present data in multiple formats. Target markets for hardware and software +products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation. +The Company’s products are distributed through its own sales force and authorized dealers in the United States. We sell to customers +outside of the United States primarily through our branch offices in Canada and Europe as well as with independent dealers and representatives. Approximately 30% of the Company’s sales in fiscal 2015 were to customers located outside the United +States. +Astro-Med operates its business through two operating segments, QuickLabel Systems (QuickLabel) and Astro-Med +Test & Measurement (T&M). Financial information by business segment and geographic area appears in Note 13 to the consolidated financial statements of this Annual Report on Form 10-K. +On January 22, 2014, Astro-Med completed the acquisition of the ruggedized printer product line from Miltope Corporation, +a company of VT Systems (“Miltope”). Astro-Med’s ruggedized printer product line is reported as part of the Test & Measurement (T&M) segment. The results of the Miltope’s ruggedized printer product line +operations have been included in the consolidated financial statements of the Company since the acquisition date. Refer to Note 2, “Acquisition,” for further details. +On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies Product Group (Grass) in order to focus on its core businesses. Grass manufactured +polysomnography and electroenecephalography systems for both clinical and research use along with the related accessories and proprietary electrodes. Consequently, the Company has classified the results of operations of Grass as discontinued +operations for the fiscal 2014 period presented. Refer to Note 20, “Discontinued Operations,” in the consolidated financial statements for a further discussion. +3 +Table of Contents +The following description of our business should be read in conjunction with +“Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 15 through 22 of this Annual Report on Form 10-K. +Description of Business +Product Overview +Astro-Med leverages its expertise in data visualization technologies to design, manufacture, and market specialty +printing systems, test and measurement systems and related services for select growing markets on a global basis. The business consists of two segments, specialty printing systems and test and measurement systems, sold under the brand names +QuickLabel ® Systems (QuickLabel ® ) and Astro-Med ® +Test & Measurement (T&M). +Products sold under the QuickLabel ® brand are used in industrial and commercial product packaging and automatic identification applications to digitally +print custom labels and other visual identification marks on demand. Products sold under the Astro-Med T&M brand acquire and record visual and electronic signal data from local and networked sensors. The recorded data is processed and analyzed +and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide high-resolution ruggedized airborne printers. +Products sold under the QuickLabel brand include digital color label printers and specialty OEM printing systems as well as a full line of +consumables including labels, tags, ink, toner, and thermal transfer ribbon. In addition, QuickLabel Systems sells special software used to design labels and other identification marks for a wide variety of applications especially in the field of +packaging. QuickLabel provides training and support on a worldwide basis via highly trained service technicians. +In the color +label market, QuickLabel Systems offers a broad range of entry-level, mid-range, and high-performance digital label printers, providing customers a continuous path to upgrade to new labeling products. QuickLabel products are primarily sold to +manufacturers, processors, and retailers who label products on a short-run basis. Users can benefit from the time and cost-savings of digitally printing their own labels on-demand. Industries that commonly benefit from short-run label printing +include apparel, chemicals, cosmetics, food and beverage, medical products, and pharmaceuticals, among many other packaged goods. +Current QuickLabel models include the Kiaro! family of high-speed inkjet color label printers; the Vivo! Touch, an electrophotographic color label printer; and the QLS-4100 Xe color thermal transfer label +printer. QuickLabel also sells and supports its Pronto! family of barcode printers which utilize single color-thermal transfer label printing technology as well as an array of custom designed OEM printers. +Products sold under the Astro-Med T&M brand acquire and record visual and electronic signal data from local and networked sensors. The +recorded data is processed and analyzed and then stored and presented in various visual output formats. The Company supplies a range of products and services that include hardware, software and consumables to customers who are in a variety of +industries. +Astro-Med Test & Measurement products include the DMX 8000 portable data acquisition +system, TMX ™ high-speed data acquisition system, Dash ® 8HF-HS data recorders, +Everest ® telemetry recorders, ToughWriter ® and Miltope-brand narrow and wide format airborne printers and ToughSwitch ® ruggedized Ethernet switches. +Astro-Med’s airborne printers are used in the flight deck and in the cabin of military and commercial aircraft to print hard copies +of airport approach plates, flight itineraries, weather maps, connecting gate information, and ground communications. ToughSwitch Ethernet switches are used in military aircraft and military vehicles to connect multiple computers or Ethernet +devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flightworthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter +airborme printers for numerous aircraft made by Airbus, Boeing, Bombardier, Lockheed and others. +4 +Table of Contents +The Company’s family of portable data recorders is used in R&D +and maintenance applications in aerospace and defense, energy discovery and production operations, automotive R&D centers, and a variety of other industrial applications. The TMX ™ data acquisition system is designed for data capture of long-term testing in aerospace, automotive, and other industrial applications where the ability to monitor +high channel counts, and accept and view a wide variety of input signals, including time-stamped and synchronized video capture data and audio notation, is important. +Everest telemetry recorders are used widely in the aerospace industry to monitor and track space vehicles, aircraft, missiles and other systems in flight. +Technology +The core +technologies of Astro-Med relate to (1) acquiring data, (2) conditioning the data, (3) displaying the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. +Patents and Copyrights +Astro-Med holds a number of product patents in the United States and in foreign countries. The Company copyrights its software and +registers its brand trademarks. While we consider our patents to be important to the operation of our business, we do not believe that any existing patent, license, trademark or other intellectual property right is of such importance that its loss +or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +Astro-Med manufactures most of the products that it designs and sells. Raw materials and supplies are typically available +from a wide variety of sources. Astro-Med manufactures most of the sub-assemblies and parts in-house including printed circuit board assemblies, harnesses, machined parts, and general final assembly. Many parts are standard electronic items +available from multiple sources. Others are parts designed by us but are manufactured by outside vendors. There are a few parts that are sole source, but these parts could be sourced elsewhere with appropriate changes in the design of our product. +Product Development +Astro-Med maintains an active program of product research and development. During fiscal 2015 and 2014, we spent $5,802,000 and $5,072,000, respectively, on Company-sponsored product development. We are +committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2016 and beyond. +Marketing and Competition +The Company competes worldwide in multiple +markets. In the specialty printing field, we believe we lead the world in bench-top color label printing technology and in aerospace printers. In the data acquisition area, we believe that we are one of the leaders in portable high speed data +acquisition systems. +We retain a leadership position by virtue of proprietary technology, product reputation, delivery, +technical assistance, and service to customers. The number of competitors varies by product line. Our management believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our product +lines, but include technology, quality, service and support, distribution network, and breadth of product and service offerings. +Our products are sold by direct field salespersons as well as independent dealers and representatives. In the United States, the Company +has factory-trained direct field salespeople located in major cities from coast to coast +5 +Table of Contents +specializing in either QuickLabel or Astro-Med T&M products. Additionally, we have direct field sales or service centers in Canada, France, Germany, Mexico, Southeast Asia and the United +Kingdom staffed by our own employees. In the rest of the world, Astro-Med utilizes approximately 90 independent dealers and representatives selling and marketing our products in 60 countries. +No single customer accounted for 10% or more of our net sales in either of the last two fiscal years. +International Sales +In +fiscal 2015 and 2014, net sales to customers in various geographic areas outside the United States, primarily in Canada and Western Europe, amounted to $26,853,000 and $19,913,000, respectively. +Order Backlog +Astro-Med’s backlog fluctuates regularly. It consists of a blend of orders for end user customers as well as original equipment +manufacturer customers. Manufacturing is geared to forecasted demands and applies a rapid turn cycle to meet customer expectations. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2015 and +2014 was $12,061,000 and $14,013,000, respectively. +Employees +As of January 31, 2015, Astro-Med employed 340 people. We are generally able to satisfy our employment requirements. No employees are represented by a union. We believe that employee relations are +good. +Other Information +The Company’s business is not seasonal in nature. However, our sales are impacted by the size of certain individual transactions, which can cause fluctuations in sales from quarter to quarter. +Available Information +We make available on our website (www.astro-medinc.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, +amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the +Securities Exchange Commission (SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. \ No newline at end of file diff --git a/raw/filings/0000008146/2014/0001193125-15-122389/item13.txt b/raw/filings/0000008146/2014/0001193125-15-122389/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..f63237c1708a9e354f694f139579728301ee7835 --- /dev/null +++ b/raw/filings/0000008146/2014/0001193125-15-122389/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships, Related Transactions and Director Independence +The response to this item is incorporated by reference to the Company’s definitive Proxy Statement for +the 2015 Annual Meeting of Shareholders. \ No newline at end of file diff --git a/raw/filings/0000008146/2014/0001193125-15-122389/item9a.txt b/raw/filings/0000008146/2014/0001193125-15-122389/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..bd200485d7fc7e79c1051eb3a71acbd9bc285779 --- /dev/null +++ b/raw/filings/0000008146/2014/0001193125-15-122389/item9a.txt @@ -0,0 +1,24 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has +evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form +10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls +and procedures are effective at January 31, 2015 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and +communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such +term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the +preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the +inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of +changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness +of its internal control over financial reporting as of January 31, 2015. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations +of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2015, the Company’s internal control over financial reporting was +effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +This annual report does +not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting +firm pursuant to the rules of the SEC that permit the Company to provide only management’s report in this annual report. +Changes in Internal Controls over Financial Reporting +There have been no changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to affect, our +internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2014/0001193125-15-122389/rp_note.txt b/raw/filings/0000008146/2014/0001193125-15-122389/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2014/0001193125-15-122389/rpt_disclosure.txt b/raw/filings/0000008146/2014/0001193125-15-122389/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..0ea96280c4efc05114fd205c2a698abc91f0ce1b --- /dev/null +++ b/raw/filings/0000008146/2014/0001193125-15-122389/rpt_disclosure.txt @@ -0,0 +1,16 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. +In reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +18 +Other than as described below, no officer, director or nominee for director of the Company +or any associate of any of the foregoing had during the fiscal year ended January 31, 2015 any material interest, direct or indirect, in any material transaction or any material proposed transaction in which the amount exceeds $120,000 and to +which the Company was or is to be a party. +The +Company employs three sons of director Everett V. Pizzuti, to whom the Company paid or accrued over $120,000 in compensation during the fiscal year ended January 31, 2015: Eric Pizzuti, as Vice President and General Manager of QuickLabel +Systems, Christopher Pizzuti, as a QuickLabel Field Sales Engineer, and Kevin Pizzuti, as a District Manager, QuickLabel Systems. The Company paid Eric Pizzuti $184,998 in salary and bonus and paid Christopher Pizzuti and Kevin Pizzuti $161,741 and +$127,312, respectively, in salary and sales commissions. Eric Pizzuti also received options for 5,500 shares, a vacation payout of $8,922 and a matching contribution to his Profit Sharing Plan account of $5,261. Christopher Pizzuti also received +options for 500 shares, an automobile allowance of $7,500 and a vacation payout of $2,094. Kevin Pizzuti also received an automobile allowance of $7,500, a vacation payout of $2,308 and a matching contribution to his Profit Sharing Plan account of +$1,253. In addition, the Company made a $678 contribution to each of their ESOP accounts. +The Company also employs April Ondis, a Co-Executor of the Ondis Estate, as Senior Manager, Applied Marketing of QuickLabel Systems product group. As Co-Executor of the Ondis Estate, Ms. Ondis is +deemed to be the beneficial owner of more than 5% of the Company’s outstanding common stock, and, therefore a “related person” of the Company. The Company paid Ms. Ondis $125,455 in salary and commission and a vacation payout of +$4,258. Ms. Ondis also received options for 600 shares. The Company also made contributions of $2,054 and $678 to her Profit Sharing Plan and ESOP accounts, respectively. \ No newline at end of file diff --git a/raw/filings/0000008146/2015/0001193125-16-534900/filing.txt b/raw/filings/0000008146/2015/0001193125-16-534900/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..a1f2386716a2608f9331d542007cf317df3894c1 --- /dev/null +++ b/raw/filings/0000008146/2015/0001193125-16-534900/filing.txt @@ -0,0 +1,3442 @@ +10-K +1 +d266722d10k.htm +FORM 10-K +Form 10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31, 2016 +OR +¨ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +Commission file number 0-13200 +Astro-Med, +Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue, +West Warwick, Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: (401) 828-4000 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange +on which registered +Common Stock, $.05 Par Value +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes ¨ No x +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the +Act. Yes ¨ No x +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the +Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes x No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive +Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such +files). Yes x No ¨ +Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not +be contained, to the best of the registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form +10-K. ¨ +Indicate by check mark whether the registrant is a large +accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the +Exchange Act. +Large accelerated filer ¨ +Accelerated filer ¨ +Non-accelerated filer ¨ +Smaller reporting company x +(Do not check if a smaller reporting company) +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange +Act): Yes ¨ No x +The aggregate market value of the registrant’s voting common equity held by non-affiliates at July 31, 2015 was approximately +$73,014,000 based on the closing price on the Nasdaq Global Market on that date. +As of March 24, 2016 there were 7,388,048 +shares of Common Stock (par value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2016 Annual Meeting of Shareholders are incorporated by +reference into Part III of this Annual Report on Form 10-K where indicated. +Table of Contents +ASTRO-MED, INC. +FORM 10-K ANNUAL REPORT +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3-6 +Item 1A. +Risk Factors +6-12 +Item 1B. +Unresolved Staff Comments +12 +Item 2. +Properties +13 +Item 3. +Legal Proceedings +13 +Item 4. +Mine Safety Disclosures +13 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +14-16 +Item 6. +Selected Financial Data +16 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of +Operations +16-23 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +23 +Item 8. +Financial Statements and Supplementary Data +24 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +24 +Item 9A. +Controls and Procedures +24 +Item 9B. +Other Information +24 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +25-26 +Item 11. +Executive Compensation +26 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholders +Matters +26-27 +Item 13. +Certain Relationships, Related Transactions and Director Independence +27 +Item 14. +Principal Accountant Fees and Services +27 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +28 +2 +Table of Contents +ASTRO-MED, INC. +Forward-Looking Statements +Information included in this Annual Report on +Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning +future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” “may,” “will,” and +similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our +actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in this Annual +Report on Form 10-K under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is cautioned not to +unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K. +PART I +Item 1. Business +General +Unless otherwise indicated, references to “Astro-Med,” the “Company,” “we,” “our,” and +“us” in this Annual Report on Form 10-K refer to Astro-Med, Inc. and its consolidated subsidiaries. +Astro-Med +designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies in order to acquire, store, analyze, and +present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general +manufacturing, packaging and transportation. +The Company’s products are distributed through its own sales force and +authorized dealers in the United States. We sell to customers outside of the United States primarily through our branch offices in Canada, Europe and Asia as well as through independent dealers and representatives. Approximately 30% of the +Company’s sales in fiscal 2016 were to customers located outside the United States. +Astro-Med operates its business +through two operating segments, QuickLabel and Astro-Med Test & Measurement (T&M). Financial information by business segment and geographic area appears in Note 14 to our audited consolidated financial statements included elsewhere in +this report. +On June 19, 2015, Astro-Med completed the asset purchase of the aerospace printer product line from Rugged +Information Technology Equipment Corporation (RITEC) and on January 22, 2014, Astro-Med completed the acquisition of the aerospace printer product line from Miltope Corporation. Astro-Med’s aerospace printer product line is part of the +T&M product group and is reported as part of the T&M segment. The results of Miltope’s aerospace printer product line operations have been included in the consolidated financial statements of the Company for all periods presented. The +Company began shipment of the RITEC products in the third quarter of the current fiscal year. Refer to Note 2, “Acquisition,” in our audited consolidated financial statements included elsewhere in this report. +On September 25, 2015, the Company announced it would immediately begin doing business as AstroNova on a +worldwide basis. The name change is part of the plan to modernize the Company and effectively communicate our strategy. The AstroNova name and brand emphasizes our traditional strengths in aerospace and acknowledges our expanding presence in +test & measurement, product identification and other new areas where we can apply our data visualization technology. Astro-Med’s aerospace products and T&M business will adopt the AstroNova brand. QuickLabel products will continue +to go to market under the QuickLabel brand. +3 +Table of Contents +The Company has filed for trademark protection of the AstroNova name and logo in the United +States and other countries. +Unless and until the Company formally changes its name, the Company’s common stock will +continue to trade on the NASDAQ Global Market stock exchange under its name, Astro-Med, Inc., using its present ticker symbol, ALOT. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 16 through 23 +of this Annual Report on Form 10-K. +Description of Business +Product Overview +Astro-Med leverages its expertise in +data visualization technologies to design, manufacture, and market specialty printing systems, test and measurement systems and related services for select growing markets on a global basis. The business consists of two segments, specialty printing +systems and test and measurement systems, sold under the brand names QuickLabel ® and Astro-Med ® Test & Measurement (T&M). +Products sold under the QuickLabel brand are used in industrial and commercial product packaging and automatic +identification applications to digitally print custom labels and other visual identification marks on demand. Products sold under the Astro-Med T&M brand acquire and record visual and electronic signal data from local and networked data streams +and sensors. The recorded data is processed and analyzed and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide high-resolution +airborne printers. +QuickLabel brand products include digital color label printers and specialty OEM printing systems as well +as a full line of consumables including labels, tags, inks, toner, and thermal transfer ribbons. In addition, QuickLabel sells special software used to design labels and other identification marks for a wide variety of applications especially in the +field of packaging. QuickLabel provides training and support on a worldwide basis via highly trained service technicians. +In +the color label market, QuickLabel offers a broad range of entry-level, mid-range, and high-performance digital label printers, providing customers a continuous path to upgrade to new labeling products. QuickLabel products are primarily sold to +manufacturers, processors, and retailers who label products on a short-run basis. Users can benefit from the time and cost-savings of digitally printing their own labels on-demand. Industries that commonly benefit from short-run label printing +include apparel, chemicals, cosmetics, food and beverage, medical products, and pharmaceuticals, among many other packaged goods. +Current QuickLabel models include the Kiaro! family of high-speed inkjet color label printers and the QLS-4100 Xe color thermal transfer label printer. QuickLabel also sells and supports its Pronto! +family of barcode printers which utilize single color-thermal transfer label printing technology as well as an array of custom designed OEM printers. +Products sold under the Astro-Med T&M brand acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed and analyzed and then +stored and presented in various visual output formats. The Company supplies a range of products and services that include hardware, software and consumables to customers who are in a variety of industries. +Astro-Med T&M products include the Daxus ® portable data acquisition system, TMX™ high-speed data acquisition system, Dash ® 8HF-HS data recorders, +Everest ® telemetry recorders, ToughWriter ® , Miltope-brand and RITEC-brand airborne printers and ToughSwitch ® ruggedized Ethernet switches. +Astro-Med’s airborne printers are used in the flight deck and in the cabin of military, commercial and business aircraft to print +hard copies of data required for the safe and efficient operation of aircraft including navigation maps, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger +4 +Table of Contents +data, and various air traffic control data. ToughSwitch Ethernet switches are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne +printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flightworthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter airborne printers for +numerous aircraft made by Airbus, Boeing, Embraer, Bombardier, Lockheed, Gulfstream and others. +The Company’s family of +portable data recorders is used in research and development (R&D) and maintenance applications in aerospace and defense, energy discovery and production operations, rapid rail, automotive, and a variety of other transportation and industrial +applications. The TMX™ data acquisition system is designed for data capture of long-term testing where the ability to monitor high channel counts and view a wide variety of input signals, including time-stamped and synchronized video capture +data and audio notation is important. +Everest telemetry recorders are used widely in the aerospace industry to monitor and +track space vehicles, aircraft, missiles and other systems in flight. +Technology +The core technologies of Astro-Med are data visualization technologies that relate to (1) acquiring data, (2) conditioning the +data, (3) displaying the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. +Patents and +Copyrights +Astro-Med holds a number of product patents in the United States and in foreign countries. We rely on a +combination of copyright, patent, trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand name. While we consider our intellectual property to be important to the operation of our business, we +do not believe that any existing patent, license, trademark or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +Astro-Med manufactures most of the products that it designs and sells. Raw materials and supplies are typically available from a wide variety of sources. Astro-Med manufactures most of the sub-assemblies +and parts in-house including printed circuit board assemblies, harnesses, machined parts, and general final assembly. Many parts are standard electronic items available from multiple sources. Other parts are designed by us and manufactured by +outside vendors. There are a few parts that are sole source, but these parts could be sourced elsewhere with appropriate changes in the design of our product. +Product Development +Astro-Med maintains an active program of product +research and development. During fiscal 2016 and 2015, we spent $6,945,000 and $5,802,000, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to +continue our focus on research and development efforts in fiscal 2017 and beyond. +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in bench-top color +label printing technology and in aerospace printers. In the data acquisition area, we believe that we are one of the leaders in portable high speed data acquisition systems. +We retain a leadership position by virtue of proprietary technology, product reputation, delivery, technical assistance, and service to customers. The number of competitors varies by product line. Our +management +5 +Table of Contents +believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our product lines, but include technology, quality, service and support, +distribution network, and breadth of product and service offerings. +Our products are sold by direct field salespersons as well +as independent dealers and representatives. In the United States, the Company has factory-trained direct field salespeople located in major cities from coast to coast specializing in either QuickLabel or Astro-Med T&M products. Additionally, we +have direct field sales or service centers in Canada, China, France, Germany, Mexico, Southeast Asia and the United Kingdom staffed by our own employees. In the rest of the world, Astro-Med utilizes approximately 90 independent dealers and +representatives selling and marketing our products in 64 countries. +No single customer accounted for 10% or more of our net +sales in either of the last two fiscal years. +International Sales +In fiscal 2016 and 2015, net sales to customers in various geographic areas outside the United States, primarily in Canada and Western +Europe, amounted to $26,342,000 and $26,853,000, respectively. +Order Backlog +Astro-Med’s backlog fluctuates regularly. It consists of a blend of orders for end user customers as well as original equipment +manufacturer customers. Manufacturing is geared to forecasted demands and applies a rapid turn cycle to meet customer expectations. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2016 and +2015 was $16,630,000 and $12,061,000, respectively. +Employees +As of January 31, 2016, Astro-Med employed 329 people. We are generally able to satisfy our employment requirements. No employees are represented by a union. We believe that employee relations are +good. +Other Information +The Company’s business is not seasonal in nature. However, our sales are impacted by the size of certain individual transactions, which can cause fluctuations in sales from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those +reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities Exchange Commission +(SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. +Item 1A. +Risk Factors +The following risk factors should be carefully considered in evaluating Astro-Med because such +factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking +statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +Astro-Med’s operating results and financial condition could be harmed if the markets into which we sell our product decline or do not grow as anticipated. +Any decline in our customers’ markets or in their general economic conditions would likely result in a reduction in demand for our +products. For example, although we have continued to experience measured progress +6 +Table of Contents +in fiscal 2016 and 2015, as sales have increased from prior years, we are still affected by the continued global economic uncertainty as some of our customers remain reluctant to make capital +equipment purchases or are deferring these purchases to future quarters. Some of our customers are also limiting consumable product purchases to quantities necessary to satisfy immediate needs with no provisions to stock supplies for future use. +Also, if our customers’ markets decline, we may not be able to collect on outstanding amounts due to us. Such declines could harm our results of operations, financial position and cash flows and could limit our ability to continue to remain +profitable. +Astro-Med’s future revenue growth depends on our ability to develop and introduce new products and services on a +timely basis and achieve market acceptance of these new products and services. +The markets for our products are +characterized by rapidly changing technologies and accelerating product introduction cycles. Our future success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, +cost-effective products, product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our +offerings from our competitors’ offerings, price our products competitively, anticipate our competitors’ development of new products, and maintain high levels of product quality and reliability. Astro-Med spends a significant amount of +time and effort related to the development of our airborne and color printer products as well as our Test and Measurement data recorder products. Failure to further develop any of our new products and their related markets as anticipated could +adversely affect our future revenue growth and operating results. +As Astro-Med introduces new or enhanced products, we must +also successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. +The introduction of new or enhanced products may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to +defer purchasing existing products in anticipation of the new products. Additionally, when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage +excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out +new products or Astro-Med’s plans for future support of existing products may cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +Astro-Med faces significant competition and our failure to compete successfully could adversely affect our results of operations and financial +condition. +We operate in an environment of significant competition, driven by rapid technological advances, evolving +industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete on the basis of technology, performance, +price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve and to expand into additional market +segments. Additionally, current competitors or new market entrants may develop new products with features that could adversely affect the competitive position of our products. To remain competitive, we must develop new products, services and +applications and periodically enhance our existing offerings. If we are unable to compete successfully, we could lose market share and important customers to our competitors which could materially adversely affect our business, results of operations +and financial position. +7 +Table of Contents +Astro-Med is dependent upon contract manufacturers for some of our products. If these manufacturers do +not meet our requirements, either in volume or quality, then we could be materially harmed. +We subcontract the +manufacturing and assembly of certain of our products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Limited control over the manufacturing process; +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; and +• +Reduced control over delivery schedules, manufacturing yields, quality and costs. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture these products in required volumes or +fails to meet our quality standards, we will have to identify qualified alternate subcontractors or we will have to take over the manufacturing ourselves in as much as we own the designs, drawings, and bills of material for all our products. +Additional qualified subcontractors may not be available, or may not be available on a timely or cost competitive basis. Any interruption in the supply or increase in the cost of the products manufactured by third party subcontractors or failure of +a subcontractor to meet quality standards could have a material adverse effect on our business, operating results and financial condition. +For certain components and assembled products, Astro-Med is dependent upon single or limited source suppliers. If these suppliers do not meet +demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components +for our products where possible, we purchase certain components and assembled products used in the manufacture of our products from a single source or limited supplier sources. If the supply of a key component or assembled products were to be +delayed or curtailed or, in the event a key manufacturing or sole vendor delays shipment of such components or assembled products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. Our business, +results of operations and financial position could also be adversely affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative +source. Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply these components or assembled products in required volumes, we will have to identify and qualify acceptable replacements or redesign our +products with different components. Alternative sources may not be available, or product redesign may not be feasible on a timely basis. Any interruption in the supply of or increase in the cost of the components and assembled products provided by +single or limited source suppliers could have a material adverse effect on our business, operating results and financial condition. +Compliance with rules governing “conflict minerals” could adversely affect the availability of certain product components and our costs +and results of operations could be materially harmed. +SEC rules require disclosures regarding the use of +“conflict minerals” mined from the Democratic Republic of the Congo and adjoining countries necessary to the functionality or production of products manufactured or contracted to be manufactured. We have determined that we use gold, tin +and tantalum, each of which are considered “conflict minerals” under the SEC rules, as they occur in electronic components supplied to us in the manufacture of our products. Because of this finding, we are required to conduct inquiries +designed to determine whether any of the conflict minerals contained in our products originated or may have originated in the conflict region or come from recycled or scrap sources. There are costs associated with complying with these disclosure +requirements, including performing due diligence in regards to the source of any conflict minerals used in our products, in addition to the cost of remediation or other changes to products, processes or services of supplies that may be necessary as +a consequence of such verification activities. As we use contract manufacturers for some of our products, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that +we implement. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. As a +result, our business, operating results and financial condition could be harmed. +8 +Table of Contents +Economic, political and other risks associated with international sales and operations could adversely +affect Astro-Med’s results of operations and financial position. +Because we sell our products worldwide, our +business is subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect sales to customers outside the U.S., accounted for approximately 30% of our total revenue for +fiscal year 2016 and we anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, job functions and facilities located outside the U.S. Accordingly, our +business, operating results and financial condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Differing protection of intellectual property; +• +Unexpected changes in regulatory requirements; and +• +Geopolitical turmoil, including terrorism and war. +Astro-Med’s profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure. +Our success depends on our ability to obtain adequate pricing for our products and services which provides a reasonable return to our +shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to +offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially +adversely affected. +We are continually reviewing our operations with a view towards reducing our cost structure, including but +not limited to downsizing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions. From time to time we also engage in restructuring actions to reduce our cost structure. If we +are unable to maintain process and systems changes resulting from cost reduction and prior restructuring actions, our results of operations and financial position could be materially adversely affected. +Astro-Med could incur liabilities as a result of installed product failures due to design or manufacturing defects. +Astro-Med has incurred and could incur additional liabilities as a result of installed product failures due to design or manufacturing +defects. Our products may have defects despite testing internally or by current or potential customers. These defects could result in among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market +acceptance or substantial damage to our reputation. We could be subject to material claims by customers, and may incur substantial expenses to correct any product defects. +9 +Table of Contents +In addition, through our acquisitions, we have assumed, and may in the future assume, +liabilities related to products previously developed by an acquired company that have not been through the same level of product development, testing and quality control processes used by us, and may have known or undetected errors. Some types of +errors may not be detected until the product is installed in a user environment. This may cause Astro-Med to incur significant warranty and repair or re-engineering costs, may divert the attention of engineering personnel from product development +efforts, and may cause significant customer relations problems such as reputational problems with customers resulting in increased costs and lower profitability. +Astro-Med could experience disruptions in, or breach in security of our information technology system or fail to implement new systems or software successfully which could harm our business and +adversely affect our results of operations. +Astro-Med employs information technology systems to support our business. +During the first quarter of fiscal 2016, Astro-Med completed the upgrade of its Enterprise Resource Planning (ERP) system to the Oracle JD Edwards EnterpriseOne platform. This new system went live in March 2015 for all of our U.S. operations. Any +security breaches or other disruptions to our information technology infrastructure could interfere with operations, compromise our information and that of our customers and suppliers, and expose us to liability which could adversely impact our +business and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a +variety of business processes and activities. We also collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations +and customer-imposed controls. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches and our information technology +networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural +disasters, catastrophic events or other unforeseen events. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of them to date has had a material +impact. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to the Company’s reputation, which could adversely affect our business, operating results and +financial condition. +Astro-Med is subject to laws and regulations; failure to address or comply with these laws and regulations could +harm our business and adversely affect our results of operations. +Our operations are subject to laws, rules, +regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify +our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our +products. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +Certain of our products require certifications by regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business. +In certain industries and for certain products, such as those used in aircraft, we must obtain certifications for our +products by regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our business, financial condition, +results of operations and cash flows could be materially and adversely affected. +10 +Table of Contents +Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, +and any determination that the Company or any of its subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to +government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some +degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and +procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies. +Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial +compliance costs or otherwise adversely affect our business. +Our operations are subject to numerous federal, state, +local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of +solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. We have used and continue to use various substances in our products and manufacturing operations, and have generated and continue to generate wastes, which have +been or may be deemed to be hazardous or dangerous. As such, our business is subject to and may be materially and adversely affected by compliance obligations and other liabilities under environmental, health and safety laws and regulations. These +laws and regulations affect ongoing operations and require capital costs and operating expenditures in order to achieve and maintain compliance. +Adverse conditions in the global banking industry and credit markets may adversely impact the value of our investments or impair our liquidity. +At the end of fiscal 2016, we had approximately $20 million of cash, cash equivalents and investments held for sale. Our cash and cash +equivalents are held in a mix of money market funds and bank demand deposit accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as money market funds that traditionally have been viewed as +highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our financial position. Our investment portfolio consists of state and +municipal securities with various maturity dates, all of which have a credit rating of AA or above at the original purchase date; however, defaults by the issuers of any of these securities may result in an adverse impact on our portfolio. +Astro-Med may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and +integration of acquired companies or divestiture of businesses may negatively impact Astro-Med’s overall business. +Astro-Med has acquired or made strategic investments in other companies, products and technologies, including our most recent acquisition +in June 2015 of the aerospace printer business from RITEC. We may continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that +we will be able to identify suitable acquisition opportunities. In any acquisition that we complete we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +11 +Table of Contents +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative effect on operating results or other +aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental effect on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse effect on our reputation; and +• +Respective operations, management and personnel will be compatible. +In certain instances as permitted by applicable law and NASDAQ rules, acquisitions may be consummated without seeking and obtaining +shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in a particular acquisition, there can be no +assurance that we will properly ascertain or assess such risks. +Astro-Med may also divest certain businesses from time to +time. Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture +depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. +Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If Astro-Med is not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize expected benefits of our acquisitions, +divestitures or strategic partnerships, Astro-Med’s business, results of operations and financial condition could be adversely affected. +Item 1B. Unresolved Staff Comments +None. +12 +Table of Contents +Item 2. Properties +The following table sets forth information regarding the Company’s principal owned properties, all of which are included in the +consolidated balance sheet appearing elsewhere in this annual report. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, USA +135,500 +Corporate headquarters, research and development, manufacturing, sales and service +Slough, England +1,700 +Sales and service +Astro-Med also leases facilities in various other locations. The following information pertains to each +location: +Location +Approximate +Square +Footage +Principal Use +Rodgau, Germany +8,300 +Manufacturing, sales and service +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service +Elancourt, France +4,150 +Sales and service +Schaumburg, Illinois, USA +630 +Sales +Wilmington, Delaware, USA +500 +Sales +El Dorado Hills, California, USA +275 +Sales +Newport Beach, California, USA +150 +Sales +Monterrey, Mexico +100 +Sales +We believe our facilities are well maintained, in good operating condition and generally adequate to meet +our needs for the foreseeable future. +Item 3. Legal Proceedings +There are no pending or threatened legal proceedings against the Company believed to be material to the financial position or results of +operations of the Company. +Item 4. Mine Safety Disclosures +Not applicable. +13 +Table of Contents +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +Astro-Med’s common stock trades on the NASDAQ Global Market under the symbol “ALOT.” The +following table sets forth the range of high and low sales prices and dividend data, as furnished by NASDAQ, for each quarter in the years ended January 31: +High +Low +Dividends +Per Share +2016 +First Quarter +$ +15.15 +$ +12.43 +$ +0.07 +Second Quarter +$ +15.20 +$ +13.66 +$ +0.07 +Third Quarter +$ +14.25 +$ +12.00 +$ +0.07 +Fourth Quarter +$ +15.94 +$ +12.68 +$ +0.07 +2015 +First Quarter +$ +14.40 +$ +11.25 +$ +0.07 +Second Quarter +$ +14.53 +$ +12.36 +$ +0.07 +Third Quarter +$ +14.11 +$ +12.02 +$ +0.07 +Fourth Quarter +$ +16.50 +$ +13.11 +$ +0.07 +Astro-Med had approximately 282 shareholders of record as of March 24, 2016, which does not reflect +shareholders with beneficial ownership in shares held in nominee name. +14 +Table of Contents +Stock Performance Graph +The graph below shows a comparison of the cumulative total return on the Company’s common stock against the cumulative total returns for the NASDAQ Composite Index and the NASDAQ Electronic +Components Index for the period of five fiscal years ended January 31, 2016. The NASDAQ Total Return Composite Index is calculated using all companies trading on the NASDAQ Global Select, NASDAQ Global Market and the NASDAQ Capital Markets. The +Index is weighted by the current shares outstanding and assumes dividends are reinvested. The NASDAQ Electronic Components Index, designated as the Company’s peer group index, is comprised of companies classified as electronic equipment +manufacturers. +COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* +Among Astro-Med, Inc., the NASDAQ Composite Index +and the NASDAQ Electronic Components Index +Cumulative Total Returns* +FY2011 +FY2012 +FY2013 +FY2014 +FY2015 +FY2016 +Astro-Med, Inc. +$ +100.00 +$ +106.42 +$ +137.63 +$ +192.62 +$ +215.03 +$ +230.23 +NASDAQ Composite +$ +100.00 +$ +105.49 +$ +119.12 +$ +158.83 +$ +179.91 +$ +179.03 +NASDAQ Electronic Components +$ +100.00 +$ +99.86 +$ +93.05 +$ +122.63 +$ +158.22 +$ +152.69 +* +$100 invested on 1/31/11 in stock or index, including reinvestment of dividends. +Fiscal +year ending January 31. +Dividend +Policy +Astro-Med began a program of paying quarterly cash dividends in fiscal 1992 and has paid a dividend for 98 +consecutive quarters. During fiscal 2016 and 2015, we paid a dividend of $0.07 per share in each quarter and anticipate that we will continue to pay comparable cash dividends on a quarterly basis. +Stock Repurchases +Pursuant to an authorization approved by Astro-Med’s Board of Directors in August 2011, the Company is currently authorized to +repurchase up to 390,000 shares of common stock. This is an ongoing authorization without any expiration date. +15 +Table of Contents +During the fourth quarter of fiscal 2016, the Company made the following repurchases of its +common stock: +Total Number +of Shares +Repurchased +Average +Price paid +Per Share +Total Number of +Shares +Purchased as +Part of Publicly +Announced Plans or +Programs +Maximum Number +of Shares That +May Be +Purchased +Under The Plans +or +Programs +November 1—November 28 +— +— +— +390,000 +November 29—December 26 +— +— +— +390,000 +December 27—January 31 +25,886 +(a) +$ +14.03 +(a) +— +390,000 +(a) +During January 2016, employees of the Company delivered 25,886 shares of the Company’s common stock to satisfy the exercise price for 35,938 stock options +exercised. The shares delivered were valued at an average market value of $14.03 per share and are included with treasury stock in the consolidated balance sheet. This transaction did not impact the number of shares authorized for repurchase under +the Company’s current repurchase program. +Item 6. Selected +Financial Data +We are a “smaller reporting company” and, as such, are not required to provide this +information. +Item 7. Management’s Discussion and Analysis of Financial +Condition and Results of Operations +Overview +Astro-Med is a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, +store, analyze and present data in multiple formats. The Company organizes its structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. It markets and sells its products and +services through the following two sales product groups: +• +QuickLabel Product Group– offers product identification and label printer hardware, software, servicing contracts, and consumable products. +• +Test and Measurement Product Group (T&M)– offers a suite of products and services that acquire and record visual and electronic signal data +from local and networked data stream and sensors as well as wired and wireless networks. The recorded data is processed and analyzed and then stored and presented in various visual output formats. The T&M segment also includes a line of +aerospace printers that are used to print hard copies of data required for the safe and efficient operation of aircraft including navigation maps, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, +and various air traffic control data. Aerospace products also include Ethernet switches which are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. +Astro-Med markets and sells its products and services globally through a diverse distribution structure of direct sales personnel, +manufacturers’ representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on organic growth through product innovation made possible +by research and development initiatives, as well as strategic acquisitions that fit into existing core businesses. Research and development activities were funded and expensed by the Company at approximately 7.3% of annual sales for fiscal 2016. We +also continue to invest in sales and marketing initiatives by expanding the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding today’s challenging economic +environment. +On June 19, 2015, Astro-Med completed the asset purchase of the aerospace printer product line from RITEC. +Astro-Med’s aerospace printer product line is part of the T&M product group and is reported as part of the T&M segment. The Company began shipment of the RITEC products in the third quarter of the current fiscal year. Refer to Note 2, +“Acquisition,” in the audited consolidated financial statements included elsewhere in this report. +16 +Table of Contents +On September 25, 2015, the Company announced it would immediately +begin doing business as AstroNova on a worldwide basis. The name change is part of the plan to modernize the Company and effectively communicate our strategy. The AstroNova name and brand emphasizes our traditional strengths in aerospace and +acknowledges our expanding presence in Test & Measurement, product identification and other new areas where we can apply our data visualization technology. Astro-Med’s aerospace products and Test & Measurement business will adopt +the AstroNova brand. QuickLabel products will continue to go to market under the QuickLabel brand. +Results of Operations +The following table presents the net sales of each of the Company’s segments, as well as the percentage of total sales and change +from prior year. +($ in thousands) +2016 +2015 +Net +Sales +As a % of +Total Net Sales +% Change +Over Prior Year +Net +Sales +As a % of +Total Net Sales +QuickLabel +$ +67,127 +70.9 +% +12.3 +% +$ +59,779 +67.7 +% +T&M +27,531 +29.1 +% +(3.6 +)% +28,568 +32.3 +% +Total +$ +94,658 +100.0 +% +7.1 +% +$ +88,347 +100.0 +% +Fiscal 2016 compared to Fiscal 2015 +Astro-Med’s net sales in fiscal 2016 were $94,658,000, a 7.1% increase as compared to prior year sales of $88,347,000. Domestic sales of $68,316,000 increased 11.1% from the prior year sales of +$61,494,000. International sales of $26,342,000 reflect a 1.9% decrease as compared to prior year sales of $26,853,000. The current year’s international sales include an unfavorable foreign exchange rate impact of $3,022,000. +Hardware sales in fiscal 2016 were $34,824,000, a 10.0% decrease compared to prior year’s sales of $38,685,000. Hardware sales in +both the T&M and QuickLabel segments contributed to the lower volume of hardware shipments. Current year T&M hardware sales decreased 8.9% as compared to the prior year attributable to the decline in sales of aerospace printers, as many +customers are deferring the shipments of orders to later periods, and the decline in data recorder sales due to the Company’s delay in the release of a new product. QuickLabel hardware sales declined 11.9% as compared to the prior year, +primarily as a result of lower OEM monochrome and other color printer sales. These declines in hardware sales were slightly offset by increases in sales of T&M’s data acquisition product line, as well as an increase in sales of the Kiaro! +series printers in the QuickLabel product group. +Consumable sales in fiscal 2016 were $51,764,000, representing an 18.8% +increase as compared to prior year sales of $43,568,000. The increase in consumable sales for the current fiscal year was primarily attributable to the double-digit increase in both digital color printer supplies and label and tag product sales in +the QuickLabel segment. The increase in consumable product sales for the current year for QuickLabel’s Kiaro! related products also made a contribution to the overall increase in consumable sales for the current year. +Service and other sales revenue in fiscal 2016 were $8,070,000, a 32.4% increase compared to prior year revenue of $6,094,000 and was +primarily due to increases in repairs and parts revenue related to the T&M suite of products. +The Company achieved gross +profit of $38,158,000 for fiscal 2016, reflecting a 3.2% improvement as compared to prior year’s gross profit of $36,977,000. However, the Company’s gross profit margin of 40.3% in the current year reflects a decrease from the prior +year’s gross profit margin of 41.9%. The higher gross profit for the current year as compared to the prior year is primarily attributable to increased sales, while the current year’s decrease in gross margin percentage is due to product +mix, higher manufacturing costs and lower factory absorption. +Operating expenses for the current year were $32,224,000, +representing an 8.3% increase from prior year’s operating expenses of $29,746,000. Selling and marketing expenses remained relatively flat from prior year at +17 +Table of Contents +$18,249,000 in fiscal 2016, representing 19.3% of sales, compared to $18,289,000 or 20.7% of sales in the prior year. However, general and administrative (G&A) expenses increased by 24.3% +from prior year to $7,030,000 in fiscal 2016 primarily due to an increase in stock-based compensation expense, as well as professional fees related to both the Company’s name change and branding initiative as well as the costs associated with +the acquisition of the RITEC business. Research & development (R&D) in fiscal 2016 has increased 19.7% to $6,945,000. The increase in R&D for fiscal 2016 is primarily due to an increase in outside service costs related to the +development of new products as well as RITEC transitional R&D costs. The R&D spending level for fiscal 2016 represents 7.3% of net sales, an increase as compared to prior year’s level of 6.6%. +Other income in fiscal 2016 was $975,000 compared to other expense of $299,000 in the prior year. In addition to interest income, the +current year other income includes $248,000 of income recognized from a settlement in an escrow account related to our 2014 acquisition of the aerospace printer line from the Miltope Corporation. Other expense in fiscal 2015 included a $251,000 +write down on the disposition of inventory related to the conclusion and settlement of the transition services agreement entered into in connection with the 2013 sale of our Grass Technologies Product Group. +During fiscal 2016 the Company recognized a $2,384,000 income tax expense and had an effective tax rate of 34.5%. Included in current year +income tax expense is a $135,000 benefit related to the statute of limitations expiring on a previously uncertain tax position and a $22,000 tax expense due to the change in estimate relating to prior year’s federal taxes. This compares to an +income tax expense of $2,270,000 in fiscal 2015 and related effective tax rate of 32.7%. The effective tax rate for fiscal 2015 was primarily impacted by the domestic production deduction, research and development credits and foreign tax credits. +Net income for fiscal 2016 was $4,525,000, providing a return of 4.8% on sales and generating an EPS of $0.61 per diluted +share and includes (a) an after-tax expense of $181,000, equal to $0.02 per diluted share, related to the Company’s rebranding initiatives; (b) an after-tax expense of $663,000, equal to $0.09 per diluted share, related to +non-recurring costs associated with the RITEC acquisition and transition; and (c) an after-tax expense of $357,000, equal to $0.05 per diluted share, related to the 2016 Long-Term Incentive Plan Share Based Compensation. On a comparable basis, +net income for fiscal 2015 was $4,662,000, providing a return of 5.3% on sales and generating an EPS of $0.60 per diluted share and includes (a) an after-tax expense of $147,000, equal to $0.02 per diluted share, related to the write-down to +market value of the Company’s former Rockland facility; (b) an after-tax expense of $68,000, equal to $0.01 per diluted share, related to costs associated with the repurchase of the Company’s common stock from the estate of the +Company’s founder and former chief executive officer, and (c) and after-tax expense of $168,000 or $0.02 per diluted share related to a write down of inventory in connection with the sale of our former Grass Technologies Product Group. +Segment Analysis +Astro-Med reports two segments consistent with its sales product groups: QuickLabel and Test & Measurement (T&M). Segment performance is evaluated based on the operating segment’s profit +before corporate and financial administration expenses. +18 +Table of Contents +The following table summarizes selected financial information by segment. +($ in thousands) +Net Sales +Segment Operating Profit +Segment Operating Profit as +a % of Net Sales +2016 +2015 +2016 +2015 +2016 +2015 +QuickLabel +$ +67,127 +$ +59,779 +$ +9,300 +$ +7,259 +13.9 +% +12.1 +% +T&M +27,531 +28,568 +3,664 +5,627 +13.3 +% +19.7 +% +Total +$ +94,658 +$ +88,347 +12,964 +12,886 +13.7 +% +14.6 +% +Corporate Expenses +7,030 +5,655 +Operating Income +5,934 +7,231 +Other Income (Expense), Net +975 +(299 +) +Income Before Income Taxes +6,909 +6,932 +Income Tax Provision +2,384 +2,270 +Net Income +$ +4,525 +$ +4,662 +QuickLabel +Sales revenues from the QuickLabel product group increased 12.3% in fiscal 2016 with sales of $67,127,000 compared to sales of $59,779,000 in the prior year. The current year’s sales reflected the +continued growth from QuickLabel’s consumable products line which posted a 19.5% growth rate over the prior year due to the strong demand for label and tag products as well as digital color printer ink supplies products for the new Kiaro! +printers. QuickLabel’s current year’s segment operating profit was $9,300,000, reflecting a profit margin of 13.9%, a 28.1% increase from prior year’s segment profit of $7,259,000 and related profit margin of 12.1%. The increase in +QuickLabel’s current year segment operating profit and related margin is due to higher sales and product mix. +Test & Measurement +Sales revenues from the T&M product group were $27,531,000 for fiscal 2016, a 3.6% decrease as compared to sales of $28,568,000 in the prior year. The decrease is primarily attributable to the decline +in sales of aerospace printers due to certain aerospace customers deferring shipments to later dates. However, sales growth in the data acquisition product line, as well as increases in parts and repairs revenue during the year slightly tempered the +lower sales volume. T&M’s segment operating profit for the current fiscal year was $3,664,000 which resulted in a 13.3% profit margin as compared to the prior year’s segment operating profit of $5,627,000 and related operating margin +of 19.7%. The lower segment operating profit and related margin were due to product mix and higher manufacturing and operating costs associated with the RITEC transaction. +Liquidity and Capital Resources +The Company expects to finance its future +working capital needs, capital expenditures and acquisition requirements through internal funds and believes that cash provided by operations will be sufficient to meet our operating and capital needs for at least the next twelve months. To the +extent our capital and liquidity requirements are not satisfied internally, we may utilize a $10.0 million revolving bank line of credit. Borrowings made under this line of credit bear interest at either a fluctuating base rate equal to the highest +of (i) the Prime Rate, (ii) 1.50% above the daily one-month LIBOR, and (iii) the Federal Funds Rate in effect plus 1.50%; or at a fixed rate of LIBOR plus an agreed upon margin of between 0% and 2.25%, based on the Company’s +funded debt to EBITDA ratio as defined in the agreement. See Note 7, “Line of Credit,” in our audited consolidated financial statements included elsewhere in this report. As of the filing date of this Annual Report on Form 10-K, there have +been no borrowings against this line of credit and the entire line is currently available. +19 +Table of Contents +Astro-Med’s statements of cash flows for the years ended January 31, 2016 and 2015 +are included on page 37. Net cash provided by operating activities was $7,727,000 in the current year compared to net cash provided by operating activities of $1,491,000 in the previous year. The increase in net cash from operations for the +current year is primarily related to increased net sales and lower working capital requirements for the current year, as well as the current year’s increase in the non-cash expense for share-based compensation. Also contributing to the increase +in operating cash for the current year as compared to the prior year were the prior year tax payments made in connection with the gain on the sale of Grass. The combination of accounts receivable, inventory and accounts payable and accrued expenses +decreased cash by $534,000 in fiscal 2016, compared to a decrease of $2,335,000 in fiscal 2015, with the year-over-year improvement related to lower receivable and inventory turns, offset slightly by increased sales and purchasing volume. The +accounts receivable collection cycle decreased to 50 days sales outstanding at January 31, 2016 compared to 52 days outstanding at the prior year end. Inventory days on hand decreased to 92 days at the end of the current fiscal year from 106 +days at the prior year end. +Net cash used by investing activities for fiscal 2016 was $3,542,000, which includes $9,978,000 of +proceeds from the sales and maturities of securities available for sale, which was partially offset by $5,192,000 of cash used to purchase securities available for sale, and $7,360,000 of cash used to purchase the RITEC aerospace printer business. +Cash used for investing activities for fiscal 2016 also included cash used for capital expenditures of $3,061,000, consisting of $947,000 for land and building improvements; $657,000 for information technology primarily related to the purchase and +implementation of the Company’s new Enterprise Resource Planning system; $663,000 for machinery and equipment; $561,000 for tools and dies; and $233,000 for furniture, fixtures and other capital expenditures. +Included in net cash used in financing activities for fiscal 2016 were dividends paid of $2,048,000. Dividends paid in fiscal 2015 were +$2,128,000. The Company’s annual dividend per share was $0.28 in both fiscal 2016 and fiscal 2015. The Company did not repurchase any shares of its common stock in fiscal 2016. In fiscal 2015, the Company repurchased 500,000 shares of its +common stock at a per share price of $12.50, for an aggregate repurchase price of $6,250,000. The purchase of these shares was from the estate of the former founder and chief executive officer of the Company and did not impact the shares available +as part of the Company’s stock buyback program. At January 31, 2016, the Company’s Board of Directors has authorized the purchase of an additional 390,000 shares of the Company’s common stock in the future. +Contractual Obligations, Commitments and Contingencies +Astro-Med is subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, such as: contract and employment claims; workers +compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with +respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on our consolidated financial +position or results of operations. It is possible, however, that results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the +Company’s control. +Critical Accounting Policies and Estimates +Astro-Med’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated +financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for +calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and +estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on the Company’s +20 +Table of Contents +historical experience, current trends and information available from other sources, as appropriate. If different conditions result from those assumptions used in our judgments, the results could +be materially different from our estimates. We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements: +Revenue Recognition : Our product sales are recognized when all of the following criteria have been met: persuasive evidence of an +arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is reasonably assured. When other significant obligations remain after products +are delivered, revenue is recognized only after such obligations are fulfilled. Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights of return are not included in sales arrangements. Revenue associated with +products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. When a sale arrangement involves training or installation, the deliverables in the arrangement are evaluated to +determine whether they represent multiple element arrangements. This evaluation occurs at inception of the arrangement and as each item in the arrangement is delivered. The total fee from the arrangement is allocated to each unit of accounting based +on its relative fair value. Fair value for each element is established generally based on the sales price charged when the same or similar element is sold separately. We allocate revenue to each element in our multiple-element arrangements based +upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on our vendor specific objective evidence (VSOE) if available, third-party +evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met. The +amount of product revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements. +Astro-Med recognizes revenue for non-recurring engineering (NRE) fees, as necessary, for product modification orders upon completion of +agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer +acceptance for the specific milestone before recognizing revenue. +Infrequently, the Company receives requests from customers +to hold product being purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements provided the transaction meets the following criteria: a valid business purpose for the arrangement exists; risk of +ownership of the purchased product has transferred to the buyer; there is a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the product is ready for shipment; the payment terms are customary; we have no +continuing performance obligation in regards to the product; and the product has been segregated from our inventories. +The +majority of our equipment contains embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold separately or marketed +separately and its production costs are minor as compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered non-software elements and are not subject to the industry-specific software revenue +recognition guidance. +Warranty Claims and Bad Debts: Provisions for the estimated costs for future product warranty +claims and bad debts are recorded in cost of sales and general and administrative expense, respectively. The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that might +impact the historical analysis such as new product introduction for warranty and bankruptcies of particular customers for bad debts. We also periodically evaluate the adequacy of our reserves for warranty and bad debts recorded in our consolidated +balance sheet as a further test to ensure the adequacy of the recorded provisions. Warranty and bad debt analysis often involves subjective analysis of a particular customer’s ability to pay. As a result, significant judgment is required in +determining the appropriate amounts to record and such judgments may prove to be incorrect in the future. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in +subsequent periods when the estimates are adjusted to the actual amounts. +21 +Table of Contents +Inventories: Inventories are stated at the lower of cost (first-in, first-out) or +market. The Company records provisions to write-down obsolete and excess inventory to its estimated net realizable value. The process for evaluating obsolete and excess inventory consists of analyzing the inventory supply on hand and estimating the +net realizable value of the inventory based on historical experience, current business conditions and anticipated future sales. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material +adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income Taxes: A valuation +allowance is established when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, including our performance, the +market environment in which we operate, length of carryforward periods, existing sales backlog and future sales projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net +deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2016, the Company has provided valuation allowances for future state tax benefits resulting from certain R&D tax credits which +could expire unused. +The calculation of tax liabilities involves significant judgment in estimating the impact of +uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of +whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be +materially impacted. +Intangible and Long-Lived Assets: Long-lived assets, such as definite-lived intangible assets and +property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted +future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the +fair value, which is determined by the discounting of future cash flows. +Assets Held for Sale: Assets held for sale are +reported at the lower of cost or fair value. Cost to sell are accrued separately. Assets held for sale are subject to an impairment assessment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If +the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, the amount of impairment is the difference between the carrying amount and the fair value of the asset, less costs to sell. +Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, +such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether further impairment +testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and +changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two step process is then performed. +Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the goodwill. +Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this +approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to publicly-traded +companies and transactions involving similar businesses, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and +working capital, as well as discount factors and income tax rates. +22 +Table of Contents +Share-Based Compensation: Share-based compensation expense is measured based on the +estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant +using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the +risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted-average expected life of our options. +Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of +the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grants and assessed the expected risk tolerance of different option groups. The risk-free interest rate +used in the model is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No +compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also +based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the grant date of the applicable RSU or RSA. +Recent Accounting Pronouncements +Reference is made to Note 1 of our +consolidated financial statements included herein. +Item 7A. Quantitative and Qualitative +Disclosures about Market Risk +The registrant is a smaller reporting company and is not required to provide this +information. +23 +Table of Contents +Item 8. Financial Statements and Supplementary +Data +The consolidated financial statements required under this item are submitted as a separate section of this report +on the pages indicated at Item 15(a)(1). +Item 9. Changes in and Disagreements with +Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has +evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form +10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls +and procedures were effective at January 31, 2016 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and +communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such +term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the +preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the +inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of +changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness +of its internal control over financial reporting as of January 31, 2016. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring +Organizations of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2016, the Company’s internal control over financial +reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +This annual +report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered +public accounting firm pursuant to the rules of the SEC that permit the Company to provide only management’s report in this annual report. +Changes in Internal Controls over Financial Reporting +There have been no +changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +24 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item is incorporated herein by reference to the Company’s definitive proxy statement for the 2016 Annual Meeting of Shareholders. +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of +the Board of Directors. +Name +Age +Position +Gregory A. Woods +57 +President, Chief Executive Officer and Director +Joseph P. O’Connell +72 +Senior Vice President, Treasurer and Chief Financial Officer +Michael M. Morawetz +56 +Vice President—International Branches +Stephen M. Petrarca +53 +Vice President—Operations +Erik J. Mancyak +40 +Vice President and Corporate Controller +Eric E. Pizzuti +49 +Vice President and General Manager—QuickLabel +Michael J. Natalizia +52 +Vice President and Chief Technology Officer +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods +joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from January 2010 to +August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to 2010, +Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts. +Mr. O’Connell joined the Company in 1996. He previously held senior financial management positions with Cherry Tree Products Inc., IBI Corporation and Avery Dennison Corporation. +Mr. O’Connell is also Assistant Secretary of the Company. He was appointed to the position of Senior Vice President in 2007. +Mr. Morawetz was appointed Vice President International Branches in 2006. He was previously the General Manager of Branch Operations for the Company’s German subsidiary, having joined the +Company in 1989. +Mr. Petrarca was appointed Vice President of Operations in 1998. He has previously held positions as +General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Mancyak was appointed Vice President of the Company in 2011. He also holds the position of Corporate Controller and Principal Accounting Officer to which he was appointed in 2009. He served as +Assistant Corporate Controller of the Company from 2008 to 2009 and prior to that was an Accounting Manager of the Company beginning in 2005. Prior to 2005, Mr. Mancyak was Senior Treasury Analyst at American Power Conversion and an auditor at +the international accounting firm of KPMG LLP. +Mr. Eric E. Pizzuti was appointed Vice President and General Manager +of the Company’s QuickLabel business segment on March 9, 2012. Prior to this appointment, Mr. Pizzuti held the position of Vice President and Worldwide Director of Sales for QuickLabel Systems from March 2010 and Worldwide Director of +Sales from March 2006 through March 2010. Mr. Pizzuti has held various other positions since joining the Company in 1996. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company on March 9, 2012. Prior to this +appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +25 +Table of Contents +Code of Ethics +The Company has adopted a Code of Conduct which applies to all directors, officers and employees of the Company, including the Chief Executive Officer (“CEO”), Chief Financial Officer +(“CFO”) and Corporate Controller, which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request +directed to Investor Relations or can be obtained on the Company’s website, (www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” The Company intends to disclose any +amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, Corporate Controller or persons performing similar functions by posting such information on its website. +Item 11. Executive Compensation +The information required by to this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2016 Annual Meeting of Shareholders. +The information set forth under the heading “Compensation Committee Report” in the Company’s definitive Proxy Statement is +furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2016 +Annual Meeting of Shareholders. +Equity Compensation Plan Information +The following table sets forth information about the Company’s equity compensation plans as of January 31, 2016: +Plan Category +Number of Securities to +be Issued Upon Exercise +of Outstanding +Options, +Warrants and Rights +Weighted- +Average Exercise +Price of +Outstanding +Options, +Warrants +and +Rights +Number of Securities +Remaining Available for +Future Issuance +Under +Equity Compensation Plans +Equity Compensation Plans Approved by Shareholders +930,136 +(1) +$ +11.00 +(2) +406,211 +(3) +Equity Compensation Plans Not Approved by Shareholders +— +— +— +Total +930,136 +(1) +$ +11.00 +(2) +392,211 +(1) +Includes 47,974 shares issuable upon exercise of outstanding options granted under the Company’s 1997 incentive stock option plan; 26,500 shares issuable upon +exercise of outstanding options granted under the Company’s 1998 non-qualified stock option plan; 553,462 shares issuable upon exercise of outstanding options granted and 37,200 restricted stock units outstanding under the Company’s 2007 +Equity Incentive Plan; and 30,000 shares issuable upon exercise of outstanding options granted and 235,000 restricted stock units outstanding under the Company’s 2015 Equity Incentive Plan. +(2) +Does not include restricted stock units. +(3) +Represents 354,611 shares available for grant under the Astro-Med, Inc. 2007 and 2015 Equity Incentive Plans and 51,600 shares available for purchase under the Employee +Stock Purchase Plan. This balance does not include 20,888 shares issued pursuant to outstanding unvested restricted stock awards which are subject to forfeiture. +26 +Table of Contents +Additional information regarding these equity compensation plans is contained in Note 11, +“Share-Based Compensation,” in the Company’s Consolidated Financial Statements included in Item 15 hereto. +Item 13. Certain Relationships, Related Transactions and Director Independence +The information required by this item is incorporated herein by reference to the Company’s definitive Proxy +Statement for the 2016 Annual Meeting of Shareholders. +Item 14. Principal +Accountant Fees and Services +The information required by this item is incorporated herein by reference to the +Company’s definitive Proxy Statement for the 2016 Annual Meeting of Shareholders. +27 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part of this Annual Report filed on Form 10-K: +Page +Report of Independent Registered Public Accounting Firm +32 +Consolidated Balance Sheets as of January 31, 2016 and 2015 +33 +Consolidated Statements of Income—Years Ended January 31, 2016 and 2015 +34 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2016 and +2015 +35 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January +31, 2016 and 2015 +36 +Consolidated Statements of Cash Flows—Years Ended January 31, 2016 and 2015 +37 +Notes to Consolidated Financial Statements +38-58 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January 31, 2016 and +2015 +59 +All other schedules for which provision is made in the applicable accounting regulations of the Securities +and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +28 +Table of Contents +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Asset Purchase Agreement dated January 11, 2014 by and between Astro-Med, Inc. (the “Company”) and Miltope Corporation (d/b/a VT Miltope, a company of VT Systems), an +Alabama corporation (the “Seller”), as amended by that Amendment to Asset Purchase Agreement dated January 22, 2014, by and between the Company and the Seller (filed as Exhibit No. 2.1 to the Company’s report on Form 8-K dated January +22, 2014 and by this reference incorporated herein). +(2.2) +Asset Purchase Agreement dated January 5, 2013 by and among Astro-Med, Inc. (the “Company”), Grass Technologies Corporation (“Grass”) and Natus Medical +Incorporated (“Natus”), as amended by First Amendment to Asset Purchase Agreement dated as of January 31, 2013, by and among the Company, Grass and Natus (filed as Exhibit No. 2.1 to the Company’s report on Form 8-K dated February 4, +2013 and by this reference incorporated herein). +(2.3) +Asset Purchase Agreement dated June 18, 2015 by and among Astro-Med, Inc. (the “Company”), and Rugged Information Technology Equipment Corp. +(“RITEC”).* +(3A) +Articles of Incorporation of the Company and all amendments thereto (filed as Exhibit No. 3A to the Company’s report on Form 10-Q for the quarter ended August 1, 1992 (File +No. 000-13200) and by this reference incorporated herein). +(3B) +By-laws of the Company as amended to date (filed as Exhibit No. 3B to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. +000-13200) and by this reference incorporated herein). +(4) +Specimen form of common stock certificate of the Company. +(10.1) +Astro-Med, Inc. Non-Employee Director Stock Plan filed as Exhibit 4.3 to Registration Statement on Form S-8 filed on March 28, 1997, Registration No. 333-24123, and incorporated +by reference herein.** +(10.2) +Astro-Med, Inc. 1997 Incentive Stock Option Plan, as amended, filed as Exhibit 4.3 to Registration Statements on Form S-8 filed on August 28, 1998, Registration No. 333-93565, +and incorporated by reference herein.** +(10.3) +Astro-Med, Inc. 1998 Non-Qualified Stock Option Plan, as amended, filed as Exhibit 4.3 to Registration Statement on Form S-8 filed on August 28, 1998, Registration No. 333-62431 +and incorporated by reference herein.** +(10.4) +Astro-Med, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 +annual shareholders meeting and incorporated by reference herein.** +(10.5) +Astro-Med, Inc. Management Bonus Plan (Group III) filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended May 3, 2014, and by this +reference incorporated herein.** +(10.6) +Astro-Med, Inc. Management Bonus Plan—Vice President International Branches filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K (File No. 000-13200) for +the year ended January 31, 2009 and by this reference incorporated herein.** +(10.7) +Astro-Med, Inc. Amended and Restated Non-Employee Directors Compensation Program filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended +May 3, 2014 and by this reference incorporated herein.** +(10.8) +Form of Performance-Based Restricted Stock Unit Award Agreement filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended April 28, 2012 and +by this reference incorporated herein.** +29 +Table of Contents +Exhibit +Number +(10.9) +Transition Services Agreement dated January 5, 2013 by and between the Company and Natus, as amended by First Amendment to Transition Services Agreement dated as of January 31, +2013, by and between the Company and Natus filed as Exhibit No. 10.1 to the Company’s report on Form 8-K dated February 4, 2013 and by this reference incorporated herein. +(10.10) +Release and Non-Competition Agreement dated as of February 1, 2014 by and between the Company and Everett V. Pizzuti filed as Exhibit 10.11 to the Company’s Annual Report on +Form 10-K for the year ended January 31, 2014 and by this reference incorporated herein.** +(10.11) +Three-Year Revolving Line of Credit Agreement dated September 5, 2014 by and between the Company and Wells Fargo Bank filed as Exhibit 10.12 to the Company’s Quarterly +Report on Form 10-Q for the period ended November 1, 2014 and by this reference incorporated herein. +(10.12) +Equity Incentive Award Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended January 31, 2015 and by this reference incorporated herein.** +(10.13) +Change in Control Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to the Company’s Annual Report on +Form 10-K for the year ended January 31, 2015 and by this reference incorporated herein.** +(10.14) +Stock Repurchase Agreement dated as of December 4, 2014 by and among Astro-Med, Inc. and Albert W. Ondis III, Alexis Ondis and April Ondis, each in his or her capacity as a +Co-Executor of the Estate of Albert W. Ondis filed on Form 8-K on December 4, 2014 and incorporated by reference herein. +(10.15) +Senior Executive Short Term Incentive Plan adopted March 27, 2015 filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended May 2, 2015 and +by this reference incorporated herein.** +(10.16) +General Manager Employment Contract dated November 18, 2014 by and among Astro-Med, Inc. and Michael Morawetz filed as Exhibit 10.2 to the Company’s Quarterly Report on Form +10-Q for the period ended May 2, 2015 and by this reference incorporated herein.** +(10.17) +Form of Indemnification Agreement for directors and officers filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 31, 2015 and +by this reference incorporated herein.** +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(101) +The following materials from Registrant’s Annual Report on Form 10-K for the year ended January 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): +(i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of +Cash Flows, and (vi) the Notes to Consolidated Financial Statements. Filed electronically herein. +* +Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon +request. +** +Management contract or compensatory plan or arrangement. +30 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly +authorized. +ASTRO-MED, INC. +(Registrant) +Date: April 8, 2016 +By: +/ S / G REGORY A. +W OODS +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below +by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/ S / G REGORY A. +W OODS +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 8, 2016 +/ S / J OSEPH P. +O’C ONNELL +Joseph P. O’Connell +Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) +April 8, 2016 +/ S / E RIK J. +M ANCYAK +Erik J. Mancyak +Vice President and Corporate Controller (Principal Accounting Officer) +April 8, 2016 +/ S / H ERMANN +V IETS +Hermann Viets +Chairman of the Board of Directors and Director +April 8, 2016 +/ S / E VERETT V. +P IZZUTI +Everett V. Pizzuti +Director +April 8, 2016 +/ S / G RAEME +M AC L ETCHIE +Graeme MacLetchie +Director +April 8, 2016 +/ S / M ITCHELL I. +Q UAIN +Mitchell I. Quain +Director +April 8, 2016 +/ S / H AROLD +S CHOFIELD +Harold Schofield +Director +April 8, 2016 +/ S / A PRIL +O NDIS +April Ondis +Director +April 8, 2016 +31 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Shareholders of +Astro-Med, Inc. +We have audited the accompanying consolidated balance sheets of Astro-Med, Inc. (the “Company”) as of January 31, 2016 and 2015, and the related consolidated statements of income, +comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. Our audit also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the +responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable +assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over +financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. +Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant +estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Astro-Med, Inc. as of January 31, 2016 and +2015, and the consolidated results of its operations and its cash flows for each of the two years in the period ended January 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related +financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. +/s/ Wolf & Company, P.C. +Boston, +Massachusetts +April 8, 2016 +32 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2016 +2015 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +10,043 +$ +7,958 +Securities Available for Sale +10,376 +15,174 +Accounts Receivable, net of reserves of $404 in 2016 and $343 in 2015 +15,325 +14,107 +Inventories +14,890 +15,582 +Line of Credit Receivable +150 +173 +Note Receivable +191 +255 +Asset Held for Sale +— +1,900 +Prepaid Expenses and Other Current Assets +3,539 +4,140 +Total Current Assets +54,514 +59,289 +PROPERTY, PLANT AND EQUIPMENT +Land and Improvements +967 +904 +Buildings and Improvements +11,350 +10,551 +Machinery and Equipment +27,396 +25,368 +39,713 +36,823 +Less Accumulated Depreciation +(29,906 +) +(28,444 +) +Total Property, Plant and Equipment, net +9,807 +8,379 +OTHER ASSETS +Note Receivable +— +256 +Deferred Tax Assets +3,049 +2,629 +Identifiable Intangibles, net +5,980 +2,698 +Goodwill +4,521 +991 +Other +92 +88 +Total Other Assets +13,642 +6,662 +TOTAL ASSETS +$ +77,963 +$ +74,330 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +3,192 +$ +3,155 +Accrued Compensation +3,436 +3,302 +Other Accrued Expenses +2,209 +2,343 +Deferred Revenue +529 +621 +Income Taxes Payable +182 +148 +Total Current Liabilities +9,548 +9,569 +Deferred Tax Liabilities +78 +83 +Other Long Term Liabilities +964 +1,167 +TOTAL LIABILITIES +10,590 +10,819 +Commitments and Contingencies (See Note 19) +SHAREHOLDERS’ EQUITY +Preferred Stock, $10 Par Value, Authorized 100,000 shares, None Issued +— +— +Common Stock, $0.05 Par Value, Authorized 13,000,000 shares; Issued 9,666,290 shares in 2016 and 9,544,864 shares in +2015 +483 +477 +Additional Paid-in Capital +45,675 +43,600 +Retained Earnings +42,212 +39,735 +Treasury Stock, at Cost, 2,323,545 shares in 2016 and 2,293,606 shares in 2015 +(20,022 +) +(19,602 +) +Accumulated Other Comprehensive Loss, Net of Tax +(975 +) +(699 +) +Total Shareholders’ Equity +67,373 +63,511 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +77,963 +$ +74,330 +See Notes to the Consolidated Financial Statements. +33 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED STATEMENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share Data) +2016 +2015 +Net Sales +$ +94,658 +$ +88,347 +Cost of Sales +56,500 +51,370 +Gross Profit +38,158 +36,977 +Costs and Expenses: +Selling and Marketing +18,249 +18,289 +Research and Development +6,945 +5,802 +General and Administrative +7,030 +5,655 +Operating Expenses +32,224 +29,746 +Operating Income +5,934 +7,231 +Other Income (Expense): +Investment Income +72 +81 +Other, Net +903 +(380 +) +975 +(299 +) +Income before Income Taxes +6,909 +6,932 +Income Tax Provision +2,384 +2,270 +Net Income +$ +4,525 +$ +4,662 +Net Income Per Common Share—Basic +$ +0.62 +$ +0.61 +Net Income Per Common Share—Diluted +$ +0.61 +$ +0.60 +Weighted Average Number of Common Shares Outstanding—Basic +7,288 +7,612 +Dilutive Effect of Common Stock Equivalents +183 +222 +Weighted Average Number of Common Shares Outstanding—Diluted +7,471 +7,834 +Dividends Declared Per Common Share +$ +0.28 +$ +0.28 +See Notes to the Consolidated Financial Statements. +34 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2016 +2015 +Net Income +$ +4,525 +$ +4,662 +Other Comprehensive Loss, net of taxes and reclassification adjustments: +Foreign currency translation adjustments +(269 +) +(866 +) +Unrealized loss on securities available for sale +(7 +) +(9 +) +Other Comprehensive Loss +(276 +) +(875 +) +Comprehensive Income +$ +4,249 +$ +3,787 +See Notes to the Consolidated Financial Statements. +35 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Treasury +Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Shares +Amount +Balance January 31, 2014 +9,291,225 +$ +465 +$ +41,235 +$ +37,201 +$ +(12,463 +) +$ +176 +$ +66,614 +Share-based compensation +— +— +511 +— +— +— +511 +Employee option exercises +227,512 +11 +1,887 +— +(889 +) +— +1,009 +Tax benefit of employee stock options +— +— +107 +— +— +— +107 +Restricted stock awards vested, net +26,127 +1 +(140 +) +— +— +— +(139 +) +Repurchases of common stock +— +— +— +— +(6,250 +) +— +(6,250 +) +Dividends paid +— +— +— +(2,128 +) +— +— +(2,128 +) +Net income +— +— +— +4,662 +— +— +4,662 +Other comprehensive loss +— +— +— +— +— +(875 +) +(875 +) +Balance January 31, 2015 +9,544,864 +$ +477 +$ +43,600 +$ +39,735 +$ +(19,602 +) +$ +(699 +) +$ +63,511 +Share-based compensation +— +— +1,209 +— +— +— +1,209 +Employee option exercises +98,734 +5 +802 +— +(371 +) +— +436 +Tax benefit of employee stock options +— +— +65 +— +— +— +65 +Restricted stock awards vested, net +22,692 +1 +(1 +) +— +(49 +) +— +(49 +) +Dividends paid +— +— +— +(2,048 +) +— +— +(2,048 +) +Net income +— +— +— +4,525 +— +— +4,525 +Other comprehensive loss +— +— +— +— +— +(276 +) +(276 +) +Balance January 31, 2016 +9,666,290 +$ +483 +$ +45,675 +$ +42,212 +$ +(20,022 +) +$ +(975 +) +$ +67,373 +See Notes to the Consolidated Financial Statements. +36 +Table of Contents +ASTRO-MED, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2016 +2015 +Cash Flows from Operating Activities: +Net Income +$ +4,525 +$ +4,662 +Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: +Depreciation and Amortization +2,065 +2,063 +Share-Based Compensation +1,209 +511 +Deferred Income Tax Benefit +(422 +) +(636 +) +Excess Tax Benefit From Share-Based Compensation +(65 +) +(107 +) +Write-down of Asset Held for Sale +— +220 +Changes in Assets and Liabilities, Net of Impact of Acquisitions: +Accounts Receivable +(1,285 +) +(2,741 +) +Inventories +600 +(404 +) +Accounts Payable and Accrued Expenses +151 +810 +Income Taxes Payable +412 +(1,747 +) +Other +537 +(1,140 +) +Net Cash Provided by Operating Activities +7,727 +1,491 +Cash Flows from Investing Activities: +Proceeds from Sales/Maturities of Securities Available for Sale +9,978 +12,885 +Purchases of Securities Available for Sale +(5,192 +) +(9,306 +) +Acquisition of RITEC’s Aerospace Printer Business +(7,360 +) +— +Net Proceeds Received for Sale of Asset Held for Sale +1,698 +— +Release of Funds Held in Escrow From Sale of Grass +— +1,800 +Proceeds Received on Disposition of Grass Inventory +— +2,355 +Payments Received on Line of Credit and Note Receivable +395 +258 +Additions to Property, Plant and Equipment +(3,061 +) +(2,247 +) +Net Cash Provided (Used) by Investing Activities +(3,542 +) +5,745 +Cash Flows from Financing Activities: +Net Proceeds from Common Shares Issued Under Employee Benefit Plans and Employee Stock Option Plans, Net of Payment of Minimum +Tax Withholdings +387 +870 +Purchase of Treasury Stock +— +(6,250 +) +Excess Tax Benefit from Share-Based Compensation +65 +107 +Dividends Paid +(2,048 +) +(2,128 +) +Net Cash Used in Financing Activities +(1,596 +) +(7,401 +) +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +(504 +) +(218 +) +Net Increase (Decrease) in Cash and Cash Equivalents +2,085 +(383 +) +Cash and Cash Equivalents, Beginning of Year +7,958 +8,341 +Cash and Cash Equivalents, End of Year +$ +10,043 +$ +7,958 +Supplemental Information: +Cash Paid During the Period for: +Income Taxes, Net of Refunds +$ +2,257 +$ +4,566 +See Notes to the Consolidated Financial Statements. +37 +Table of Contents +ASTRO-MED, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +January 31, 2016 and 2015 +Note 1—Summary of Significant Accounting Policies +Basis of Presentation : The accompanying financial data have been prepared by us pursuant to the rules and +regulations of the U.S. Securities and Exchange Commission (SEC) and are presented in conformity with U.S. generally accepted accounting principles (U.S. GAAP). Our fiscal year end is January 31. Unless otherwise stated, all years and dates +refer to our fiscal year. +Principles of Consolidation: The consolidated financial statements include the accounts of +Astro-Med, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: Certain amounts in prior year’s financial statements have been reclassified to conform to the current +year’s presentation. +Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP +requires management to make estimates and assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts and credits, inventory valuation, valuation +and estimated lives of intangible assets, impairment of long-lived assets, asset held for sale, goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at +the time estimates are made, past historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those +estimates. +Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are +considered to be cash equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. Cash of $2,959,000 and $2,995,000 was held in foreign bank accounts at January 31, 2016 and +2015, respectively. +Securities Available for Sale: Securities available for sale are carried at fair value based on +quoted market prices, where available. The difference between cost and fair value, net of related tax effects, is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. +Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and +manufacturing overhead. +Property, Plant and Equipment: Property, plant and equipment are stated at cost less +accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and improvements—10 to 45 years; machinery and equipment—3 to 10 +years). Depreciation expense was $1,567,000 for fiscal 2016 and $1,361,000 for 2015. +Revenue Recognition: +Astro-Med’s product sales are recognized when all of the following criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss +have passed to the customer; and collectability is reasonably assured. Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights of return are not included in sales arrangements. Revenue associated with products +that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Discounts from list prices are recorded as a reduction to sales. Amounts billed to customers for shipping and handling fees +are included in sales while related shipping and handling costs are included in cost of sales. +The majority of our equipment +contains embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold separately or marketed separately and its +production costs are minor as compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered non-software elements and are not subject to the industry-specific software revenue recognition guidance. +38 +Table of Contents +Our multiple-element arrangements are generally comprised of a combination of equipment, +software, installation and/or training services. Hardware and software elements are typically delivered at the same time and revenue is recognized when all the revenue recognition criteria for each unit are met. Delivery of installation and training +services will vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized +over the contractual period or as services are rendered and accepted by the customer. +We have evaluated the deliverables in +our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and delivery or performance of the undelivered item(s) is considered probable +and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling +price for a deliverable is based on vendor specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element +is then recognized when the basic revenue recognition criteria for that element has been met. +Infrequently, Astro-Med +recognizes revenue for non-recurring engineering (NRE) fees for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements +include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. NRE fees have not been significant in the periods presented herein. +Infrequently, Astro-Med receives requests from customers to hold product purchased from us for the customer’s +convenience. Revenue is recognized for such bill and hold arrangements in accordance with the requirements of SEC Staff Accounting Bulletin No. 104 which requires, among other things, the existence of a valid business purpose for the +arrangement; the transfer of ownership of the purchased product; a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the readiness of the product for shipment; the use of customary payment terms; no +continuing performance obligation by us; and segregation of the product from our inventories. +Research and Development +Costs: Astro-Med charges costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. Included in research and development expense are the following: salaries and benefits, external +engineering service costs, engineering related information costs and supplies. +Foreign Currency Translation: The +financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are translated into U.S. dollars at year-end exchange rates with the +translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the monthly average exchange rates. We do not provide for U.S. income taxes on foreign +currency translation adjustments associated with our German subsidiary since its undistributed earnings are considered to be permanently invested. Our net foreign exchange losses were $323,000 and $219,000 for fiscal 2016 and 2015, respectively. +Advertising: Astro-Med expenses advertising costs as incurred. Advertising costs including advertising production, +trade shows and other activities are designed to enhance demand for our products and amounted to approximately $1,058,000 and $1,717,000 in fiscal 2016 and 2015, respectively. +Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be +recoverable. Determination +39 +Table of Contents +of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less +than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. For both 2016 and 2015, these were no impairment charges for +long-lived assets. +Assets Held for Sale: Assets held for sale are reported at the lower of cost or fair value. Cost to +sell are accrued separately. Astro-Med’s former Grass facility located in Rockland, Massachusetts met the held for sale classification criteria for the period ended January 31, 2015. The Company estimated the fair value of the Rockland +facility using the market values for similar properties and estimated the fair value less the cost to sell and was considered a Level 2 asset in as defined in ASC 820, “Fair Value Measurements. ” Refer to Note 20, “Fair Value +Measurements,” for further details. +Intangible Assets: Intangible assets include the value of customer +relationships, non-competition agreements and backlog rights acquired in connection with business acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are +amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the +carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The +amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. For both 2016 and 2015, there were no impairment +charges for intangible assets. +Goodwill: Management evaluates the recoverability of goodwill annually or more +frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively +assessed to determine whether further impairment testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and +projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its +carrying amount, a two-step process is then performed. Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to +determine if there is an impairment of the goodwill. Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based +upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long–term operating cash flow performance. In addition, the Company uses the +market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and +estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. +We performed a qualitative assessment for our 2016 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying value of the reporting +units exceed their fair values. Accordingly, no further testing was performed as management believes that there are no impairment issues in regards to goodwill at this time. +Income Taxes: Astro-Med uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the +financial reporting basis and tax basis of the assets and liabilities and are measured using enacted tax rates that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized when it is +more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At January 31, 2016 and 2015, a valuation allowance was provided for deferred tax assets attributable to certain state R&D credit carryforwards. +40 +Table of Contents +Astro-Med accounts for uncertain tax positions in accordance with the guidance provided in +ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires +recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. +Net Income Per Common Share: Basic net income per share is based on the weighted average number of shares outstanding during the +period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the +treasury stock method. In fiscal years 2016 and 2015, there were 425,200 and 156,600, respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be +anti-dilutive. +Allowance for Doubtful Accounts: In circumstances where we are aware of a customer’s inability to +meet its financial obligations, an allowance is established. The majority of accounts are individually evaluated on a regular basis and allowances are established to state such receivables at their net realizable value. The remainder of the +allowance is based upon historical write-off experience and current market assessments. +Fair Value of Financial +Instruments: Our financial instruments consist of cash and cash equivalents, investment securities, accounts receivable, a note receivable, a line of credit receivable and accounts payable. The carrying amount reflected in the consolidated +balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term nature of these items. Investment securities, all of which are available for sale, are carried in the consolidated +balance sheets at fair value based on quoted market prices, when available. The note receivable is carried in the consolidated balance sheets at fair value based on the present value of the discounted cash flows over the life of the note. +The Company measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when the assets +are deemed to be impaired. +Share-Based Compensation : Share-based compensation expense is measured based on the +estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant +using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the +risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. +Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of +the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest +rate is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense +is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value +method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the grant date. +The cash flow from the tax benefits that are a result of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as a cash inflow from financing +activities and a cash outflow from operating activity. Tax deductions from certain stock option exercises are treated as being realized when they reduce taxes payable in accordance with relevant tax law. +41 +Table of Contents +Recent Accounting Pronouncements: +Leases +In February 2016, the Financial Accounting Standards Board (FASB) +issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842).” ASU 2016-02 will supersede current guidance related to accounting for leases and is intended to increase transparency and comparability among organizations by +requiring lessees to recognize assets and liabilities in the balance sheet for operating leases with lease terms greater than twelve months. The update also requires improved disclosures to help users of financial statements better understand the +amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (Q1 fiscal 2020 for Astro-Med), with early +adoption permitted. At adoption, this update will be applied using a modified retrospective approach. The Company is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements. +Income Taxes +In +November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740).” ASU 2015-17 amended guidance applicable to the presentation of income taxes and requires that all deferred tax assets and liabilities, along with any related valuation +allowance, be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. This amendment represents a change in accounting principle and is effective for annual periods beginning after December 15, +2016 and interim periods within those annual periods. Early adoption is permitted. As permitted by the standard, we adopted the new presentation retrospectively, beginning on February 1, 2014. As a result, all of the Company’s deferred +taxes are presented as non-current in the accompanying consolidated balance sheets for the periods ended January 31, 2016 and 2015. +Inventory +In July 2015, +the FASB issued ASU 2015-11, “Inventory (Topic 330).” ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is +measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including inventory measured using first-in, first-out (FIFO) or the average cost method. ASU 2015-11 will be effective for fiscal years +beginning after December 15, 2016, including interim periods within those fiscal years (Q1 fiscal 2018 for Astro-Med) and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. +Astro-Med is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements. +Revenue +Recognition +In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU +2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (IFRS). +ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. In August 2015, the FASB modified ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017 (Q1 fiscal +2019 for Astro-Med), including interim periods within that reporting period. As modified, the FASB permits the adoption of the new revenue standard early, but not before annual periods beginning after December 15, 2016. Entities have the choice +to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. The Company is currently +evaluating the requirements of ASU 2014-09 and has not yet determined its impact on the Company’s consolidated financial statements. +42 +Table of Contents +Note 2—Acquisition +On June 19, 2015, Astro-Med completed the acquisition of the aerospace printer product line for civil and +commercial aircraft from Rugged Information Technology Equipment Corporation (RITEC) under the terms of an Asset Purchase Agreement dated June 18, 2015. The products of RITEC consist of aerospace printers for use in commercial aircraft sold +primarily to aircraft manufacturers, tier one contractors and directly to airlines around the world. Astro-Med’s aerospace printer product line is part of the Test & Measurement (T&M) product group and is reported as part of the +T&M segment. The Company began shipment of the RITEC products in the third quarter of fiscal 2016. +The purchase price of +the acquisition was $7,360,000 which was funded using available cash and investment securities. Of the $7,360,000 purchase price, $750,000 is being held in escrow for twelve months following the acquisition date to support an indemnity to the +Company in the event of any breach in the representations, warranties or covenants of RITEC. The assets acquired consist principally of accounts receivables and certain intangible assets. Acquisition related costs of approximately $109,000 are +included in the general and administrative expenses in the Company’s consolidated statements of income for fiscal year ended 2016. The acquisition was accounted for under the acquisition method in accordance with the guidance provided by FASB +ASC 805, “Business Combinations.” +Astro-Med also entered into a Transition Services Agreement, under which RITEC +will provide transition services and continue to manufacture products in the acquired product line until the Company transitions the manufacturing to its West Warwick, Rhode Island facility, which the Company anticipates will occur in the second +quarter of fiscal 2017. Upon expiration of the Transition Services Agreement, Astro-Med will purchase any inventory held by RITEC at its book value (net of reserves), which the Company estimates will be approximately $150,000. +Also as part of the Asset Purchase Agreement, Astro-Med entered into a License Agreement, which grants RITEC certain rights to use the +intellectual property acquired by the Company in the design, development, marketing, manufacture, sale and servicing of aerospace printers for aircraft sold to the military end-user market and printers sold to other non-aircraft market segments. +RITEC will pay royalties equal to 7.5% of the sales price on all products sold into the military end-user aircraft market during the first five years of the License Agreement. +The purchase price of the acquisition has been allocated on the basis of the fair value as follows: +(In thousands) +Accounts Receivable +$ +50 +Identifiable Intangible Assets +3,780 +Goodwill +3,530 +Total Purchase Price +$ +7,360 +The fair value of the intangible assets acquired was estimated by applying the income approach. This fair +value measurement is based on significant inputs that are not observable in the market and therefore, represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement and Disclosure.” Key assumptions include (1) a +weighted average cost of capital of 15.5%; (2) a range of earnings projections from $110,000-$700,000 and (3) a range of contract renewal probability from 30%-100%. +Goodwill of $3,530,000, which is deductible for tax purposes, represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired +from RITEC. The carrying amount of the goodwill was allocated to the T&M segment of the Company. +43 +Table of Contents +The following table reflects the fair value of the acquired identifiable intangible assets +and related estimated useful lives: +(In thousands) +Fair +Value +Useful Life +(Years) +Customer Contract Relationships +$ +2,830 +10 +Non-Competition Agreement +950 +5 +Total +$ +3,780 +Assuming the acquisition of RITEC occurred on February 1, 2014, the impact on net sales, net income +and earnings per share would not have been material to the Company for the years ended January 31, 2016 and 2015. +Note 3—Intangible Assets +Intangible assets are as follows: +January 31, 2016 +January 31, 2015 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Net +Carrying +Amount +Miltope: +Customer Contract Relationships +$ +3,100 +$ +(758 +) +$ +2,342 +$ +3,100 +$ +(402 +) +$ +2,698 +Backlog +— +— +— +300 +(300 +) +— +RITEC: +Customer Contract Relationships +2,830 +(31 +) +2,799 +— +— +— +Non-Competition Agreement +950 +(111 +) +839 +— +— +— +Intangible assets, net +$ +6,880 +$ +(900 +) +$ +5,980 +$ +3,400 +$ +(702 +) +$ +2,698 +There were no impairments to intangible assets during the periods ended January 31, 2016 and 2015. +Amortization expense of $498,000 and $702,000 in regards to the above acquired intangibles has been included in the consolidated statements of income for years ended January 31, 2016 and 2015, respectively. +Estimated amortization expense for the next five years is as follows: +(In thousands) +2017 +2018 +2019 +2020 +2021 +Estimated amortization expense +$ +715 +$ +774 +$ +769 +$ +803 +$ +706 +Note 4—Securities Available for Sale +Pursuant to our investment policy, securities available for sale include state and municipal securities with various +contractual or anticipated maturity dates ranging from one month to three years. These securities are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss), net of taxes in +shareholders’ equity until realized. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification basis. A decline in the fair value of any available for sale security below cost +that is determined to be other than temporary will result in a write-down of its carrying amount to fair value. No such impairment charges were recorded for any period presented. All short-term investment securities have original maturities greater +than 90 days. +44 +Table of Contents +The fair value, amortized cost and gross unrealized gains and losses of the securities are +as follows: +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair +Value +(In thousands) +January 31, 2016 +State and Municipal Obligations +$ +10,363 +$ +15 +$ +(2 +) +$ +10,376 +January 31, 2015 +State and Municipal Obligations +$ +15,150 +$ +26 +$ +(2 +) +$ +15,174 +The contractual maturity dates of these securities are as follows: +January 31 +2016 +2015 +(In thousands) +Less than one year +$ +3,833 +$ +9,470 +One to three years +6,543 +5,704 +$ +10,376 +$ +15,174 +Actual maturities may differ from contractual dates as a result of sales or earlier issuer redemptions. +Note 5—Inventories +The components of inventories are as follows: +January 31 +2016 +2015 +(In thousands) +Materials and Supplies +$ +10,197 +$ +10,600 +Work-in-Progress +1,025 +765 +Finished Goods +7,491 +7,372 +18,713 +18,737 +Inventory Reserve +(3,823 +) +(3,155 +) +Balance at January 31 +$ +14,890 +$ +15,582 +Included within finished goods inventory is $1,354,000 and $1,030,000 of demonstration equipment at +January 31, 2016 and 2015, respectively. +Note 6—Accrued Expenses +Accrued expenses consisted of the following: +January 31 +2016 +2015 +(In thousands) +Warranty +$ +400 +$ +375 +Product Replacement Cost Reserve +278 +353 +Professional Fees +328 +256 +Executive Retirement Package +— +250 +Dealer Commissions +221 +163 +Other +982 +946 +$ +2,209 +$ +2,343 +45 +Table of Contents +Note 7—Line of Credit +Astro-Med has a $10 million revolving line of credit available to be used as needed for ongoing working capital +requirements, business acquisitions or general corporate purposes. Any borrowings made under the line of credit bear interest at either a fluctuating base rate equal to the highest of (i) the Prime Rate, (ii) 1.50% above the daily one +month LIBOR, and (iii) the Federal Funds Rate in effect plus 1.50% or at a fixed rate of LIBOR plus an agreed upon margin of between 0% and 2.25%, based on the Company’s funded debt to EBITDA ratio as defined in the agreement. In addition, +the agreement provides for two financial covenant requirements, namely, Total Funded Debt to Adjusted EBITDA (as defined) of not greater than 3 to 1 and a Fixed Charge Coverage Ratio (as defined) of not less than 1.25 to 1, both measured at the end +of each quarter on a rolling four quarter basis. As of January 31, 2016, there have been no borrowings against this line of credit and the Company was in compliance with its financial covenants. Under the terms, the line of credit will expire +on August 30, 2017. +Note 8—Note Receivable and Revolving Line of Credit Receivable +On January 30, 2012, we completed the sale of our label manufacturing operations in Asheboro, North Carolina to +Label Line Ltd. The net sales price of $1,000,000 was received in the form of a promissory note issued by Label Line Ltd. and is fully secured by a first lien on various collateral, including the Asheboro plant and plant assets. The note bears +interest at 3.75% and is payable in sixteen quarterly installments of principal and interest which commenced on January 30, 2013. As of January 31, 2016, $191,000 remains outstanding on this note which approximates its estimated fair +value. +The terms of the Asheboro sale also included an agreement for Astro-Med to provide Label Line Ltd. with additional +financing in the form of a revolving line of credit of $600,000, which is fully secured by a first lien on various collateral, including the Asheboro plant and plant assets. This line of credit bears interest at a rate equal to the United States +prime rate plus an additional margin of two percent of the outstanding credit balance (5.25% at January 31, 2016). Although the initial term was for a period of one-year from the date of the sale, the agreement had been extended through +January 31, 2016. As of January 31, 2016, $150,000 remains outstanding on this revolving line of credit. Subsequent to fiscal 2016 year-end, the agreement was amended to extend the term of the agreement through January 31, 2017. +Note 9—Accumulated Other Comprehensive Loss +The changes in the balance of accumulated other comprehensive loss by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Unrealized Holding Gain (Loss) +on Available for +Sale Securities +Total +Balance at January 31, 2014 +$ +152 +$ +24 +$ +176 +Other Comprehensive Loss +(866 +) +(9 +) +(875 +) +Amounts Reclassified to Net Income +— +— +— +Net Other Comprehensive Loss +(866 +) +(9 +) +(875) +Balance at January 31, 2015 +(714 +) +15 +(699 +) +Other Comprehensive Loss +(269 +) +(7 +) +(276 +) +Amounts Reclassified to Net Income +— +— +— +Net Other Comprehensive Loss +(269 +) +(7 +) +(276 +) +Balance at January 31, 2016 +$ +(983 +) +$ +8 +$ +(975 +) +The amounts presented above in other comprehensive loss are net of taxes except for translation +adjustments associated with our German subsidiary. +46 +Table of Contents +Note 10—Shareholders’ Equity +During fiscal 2016, the Company did not repurchase any shares of its common stock except as described below in +connection with the exercise of employee stock options. +During fiscal 2015, the Company repurchased 500,000 shares of the +Company’s common stock from the Estate of Albert W. Ondis for an aggregate purchase price of $6,250,000. Prior to entering into the Stock Purchase Agreement, the Company obtained an opinion from an independent investment banking firm as to the +fairness, from a financial point of view, to the public shareholders of the Company other than the selling shareholders, of the consideration paid by the Company in the transaction. The purchase was funded using existing cash on hand. This +transaction did not impact the number of shares authorized for repurchase under the Company’s current repurchase program. +During fiscal 2016 and 2015, certain of the Company’s employees delivered a total of 29,939 and 62,797 shares, respectively, of the +Company’s common stock to satisfy the exercise price and related taxes for stock options exercised and restriction stock vesting. The shares delivered were valued at a total of $420,000 and $889,000, respectively, and are included in treasury +stock in the accompanying consolidated balance sheets at January 31, 2016 and 2015. These transactions did not impact the number of shares authorized for repurchase under the Company’s current repurchase program. +As of January 31, 2016, the Company’s Board of Directors has authorized the purchase of up to an additional 390,000 shares of +the Company’s common stock on the open market or in privately negotiated transactions. +Note 11—Share-Based Compensation +Astro-Med maintains the following share-based compensation plans: +Stock Plans: +Astro-Med has two equity incentive plans – the 2007 Equity Incentive Plan (the “2007 Plan”) and the 2015 Equity Incentive Plan (the “2015 Plan”). Under these plans, the Company +may grant incentive stock options, non-qualified stock options, stock appreciation rights, time or performance based restricted stock units (RSUs), restricted stock awards (RSAs), and other stock-based awards to executives, key employees, directors +and other eligible individuals. At January 31, 2016, 106,347 shares were available for grant under the 2007 Plan, of which 100,000 are reserved for stock options that the Company is obligated to issue to its CEO in fiscal years 2017 and 2018 +pursuant to an Equity Incentive Award Agreement dated as of November 24, 2014 (the “CEO Equity Incentive Agreement”). The 2007 Plan will expire in May 2017. The 2015 Plan was approved by the Company’s shareholders at the 2015 +annual meeting. The 2015 Plan authorizes the issuance of up to 500,000 shares (subject to adjustment for stock dividends and stock splits) and will expire in May 2025. At January 31, 2016, 234,264 shares were available for grant under the 2015 +Plan. Options granted to date to employees under both plans vest over four years and expire after ten years. The exercise price of each stock option is established at the discretion of the Compensation Committee; however, any incentive stock options +granted under the 2007 plan, and all options granted under the 2015 Plan, must be at an exercise price of not less than the fair market value of the Company’s common stock on the date of grant. +Under the plans, each non-employee director receives an automatic annual grant of ten-year options to purchase 5,000 shares of stock upon +the adjournment of each shareholders meeting. Each such option is exercisable at the fair market value of the Company’s common stock as of the grant date, and vests immediately prior to the next succeeding shareholders’ meeting. During the +second quarter of fiscal 2016, 25,000 options in total were granted to the non-employee directors. In addition to the automatic option grant, the Company has a Non-Employee Director Annual Compensation Program (the “Program”) which +provides that each non-employee director is entitled to an annual cash retainer of $7,000 (the “Annual Cash Retainer”), plus $500 for each Board and committee meeting attended. In addition, the Chairman of the Board also receives an annual +retainer of $6,000, and the Chairs of the Audit and Compensation Committees each receive an annual retainer of $4,000 +47 +Table of Contents +(“Chair Retainer”). The non-employee directors may elect, for any fiscal year, to receive all or a portion of the Annual Cash Retainer and/or Chair Retainer (collectively the “Cash +Retainer”) in the form of common stock of the Company, which will be issued under one of the Plans. If a non-employee director elects to receive all or a portion of the Cash Retainer in the form of common stock, such shares shall be issued in +four quarterly installments on the first day of each fiscal quarter, and the number of shares of common stock to be issued shall be based on the fair market value of the Company’s common stock on the date such installment is payable. The common +stock received in lieu of such Cash Retainer is fully vested upon issuance. However, a non-employee director who receives common stock in lieu of all or a portion of the Cash Retainer may not sell, transfer, assign, pledge or otherwise encumber the +common stock prior to the first anniversary of the date on which such shares were issuable. In the event of the death or disability of a non-employee director, or a change in control of the Company, any shares of common stock issued in lieu of the +Cash Retainer, shall no longer be subject to such restrictions on transfer. During fiscal 2016 and 2015, 2,947 and 2,649 shares, respectively, were awarded to non-employee directors in lieu of the Cash Retainer. +In addition, under the Program, each non-employee director receives RSAs with a value equal to $20,000 (the “Equity Retainer”) +upon adjournment of each annual shareholders’ meeting. If a non-employee director is first appointed or elected to the Board of Directors effective on a date other than the annual shareholders’ meeting, on the date of such appointment or +election the director shall receive a pro rata award of restricted common stock having a value based on the number of days remaining until the next annual meeting. The Equity Retainer will vest on the earlier of 12 months after the grant date or the +date immediately prior to the next annual meeting of the shareholders following the meeting at which such RSAs were granted. However, a non-employee director may not sell, transfer, assign, pledge or otherwise encumber the vested common stock prior +to the second anniversary of the vesting date. In the event of the death or disability of a non-employee director, or a change in control of the Company, the RSAs shall immediately vest and shall no longer be subject to such restrictions on +transfer. +In March 2012 (fiscal year 2013), a portion of the Company’s executives’ long-term incentive compensation +was awarded in the form of RSUs (“2013 RSUs”). The 2013 RSUs were earned based on the Company achieving specific thresholds of net sales and annual operating income as established under the fiscal 2013 Domestic Management Bonus Plan, and +vested fifty percent on the first anniversary of the grant date and fifty percent on the second anniversary of the grant date, provided that the grantee was employed on each vesting date by Astro-Med or an affiliate company. All such 2013 RSUs were +earned and vested as of March 2014. +In April 2013 (fiscal year 2014), the Company granted options and RSUs to officers +(“2014 RSUs”). The 2014 RSUs vest as follows: twenty-five percent vest on the third anniversary of the grant date, fifty percent vest upon the Company achieving its cumulative budgeted net sales target for fiscal years 2014 through 2016 +(the “Measurement Period”), and twenty-five percent vest upon the Company achieving a target average annual ORONA (operating income return on net assets as calculated under the Domestic Management Bonus Plan) for the Measurement Period. +The grantee may not sell, transfer or otherwise dispose of more than fifty percent of the common stock issued upon vesting of the 2014 RSUs until the first anniversary of the vesting date. On February 1, 2014, the Company accelerated the +vesting of 4,166 of the 2014 RSUs held by Everett Pizzuti in connection with his retirement. In April 2016, 9,300 of the 2014 RSUs will vest based on the Company achieving the targeted average annual ORONA for the Measurement Period and another +9,300 will vest due to the third year anniversary date of the grant. +In March 2015 (fiscal year 2016), the Company granted +50,000 options and 537 RSAs to its CEO pursuant to the CEO Equity Incentive Agreement, and 35,000 options to other key employees. The options and RSAs vest in four equal annual installments commencing on the first anniversary of the grant date. +In May 2015 (fiscal year 2016), the Company granted an aggregate of 80,000 time-based and 155,000 performance-based RSUs +(“2016 RSUs”) to certain officers of the Company. The time-based 2016 RSUs will vest in four equal annual installments commencing on the first anniversary of the grant date. The performance-based 2016 RSUs will vest over three years based +upon the increase in net sales, if any, achieved each fiscal year relative to a three-year net sales increase goal. Performance-based 2016 RSUs that are earned based on organic +48 +Table of Contents +revenue growth will be fully vested when earned, while those earned based on revenue growth via acquisitions will vest annually over a three-year period following the fiscal year in which the +revenue growth occurs. Any performance-based 2016 RSUs that have not been earned at the end of the three-year performance period will be forfeited. The expense for such shares is recognized in the fiscal year in which the results are achieved, +however, the shares are not fully earned until approved by the Compensation Committee in the first quarter of the following fiscal year. Based upon revenue in fiscal 2016, 15,810 of the performance based 2016 RSUs will be earned in the first quarter +of fiscal 2017. +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +Years Ended January 31 +2016 +2015 +(In thousands) +Stock Options +$ +286 +$ +234 +Restricted Stock Awards and Restricted Stock Units +912 +270 +Employee Stock Purchase Plan +11 +7 +Total +$ +1,209 +$ +511 +Stock Options: +Aggregated information regarding stock options granted under the plans during the year ended January 31, 2016 is summarized below: +Number +of Shares +Option Price +Per Share +Weighted- +Average +Option +Price Per +Share +Options Outstanding, January 31, 2015 +656,011 +$ +5.78-14.20 +$ +10.01 +Options Granted +115,000 +$ +13.31-14.05 +$ +13.95 +Options Exercised +(93,344 +) +$ +6.22-11.90 +$ +7.95 +Options Forfeited +(5,550 +) +$ +8.09-14.20 +$ +12.75 +Options Cancelled +(14,181 +) +$ +6.22-14.20 +$ +8.82 +Options Outstanding, January 31, 2016 +657,936 +$ +5.78-14.20 +$ +11.00 +Options Exercisable, January 31, 2016 +405,823 +$ +5.78-14.20 +$ +9.67 +Set forth below is a summary of options outstanding at January 31, 2016: +Outstanding +Exercisable +Range of +Exercise prices +Options +Weighted-Average +Exercise Price +Remaining +Contractual Life +Options +Weighted-Average +Exercise Price +$5.78-8.95 +253,036 +$ +7.79 +4.9 +226,948 +$ +7.76 +$9.81-14.20 +404,900 +$ +13.01 +6.9 +178,875 +$ +12.10 +657,936 +405,823 +The fair value of each stock option granted was estimated on the grant date using the Black-Scholes +option-pricing model with the following weighted-average assumptions: +Years Ended January 31 +2016 +2015 +Risk-Free Interest Rate +1.58% +1.58% +Expected Life (years) +5 +5 +Expected Volatility +22.68% +26.46% +Expected Dividend Yield +1.98% +1.98% +49 +Table of Contents +The weighted-average estimated fair value of options granted during fiscal 2016 and 2015 was +$2.43 and $2.85, respectively. As of January 31, 2016, there was $437,000 of unrecognized compensation expense related to the unvested stock options granted under the plans. This expense is expected to be recognized over a weighted-average period of 2.3 years. +As of January 31, 2016, the aggregate intrinsic +value (the aggregate difference between the closing stock price of the Company’s common stock on January 31, 2016, and the exercise price of the outstanding options) that would have been received by the option holders if all options had +been exercised was $2,442,000 for all exercisable options and $3,083,000 for all options outstanding. The weighted average remaining contractual term for these options was 6.1 years. The total aggregate intrinsic value of options exercised during +fiscal 2016 and 2015 was $553,000 and $1,149,000, respectively. +Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs): +Aggregated information regarding RSUs and RSAs granted under the Plan is summarized below: +RSAs & RSUs +Weighted-Average +Grant Date Fair Value +Outstanding at January 31, 2015 +72,245 +$ +9.70 +Granted +246,335 +14.05 +Vested +(22,692 +) +14.02 +Expired or canceled +(2,800 +) +10.07 +Outstanding at January 31, 2016 +293,088 +$ +13.02 +As of January 31, 2016, there was $1,277,000 of unrecognized compensation expense related to unvested +RSUs and RSAs. This expense is expected to be recognized over a weighted average period of 2.7 years. +Employee Stock Purchase Plan (ESPP): +Astro-Med’s ESPP allows eligible employees to purchase shares of common stock at a 15% discount from fair market +value on the date of purchase. A total of 247,500 shares were initially reserved for issuance under this plan. Summarized plan activity is as follows: +Years Ended January 31 +2016 +2015 +Shares Reserved, Beginning +57,005 +60,242 +Shares Purchased +(5,405 +) +(3,237 +) +Shares Reserved, Ending +51,600 +57,005 +Note 12—Income Taxes +The components of income before income taxes are as follows: +Years Ended +January 31 +2016 +2015 +(In thousands) +Domestic +$ +5,982 +$ +5,401 +Foreign +927 +1,531 +$ +6,909 +$ +6,932 +50 +Table of Contents +The components of the provision for income taxes are as follows: +Years Ended +January 31 +2016 +2015 +(In thousands) +Current: +Federal +$ +1,930 +$ +1,666 +State +470 +466 +Foreign +276 +535 +2,676 +2,667 +Deferred: +Federal +$ +(402 +) +$ +(290 +) +State +126 +(107 +) +Foreign +(16 +) +— +(292 +) +(397 +) +$ +2,384 +$ +2,270 +The provision for income taxes differs from the amount computed by applying the statutory federal income +tax rate of 34% in both fiscal 2016 and 2015 to income before income taxes due to the following: +Years Ended +January 31 +2016 +2015 +(In thousands) +Income Tax Provision at Statutory Rate +$ +2,349 +$ +2,357 +State Taxes, Net of Federal Tax Effect +277 +233 +Change in Valuation Allowance +116 +— +Change in Reserves Related to ASC 740 Liability +(67 +) +23 +Meals and Entertainment +38 +41 +Domestic Production Deduction +(134 +) +(164 +) +Share-Based Compensation +21 +(25 +) +Tax-Exempt Income +(23 +) +(24 +) +R&D Credits +(176 +) +(135 +) +Foreign Rate Differential +(65 +) +(56 +) +Other Permanent Differences and Miscellaneous, Net +48 +20 +$ +2,384 +$ +2,270 +51 +Table of Contents +The components of deferred income tax expense arise from various temporary differences and +relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31 +2016 +2015 +(In thousands) +Deferred Tax Assets: +Inventory +$ +1,948 +$ +1,666 +Share-Based Compensation +830 +572 +State R&D Credits +583 +371 +Compensation Accrual +346 +417 +ASC 740 Liability Federal Benefit +237 +304 +Deferred Service Contract Revenue +200 +235 +Warranty Reserve +149 +140 +Reserve for Doubtful Accounts +140 +116 +Foreign Tax Credit +426 +356 +Currency Translation Adjustment +36 +— +Other +207 +298 +5,102 +4,475 +Deferred Tax Liabilities: +Accumulated Tax Depreciation in Excess of Book Depreciation +1,355 +766 +Deferred Gain on Asset Held for Sale +76 +785 +Currency Translation Adjustment +— +36 +Other +117 +87 +1,548 +1,674 +Subtotal +3,554 +2,801 +Valuation Allowance +(583 +) +(255 +) +Net Deferred Tax Assets +$ +2,971 +$ +2,546 +The valuation allowance at January 31, 2016 relates to state research and development tax credit +carryforwards which are expected to expire unused. The change in the valuation allowance in 2016 was an increase of approximately $328,000 due to the generation of research and development credits during the current year and a decision to fully +reserve for the state tax benefits of all R&D tax credits, net of federal benefit. The change in the valuation allowance in 2015 was a decrease of approximately $3,000 and represented a decrease in the reserve due to the utilization of research +and development credits during the current year, net of federal benefit. +The Company reasonably believes that it is possible +that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the +balance of unrecognized tax benefits, excluding interest and penalties are as follows: +2016 +2015 +(In thousands) +Balance at February 1 +$ +707 +$ +715 +Increases in prior period tax positions +— +— +Increases in current period tax positions +49 +87 +Reductions related to lapse of statute of limitations +(165 +) +(95 +) +Balance at January 31 +$ +591 +$ +707 +If the $591,000 is recognized, $354,000 would decrease the effective tax rate in the period in which each +of the benefits is recognized and the remainder would be offset by a reversal of deferred tax assets. +52 +Table of Contents +During fiscal 2016 and 2015, the Company recognized a benefit of $87,000 and an expense of +$43,000, respectively, related to change in interest and penalties, which are included as a component of income tax expense in the accompanying statements of income. At January 31, 2016 and 2015, the Company had accrued potential interest and +penalties of $373,000 and $460,000, respectively. +The Company and its subsidiaries file income tax returns in U.S. federal +jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations prior to fiscal year ended January 2013. +At January 31, 2016, the Company has indefinitely reinvested $4,207,000 of the cumulative undistributed earnings of its foreign +subsidiary in Germany, all of which would be subject to U.S. taxes if repatriated to the U.S. Through January 31, 2016, the Company has not provided deferred income taxes on the undistributed earnings of this subsidiary because such earnings +are considered to be indefinitely reinvested. Non-U.S. income taxes are, however, provided on these undistributed earnings. +Note 13—Contractual Obligations +The following table summarizes our contractual obligations: +Total +2017 +2018 +2019 +2020 +2021 +and +Thereafter +(In thousands) +Purchase Commitments* +$ +22,225 +$ +22,123 +$ +28 +$ +4 +$ +70 +$ +– +Operating Lease Obligations +668 +300 +251 +103 +14 +– +$ +22,893 +$ +22,423 +$ +279 +$ +107 +$ +84 +$ +– +* +Purchase commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business. +The Company incurred rent and lease expenses in the amount of $567,000 and $614,000 for the fiscal years 2016 and 2015, respectively. +Note 14—Nature of Operations, Segment Reporting and Geographical Information +The Company’s operations consist of the design, development, manufacture and sale of specialty printers and data +acquisition and analysis systems, including both hardware and software and related consumable supplies. The Company organizes and manages its business as a portfolio of products and services designed around a common theme of data acquisition +and information output. The Company has two reporting segments consistent with its sales product groups: QuickLabel and Test & Measurement (T&M). +QuickLabel produces an array of high-technology digital color and monochrome label printers, labeling software and consumables for a variety of commercial industries worldwide. T&M produces data +recording equipment used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing. +Business is conducted in the United States and through foreign affiliates in Canada, Europe, Southeast Asia and Mexico. Manufacturing +activities are primarily conducted in the United States. Sales and service activities +53 +Table of Contents +outside the United States are conducted through wholly-owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit +margins as would be associated with an arms-length transaction. +On June 19, 2015, Astro-Med completed the asset purchase +of the aerospace printer product line from RITEC. Astro-Med’s aerospace printer product line is part of the T&M product group and is reported as part of the T&M segment. The Company began shipment of the RITEC products in the third +quarter of the current fiscal year. Refer to Note 2, “Acquisition,” for further details. +The accounting policies of +the reporting segments are the same as those described in the summary of significant accounting policies herein. The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses. +Summarized below are the Net Sales and Segment Operating Profit (both in dollars and as a percentage of Net Sales) for each +reporting segment: +($ in thousands) +Net Sales +Segment Operating Profit +Segment Operating Profit % +of Net Sales +2016 +2015 +2016 +2015 +2016 +2015 +QuickLabel +$ +67,127 +$ +59,779 +$ +9,300 +$ +7,259 +13.9 +% +12.1 +% +T&M +27,531 +28,568 +3,664 +5,627 +13.3 +% +19.7 +% +Total +$ +94,658 +$ +88,347 +12,964 +12,886 +13.7 +% +14.6 +% +Corporate Expenses +7,030 +5,655 +Operating Income +5,934 +7,231 +Other Income (Expense) +975 +(299 +) +Income before Income Taxes +6,909 +6,932 +Income Tax Provision +2,384 +2,270 +Net Income +$ +4,525 +$ +4,662 +No customer accounted for greater than 10% of net sales in fiscal 2016 and 2015. +Other information by segment is presented below: +(In thousands) +Assets +2016 +2015 +QuickLabel +$ +27,143 +$ +24,874 +T&M +28,570 +22,323 +Corporate* +22,250 +27,133 +Total +$ +77,963 +$ +74,330 +* +Corporate assets consist principally of cash and cash equivalents, securities available for sale, and building held for sale . +(In thousands) +Depreciation and +Amortization +Capital Expenditures +2016 +2015 +2016 +2015 +QuickLabel +$ +690 +$ +678 +$ +2,284 +$ +1,408 +T&M +1,375 +1,385 +777 +839 +Total +$ +2,065 +$ +2,063 +$ +3,061 +$ +2,247 +54 +Table of Contents +Geographical Data +Presented below is selected financial information by geographic area: +(In thousands) +Net Sales +Long-Lived Assets* +2016 +2015 +2016 +2015 +United States +$ +68,316 +$ +61,494 +$ +15,290 +$ +10,422 +Europe +16,830 +18,181 +290 +383 +Canada +4,487 +3,934 +207 +272 +Asia +1,741 +1,408 +— +— +Central and South America +2,436 +1,919 +— +— +Other +848 +1,411 +— +— +Total +$ +94,658 +$ +88,347 +$ +15,787 +$ +11,077 +* +Long-lived assets excludes goodwill assigned to the T&M segment of $4.5 million and $1.0 million at January 31, 2016 and 2015, respectively. +Note 15—Employee Benefit Plans +Employee Stock Ownership Plan (ESOP): +Astro-Med has an ESOP providing retirement benefits to all eligible employees. Annual contributions in amounts determined by the Company’s Board of Directors are invested by the ESOP’s Trustees +in shares of common stock of Astro-Med. Contributions may be in cash or stock. Astro-Med did not make a contribution to the ESOP in fiscal 2016. The Company’s contribution amounted to $100,000 in fiscal 2015 and was recorded as compensation +expense. All shares owned by the ESOP have been allocated to participants. +Profit-Sharing Plan: +Astro-Med sponsors a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible domestic employees. The +Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are made within the limits +prescribed by Section 401(k) of the Internal Revenue Code. +All contributions are deposited into trust funds. It is the +policy of the Company to fund any contributions accrued. The Company’s annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $306,000 and $294,000 in fiscal 2016 and 2015, respectively. +Note 16—Product Warranty Liability +Astro-Med offers a manufacturer’s warranty for the majority of its hardware products. The specific terms and +conditions of warranty vary depending upon the product sold and country in which the Company does business. For products sold in the United States, the Company provides a basic limited warranty, including parts and labor. The Company estimates the +warranty costs based on historical claims experience and records a liability in the amount of such estimates at the time product revenue is recognized. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the +amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows: +January 31 +2016 +2015 +(In thousands) +Balance, beginning of the year +$ +375 +$ +355 +Warranties issued +887 +546 +Settlements made +(862 +) +(526 +) +Balance, end of the year +$ +400 +$ +375 +55 +Table of Contents +Note 17—Product Replacement Costs +In April 2013, tests conducted by the Company revealed that one of its suppliers had been using a non-conforming +material in certain models of Astro-Med’s Test & Measurement printers. No malfunctions have been reported by customers as a result of the non-conforming material. +Upon identifying this issue, Astro-Med immediately suspended production of the printers, notified all customers and contacted the supplier who confirmed the problem. Astro-Med is continuing to work with +its customers to replace the non-conforming material on existing printers with conforming material. The estimated costs associated with the replacement program were $672,000, which was based upon the number of printers shipped during the period the +non-conforming material was used. Those costs were recognized and recorded in the first quarter of fiscal 2014. As of January 31, 2016, the Company had expended $394,000 in replacement costs which have been charged against this reserve. The +remaining reserve amount of $278,000 is included in other accrued expenses in the accompanying consolidated balance sheet as of January 31, 2016. +Since the supplier deviated from the agreed upon specifications for the power supply while providing certificates of conformance to the original specifications, Astro-Med received a non-refundable +$450,000 settlement from the supplier in January 2014 for recovery of the costs and expense associated with this issue. In addition to this cash settlement, the Company will receive lower product prices from the supplier through fiscal 2017. +Note 18—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. +Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts which constitute the Company’s customer base. The Company periodically performs on-going +credit evaluations of its customers. The Company has not historically experienced significant credit losses on collection of its accounts receivable. +Excess cash is invested principally in investment grade government and state municipal securities. The Company has established guidelines relative to diversification and maturities that maintain safety of +principal, liquidity and yield. These guidelines are periodically reviewed and modified to reflect changes in market conditions. The Company has not historically experienced any significant losses on its cash equivalents or investments. +During the years ended January 31, 2016 and 2015, one vendor accounted for 23.7% and 21.9% of purchases, and 16.7% and 55.1% of +accounts payable, respectively. +Note 19—Commitments and Contingencies +Astro-Med is subject to contingencies, including legal proceedings and claims arising in the normal course of business +that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable +that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company +believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, +that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the Company’s control. +56 +Table of Contents +Note 20—Fair Value Measurements +We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, +“Fair Value Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In +addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that +observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the +circumstances. +The fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; +quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or +liabilities +Cash and cash equivalents; accounts receivables; line of credit receivable; accounts payable, +note receivable, accrued compensation and other expenses; and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short term nature of the these instruments. +Assets measured at fair value on a recurring basis are summarized below: +January 31, 2016 +Level 1 +Level 2 +Level 3 +Total +(In thousands) +Money market funds (included in cash and cash equivalents) +$ +4,340 +$ +– +$ +– +$ +4,340 +State and municipal obligations (included in securities available for sale) +– +10,376 +– +10,376 +Total +$ +4,340 +$ +10,376 +$ +– +$ +14,716 +January 31, 2015 +Level 1 +Level 2 +Level 3 +Total +(In thousands) +Money market funds (included in cash and cash equivalents) +$ +3,028 +$ +– +$ +– +$ +3,028 +State and municipal obligations (included in securities available for sale) +– +15,174 +– +15,174 +Total +$ +3,028 +$ +15,174 +$ +– +$ +18,202 +For our money market funds and state and municipal obligations, we utilize the market approach to measure +fair value. The market approach is based on using quoted market prices for similar assets. +Non-financial assets such as +goodwill, intangible assets, and property, plant and equipment are required to be measured at fair value only when an impairment loss is recognized. The Company did not record an impairment loss related to these assets during the period ended +January 31, 2016. +57 +Table of Contents +Non-financial assets measured at fair value on a non-recurring basis are summarized below: +January 31, 2015 +Level 1 +Level 2 +Level 3 +(In thousands) +Asset Held for Sale +$ +– +$ +1,900 +$ +– +Asset held for sale consisted of Astro-Med’s former Grass facility in Rockland, Massachusetts which +was being actively marketed for sale at January 31, 2015. In accordance with ASC 360, “Property, Plant and Equipment,” assets held for sale are written down to fair value less cost to sell and as such, the Company recorded an +impairment charge of $220,000 in fiscal 2015. In fiscal 2015, the impairment charge was included in other income (expense), other, net in the consolidated statement of income. The Company estimated the fair value of the Rockland facility using the +market values for similar properties less the cost to sell. On October 29, 2015, the Company completed the sale of this facility for $1,800,000 in cash. The net cash proceeds received of $1,698,000 reflect closing costs and broker fees +previously accrued. After considering reserved amounts, the net loss on the sale of $3,000 was recognized in the consolidated income statement for the period ended January 31, 2016. +58 +Table of Contents +ASTRO-MED, INC. +SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts(1): +(In thousands) +Year Ended January 31, +2016 +$ +343 +$ +112 +$ +(51 +) +$ +404 +2015 +$ +370 +$ +60 +$ +(87 +) +$ +343 +(1) +The allowance for doubtful accounts has been netted against accounts receivable as of the respective balance sheet dates. +(2) +Uncollectible accounts written off, net of recoveries, also includes foreign exchange adjustment. +59 \ No newline at end of file diff --git a/raw/filings/0000008146/2015/0001193125-16-534900/filing_metadata.csv b/raw/filings/0000008146/2015/0001193125-16-534900/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..855c3d980c05de3db6468da3c837c4090161ee32 --- /dev/null +++ b/raw/filings/0000008146/2015/0001193125-16-534900/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2016-04-08,2016-01-31,2016-04-08T14:21:38.000Z,0001193125-16-534900,d266722d10k.htm,FORM 10-K,7227937,1,0,https://www.sec.gov/Archives/edgar/data/8146/000119312516534900/d266722d10k.htm,https://www.sec.gov/Archives/edgar/data/8146/000119312516534900/,2015,2015,1 diff --git a/raw/filings/0000008146/2015/0001193125-16-534900/item1.txt b/raw/filings/0000008146/2015/0001193125-16-534900/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..39a668811118fe48297a83458e7fc91c5156c56e --- /dev/null +++ b/raw/filings/0000008146/2015/0001193125-16-534900/item1.txt @@ -0,0 +1,112 @@ +Item 1. Business +General +Unless otherwise indicated, references to “Astro-Med,” the “Company,” “we,” “our,” and +“us” in this Annual Report on Form 10-K refer to Astro-Med, Inc. and its consolidated subsidiaries. +Astro-Med +designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies in order to acquire, store, analyze, and +present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general +manufacturing, packaging and transportation. +The Company’s products are distributed through its own sales force and +authorized dealers in the United States. We sell to customers outside of the United States primarily through our branch offices in Canada, Europe and Asia as well as through independent dealers and representatives. Approximately 30% of the +Company’s sales in fiscal 2016 were to customers located outside the United States. +Astro-Med operates its business +through two operating segments, QuickLabel and Astro-Med Test & Measurement (T&M). Financial information by business segment and geographic area appears in Note 14 to our audited consolidated financial statements included elsewhere in +this report. +On June 19, 2015, Astro-Med completed the asset purchase of the aerospace printer product line from Rugged +Information Technology Equipment Corporation (RITEC) and on January 22, 2014, Astro-Med completed the acquisition of the aerospace printer product line from Miltope Corporation. Astro-Med’s aerospace printer product line is part of the +T&M product group and is reported as part of the T&M segment. The results of Miltope’s aerospace printer product line operations have been included in the consolidated financial statements of the Company for all periods presented. The +Company began shipment of the RITEC products in the third quarter of the current fiscal year. Refer to Note 2, “Acquisition,” in our audited consolidated financial statements included elsewhere in this report. +On September 25, 2015, the Company announced it would immediately begin doing business as AstroNova on a +worldwide basis. The name change is part of the plan to modernize the Company and effectively communicate our strategy. The AstroNova name and brand emphasizes our traditional strengths in aerospace and acknowledges our expanding presence in +test & measurement, product identification and other new areas where we can apply our data visualization technology. Astro-Med’s aerospace products and T&M business will adopt the AstroNova brand. QuickLabel products will continue +to go to market under the QuickLabel brand. +3 +Table of Contents +The Company has filed for trademark protection of the AstroNova name and logo in the United +States and other countries. +Unless and until the Company formally changes its name, the Company’s common stock will +continue to trade on the NASDAQ Global Market stock exchange under its name, Astro-Med, Inc., using its present ticker symbol, ALOT. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 16 through 23 +of this Annual Report on Form 10-K. +Description of Business +Product Overview +Astro-Med leverages its expertise in +data visualization technologies to design, manufacture, and market specialty printing systems, test and measurement systems and related services for select growing markets on a global basis. The business consists of two segments, specialty printing +systems and test and measurement systems, sold under the brand names QuickLabel ® and Astro-Med ® Test & Measurement (T&M). +Products sold under the QuickLabel brand are used in industrial and commercial product packaging and automatic +identification applications to digitally print custom labels and other visual identification marks on demand. Products sold under the Astro-Med T&M brand acquire and record visual and electronic signal data from local and networked data streams +and sensors. The recorded data is processed and analyzed and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide high-resolution +airborne printers. +QuickLabel brand products include digital color label printers and specialty OEM printing systems as well +as a full line of consumables including labels, tags, inks, toner, and thermal transfer ribbons. In addition, QuickLabel sells special software used to design labels and other identification marks for a wide variety of applications especially in the +field of packaging. QuickLabel provides training and support on a worldwide basis via highly trained service technicians. +In +the color label market, QuickLabel offers a broad range of entry-level, mid-range, and high-performance digital label printers, providing customers a continuous path to upgrade to new labeling products. QuickLabel products are primarily sold to +manufacturers, processors, and retailers who label products on a short-run basis. Users can benefit from the time and cost-savings of digitally printing their own labels on-demand. Industries that commonly benefit from short-run label printing +include apparel, chemicals, cosmetics, food and beverage, medical products, and pharmaceuticals, among many other packaged goods. +Current QuickLabel models include the Kiaro! family of high-speed inkjet color label printers and the QLS-4100 Xe color thermal transfer label printer. QuickLabel also sells and supports its Pronto! +family of barcode printers which utilize single color-thermal transfer label printing technology as well as an array of custom designed OEM printers. +Products sold under the Astro-Med T&M brand acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed and analyzed and then +stored and presented in various visual output formats. The Company supplies a range of products and services that include hardware, software and consumables to customers who are in a variety of industries. +Astro-Med T&M products include the Daxus ® portable data acquisition system, TMX™ high-speed data acquisition system, Dash ® 8HF-HS data recorders, +Everest ® telemetry recorders, ToughWriter ® , Miltope-brand and RITEC-brand airborne printers and ToughSwitch ® ruggedized Ethernet switches. +Astro-Med’s airborne printers are used in the flight deck and in the cabin of military, commercial and business aircraft to print +hard copies of data required for the safe and efficient operation of aircraft including navigation maps, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger +4 +Table of Contents +data, and various air traffic control data. ToughSwitch Ethernet switches are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne +printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flightworthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter airborne printers for +numerous aircraft made by Airbus, Boeing, Embraer, Bombardier, Lockheed, Gulfstream and others. +The Company’s family of +portable data recorders is used in research and development (R&D) and maintenance applications in aerospace and defense, energy discovery and production operations, rapid rail, automotive, and a variety of other transportation and industrial +applications. The TMX™ data acquisition system is designed for data capture of long-term testing where the ability to monitor high channel counts and view a wide variety of input signals, including time-stamped and synchronized video capture +data and audio notation is important. +Everest telemetry recorders are used widely in the aerospace industry to monitor and +track space vehicles, aircraft, missiles and other systems in flight. +Technology +The core technologies of Astro-Med are data visualization technologies that relate to (1) acquiring data, (2) conditioning the +data, (3) displaying the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. +Patents and +Copyrights +Astro-Med holds a number of product patents in the United States and in foreign countries. We rely on a +combination of copyright, patent, trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand name. While we consider our intellectual property to be important to the operation of our business, we +do not believe that any existing patent, license, trademark or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +Astro-Med manufactures most of the products that it designs and sells. Raw materials and supplies are typically available from a wide variety of sources. Astro-Med manufactures most of the sub-assemblies +and parts in-house including printed circuit board assemblies, harnesses, machined parts, and general final assembly. Many parts are standard electronic items available from multiple sources. Other parts are designed by us and manufactured by +outside vendors. There are a few parts that are sole source, but these parts could be sourced elsewhere with appropriate changes in the design of our product. +Product Development +Astro-Med maintains an active program of product +research and development. During fiscal 2016 and 2015, we spent $6,945,000 and $5,802,000, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to +continue our focus on research and development efforts in fiscal 2017 and beyond. +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in bench-top color +label printing technology and in aerospace printers. In the data acquisition area, we believe that we are one of the leaders in portable high speed data acquisition systems. +We retain a leadership position by virtue of proprietary technology, product reputation, delivery, technical assistance, and service to customers. The number of competitors varies by product line. Our +management +5 +Table of Contents +believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our product lines, but include technology, quality, service and support, +distribution network, and breadth of product and service offerings. +Our products are sold by direct field salespersons as well +as independent dealers and representatives. In the United States, the Company has factory-trained direct field salespeople located in major cities from coast to coast specializing in either QuickLabel or Astro-Med T&M products. Additionally, we +have direct field sales or service centers in Canada, China, France, Germany, Mexico, Southeast Asia and the United Kingdom staffed by our own employees. In the rest of the world, Astro-Med utilizes approximately 90 independent dealers and +representatives selling and marketing our products in 64 countries. +No single customer accounted for 10% or more of our net +sales in either of the last two fiscal years. +International Sales +In fiscal 2016 and 2015, net sales to customers in various geographic areas outside the United States, primarily in Canada and Western +Europe, amounted to $26,342,000 and $26,853,000, respectively. +Order Backlog +Astro-Med’s backlog fluctuates regularly. It consists of a blend of orders for end user customers as well as original equipment +manufacturer customers. Manufacturing is geared to forecasted demands and applies a rapid turn cycle to meet customer expectations. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2016 and +2015 was $16,630,000 and $12,061,000, respectively. +Employees +As of January 31, 2016, Astro-Med employed 329 people. We are generally able to satisfy our employment requirements. No employees are represented by a union. We believe that employee relations are +good. +Other Information +The Company’s business is not seasonal in nature. However, our sales are impacted by the size of certain individual transactions, which can cause fluctuations in sales from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those +reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities Exchange Commission +(SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. \ No newline at end of file diff --git a/raw/filings/0000008146/2015/0001193125-16-534900/item13.txt b/raw/filings/0000008146/2015/0001193125-16-534900/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..074b7ffa66f59d8999f371d9bdcf013a9d9ae3cd --- /dev/null +++ b/raw/filings/0000008146/2015/0001193125-16-534900/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships, Related Transactions and Director Independence +The information required by this item is incorporated herein by reference to the Company’s definitive Proxy +Statement for the 2016 Annual Meeting of Shareholders. \ No newline at end of file diff --git a/raw/filings/0000008146/2015/0001193125-16-534900/item9a.txt b/raw/filings/0000008146/2015/0001193125-16-534900/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..bcccd28fd3f5b4d3b52991c18f8529acd068c83a --- /dev/null +++ b/raw/filings/0000008146/2015/0001193125-16-534900/item9a.txt @@ -0,0 +1,24 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has +evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form +10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls +and procedures were effective at January 31, 2016 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and +communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such +term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the +preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the +inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of +changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness +of its internal control over financial reporting as of January 31, 2016. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring +Organizations of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2016, the Company’s internal control over financial +reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +This annual +report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered +public accounting firm pursuant to the rules of the SEC that permit the Company to provide only management’s report in this annual report. +Changes in Internal Controls over Financial Reporting +There have been no +changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2015/0001193125-16-534900/rp_note.txt b/raw/filings/0000008146/2015/0001193125-16-534900/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2015/0001193125-16-534900/rpt_disclosure.txt b/raw/filings/0000008146/2015/0001193125-16-534900/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..f78c6db5d5e7c5f8cecb254b583b742dd1d4b563 --- /dev/null +++ b/raw/filings/0000008146/2015/0001193125-16-534900/rpt_disclosure.txt @@ -0,0 +1,13 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party +transactions are referred by the Board to the Audit Committee for review and approval. In reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC +rules as a guide. +Other than as described below, +no officer, director or nominee for director of the Company or any associate of any of the foregoing had during the fiscal year ended January 31, 2016 any material interest, direct or indirect, in any material transaction or any material +proposed transaction in which the amount exceeds $120,000 and to which the Company was or is to be a party. +The Company employs three sons of Everett V. Pizzuti, to two of whom the Company paid or accrued over $120,000 in compensation during the +fiscal year ended January 31, 2016: Eric Pizzuti, as Vice President and +26 +General Manager of QuickLabel Systems, and Christopher Pizzuti, as a QuickLabel Field Sales Engineer. The Company paid Eric Pizzuti $170,209 in salary and bonus and paid Christopher Pizzuti +$166,567 in salary and sales commissions. Eric Pizzuti also received restricted stock units with a grant date fair value of $179,671, a vacation payout of $2,873 and a matching contribution to his Profit Sharing Plan account of $5,326. Christopher +Pizzuti also received an automobile allowance of $7,500, a vacation payout of $762, and a matching contribution to his Profit Sharing Plan account of $894. \ No newline at end of file diff --git a/raw/filings/0000008146/2016/0001193125-17-114309/filing.txt b/raw/filings/0000008146/2016/0001193125-17-114309/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..0126d2e886362677a6eb29f6b3fdf4072161b587 --- /dev/null +++ b/raw/filings/0000008146/2016/0001193125-17-114309/filing.txt @@ -0,0 +1,4404 @@ +10-K +1 +d313601d10k.htm +FORM 10-K +Form 10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31, 2017 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission file number 0-13200 +AstroNova, +Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue, +West Warwick, Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: (401) 828-4000 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange +on which registered +Common Stock, $.05 Par Value +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes ☐ No ☒ +Indicate by check mark if the +registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the +Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes ☒ No ☐ +Indicate by check mark +whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the +preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ +Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not +be contained, to the best of the registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller +reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☑ +Non-accelerated filer ☐ +Smaller reporting company ☐ +(Do not check if a smaller reporting company) +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange +Act): Yes ☐ No ☒ +The aggregate market value of +the registrant’s voting common equity held by non-affiliates at July 29, 2016 was approximately $85,985,000 based on the closing price on the Nasdaq Global Market on that date. +As of March 24, 2017 there were 7,525,046 shares of Common Stock (par value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. +Table of Contents +ASTRONOVA, INC. +FORM 10-K ANNUAL REPORT +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3-6 +Item 1A. +Risk Factors +6-13 +Item 1B. +Unresolved Staff Comments +13 +Item 2. +Properties +14 +Item 3. +Legal Proceedings +14 +Item 4. +Mine Safety Disclosures +14 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +15-17 +Item 6. +Selected Financial Data +17 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of +Operations +17-27 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +27 +Item 8. +Financial Statements and Supplementary Data +28 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +28 +Item 9A. +Controls and Procedures +28 +Item 9B. +Other Information +28 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +29-30 +Item 11. +Executive Compensation +30 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholders +Matters +30 +Item 13. +Certain Relationships, Related Transactions and Director Independence +31 +Item 14. +Principal Accountant Fees and Services +31 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +32 +Item 16. +Form 10-K Summary +32 +2 +Table of Contents +ASTRONOVA, INC. +Forward-Looking Statements +Information included in this Annual Report on +Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning +future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” “may,” “will,” and +similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our +actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in this Annual +Report on Form 10-K under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is cautioned not to +unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K. +PART I +Item 1. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and +“us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +AstroNova +designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies in order to acquire, store, analyze, and +present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general +manufacturing, packaging and transportation. +The Company’s products are distributed through its own sales force and +authorized dealers in the United States. We sell to customers outside of the United States primarily through our branch offices in Canada, Europe and Asia as well as through independent dealers and representatives. Approximately 30% of the +Company’s sales in fiscal 2017 were to customers located outside the United States. +We operate the business through two +operating segments, Product Identification (previously known as the QuickLabel segment) and Test & Measurement (T&M). Financial information by business segment and geographic area appears in Note 13 to our audited consolidated financial +statements included elsewhere in this report. +On June 19, 2015, we completed the asset purchase of the aerospace printer +product line from Rugged Information Technology Equipment Corporation (RITEC). Our aerospace printer product line is part of the T&M product group and is reported as part of the T&M segment. We began shipment of the RITEC products in the +third quarter of fiscal 2016. Refer to Note 2, “Acquisition,” in our audited consolidated financial statements included elsewhere in this report. +On February 1, 2017, AstroNova completed its acquisition of TrojanLabel ApS (TrojanLabel) a European manufacturer of digital color label presses and specialty printing systems for a broad range of end +markets. TrojanLabel will be reported as part of our Product Identification segment beginning with the first quarter of fiscal year 2018. Refer to Note 20, “Subsequent Event,” in our audited consolidated financial statements included +elsewhere in this report. +3 +Table of Contents +The following description of our business should be read in conjunction with +“Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 17 through 27 of this Annual Report on Form 10-K. +Description of Business +Product Overview +AstroNova leverages its expertise in data visualization technologies to design, manufacture and market specialty +printing systems, test and measurement systems and related services for select growing markets on a global basis. The business consists of two segments, Product Identification, which includes specialty printing systems sold under the brand name +QuickLabel ® and Test & Measurement (T&M), which includes test and measurement systems sold under +the AstroNova™ brand name. Refer to Note 13, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding the +Company’s segments. +Products sold under the QuickLabel brand are used in industrial and commercial product packaging, +branding and labeling applications to digitally print custom labels and corresponding visual content on demand. Products sold under the AstroNova brand acquire and record visual and electronic signal data from local and networked data streams and +sensors. The recorded data is processed and analyzed and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide high-resolution +airborne printers. +Product Identification +QuickLabel brand products include tabletop and work cell-ready digital color label printers and specialty OEM printing systems as well as a full line of consumables including labels, tags, inks, toner and +thermal transfer ribbons. In addition, the Product Identification segment sells special software used to design labels and print them on an automated basis and also provides training and support on a worldwide basis via highly trained service +technicians. +Through the QuickLabel line, our Product Identification segment offers a broad range of entry-level, mid-range, +and high-performance digital label printers, providing customers a continuous path to upgrade to new labeling solutions designed, manufactured and sold by the Company. Product Identification segment products are primarily sold to manufacturers, +processors, and retailers who label products on a short-run basis. QuickLabel’s customers benefit from the efficiency, flexibility and cost-savings of digitally printing their own labels on-site and on-demand. Industry segments that commonly +benefit from short-run label printing include chemicals, cosmetics, food and beverage, medical products, and pharmaceuticals, among many others. +Current QuickLabel models include the Kiaro! family of high-speed inkjet color label printers, the QL-111 industrial color label printer and the QL-800 wide format color label printer, as well as a family +of barcode printers. +T&M +Products sold under the AstroNova T&M brand acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed and analyzed and then +stored and presented in various visual output formats. The Company supplies a range of products and services that include hardware, software and consumables to customers who are in a variety of industries. +Our T&M products include the Daxus ® portable data acquisition system, +TMX ® high-speed data acquisition system, DDX100 SmartCorder ® portable data acquisition system, EVX multi-channel chart recording system, ToughWriter ® , Miltope-brand and RITEC-brand airborne printers and ToughSwitch ® ruggedized Ethernet switches. +4 +Table of Contents +AstroNova airborne printers are used in the flight deck and in the cabin of military, +commercial and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, +and various air traffic control data. ToughSwitch Ethernet switches are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with +rigorous military and commercial flightworthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter airborne printers for numerous aircraft made by Airbus, Boeing, Embraer, Bombardier, +Lockheed, Gulfstream and others. +The Company’s family of portable data recorders is used in research and development +(R&D) and maintenance applications in aerospace and defense, energy discovery and production operations, rapid rail, automotive, and a variety of other transportation and industrial applications. The TMX data acquisition system is designed for +data capture of long-term testing where the ability to monitor high channel counts and view a wide variety of input signals, including time-stamped and synchronized video capture data and audio notation is important. The Daxus and DDX 100 +SmartCorder are both powerful instruments designed for portability and ease of use in facilities maintenance applications, field work, test cells and transportation. Daxus and DDX100 SmartCorder can be linked to increase channel count and can also +be networked for distributed data collection. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying the data on hard copy, monitor or electronic storage +media, and (4) analyzing the data. +Patents and Copyrights +We hold a number of product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, +trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand name. While we consider our intellectual property to be important to the operation of our business, we do not believe that any existing +patent, license, trademark or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture most of the sub-assemblies and parts in-house +including printed circuit board assemblies, harnesses, machined parts, and general final assembly. Many parts are standard electronic items available from multiple sources. Other parts are designed by us and manufactured by outside vendors. There +are a few parts that are sole source, but these parts could be sourced elsewhere with appropriate changes in the design of our product. +Product Development +We +maintain an active program of product research and development. During fiscal 2017, 2016 and 2015, we spent $6.3 million, $6.9 million and $5.8 million, respectively, on Company-sponsored product development. We are committed to continuous product +development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2018 and beyond. +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in tabletop color +label printing technology and in aerospace printers. In the data acquisition area, we believe that we are one of the leaders in portable high speed data acquisition systems. +5 +Table of Contents +We retain a leadership position by virtue of proprietary technology, product reputation, +delivery, technical assistance, and service to customers. The number of competitors varies by product line. Our management believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our +product lines, but include technology, quality, service and support, distribution network, and breadth of product and service offerings. +Our products are sold by direct field salespersons as well as independent dealers and representatives. In the United States, the Company has factory-trained direct field salespeople located in major +cities from coast to coast specializing in either Product Identification or AstroNova T&M products. Additionally, we have direct field sales or service centers in Canada, China, France, Germany, Mexico, Southeast Asia and the United Kingdom +staffed by our own employees, some of whom are third party contractors. In the rest of the world, we utilize approximately 90 independent dealers and representatives selling and marketing our products in 57 countries. +No single customer accounted for 10% or more of our net revenue in either of the last three fiscal years. +International Sales +In +fiscal 2017, 2016 and 2015, revenue from customers in various geographic areas outside the United States, primarily in Canada and Western Europe, amounted to $28.6 million, $26.4 million and $26.8 million, respectively. Refer to Note 13, +“Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for further financial information by geographic areas. +Order Backlog +Our +backlog varies regularly. It consists of a blend of orders for end-user customers as well as original equipment manufacturer customers. Manufacturing is geared to forecasted demands and applies a rapid turn cycle to meet customer expectations. +Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2017, 2016 and 2015 was $17.6 million, $18.2 million and $18.3 million, respectively. +Employees +As of +January 31, 2017, we employed 312 team members. We are generally able to satisfy our employment requirements. No employees are represented by a union. We believe that employee relations are good. +Other Information +The +Company’s business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, +Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such +material with, or furnishes it to, the Securities and Exchange Commission (SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. +Item 1A. Risk Factors +The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on our business, operating results, liquidity and financial condition. +As a result of +6 +Table of Contents +the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or +that we currently consider to be immaterial, may also impact our business operations. +AstroNova’s operating results and financial +condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated. +Any +decline in our customers’ markets or in their general economic conditions would likely result in a reduction in demand for our products. For example, although we have continued to experience measured progress, as sales have increased steadily +from prior years, we are still affected by the continued global economic uncertainty. Some of our customers may be reluctant to make capital equipment purchases or may defer certain of these purchases to future quarters. Some of our customers may +also limit consumable product purchases to quantities necessary to satisfy immediate needs with no provisions to stock supplies for future use. Also, if our customers’ markets decline, we may not be able to collect on outstanding amounts due to +us. Such declines could harm our results of operations, financial position and cash flows and could limit our ability to continue to remain profitable. +AstroNova’s future revenue growth depends on our ability to develop and introduce new products and services on a timely basis and achieve market acceptance of these new products and services. +The markets for our products are characterized by rapidly changing technologies and accelerating product introduction +cycles. Our future success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping +pace with technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate +our competitors’ development of new products, and maintain high levels of product quality and reliability. AstroNova spends a significant amount of time and effort related to the development of our airborne and color printer products as well as +our Test and Measurement data recorder products. Failure to further develop any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results. +As we introduce new or enhanced products, we must also successfully manage the transition from older products to minimize disruption in +customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of our existing +products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. Additionally, +when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and +manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or AstroNova’s plans for future support of existing products may +cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +AstroNova faces significant competition, and our failure to compete successfully could adversely affect our results of operations and financial +condition. +We operate in an environment of significant competition, driven by rapid technological advances, evolving +industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete on the basis of technology, performance, +price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we +7 +Table of Contents +currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products with features that could adversely affect the +competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, we could lose market share and important +customers to our competitors which could materially adversely affect our business, results of operations and financial position. +AstroNova is dependent upon contract manufacturers for some of our products. If these manufacturers do not meet our requirements, either in volume +or quality, then we could be materially harmed. +We subcontract the manufacturing and assembly of certain of our +products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Limited control over the manufacturing process; +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; and +• +Reduced control over delivery schedules, manufacturing yields, quality and costs. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture these products in required volumes or +fails to meet our quality standards, we will have to identify qualified alternate subcontractors or we will have to take over the manufacturing ourselves. Additional qualified subcontractors may not be available, or may not be available on a timely +or cost competitive basis. Any interruption in the supply or increase in the cost of the products manufactured by third party subcontractors or failure of a subcontractor to meet quality standards could have a material adverse effect on our +business, operating results and financial condition. +For certain components, assembled products and consumables, AstroNova is dependent +upon single or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and consumables used in the manufacture of our products from a single +source or limited supplier sources. If the supply of a key component, assembled products or certain consumables were to be delayed or curtailed or, in the event a key manufacturing or sole vendor delays shipment of such components or assembled +products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. Our business, results of operations and financial position could also be adversely affected, depending on the time required to obtain +sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source. Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply these +components, assembled products or consumables in required volumes, we will have to identify and qualify acceptable replacements or redesign our products with different components. Alternative sources may not be available, or product redesign may not +be feasible on a timely basis. Any interruption in the supply of or increase in the cost of the components, assembled products and consumables provided by single or limited source suppliers could have a material adverse effect on our business, +operating results and financial condition. +Any future action by the U.S. Congress lowering the federal corporate income tax rate, +and/or limiting deductions and credits, and/or eliminating the federal corporate alternative minimum tax could result in the reduction of our deferred tax asset and a corresponding charge against earnings. +The net deferred tax asset reported on our balance sheet represents the net amount of income taxes expected to be received upon the +reversal of temporary differences between the bases of assets and liabilities as measured +8 +Table of Contents +by enacted tax laws, and their bases as reported in the financial statements. As of January 31, 2017, the Company’s net deferred tax asset was computed using the federal statutory rate +of 34%. +The President of the United States and members of Congress have announced plans to lower the federal corporate income +tax rate from its current level of 35% and to eliminate the corporate alternative minimum tax. If these plans ultimately result in the enactment of new laws lowering the corporate income tax rate and/or eliminating the corporate alternative +minimum tax, our net deferred tax asset would be re-measured resulting in a reduction of the deferred tax asset in the period of the law change and a corresponding charge against earnings. +The decision by British voters to exit the European Union may negatively impact our operations. +The June 2016 referendum by British voters to exit the European Union (“Brexit”) adversely impacted global markets and resulted in a sharp decline in the value of the British pound, as compared +to the U.S. dollar and other currencies. As the U.K. negotiates its exit from the European Union, volatility in exchange rates and in U.K. interest rates may continue. In the near term, a weaker British pound compared to the U.S. dollar during a +reporting period causes local currency results of our U.K. operations to be translated into fewer U.S. dollars; a weaker British pound compared to other currencies increases the cost of goods imported into our U.K. operations and may decrease the +profitability of our U.K. operations; and a higher U.K. interest rate may have a dampening effect on the U.K. economy. In the longer term, any impact from Brexit on our U.K. operations will depend, in part, on the outcome of tariff, trade, +regulatory and other negotiations. +AstroNova has significant inventories on hand. +We maintain a significant amount of inventory. Although we have provided an allowance for slow-moving and obsolete inventory, any +significant unanticipated changes in future product demand or market conditions, including obsolescence or the uncertainty in the global market, could have an impact on the value of inventory and adversely impact our business, operating results and +financial condition. +Compliance with rules governing “conflict minerals” could adversely affect the availability of certain +product components and our costs and results of operations could be materially harmed. +SEC rules require disclosures +regarding the use of “conflict minerals” mined from the Democratic Republic of the Congo and adjoining countries necessary to the functionality or production of products manufactured or contracted to be manufactured. We have determined +that we use gold, tin and tantalum, each of which are considered “conflict minerals” under the SEC rules, as they occur in electronic components supplied to us in the manufacture of our products. Because of this finding, we are required to +conduct inquiries designed to determine whether any of the conflict minerals contained in our products originated or may have originated in the conflict region or come from recycled or scrap sources. There are costs associated with complying with +these disclosure requirements, including performing due diligence in regards to the source of any conflict minerals used in our products, in addition to the cost of remediation or other changes to products, processes or services of supplies that may +be necessary as a consequence of such verification activities. As we use contract manufacturers for some of our products, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence +procedures that we implement. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do +so. As a result, our business, operating results and financial condition could be harmed. +Economic, political and other risks +associated with international sales and operations could adversely affect AstroNova’s results of operations and financial position. +Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect +sales to customers outside the U.S., accounted for approximately 30% of our total revenue for fiscal year 2017, and we anticipate +9 +Table of Contents +that international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, job functions and facilities located outside the U.S. +Accordingly, our business, operating results and financial condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Differing protection of intellectual property; +• +Unexpected changes in regulatory requirements; and +• +Geopolitical turmoil, including terrorism and war. +AstroNova’s profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure. +Our success depends on our ability to obtain adequate pricing for our products and services which provides a reasonable return to our +shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to +offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially +adversely affected. +We are continually reviewing our operations with a view towards reducing our cost structure, including but +not limited to downsizing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions. From time to time we also engage in restructuring actions to reduce our cost structure. If we +are unable to maintain process and systems changes resulting from cost reduction and prior restructuring actions, our results of operations and financial position could be materially adversely affected. +AstroNova could incur liabilities as a result of installed product failures due to design or manufacturing defects. +AstroNova has incurred and could incur additional liabilities as a result of installed product failures due to design or manufacturing +defects. Our products may have defects despite testing internally or by current or potential customers. These defects could result in among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market +acceptance or substantial damage to our reputation. We could be subject to material claims by customers, and may incur substantial expenses to correct any product defects. +In addition, through our acquisitions, we have assumed, and may in the future assume, liabilities related to products previously developed by an acquired company that have not been subjected to the same +level of product development, testing and quality control processes used by us, and may have known or undetected errors. +10 +Table of Contents +Some types of errors may not be detected until the product is installed in a user environment. This may cause AstroNova to incur significant warranty and repair or re-engineering costs, may +divert the attention of engineering personnel from product development efforts, and may cause significant customer relations problems such as reputational problems with customers resulting in increased costs and lower profitability. +AstroNova could experience disruptions in, or breach in security of our information technology system or fail to implement new systems or software +successfully which could harm our business and adversely affect our results of operations. +We employ information +technology systems to support our business. Any security breaches or other disruptions to our information technology infrastructure could interfere with operations, compromise our information and that of our customers and suppliers, and expose us to +liability which could adversely impact our business and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic +information, and to manage or support a variety of business processes and activities. We also collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to +privacy and security laws, regulations and customer-imposed controls. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security +breaches and our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error, power outages, computer viruses, telecommunication or utility +failures, systems failures, natural disasters, catastrophic events or other unforeseen events. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of +them to date has had a material impact. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to the Company’s brand and reputation, which could adversely +affect our business, operating results and financial condition. +AstroNova is subject to laws and regulations; failure to address or +comply with these laws and regulations could harm our business and adversely affect our results of operations. +Our +operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or +requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to +include lead and certain other substances in our products. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +Certain of our products require certifications by regulators or standards organizations, and our failure to obtain or maintain such certifications +could negatively impact our business. +In certain industries and for certain products, such as those used in aircraft, +we must obtain certifications for our products by regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our +business, financial condition, results of operations and cash flows could be materially and adversely affected. +Our operations are +subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, and any determination that the Company or any of its subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally +prohibit companies and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance +11 +Table of Contents +with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with +anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by +those of our employees or agents who violate our policies. +Certain of our operations and products are subject to environmental, health +and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our business. +Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of +pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. We have used and continue to use various substances in our +products and manufacturing operations, and have generated and continue to generate wastes, which have been or may be deemed to be hazardous or dangerous. As such, our business is subject to and may be materially and adversely affected by compliance +obligations and other liabilities under environmental, health and safety laws and regulations. These laws and regulations affect ongoing operations and require capital costs and operating expenditures in order to achieve and maintain compliance. +Adverse conditions in the global banking industry and credit markets may adversely impact the value of our investments or impair our +liquidity. +At the end of fiscal 2017, we had approximately $24.8 million of cash, cash equivalents and investments +held for sale. Our cash and cash equivalents are held in a mix of money market funds, bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as +money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our +financial position. Our investment portfolio consists of state and municipal securities with various maturity dates, all of which have a credit rating of AA or above at the original purchase date; however, defaults by the issuers of any of these +securities may result in an adverse impact on our portfolio. +The agreements governing our indebtedness subject us to various +restrictions that may limit our ability to pursue business opportunities. +On February 28, 2017, we entered into a +secured credit facility with Bank of America, N.A., as lender, pursuant to which we borrowed a term loan in the amount of $9.2 million and established a $10.0 million revolving line of credit. All amounts borrowed pursuant to the credit facility are +required to be paid in full no later than January 31, 2022. +The agreements governing our secured credit facility subject us to +various restrictions on our ability to engage in certain activities, including, among other things, our ability to: +• +Incur future indebtedness; +• +Place liens on assets; +• +Pay dividends or distributions on our and our subsidiaries’ capital stock; +• +Repurchase or acquire our capital stock; +• +Conduct mergers or acquisitions; +• +Sell assets; and/or +• +Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay +subordinated indebtedness. +12 +Table of Contents +These restrictions may limit or restrict our cash flow and our ability to pursue business +opportunities or strategies that we would otherwise consider to be in our best interests. +AstroNova may not realize the anticipated +benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may negatively impact AstroNova’s overall business. +We have made strategic investments in other companies, products and technologies, including our June 2015 acquisition of the aerospace +printer business from RITEC. We may continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that we will be able to identify +suitable acquisition opportunities. In any acquisition that we complete we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative effect on operating results or other +aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental effect on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse effect on our reputation; and +• +Respective operations, management and personnel will be compatible. +In certain instances as permitted by applicable law and NASDAQ rules, acquisitions may be consummated without seeking and obtaining +shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in a particular acquisition, there can be no +assurance that we will properly ascertain or assess such risks. +We may also divest certain businesses from time to time. +Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture +depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. +Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If we are not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize expected benefits of our acquisitions, divestitures or +strategic partnerships, AstroNova’s business, results of operations and financial condition could be adversely affected. +Item 1B. Unresolved Staff Comments +None. +13 +Table of Contents +Item 2. Properties +The following table sets forth information regarding the Company’s principal owned properties, all of which are included in the +consolidated balance sheet appearing elsewhere in this annual report. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, USA +135,500 +Corporate headquarters, research and development, manufacturing, sales and service +AstroNova also leases facilities in various other locations. The following information pertains to each +location: +Location +Approximate +Square +Footage +Principal Use +Rodgau, Germany +8,300 +Manufacturing, sales and service +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service +Elancourt, France +4,150 +Sales and service +Copenhagen, Denmark +2,434 +Manufacturing, sales and service (T&M only) +Maidenhead, England +1,000 +Sales and service +Schaumburg, Illinois, USA +630 +Sales (Product Identification only) +Shanghai, China +170 +Sales (T&M only) +Newport Beach, California, USA +150 +Sales (Product Identification only) +Mexico City, Mexico +65 +Sales (Product Identification only) +We believe our facilities are well maintained, in good operating condition and generally adequate to meet +our needs for the foreseeable future. +Item 3. Legal Proceedings +There are no pending or threatened legal proceedings against the Company believed to be material to the financial position or results of +operations of the Company. +Item 4. Mine Safety Disclosures +Not applicable. +14 +Table of Contents +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +AstroNova common stock trades on the NASDAQ Global Market under the symbol “ALOT.” The following +table sets forth the range of high and low sales prices and dividend data, as furnished by NASDAQ, for each quarter in the years ended January 31: +High +Low +Dividends +Per Share +2017 +First Quarter +$ +15.69 +$ +11.18 +$ +0.07 +Second Quarter +$ +16.17 +$ +13.49 +$ +0.07 +Third Quarter +$ +16.41 +$ +14.40 +$ +0.07 +Fourth Quarter +$ +14.60 +$ +12.50 +$ +0.07 +2016 +First Quarter +$ +15.15 +$ +12.43 +$ +0.07 +Second Quarter +$ +15.20 +$ +13.66 +$ +0.07 +Third Quarter +$ +14.25 +$ +12.00 +$ +0.07 +Fourth Quarter +$ +15.94 +$ +12.68 +$ +0.07 +AstroNova had approximately 288 shareholders of record as of March 24, 2017, which does not reflect +shareholders with beneficial ownership in shares held in nominee name. +15 +Table of Contents +Stock Performance Graph +The graph below shows a comparison of the cumulative total return on the Company’s common stock against the cumulative total returns for the NASDAQ Composite Index and the NASDAQ Electronic +Components Index for the period of five fiscal years ended January 31, 2017. The NASDAQ Total Return Composite Index is calculated using all companies trading on the NASDAQ Global Select, NASDAQ Global Market and the NASDAQ Capital Markets. The +Index is weighted by the current shares outstanding and assumes dividends are reinvested. The NASDAQ Electronic Components Index, designated as the Company’s peer group index, is comprised of companies classified as electronic equipment +manufacturers. +COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* +Among AstroNova, Inc. the NASDAQ Composite Index +and the NASDAQ Electronic Components Index +Cumulative Total Returns* +FY2012 +FY2013 +FY2014 +FY2015 +FY2016 +FY2017 +AstroNova, Inc. +$ +100.00 +$ +129.33 +$ +180.99 +$ +202.05 +$ +216.33 +$ +194.83 +NASDAQ Composite +$ +100.00 +$ +113.29 +$ +151.56 +$ +172.90 +$ +172.62 +$ +211.07 +NASDAQ Electronic Components +$ +100.00 +$ +93.49 +$ +125.28 +$ +158.72 +$ +150.27 +$ +221.02 +* +$100 invested on 1/31/12 in stock or index, including reinvestment of dividends. +Fiscal +year ending January 31. +Dividend +Policy +AstroNova began a program of paying quarterly cash dividends in fiscal 1992 and has paid a dividend for 102 +consecutive quarters. During fiscal 2017, 2016 and 2015, we paid a dividend of $0.07 per share in each quarter and anticipate that we will continue to pay comparable cash dividends on a quarterly basis. +Stock Repurchases +Pursuant to an authorization approved by AstroNova’s Board of Directors in August 2011, the Company is currently authorized to +repurchase up to 390,000 shares of common stock, subject to any increase or decrease by the Board of Directors at any time. This is an ongoing authorization without any expiration date. +There were no stock repurchases during the quarter ended January 31, 2017. +16 +Table of Contents +Item 6. Selected Financial Data +Historical Financial Summary +Income +Statement Data +(In thousands, except per share data) +For the Fiscal Years Ended January 31, +2017 +2016 +2015 +2014 +2013 +Revenue +$ +98,448 +$ +94,658 +$ +88,347 +$ +68,592 +$ +61,224 +Gross profit +39,489 +38,158 +36,977 +26,983 +23,728 +Operating income +6,281 +5,934 +7,231 +1,533 +2,926 +Income from continuing operations +6,605 +6,909 +6,932 +1,237 +2,038 +Income from discontinued operations +— +— +— +1,975 +8,729 +Net income +4,228 +4,525 +4,662 +3,212 +10,767 +Net income per Common Share—Basic : +Continuing operations +$ +0.57 +$ +0.62 +$ +0.61 +$ +0.17 +$ +0.28 +Discontinued operations +— +— +— +0.26 +1.18 +Net income per Common Share – Basic +$ +0.57 +$ +0.62 +$ +0.61 +$ +0.43 +$ +1.46 +Net income per Common Share – Diluted : +Continuing operations +$ +0.56 +$ +0.61 +$ +0.60 +$ +0.16 +$ +0.27 +Discontinued operations +— +— +— +0.26 +1.17 +Net income per Common Share—Diluted +$ +0.56 +$ +0.61 +$ +0.60 +$ +0.42 +$ +1.44 +Dividends Declared per Common Share +$ +0.28 +$ +0.28 +$ +0.28 +$ +0.28 +$ +0.28 +Balance Sheet Data +(In thousands) +As of January 31, +2017 +2016 +2015 +2014 +2013 +Cash and Marketable Securities +$ +24,821 +$ +20,419 +$ +23,132 +$ +27,107 +$ +39,508 +Current Assets +61,697 +54,514 +59,289 +65,034 +70,122 +Total assets +83,665 +77,963 +74,330 +77,964 +79,913 +Current liabilities +11,985 +9,548 +9,569 +9,892 +13,525 +Shareholders’ equity +70,537 +67,373 +63,511 +66,614 +63,837 +Item 7. Management’s Discussion and Analysis of Financial +Condition and Results of Operations +Overview +AstroNova is a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, +store, analyze and present data in multiple formats. The Company organizes its structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. It markets and sells its products and +services through the following two segments: +• +Product Identification (previously QuickLabel) – offers product identification and label printer hardware, software, servicing contracts, and +consumable products. +• +Test and Measurement Product Group (T&M) – offers a suite of products and services that acquire and record visual and electronic signal data +from local and networked data stream and sensors as well as wired and wireless networks. The recorded data is processed and analyzed and then stored and presented in various visual output formats. The T&M segment also includes a line of +aerospace printers that are used to print hard copies of data required for the safe and efficient operation of aircraft including navigation maps, arrival and departure procedures, flight itineraries, weather maps, +17 +Table of Contents +performance data, passenger data, and various air traffic control data. Aerospace products also include Ethernet switches which are used in military aircraft and military vehicles to connect +multiple computers or Ethernet devices. +The Company markets and sells its products and services globally +through a diverse distribution structure of direct sales personnel, manufacturers’ representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth +strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. Research and development activities were +funded and expensed by the Company at approximately 6.4% of annual revenue for fiscal 2017. We also continue to invest in sales and marketing initiatives by expanding the existing sales force and using various marketing campaigns to achieve our +goals of sales growth and increased profitability notwithstanding today’s challenging economic environment. +On +June 19, 2015, we completed the asset purchase of the aerospace printer product line from RITEC. AstroNova’s aerospace printer product line is part of the T&M product group and is reported as part of the T&M segment. The Company +began shipment of the RITEC products in the third quarter fiscal 2016. Refer to Note 2, “Acquisition,” in the audited consolidated financial statements included elsewhere in this report. +On February 1, 2017, AstroNova completed its acquisition of TrojanLabel ApS (TrojanLabel), a European manufacturer of digital color +label presses and specialty printing systems for a broad range of end markets. TrojanLabel will be reported as part of our Product Identification segment beginning with the first quarter of fiscal year 2018. Refer to Note 20, “Subsequent +Event,” in our consolidated financial statements included elsewhere in this report. +Results of Operations +Fiscal 2017 compared to Fiscal 2016 +The following table presents the revenue of each of the Company’s segments, as well as the percentage of total revenue and change from prior year. +($ in thousands) +2017 +2016 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +Product Identification +$ +69,862 +71.0 +% +4.1 +% +$ +67,127 +70.9 +% +T&M +28,586 +29.0 +% +3.8 +% +27,531 +29.1 +% +Total +$ +98,448 +100.0 +% +4.0 +% +$ +94,658 +100.0 +% +Net revenue in fiscal 2017 was $98.4 million, a 4.0% increase compared to prior year revenue of +$94.7 million. Revenue through domestic channels of $69.9 million was a slight increase compared to prior year domestic revenue of $68.3 million. International revenue of $28.6 million increased 8.3% over prior year international revenue +of $26.4 million somewhat as a result of the earlier release of new QuickLabel products. The current year’s international revenue includes an unfavorable foreign exchange rate impact of $0.5 million. +Hardware revenue in fiscal 2017 was $33.8 million, a 2.9% decrease compared to prior year’s revenue of $34.8 million. Hardware +revenue in the Product Identification segment decreased 8.8% compared to prior year due to the anticipation of the introduction of new products in the third quarter of the current year and delayed traction for new products introduced. Hardware +revenue in the T&M segment increased slightly to $22.5 million from $22.4 million in the prior year, as the overall decline in sales of data recorders was offset by a 6.0% increase in sales of the Aerospace product line due to fulfillment during +fiscal 2017 of orders received in previous years. +18 +Table of Contents +Revenue from consumables in fiscal 2017 was $56.2 million, representing an 8.5% increase +compared to prior year revenue of $51.8 million. The increase was primarily attributable to the increase in label and tag product sales, as well as digital color printer supplies in the Product Identification segment. The double-digit increase in +sales of T&M’s chart paper products also made a contribution to the overall increase in consumable revenue for the current year. +Service and other revenue in fiscal 2017 was $8.4 million, a 5.1% increase compared to prior year revenue of $8.1 million as the increase in parts revenue during the year was offset by declines in revenue +from repairs service and freight. +The Company achieved gross profit of $39.5 million for fiscal 2017, reflecting a 3.5% +improvement compared to prior year’s gross profit of $38.2 million. The Company’s gross profit margin of 40.1% in the current year reflects a decrease from the prior year’s gross profit margin of 40.3%. The higher gross profit for the +current year compared to the prior year is primarily attributable to increased revenue; the current year’s decrease in gross margin is due to product mix and higher manufacturing and period costs. +Operating expenses for the current year were $33.2 million, representing a 3.1% increase from the prior year’s operating expenses of +$32.2 million. Specifically, selling and marketing expenses of $19.0 million in fiscal 2017 increased 3.9% from prior year’s amount of $18.2 million. Selling and marketing expense for both fiscal 2017 and 2016 represent 19.3% of net revenue. +Current year general and administrative (G&A) expenses increased by 12.9% from prior year to $7.9 million primarily attributable to an increase in professional and outside service fees in fiscal 2017 related to non-recurring costs associated +with the TrojanLabel acquisition. The increases in selling, marketing and G&A expenses for the current year were somewhat offset by a decrease in research & development (R&D) costs in fiscal 2017. R&D costs in fiscal 2017 of +$6.3 million decreased 9.1% from $6.9 million in fiscal 2016, primarily due to a decrease in outside service costs related to the development and integration of the RITEC products. The R&D spending level for fiscal 2017 represents 6.4% of net +revenue, a decrease compared to prior year’s level of 7.3%. +Other income in fiscal 2017 was $0.3 million compared to $1.0 +million in the prior year. In addition to interest income, other income in the current year includes a gain on sale of a property we owned in England of $0.4 million and $0.1 million related to an amount retained from the RITEC escrow, somewhat +offset by $0.2 million of foreign exchange loss for the year. Other income in fiscal 2016 included $0.2 million of income recognized from a settlement in an escrow account related to our 2014 acquisition of the aerospace printer line from the +Miltope Corporation. +During fiscal 2017 the Company recognized a $2.4 million income tax expense and had an effective tax rate +of 36.0%. Current year income tax expense included a $0.2 million tax expense related to non-deductible transaction costs for the TrojanLabel acquisition and a $0.2 million tax expense related to the increase for unrecognized tax benefits. This +compares to an income tax expense of $2.4 million in fiscal 2016 and related effective tax rate of 34.5%. Prior year’s income tax expense included a $0.1 million tax expense related to an increase in valuation allowance. +Net income for fiscal 2017 was $4.2 million, providing a return of 4.3% on revenue and EPS of $0.56 per diluted share. On a comparable +basis, net income for fiscal 2016 was $4.5 million, a return on revenue of 4.8% and EPS of $0.61 per diluted share. +19 +Table of Contents +Fiscal 2016 compared to Fiscal 2015 +The following table presents the revenue of each of the Company’s segments, as well as the percentage of total revenue and change +from prior year. +($ in thousands) +2016 +2015 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +Product Identification +$ +67,127 +70.9 +% +12.3 +% +$ +59,779 +67.7 +% +T&M +27,531 +29.1 +% +(3.6 +)% +28,568 +32.3 +% +Total +$ +94,658 +100.0 +% +7.1 +% +$ +88,347 +100.0 +% +Revenue in fiscal 2016 was $94.7 million, a 7.1% increase compared to the prior year’s revenue of +$88.3 million. Domestic revenue in fiscal 2016 of $68.3 million increased 11.1% from the prior year revenue of $61.5 million. International revenue of $26.4 million in fiscal 2016 reflects a 1.9% decrease compared to the prior year revenue of +$26.8 million. International revenue for fiscal 2016 included an unfavorable foreign exchange rate impact of $3.0 million. +Hardware revenue in fiscal 2016 was $34.8 million, a 10.0% decrease compared to the prior year’s revenue of $38.7 million. Hardware +revenue in both the T&M and Product Identification segments contributed to the lower volume of hardware shipments. Fiscal 2016 T&M hardware revenue decreased 8.9% compared to the prior year attributable to the decline in revenue from +aerospace printers, as some customers were deferring the shipments of orders to later periods, and the decline in data recorder revenue due to the Company’s delay in the release of a new product. Product Identification hardware revenue declined +11.9% in fiscal 2016 compared to the prior year, primarily as a result of lower OEM monochrome and other color printer revenue. These declines in hardware revenue were slightly offset by increases in revenue from T&M’s data acquisition +product line, as well as an increase in revenue from the Kiaro! series printers in the Product Identification segment. +Revenue +from consumables in fiscal 2016 was $51.8 million, representing an 18.8% increase compared to the prior year revenue of $43.5 million. The increase was primarily attributable to the double-digit increase in both digital color printer supplies and +label and tag product revenue in the Product Identification segment. The increase in consumable product revenue for Kiaro! related products also made a contribution to the overall increase in consumable revenue for the current year. +Service and other revenue in fiscal 2016 was $8.1 million, a 32.4% increase compared to prior year revenue of $6.1 million, primarily due +to increases in repairs and parts revenue related to the T&M suite of products. +The Company achieved gross profit of $38.2 +million for fiscal 2016, reflecting a 3.2% improvement compared to the prior year’s gross profit of $37.0 million. The Company’s gross profit margin of 40.3% in fiscal 2016 reflected a decrease from the prior year’s gross profit +margin of 41.9%. The higher gross profit for fiscal 2016 compared to the prior year is primarily attributable to increased revenue, while the decrease in gross margin is due to product mix, higher manufacturing costs and lower factory absorption. +Operating expenses for fiscal 2016 were $32.2 million, representing an 8.3% increase from prior year’s operating expenses +of $29.7 million. Selling and marketing expenses in fiscal 2016 remained relatively flat from the prior year at $18.2 million, representing 19.3% of revenue, compared to $18.3 million or 20.7% of revenue in the prior year. G&A expenses in fiscal +2016 increased by 24.3% from the prior year to $7.0 million, primarily due to an increase in stock-based compensation expense, as well as professional fees related to both the Company’s name change and branding initiative as well as the costs +associated with the acquisition of the RITEC business. R&D expenses in fiscal 2016 increased 19.7% to $6.9 million compared to fiscal 2015, primarily due to an increase in outside service costs related to the development of new products as +well as RITEC transitional R&D costs. The R&D spending level for fiscal 2016 represent 7.3% of net revenue, an increase of 6.6% compared to the prior year level. +Other income in fiscal 2016 was $1.0 million compared to other expense of $0.3 million in the prior year. In addition to interest income, the current year other income included $0.2 million of income +recognized from a +20 +Table of Contents +settlement in an escrow account related to our 2014 acquisition of the aerospace printer line from Miltope Corporation. Other expense in fiscal 2015 included $0.3 million write-down of inventory +in connection with the 2013 sale of our Grass Technologies Product Group. +During fiscal 2016 the Company recognized $2.4 +million income tax expense and had an effective tax rate of 34.5%. Fiscal 2016 income tax expense included $0.1 million tax expense related to an increase in the valuation allowance. This compared to an income tax expense of $2.3 million in fiscal +2015 and related effective tax rate of 32.7%. The effective tax rate for fiscal 2015 was primarily impacted by the domestic production deduction, research and development credits and foreign tax credits. +Net income for fiscal 2016 was $4.5 million, indicating a return of 4.8% on revenue and EPS of $0.61 per diluted share and included +(a) an after-tax expense of $0.2 million, equal to $0.02 per diluted share, related to the Company’s rebranding initiatives; (b) an after-tax expense of $0.7 million, equal to $0.09 per diluted share, related to non-recurring costs +associated with the RITEC acquisition and transition; and (c) an after-tax expense of $0.4 million, equal to $0.05 per diluted share, related to the 2016 Long-Term Incentive Plan Share Based Compensation. On a comparable basis, net income for +fiscal 2015 was $4.7 million, indicating a return of 5.3% on revenue and EPS of $0.60 per diluted share and includes (a) an after-tax expense of $0.1 million, equal to $0.02 per diluted share, related to the write-down to market value of +the Company’s former Rockland facility; (b) an after-tax expense of $0.1 million, equal to $0.01 per diluted share, related to costs associated with the repurchase of the Company’s common stock from the estate of the Company’s +founder and former chief executive officer, and (c) an after-tax expense of $0.2 million, or $0.02 per diluted share related to a write down of inventory in connection with the sale of our former Grass Technologies Product Group. +Segment Analysis +We +report two segments consistent with our product revenue groups: Product Identification and Test & Measurement (T&M). Segment performance is evaluated based on the operating segment’s profit before corporate and financial +administration expenses. +The following table summarizes selected financial information by segment. +($ in thousands) +Revenue +Segment Operating Profit +Segment Operating Profit as +a % of Revenue +2017 +2016 +2015 +2017 +2016 +2015 +2017 +2016 +2015 +Product Identification +$ +69,862 +$ +67,127 +$ +59,779 +$ +9,821 +$ +9,300 +$ +7,259 +14.1% +13.9% +12.1% +T&M +28,586 +27,531 +28,568 +4,399 +3,664 +5,627 +15.4% +13.3% +19.7% +Total +$ +98,448 +$ +94,658 +$ +88,347 +14,220 +12,964 +12,886 +14.4% +13.7% +14.6% +Corporate Expenses +7,939 +7,030 +5,655 +Operating Income +6,281 +5,934 +7,231 +Other Income (Expense), Net +324 +975 +(299) +Income Before Income Taxes +6,605 +6,909 +6,932 +Income Tax Provision +2,377 +2,384 +2,270 +Net Income +$ +4,228 +$ +4,525 +$ +4,662 +Product Identification +Revenue from the Product Identification segment increased 4.1% in fiscal 2017 with revenue of $69.9 million compared to revenue of $67.1 million in the prior year. The current year’s revenue +reflected the continued growth from the Product Identification consumables products line which posted a 7.1% growth rate over the prior year due to the strong demand for label and tag products as well as digital color printer ink supplies +21 +Table of Contents +products. Product Identification current year segment operating profit was $9.8 million, reflecting a profit margin of 14.1%, a 5.6% increase from prior year segment profit of $9.3 million +and related profit margin of 13.9%. The increase in Product Identification current year segment operating profit and related margin is due to higher revenue and product mix. +Revenue from the Product Identification segment increased 12.3% in fiscal 2016 over fiscal 2015 with revenue of $67.1 million compared to revenue of $59.8 million in fiscal 2015. The fiscal 2016 revenue +reflected the continued growth from Product Identification consumables products line which posted a 19.5% growth rate over the prior year due to the strong demand for label and tag products as well as digital color printer ink supplies products for +the new Kiaro! printers. Product Identification fiscal 2016 segment operating profit was $9.3 million, reflecting a profit margin of 13.9%, a 28.1% increase from prior year segment profit of $7.3 million and related profit margin of 12.1%. The +increase in Product Identification segment operating profit and related margin was due to higher revenue and product mix. +Test & Measurement +Revenue from the T&M product group was $28.6 million for fiscal 2017, a 3.8% increase compared to revenue of $27.5 million in the prior year. The increase is primarily attributable to the increase in +revenue of aerospace printer sales due to fulfilment of orders received in previous years. Revenue growth for fiscal 2017 was tempered by lower sales in the data acquisition product line, as well as decreases in parts and repairs revenue during the +year. T&M’s segment operating profit for the current fiscal year was $4.4 million which resulted in a 15.4% profit margin compared to the prior year’s segment operating profit of $3.7 million and related operating margin of 13.3%. +The higher segment operating profit and related margin were due to product mix. +Revenue from the T&M product group was +$27.5 million for fiscal 2016, a 3.6% decrease compared to revenue of $28.6 million in fiscal 2015. The decrease was primarily attributable to the decline in revenue from aerospace printers due to certain aerospace customers deferring shipments to +later dates. Revenue growth in the data acquisition product line, as well as increases in parts and repairs revenue during the year tempered the lower revenue volume somewhat. T&M’s segment operating profit for the 2016 fiscal year was $3.7 +million which resulted in a 13.3% profit margin as compared to the prior year segment operating profit of $5.6 million and related operating margin of 19.7%. The lower segment operating profit and related margin were due to product mix and higher +manufacturing and operating costs associated with the RITEC transaction. +Liquidity and Capital Resources +Based upon our current working capital position, current operating plans and expected business conditions, we expect to fund our short and +long-term working capital needs, capital expenditures and acquisition requirements primarily using internal funds, and we believe that cash provided by operations will be sufficient to meet our operating and capital needs for at least the next 12 +months. +We may also utilize amounts available under our secured credit facility, as described below, to fund a portion of our +capital expenditures, contractual contingent consideration obligations, and future acquisitions. +On February 28, 2017, we +entered into a credit agreement with Bank of America, N.A., which provided for a secured credit facility consisting of a $9.2 million term loan and a $10.0 million revolving credit facility. No amount has been drawn under the revolving credit +facility as of the date of this report. See Note 20, “Subsequent Event,” to our audited consolidated financial statements included elsewhere in this annual report for additional information regarding our new secured credit facility. +The term loan bears interest at a rate per annum equal to the LIBOR rate plus a margin that varies within a range of 1.0% to +1.5% based on the Company’s consolidated leverage ratio. In connection with our entry into the credit agreement, a subsidiary of the Company entered into a hedging arrangement to manage the variable interest rate risk and currency risk +associated with its payments in respect of the term loan. Under these arrangements, payments of principal and interest in respect of approximately $8.9 million of the principal of the +22 +Table of Contents +term loan will be made in Danish Krone, and interest on such principal amount will be payable at a fixed rate of 0.67% per annum for the entire term, subject only to potential increases of 0.25% +or 0.50% per annum based on the Company’s consolidated leverage ratio. +Amounts borrowed under the revolving credit +facility bear interest at a rate per annum equal to, at the Company’s option, either (a) the LIBOR rate, plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio, or (b) a fluctuating +reference rate equal to the highest of (i) the federal funds rate plus 0.50%, (ii) Bank of America’s publicly-announced prime rate or (iii) the LIBOR rate plus 1.00%, plus a margin that varies within a range of 0.0% to 0.5% based on the +Company’s consolidated leverage ratio. In addition to certain other fees and expenses that the Company is required to pay to the Lender, the Company is required to pay a commitment fee on the undrawn portion of the revolving credit facility at +the rate of 0.25% per annum. +The statements of cash flows for the years ended January 31, 2017, 2016 and 2015 are +included on page 42 of this Form 10-K. Net cash provided by operating activities was $7.0 million in fiscal 2017 compared to net cash provided by operating activities of $7.7 million in the previous year. The decrease in net cash from +operations for the current year is primarily due to increased net income adjusted for non-cash effects, offset by increased cash used for working capital. The combination of changes in accounts receivable, inventory, and accounts payable and accrued +expenses decreased cash by $3.6 million in fiscal 2017, compared to a decrease of $0.5 million in fiscal 2016. The year-over-year decline was due to increased inventory and purchasing volume in fiscal 2017. The accounts receivable collection cycle +decreased to 49 days of revenue at January 31, 2017 compared to 50 days of revenue at the prior year end. Inventory days on hand increased to 114 days at the end of the current fiscal year from 92 days at the prior year end. +Net cash provided by investing activities for fiscal 2017 was $3.1 million, which included $4.0 million of proceeds from maturities of +securities available for sale and proceeds of $0.5 million related to the sale of the UK property. Cash used for investing activities for fiscal 2017 included capital expenditures of $1.2 million, consisting of $0.4 million for land and building +improvements; $0.3 million for information technology; $0.3 million for machinery and equipment; $0.1 million for tools and dies; and $0.1 million for furniture, fixtures and other capital expenditures. +Net cash provided by operating activities was $7.7 million in fiscal 2016 compared to net cash provided by operating activities of $1.5 +million in fiscal 2015. The increase in net cash form operations for fiscal 2016 is primarily related to increased net income adjusted for non-cash effects and less cash used for working capital in fiscal 2016, and the fiscal 2015 tax payments made +in connection with the gain on the 2013 sale of our Grass Technologies Product Group. The combination of accounts receivable, inventory and accounts payable and accrued expenses decreased cash by $0.5 million in fiscal 2016, compared to a decrease +of $2.3 million in fiscal 2015. The accounts receivable collection cycle decreased to 50 days revenue outstanding at January 31, 2016 compared to 52 days outstanding at January 31, 2015. Inventory days on hand decreased to 92 days at the end of +the fiscal 2016 from 106 days at the end of fiscal 2015. +Net cash used by investing activities for fiscal 2016 was $3.5 +million, which included $10.0 million of proceeds from the sales and maturities of securities available for sale, which was partially offset by $5.2 million of cash used to purchase securities available for sale, and $7.4 million of cash used to +purchase the RITEC aerospace printer business. Cash used for investing activities in fiscal 2016 also included cash used for capital expenditures of $3.1 million, consisting of $0.9 million for land and building improvements; $0.7 million for +information technology primarily related to the purchase and implementation of the Company’s new Enterprise Resource Planning system; $0.7 million for machinery and equipment; $0.6 million for tools and dies; and $0.2 million for +furniture, fixtures and other capital expenditures. +Net cash used in financing activities included dividends paid of $2.1 +million in fiscal 2017, $2.0 million in fiscal 2016 and $2.1 million in fiscal 2015. The Company’s annual dividend per share was $0.28 in fiscal 2017, +23 +Table of Contents +2016 and 2015. The Company did not repurchase any shares of its common stock in fiscal 2017 or fiscal 2016. In fiscal 2015, the Company repurchased 500,000 shares of its common stock at a per +share price of $12.50, for an aggregate repurchase price of $6.3 million. The purchase of these shares was from the estate of the former founder and chief executive officer of the Company and did not impact the shares available as part of the +Company’s stock buyback program. At January 31, 2016, there is an ongoing authorization by the Company’s Board of Directors for the purchase of 390,000 shares of the Company’s common stock. +Contractual Obligations, Commitments and Contingencies +At January 31, 2017, the Company’s contractual obligations with initial remaining terms in excess of one year were as follows: +(In thousands) +Total +Less than +1 +Year +1-3 +Years +3-5 +Years +More than +5 +Years +Purchase Commitments* +$ +19,271 +$ +17,848 +$ +1,352 +$ +— +$ +71 +Operating Lease Obligations +706 +371 +331 +4 +— +$ +19,977 +$ +18,219 +$ +1,683 +$ +4 +$ +71 +*Purchase +commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business. +The Company is also subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range +of matters, such as: contract and employment claims; workers compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to +ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a +material adverse effect on our consolidated financial position or results of operations. It is possible, however, that results of operations for any particular future period could be materially affected by changes in our assumptions or strategies +related to these contingencies or changes out of the Company’s control. +Critical Accounting Policies and Estimates +Our discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial +statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating +financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are +reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on the Company’s historical experience, current trends and information available from other sources, as appropriate. If different conditions +result from those assumptions used in our judgments, the results could be materially different from our estimates. We believe the following critical accounting policies require significant judgments and estimates in the preparation of our +consolidated financial statements: +Revenue Recognition : Our product revenue is recognized when all of the following +criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is reasonably assured. When +other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Rights of return are not +included in revenue arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. When a sale arrangement involves training or installation, +the deliverables in the arrangement are evaluated to determine +24 +Table of Contents +whether they represent multiple element arrangements. This evaluation occurs at inception of the arrangement and as each item in the arrangement is delivered. The total fee from the arrangement +is allocated to each unit of accounting based on its relative fair value. Fair value for each element is established generally based on the revenue price charged when the same or similar element is sold separately. We allocate revenue to each +element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on our vendor specific +objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue +recognition criteria for that element have been met. The amount of product revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements. +We recognize revenue for non-recurring engineering (NRE) fees, as necessary, for product modification orders upon completion of +agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer +acceptance for the specific milestone before recognizing revenue. +Infrequently, the Company receives requests from customers +to hold product being purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements provided the transaction meets the following criteria: a valid business purpose for the arrangement exists; risk of +ownership of the purchased product has transferred to the buyer; there is a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the product is ready for shipment; the payment terms are customary; we have no +continuing performance obligation in regards to the product; and the product has been segregated from our inventories. +The +majority of our equipment contains embedded operating systems and data management software which are included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold separately or +marketed separately and its production costs are minor as compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered non-software elements and are not subject to the industry-specific software revenue +recognition guidance. +Warranty Claims and Bad Debts: Provisions for the estimated costs for future product warranty +claims and bad debts are recorded in cost of revenue and general and administrative expense, respectively. The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that might +impact the historical analysis such as new product introduction for warranty and bankruptcies of particular customers for bad debts. We also periodically evaluate the adequacy of reserves for warranty and bad debts recorded in our consolidated +balance sheet as a further test to ensure the adequacy of the recorded provisions. Warranty and bad debt analysis often involves subjective analysis of a particular customer’s ability to pay. As a result, significant judgment is required in +determining the appropriate amounts to record, and such judgments may prove to be incorrect in the future. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in +subsequent periods when the estimates are adjusted to the actual amounts. +Inventories: Inventories are stated at the +lower of cost (first-in, first-out) or market. The Company records provisions to write-down obsolete and excess inventory to its estimated net realizable value. The process for evaluating obsolete and excess inventory consists of analyzing the +inventory supply on hand and estimating the net realizable value of the inventory based on historical experience, current business conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable +and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income Taxes: A valuation allowance is established when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive +and negative evidence must be considered, including our performance, the market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ +25 +Table of Contents +materially from the estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At +January 31, 2017, the Company has provided valuation allowances for future state tax benefits resulting from certain R&D tax credits which could expire unused. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although +guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by +management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted. +Intangible and Long-Lived Assets: Long-lived assets, such as definite-lived intangible assets and property, plant and equipment, are reviewed for impairment whenever events or changes in +circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the +projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows. +Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, +such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether further +impairment testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and +strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two step process is then +performed. Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the +goodwill. Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe +that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to +publicly-traded companies and transactions involving similar businesses, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital +expenditures, and working capital, as well as discount factors and income tax rates. +Share-Based Compensation: +Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have +estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, +employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period +equivalent to the weighted-average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that +there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grants and assessed the expected risk +tolerance of different option groups. The risk-free interest rate used in the model is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is +based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the +26 +Table of Contents +requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the +RSUs and RSAs is based on the closing market price of the Company’s common stock on the date of grant. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is +adjusted periodically based on actual forfeiture experience. +Recent Accounting Pronouncements +Reference is made to Note 1 of our audited consolidated financial statements included elsewhere in this report. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +We have exposure to financial market risks, including changes in foreign currency exchange rates and interest rates. +Financial Exchange Risk +The functional currencies of our foreign subsidiaries and branches are the local currencies – the British Pound in the UK, the Canadian Dollar in Canada and the Euro in France and Germany. +Accordingly, the effects of exchange rate fluctuations on the net assets of these foreign subsidiaries’ operations are accounted for as translation gains or losses in accumulated other comprehensive income (loss) within stockholders’ +equity. We do not believe that a change of 10% in such foreign currency exchange rates would have a material impact on our consolidated financial position or results of operations. +Interest Rate Risk +At January 31, 2017, we had cash and cash equivalents of $18.1 million, of which $3.0 million is held for working capital, $5.0 million is held in foreign bank accounts and $10.0 million is held in +highly liquid money market funds with original maturities of 90 days or less. We also have $6.7 million of securities available for sale which include state and municipal securities with maturities ranging from one month to two years. We do not +enter into investments for trading or speculative purposes. We do not believe that we have material exposure to changes in fair value of these investments as a result of changes in interest rates due to the short-term nature of these investments. +27 +Table of Contents +Item 8. Financial Statements and Supplementary +Data +The consolidated financial statements required under this item are submitted as a separate section of this report +on the pages indicated at Item 15(a)(1). +Item 9. Changes in and Disagreements +with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of +the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief +Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2017 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and +reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such +term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the +preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the +inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of +changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness +of its internal control over financial reporting as of January 31, 2017. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring +Organizations of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2017, the Company’s internal control over financial +reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +The +attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting appears in Part IV, Item 15 of this Form 10-K and is incorporated herein by reference. +Changes in Internal Controls over Financial Reporting +There have been no changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially +affect, our internal control over financial reporting. +Item 9B. Other Information +None. +28 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item is incorporated herein by reference to the Company’s definitive proxy statement for the 2017 Annual Meeting of Shareholders. +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of +the Board of Directors. +Name +Age +Position +Gregory A. Woods +58 +President, Chief Executive Officer and Director +John P. Jordan +71 +Vice President, Chief Financial Officer and Treasurer +Michael M. Morawetz +57 +Vice President—International Branches +Stephen M. Petrarca +54 +Vice President—Operations +Eric E. Pizzuti +50 +Vice President and General Manager—QuickLabel +Michael J. Natalizia +53 +Vice President and Chief Technology Officer +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. +Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from +January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to +2010, Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts. +Mr. Jordan was appointed Vice President, Chief Financial Officer and Treasurer of the Company on August 1, 2016. Since February 2015, Mr. Jordan has served as the president of FreshFoodsVI.com, +an on-line grocery delivery service. From February 2011 to October 2014, Mr. Jordan served as chief financial officer, vice president and treasurer of Zygo Corporation, a company that manufactures and designs advanced optical metrology systems and +optical components and assemblies. From March 2007 to February 2011, Mr. Jordan served as chief financial officer, vice president, and treasurer of Baldwin Technology Company, Inc., a supplier of process automation equipment and related consumables +for the print media industry. +Mr. Morawetz was appointed Vice President International Branches in 2006. He was previously +the General Manager of Branch Operations for the Company’s German subsidiary, having joined the Company in 1989. +Mr. Petrarca was appointed Vice President of Operations in 1998. He has previously held positions as General Manager of +Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Eric E. Pizzuti was appointed Vice President and General Manager of the Company’s Product Identification business +segment on March 9, 2012. Prior to this appointment, Mr. Pizzuti held the position of Vice President and Worldwide Director of Sales for QuickLabel Systems from March 2010 and Worldwide Director of Sales from March 2006 through March 2010. +Mr. Pizzuti has held various other positions since joining the Company in 1996. +Mr. Natalizia was appointed Vice +President and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +Code of Ethics +The +Company has adopted a Code of Conduct which applies to all directors, officers and employees of the Company, including the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and principal accounting officer which +meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K. +29 +Table of Contents +A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on the Company’s website, +(www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” The Company intends to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, principal +accounting officer or controller, or persons performing similar functions by posting such information on its website. +Item 11. Executive Compensation +The information required by this item is incorporated +herein by reference to the Company’s definitive Proxy Statement for the 2017 Annual Meeting of Shareholders. +The +information set forth under the heading “Compensation Committee Report” in the Company’s definitive Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by +reference in any filing under the Securities Act of 1933, as amended. +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The +information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2017 Annual Meeting of Shareholders. +Equity Compensation Plan Information +The following table sets forth +information about the Company’s equity compensation plans as of January 31, 2017: +Plan Category +Number of Securities to +be Issued Upon Exercise +of Outstanding +Options, +Warrants and Rights +Weighted- +Average Exercise +Price of +Outstanding +Options, +Warrants +and +Rights +Number of Securities +Remaining Available for +Future Issuance +Under +Equity Compensation Plans +Equity Compensation Plans Approved by Shareholders +841,250 +(1) +$ +11.96 +(2) +285,200 +(3) +Equity Compensation Plans Not Approved by Shareholders +— +— +— +Total +841,250 +(1) +$ +11.96 +(2) +285,200 +(1) +Includes 30,700 shares issuable upon exercise of outstanding options granted under the Company’s 1997 incentive stock option plan; 26,500 shares issuable upon +exercise of outstanding options granted under the Company’s 1998 non-qualified stock option plan; 526,456 shares issuable upon exercise of outstanding options granted under the Company’s 2007 Equity Incentive Plan; and 101,800 shares +issuable upon exercise of outstanding options granted and 189,794 restricted stock units outstanding under the Company’s 2015 Equity Incentive Plan. +(2) +Does not include restricted stock units. +(3) +Represents 239,976 shares available for grant under the AstroNova, Inc. 2007 and 2015 Equity Incentive Plans and 45,224 shares available for purchase under the Employee +Stock Purchase Plan. This balance does not include 24,073 shares issued pursuant to outstanding unvested restricted stock awards which are subject to forfeiture. +Additional information regarding these equity compensation plans is contained in Note 11, “Share-Based Compensation,” in the Company’s Consolidated Financial Statements included in +Item 15 hereto. +30 +Table of Contents +Item 13. Certain Relationships, Related +Transactions and Director Independence +The information required by this item is incorporated herein by reference to +the Company’s definitive Proxy Statement for the 2017 Annual Meeting of Shareholders. +Item 14. Principal Accountant Fees and Services +The information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2017 +Annual Meeting of Shareholders. +31 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part of this Annual Report filed on Form 10-K: +Page +Report of Independent Registered Public Accounting Firm +37 +Consolidated Balance Sheets as of January 31, 2017 and 2016 +38 +Consolidated Statements of Income—Years Ended January 31, 2017, 2016 and +2015 +39 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2017, 2016 and +2015 +40 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January +31, 2017, 2016 and 2015 +41 +Consolidated Statements of Cash Flows—Years Ended January 31, 2017, 2016 and +2015 +42 +Notes to Consolidated Financial Statements +43-65 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January 31, 2017, 2016 and 2015 +66 +All other schedules for which provision is made in the applicable accounting regulations of the Securities +and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +Item 16. Form 10-K Summary +Not Applicable. +32 +Table of Contents +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Share Purchase Agreement, dated January 7, 2017, as amended, by and among ANI ApS, Trojan Holding ApS, as a Seller and as the +Sellers’ Representative, and Li Wei Chong.* +(2.2) +Asset Purchase Agreement dated June 18, 2015 by and among AstroNova, Inc., and Rugged Information Technology Equipment Corp. filed as Exhibit 2.3 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 31, 2016 and incorporated by reference herein.* +(3A) +Restated Articles of Incorporation of the Company and all amendments thereto filed as Exhibit 3A to the Company’s Quarterly Report on Form 10-Q for the quarter ended +April 30, 2016 and incorporated by reference herein. +(3B) +By-laws of the Company as amended to date filed as Exhibit 3B to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. 000-13200) and incorporated by reference herein. +(4) +Specimen form of common stock certificate of the Company filed as Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and +incorporated by reference herein. +(10.1) +AstroNova, Inc. Non-Employee Director Stock Plan filed as Exhibit 4.3 to Registration Statement on Form S-8 filed on March 28, 1997, +Registration No. 333-24123, and incorporated by reference herein.** +(10.2) +AstroNova, Inc. 1997 Incentive Stock Option Plan, as amended, filed as Exhibit 4.3 to Registration Statements on Form S-8 filed on August 28, 1998, Registration +No. 333-93565, and incorporated by reference herein.** +(10.3) +AstroNova, Inc. 1998 Non-Qualified Stock Option Plan, as amended, filed as Exhibit 4.3 to Registration Statement on Form S-8 filed on August 28, 1998, Registration No. 333-62431 and incorporated by reference herein.** +(10.4) +AstroNova, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 annual shareholders meeting and incorporated by reference herein.** +(10.5) +AstroNova, Inc. Management Bonus Plan (Group III) filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended May 3, 2014 +incorporated by reference herein.** +(10.6) +AstroNova, Inc. Management Bonus Plan—Vice President International Branches filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K (File No. 000-13200) for the year ended January 31, 2009 and incorporated by reference herein.** +(10.7) +AstroNova, Inc. Amended and Restated Non-Employee Directors Compensation Program filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period +ended May 3, 2014 and incorporated by reference herein.** +(10.8) +Form of Performance-Based Restricted Stock Unit Award Agreement filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended +April 28, 2012 and incorporated by reference herein.** +(10.9) +Three-Year Revolving Line of Credit Agreement dated September 5, 2014 by and between the Company and Wells Fargo Bank filed as Exhibit 10.12 to the Company’s +Quarterly Report on Form 10-Q for the period ended November 1, 2014 and incorporated by reference herein. +33 +Table of Contents +Exhibit +Number +(10.10) +Equity Incentive Award Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.12 to the Company’s Annual +Report on Form 10-K for the year ended January 31, 2015 and incorporated by reference herein.** +(10.11) +Change in Control Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to the Company’s Annual Report on +Form 10-K for the year ended January 31, 2015 and incorporated by reference herein.** +(10.12) +Stock Repurchase Agreement dated as of December 4, 2014 by and among AstroNova, Inc. and Albert W. Ondis III, Alexis Ondis and April Ondis, each in his or her capacity as a +Co-Executor of the Estate of Albert W. Ondis filed on Form 8-K on December 4, 2014 and incorporated by reference herein. +(10.13) +Senior Executive Short Term Incentive Plan adopted March 27, 2015 filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended +May 2, 2015 and incorporated by reference herein.** +(10.14) +General Manager Employment Contract dated November 18, 2014 by and among AstroNova, Inc. and Michael Morawetz filed as Exhibit 10.2 to the Company’s Quarterly +Report on Form 10-Q for the period ended May 2, 2015 and incorporated by reference herein.** +(10.15) +Form of Indemnification Agreement for directors and officers filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended +October 31, 2015 and incorporated by reference herein.** +(10.16) +Credit Agreement dated February 28, 2017 among AstroNova, Inc., as the U.S. Borrower, ANI APS, as the Danish Borrower, Certain Subsidiaries of the U.S. Borrower, as the +Guarantors and Bank of America, N.A. +(10.18) +Security and Pledge Agreement dated February 28, 2017 among AstroNova, Inc. as the U.S. Borrower and such other parties that become Grantors hereunder after the date hereof and +Bank of America, N.A. +(10.19) +AstroNova, Inc. Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the +period ended July 30, 2016 and incorporated by reference herein.** +(10.20) +Form of Restricted Stock Agreement granted under the Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.2 to the Company’s +Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.21) +Form of Incentive Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the +period ended July 30, 2016 and incorporated by reference herein.** +(10.22) +Form of Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for +the period ended July 30, 2016 and incorporated by reference herein.** +(10.23) +Form of Non-Employee Director Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.5 to the Company’s Quarterly Report +on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.24) +Form of Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period +ended July 30, 2016 and incorporated by reference herein.** +34 +Table of Contents +Exhibit +Number +(10.25) +Form of Non-Employee Director Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on +Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.26) +Form of Time-Based Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for +the period ended July 30, 2016 and incorporated by reference herein.** +(10.27) +Form of Performance Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q +for the period ended July 30, 2016 and incorporated by reference herein.** +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(101) +The following materials from Registrant’s Annual Report on Form 10-K for the year ended January 31, 2017, formatted in XBRL +(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in +Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. Filed electronically herein. +* +Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon +request. +** +Management contract or compensatory plan or arrangement. +35 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly +authorized. +ASTRONOVA, INC. +(Registrant) +Date: April 6, 2017 +By: +/ S / G REGORY A. +W OODS +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below +by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/ S / G REGORY A. +W OODS +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 6, 2017 +/ S / J OHN P. +J ORDAN +John P. Jordan +Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) +April 6, 2017 +/ S / H ERMANN +V IETS +Hermann Viets +Chairman of the Board of Directors and Director +April 6, 2017 +/ S / E VERETT V. +P IZZUTI +Everett V. Pizzuti +Director +April 6, 2017 +/ S / G RAEME +M AC L ETCHIE +Graeme MacLetchie +Director +April 6, 2017 +/ S / M ITCHELL I. +Q UAIN +Mitchell I. Quain +Director +April 6, 2017 +/ S / H AROLD +S CHOFIELD +Harold Schofield +Director +April 6, 2017 +/ S / A PRIL +O NDIS +April Ondis +Director +April 6, 2017 +36 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Shareholders of +AstroNova, Inc. +We have audited the accompanying consolidated balance sheets of AstroNova, Inc. (the “Company”) as of January 31, 2017 and 2016, and the related consolidated statements of income, comprehensive +income, changes in shareholders’ equity and cash flows for each of the three years in the period ended January 31, 2017, and the financial statement schedule listed in Item 15(a)(2)(collectively, the financial statements). We also have audited +AstroNova, Inc.’s internal control over financial reporting as of January 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway +Commission in 2013. The Company’s management is responsible for these financial statements and for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial +reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards +require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material +respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, +and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, +and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits +provide a reasonable basis for our opinions. +A company’s internal control over financial reporting is a process designed +to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over +financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide +reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in +accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a +material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting +may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the +policies or procedures may deteriorate. +In our opinion, the consolidated financial statements referred to above present +fairly, in all material respects, the financial position of AstroNova, Inc. as of January 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 2017, in conformity +with accounting principles generally accepted in the United States of America, and in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, +in all material respects, the information set forth therein. Also in our opinion, AstroNova, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2017, based on criteria established +in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +/s/ Wolf & Company, P.C. +Boston, Massachusetts +April 6, 2017 +37 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2017 +2016 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +18,098 +$ +10,043 +Securities Available for Sale +6,723 +10,376 +Accounts Receivable, net of reserves of $266 in 2017 and $404 in 2016 +15,702 +15,325 +Inventories +19,506 +14,890 +Prepaid Expenses and Other Current Assets +1,394 +3,880 +Total Current Assets +61,423 +54,514 +PROPERTY, PLANT AND EQUIPMENT +Land and Improvements +967 +967 +Buildings and Improvements +11,266 +11,350 +Machinery and Equipment +28,145 +27,396 +40,378 +39,713 +Less Accumulated Depreciation +(31,098 +) +(29,906 +) +Total Property, Plant and Equipment, net +9,280 +9,807 +OTHER ASSETS +Identifiable Intangibles, net +5,264 +5,980 +Goodwill +4,521 +4,521 +Deferred Tax Assets +2,811 +3,049 +Other +366 +92 +Total Other Assets +12,962 +13,642 +TOTAL ASSETS +$ +83,665 +$ +77,963 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +4,957 +$ +3,192 +Accrued Compensation +2,936 +3,436 +Other Accrued Expenses +2,171 +2,209 +Deferred Revenue +472 +529 +Income Taxes Payable +1,449 +182 +Total Current Liabilities +11,985 +9,548 +Deferred Tax Liabilities +11 +78 +Other Long Term Liabilities +1,132 +964 +TOTAL LIABILITIES +13,128 +10,590 +Commitments and Contingencies (See Note 18) +SHAREHOLDERS’ EQUITY +Preferred Stock, $10 Par Value, Authorized 100,000 shares, None Issued +— +— +Common Stock, $0.05 Par Value, Authorized 13,000,000 shares; Issued 9,834,906 shares in 2017 and 9,666,290 shares in +2016 +492 +483 +Additional Paid-in Capital +47,524 +45,675 +Retained Earnings +44,358 +42,212 +Treasury Stock, at Cost, 2,375,076 shares in 2017 and 2,323,545 shares in 2016 +(20,781 +) +(20,022 +) +Accumulated Other Comprehensive Loss, Net of Tax +(1,056 +) +(975 +) +TOTAL SHAREHOLDERS’ EQUITY +70,537 +67,373 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +83,665 +$ +77,963 +See Notes to the Consolidated Financial Statements. +38 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share +Data) +2017 +2016 +2015 +Revenue +$ +98,448 +$ +94,658 +$ +88,347 +Cost of Revenue +58,959 +56,500 +51,370 +Gross Profit +39,489 +38,158 +36,977 +Costs and Expenses: +Selling and Marketing +18,955 +18,249 +18,289 +Research and Development +6,314 +6,945 +5,802 +General and Administrative +7,939 +7,030 +5,655 +Operating Expenses +33,208 +32,224 +29,746 +Operating Income +6,281 +5,934 +7,231 +Other Income (Expense): +Investment Income +78 +72 +81 +Other, Net +246 +903 +(380 +) +324 +975 +(299 +) +Income before Income Taxes +6,605 +6,909 +6,932 +Income Tax Provision +2,377 +2,384 +2,270 +Net Income +$ +4,228 +$ +4,525 +$ +4,662 +Net Income Per Common Share—Basic +$ +0.57 +$ +0.62 +$ +0.61 +Net Income Per Common Share—Diluted +$ +0.56 +$ +0.61 +$ +0.60 +Weighted Average Number of Common Shares Outstanding—Basic +7,421 +7,288 +7,612 +Dilutive Effect of Common Stock Equivalents +151 +183 +222 +Weighted Average Number of Common Shares Outstanding—Diluted +7,572 +7,471 +7,834 +Dividends Declared Per Common Share +$ +0.28 +$ +0.28 +$ +0.28 +See Notes to the Consolidated Financial Statements. +39 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2017 +2016 +2015 +Net Income +$ +4,228 +$ +4,525 +$ +4,662 +Other Comprehensive Loss, net of taxes and reclassification adjustments: +Foreign currency translation adjustments +(65 +) +(269 +) +(866 +) +Unrealized loss on securities available for sale +(16 +) +(7 +) +(9 +) +Other Comprehensive Loss +(81 +) +(276 +) +(875 +) +Comprehensive Income +$ +4,147 +$ +4,249 +$ +3,787 +See Notes to the Consolidated Financial Statements. +40 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Treasury +Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Shares +Amount +Balance January 31, 2014 +9,291,225 +$ +465 +$ +41,235 +$ +37,201 +$ +(12,463 +) +$ +176 +$ +66,614 +Share-based compensation +— +— +511 +— +— +— +511 +Employee option exercises +227,512 +11 +1,887 +— +(889 +) +— +1,009 +Tax benefit of employee stock options +— +— +107 +— +— +— +107 +Restricted stock awards vested, net +26,127 +1 +(140 +) +— +— +— +(139 +) +Repurchases of common stock +— +— +— +— +(6,250 +) +— +(6,250 +) +Dividends paid +— +— +— +(2,128 +) +— +— +(2,128 +) +Net income +— +— +— +4,662 +— +— +4,662 +Other comprehensive loss +— +— +— +— +— +(875 +) +(875 +) +Balance January 31, 2015 +9,544,864 +$ +477 +$ +43,600 +$ +39,735 +$ +(19,602 +) +$ +(699 +) +$ +63,511 +Share-based compensation +— +— +1,209 +— +— +— +1,209 +Employee option exercises +98,734 +5 +802 +— +(371 +) +— +436 +Tax benefit of employee stock options +— +— +65 +— +— +— +65 +Restricted stock awards vested, net +22,692 +1 +(1 +) +— +(49 +) +— +(49 +) +Dividends paid +— +— +— +(2,048 +) +— +— +(2,048 +) +Net income +— +— +— +4,525 +— +— +4,525 +Other comprehensive loss +— +— +— +— +— +(276 +) +(276 +) +Balance January 31, 2016 +9,666,290 +$ +483 +$ +45,675 +$ +42,212 +$ +(20,022 +) +$ +(975 +) +$ +67,373 +Share-based compensation +— +— +1,019 +— +— +— +1,019 +Employee option exercises +93,483 +5 +834 +— +(451 +) +— +388 +Restricted stock awards vested, net +75,133 +4 +(4 +) +— +(308 +) +— +(308 +) +Dividends paid +— +— +— +(2,082 +) +— +— +(2,082 +) +Net income +— +— +— +4,228 +— +— +4,228 +Other comprehensive loss +— +— +— +— +— +(81 +) +(81 +) +Balance January 31, 2017 +9,834,906 +$ +492 +$ +47,524 +$ +44,358 +$ +(20,781 +) +$ +(1,056 +) +$ +70,537 +See Notes to the Consolidated Financial Statements. +41 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2017 +2016 +2015 +Cash Flows from Operating Activities: +Net Income +$ +4,228 +$ +4,525 +$ +4,662 +Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: +Depreciation and Amortization +2,431 +2,065 +2,063 +Share-Based Compensation +1,019 +1,209 +511 +Deferred Income Tax Provision (Benefit) +174 +(292 +) +(397 +) +Excess Tax Benefit From Share-Based Compensation +— +(65 +) +(107 +) +Gain on Sale of UK Property +(419 +) +— +— +Write-down of Asset Held for Sale +— +— +220 +Changes in Assets and Liabilities, Net of Impact of Acquisitions: +Accounts Receivable +(416 +) +(1,285 +) +(2,741 +) +Inventories +(4,659 +) +600 +(404 +) +Accounts Payable and Accrued Expenses +1,426 +151 +810 +Income Taxes Payable +2,187 +412 +(1,747 +) +Other +982 +407 +(1,379 +) +Net Cash Provided by Operating Activities +6,953 +7,727 +1,491 +Cash Flows from Investing Activities: +Proceeds from Maturities of Securities Available for Sale +4,029 +9,978 +12,885 +Purchases of Securities Available for Sale +(400 +) +(5,192 +) +(9,306 +) +Proceeds from Sale of UK Property +474 +— +— +Acquisition of RITEC’s Aerospace Printer Business +— +(7,360 +) +— +Net Proceeds Received for Sale of Asset Held for Sale +— +1,698 +— +Release of Funds Held in Escrow From Sale of Grass +— +— +1,800 +Proceeds Received on Disposition of Grass Inventory +— +— +2,355 +Payments Received on Line of Credit and Note Receivable +256 +395 +258 +Additions to Property, Plant and Equipment +(1,238 +) +(3,061 +) +(2,247 +) +Net Cash Provided (Used) by Investing Activities +3,121 +(3,542 +) +5,745 +Cash Flows from Financing Activities: +Net Proceeds from Common Shares Issued Under Employee Benefit Plans and Employee Stock Option Plans, Net of Payment of Minimum +Tax Withholdings +79 +387 +870 +Purchase of Treasury Stock +— +— +(6,250 +) +Excess Tax Benefit from Share-Based Compensation +— +65 +107 +Dividends Paid +(2,082 +) +(2,048 +) +(2,128 +) +Net Cash Used in Financing Activities +(2,003 +) +(1,596 +) +(7,401 +) +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +(16 +) +(504 +) +(218 +) +Net Increase (Decrease) in Cash and Cash Equivalents +8,055 +2,085 +(383 +) +Cash and Cash Equivalents, Beginning of Year +10,043 +7,958 +8,341 +Cash and Cash Equivalents, End of Year +$ +18,098 +$ +10,043 +$ +7,958 +Supplemental Information: +Cash Paid (Received) During the Period for: +Income Taxes, Net of Refunds +$ +(84 +) +$ +2,257 +$ +4,566 +See Notes to the Consolidated Financial Statements. +42 +Table of Contents +ASTRONOVA, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +January 31, 2017, 2016 and 2015 +Note 1—Summary of Significant Accounting Policies +Basis of +Presentation : The accompanying financial data have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and are presented in conformity with U.S. generally accepted accounting principles +(U.S. GAAP). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year. +Principles of Consolidation: The consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. +All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: Certain amounts +in prior year financial statements have been reclassified to conform to the current year’s presentation. +Use of +Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to +the allowances for doubtful accounts, inventory valuation, valuation and estimated lives of intangible assets, impairment of long-lived assets, goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are +based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. +Consequently, actual results could differ from those estimates. +Cash and Cash Equivalents: Highly liquid investments +with an original maturity of 90 days or less are considered to be cash equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. Cash of $5.1 million and $3.0 million was held in +foreign bank accounts at January 31, 2017 and 2016, respectively. +Securities Available for Sale: Securities +available for sale are carried at fair value based on quoted market prices, where available. The difference between cost and fair value, net of related tax effects, is recorded as a component of accumulated other comprehensive loss in +shareholders’ equity. +Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market and +include material, labor and manufacturing overhead. +Property, Plant and Equipment: Property, plant and equipment are +stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and improvements—10 to 45 years; machinery and +equipment—3 to 10 years). Depreciation expense was $1.7 million for fiscal 2017; $1.6 million for fiscal 2016 and $1.4 million for 2015. +Revenue Recognition: Product revenue is recognized when all of the following criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; +delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is reasonably assured. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Rights of return are not included +in revenue arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Revenue is recorded net of any discounts from list price. Amounts +billed to customers for shipping and handling fees are included in revenue, while related shipping and handling costs are included in cost of revenue. +The majority of our hardware products contain embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the +systems as a +43 +Table of Contents +whole as it is not sold or marketed separately and its production costs are minor compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered +non-software elements and are not subject to industry-specific software revenue recognition guidance. +Our multiple-element +arrangements are generally comprised of a combination of equipment, software, installation and/or training services. Hardware and software elements are typically delivered at the same time and revenue is recognized when all the revenue recognition +criteria for each unit are met. Delivery of installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few +days to a few months. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. +We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone +basis and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the +selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on vendor specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling +price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met. +Infrequently, we recognize revenue for non-recurring engineering (NRE) fees for product modification orders upon completion of agreed-upon +milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for +the specific milestone before recognizing revenue. NRE fees have not been significant in the periods presented herein. +We also +receive infrequent requests from customers to hold product purchased from us for the customer’s convenience. Revenue is recognized for such bill and hold arrangements in accordance with the requirements of SEC Staff Accounting Bulletin +No. 104 which requires, among other things, the existence of a valid business purpose for the arrangement; the transfer of ownership of the purchased product; a fixed delivery date that is reasonable and consistent with the buyer’s +business purpose; the readiness of the product for shipment; the use of customary payment terms; no continuing performance obligation by us; and segregation of the product from our inventories. +Research and Development Costs: We charge costs to expense in the period incurred, and these expenses are presented in the +consolidated statement of income. The following costs are included in research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies. +Foreign Currency Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency +as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in +shareholders’ equity. Revenues and expenses are translated at the monthly average exchange rates. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our German subsidiary since its undistributed +earnings are considered to be permanently invested. Our net foreign exchange losses were $0.2 million; $0.3 million and $0.2 million for fiscal 2017, 2016 and 2015, respectively. +Advertising: The Company expenses advertising costs as incurred. Advertising costs including advertising production, trade shows +and other activities are designed to enhance demand for our products and amounted to approximately $1.3 million; $1.1 million and $1.7 million in fiscal 2017, 2016 and 2015, respectively. +Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances +indicate that the carrying amount of such assets may not be recoverable. Determination +44 +Table of Contents +of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less +than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. For 2017, 2016 and 2015, there were no impairment charges for +long-lived assets. +Intangible Assets: Intangible assets include the value of customer relationships and non-competition +agreements acquired in connection with business acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a +systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be +recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated +by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. For 2017, 2016 and 2015, there were no impairment charges for intangible assets. +Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, +such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether further impairment +testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and +changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two-step process is then performed. +Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the goodwill. +Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this +approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, the Company uses the market approach, which compares the reporting unit to +publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital +expenditures, and working capital, as well as discount factors and income tax rates. +We performed a qualitative assessment for +our 2017 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying value of the reporting units exceed their fair values. Accordingly, no further testing was performed, as +management believes that there are no impairment issues in regards to goodwill at this time. +Income Taxes: We use the +liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using +statutory tax rates that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. +At January 31, 2017 and 2016, a valuation allowance was provided for deferred tax assets attributable to certain state R&D credit carryforwards. +AstroNova accounts for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement +attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, +classification, interest and penalties, accounting in interim periods and disclosure. +45 +Table of Contents +In fiscal 2015, the Company adopted the guidance in ASU 2015-17, “Income Taxes (Topic +740)” and accordingly has presented the Company’s deferred taxes as non-current in the accompanying consolidated balance sheet. +Net Income Per Common Share: Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted +average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2017, 2016 and 2015, there were +459,700, 425,200 and 156,600, respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive. +Allowance for Doubtful Accounts: In circumstances where we are aware of a customer’s inability to meet its financial +obligations, an allowance is established. Accounts are individually evaluated on a regular basis and allowances are established to state such receivables at their net realizable value. The remainder of the allowance is based upon historical +write-off experience and current market assessments. +Fair Value of Financial Instruments: Our financial instruments +consist of cash and cash equivalents, investment securities, accounts receivable and accounts payable. The carrying amount reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable +approximates fair value due to the short-term nature of these items. Investment securities, all of which are available for sale, are carried in the consolidated balance sheets at fair value based on quoted market prices, when available. +Share-Based Compensation : Share-based compensation expense is measured based on the estimated fair value of the share-based award +when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our +estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend +yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that +period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms +of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for +bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the +employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on +the closing market price of the Company’s common stock on the grant date. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based +on actual forfeiture experience. +In the first quarter of fiscal 2017, the Company prospectively adopted the provisions of ASU +2016-09, and, as such, the cash flow from tax benefits that are a result of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) is classified with other income tax cash flows as an operating activity +for the year ended January 31, 2017. Tax deductions from certain stock option exercises are treated as being realized when they reduce tax expense and taxes payable in accordance with relevant tax law. +46 +Table of Contents +Recent Accounting Pronouncements: +Statement of Cash Flows +In August 2016, the Financial Accounting Standards +Board (FASB) issued Accounting Standards Update (ASU) 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing +diversity in practice for certain cash receipts and cash payments. The standard is effective for interim and annual reporting periods beginning after December 15, 2017 (Q1 fiscal 2019 for AstroNova), with early adoption permitted. The Company +does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements. +Revenue Recognition +In +May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common +revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. In August 2015, the FASB modified ASU 2014-09 to +be effective for annual reporting periods beginning after December 15, 2017 (Q1 fiscal 2019 for AstroNova), including interim periods within that reporting period. As modified, the FASB permits the adoption of the new revenue standard early, +but not before annual periods beginning after December 15, 2016. Entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date +of initial application and not adjusting comparative information. +In March 2016, the FASB issued ASU 2016-08, “Revenue +from Contracts with Customers (Topic 606) – Principal versus Agent Consideration.” In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and +Licensing.” In May 2016, the FASB issued ASU 2016-11, “Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) – Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16” and ASU 2016-12, +“Revenue from Contracts with Customers (Topic 606) – Narrow Scope Improvements and Practical Expedients.” All of these ASUs do not change the core principle of the guidance in Topic 606 (as amended by ASU 2014-09), but rather provide +further guidance to improve the operability and understandability of the implementation guidance included in ASU 2014-09. The effective date for all of these ASUs is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual +reporting periods beginning after December 15, 2017, including interim periods within those years (Q1 fiscal 2019 for AstroNova). The Company does not expect the adoption of this guidance to have a material impact on the Company’s +consolidated financial statements. +Share-Based Compensation +In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies +several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU +2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods (Q1 fiscal 2018 for AstroNova) and early adoption is allowed. As permitted by ASU 2016-09, the Company adopted this +guidance prospectively in fiscal 2017 and the adoption of this guidance did not have a material effect on the Company’s consolidated financial statements. +Leases +In February 2016, the FASB issued ASU 2016-02, “Leases (Topic +842).” ASU 2016-02 supersedes current guidance related to accounting for leases and is intended to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities in the balance sheet for +operating leases with +47 +Table of Contents +lease terms greater than twelve months. The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows +arising from leases. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (Q1 fiscal 2020 for AstroNova), with early adoption permitted. At adoption, this update +will be applied using a modified retrospective approach. The Company is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements. +Inventory +In July 2015, the FASB issued ASU 2015-11, “Inventory +(Topic 330).” ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the +retail inventory method but applies to all other inventory, including inventory measured using first-in, first-out (FIFO) or the average cost method. ASU 2015-11 will be effective for fiscal years beginning after December 15, 2016, including +interim periods within those fiscal years (Q1 fiscal 2018 for AstroNova) and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company does not believe the adoption of this +guidance will have a material impact on the Company’s consolidated financial statements. +Note 2—Acquisition +On June 19, 2015, we completed the acquisition of the aerospace printer product line for civil and commercial aircraft from Rugged +Information Technology Equipment Corporation (RITEC) under the terms of an Asset Purchase Agreement dated June 18, 2015. The products of RITEC consist of aerospace printers for use in commercial aircraft sold primarily to aircraft +manufacturers, tier one contractors and directly to airlines around the world. Our aerospace printer product line is part of the Test & Measurement (T&M) product group and is reported as part of the T&M segment. The Company began +shipment of the RITEC products in the third quarter of fiscal 2016. +The purchase price of the acquisition was $7.4 million +which was funded using available cash and investment securities. The Company withheld $0.8 million of the purchase price in escrow for twelve months following the acquisition date to support the sellers’ indemnifications in the event of any +breach in the representations, warranties or covenants of RITEC. The Company retained $0.1 million from the escrow, which was recorded as other income in the consolidated statement of income for the period ended January 31, 2017. +The assets acquired consist principally of accounts receivable and certain intangible assets. Acquisition related costs of approximately +$0.1 million are included in the general and administrative expenses in the Company’s consolidated statements of income for fiscal year ended 2016. The acquisition was accounted for under the acquisition method in accordance with the guidance +provided by FASB ASC 805, “Business Combinations.” +The Company also entered into a Transition Services Agreement, +under which RITEC provided transition services and continued to manufacture products in the acquired product line until the Company transitioned the manufacturing to its West Warwick, Rhode Island facility. The TSA concluded in the third quarter of +fiscal 2017 and AstroNova purchased the remaining inventory held by RITEC for $0.2 million. +Also as part of the Asset Purchase +Agreement, the Company entered into a License Agreement, which grants RITEC certain rights to use the intellectual property acquired by the Company in the design, development, marketing, manufacture, sale and servicing of aerospace printers for +aircraft sold to the military end-user market and printers sold to other non-aircraft market segments. RITEC will pay royalties equal to 7.5% of the revenue price on all products sold into the military end-user aircraft market during the first five +years of the License Agreement. No royalty revenue was accrued in fiscal 2017. +48 +Table of Contents +The purchase price of the acquisition has been allocated on the basis of the fair value as +follows: +(In thousands) +Accounts Receivable +$ +50 +Identifiable Intangible Assets +3,780 +Goodwill +3,530 +Total Purchase Price +$ +7,360 +The fair value of the intangible assets acquired was estimated by applying the income approach. This fair +value measurement is based on significant inputs that are not observable in the market and therefore, represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement and Disclosure.” Key assumptions include (1) a +weighted average cost of capital of 15.5%; (2) a range of earnings projections from $0.1-$0.7 million and (3) a range of contract renewal probability from 30%-100%. +Goodwill of $3.5 million, which is deductible for tax purposes, represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets +acquired from RITEC. The carrying amount of the goodwill was allocated to the T&M segment of the Company. +The following +table reflects the fair value of the acquired identifiable intangible assets and related estimated useful lives: +(In thousands) +Fair +Value +Useful Life +(Years) +Customer Contract Relationships +$ +2,830 +10 +Non-Competition Agreement +950 +5 +Total +$ +3,780 +Assuming the acquisition of RITEC occurred on February 1, 2014, the impact on net revenue, net income +and earnings per share would not have been material to the Company for the years ended January 31, 2017, 2016 and 2015. +Note +3—Intangible Assets +Intangible assets are as follows: +January 31, 2017 +January 31, 2016 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Net +Carrying +Amount +Miltope: +Customer Contract Relationships +$ +3,100 +$ +(1,108 +) +$ +1,992 +$ +3,100 +$ +(758 +) +$ +2,342 +RITEC: +Customer Contract Relationships +2,830 +(207 +) +2,623 +2,830 +(31 +) +2,799 +Non-Competition Agreement +950 +(301 +) +649 +950 +(111 +) +839 +Intangible assets, net +$ +6,880 +$ +(1,616 +) +$ +5,264 +$ +6,880 +$ +(900 +) +$ +5,980 +There were no impairments to intangible assets during the periods ended January 31, 2017, 2016 and +2015. Amortization expense of $0.7 million; $0.5 million and $0.7 million with regard to acquired intangibles has been included in the consolidated statements of income for years ended January 31, 2017, 2016 and 2015, respectively. +Estimated amortization expense for the next five years is as follows: +(In thousands) +2018 +2019 +2020 +2021 +2022 +Estimated amortization expense +$ +774 +$ +769 +$ +803 +$ +706 +$ +633 +49 +Table of Contents +Note 4—Securities Available for Sale +Pursuant to our investment policy, securities available for sale include state and municipal securities with various contractual or +anticipated maturity dates ranging from one month to two years. These securities are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss), net of taxes in shareholders’ +equity until realized. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification basis. A decline in the fair value of any available for sale security below cost that is determined +to be other than temporary will result in a write-down of its carrying amount to fair value. No such impairment charges were recorded for any period presented. All short-term investment securities have original maturities greater than 90 days. +The fair value, amortized cost and gross unrealized gains and losses of the securities are as follows: +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair +Value +(In thousands) +January 31, 2017 +State and Municipal Obligations +$ +6,732 +$ +— +$ +(9 +) +$ +6,723 +January 31, 2016 +State and Municipal Obligations +$ +10,363 +$ +15 +$ +(2 +) +$ +10,376 +The contractual maturity dates of these securities are as follows: +January 31 +2017 +2016 +(In thousands) +Less than one year +$ +3,563 +$ +3,833 +One to two years +3,160 +6,543 +$ +6,723 +$ +10,376 +Actual maturities may differ from contractual dates as a result of revenue or earlier issuer redemptions. +Note 5—Inventories +The components of inventories are as follows: +January 31 +2017 +2016 +(In thousands) +Materials and Supplies +$ +11,865 +$ +10,197 +Work-in-Progress +1,216 +1,025 +Finished Goods +10,270 +7,491 +23,351 +18,713 +Inventory Reserve +(3,845 +) +(3,823 +) +Balance at January 31 +$ +19,506 +$ +14,890 +Finished goods inventory includes $1.6 million and $1.4 million of demonstration equipment at +January 31, 2017 and 2016, respectively. +50 +Table of Contents +Note 6—Accrued Expenses +Accrued expenses consisted of the following: +January 31 +2017 +2016 +(In thousands) +Professional Fees +$ +584 +$ +328 +Warranty +515 +400 +Product Replacement Cost Reserve +174 +278 +Dealer Commissions +180 +221 +Other +718 +982 +$ +2,171 +$ +2,209 +Note 7—Line of Credit +At January 31, 2017 the Company had a $10.0 million revolving line of credit available to be used as needed for ongoing working capital requirements, business acquisitions or general corporate +purposes. Any borrowings made under the line of credit would bear interest at a fluctuating variable rate of either (i) the Prime Rate plus an agreed upon margin of between 0% and 0.50%, based upon the consolidated leverage ratio (funded debt: +EBITDA, as defined); or (ii) the Eurocurrency Rate (LIBOR) plus an agreed-upon margin of between 1.00% and 1.50%, based upon the consolidated leverage ratio. In addition, the agreement provides for two financial covenant requirements: Total +Funded Debt to Adjusted EBITDA (as defined) of not greater than 3 to 1 and a Fixed Charge Coverage Ratio (as defined) of not less than 1.25 to 1, both measured at the end of each quarter on a rolling four quarter basis. As of January 31, 2017, +there had been no borrowings against this line of credit and the Company was in compliance with its financial covenants. Under the terms, the line of credit would have expired on August 30, 2017. Subsequent to year-end, this $10.0 million +revolving line of credit was terminated. As part of a new credit facility, the Company entered into a $10.0 million revolving credit facility with a different Lender. Refer to Note 20 for additional details. +Note 8—Sale of Property +In December of 2016, we sold our Slough UK real estate and related machinery, computers and equipment at that location. Proceeds from the sale amounted to $0.5 million (0.4 million in British +Pounds) and a gain of $0.4 million was recognized in other income in the Company’s consolidated statement of income for the period ended January 31, 2017. Our UK branch is currently leasing property for its operations in Maidenhead, +UK. +51 +Table of Contents +Note 9—Accumulated Other Comprehensive Loss +The changes in the balance of accumulated other comprehensive loss by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Unrealized Holding Gain (Loss) +on Available for +Sale Securities +Total +Balance at January 31, 2014 +$ +152 +$ +24 +$ +176 +Other Comprehensive Loss +(866 +) +(9 +) +(875 +) +Amounts Reclassified to Net Income +— +— +— +Net Other Comprehensive Loss +(866 +) +(9 +) +(875) +Balance at January 31, 2015 +(714 +) +15 +(699 +) +Other Comprehensive Loss +(269 +) +(7 +) +(276 +) +Amounts Reclassified to Net Income +— +— +— +Net Other Comprehensive Loss +(269 +) +(7 +) +(276 +) +Balance at January 31, 2016 +$ +(983 +) +$ +8 +$ +(975 +) +Other Comprehensive Loss +(65 +) +(16 +) +(81 +) +Amounts Reclassified to Net Income +— +— +— +Net Other Comprehensive Loss +(65 +) +(16 +) +(81 +) +Balance at January 31, 2017 +$ +(1,048 +) +$ +(8 +) +$ +(1,056 +) +The amounts presented above in other comprehensive loss are net of taxes except for translation +adjustments associated with our German subsidiary. +Note 10—Shareholders’ Equity +During fiscal 2017, 2016 and 2015, certain of the Company’s employees delivered a total of 51,531, 29,939 and 62,797 shares, +respectively, of the Company’s common stock to satisfy the exercise price and related taxes for stock options exercised and restricted stock vesting. The shares delivered were valued at a total of $0.8 million, $0.4 million and $0.9 million, +respectively, and are included in treasury stock in the accompanying consolidated balance sheets at January 31, 2017, 2016 and 2015. These transactions did not impact the number of shares authorized for repurchase under the Company’s +current repurchase program. +During fiscal 2015, the Company repurchased 500,000 shares of the Company’s common stock from +the Estate of Albert W. Ondis for an aggregate purchase price of $6.3 million. Prior to entering into the Stock Purchase Agreement, the Company obtained an opinion from an independent investment banking firm as to the fairness, from a financial +point of view, to the public shareholders of the Company other than the selling shareholders, of the consideration paid by the Company in the transaction. The purchase was funded using existing cash on hand. This transaction did not impact the +number of shares authorized for repurchase under the Company’s current repurchase program. +As of January 31, 2017, +the Company’s Board of Directors has authorized the purchase of up to an additional 390,000 shares of the Company’s common stock on the open market or in privately negotiated transactions. +Note 11—Share-Based Compensation +The Company maintains the following share-based compensation plans: +Stock +Plans: +We have two equity incentive plans – the 2007 Equity Incentive Plan (the “2007 Plan”) and the 2015 +Equity Incentive Plan (the “2015 Plan”). Under these plans, the Company may grant incentive stock options, +52 +Table of Contents +non-qualified stock options, stock appreciation rights, time or performance-based restricted stock units (RSUs), restricted stock awards (RSAs), and other stock-based awards to executives, key +employees, directors and other eligible individuals. At January 31, 2017, 87,989 shares were available for grant under the 2007 Plan, of which 50,000 are reserved for stock options that the Company is obligated to issue to its CEO in fiscal +2018 pursuant to an Equity Incentive Award Agreement dated as of November 24, 2014 (the “CEO Equity Incentive Agreement”). The 2007 Plan will expire in May 2017. The 2015 Plan authorizes the issuance of up to 500,000 shares (subject +to adjustment for stock dividends and stock splits), and at January 31, 2017, 151,987 shares were available for grant under the 2015 Plan. The 2015 Plan will expire in May 2025. Options granted to date to employees under both plans vest over +four years and expire after ten years. The exercise price of each stock option is established at the discretion of the Compensation Committee; however, any incentive stock options granted under the 2007 Plan, and all options granted under the 2015 +Plan, must be issued at an exercise price of not less than the fair market value of the Company’s common stock on the date of grant. +Under the plans, each non-employee director receives an automatic annual grant of ten-year options to purchase 5,000 shares of stock upon the adjournment of each annual shareholders meeting. Each such +option is exercisable at the fair market value of the Company’s common stock as of the grant date, and vests immediately prior to the next succeeding annual shareholders’ meeting. Accordingly, on May 18, 2016, 30,000 options were +issued to the non-employee directors. +In addition to the plans, the Company has a Non-Employee Director Annual Compensation +Program (the “Program”). Prior to August 1, 2016, this program provided that each non-employee director was entitled to an annual cash retainer of $7,000 (the “Annual Cash Retainer”), plus $500 for each Board and committee +meeting attended. In addition, the Chairman of the Board received an annual retainer of $6,000, and the Chairs of the Audit and Compensation Committees each received an annual retainer of $4,000 (“Chair Retainer”). The non-employee +directors could elect, for any fiscal year, to receive all or a portion of the Annual Cash Retainer and/or Chair Retainer (collectively the “Cash Retainer”) in the form of common stock of the Company, which was issued under one of the +Plans. If a non-employee director elected to receive all or a portion of the Cash Retainer in the form of common stock, such shares were issued in four quarterly installments on the first day of each fiscal quarter, and the number of shares of +common stock issued was based on the fair market value of the Company’s common stock on the date such installment was payable. The common stock received in lieu of such Cash Retainer was fully vested upon issuance. However, a non-employee +director who received common stock in lieu of all or a portion of the Cash Retainer could not sell, transfer, assign, pledge or otherwise encumber the common stock prior to the first anniversary of the date on which such shares were issued. In the +event of the death or disability of a non-employee director, or a change in control of the Company, any shares of common stock issued in lieu of the Cash Retainer would no longer be subject to such restrictions on transfer. During fiscal 2017 and +2016, a total of 1,168 and 2,947 shares were awarded to non-employee directors in lieu of the Cash Retainer. In addition, under the Program, each non-employee director received RSAs with a value equal to $20,000 (the “Equity Retainer”) +upon the adjournment of the annual shareholders’ meeting. The Equity Retainer vests on the earlier of 12 months after the grant date or the date immediately prior to the next annual meeting of the shareholders following the meeting at which +such RSAs were granted. However, a non-employee director could not sell, transfer, assign, pledge or otherwise encumber the vested common stock prior to the second anniversary of the vesting date. In the event of the death or disability of a +non-employee director, or a change in control of the Company, the RSAs would immediately vest and would no longer be subject to such restrictions on transfer. During the second quarter of fiscal 2017, 8,262 shares were awarded as the Equity Retainer +to the non-employee directors. +Effective August 1, 2016, the Non-Employee Director Annual Compensation Program was +amended. Under the amended Program, and commencing on the first business day of the third fiscal quarter of fiscal 2017, each non-employee director receives an automatic grant of RSAs on the first business day of each fiscal quarter. The number of +whole shares to be granted each quarter is equal to 25% of the number calculated by dividing the director compensation amount by the fair market value of the Company’s stock on such day. The director annual compensation amount is $55,000 for +the remainder of fiscal year 2017, $65,000 for fiscal 2018, and $75,000 for fiscal 2019. In addition, the Chairman of the Board receives RSAs with an aggregate value of $6,000, and the +53 +Table of Contents +Chairs of the Audit and Compensation Committees each receive RSAs with an aggregate value of $4,000, also issued in quarterly installments and calculated in the same manner as the directors’ +RSA grants. RSAs granted pursuant to the amended Program become fully vested on the first anniversary of the date of grant. A total of 11,379 shares were awarded to the non-employee directors as compensation under the amended Program in fiscal 2017. +In April 2013 (fiscal year 2014), the Company granted options and RSUs to officers (“2014 RSUs”). The 2014 RSUs +vested as follows: twenty-five percent vested on the third anniversary of the grant date, fifty percent vested upon the Company achieving its cumulative budgeted net revenue target for fiscal years 2014 through 2016 (the “Measurement +Period”), and twenty-five percent vested upon the Company achieving a target average annual ORONA (operating income return on net assets as calculated under the Domestic Management Bonus Plan) for the Measurement Period. The grantee may not +sell, transfer or otherwise dispose of more than fifty percent of the common stock issued upon vesting of the 2014 RSUs until the first anniversary of the vesting date. In April 2016, 9,300 of the 2014 RSUs vested, as the Company achieved the +targeted average annual ORONA, as defined in the plan, for the Measurement Period and another 9,300 vested as a result of the third year anniversary date of the grant. Additionally, on February 1, 2014, the Company accelerated the vesting of +4,166 of the 2014 RSUs held by Everett Pizzuti in connection with his retirement. +In March 2015 (fiscal year 2016), the +Company granted 50,000 options and 537 RSAs to its CEO pursuant to the CEO Equity Incentive Agreement, and 35,000 options to other key employees. The options and RSAs vest in four equal annual installments commencing on the first anniversary of the +grant date. +In May 2015 (fiscal year 2016), the Company granted an aggregate of 80,000 time-based and 155,000 +performance-based RSUs (“2016 RSUs”) to certain officers of the Company. The time-based 2016 RSUs vest in four equal annual installments commencing on the first anniversary of the grant date. The performance-based 2016 RSUs vest over three +years based upon the increase in revenue, if any, achieved each fiscal year relative to a three-year revenue increase goal. Performance-based 2016 RSUs that are earned based on organic revenue growth are fully vested when earned, while those earned +based on revenue growth via acquisitions vest annually over a three-year period following the fiscal year in which the revenue growth occurs. Any performance-based 2016 RSUs that have not been earned at the end of the three-year performance period +will be forfeited. The expense for such shares is recognized in the fiscal year in which the results are achieved, however, the shares are not fully earned until approved by the Compensation Committee in the first quarter of the following fiscal +year. Based upon revenue in fiscal 2016, 15,810 of the performance based 2016 RSUs were earned in the first quarter of fiscal 2017 based on revenue in fiscal 2017, 9,025 of the performance based 2016 RSUs will be earned in the first quarter of 2018. +In March 2016 (fiscal year 2017), the Company granted 50,000 options and 4,030 RSAs to its CEO pursuant to the CEO Equity +Incentive Agreement. The options and RSAs vest in four equal annual installments commencing on the first anniversary of the grant date. +In May 2016, the Company granted 37,000 options to certain key employees. On August 1, 2016 the Company granted 5,000 options to its Chief Financial Officer. The options vest in four equal +installments commencing on the first anniversary of the grant date. +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +Years Ended January 31 +2017 +2016 +2015 +(In thousands) +Stock Options +$ +321 +$ +286 +$ +234 +Restricted Stock Awards and Restricted Stock Units +685 +912 +270 +Employee Stock Purchase Plan +13 +11 +7 +Total +$ +1,019 +$ +1,209 +$ +511 +54 +Table of Contents +Stock Options: +Aggregated information regarding stock options granted under the plans is summarized below: +Number +of Shares +Weighted- +Average +Exercise +Price Per +Share +Options Outstanding, January 31, 2014 +736,647 +$ +8.63 +Options Granted +158,600 +$ +13.99 +Options Exercised +(224,275 +) +$ +8.29 +Options Forfeited +(8,975 +) +$ +11.84 +Options Cancelled +(5,986 +) +$ +8.70 +Options Outstanding, January 31, 2015 +656,011 +$ +10.01 +Options Granted +115,000 +$ +13.95 +Options Exercised +(93,344 +) +$ +7.95 +Options Forfeited +(5,550 +) +$ +12.75 +Options Cancelled +(14,181 +) +$ +8.82 +Options Outstanding, January 31, 2016 +657,936 +$ +11.00 +Options Granted +122,000 +$ +14.82 +Options Exercised +(87,107 +) +$ +8.73 +Options Forfeited +(4,250 +) +$ +13.91 +Options Cancelled +(3,123 +) +$ +8.95 +Options Outstanding, January 31, 2017 +685,456 +$ +11.96 +Set forth below is a summary of options outstanding at January 31, 2017: +Outstanding +Exercisable +Range of +Exercise prices +Number of +Shares +Weighted- +Average +Exercise Price +Weighted- +Average +Remaining +Contractual Life +Number of +Shares +Weighted- +Average +Exercise Price +Weighted +Average +Remaining +Contractual +Life +$5.00-10.00 +190,706 +$ +7.85 +3.9 +190,706 +$ +7.85 +3.9 +$10.01-15.00 +439,750 +$ +13.36 +6.6 +241,950 +$ +12.79 +5.3 +$15.01-20.00 +55,000 +$ +15.07 +9.2 +— +$ +— +— +685,456 +$ +11.96 +6.1 +432,656 +$ +10.61 +4.7 +The fair value of each stock option granted was estimated on the grant date using the Black-Scholes +option-pricing model with the following weighted-average assumptions: +Years Ended January 31 +2017 +2016 +2015 +Risk-Free Interest Rate +1.4% +1.6% +1.6% +Expected Life (years) +5 +5 +5 +Expected Volatility +28.3% +22.7% +26.5% +Expected Dividend Yield +1.9% +2.0% +2.0% +55 +Table of Contents +The weighted-average estimated fair value of options granted during fiscal 2017, 2016 and +2015 was $3.22; $2.43 and $2.85, respectively. As of January 31, 2017, there was $0.5 million of unrecognized compensation expense related to the unvested stock options granted under the plans. This expense is expected to be recognized over a +weighted-average period of 2.3 years. +As of January 31, 2017, the aggregate intrinsic value (the aggregate difference +between the closing stock price of the Company’s common stock on January 31, 2017, and the exercise price of the outstanding options) that would have been received by the option holders if all options had been exercised was $1.4 million +for all exercisable options and $1.5 million for all options outstanding. The total aggregate intrinsic value of options exercised during fiscal 2017, 2016 and 2015 was $0.6 million; $0.6 million and $1.1 million, respectively. +Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs): +Aggregated information regarding RSUs and RSAs granted under the Plan is summarized below: +RSAs & RSUs +Weighted-Average +Grant Date Fair Value +Outstanding at January 31, 2014 +106,496 +$ +9.12 +Granted +7,245 +13.80 +Vested +(35,662 +) +8.75 +Forfeited +(5,834 +) +10.07 +Outstanding at January 31, 2015 +72,245 +$ +9.70 +Granted +246,335 +14.05 +Vested +(22,692 +) +14.02 +Forfeited +(2,800 +) +10.07 +Outstanding at January 31, 2016 +293,088 +$ +13.02 +Granted +24,839 +14.89 +Vested +(75,133 +) +12.05 +Forfeited +(28,926 +) +11.49 +Outstanding at January 31, 2017 +213,868 +$ +13.78 +As of January 31, 2017, there was $0.9 million of unrecognized compensation expense related to +unvested RSUs and RSAs. This expense is expected to be recognized over a weighted average period of 2.1 years. +Employee Stock Purchase +Plan (ESPP): +AstroNova’s ESPP allows eligible employees to purchase shares of common stock at a 15% discount from +fair market value on the date of purchase. A total of 247,500 shares were initially reserved for issuance under this plan. Summarized plan activity is as follows: +Years Ended January 31 +2017 +2016 +2015 +Shares Reserved, Beginning +51,600 +57,005 +60,242 +Shares Purchased +(6,376 +) +(5,405 +) +(3,237 +) +Shares Reserved, Ending +45,224 +51,600 +57,005 +56 +Table of Contents +Note 12—Income Taxes +The components of income before income taxes are as follows: +January 31 +2017 +2016 +2015 +(In thousands) +Domestic +$ +4,026 +$ +5,982 +$ +5,401 +Foreign +2,579 +927 +1,531 +$ +6,605 +$ +6,909 +$ +6,932 +The components of the provision for income taxes are as follows: +January 31 +2017 +2016 +2015 +(In thousands) +Current: +Federal +$ +1,269 +$ +1,930 +$ +1,666 +State +209 +470 +466 +Foreign +725 +276 +535 +2,203 +2,676 +2,667 +Deferred: +Federal +$ +150 +$ +(402 +) +$ +(290 +) +State +37 +126 +(107 +) +Foreign +(13 +) +(16 +) +— +174 +(292 +) +(397 +) +$ +2,377 +$ +2,384 +$ +2,270 +The Company’s effective tax rate for 2017 was 36.0% compared to 34.5% in 2016 and 32.7% in 2015. The +increase from 2016 is primarily related to non-deductible transaction costs and increased unrecognized tax benefits. The increase in 2016 from 2015 is primarily related to the change in valuation allowance. The provision for income taxes differs +from the amount computed by applying the United States federal statutory income tax rate of 34% to income before income taxes. The reasons for this difference were due to the following: +January 31 +2017 +2016 +2015 +(In thousands) +Income Tax Provision at Statutory Rate +$ +2,246 +$ +2,349 +$ +2,357 +Capitalized Transaction Costs +179 +— +— +Unrecognized Tax Benefits +165 +(67 +) +23 +State Taxes, Net of Federal Tax Effect +162 +277 +233 +Domestic Production Deduction +(103 +) +(134 +) +(164 +) +R&D Credits +(168 +) +(176 +) +(135 +) +Other +(104 +) +135 +(44 +) +$ +2,377 +$ +2,384 +$ +2,270 +57 +Table of Contents +The components of deferred income tax expense arise from various temporary differences and +relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31 +2017 +2016 +(In thousands) +Deferred Tax Assets: +Inventory +$ +2,151 +$ +1,948 +State R&D Credits +679 +583 +Share-Based Compensation +546 +830 +Foreign Tax Credit +508 +426 +Compensation Accrual +281 +346 +Unrecognized State Tax Benefits +241 +237 +Warranty Reserve +192 +149 +Deferred Service Contract Revenue +176 +200 +Other +348 +383 +5,122 +5,102 +Deferred Tax Liabilities: +Accumulated Tax Depreciation in Excess of Book Depreciation +1,380 +1,355 +Other +263 +193 +1,643 +1,548 +Subtotal +3,479 +3,554 +Valuation Allowance +(679 +) +(583 +) +Net Deferred Tax Assets +$ +2,800 +$ +2,971 +As of January 31, 2017 there are $0.5 million of foreign tax credit carryforwards which are expected +to be utilized prior to their expiration. Carryforwards will expire during fiscal years 2024 to 2027. +The valuation allowance +of $0.7 million at January 31, 2017 and $0.6 million at January 31, 2016 related to state research and development tax credit carryforwards which are expected to expire unused. The valuation allowance increased $0.1 million in 2017 and +$0.3 million in 2016 due to the generation of research and development credits in excess of the Company’s ability to currently utilize credits, and the decision to fully reserve for the state tax benefits of all R&D tax credit +carryforwards, net of federal benefit. The Company has reached this conclusion after considering the availability of taxable income in prior carryback years, tax planning strategies, and the likelihood of future taxable income exclusive of reversing +temporary differences and carryforwards in the relevant state jurisdiction. +The Company believes that it is reasonably +possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes +in the balances of unrecognized tax benefits, excluding interest and penalties are as follows: +2017 +2016 +2015 +(In thousands) +Balance at February 1 +$ +591 +$ +707 +$ +715 +Increases in prior period tax positions +75 +— +— +Increases in current period tax positions +133 +49 +87 +Reductions related to lapse of statute of limitations +(91 +) +(165 +) +(95 +) +Balance at January 31 +$ +708 +$ +591 +$ +707 +58 +Table of Contents +If the $0.7 million balance as of January 31, 2017 is recognized, $0.5 million would +decrease the effective tax rate in the period in which each of the benefits is recognized and the remainder would be offset by a reversal of deferred tax assets. +During fiscal 2017, 2016 and 2015, the Company recognized an expense of $52,000, a benefit of $87,000 and an expense of $43,000, respectively, related to change in interest and penalties, which are +included as a component of income tax expense in the accompanying statements of income. The Company has accrued potential interest and penalties of $0.4 million at the end of both January 31, 2017 and 2016. +The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign +jurisdictions. The Company is no longer subject to U.S. federal tax examinations for fiscal years ended prior to January 2014. +U.S. income taxes have not been provided on $4.7 million of undistributed earnings of the Company’s German subsidiary since it is the +Company’s intention to permanently reinvest such earnings offshore or to repatriate them only when it is tax efficient to do so. It is impracticable to estimate a total tax liability or benefit, if any, created by the future distribution of all +or portions of these earnings due to complexities related to taxation and foreign tax credit benefits. If circumstances change and it becomes apparent that some, or all of these undistributed earnings as of January 31, 2017 will not be +indefinitely reinvested, the provision for the tax consequence, if any, will be recorded in the period when circumstances change. +Note +13—Nature of Operations, Segment Reporting and Geographical Information +The Company’s operations consist of the +design, development, manufacture and sale of specialty printers and data acquisition and analysis systems, including both hardware and software and related consumable supplies. The Company organizes and manages its business as a portfolio of +products and services designed around a common theme of data acquisition and information output. The Company has two reporting segments consistent with its revenue product groups: Product Identification and Test & Measurement (T&M). +The Product Identification segment produces an array of tabletop, high-technology digital color and monochrome label printers, +labeling software and consumables for a variety of commercial industries worldwide. T&M produces data recording equipment used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including +aerospace, automotive, defense, rail, energy, industrial and general manufacturing. +Business is conducted in the United States +and through foreign affiliates in Canada, Europe, China Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United States are conducted through wholly-owned +entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction. +On June 19, 2015, AstroNova completed the asset purchase of the aerospace printer product line from RITEC. AstroNova’s aerospace +printer product line is part of the T&M product group and is reported as part of the T&M segment. The Company began shipment of the RITEC products in the third quarter of fiscal 2016. Refer to Note 2, “Acquisition,” for further +details. +The accounting policies of the reporting segments are the same as those described in the summary of significant +accounting policies herein. The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses. +59 +Table of Contents +Summarized below are the Revenue and Segment Operating Profit (both in dollars and as a +percentage of Revenue) for each reporting segment: +($ in thousands) +Revenue +Segment Operating Profit +Segment Operating Profit % +of Revenue +2017 +2016 +2015 +2017 +2016 +2015 +2017 +2016 +2015 +Product Identification +$ +69,862 +$ +67,127 +$ +59,779 +$ +9,821 +$ +9,300 +$ +7,259 +14.1% +13.9% +12.1% +T&M +28,586 +27,531 +28,568 +4,399 +3,664 +5,627 +15.4% +13.3% +19.7% +Total +$ +98,448 +$ +94,658 +$ +88,347 +14,220 +12,964 +12,886 +14.4% +13.7% +14.6% +Corporate Expenses +7,939 +7,030 +5,655 +Operating Income +6,281 +5,934 +7,231 +Other Income (Expense) +324 +975 +(299) +Income before Income Taxes +6,605 +6,909 +6,932 +Income Tax Provision +2,377 +2,384 +2,270 +Net Income +$ +4,228 +$ +4,525 +$ +4,662 +No customer accounted for greater than 10% of net revenue in fiscal 2017, 2016 and 2015. +Other information by segment is presented below: +(In thousands) +Assets +2017 +2016 +Product Identification +$ +30,624 +$ +27,143 +T&M +28,129 +28,570 +Corporate* +24,912 +22,250 +Total +$ +83,665 +$ +77,963 +* +Corporate assets consist principally of cash, cash equivalents and securities available for sale . +(In thousands) +Depreciation and +Amortization +Capital Expenditures +2017 +2016 +2015 +2017 +2016 +2015 +Product Identification +$ +885 +$ +690 +$ +678 +$ +767 +$ +2,284 +$ +1,408 +T&M +1,546 +1,375 +1,385 +471 +777 +839 +Total +$ +2,431 +$ +2,065 +$ +2,063 +$ +1,238 +$ +3,061 +$ +2,247 +Geographical Data +Presented below is selected financial information by geographic area: +(In thousands) +Revenue +Long-Lived Assets* +2017 +2016 +2015 +2017 +2016 +United States +$ +69,850 +$ +68,316 +$ +61,494 +$ +8,940 +$ +9,310 +Europe +18,848 +16,830 +18,181 +168 +290 +Canada +5,008 +4,487 +3,934 +172 +207 +Central and South America +3,053 +2,436 +1,919 +0 +— +Asia +1,664 +1,741 +1,408 +0 +— +Other +25 +848 +1,411 +0 +— +Total +$ +98,448 +$ +94,658 +$ +88,347 +$ +9,280 +$ +9,807 +* +Long-lived assets excludes goodwill assigned to the T&M segment of $4.5 million at both January 31, 2017 and 2016. +60 +Table of Contents +Note 14—Employee Benefit Plans +Employee Stock Ownership Plan (ESOP): +AstroNova has an ESOP providing +retirement benefits to all eligible employees. Annual contributions in amounts determined by the Company’s Board of Directors are invested by the ESOP’s Trustees in shares of common stock of AstroNova. Contributions may be in cash or +stock. The Company did not make a contribution to the ESOP in fiscal 2017 or 2016. The Company’s contribution of $0.1 million in fiscal 2015 was recorded as compensation expense. All shares owned by the ESOP have been allocated to participants. +On January 23, 2017, the Compensation Committee of the Board of Directors has voted to terminate the ESOP. +Profit-Sharing Plan: +AstroNova sponsors a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible +domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are +made within the limits prescribed by Section 401(k) of the Internal Revenue Code. +All contributions are deposited into +trust funds. It is the policy of the Company to fund any contributions accrued. The Company’s annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $0.5 million in fiscal 2017 and $0.3 +million in both 2016 and 2015. +Note 15—Product Warranty Liability +AstroNova offers a manufacturer’s warranty for the majority of its hardware products. The specific terms and conditions of warranty +vary depending upon the products sold and country in which the Company does business. For products sold in the United States, the Company provides a basic limited warranty, including parts and labor. The Company estimates the warranty costs based on +historical claims experience and records a liability in the amount of such estimates at the time product revenue is recognized. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. +Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows: +January 31 +2017 +2016 +2015 +(In thousands) +Balance, beginning of the year +$ +400 +$ +375 +$ +355 +Provision for Warranty Expense +971 +887 +546 +Cost of Warranty Repairs +(856 +) +(862 +) +(526 +) +Balance, end of the year +$ +515 +$ +400 +$ +375 +Note 16—Product Replacement Costs +In April 2013, tests conducted by the Company revealed that one of its suppliers had been using a non-conforming material in certain models of AstroNova’s Test & Measurement printers. No +malfunctions have been reported by customers as a result of the non-conforming material. +Upon identifying this issue, we +immediately suspended production of the printers, notified all customers and contacted the supplier who confirmed the problem. We are continuing to work with our customers to replace the non-conforming material on existing printers with conforming +material. The estimated costs associated with the replacement program were $0.7 million, which was based upon the number of printers shipped during the period the non-conforming material was used. Those costs were recognized and recorded in the +first quarter of fiscal +61 +Table of Contents +2014. As of January 31, 2017, the Company had expended $0.4 million in replacement costs which have been charged against this reserve and has adjusted the reserve amount to reflect the +estimate of remaining cost associated with the replacement program. The remaining reserve amount of $0.2 million is included in other accrued expenses in the accompanying consolidated balance sheet as of January 31, 2017. +Since the supplier deviated from the agreed upon specifications for the power supply while providing certificates of conformance to the +original specifications, AstroNova received a $0.5 million settlement from the supplier in January 2014 for recovery of the costs and expense associated with this issue. In addition to this cash settlement, the Company received lower product prices +from the supplier through the first quarter of fiscal 2017. +Note 17—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of +credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts which constitute the Company’s customer base. The Company periodically performs on-going credit evaluations of +its customers. The Company has not historically experienced significant credit losses on collection of its accounts receivable. +Excess cash is invested principally in investment grade government and state municipal securities. The Company has established guidelines +relative to diversification and maturities that maintain safety of principal, liquidity and yield. These guidelines are periodically reviewed and modified to reflect changes in market conditions. The Company has not historically experienced any +significant losses on its cash equivalents or investments. +During the years ended January 31, 2017, 2016 and 2015, one +vendor accounted for 33.2%, 23.7% and 21.9% of purchases, and 42.7%, 16.7% and 55.1% of accounts payable, respectively. +Note +18—Commitments and Contingencies +Contractual Obligations +The following table summarizes our contractual obligations: +(In thousands) +Total +2018 +2019 +2020 +2021 +2022 +and +Thereafter +Purchase Commitments* +$ +19,271 +$ +17,848 +$ +— +$ +1,352 +$ +— +$ +71 +Operating Lease Obligations +706 +371 +214 +101 +20 +— +$ +19,977 +$ +18,219 +$ +214 +$ +1,453 +$ +20 +$ +71 +*Purchase +commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business. +The Company is also subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a +wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable +that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company +believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, +that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the Company’s control. +62 +Table of Contents +Note 19—Fair Value Measurements +We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, “Fair Value +Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, ASC 820 +establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be +used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances. +The fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; +quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or +liabilities +Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other +expenses and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short term nature of the these instruments. +Assets measured at fair value on a recurring basis are summarized below: +January 31, 2017 +Level 1 +Level 2 +Level 3 +Total +(In thousands) +Money market funds (included in cash and cash equivalents) +$ +2 +$ +– +$ +– +$ +2 +State and municipal obligations (included in securities available for sale) +– +6,723 +– +6,723 +Total +$ +2 +$ +6,723 +$ +– +$ +6,725 +January 31, 2016 +Level 1 +Level 2 +Level 3 +Total +(In thousands) +Money market funds (included in cash and cash equivalents) +$ +4,340 +$ +– +$ +– +$ +4,340 +State and municipal obligations (included in securities available for sale) +– +10,376 +– +10,376 +Total +$ +4,340 +$ +10,376 +$ +– +$ +14,716 +For our money market funds and state and municipal obligations, we utilize the market approach to measure +fair value. The market approach is based on using quoted market prices for similar assets. +Non-financial assets such as +goodwill, intangible assets, and property, plant and equipment are required to be measured at fair value only when an impairment loss is recognized. The Company did not record an impairment loss related to these assets during the periods ended +January 31, 2017, 2016 or 2015. +Note 20—Subsequent Event +On February 1, 2017, our wholly-owned Danish subsidiary, ANI ApS, completed the acquisition of the issued and outstanding equity interests +of TrojanLabel ApS, a Danish private limited liability company, pursuant to the terms of a Share Purchase Agreement, dated January 7, 2017, by and among the ANI ApS, +63 +Table of Contents +Holdingselskabet af 20. marts 2014 ApS (“Holding”), a Danish private limited liability company and Li Wei Chong, an individual (Holding, together with Li Wei Chong, the +“Sellers”). Based in Copenhagen, Denmark, TrojanLabel ApS is a manufacturer of products including digital color label presses and specialty printing systems for a broad range of end markets. Upon the consummation of the acquisition, +TrojanLabel ApS became an indirect wholly-owned subsidiary of AstroNova. +The purchase price of this acquisition was DKK 62.9 +million (approximately $9.1 million), of which DKK 6.4 million (approximately $0.9 million) was placed in escrow to secure certain post-closing working capital adjustments and indemnification obligations of the Sellers. The Sellers may be entitled +to additional contingent consideration if 80% of specified earnings targets are achieved by Trojanlabel ApS during the seven years following the closing, subject to certain closing working capital adjustments and potential offsets to satisfy the +Sellers’ indemnification obligations. The contingent consideration consists of potential earn-out payments to the Sellers of between DKK 32.5 million (approximately $5 million) if 80% of the specified earnings targets are achieved, DKK 40.6 +million (approximately $5.8 million) if 100% of the specified earnings targets are achieved, and a maximum of DKK 48.7 million (approximately $7 million) if 120% of the specified earnings targets are achieved. Transaction costs related to this +acquisition of $0.6 million are included in the general and administrative expenses in the consolidated statement of income for the period ended January 31, 2017. The Company is currently in the process of completing the purchase +accounting allocations and does not expect this transaction to have a material impact on the consolidated financial statements. +On February 28, 2017, ANI ApS, entered into a Credit Agreement with Bank of America, N.A. (the “Lender”), ANI ApS, and +Trojanlabel ApS. The Company also entered into a related Security and Pledge Agreement with the Lender. The Credit Agreement provides for a term loan to AstroNova in the amount of $9.2 million. The Credit Agreement also provides for a +$10.0 million revolving credit facility available to the Company for general corporate purposes. Revolving credit loans may be borrowed, at the Company’s option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, +Canadian Dollars or Danish Krone. No amount was drawn under the revolving credit facility as of the filing of this Annual Report on 10-K. +In connection with the Credit Agreement, AstroNova entered into certain hedging arrangements with the Lender to manage the variable interest rate risk and currency risk associated with its payments in +respect of the term loan. Under these arrangements, payments of principal and interest in respect of approximately $8.9 million of the principal of the term loan will be made in Danish Krone, and interest on such principal amount will be payable at +a fixed rate of 0.67% per annum for the entire term, subject only to potential increases of 0.25% or 0.50% per annum based on the Company’s consolidated leverage ratio. The obligations of ANI ApS under these arrangements are guaranteed by the +Company. +In connection with the entry into the Credit Agreement on February 28, 2017, the Company’s existing Credit +Agreement, dated as of September 5, 2014, among the Company, as borrower, and Wells Fargo Bank was terminated. No loans or other amounts were outstanding or owed under the existing Credit Agreement with Wells Fargo Bank at the time of termination. +64 +Table of Contents +SUPPLEMENTARY DATA +Quarterly Financial Information (Unaudited) +2017 +2016 +(In thousands, except per share data) +Q1 +Q2 +Q3 +Q4 +Q1 +Q2 +Q3 +Q4 +Revenue +$ +24,110 +$ +25,339 +$ +23,342 +$ +25,657 +$ +22,206 +$ +23,938 +$ +24,753 +$ +23,761 +Cost of Goods Sold +14,637 +15,034 +13,701 +15,586 +13,176 +14,092 +14,601 +14,631 +Gross Profit +9,473 +10,305 +9,641 +10,071 +9,030 +9,846 +10,152 +9,130 +39.3 +% +40.7 +% +41.3 +% +39.3 +% +40.7 +% +41.1 +% +41.0 +% +38.4 +% +Operating Expenses: +Selling & Marketing +$ +4,831 +$ +4,777 +$ +4,578 +$ +4,770 +$ +4,329 +$ +4,664 +$ +4,563 +$ +4,694 +Research & Development +1,444 +1,755 +1,338 +1,776 +1,796 +1,565 +1,839 +1,745 +General & Administrative +1,651 +2,025 +1,891 +2,373 +1,457 +1,783 +1,891 +1,898 +Total Operating Expenses +7,926 +8,557 +7,807 +8,919 +7,582 +8,012 +8,293 +8,337 +Operating Income +1,547 +1,748 +1,834 +1,152 +1,448 +1,834 +1,859 +793 +6.4 +% +6.9 +% +7.9 +% +4.5 +% +6.5 +% +7.7 +% +7.5 +% +3.3 +% +Other Income (Expense), Net +(52 +) +40 +(60 +) +396 +234 +21 +333 +387 +Income Before Taxes +1,495 +1,788 +1,774 +1,548 +1,682 +1,855 +2,192 +1,180 +Income Tax Provision +476 +496 +623 +782 +471 +687 +873 +352 +Net income +$ +1,019 +$ +1,292 +$ +1,151 +$ +766 +$ +1,211 +$ +1,168 +$ +1,319 +$ +828 +Net Income per Common Share—Basic +$ +0.14 +$ +0.17 +$ +0.15 +$ +0.10 +$ +0.17 +$ +0.16 +$ +0.18 +$ +0.11 +Weighted Average Number of Common Shares—Basic +7,358 +7,418 +7,444 +7,463 +7,280 +7,278 +7,295 +7,320 +Net Income per Common Share—Diluted +$ +0.14 +$ +0.17 +$ +0.15 +$ +0.10 +$ +0.16 +$ +0.16 +$ +0.18 +$ +0.11 +Weighted Average Number of Common Shares—Diluted +7,524 +7,587 +7,594 +7,586 +7,454 +7,569 +7,466 +7,494 +Annual totals may not agree to the summation of quarterly information due to insignificant rounding and the required +calculation conventions. +65 +Table of Contents +ASTRONOVA, INC. +SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision/ +(Benefit) +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts(1): +(In thousands) +Year Ended January 31, +2017 +$ +404 +$ +(80 +) +$ +(58 +) +$ +266 +2016 +$ +343 +$ +112 +$ +(51 +) +$ +404 +2015 +$ +370 +$ +60 +$ +(87 +) +$ +343 +(1) +The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet dates. +(2) +Uncollectible accounts written off, net of recoveries. Also includes foreign exchange adjustment. +66 \ No newline at end of file diff --git a/raw/filings/0000008146/2016/0001193125-17-114309/filing_metadata.csv b/raw/filings/0000008146/2016/0001193125-17-114309/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..7edcffdde68e4eb30a2b9cfdde048f43d24f9f4f --- /dev/null +++ b/raw/filings/0000008146/2016/0001193125-17-114309/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2017-04-07,2017-01-31,2017-04-07T00:57:16.000Z,0001193125-17-114309,d313601d10k.htm,FORM 10-K,8581494,1,0,https://www.sec.gov/Archives/edgar/data/8146/000119312517114309/d313601d10k.htm,https://www.sec.gov/Archives/edgar/data/8146/000119312517114309/,2016,2016,1 diff --git a/raw/filings/0000008146/2016/0001193125-17-114309/item1.txt b/raw/filings/0000008146/2016/0001193125-17-114309/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..4bf25fcfc194cdbebfed08bc197d263c372d3821 --- /dev/null +++ b/raw/filings/0000008146/2016/0001193125-17-114309/item1.txt @@ -0,0 +1,107 @@ +Item 1. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and +“us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +AstroNova +designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies in order to acquire, store, analyze, and +present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general +manufacturing, packaging and transportation. +The Company’s products are distributed through its own sales force and +authorized dealers in the United States. We sell to customers outside of the United States primarily through our branch offices in Canada, Europe and Asia as well as through independent dealers and representatives. Approximately 30% of the +Company’s sales in fiscal 2017 were to customers located outside the United States. +We operate the business through two +operating segments, Product Identification (previously known as the QuickLabel segment) and Test & Measurement (T&M). Financial information by business segment and geographic area appears in Note 13 to our audited consolidated financial +statements included elsewhere in this report. +On June 19, 2015, we completed the asset purchase of the aerospace printer +product line from Rugged Information Technology Equipment Corporation (RITEC). Our aerospace printer product line is part of the T&M product group and is reported as part of the T&M segment. We began shipment of the RITEC products in the +third quarter of fiscal 2016. Refer to Note 2, “Acquisition,” in our audited consolidated financial statements included elsewhere in this report. +On February 1, 2017, AstroNova completed its acquisition of TrojanLabel ApS (TrojanLabel) a European manufacturer of digital color label presses and specialty printing systems for a broad range of end +markets. TrojanLabel will be reported as part of our Product Identification segment beginning with the first quarter of fiscal year 2018. Refer to Note 20, “Subsequent Event,” in our audited consolidated financial statements included +elsewhere in this report. +3 +Table of Contents +The following description of our business should be read in conjunction with +“Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 17 through 27 of this Annual Report on Form 10-K. +Description of Business +Product Overview +AstroNova leverages its expertise in data visualization technologies to design, manufacture and market specialty +printing systems, test and measurement systems and related services for select growing markets on a global basis. The business consists of two segments, Product Identification, which includes specialty printing systems sold under the brand name +QuickLabel ® and Test & Measurement (T&M), which includes test and measurement systems sold under +the AstroNova™ brand name. Refer to Note 13, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding the +Company’s segments. +Products sold under the QuickLabel brand are used in industrial and commercial product packaging, +branding and labeling applications to digitally print custom labels and corresponding visual content on demand. Products sold under the AstroNova brand acquire and record visual and electronic signal data from local and networked data streams and +sensors. The recorded data is processed and analyzed and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide high-resolution +airborne printers. +Product Identification +QuickLabel brand products include tabletop and work cell-ready digital color label printers and specialty OEM printing systems as well as a full line of consumables including labels, tags, inks, toner and +thermal transfer ribbons. In addition, the Product Identification segment sells special software used to design labels and print them on an automated basis and also provides training and support on a worldwide basis via highly trained service +technicians. +Through the QuickLabel line, our Product Identification segment offers a broad range of entry-level, mid-range, +and high-performance digital label printers, providing customers a continuous path to upgrade to new labeling solutions designed, manufactured and sold by the Company. Product Identification segment products are primarily sold to manufacturers, +processors, and retailers who label products on a short-run basis. QuickLabel’s customers benefit from the efficiency, flexibility and cost-savings of digitally printing their own labels on-site and on-demand. Industry segments that commonly +benefit from short-run label printing include chemicals, cosmetics, food and beverage, medical products, and pharmaceuticals, among many others. +Current QuickLabel models include the Kiaro! family of high-speed inkjet color label printers, the QL-111 industrial color label printer and the QL-800 wide format color label printer, as well as a family +of barcode printers. +T&M +Products sold under the AstroNova T&M brand acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed and analyzed and then +stored and presented in various visual output formats. The Company supplies a range of products and services that include hardware, software and consumables to customers who are in a variety of industries. +Our T&M products include the Daxus ® portable data acquisition system, +TMX ® high-speed data acquisition system, DDX100 SmartCorder ® portable data acquisition system, EVX multi-channel chart recording system, ToughWriter ® , Miltope-brand and RITEC-brand airborne printers and ToughSwitch ® ruggedized Ethernet switches. +4 +Table of Contents +AstroNova airborne printers are used in the flight deck and in the cabin of military, +commercial and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, +and various air traffic control data. ToughSwitch Ethernet switches are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with +rigorous military and commercial flightworthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter airborne printers for numerous aircraft made by Airbus, Boeing, Embraer, Bombardier, +Lockheed, Gulfstream and others. +The Company’s family of portable data recorders is used in research and development +(R&D) and maintenance applications in aerospace and defense, energy discovery and production operations, rapid rail, automotive, and a variety of other transportation and industrial applications. The TMX data acquisition system is designed for +data capture of long-term testing where the ability to monitor high channel counts and view a wide variety of input signals, including time-stamped and synchronized video capture data and audio notation is important. The Daxus and DDX 100 +SmartCorder are both powerful instruments designed for portability and ease of use in facilities maintenance applications, field work, test cells and transportation. Daxus and DDX100 SmartCorder can be linked to increase channel count and can also +be networked for distributed data collection. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying the data on hard copy, monitor or electronic storage +media, and (4) analyzing the data. +Patents and Copyrights +We hold a number of product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, +trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand name. While we consider our intellectual property to be important to the operation of our business, we do not believe that any existing +patent, license, trademark or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture most of the sub-assemblies and parts in-house +including printed circuit board assemblies, harnesses, machined parts, and general final assembly. Many parts are standard electronic items available from multiple sources. Other parts are designed by us and manufactured by outside vendors. There +are a few parts that are sole source, but these parts could be sourced elsewhere with appropriate changes in the design of our product. +Product Development +We +maintain an active program of product research and development. During fiscal 2017, 2016 and 2015, we spent $6.3 million, $6.9 million and $5.8 million, respectively, on Company-sponsored product development. We are committed to continuous product +development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2018 and beyond. +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in tabletop color +label printing technology and in aerospace printers. In the data acquisition area, we believe that we are one of the leaders in portable high speed data acquisition systems. +5 +Table of Contents +We retain a leadership position by virtue of proprietary technology, product reputation, +delivery, technical assistance, and service to customers. The number of competitors varies by product line. Our management believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our +product lines, but include technology, quality, service and support, distribution network, and breadth of product and service offerings. +Our products are sold by direct field salespersons as well as independent dealers and representatives. In the United States, the Company has factory-trained direct field salespeople located in major +cities from coast to coast specializing in either Product Identification or AstroNova T&M products. Additionally, we have direct field sales or service centers in Canada, China, France, Germany, Mexico, Southeast Asia and the United Kingdom +staffed by our own employees, some of whom are third party contractors. In the rest of the world, we utilize approximately 90 independent dealers and representatives selling and marketing our products in 57 countries. +No single customer accounted for 10% or more of our net revenue in either of the last three fiscal years. +International Sales +In +fiscal 2017, 2016 and 2015, revenue from customers in various geographic areas outside the United States, primarily in Canada and Western Europe, amounted to $28.6 million, $26.4 million and $26.8 million, respectively. Refer to Note 13, +“Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for further financial information by geographic areas. +Order Backlog +Our +backlog varies regularly. It consists of a blend of orders for end-user customers as well as original equipment manufacturer customers. Manufacturing is geared to forecasted demands and applies a rapid turn cycle to meet customer expectations. +Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2017, 2016 and 2015 was $17.6 million, $18.2 million and $18.3 million, respectively. +Employees +As of +January 31, 2017, we employed 312 team members. We are generally able to satisfy our employment requirements. No employees are represented by a union. We believe that employee relations are good. +Other Information +The +Company’s business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, +Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such +material with, or furnishes it to, the Securities and Exchange Commission (SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. \ No newline at end of file diff --git a/raw/filings/0000008146/2016/0001193125-17-114309/item13.txt b/raw/filings/0000008146/2016/0001193125-17-114309/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a59926a03845b4b6f5997a8d68a51647a16ab38 --- /dev/null +++ b/raw/filings/0000008146/2016/0001193125-17-114309/item13.txt @@ -0,0 +1,4 @@ +Item 13. Certain Relationships, Related +Transactions and Director Independence +The information required by this item is incorporated herein by reference to +the Company’s definitive Proxy Statement for the 2017 Annual Meeting of Shareholders. \ No newline at end of file diff --git a/raw/filings/0000008146/2016/0001193125-17-114309/item9a.txt b/raw/filings/0000008146/2016/0001193125-17-114309/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..7c73bf0f4fd0be5318ba427983d0140b07d6e3ab --- /dev/null +++ b/raw/filings/0000008146/2016/0001193125-17-114309/item9a.txt @@ -0,0 +1,22 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of +the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief +Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2017 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and +reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such +term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the +preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the +inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of +changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness +of its internal control over financial reporting as of January 31, 2017. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring +Organizations of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2017, the Company’s internal control over financial +reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +The +attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting appears in Part IV, Item 15 of this Form 10-K and is incorporated herein by reference. +Changes in Internal Controls over Financial Reporting +There have been no changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially +affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2016/0001193125-17-114309/rp_note.txt b/raw/filings/0000008146/2016/0001193125-17-114309/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2016/0001193125-17-114309/rpt_disclosure.txt b/raw/filings/0000008146/2016/0001193125-17-114309/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4bd157f4f1837c00911e09fbeea8f972fa0462d1 --- /dev/null +++ b/raw/filings/0000008146/2016/0001193125-17-114309/rpt_disclosure.txt @@ -0,0 +1,17 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. +In reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +Other than as described below, no officer, director or +nominee for director of the Company or any associate of any of the foregoing had during the fiscal year ended January 31, 2018 any material interest, direct or indirect, in any material transaction or any material proposed transaction in which +the amount exceeds $120,000 and to which the Company was or is to be a party. +29 +During the fiscal year ended January 31, 2018, the Company employed Christopher +Pizzuti, a son of Everett V. Pizzuti, as a Product Identification Field Sales Engineer. The aggregate amount of compensation paid by the Company to Christopher Pizzuti during fiscal year 2018 was $122,050, consisting of $113,013 in salary and sales +commissions, an automobile allowance of $7,644, a vacation payout of $800, and a matching contribution to his Profit Sharing Plan account of $593. +On May 1, 2017, the Company entered into a stock repurchase agreement (the “Stock Repurchase Agreement”) with the trust +established by Albert W. Ondis by Declaration of Trust dated December 4, 2003, as amended (the “Trust”) to repurchase 826,305 shares of the Company’s common stock held by the Trust at a per share price of $13.60, for an aggregate +repurchase price of $11,237,748.00 (the “Stock Repurchase”). The Stock Repurchase was consummated on May 2, 2017 and was funded using existing cash on hand. The Company has been informed that, following the Stock Repurchase, the +Trust owns 36,000 shares of the Company’s common stock. +April L. Ondis, a director of the Company, is a beneficiary of the Trust. The Stock Repurchase was authorized and approved by the Company’s Audit Committee as a related party transaction. Prior to +entering into the Stock Repurchase Agreement, the Company obtained an opinion from an independent investment banking firm that the consideration to be paid by the Company to the Trust pursuant to the Stock Repurchase Agreement would be fair to the +public stockholders of the Company, other than the Trust, from a financial point of view. \ No newline at end of file diff --git a/raw/filings/0000008146/2017/0001193125-18-113108/filing.txt b/raw/filings/0000008146/2017/0001193125-18-113108/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..007758d9ccbc522749a6b1203828cd0d290a34d0 --- /dev/null +++ b/raw/filings/0000008146/2017/0001193125-18-113108/filing.txt @@ -0,0 +1,5099 @@ +10-K +1 +d518979d10k.htm +10-K +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31, 2018 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission file number 0-13200 +AstroNova, +Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue, +West Warwick, Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: +(401) 828-4000 +Securities registered pursuant to Section 12(b) of the +Act: +Title of each class +Name of each exchange +on which registered +Common Stock, $.05 Par Value +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes ☐ No ☒ +Indicate by check mark if the +registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the +Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes ☒ No ☐ +Indicate by check mark +whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T +(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such +files). Yes ☒ No ☐ +Indicate by checkmark if +disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or +information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller +reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange +Act. +Large accelerated filer ☐ +Accelerated filer ☒ +Non-accelerated filer ☐ +Smaller reporting company ☐ +(Do not check if a smaller +reporting company) +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the +extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +The aggregate market value of the registrant’s voting common equity held by non-affiliates at July 28, 2017 was approximately $94,686,969 based on the +closing price on the Nasdaq Global Market on that date. +As of March 28, 2018 there were 6,799,166 shares of Common Stock (par +value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into +Part III of this Annual Report on Form 10-K where indicated. +Table of Contents +ASTRONOVA, INC. +FORM 10-K ANNUAL REPORT +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3-6 +Item 1A. +Risk Factors +7-15 +Item 1B. +Unresolved Staff Comments +15 +Item 2. +Properties +16 +Item 3. +Legal Proceedings +16 +Item 4. +Mine Safety Disclosures +16 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +17-18 +Item 6. +Selected Financial Data +19 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of +Operations +19-29 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +29-30 +Item 8. +Financial Statements and Supplementary Data +31 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +31 +Item 9A. +Controls and Procedures +31 +Item 9B. +Other Information +31 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +32 +Item 11. +Executive Compensation +33 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholders +Matters +33 +Item 13. +Certain Relationships, Related Transactions and Director Independence +33 +Item 14. +Principal Accountant Fees and Services +33 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +34 +Item 16. +Form 10-K Summary +34 +2 +Table of Contents +ASTRONOVA, INC. +Forward-Looking Statements +Information included in this Annual Report on +Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect +our current expectations concerning future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” +“may,” “will,” and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond +our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those +factors set forth in this Annual Report on Form 10-K under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new +information, future events or otherwise. The reader is cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K. +PART I +Item 1. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and +“us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +AstroNova designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced +technologies in order to acquire, store, analyze, and present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, +communications, distribution, food and beverage, general manufacturing, packaging and transportation. +The Company’s +products are distributed through its own sales force and authorized dealers in the United States. We sell to customers outside of the United States primarily through our branch offices in Canada, Europe, and Asia as well as through independent +dealers and representatives. In fiscal 2018, 38% of the Company’s revenue was from customers located outside the United States. +We operate the business through two operating segments, Product Identification (PI) and Test & Measurement (T&M). Financial information by business segment and geographic area appears in Note +15 to our audited consolidated financial statements included elsewhere in this report. +On September 28, 2017, AstroNova, +Inc. entered into an Asset Purchase and License Agreement with Honeywell International, Inc. pursuant to which it acquired an exclusive perpetual world-wide license to manufacture Honeywell’s narrow-format flight deck printers for the Boeing +737 and Airbus 320 aircraft. Revenue related to that transaction has been included as part of the aerospace printer product line of the T&M segment since the acquisition date. On February 1, 2017, AstroNova completed its acquisition of +TrojanLabel ApS (TrojanLabel) a European manufacturer of digital color label presses and specialty printing systems for a broad range of end user markets. TrojanLabel is reported as part of our PI segment beginning with the first quarter of fiscal +year 2018. Additionally, on June 19, 2015, we completed the acquisition of the aerospace printer product line from Rugged Information Technology Equipment Corporation (RITEC). Our aerospace printer product line is part of the T&M product +group and is reported as part of the T&M segment. We began shipment of the RITEC products in the third quarter of fiscal 2016. Refer to Note 2, “Acquisitions,” in our audited consolidated financial statements included elsewhere in this +report. +The following description of our business should be read in conjunction with “Management’s Discussion and +Analysis of Financial Conditions and Results of Operations” on pages 19 through 29 of this Annual Report on Form 10-K. +3 +Table of Contents +Description of Business +Product Overview +AstroNova leverages its expertise in +data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems and related services for select growing markets on a global basis. The business consists of two segments, Product +Identification (PI), which includes specialty printing systems sold under the brand name QuickLabel ® and +TrojanLabel ® ; and Test & Measurement (T&M), which includes test and measurement systems sold under +the AstroNova ® brand name. Refer to Note 15, “Nature of Operations, Segment Reporting and Geographical +Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding the Company’s segments. +Products sold under the QuickLabel and TrojanLabel brands are used in industrial and commercial product packaging, branding and labeling applications to digitally print custom labels and corresponding +visual content in house. Products sold under the AstroNova brand enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed and analyzed and then +stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide high-resolution light-weight flight deck and cabin printers. +Product Identification +QuickLabel brand products include tabletop and work cell-ready digital color label printers and specialty OEM printing systems as well as a full line of supplies including labels, tags, inks, toner and +thermal transfer ribbons. QuickLabel products are primarily sold to manufacturers, processors, and retailers who label products on a short-run basis. QuickLabel customers benefit from the efficiency, +flexibility and cost-savings of digitally printing their own labels in house and on demand. Industry segments that commonly benefit from short-run digital label printing include chemicals, cosmetics, food and +beverage, medical products, and pharmaceuticals, among many others. +Current QuickLabel models include the Kiaro! family of +high-speed inkjet color label printers, the QL-111 industrial color label printer and the QL-800 wide format color label printer, as well as a family of high-end monochrome printers. +TrojanLabel brand products include tabletop and digital color +label presses and specialty printing systems, as well as overprinting solutions. This highly innovative line of presses offers customers the ability to execute smaller runs with an affordable digital solution. It is commonly sold to larger brand +owners, label converters, commercial printers and packaging manufacturers. +Current TrojanLabel models include the T2-C, an inkjet table top label press; the T2, the full size parent of the T2-C, allowing larger volumes and with a full-size PC +display for comfortable use and fast turnaround; the T4, a complete label finisher which enables print, die cut and lamination all in one machine; and the T3, a highly customizable +all-in-one label production and finishing press offered in multiple OEM integration options. +The Product Identification segment also offers a full line of supplies including labels, tags, inks, toner and thermal transfer ribbons. In addition, the Product Identification segment sells various +specialized software used to operate the printers and presses, design labels and manage printing on an automated basis and provides worldwide training and support. +T&M +Products sold under the AstroNova T&M brand acquire and record +visual data from local and networked data streams and sensors. The recorded data is processed and analyzed and then stored and presented in various visual output formats. The Company supplies a range of products and services that include hardware, +software and supplies to customers in a variety of industries. +4 +Table of Contents +Our T&M products include the Daxus ® distributed data acquisition system; TMX ® high-speed data acquisition system; DDX100 SmartCorder ® portable data acquisition system; EV-500 digital strip chart recording system; ToughWriter ® , Miltope-brand and RITEC-brand airborne printers; the PTA-45B cockpit printer that is subject to the Asset Purchase +and Licenses Agreement with Honeywell and ToughSwitch ® ruggedized Ethernet switches. +AstroNova airborne printers are used in the flight deck and in the cabin of military, commercial and business aircraft to print hard +copies of data required for the safe and efficient operation of aircraft, including navigation maps, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. +ToughSwitch Ethernet switches are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial +flightworthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter airborne printers for numerous aircraft made by Airbus, Boeing, Embraer, Bombardier, Lockheed, Gulfstream and others. +The Company’s family of portable data acquisition systems is used in research and development (R&D), field testing, +production and maintenance applications in a wide range of industries including aerospace and defense, energy, industrial and transportation. The TMX data acquisition system is an +all-in-one solution for applications in which the ability to monitor high channel counts and view a wide variety of input signals, including time-stamped and +synchronized video capture data and audio notation is essential. The DDX100 SmartCorder is an ultra-portable all-in-one solution for facilities maintenance and field +testing. The Daxus is a distributed data acquisition platform that can be connected to the DDX100 SmartCorder to increase channel count or networked as part of a distributed measurement system spanning large distances. +Technology +Our core +technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. +Patents and Copyrights +We hold a number of product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, +trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand name. While we consider our intellectual property to be important to the operation of our business, we do not believe that any existing +patent, license, trademark or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many of the +sub-assemblies and parts in-house including printed circuit board assemblies, harnesses, machined parts and general final assembly. Many not manufactured in-house parts +are standard electronic items available from multiple sources. Other parts are designed by us and manufactured by outside vendors. We purchase certain components, assembled products and supplies used in the manufacture of our products from a single +source or limited supplier source, but these components, products and supplies could be sourced elsewhere with appropriate changes in the design of our products. +Product Development +We maintain an active program of product research and +development. During fiscal 2018, 2017 and 2016, we spent $7.5 million, $6.3 million and $6.9 million, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our +organic growth and expect to continue our focus on research and development efforts in fiscal 2019 and beyond. +5 +Table of Contents +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in tabletop digital +color label printing technology and in aerospace printers. In the data acquisition area, we believe that we are one of the leaders in portable high speed data acquisition systems. +We retain a leadership position by virtue of proprietary technology, product reputation, delivery, technical assistance, and service to +customers. The number of competitors varies by product line. Our management believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our product lines, but include technology, quality, +service and support, distribution network, and breadth of product and service offerings. +Our products are sold by direct field +salespersons as well as independent dealers and representatives. In the United States, the Company has factory-trained direct field salespeople located in major cities from coast to coast specializing in either Product Identification or AstroNova +T&M products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, India, Malaysia, Mexico, Singapore, Spain and the United Kingdom staffed by our own employees and dedicated third party contractors. +Additionally, we utilize over 200 independent dealers and representatives selling and marketing our products in over 75 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +International Sales +In fiscal 2018, 2017 and 2016, revenue from customers +in various geographic areas outside the United States, primarily in Canada and Western Europe, amounted to $43.6 million, $28.6 million and $26.3 million, respectively. Refer to Note 15, “Nature of Operations, Segment +Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for further financial information by geographic areas. +Order Backlog +Our backlog varies regularly. It consists of a blend of +orders for end-user customers as well as original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and customer requirements. Accordingly, the amount of order +backlog may not indicate future sales trends. Backlog at January 31, 2018, 2017 and 2016 was $21.4 million, $17.6 million and $18.2 million, respectively. +Employees +As of January 31, 2018, we employed 352 people. We are +generally able to satisfy our employment requirements. No employees are represented by a union. We believe that employee relations are good. +Other Information +The +Company’s business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form +10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or +furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). These +filings are also accessible on the SEC’s website at http://www.sec.gov. +6 +Table of Contents +Item 1A. Risk Factors +The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on +our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties +not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +AstroNova’s +operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated. +Any decline in our customers’ markets or in their general economic conditions would likely result in a reduction in demand for our products. For example, although we have continued to experience +measured progress, as sales have increased steadily from prior years, we are still affected by the continued global economic uncertainty. Some of our customers may be reluctant to make capital equipment purchases or may defer certain of these +purchases to future quarters. Some of our customers may also limit consumable product purchases to quantities necessary to satisfy immediate needs with no provisions to stock supplies for future use. Also, if our customers’ markets decline, we +may not be able to collect on outstanding amounts due to us. Such declines could harm our results of operations, financial position and cash flows and could limit our ability to continue to remain profitable. +AstroNova’s future revenue growth depends on our ability to develop and introduce new products and services on a timely basis and achieve +market acceptance of these new products and services. +The markets for our products are characterized by rapidly +changing technologies and accelerating product introduction cycles. Our future success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product +enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our +competitors’ offerings, price our products competitively, anticipate our competitors’ development of new products, and maintain high levels of product quality and reliability. AstroNova spends a significant amount of time and effort +related to the development of our airborne and color printer products as well as our Test and Measurement data recorder products. Failure to further develop any of our new products and their related markets as anticipated could adversely affect our +future revenue growth and operating results. +As we introduce new or enhanced products, we must also successfully manage the +transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or +enhanced products may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing +products in anticipation of the new products. Additionally, when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete +inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or +AstroNova’s plans for future support of existing products may cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +7 +Table of Contents +AstroNova is dependent upon contract manufacturers for some of our products. If these +manufacturers do not meet our requirements, either in volume or quality, then we could be materially harmed. +We +subcontract the manufacturing and assembly of certain of our products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Limited control over the manufacturing process; +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; and +• +Reduced control over delivery schedules, manufacturing yields, quality and costs. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture these products in required volumes or +fails to meet our quality standards, we will have to identify qualified alternate subcontractors or we will have to take over the manufacturing ourselves. Additional qualified subcontractors may not be available, or may not be available on a timely +or cost competitive basis. Any interruption in the supply or increase in the cost of the products manufactured by third party subcontractors or failure of a subcontractor to meet quality standards could have a material adverse effect on our +business, operating results and financial condition. +For certain components, assembled products and supplies, AstroNova is dependent +upon single or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and supplies used in the manufacture of our products from a single source +or limited supplier sources. If the supply of a key component, assembled products or certain supplies were to be delayed or curtailed or, in the event a key manufacturing or sole supplier delays shipment of such components or assembled products, our +ability to ship products in desired quantities and in a timely manner would be adversely affected. Our business, results of operations and financial position could also be adversely affected, depending on the time required to obtain sufficient +quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source. Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply these components, +assembled products or supplies in required volumes, we will have to identify and qualify acceptable replacements or redesign our products with different components. Alternative sources may not be available, or product redesign may not be feasible on +a timely basis. Any interruption in the supply of or increase in the cost of the components, assembled products and supplies provided by single or limited source suppliers could have a material adverse effect on our business, operating results and +financial condition. +AstroNova faces significant competition, and our failure to compete successfully could adversely affect our +results of operations and financial condition. +We operate in an environment of significant competition, driven by +rapid technological advances, evolving industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete on +the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently +serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products with features that could adversely affect the competitive position of our products. To remain competitive, we must +develop new products, services and applications and periodically +8 +Table of Contents +enhance our existing offerings. If we are unable to compete successfully, we could lose market share and important customers to our competitors which could materially adversely affect our +business, results of operations and financial position. +AstroNova’s profitability is dependent upon our ability to obtain adequate +pricing for our products and to control our cost structure. +Our success depends on our ability to obtain adequate +pricing for our products and services which provides a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from previous levels. In addition, pricing +actions to offset the effect of currency devaluations may not prove sufficient to offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and +services, our results of operations and financial position could be materially adversely affected. +We are continually +reviewing our operations with a view towards reducing our cost structure, including but not limited to downsizing our employee base, improving process and system efficiencies and outsourcing some internal functions. From time to time we also engage +in restructuring actions to reduce our cost structure. If we are unable to maintain process and systems changes resulting from cost reduction and prior restructuring actions, our results of operations and financial position could be materially +adversely affected. +AstroNova has significant inventories on hand. +We maintain a significant amount of inventory. Although we have provided an allowance for slow-moving and obsolete inventory, any +significant unanticipated changes in future product demand or market conditions, including obsolescence or the uncertainty in the global market, could have an impact on the value of inventory and adversely impact our business, operating results and +financial condition. +Economic, political and other risks associated with international sales and operations could adversely affect +AstroNova’s results of operations and financial position. +Because we sell our products worldwide, our business is +subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect sales to customers outside the U.S., accounted for 38% of our total revenue for fiscal year 2018, and we +anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, job functions and facilities located outside the U.S. Accordingly, our business, operating results and +financial condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +9 +Table of Contents +• +Differing protection of intellectual property; +• +Unexpected changes in regulatory requirements; and +• +Geopolitical turmoil, including terrorism and war. +AstroNova could incur liabilities as a result of installed product failures due to design or manufacturing defects. +AstroNova has incurred and could incur additional liabilities as a result of installed product failures due to design or manufacturing defects. Our products may have defects despite testing internally or +by current or potential customers. These defects could result in among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance or substantial damage to our reputation. We could be +subject to material claims by customers, and may incur substantial expenses to correct any product defects. +In addition, +through our acquisitions, we have assumed, and may in the future assume, liabilities related to products previously developed by an acquired company that have not been subjected to the same level of product development, testing and quality control +processes used by us, and may have known or undetected errors. Some types of errors may not be detected until the product is installed in a user environment. This may cause AstroNova to incur significant warranty and repair or re-engineering costs, may divert the attention of engineering personnel from product development efforts, and may cause significant customer relations problems such as reputational problems with customers resulting +in increased costs and lower profitability. +Certain of our products require certifications by regulators or standards organizations, +and our failure to obtain or maintain such certifications could negatively impact our business. +In certain industries +and for certain products, such as those used in aircraft, we must obtain certifications for our products by regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such +certifications on our products after they have been certified, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax +payments for prior periods. +On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA” or “Tax +Act”) was signed into law. The Tax Act significantly revises the U.S. federal corporate income tax law and includes a broad range of tax reform measures affecting business including among other things, the reduction of the corporate income tax +rate from 35% to 21%, the loss of certain business deductions, the acceleration of first-year expensing of certain capital expenditures and a one-time tax imposed on unremitted cumulative non-U.S. earnings of foreign subsidiaries. The U.S. Treasury Department and IRS have not yet issued regulations with respect to the Tax Act. +Changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the Tax Act), the ambiguity of tax laws and regulations, the +subjectivity of factual interpretations, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, could have a material impact on our estimates of the effective tax rate and deferred tax assets and +liabilities. For example, our estimate of the net one-time charge we have incurred related to the Tax Act could differ materially from our actual liability, due to, among other things, further refinement of +our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by the U.S. Treasury Department and IRS, and actions we may take as a result of the Tax Act. The impact of the factors referenced +in the first sentence of this paragraph may be substantially different from period-to-period. +In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities. If audits result in payments or assessments different from our reserves, our +future results may include +10 +Table of Contents +unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other +jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our financial statements. +The agreements governing our indebtedness subject us to various restrictions that may limit our ability to pursue business opportunities. +The agreement governing our current credit facility contains, and any future debt agreements may include, a number of restrictive +covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to: +• +Incur future indebtedness; +• +Place liens on assets; +• +Pay dividends or distributions on our and our subsidiaries’ capital stock; +• +Repurchase or acquire our capital stock; +• +Conduct mergers or acquisitions; +• +Sell assets; and/or +• +Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay +subordinated indebtedness. +Such agreements also require us to satisfy other requirements, including +maintaining certain financial ratios and condition tests. Our ability to meet these requirements can be affected by events beyond our control, and we may be unable to meet them. To the extent we fail to meet any such requirements and are in default +under our debt obligations, our financial condition may be materially adversely affected. These restrictions may limit our ability to engage in activities that could otherwise benefit us. To the extent that we are unable to engage in activities that +support the growth, profitability and competitiveness of our business, our business, results of operations and financial condition could be adversely affected. +AstroNova may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may +negatively impact AstroNova’s overall business. +We have made strategic investments in other companies, products +and technologies, including our September 2017 Asset Purchase and License Agreement with Honeywell International, Inc.; our February 2017 acquisition of the digital color label press and specialty printing systems business of the Danish company, +TrojanLabel and the June 2015 acquisition of the aerospace printer business from RITEC. We may continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, +there can be no assurance that we will be able to identify suitable acquisition opportunities. In any acquisition that we complete we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative effect on operating results or other +aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental effect on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse effect on our reputation; and +• +Respective operations, management and personnel will be compatible. +11 +Table of Contents +In certain instances as permitted by applicable law and NASDAQ rules, acquisitions may +be consummated without seeking and obtaining shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in a +particular acquisition, there can be no assurance that we will properly ascertain or assess such risks. +We may also divest +certain businesses from time to time. Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer +relationships. A successful divestiture depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. +Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If we are not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize expected benefits of our acquisitions, divestitures or +strategic partnerships, AstroNova’s business, results of operations and financial condition could be adversely affected. +Adverse conditions in the global banking industry and credit markets may adversely impact the value of our investments or impair our liquidity. +At the end of fiscal 2018, we had approximately $11.7 million of cash, cash equivalents and investments held for sale. Our cash and +cash equivalents are held in a mix of money market funds, bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as money market funds that +traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our financial position. Our +investment portfolio consists of state and municipal securities with various maturity dates, all of which have a credit rating of AA or above at the original purchase date; however, defaults by the issuers of any of these securities may result in an +adverse impact on our portfolio. +AstroNova could experience disruptions in, or breach in security of our information technology system +or fail to implement new systems or software successfully which could harm our business and adversely affect our results of operations. +We employ information technology systems to support our business. Any security breaches or other disruptions to our information technology infrastructure could interfere with operations, compromise our +information and that of our customers and suppliers, and expose us to liability which could adversely impact our business and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are +managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. While we continually work to safeguard our systems and mitigate potential risks, there is no +assurance that such actions will be sufficient to prevent cyber attacks or security breaches and our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, +employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events or other unforeseen events. While we have experienced, and expect to continue to experience, these types +of threats to our information technology networks and infrastructure, none of them to date has had a material impact. Any +12 +Table of Contents +such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to the Company’s brand and reputation, which could +adversely affect our business, operating results and financial condition. +AstroNova depends on our key employees and other highly +qualified personnel and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees could compromise our future success and our business could be harmed. +Our future success depends upon our ability to attract and retain professional and executive employees, including sales, operating, +marketing, and financial management personnel. There is substantial competition for skilled personnel, and the failure to attract, develop, retain and motivate qualified personnel could negatively impact our business, financial condition, results of +operations and future prospects. In order to retain or replace our key personnel, we may be required to increase compensation, which would decrease net income. Additionally, a number of key employees have special knowledge of customers, supplier +relationships, business processes, manufacturing operations, and financial management issues and the loss of any of these employees could harm the company’s ability to perform efficiently and effectively until their knowledge and skills are +replaced, which might be difficult to do quickly, and as a result could have a material adverse effect on our business, financial condition, and results of operations. +AstroNova is subject to laws and regulations; failure to address or comply with these laws and regulations could harm our business and adversely affect our results of operations. +Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in +each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on +our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our products. If we do not comply with applicable laws, rules and regulations we could be subject to +costs and liabilities and our business may be adversely impacted. +Certain of our operations and products are subject to environmental, +health and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our business. +Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of +pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. We have used and continue to use various substances in our +products and manufacturing operations, and have generated and continue to generate wastes, which have been or may be deemed to be hazardous or dangerous. As such, our business is subject to and may be materially and adversely affected by compliance +obligations and other liabilities under environmental, health and safety laws and regulations. These laws and regulations affect ongoing operations and require capital costs and operating expenditures in order to achieve and maintain compliance. +Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, and any determination that the +Company or any of its subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to +government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some +degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local +13 +Table of Contents +customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts +committed by those of our employees or agents who violate our policies. +Unauthorized access of personal data could give rise to +liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights and compliance with laws designed to prevent unauthorized access of personal data could be costly. +AstroNova collects and stores certain data, including proprietary business information, and may have access to confidential or personal +information that is subject to privacy and security laws, regulations and customer-imposed controls. Security breaches or other unauthorized access to, or the use or transmission of, personal user information could result in a variety of claims +against us, including privacy-related claims. There are numerous laws in the countries in which we operate regarding privacy and the storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are +changing, inconsistent and conflicting and subject to differing interpretations, and new laws of this nature are adopted from time to time. For example, in 2016 the European Commission adopted the General Data Protection Regulation, a +comprehensive privacy and data protection reform that becomes enforceable in May 2018. At the same time, certain developing countries in which we do business are also currently considering adopting privacy and data protection laws and regulations +and legislative proposals concerning privacy and the protection of user information are often pending before the U.S. Congress and various U.S. state legislatures. +While we believe that we comply with industry standards and applicable laws and industry codes of conduct relating to privacy and data protection in all material respects, there is no assurance that we +will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event of non-compliance. +Any failure or perceived failure by us (or any third parties with whom we +have contracted to store such information) to comply with applicable privacy and security laws, policies or related contractual obligations or any compromise of security that results in unauthorized access to personal information may result in +governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. In the case of such an event, our reputation may be harmed, we could lose current and potential users +and the competitive positions of our various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations. +We may record future goodwill impairment charges or other intangible asset impairment charges related to one or more of our reporting units, which could materially adversely impact our results of +operations. +We test our goodwill balances annually, or more frequently if indicators are present or changes in +circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit level and, in evaluating the potential for impairment of goodwill, we make assumptions regarding estimated revenue projections, growth rates, +cash flows and discount rates. We monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Relatively small declines in the future performance and +cash flows of a reporting unit or asset group, changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses, or small changes in other key assumptions, +may result in the recognition of significant asset impairment charges, which could have a material adverse impact on our results of operations. +Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could +significantly affect our financial results or financial condition. +Generally accepted accounting principles and +related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as +14 +Table of Contents +revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, leases, and litigation, are highly complex and involve +many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial +condition. +Compliance with rules governing “conflict minerals” could adversely affect the availability of certain product +components and our costs and results of operations could be materially harmed. +SEC rules require disclosures regarding +the use of “conflict minerals” mined from the Democratic Republic of the Congo and adjoining countries necessary to the functionality or production of products manufactured or contracted to be manufactured. We have determined that we use +gold, tin and tantalum, each of which is considered a “conflict mineral” under the SEC rules, as they occur in electronic components supplied to us in the manufacture of our products. Because of this finding, we are required to conduct +inquiries designed to determine whether any of the conflict minerals contained in our products originated or may have originated in the conflict region or come from recycled or scrap sources. There are costs associated with complying with these +disclosure requirements, including performing due diligence in regards to the source of any conflict minerals used in our products, in addition to the cost of remediation or other changes to products, processes or services of supplies that may be +necessary as a consequence of such verification activities. As we use contract manufacturers for some of our products, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence +procedures that we implement. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do +so. As a result, our business, operating results and financial condition could be harmed. +The decision by British voters to exit the +European Union may negatively impact our operations. +In June 2016 the United Kingdom held a referendum in which the +British voted in favor of exiting the European Union. This referendum has caused and may continue to cause political and economic uncertainty, including significant volatility in global stock markets and currency exchange rate fluctuations. Although +it is unknown what the full terms of the United Kingdom’s future relationship with the EU will be, it is possible that there will be greater restrictions on imports and exports between the United Kingdom and other countries, including the +United States, and increased regulatory complexities. Any of these factors could adversely affect customer demand, our relationships with customers and suppliers and our business and financial statements. +Item 1B. Unresolved Staff Comments +None. +15 +Table of Contents +Item 2. Properties +The following table sets forth information regarding the Company’s principal owned properties, all of which are included in the +consolidated balance sheet appearing elsewhere in this annual report. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, USA +135,500 +Corporate headquarters, research and development, manufacturing, sales and service +AstroNova also leases facilities in various other locations. The following information pertains to each +location: +Location +Approximate +Square +Footage +Principal Use +Dietzenbach, Germany +18,630 +Manufacturing, sales and service +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service +Elancourt, France +4,500 +Sales and service +Copenhagen, Denmark +4,000 +R&D and sales +Maidenhead, England +1,000 +Sales and service +Schaumburg, Illinois, USA +3,428 +Sales (Product Identification only) +Shanghai, China +461 +Sales (Product Identification only) +Newport Beach, California, USA +150 +Sales (Product Identification only) +Tambauam Chennai, India +70 +Sales (Product Identification only) +Mexico City, Mexico +65 +Sales (Product Identification only) +We believe our facilities are well maintained, in good operating condition and generally adequate to meet +our needs for the foreseeable future. +Item 3. Legal Proceedings +There are no pending or threatened legal proceedings against the Company believed to be material to the financial position or results of +operations of the Company. +Item 4. Mine Safety Disclosures +Not applicable. +16 +Table of Contents +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +AstroNova common stock trades on the NASDAQ Global Market under the symbol “ALOT.” The following +table sets forth the range of high and low sales prices and dividend data, as furnished by NASDAQ, for each quarter in the years ended January 31: +High +Low +Dividends +Per Share +2018 +First Quarter +$ +15.65 +$ +12.85 +$ +0.07 +Second Quarter +$ +15.15 +$ +12.69 +$ +0.07 +Third Quarter +$ +14.05 +$ +11.00 +$ +0.07 +Fourth Quarter +$ +15.00 +$ +11.96 +$ +0.07 +2017 +First Quarter +$ +15.69 +$ +11.18 +$ +0.07 +Second Quarter +$ +16.17 +$ +13.49 +$ +0.07 +Third Quarter +$ +16.41 +$ +14.40 +$ +0.07 +Fourth Quarter +$ +14.60 +$ +12.50 +$ +0.07 +AstroNova had approximately 277 shareholders of record as of March 28, 2018, which does not reflect +shareholders with beneficial ownership in shares held in nominee name. +17 +Table of Contents +Stock Performance Graph +The graph below shows a comparison of the cumulative total return on the Company’s common stock against the cumulative total returns for the NASDAQ Composite Index and the NASDAQ Electronic +Components Index for the period of five fiscal years ended January 31, 2018. The NASDAQ Total Return Composite Index is calculated using all companies trading on the NASDAQ Global Select, NASDAQ Global Market and the NASDAQ Capital Markets. The +Index is weighted by the current shares outstanding and assumes dividends are reinvested. The NASDAQ Electronic Components Index, designated as the Company’s peer group index, is comprised of companies classified as electronic equipment +manufacturers. +COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* +Among AstroNova, Inc., the NASDAQ Composite Index +and the NASDAQ Electronic Components Index +Cumulative Total Returns* +FY2013 +FY2014 +FY2015 +FY2016 +FY2017 +FY2018 +AstroNova, Inc. +$ +100.00 +$ +139.95 +$ +156.23 +$ +167.27 +$ +150.65 +$ +149.66 +NASDAQ Composite +$ +100.00 +$ +133.35 +$ +152.66 +$ +153.70 +$ +187.33 +$ +249.85 +NASDAQ Electronic Components +$ +100.00 +$ +132.48 +$ +172.07 +$ +162.80 +$ +239.21 +$ +344.98 +* +$100 invested on 1/31/13 in stock or index, including reinvestment of dividends. +Fiscal +year ending January 31. +Dividend +Policy +AstroNova began a program of paying quarterly cash dividends in fiscal 1992 and has paid a dividend for 106 +consecutive quarters. During fiscal 2018, 2017 and 2016, we paid a dividend of $0.07 per share in each quarter and anticipate that we will continue to pay comparable cash dividends on a quarterly basis. +Stock Repurchases +Pursuant to an authorization approved by AstroNova’s Board of Directors in August 2011, the Company is currently authorized to +repurchase up to 390,000 shares of common stock, subject to any increase or decrease by the Board of Directors at any time. This is an ongoing authorization without any expiration date. +There were no stock repurchases during the quarter ended January 31, 2018. +18 +Table of Contents +Item 6. Selected Financial Data +Historical Financial Summary +Income Statement Data +(In thousands, except per share data) +For the Fiscal Years Ended January 31, +2018 +2017 +2016 +2015 +2014 +Revenue +$ +113,401 +$ +98,448 +$ +94,658 +$ +88,347 +$ +68,592 +Gross profit +44,002 +39,489 +38,158 +36,977 +26,983 +Operating income +5,412 +6,281 +5,934 +7,231 +1,533 +Income from continuing operations before taxes +5,157 +6,605 +6,909 +6,932 +1,412 +Taxes on continuing operations +1,871 +2,377 +2,384 +2,270 +175 +Income from discontinued operations, net of taxes +— +— +— +— +1,975 +Net income +3,286 +4,228 +4,525 +4,662 +3,212 +Net income per Common Share—Basic : +Continuing operations +$ +0.48 +$ +0.57 +$ +0.62 +$ +0.61 +$ +0.17 +Discontinued operations +— +— +— +— +0.26 +Net income per Common Share – Basic +$ +0.48 +$ +0.57 +$ +0.62 +$ +0.61 +$ +0.43 +Net income per Common Share – Diluted : +Continuing operations +$ +0.47 +$ +0.56 +$ +0.61 +$ +0.60 +$ +0.16 +Discontinued operations +— +— +— +— +0.26 +Net income per Common Share—Diluted +$ +0.47 +$ +0.56 +$ +0.61 +$ +0.60 +$ +0.42 +Dividends Declared per Common Share +$ +0.28 +$ +0.28 +$ +0.28 +$ +0.28 +$ +0.28 +Balance Sheet Data +(In thousands) +As of January 31, +2018 +2017 +2016 +2015 +2014 +Cash and Marketable Securities +$ +11,688 +$ +24,821 +$ +20,419 +$ +23,132 +$ +27,107 +Current Assets +63,780 +61,423 +54,514 +59,289 +65,034 +Total assets +122,313 +83,665 +77,963 +74,330 +77,964 +Current liabilities +25,912 +11,985 +9,548 +9,569 +9,892 +Debt, including short term portion +23,146 +— +— +— +— +Shareholders’ equity +63,647 +70,537 +67,373 +63,511 +66,614 +Item 7. Management’s Discussion and Analysis of Financial +Condition and Results of Operations +Overview +AstroNova is a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, +store, analyze and present data in multiple formats. The Company organizes its structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. It markets and sells its products and +services through the following two segments: +• +Product Identification – offers product identification and digital label printer hardware, software, servicing contracts, and supplies. +• +Test and Measurement Product Group (T&M) – offers a suite of products and services that acquire data from local and networked data streams and +sensors as well as wired and wireless networks. The recorded data is processed and analyzed and then stored and presented in various visual output formats. The T&M segment also includes a line of aerospace printers that are used to print hard +copies of data +19 +Table of Contents +required for the safe and efficient operation of aircraft including navigation maps, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, and +various air traffic control data. Aerospace products also include Ethernet switches which are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. +The Company markets and sells its products and services globally through a diverse distribution structure of direct sales personnel, +manufacturers’ representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on organic growth through product innovation made possible +by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. Research and development activities were funded and expensed by the Company at approximately 6.6% of annual revenue for +fiscal 2018. We also continue to invest in sales and marketing initiatives by expanding the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding today’s +challenging economic environment. +On September 28, 2017, AstroNova entered into an Asset Purchase and License Agreement +with Honeywell International, Inc. pursuant to which it acquired the exclusive perpetual world-wide license to manufacture Honeywell’s narrow format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Revenue from the sales of +these printers is reported as part of our Test & Measurement segment beginning in the third quarter of fiscal year 2018. Refer to Note 2, “Acquisitions,” in the audited consolidated financial statements included elsewhere in +this report. +On February 1, 2017, AstroNova completed its acquisition of TrojanLabel ApS (TrojanLabel), a European +manufacturer of digital color label presses and specialty printing systems for a broad range of end user markets. TrojanLabel is reported as part of our Product Identification segment beginning with the first quarter of fiscal year 2018. Refer to +Note 2, “Acquisitions,” in the audited consolidated financial statements included elsewhere in this report. +On +June 19, 2015, AstroNova completed the acquisition of the aerospace printer product line from RITEC. AstroNova’s aerospace printer product line is part of the T&M product group and is reported as part of the T&M segment. The +Company began shipment of the RITEC products in the third quarter of fiscal year 2016. Refer to Note 2, “Acquisitions,” in the audited consolidated financial statements included elsewhere in this report. +Results of Operations +Fiscal 2018 +compared to Fiscal 2017 +The following table presents the revenue of each of the Company’s segments, as well as the +percentage of total revenue and change from prior year. +($ in thousands) +2018 +2017 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +Product Identification +$ +81,681 +72.0 +% +16.9 +% +$ +69,862 +71.0 +% +T&M +31,720 +28.0 +% +11.0 +% +28,586 +29.0 +% +Total +$ +113,401 +100.0 +% +15.2 +% +$ +98,448 +100.0 +% +Net revenue in fiscal 2018 was $113.4 million, a 15.2% increase compared to prior year revenue of +$98.4 million. Revenue through domestic channels of $69.8 million was consistent with prior year domestic revenue of $69.8 million. International revenue of $43.6 million increased 52.4% over prior year international revenue of +$28.6 million primarily due to the impact on revenue from the Honeywell and TrojanLabel acquisitions. The current year’s international revenue includes a favorable foreign exchange rate impact of $0.6 million. +Hardware revenue in fiscal 2018 was $37.5 million, a 10.9% increase compared to prior year’s revenue of $33.8 million. +Hardware revenue in the Product Identification segment increased 23.5% compared to prior year +20 +Table of Contents +due to the integration of TrojanLabel, but was tempered by lower OEM bar code printer sales. Hardware revenue in the T&M segment increased 4.6% primarily due to the Honeywell acquisition and +the introduction of the EV-5000 data recorder. These revenue increases were partially offset by lower sales from the Aerospace ToughWriter 4 product line. +Revenue from supplies in fiscal 2018 was $65.3 million, representing a 16.2% increase compared to prior year revenue of +$56.2 million. This increase is primarily attributable to double-digit growth from Product Identification inkjet printer inks and labels. Also contributing to the revenue increase were the impact of Honeywell and TrojanLabel paper and ink +sales. +Service and other revenue in fiscal 2018 was $10.6 million, a 26.2% increase compared to prior year revenue of +$8.4 million. Product Identification and Test & Measurement segments both generated double-digit growth in service and other revenue as a result of the TrojanLabel and Honeywell acquisitions. +The Company achieved gross profit of $44.0 million for fiscal 2018, reflecting an 11.4% improvement compared to the prior year’s +gross profit of $39.5 million. The Company’s gross profit margin of 38.8% in the current year reflects a decrease from the prior year’s gross profit margin of 40.1%. The higher gross profit for the current year compared to the prior +year is primarily attributable to increased revenue; the current year’s decrease in gross margin is due to product mix and higher manufacturing and period costs. +Operating expenses for the current year were $38.6 million, representing a 16.2% increase from the prior year’s operating expenses of $33.2 million. Specifically, selling and marketing +expenses of $22.2 million in fiscal 2018 increased 17.3% from prior year’s amount of $19.0 million. The increase in selling and marketing expenses for the current year primarily relates to increases in wages and amortization related +to the TrojanLabel and Honeywell acquisitions. Selling and marketing expenses represent 19.6% and 19.3% of net revenue for fiscal 2018 and 2017, respectively. Current year general and administrative (G&A) expenses increased by 12.1% from prior +year to $8.9 million primarily as a result of an increase in share-based compensation expenses, as well as outside and professional service costs, including non-recurring costs related to expenses +incurred pursuant to a transition service agreement we entered into with Honeywell. The increase in G&A was offset by income of $1.4 million due to the change in the fair value of the Company’s contingent earn out liability related to +the TrojanLabel acquisition. Research & development (R&D) costs in fiscal 2018 of $7.5 million increased 18.0% from $6.3 million in fiscal 2017, primarily due to the increase related to the absorption of the TrojanLabel +R&D team, as well as an increase in wages. This increase was slightly tempered by a decrease in outside service costs and prototype expenses. The R&D spending level for fiscal 2018 represents 6.6% of net revenue, an increase compared to the +prior year’s level of 6.4%. +Other expense in fiscal 2018 was $0.3 million compared to other income of $0.3 million +in fiscal 2017. Current year other expense includes interest expense on debt of $0.4 million and foreign exchange loss of $0.2 million, offset by investment income of $0.2 and income related to a settlement of a trademark infringement +litigation. Other income in fiscal 2017 includes a gain on sale of a property we owned in England of $0.4 million and $0.1 million related to an amount retained from the RITEC escrow partially offset by foreign exchange loss of +$0.2 million. +Net income for fiscal 2018 was $3.3 million, or $0.47 per diluted share, a decrease from +$4.2 million, or $0.56 per diluted share in fiscal 2017. Current year results were impacted by income of $1.4 million ($1.1 million net of tax or $0.16 per diluted share) related to change in the fair value of the Company’s contingent earn +out liability and $1.1 million, or $0.16 per diluted share, in taxes as a result of the enactment of the Tax Act. The $1.1 million increase in tax provision includes $1.0 million related to revaluation of our deferred tax assets at +the new lower corporate tax rate and $0.1 million related to the transition tax on the un-repatriated earnings of our foreign subsidiaries also included in the Tax Act. During fiscal 2017 the Company +recognized a $2.4 million income tax expense and had an effective tax rate of 36.0%. Fiscal 2017 income tax expense included a $0.2 million tax expense related to non-deductible transaction costs for +the TrojanLabel acquisition and a $0.2 million tax expense related to the increase for unrecognized tax benefits. +21 +Table of Contents +Fiscal 2017 compared to Fiscal 2016 +The following table presents the revenue of each of the Company’s segments, as well as the percentage of total revenue and change +from prior year. +($ in thousands) +2017 +2016 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +Product Identification +$ +69,862 +71.0 +% +4.1 +% +$ +67,127 +70.9 +% +T&M +28,586 +29.0 +% +3.8 +% +27,531 +29.1 +% +Total +$ +98,448 +100.0 +% +4.0 +% +$ +94,658 +100.0 +% +Net revenue in fiscal 2017 was $98.4 million, a 4.0% increase compared to prior year revenue of +$94.7 million. Revenue through domestic channels of $69.9 million was a slight increase compared to prior year domestic revenue of $68.3 million. International revenue of $28.6 million increased 8.6% over prior year international +revenue of $26.4 million somewhat as a result of the earlier release of new QuickLabel products. Fiscal 2017 international revenue includes an unfavorable foreign exchange rate impact of $0.5 million. +Hardware revenue in fiscal 2017 was $33.8 million, a 2.9% decrease compared to prior year’s revenue of $34.8 million. +Hardware revenue in the Product Identification segment decreased 8.8% compared to prior year due to the anticipation of the introduction of new products in the third quarter of the fiscal 2017 and delayed traction for new products introduced. +Hardware revenue in the T&M segment for fiscal 2017 increased slightly to $22.5 million from $22.4 million in the prior year, as the overall decline in sales of data recorders was offset by a 6.0% increase in sales of the Aerospace +product line due to fulfillment during fiscal 2017 of orders received in previous years. +Revenue from supplies in fiscal 2017 +was $56.2 million, representing an 8.5% increase compared to prior year revenue of $51.8 million. The increase was primarily attributable to the increase in label and tag product sales, as well as digital color printer supplies in the +Product Identification segment. The double-digit increase in sales of T&M’s chart paper products also made a contribution to the overall increase in supplies revenue for the current year. +Service and other revenue in fiscal 2017 was $8.4 million, a 3.7% increase compared to prior year revenue of $8.1 million as the +increase in parts revenue during the year was offset by declines in revenue from repairs service and freight. +The Company +achieved gross profit of $39.5 million for fiscal 2017, reflecting a 3.5% improvement compared to the prior year’s gross profit of $38.2 million. The Company’s gross profit margin of 40.1% in fiscal 2017 reflects a decrease from +the prior year’s gross profit margin of 40.3% due to product mix and higher manufacturing and period costs. +Operating +expenses for fiscal 2017 were $33.2 million, representing a 3.1% increase from the prior year’s operating expenses of $32.2 million. Specifically, selling and marketing expenses of $19.0 million in fiscal 2017 increased 3.9% from +prior year’s amount of $18.2 million. Selling and marketing expense for both fiscal 2017 and 2016 represent 19.3% of net revenue. Fiscal 2017 G&A expenses increased by 12.9% from prior year to $7.9 million primarily attributable +to an increase in professional and outside service fees related to non-recurring costs associated with the TrojanLabel acquisition. The increases in selling, marketing and G&A expenses for fiscal 2017 were +somewhat offset by a decrease in R&D costs. R&D costs in fiscal 2017 of $6.3 million decreased 9.1% from $6.9 million in fiscal 2016, primarily due to a decrease in outside service costs related to the development and integration +of the RITEC products. The R&D spending level for fiscal 2017 represents 6.4% of net revenue, a decrease compared to prior year’s level of 7.3%. +Other income in fiscal 2017 was $0.3 million compared to $1.0 million in the prior year. In addition to interest income, other income for fiscal 2017 includes a $0.4 million gain on sale of +a property we owned in England +22 +Table of Contents +and $0.1 million related to an amount retained from the RITEC escrow, offset by $0.2 million of foreign exchange loss for the year. Other income in fiscal 2016 included +$0.2 million of income recognized from a settlement in an escrow account related to our 2014 acquisition of the aerospace printer line from the Miltope Corporation. +During fiscal 2017 the Company recognized a $2.4 million income tax expense and had an effective tax rate of 36.0%. Income tax expense for fiscal 2017 included a $0.2 million tax expense related +to non-deductible transaction costs for the TrojanLabel acquisition and a $0.2 million tax expense related to the increase for unrecognized tax benefits. This compares to an income tax expense of +$2.4 million in fiscal 2016 and related effective tax rate of 34.5%. Fiscal 2016 income tax expense included a $0.1 million tax expense related to an increase in valuation allowance. +Net income for fiscal 2017 was $4.2 million, providing a return of 4.3% on revenue and earnings of $0.56 per diluted share. On a +comparable basis, net income for fiscal 2016 was $4.5 million, a return on revenue of 4.8% and earnings of $0.61 per diluted share. +Segment Analysis +We +report two segments consistent with our product revenue groups: Product Identification and Test & Measurement (T&M). Segment performance is evaluated based on the operating segment’s profit before corporate and financial +administration expenses. +The following table summarizes selected financial information by segment. +($ in thousands) +Revenue +Segment Operating Profit +Segment Operating Profit as +a % of Revenue +2018 +2017 +2016 +2018 +2017 +2016 +2018 +2017 +2016 +Product Identification +$ +81,681 +$ +69,862 +$ +67,127 +$ +10,561 +$ +9,821 +$ +9,300 +12.9% +14.1% +13.9% +T&M +31,720 +28,586 +27,531 +3,754 +4,399 +3,664 +11.8% +15.4% +13.3% +Total +$ +113,401 +$ +98,448 +$ +94,658 +14,315 +14,220 +12,964 +12.6% +14.4% +13.7% +Corporate Expenses +8,903 +7,939 +7,030 +Operating Income +5,412 +6,281 +5,934 +Other Income (Expense), Net +(255) +324 +975 +Income Before Income Taxes +5,157 +6,605 +6,909 +Income Tax Provision +1,871 +2,377 +2,384 +Net Income +$ +3,286 +$ +4,228 +$ +4,525 +Product Identification +Revenue from the Product Identification segment increased 16.9% in fiscal 2018 with revenue of $81.7 million compared to revenue of $69.9 million in the prior year. Both the hardware and +supplies product lines saw strong growth in fiscal 2018, with increases of 23.5% and 15.2%, respectively, as compared to the prior year. The increase in hardware revenue for the current year was primarily due to the contribution from the TrojanLabel +line of presses. The supplies revenue increase in the current year was a result of supplies revenue from the newly acquired TrojanLabel business and continued strong demand for digital color printer ink as well as label and tag products supplies. +Product Identification current year segment operating profit was $10.6 million, reflecting a profit margin of 12.9%, compared to prior year segment profit of $9.8 million and related profit margin of 14.1%. The decrease in Product +Identification current year segment operating profit margin is due to unfavorable product mix and increased operating costs. +Revenue from the Product Identification segment increased 4.1% in fiscal 2017 with revenue of $69.9 million compared to revenue of +$67.1 million in the prior year. Fiscal 2017 revenue reflected the continued +23 +Table of Contents +growth from the Product Identification supplies products line which posted a 7.2% growth rate over the prior year due to the strong demand for label and tag products as well as digital color +printer ink supplies products. Product Identification fiscal 2017 segment operating profit was $9.8 million, reflecting a profit margin of 14.1%, a 5.6% increase from prior year segment profit of $9.3 million and related profit margin of +13.9%. The increase in Product Identification segment operating profit and related margin for fiscal 2017 as compared to fiscal 2016 is due to higher revenue and product mix. +Test & Measurement +Revenue from the T&M product group was +$31.7 million for fiscal 2018, an 11.0% increase compared to revenue of $28.6 million in the prior year. Both the hardware and supplies product lines saw sustained growth in fiscal 2018, with the overall increase primarily attributable to +the contribution of revenue from the entry into the arrangement with Honeywell in September of the current year. T&M’s segment operating profit for the current fiscal year was $3.8 million which resulted in a 11.8% profit margin +compared to the prior year’s segment operating profit of $4.4 million and related operating margin of 15.4%. The lower segment operating profit and related margin were due to product mix and higher operating costs. +Revenue from the T&M product group was $28.6 million for fiscal 2017, a 3.8% increase compared to revenue of $27.5 million +in the prior year. The increase is primarily attributable to the increase in revenue of aerospace printer sales due to fulfillment of orders received in previous years. Revenue growth for fiscal 2017 was tempered by lower sales in the data +acquisition product line. T&M’s fiscal 2017 segment operating profit was $4.4 million which resulted in a 15.4% profit margin compared to the prior year’s segment operating profit of $3.7 million and related operating margin +of 13.3%. The higher segment operating profit and related margin in fiscal 2017 were due to product mix. +Liquidity and Capital Resources +Based upon our current working capital position, current operating plans and expected business conditions, we expect to +fund our short and long-term working capital needs and capital expenditures primarily using internal funds, and we believe that cash provided by operations will be sufficient to meet our operating and capital needs for at least the next 12 months. +We may also utilize amounts available under our secured credit facility, as described below, to fund a portion of our capital +expenditures, contractual contingent consideration obligations, and future acquisitions. +On February 28, 2017, we entered +into a credit agreement with Bank of America, N.A., which provided for a secured credit facility consisting of a $9.2 million term loan to our wholly owned Danish subsidiary, “ANI ApS,” and a $10.0 million revolving credit +facility for the Company. On September 28, 2017, the Company entered into the First Amendment to the Credit Agreement to permit the Honeywell Asset Purchase and License Agreement and temporarily increase the amount available for borrowing under +the revolving credit line from $10.0 million to $15.0 million. The Company used $14.6 million of the revolving credit line to complete the Honeywell Asset Purchase and License Agreement. +On November 30, 2017, the Company entered into the Second Amendment to the Credit Agreement which, in addition to the revolving +credit facility and the term loan previously borrowed by ANI ApS under the original Credit Agreement, provided for a term loan to the Company in the principal amount of $15.0 million. Upon the closing of the Second Amendment, the Company used +the proceeds from the $15.0 million term loan to repay the entire $14.6 million principal balance of the revolving loan outstanding under the revolving credit facility as of October 28, 2017, with the remaining proceeds retained by +the Company to be used for general corporate purposes. The principal amount of the revolving credit facility under the Credit Agreement, which had been temporarily increased to $15.0 million pursuant to the First Amendment, was reduced to +$10.0 million effective upon the closing of the Second Amendment, and the revolving credit facility termination and maturity date was extended from January 31, 2022 to November 22, 2022. As of January 31, 2018, no amounts have +been drawn under the existing $10.0 million revolving credit facility. Refer to Note 7 “Revolving Credit Line” and Note 8 “Debt” in the audited consolidated financial statements included elsewhere in this report for further +details. +24 +Table of Contents +Both term loans bear interest at a rate per annum equal to the LIBOR rate plus a margin +that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio. In connection with our entry into the original Credit Agreement, ANI ApS entered into a hedging agreement to manage the variable interest rate risk +and currency risk associated with its payments in respect to the term loan. Under this combined arrangement, payments of principal and interest with respect to approximately $8.9 million of the principal of the term loan will be made in Danish +Krone, and interest on such principal amount will be payable at a fixed rate of 0.67% per annum for the entire term, subject only to potential changes based on the Company’s consolidated leverage ratio. In connection with our entry into +the Second Amendment of the Credit Agreement, effective November 30, 2017, the Company entered into a hedging agreement to manage the variable interest rate risk associated with its payments in respect to the $15.0 million term loan. Under +this combined arrangement, interest will be payable at a fixed rate of 2.04% per annum for the entire term, plus an incremental margin of 1.0% to 1.5%, based on the Company’s consolidated leverage ratio. Refer to Note 8 “Debt” +and Note 9, “Derivative Financial Instruments and Risk Management,” in the audited consolidated financial statements included elsewhere in this report for further details regarding our debt and hedging arrangements. +The statements of cash flows for the years ended January 31, 2018, 2017 and 2016 are included on page 46 of this Form 10-K. Net cash provided by operating activities was $3.8 million in fiscal 2018 compared to net cash provided by operating activities of $7.0 million in the previous year. The decrease in net cash from +operations for the current year is primarily due to the decrease in net income and the increase in working capital accounts, particularly inventory and accounts receivables. Excluding the impact of the TrojanLabel acquisition, inventory increased +$6.8 million to $27.6 in fiscal 2018 compared to $19.5 million in fiscal 2017, and accounts receivable increased $5.9 million to $22.4 million in fiscal 2018 from $15.7 million in fiscal 2017. The increase in inventory for fiscal 2018 is due to +increased purchasing volume and decreased inventory turn, as inventory days on hand increased to 124 days at the end of the current fiscal year from 114 days at the prior year end. The increase in accounts receivable for the current fiscal year +is due to increased revenue and increase in the accounts receivable collection cycle to 55 days at January 31, 2018 compared to 49 days at the prior year end. +Net cash provided by operating activities was $7.0 million in fiscal 2017 compared to net cash provided by operating activities of $7.7 million in fiscal 2016. The decrease in net cash from +operations for fiscal 2017 is primarily due to increased net income and increased cash used for working capital. The combination of changes in accounts receivable, inventory, and accounts payable and accrued expenses decreased cash by +$3.6 million in fiscal 2017, compared to a decrease of $0.5 million in fiscal 2016. The year-over-year decline was due to increased inventory and purchasing volume in fiscal 2017. The accounts receivable collection cycle decreased to 49 +days of revenue at January 31, 2017 compared to 50 days of revenue at the prior year end. Inventory days on hand increased to 114 days at the end of the 2017 fiscal year from 92 days at the prior year end. +Net cash used by investing activities for fiscal 2018 was $20.8 million, which included $23.9 million of cash paid for the +TrojanLabel acquisition and the Honeywell asset purchase and licenses agreement, partially offset by $5.5 million of proceeds from sales and maturities of securities available for sale. Cash used for investing activities for fiscal 2018 +included capital expenditures of $2.2 million, consisting of $0.7 million for land and building improvements; $0.7 million for information technology; $0.5 million for machinery and equipment; $0.2 million for tools and +dies; and $0.1 million for furniture, fixtures and other capital expenditures. +Net cash provided by investing activities +for fiscal 2017 was $3.1 million, which included $4.0 million of proceeds from maturities of securities available for sale and proceeds of $0.5 million related to the sale of the UK property. Cash used for investing activities for +fiscal 2017 included capital expenditures of $1.2 million, consisting of $0.4 million for land and building improvements; $0.3 million for information technology; $0.3 million for machinery and equipment; $0.1 million for +tools and dies; and $0.1 million for furniture, fixtures and other capital expenditures. +Net cash provided by financing +activities for fiscal 2018 was $9.1 million and includes $24.2 million of proceeds related to the issuance of debt under the Company’s credit facility with Bank of America. Offsetting the cash provided by financing activities in fiscal +2018 is the $11.2 million of cash used to repurchase 826,305 shares of the Company’s common stock at a per share price of $13.60. The purchase of these shares was from a trust +25 +Table of Contents +established by the former founder and chief executive officer of the Company and did not impact the shares available as part of the Company’s stock buyback program. The Company did not +repurchase any shares of its common stock in fiscal 2017 and 2016. At January 31, 2018, there is an ongoing authorization by the Company’s Board of Directors for the purchase of 390,000 shares of the Company’s common stock. Cash +provided or used by financing activities also included cash used to pay dividends of $1.9 million, $2.1 million, and $2.0 million in fiscal 2018, 2017 and 2016, respectively. +Net cash used by investing activities for fiscal 2016 was $3.5 million, which included $10.0 million of proceeds from the sales +and maturities of securities available for sale, which was partially offset by $5.2 million of cash used to purchase securities available for sale, and $7.4 million of cash used to purchase the RITEC aerospace printer business. Cash used +for investing activities in fiscal 2016 also included cash used for capital expenditures of $3.1 million, consisting of $0.9 million for land and building improvements; $0.7 million for information technology primarily related to the +purchase and implementation of the Company’s new Enterprise Resource Planning system; $0.7 million for machinery and equipment; $0.6 million for tools and dies; and $0.2 million for furniture, fixtures and other capital +expenditures. +Contractual Obligations, Commitments and Contingencies +At January 31, 2018, the Company’s contractual obligations with initial remaining terms in excess of one year were as follows: +(In thousands) +Total +Less than +1 Year +1-3 +Years +3-5 +Years +More than +5 Years +Purchase Commitments (1) +$ +21,907 +$ +19,598 +$ +2,287 +$ +— +$ +22 +Debt +23,372 +5,498 +10,048 +7,826 +— +Interest on Debt (2) +2,115 +587 +887 +641 +— +Royalty Obligation (3) +15,000 +1,625 +3,875 +4,000 +5,500 +Operating Lease Obligations +4,034 +726 +1,137 +854 +1,317 +$ +66,428 +$ +28,034 +$ +18,234 +$ +13,321 +$ +6,839 +(1) +Purchase obligations include undiscounted amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to +price, quantity and delivery dates. +(2) +Interest rate on variable rate debt is provided at the effective fixed rate paid by the Company per the hedging arrangements plus the maximum additional margin payable +based on the Company’s consolidated leverage ratio of 1.5%. +(3) +The Company is subject to a guaranteed minimum royalty payment obligation of $15.0 million over the next ten years pursuant to Honeywell Asset Purchase and License +Agreement. Refer to Note 2, “Acquisitions,” in the audited consolidated financial statements included elsewhere in this report for further details. +The Company is also subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, such as: contract and employment claims; workers +compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with +respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on our consolidated financial +position or results of operations. It is possible, however, that results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the +Company’s control. +Critical Accounting Policies and Estimates +Our discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial +statements, which have been prepared in accordance with accounting principles generally +26 +Table of Contents +accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their +nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on the Company’s historical experience, current trends and information available from other sources, as appropriate. If different +conditions result from those assumptions used in our judgments, the results could be materially different from our estimates. We believe the following critical accounting policies require significant judgments and estimates in the preparation of our +consolidated financial statements: +Revenue Recognition : Our product revenue is recognized when all of the following +criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is reasonably assured. When +other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Rights of return are not +included in revenue arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. When a sale arrangement involves training or installation, +the deliverables in the arrangement are evaluated to determine whether they represent multiple element arrangements. This evaluation occurs at inception of the arrangement and as each item in the arrangement is delivered. The total fee from the +arrangement is allocated to each unit of accounting based on its relative fair value. Fair value for each element is established generally based on the revenue price charged when the same or similar element is sold separately. We allocate revenue to +each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on our vendor specific +objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue +recognition criteria for that element has been met. The amount of product revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements. +We recognize revenue for non-recurring engineering (NRE) fees, as necessary, for product +modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine +whether we have obtained customer acceptance for the specific milestone before recognizing revenue. +Infrequently, the Company +receives requests from customers to hold product being purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements provided the transaction meets the following criteria: a valid business purpose +for the arrangement exists; risk of ownership of the purchased product has transferred to the buyer; there is a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the product is ready for shipment; the +payment terms are customary; we have no continuing performance obligation in regards to the product; and the product has been segregated from our inventories. +The majority of our equipment contains embedded operating systems and data management software which are included in the purchase price of the equipment. The software is deemed incidental to the systems +as a whole as it is not sold separately or marketed separately and its production costs are minor as compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered +non-software elements and are not subject to the industry-specific software revenue recognition guidance. +Warranty Claims and Bad Debts: Provisions for the estimated costs for future product warranty claims and bad debts are recorded in cost of revenue and general and administrative expense, +respectively. The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that might impact the historical analysis such as new product introduction for warranty and bankruptcies +of particular customers for bad debts. We also periodically evaluate the adequacy of reserves for +27 +Table of Contents +warranty and bad debts recorded in our consolidated balance sheet as a further test to ensure the adequacy of the recorded provisions. Warranty and bad debt analysis often involves subjective +analysis of a particular customer’s ability to pay. As a result, significant judgment is required in determining the appropriate amounts to record, and such judgments may prove to be incorrect in the future. We believe that our procedures for +estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to the actual amounts. +Inventories: Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. The process +for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on hand and estimating the net realizable value of the inventory based on historical experience, current business conditions and +anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income Taxes: A valuation allowance is established when it is +“more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, including our performance, the +market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the +net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2018, the Company has provided valuation allowances for future state tax benefits resulting from certain R&D tax credits which +could expire unused. +The calculation of tax liabilities involves significant judgment in estimating the impact of +uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of +whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be +materially impacted. +On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted into law and +the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% +effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as +reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), +which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of fiscal 2018, and ongoing guidance and accounting interpretation +are expected over the next 12 months, we consider the accounting of the transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and our ongoing +analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118. Refer to Note 14 “Income Taxes” in the +audited consolidated financial statements included elsewhere in this report for further details +Intangible and Long-Lived +Assets: Long-lived assets, such as definite-lived intangible assets and property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be +recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then +an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows. +Goodwill: Goodwill is tested for impairment at the reporting unit. A reporting unit is an operating segment or a business unit one level below an operating segment if discrete financial information +for that business is +28 +Table of Contents +prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. +Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the +carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this +assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this +qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. The quantitative assessment compares the +fair value of the reporting unit with its carrying value. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair +value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar +business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors +and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net +assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. +Share-Based Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite +service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of +complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on +the historical weekly price data of our common stock over a period equivalent to the weighted-average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the +volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and +the actual vesting schedule of the grants and assessed the expected risk tolerance of different option groups. The risk-free interest rate used in the model is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term +of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite +service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the +Company’s common stock on the date of grant. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture +experience. +Recent Accounting Pronouncements +Reference is made to Note 1 of our audited consolidated financial statements included elsewhere in this report. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +We have exposure to financial market risks, including changes in foreign currency exchange rates and interest rates. +29 +Table of Contents +Financial Exchange Risk +The functional currencies of our foreign subsidiaries and branches are the local currencies – the British Pound in the UK, +the Canadian Dollar in Canada, the Danish Krone in Denmark , the Chinese Yuan in China, and the Euro in France and Germany. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign subsidiaries are +translated to U.S. dollars. The assets and liabilities of our foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at an average +exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The reported results of +our foreign subsidiaries will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency translation exposure is related to our subsidiaries that have functional currencies denominated in +Euro. A hypothetical 10% adverse change in the rates used to translate the results of our foreign subsidiaries would result in an increase or decrease in our consolidated net income of approximately $0.3 million for the year ended +January 31, 2018. +Transactional exposure arises where transactions occur in currencies other than the functional +currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates +prevailing at the balance sheet date and the resulting gains and losses are reported as foreign exchange gain (loss) in the consolidated statements of income. Realized and unrealized foreign exchange losses resulting from transactional exposure were +$0.2 million for the year ended January 31, 2018. +The Company is also subject to risk from the effects of +exchange rate movements in foreign currency through its borrowings, specifically our U.S. dollar borrowing at our Danish Krone functional currency subsidiary. We entered into a cross-currency interest rate swap to hedge the foreign currency cash +flow and interest rate exposures related to the U.S. Dollar floating-rate debt included on the books of our Danish subsidiary (functional currency is Danish Krone). A 10% increase in the rate of exchange of Danish Krone to U.S. Dollars would +result in an increase in our indebtedness of approximately $0.1 million, and a 10% decrease in the rate of exchange of Danish Krone to U.S. Dollars would result in a decrease of our indebtedness of approximately $0.1 million. This impact +is mitigated through our cross-currency interest rate swap. +Interest Rate Risk +The Company has exposure to interest rate risk from its variable rate long-term debt. We entered into interest rate swaps to hedge the +interest rate exposure related to our variable rate debt. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. If interest rates were to decrease by 50 basis +points, the fair value of the Company’s debt would increase by approximately $0.3 million. If interest rates were to increase by 50 basis points, the fair value of the Company’s debt would decrease by approximately +$0.3 million. +At January 31, 2018, we had cash and cash equivalents of $10.2 million, of which +$4.2 million is held for working capital, $3.9 million is held in foreign bank accounts and $2.1 million is held in highly liquid money market funds with original maturities of 90 days or less. We also have $1.5 million of +securities available for sale which include state and municipal securities with maturities ranging from one to thirteen months. We do not enter into investments for trading or speculative purposes. We do not believe that we have material exposure to +changes in fair value of these investments as a result of changes in interest rates due to the short-term nature of these investments. +30 +Table of Contents +Item 8. Financial Statements and Supplementary Data +The consolidated financial statements required under this item are submitted as a separate section of this +report on the pages indicated at Item 15(a)(1). +Item 9. Changes in and Disagreements with +Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of +the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities +Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2018 to ensure that +the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and +our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s +Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing +and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s +internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting +principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect +misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2018. In +making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the +principal executive officer and principal financial officer believe that as of January 31, 2018, the Company’s internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated +Framework.” +Management’s assessment of and conclusion on the effectiveness of internal control over financial +reporting did not include the internal controls of TrojanLabel acquired on February 1, 2017 which is included in our January 31, 2018 consolidated financial statements and constituted approximately $15.0 million of our total assets as +of January 31, 2018 and $7.5 million of our revenues for the year then ended. +The attestation report of the +Company’s registered public accounting firm regarding internal control over financial reporting appears in Part IV, Item 15 of this Form 10-K and is incorporated herein by reference. +Changes in Internal Controls over Financial Reporting +There have been no changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially +affect, our internal control over financial reporting. +Item 9B. Other Information +None. +31 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item is incorporated herein by reference to the Company’s definitive proxy statement for the 2018 +Annual Meeting of Shareholders. +The following sets forth certain information with respect to all executive officers of the +Company. All officers serve at the pleasure of the Board of Directors. +Name +Age +Position +Gregory A. Woods +59 +President, Chief Executive Officer and Director +David S. Smith +61 +Vice President, Chief Financial Officer and Treasurer +Michael M. Morawetz +58 +Vice President—Europe +Stephen M. Petrarca +55 +Vice President—Operations +Michael J. Natalizia +54 +Vice President and Chief Technology Officer +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. +Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from +January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to +2010, Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts. +Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner +of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. Mr. Smith has also held a variety of senior finance positions at semiconductor and manufacturing companies, including Senior Vice President and Chief +Financial Officer of Standard Microsystems Corporation, a global semiconductor company, from 2005 to 2008 and Vice President, Finance and Chief Financial Officer of both Dover Corporation, a diversified global manufacturing company, from 2000 to +2002 and Crane Company, a diversified manufacturing company from 1994 to 2000. +Mr. Morawetz was appointed Vice President +International Branches in 2006. He was previously the General Manager of Branch Operations for the Company’s German subsidiary, having joined the Company in 1989. +Mr. Petrarca was appointed Vice President of Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has +been with the Company since 1980. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company +on March 9, 2012. Prior to this appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +Code of Ethics +The Company has adopted a Code of Conduct which applies to +all directors, officers and employees of the Company, including the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and principal accounting officer which meets the requirements of a “code of ethics” as +defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on the Company’s +website, (www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” The Company intends to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, +principal accounting officer or controller, or persons performing similar functions by posting such information on its website. +32 +Table of Contents +Item 11. Executive Compensation +The information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2018 +Annual Meeting of Shareholders. +The information set forth under the heading “Compensation Committee Report” in the +Company’s definitive Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters +The information required by this item is incorporated herein by reference to the Company’s +definitive Proxy Statement for the 2018 Annual Meeting of Shareholders. +Equity Compensation Plan Information +The following table sets forth information about the Company’s equity compensation plans as of January 31, 2018: +Plan Category +Number of Securities to +be Issued Upon Exercise +of Outstanding +Options, +Warrants and Rights +Weighted- +Average Exercise +Price of +Outstanding +Options, +Warrants +and +Rights +Number of Securities +Remaining Available for +Future Issuance +Under +Equity Compensation Plans +Equity Compensation Plans Approved by Shareholders +912,690 +(1) +$ +12.52 +(2) +54,916 +(3) +Equity Compensation Plans Not Approved by Shareholders +— +— +— +Total +912,690 +(1) +$ +12.52 +(2) +54,916 +(3) +(1) +Includes 554,870 shares issuable upon exercise of outstanding options granted under the Company’s 2007 Equity Incentive Plan; and 190,400 shares issuable upon +exercise of outstanding options granted and 167,420 restricted stock units outstanding under the Company’s 2015 Equity Incentive Plan. +(2) +Does not include restricted stock units. +(3) +Represents 15,709 shares available for grant under the AstroNova, Inc. 2015 Equity Incentive Plan and 39,207 shares available for purchase under the Employee Stock +Purchase Plan. This balance does not include 9,927 shares issued pursuant to outstanding unvested restricted stock awards which are subject to forfeiture. +Additional information regarding these equity compensation plans is contained in Note 13, “Share-Based Compensation,” in the Company’s Consolidated Financial Statements included in +Item 15 hereto. +Item 13. Certain Relationships, Related Transactions and Director +Independence +The information required by this item is incorporated herein by reference to the Company’s +definitive Proxy Statement for the 2018 Annual Meeting of Shareholders. +Item 14. Principal +Accountant Fees and Services +The information required by this item is incorporated herein by reference to the +Company’s definitive Proxy Statement for the 2018 Annual Meeting of Shareholders. +33 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part +of this Annual Report filed on Form 10-K: +Page +Report of Independent Registered Public Accounting Firm +39-40 +Consolidated Balance Sheets as of January 31, 2018 and 2017 +41 +Consolidated Statements of Income—Years Ended January 31, 2018, 2017 and +2016 +42 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2018, 2017 and +2016 +43 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January +31, 2018, 2017 and 2016 +44 +Consolidated Statements of Cash Flows—Years Ended January 31, 2018, 2017 and +2016 +45 +Notes to Consolidated Financial Statements +46-75 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January +31, 2018, 2017 and 2016 +76 +All other schedules for which provision is made in the applicable accounting regulations of the Securities +and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +Item 16. Form 10-K Summary +Not Applicable. +34 +Table of Contents +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Share Purchase Agreement, dated January 7, 2017, +as +amended, by and among ANI ApS, Trojan Holding ApS, as a Seller and as the Sellers’ Representative, and Li Wei Chong filed as Exhibit 2.1 to the Company’s Annual Report on Form 10-K for the year ended January 31, +2017 and incorporated by reference herein* +(3A) +Restated Articles of Incorporation of the Company and all amendments thereto filed as Exhibit 3A +to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(3B) +By-laws of the Company as amended to date filed as Exhibit 3B +to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. 000-13200) and incorporated by reference herein. +(4) +Specimen form of common stock certificate of the Company filed as Exhibit 4 to the Company’s +Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(10.1) +AstroNova, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement +filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 annual shareholders meeting and incorporated by reference herein.** +(10.2) +AstroNova, Inc. Management Bonus Plan (Group III) filed as Exhibit +10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended May 3, 2014 incorporated by reference herein.** +(10.3) +Form of Performance-Based Restricted Stock Unit Award Agreement filed as Exhibit +10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended April 28, 2012 and incorporated by reference herein.** +(10.4) +Equity Incentive Award Agreement dated as of November +24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended January +31, 2015 and incorporated by reference herein.** +(10.5) +Change in Control Agreement dated as of November +24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended January +31, 2015 and incorporated by reference herein.** +(10.6) +AstroNova Inc. 2015 Equity Incentive Plan filed as as Exhibit A to the Definitive Proxy Statement +filed on April 21, 2015 (File No. 000-13200) for the 2015 annual shareholders meeting and incorporated by reference herein.** +(10.7) +Senior Executive Short Term Incentive Plan adopted March +27, 2015 filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended May 2, 2015 and incorporated by reference herein.** +(10.8) +General Manager Employment Contract dated November +18, 2014 by and among AstroNova, Inc. and Michael Morawetz filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended May +2, 2015 and incorporated by reference herein.** +(10.9) +Form of Indemnification Agreement for directors and officers filed as Exhibit +10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 31, 2015 and incorporated by reference herein.** +(10.10) +Credit Agreement dated February +28, 2017 among AstroNova, Inc., as the U.S. Borrower, ANI APS, as the Danish Borrower, Certain Subsidiaries of the U.S. Borrower, as the Guarantors and Bank of America, N.A. filed as Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2017 and incorporated by reference herein. +35 +Table of Contents +Exhibit +Number +(10.11) +Security and Pledge Agreement dated February +28, 2017 among AstroNova, Inc. as the U.S. Borrower and such other parties that become Grantors hereunder after the date hereof and Bank of America, N.A. filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2017 and incorporated by reference herein. +(10.12) +AstroNova, Inc. Amended and Restated Non-Employee Director +Annual Compensation Program filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.13) +Form of Restricted Stock Agreement granted under the Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.2 to the Company’s Quarterly Report on Form +10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.14) +Form of Incentive Stock Option Agreement granted under the 2015 Equity Incentive Plan filed +as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.15) +Form of Non-Statutory Stock Option Agreement granted +under the 2015 Equity Incentive Plan filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.16) +Form of Non-Employee Director Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.5 to the Company’s Quarterly Report on Form +10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.17) +Form of Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.6 +to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.18) +Form of Non-Employee Director Restricted Stock Agreement +granted under the 2015 Equity Incentive Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.19) +Form of Time-Based Restricted Stock Unit Agreement granted under the 2015 Equity Incentive +Plan filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.20) +Form of Performance Restricted Stock Unit Agreement granted under the 2015 Equity Incentive +Plan filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.21) +Stock Purchase Agreement, dated as of May +1, 2017, by and among AstroNova, Inc. and the trust established by Albert W. Ondis by Declaration of Trust dated December +4, 2003, as amended filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date May 1, 2017, filed with the SEC on May 5, 2017 and incorporated by reference +herein. +(10.22) +Consent under Credit Agreement, dated as of May +1, 2017, by and among AstroNova, Inc., ANI ApS, Trojanlabel ApS, and Bank of America, N.A. filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date May +1, 2017, filed with the SEC on May 5, 2017 and incorporated by reference herein. +(10.23) +AstroNova, Inc. Amended and Restated Non-Employee Director +Annual Compensation Program, as amended filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended April 29, 2017 and incorporated by reference +herein.** +36 +Table of Contents +Exhibit +Number +(10.24) +Stock Purchase Agreement, dated as of May +1, 2017, by and among AstroNova, Inc. and the trust established by Albert W. Ondis by Declaration of Trust dated December +4, 2003, as amended filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date May 1, 2017, filed with the SEC on May 5, 2017 and incorporated by reference herein. +(10.25) +Consent under Credit Agreement, dated as of May +1, 2017, by and among AstroNova, Inc., ANI ApS, Trojanlabel ApS, and Bank of America, N.A. filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date May +1, 2017, filed with the SEC on May 5, 2017 and incorporated by reference herein. +(10.26) +Asset Purchase and License Agreement, dated September +28, 2017, by and between AstroNova, Inc. and Honeywell International, Inc. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date September +28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.27) +First Amendment to the Credit Agreement, dated September +28, 2017, by and among AstroNova, Inc., ANI ApS, Trojan Label ApS and Bank of America, N.A. filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event dated September +28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.28) +Second Amendment to the Credit Agreement, dated November +30, 2017, by and among AstroNova, Inc., ANI ApS, Trojan Label ApS and Bank of America, N.A. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event dated November +30, 2017, filed with the SEC on December 6, 2017 and incorporated by reference herein. +(10.29) +Amended and Restated AstroNova, Inc. Employee Stock Purchase Plan filed as Exhibit +10.1 to the Company’s Current Report on Form 8-K/A, event date November 20, 2017, filed with the SEC on December 28, 2017 and incorporated by reference herein. +(10.30) +Letter Agreement dated January 12, 2018 between the Company and David Smith.** +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section +906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section +906 of the Sarbanes-Oxley Act of 2002. +(101) +The following materials from Registrant’s Annual Report on Form 10-K for the year ended January 31, 2018, formatted in XBRL +(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in +Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. Filed electronically herein. +* +Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K. The Company will furnish +copies of any such schedules to the SEC upon request. +** +Management contract or compensatory plan or arrangement. +37 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this +report to be signed on its behalf by the undersigned, thereunto duly authorized. +ASTRONOVA, INC. +(Registrant) +Date: April 10, 2018 +By: +/ S / G REGORY A. +W OODS +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below +by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/ S / G REGORY A. +W OODS +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 10, 2018 +/ S / D AVID S. +S MITH +David S. Smith +Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) +April 10, 2018 +/ S / M ITCHELL I. +Q UAIN +Mitchell I. Quain +Director +April 10, 2018 +/ S / H AROLD +S CHOFIELD +Harold Schofield +Director +April 10, 2018 +/ S / A PRIL +O NDIS +April Ondis +Director +April 10, 2018 +Richard S. Warzala +Director +Yvonne E. Schlaeppi +Director +38 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Shareholders of +AstroNova, Inc. +Opinions on the Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated balance sheets of AstroNova, Inc. (the “Company”) as of January 31, 2018 and +2017, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended January 31, 2018, and the related notes and the financial +statement schedule listed in Item 15(a)(2)(collectively, the financial statements). We also have audited AstroNova, Inc.’s internal control over financial reporting as of January 31, 2018, based on criteria established in Internal +Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company +as of January 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 2018 in conformity with accounting principles generally accepted in the United States of +America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2018, based on criteria established in Internal Control—Integrated Framework +(2013) issued by the COSO. +Basis for Opinion +The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal +control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the +Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with +respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are +free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures +that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant +estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, +assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered +necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +As described in +Management’s Annual Report on Internal Control over Financial Reporting, management has excluded TrojanLabel from its assessment of internal control over financial reporting as of January 31, 2018, because it was acquired by the Company in +a purchase business combination in the first quarter of 2018. We have also excluded TrojanLabel from our audit of internal control over financial reporting. TrojanLabel is a wholly-owned subsidiary whose total assets and total revenues excluded from +management’s assessment and our +39 +Table of Contents +audit of internal control over financial reporting represent $15 million and $7.5 million, respectively, of the related consolidated financial statement amounts as of and for the year +ended January 31, 2018. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability +of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures +that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as +necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors +of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of +any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Wolf & Company, P.C. +We have +served as the Company’s auditor since 2013. +Boston, Massachusetts +April 10, 2018 +40 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2018 +2017 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +10,177 +$ +18,098 +Securities Available for Sale +1,511 +6,723 +Accounts Receivable, net of reserves of $377 in 2018 and $266 in 2017 +22,400 +15,702 +Inventories +27,609 +19,506 +Prepaid Expenses and Other Current Assets +2,083 +1,394 +Total Current Assets +63,780 +61,423 +PROPERTY, PLANT AND EQUIPMENT +Land and Improvements +967 +967 +Buildings and Improvements +12,056 +11,266 +Machinery and Equipment +29,854 +28,145 +42,877 +40,378 +Less Accumulated Depreciation +(33,125 +) +(31,098 +) +Total Property, Plant and Equipment, net +9,752 +9,280 +OTHER ASSETS +Identifiable Intangibles, net +33,633 +5,264 +Goodwill +13,004 +4,521 +Deferred Tax Assets +1,829 +2,811 +Other +315 +366 +Total Other Assets +48,781 +12,962 +TOTAL ASSETS +$ +122,313 +$ +83,665 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +11,808 +$ +4,957 +Accrued Compensation +2,901 +2,936 +Other Accrued Expenses +2,414 +2,171 +Current Portion of Long-Term Debt +5,498 +— +Current Liability —Royalty Obligation +1,625 +— +Current Liability —Excess Royalty Payment Due +615 +— +Income Taxes Payable +684 +1,449 +Deferred Revenue +367 +472 +Total Current Liabilities +25,912 +11,985 +NON CURRENT LIABILITIES +Long-Term Debt, net of current portion +17,648 +— +Royalty Obligation, net of current portion +11,760 +— +Deferred Tax Liabilities +698 +11 +Other Long Term Liabilities +2,648 +1,132 +TOTAL LIABILITIES +58,666 +13,128 +Commitments and Contingencies (See Note 19) +SHAREHOLDERS’ EQUITY +Preferred Stock, $10 Par Value, Authorized 100,000 shares, None Issued +— +— +Common Stock, $0.05 Par Value, Authorized 13,000,000 shares; Issued 9,996,120 shares in 2018 and 9,834,906 shares in +2017 +500 +492 +Additional Paid-in Capital +50,016 +47,524 +Retained Earnings +45,700 +44,358 +Treasury Stock, at Cost, 3,227,942 shares in 2018 and 2,375,076 shares in 2017 +(32,397 +) +(20,781 +) +Accumulated Other Comprehensive Loss, Net of Tax +(172 +) +(1,056 +) +TOTAL SHAREHOLDERS’ EQUITY +63,647 +70,537 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +122,313 +$ +83,665 +See Notes to the Consolidated Financial Statements. +41 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share +Data) +2018 +2017 +2016 +Revenue +$ +113,401 +$ +98,448 +$ +94,658 +Cost of Revenue +69,399 +58,959 +56,500 +Gross Profit +44,002 +39,489 +38,158 +Costs and Expenses: +Selling and Marketing +22,234 +18,955 +18,249 +Research and Development +7,453 +6,314 +6,945 +General and Administrative +8,903 +7,939 +7,030 +Operating Expenses +38,590 +33,208 +32,224 +Operating Income +5,412 +6,281 +5,934 +Other Income (Expense): +Investment Income +168 +78 +72 +Interest Expense +(402 +) +— +— +Other, Net +(21 +) +246 +903 +(255 +) +324 +975 +Income before Income Taxes +5,157 +6,605 +6,909 +Income Tax Provision +1,871 +2,377 +2,384 +Net Income +$ +3,286 +$ +4,228 +$ +4,525 +Net Income Per Common Share—Basic +$ +0.48 +$ +0.57 +$ +0.62 +Net Income Per Common Share—Diluted +$ +0.47 +$ +0.56 +$ +0.61 +Weighted Average Number of Common Shares Outstanding—Basic +6,911 +7,421 +7,288 +Dilutive Effect of Common Stock Equivalents +104 +151 +183 +Weighted Average Number of Common Shares Outstanding—Diluted +7,015 +7,572 +7,471 +Dividends Declared Per Common Share +$ +0.28 +$ +0.28 +$ +0.28 +See Notes to the Consolidated Financial Statements. +42 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2018 +2017 +2016 +Net Income +$ +3,286 +$ +4,228 +$ +4,525 +Other Comprehensive Income (Loss), net of taxes and reclassification adjustments: +Foreign currency translation adjustments +870 +(65 +) +(269 +) +Change in value of derivatives designated as cash flow hedge +(1,036 +) +— +— +Gain from cash flow hedges reclassified to income statement +1,048 +— +— +Unrealized gain (loss) on securities available for sale +2 +(16 +) +(7 +) +Other Comprehensive Income (Loss) +884 +(81 +) +(276 +) +Comprehensive Income +$ +4,170 +$ +4,147 +$ +4,249 +See Notes to the Consolidated Financial Statements. +43 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Treasury +Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Shares +Amount +Balance January 31, 2015 +9,544,864 +$ +477 +$ +43,600 +$ +39,735 +$ +(19,602 +) +$ +(699 +) +$ +63,511 +Share-based compensation +— +— +1,209 +— +— +— +1,209 +Employee option exercises +98,734 +5 +802 +— +(371 +) +— +436 +Tax benefit of employee stock options +— +— +65 +— +— +— +65 +Restricted stock awards vested, net +22,692 +1 +(1 +) +— +(49 +) +— +(49 +) +Dividends paid +— +— +— +(2,048 +) +— +— +(2,048 +) +Net income +— +— +— +4,525 +— +— +4,525 +Other comprehensive loss +— +— +— +— +— +(276 +) +(276 +) +Balance January 31, 2016 +9,666,290 +$ +483 +$ +45,675 +$ +42,212 +$ +(20,022 +) +$ +(975 +) +$ +67,373 +Share-based compensation +— +— +1,019 +— +— +— +1,019 +Employee option exercises +93,483 +5 +834 +— +(451 +) +— +388 +Restricted stock awards vested, net +75,133 +4 +(4 +) +— +(308 +) +— +(308 +) +Dividends paid +— +— +— +(2,082 +) +— +— +(2,082 +) +Net income +— +— +— +4,228 +— +— +4,228 +Other comprehensive loss +— +— +— +— +— +(81 +) +(81 +) +Balance January 31, 2017 +9,834,906 +$ +492 +$ +47,524 +$ +44,358 +$ +(20,781 +) +$ +(1,056 +) +$ +70,537 +Share-based compensation +— +— +1,583 +— +— +— +1,583 +Employee option exercises +90,042 +4 +913 +— +(275 +) +— +642 +Restricted stock awards vested, net +71,172 +4 +(4 +) +— +(103 +) +— +(103 +) +Repurchase of Common Stock +— +— +— +— +(11,238 +) +— +(11,238 +) +Dividends paid +— +— +— +(1,944 +) +— +— +(1,944 +) +Net income +— +— +— +3,286 +— +— +3,286 +Other comprehensive income +— +— +— +— +— +884 +884 +Balance January 31, 2018 +9,996,120 +$ +500 +$ +50,016 +$ +45,700 +$ +(32,397 +) +$ +(172 +) +$ +63,647 +See Notes to the Consolidated +Financial Statements. +44 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2018 +2017 +2016 +Cash Flows from Operating Activities: +Net Income +$ +3,286 +$ +4,228 +$ +4,525 +Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: +Depreciation and Amortization +3,994 +2,431 +2,065 +Amortization of Debt Issuance Costs +34 +— +— +Share-Based Compensation +1,583 +1,019 +1,209 +Deferred Income Tax Provision (Benefit) +744 +174 +(292 +) +Excess Tax Benefit From Share-Based Compensation +— +— +(65 +) +Gain on Sale of UK Property +— +(419 +) +— +Changes in Assets and Liabilities, Net of Impact of Acquisitions: +Accounts Receivable +(4,722 +) +(416 +) +(1,285 +) +Inventories +(5,509 +) +(4,659 +) +600 +Accounts Payable and Accrued Expenses +5,207 +1,426 +151 +Income Taxes Payable +(801 +) +2,187 +412 +Other +(92 +) +982 +407 +Net Cash Provided by Operating Activities +3,724 +6,953 +7,727 +Cash Flows from Investing Activities: +Proceeds from Sales/Maturities of Securities Available for Sale +5,539 +4,029 +9,978 +Purchases of Securities Available for Sale +(321 +) +(400 +) +(5,192 +) +Proceeds from Sale of UK Property +— +474 +— +Acquisition of RITEC’s Aerospace Printer Business +— +— +(7,360 +) +Cash Paid for TrojanLabel Acquisition, net of cash acquired +(9,007 +) +— +— +Cash Paid for Honeywell Asset Purchase and License Agreement +(14,873 +) +— +— +Net Proceeds Received for Sale of Asset Held for Sale +— +— +1,698 +Payments Received on Line of Credit and Note Receivable +85 +256 +395 +Additions to Property, Plant and Equipment +(2,204 +) +(1,238 +) +(3,061 +) +Net Cash Provided (Used) by Investing Activities +(20,781 +) +3,121 +(3,542 +) +Cash Flows from Financing Activities: +Net Proceeds from Common Shares Issued Under Employee Benefit Plans and Employee Stock Option Plans, Net of Payment of Minimum +Tax Withholdings +539 +79 +387 +Purchase of Treasury Stock +(11,238 +) +— +— +Proceeds from Issuance of Long-Term Debt +24,200 +— +— +Change in TrojanLabel Earn Out Liability +(1,438 +) +— +— +Principle Payments on Long-Term Debt +(828 +) +— +— +Payments of Debt Issuance Costs +(234 +) +— +— +Excess Tax Benefit from Share-Based Compensation +— +— +65 +Dividends Paid +(1,944 +) +(2,082 +) +(2,048 +) +Net Cash (Used) Provided by Financing Activities +9,057 +(2,003 +) +(1,596 +) +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +79 +(16 +) +(504 +) +Net (Decrease) Increase in Cash and Cash Equivalents +(7,921 +) +8,055 +2,085 +Cash and Cash Equivalents, Beginning of Year +18,098 +10,043 +7,958 +Cash and Cash Equivalents, End of Year +$ +10,177 +$ +18,098 +$ +10,043 +Supplemental Information: +Cash Paid (Received) During the Period for: +Interest +$ +246 +$ +— +$ +— +Income Taxes, Net of Refunds +$ +1,940 +$ +(84 +) +$ +2,257 +Schedule of non-cash financing activities: +Value of Shares Received in Satisfaction of Option Exercise Price +$ +275 +$ +451 +$ +371 +See Notes to the Consolidated Financial Statements. +45 +Table of Contents +ASTRONOVA, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +January 31, 2018, 2017 and 2016 +Note 1—Summary of Significant Accounting Policies +Basis of +Presentation: The accompanying financial data have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and are presented in conformity with U.S. generally accepted accounting principles +(U.S. GAAP). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year. +Correction of an Accounting Error: The Company has identified an immaterial error in its previously issued financial statements on +Form 10-Q for the period ended October 28, 2017. The error related to the recording of the Honeywell asset purchase and license agreement transaction and as a result, both the intangible assets acquired and royalty obligation incurred were +understated by $4.7 million at October 28, 2017. The impact of the error also resulted in an overstatement of the Company’s net income of approximately $42,000 for the three and six month periods ended October 28, 2017 related to +the additional intangible amortization that should have been recognized during the period. The Company reviewed this accounting error utilizing SEC Staff Accounting Bulletin No. 99, “Materiality” and SEC Staff Accounting Bulletin +No. 108, “Effects of Prior Year Misstatements on Current Year Financial Statements” and determined the impact of the error to be immaterial to any prior period’s presentation. The accompanying consolidated financial statements as +of January 31, 2018 reflect the correction of the aforementioned immaterial error. +Principles of Consolidation: The +consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: Certain amounts in prior year’s financial statements have been reclassified to conform to the current +year’s presentation. +Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP +requires management to make estimates and assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts, inventory valuation, valuation and estimated +lives of intangible assets, impairment of long-lived assets, goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, past +historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates. +Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are considered to be cash +equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. Cash of $3.9 million and $5.1 million was held in foreign bank accounts at January 31, 2018 and 2017, +respectively. +Securities Available for Sale: Securities available for sale are carried at fair value based on quoted +market prices, where available. The difference between cost and fair value, net of related tax effects, is recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity. +Inventories: Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and include material, labor and manufacturing overhead. +Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is +provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and improvements—10 to 45 years; machinery and equipment—3 to 10 years). Depreciation expense was +$1.8 million for fiscal 2018; $1.7 million for fiscal 2017 and $1.6 million for 2016. +46 +Table of Contents +Revenue Recognition: Product revenue is recognized when all of the following +criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is reasonably assured. Returns +and customer credits are infrequent and are recorded as a reduction to revenue. Rights of return are not included in revenue arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before +the customer acceptance criteria are satisfied. Revenue is recorded net of any discounts from list price. Amounts billed to customers for shipping and handling fees are included in revenue, while related shipping and handling costs are included in +cost of revenue. +The majority of our hardware products contain embedded operating systems and data management software which +is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold or marketed separately and its production costs are minor compared to those of the hardware system. Therefore, the +Company’s hardware appliances are considered non-software elements and are not subject to industry-specific software revenue recognition guidance. +Our multiple-element arrangements are generally comprised of a combination of equipment, software, installation and/or training services. +Hardware and software elements are typically delivered at the same time and revenue is recognized when all the revenue recognition criteria for each unit are met. Delivery of installation and training services vary based on certain factors such as +the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are +rendered and accepted by the customer. +We have evaluated the deliverables in our multiple-element arrangements and concluded +that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate +revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on vendor +specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue +recognition criteria for that element have been met. +Infrequently, we recognize revenue for +non-recurring engineering (NRE) fees for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our +NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. NRE fees have not been significant in the periods +presented herein. +We also receive infrequent requests from customers to hold product purchased from us for the customer’s +convenience. Revenue is recognized for such bill and hold arrangements in accordance with the requirements of SEC Staff Accounting Bulletin No. 104 which requires, among other things, the existence of a valid business purpose for the +arrangement; the transfer of ownership of the purchased product; a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the readiness of the product for shipment; the use of customary payment terms; no +continuing performance obligation by us; and segregation of the product from our inventories. +Research and Development +Costs: We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. The following costs are included in research and development expense: salaries and benefits, external engineering +service costs, engineering related information costs and supplies. +Foreign Currency Translation: The financial +statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at +year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the +47 +Table of Contents +average monthly exchange rates in effect during the related period. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our subsidiaries in +Germany, Denmark and China since their undistributed earnings are considered to be permanently invested. Our net foreign exchange losses were $0.2 million for both fiscal 2018 and 2017 and $0.3 million in fiscal 2016. +Advertising: The Company expenses advertising costs as incurred. Advertising costs including advertising production, trade shows +and other activities are designed to enhance demand for our products and amounted to approximately $1.8 million; $1.6 million and $1.6 million in fiscal 2018, 2017 and 2016, respectively. +Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances +indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected +undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. For 2018, 2017 and 2016, there +were no impairment charges for long-lived assets. +Intangible Assets: Intangible assets include the value of customer +and distributor relationships, existing technology and non-competition agreements acquired in connection with business and asset acquisitions and are stated at cost (fair value at acquisition) less accumulated +amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested +for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated +undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a +discounted cash flow analysis. For 2018, 2017 and 2016, there were no impairment charges for intangible assets. +Goodwill: +Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate indicate that the +carrying value of an asset might be impaired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment if discrete financial information for that +business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. We determined that each of our operating +segments (Product Identification and T&M) represents a reporting unit for purposes of goodwill impairment testing. +The accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of +whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this qualitative assessment include macroeconomic conditions, industry and market considerations, +overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair +value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. We estimate the fair +value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating +cash flow performance. In addition, the Company uses the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The +income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the +carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net +48 +Table of Contents +assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. +We performed a qualitative assessment for our fiscal 2018 analysis of goodwill. Based on this assessment, management does not believe that +it is more likely than not that the carrying values of the reporting units exceed their fair values. Accordingly, no quantitative assessment was performed, as management believes that there are no impairment issues in regards to goodwill at this +time. +Income Taxes: We use the liability method of accounting for income taxes. Under this method, deferred tax assets +and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. +The Company’s deferred taxes are presented as non-current in the accompanying consolidated balance sheet. An allowance against deferred tax assets is recognized when it is +more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At January 31, 2018 and 2017, a valuation allowance was provided for deferred tax assets attributable to +certain state R&D credit carryforwards. +AstroNova accounts for uncertain tax positions in accordance with the guidance +provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and +requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and +penalties, accounting in interim periods and disclosure. +In December 2017, +the Tax Cuts and Jobs Act (“Tax Act”) was enacted into law, significantly changing income tax law that affects U.S corporations. Key changes included a corporate tax rate reduction from 35% to 21% effective +January 1, 2018, expensing of certain qualified property, significant changes to the U.S international tax system such as a one-time transition tax on accumulated foreign earnings, and how foreign +earnings are subject to U.S. tax. The Company is required to recognize the effects of the tax law changes in the period of enactment, including the determination of the transition tax and the re-measurement of +deferred taxes as well as to re-assess the realizability of the deferred tax assets. Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax +Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows companies to record provisional amounts related to the effects of the Tax Act during a measurement period not to extend beyond one year +from the enactment date. Due to the timing of the Tax Act and additional guidance and interpretations that may be issued by the U.S. Treasury Department, the Internal Revenue Service and other standard-setting bodies in the future, the Company has +not completed its analysis of the income tax effects of the Tax Act. The provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon the Company’s ongoing analysis of its data and tax positions along +with new guidance from regulators and interpretations of the law. +Net Income Per Common Share: Basic net income per +share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock +awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2018, 2017 and 2016, there were 675,600, 459,700 and 425,200, respectively, of common equivalent shares that were not included in the +computation of diluted net income per common share because their inclusion would be anti-dilutive. +Allowance for Doubtful +Accounts: In circumstances where we are aware of a customer’s inability to meet its financial obligations, an allowance is established. Accounts are individually evaluated on a regular basis and allowances are established to state such +receivables at their net realizable value. The remainder of the allowance is based upon historical write-off experience and current market assessments. +Fair Value Measurement: We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided +in ASC 820, “Fair Value Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction +49 +Table of Contents +between market participants at the measurement date. In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial +instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market +participants would use in pricing a financial instrument based on the best information available in the circumstances. +The +fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or +liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or +liabilities +Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, other +accrued expenses and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short term nature of these instruments. +Share-Based Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award +when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our +estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend +yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that +period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms +of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for +bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the +employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on +the closing market price of the Company’s common stock on the grant date. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based +on actual forfeiture experience. +In the first quarter of fiscal 2017, the Company prospectively adopted the provisions of ASU 2016-09, and, as such, the cash flow from tax benefits that are a result of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) is classified with other income tax +cash flows as an operating activity for the years ended January 31, 2018 and 2017. Tax deductions from certain stock option exercises are treated as being realized when they reduce tax expense and taxes payable in accordance with relevant tax +law. +Derivative Financial Instruments: The Company uses derivative instruments as part of its overall strategy to +manage its exposure to market risks primarily associated with fluctuations in foreign currency exchange rates and interest rates. Derivative instruments are recognized as either assets or liabilities in the balance sheet at fair value. The +accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For derivative +instruments not designated as hedging instruments, the gain or loss is recognized in +50 +Table of Contents +the statement of income during the current period. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based +upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. +For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the +derivative instrument is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the hedged +transaction affects earnings (e.g., in “Interest Expense” when the hedged transactions are interest cash flows associated with floating-rate debt, or “Other, Net” for portions reclassified relating to the remeasurement of the +debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffectiveness portion), or hedge components excluded from the +assessment of effectiveness, are recognized in the statement of income during the current period. +Recent Accounting Pronouncements: +Derivatives and Hedging +In August 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging +Activities.” The objective of this new guidance is to improve the financial reporting of hedging relationships by, among other things, eliminating the requirement to separately measure and record hedge ineffectiveness. ASU 2017-12 is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years (Q1 fiscal 2019 for AstroNova). Early application is permitted +using a modified retrospective method effective as of the beginning of the fiscal year. The Company does not believe that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements. +Goodwill +In +January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350).” ASU 2017-14 simplifies the subsequent measurement of goodwill +impairment. The new guidance eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be +determined by reducing the goodwill balance by the difference between the carrying value and the reporting unit’s fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill +impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU +2017-04 effective February 1, 2017. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. +Business Combinations +In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): +Clarifying the Definition of a Business, ” which clarifies the definition of a business to assist entities with determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard +introduces a screen for determining when assets acquired are not a business (if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then under ASU 2017-01, the asset or group of assets is not a business) and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This +standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted in certain circumstances. The Company elected to adopt ASU 2017-01 in the third quarter of the fiscal 2018 as a result of the Honeywell acquisition and has accounted for this transaction as a purchase of an asset in its condensed consolidated financial statements for the +period ending January 31, 2018. +51 +Table of Contents +Statement of Cash Flows +In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU +2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments. The standard is effective for annual reporting +periods beginning after December 15, 2017 and interim periods within those years (Q1 fiscal 2019 for AstroNova), with early adoption permitted. The Company does not believe the adoption of this guidance will have a material impact on the +Company’s consolidated financial statements. +Revenue Recognition +In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic +606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and +International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. Under the standard, revenue is recognized when a +customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, +and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the +cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We adopted this standard effective February 1, 2018 using the modified retrospective method. The adoption of +this guidance will not have a material impact on the Company’s consolidated financial statements. +Leases +In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 supersedes current guidance related to accounting for leases and is intended to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities in the +balance sheet for operating leases with lease terms greater than twelve months. The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from +leases. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (Q1 fiscal 2020 for AstroNova), with early adoption permitted. +At adoption, this update will be applied using a modified retrospective approach. The Company is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements. +No other new accounting pronouncements, issued or effective during the current year, have had or are expected to have a material impact on +our consolidated financial statements. +Note 2—Acquisitions +Honeywell Asset Purchase and License Agreement +On September 28, 2017, +AstroNova, Inc. entered into an Asset Purchase and License Agreement (the “Honeywell Agreement”) with Honeywell International, Inc. to acquire an exclusive perpetual world-wide license to manufacture Honeywell’s narrow-format flight +deck printers for two aircraft families along with certain inventory used in the manufacturing. The purchase price consisted of an initial upfront payment of $14.6 million in cash. The Honeywell Agreement also provides for guaranteed minimum +royalty payments of $15.0 million, to be paid over the next ten years, based on gross revenues from the sales of the printers, paper and repair services of the licensed products. The royalty rates vary based on the year in which they are paid +or earned and product sold or service provided, and range from single-digit to mid double-digit percentages of gross revenue. +52 +Table of Contents +The Company has evaluated this transaction under Accounting Standard Update (ASU) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” and determined that this transaction should be accounted for as an asset acquisition. Refer to Note 1, +“Summary of Significant Accounting Policies,” for further details on ASU 2017-01. +The initial upfront payment of $14.6 million was paid at the closing of this transaction using borrowings from the Company’s revolving credit facility under its amended Credit Agreement with +Bank of America, N.A. Refer to Note 7, “Revolving Credit Facility” for further details. +The minimum royalty payment +obligation of $15.0 million was recorded at the present value of the minimum annual royalty payments using a present value factor of 2.8%, which is based on the estimated after tax cost of debt for similar companies. The current portion of the +royalty obligation of $1.625 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $11.760 million is reported as a long-term liability on the Company’s consolidated balance +sheet at January 31, 2018. In fiscal 2018, the Company incurred $0.6 million in excess royalty expense, which is included in cost of goods sold in the Company’s consolidated statement of income for the year ended January 31, 2018 +and reported as a current liability on the Company’s consolidated balance sheet at January 31, 2018. +Transaction +costs incurred for this acquisition were $0.3 million and have been included as part of the purchase price. +In connection +with the Honeywell Agreement, the Company also entered into a Transition Services Agreement (“TSA”) with Honeywell related to the transfer of the manufacturing and repair of the licensed printers from their current locations to +AstroNova’s plant in West Warwick, Rhode Island. Subject to the completion of the terms of the TSA by Honeywell International, the Company may make an additional payment of $0.4 million. In addition, under the terms of the TSA, +the Company is required to pay for certain product costs and operating expenses incurred by Honeywell during the period in which product manufacturing is transferred to the Company’s facilities. During 2018, these expenses totaled +$1.1 million and are recorded in general and administrative expenses in the Company’s consolidated income statement for the period ended January 31, 2018. +The assets acquired in connection with the acquisition were recorded by the Company at their estimated relative fair values as of the acquisition date as follows: +(In thousands) +Inventory +$ +1,411 +Identifiable Intangible Assets +26,843 +Total Purchase Price +$ +28,254 +The purchase price, including the initial payment, the minimum royalty payment obligation and the +transaction costs, was allocated based on the relative fair value of the assets acquired. The fair value of the intangible assets acquired was estimated by applying the income approach. These fair value measurements are based on significant inputs +that are not observable in the market and therefore represent a Level 3 measurement as defined in Accounting Standards Codification (ASC) 820, “Fair Value Measurement and Disclosure.” Key assumptions in estimating the fair value of +the intangibles include (1) the remaining life of the intangibles based on the term of the Honeywell Asset Purchase and License Agreement of 10 years, (2) a range of annual earnings projections from $3.9 million – +$5.4 million and (3) the Company’s internal rate of return of 21.0%. +The acquired identifiable intangible +assets are as follows: +(In thousands) +Fair +Value +Useful Life +(Years) +Customer Contract Relationships +$ +26,843 +10 +53 +Table of Contents +Trojan Label +On February 1, 2017, our newly-formed wholly-owned Danish subsidiary, ANI ApS, completed the acquisition of the issued and outstanding equity interests of TrojanLabel ApS (TrojanLabel), a Danish +private limited liability company, pursuant to the terms of a Share Purchase Agreement dated January 7, 2017. Based in Copenhagen, Denmark, TrojanLabel was a manufacturer of products including digital color label presses and specialty printing +systems for a broad range of end markets. Upon consummation of the acquisition, TrojanLabel became an indirect wholly-owned subsidiary of AstroNova. +The purchase price of this acquisition was 62.9 million Danish Krone (approximately $9.1 million), net of cash acquired of 976,000 Danish Krone (approximately $0.1 million), of which 6.4 million +Danish Krone (approximately $0.9 million) was placed in escrow to secure certain post-closing working capital adjustments and indemnification obligations of the sellers. The acquisition was funded using available cash and investment securities. +The sellers of TrojanLabel may be entitled to additional contingent consideration if 80% of specified earnings targets are +achieved by the TrojanLabel business during the seven years following the closing, subject to certain closing working capital adjustments and potential offsets to satisfy the sellers’ indemnification obligations. The contingent consideration +consists of potential earn-out payments to the sellers of between 32.5 million Danish Krone (approximately $5.0 million) if 80% of the specified earnings targets are achieved, 40.6 million Danish +Krone (approximately $5.8 million) if 100% of the specified earnings targets are achieved, and a maximum of 48.7 million Danish Krone (approximately $7 million) if 120% of the specified earnings targets are achieved. The fair value of +contingent consideration is re-evaluated each reporting period and changes are adjusted through earnings. +Subsequent to the acquisition, the Company restructured the operating model for the TrojanLabel business such that most of the sales and some of the expenses of the business would be transferred to other +legal entities of the Company. This caused the expected earnings targets in the Danish entity, which was the basis upon which the contingent consideration was structured, to become unlikely to be met. As a result, during fiscal 2018, the estimated +fair value of the contingent consideration was reduced resulting in the Company recognizing an additional $1.4 million of income for the year which is offset in general and administrative expense on the Company’s Consolidated Income +Statement for the period ended January 31, 2018. +Total acquisition-related costs were approximately $0.7 million, of +which $0.1 million and $0.6 million are included in the general and administrative expenses in the Company’s consolidated statements of income for the years ending January 31, 2018 and January 31, 2017, respectively. The +acquisition was accounted for as a purchase of a business under the acquisition method in accordance with the guidance provided by FASB ASC 805, “Business Combinations.” +The US dollar purchase price of the acquisition has been allocated on the basis of fair value as follows: +(In thousands) +Accounts Receivable +$ +1,322 +Inventory +796 +Other Current Assets +166 +Property, Plant and Equipment +15 +Identifiable Intangible Assets +3,264 +Goodwill +7,388 +Accounts Payable and Other Current Liabilities +(1,821 +) +Other Liability +(114 +) +Contingent Liability (Earnout) +(1,314 +) +Deferred Tax Liability +(695 +) +Total Purchase Price +$ +9,007 +54 +Table of Contents +The fair value of the intangible assets acquired was estimated by applying the income +approach, and the fair value of the contingent consideration liability was estimated by applying the real options method. These fair value measurements are based on significant inputs that are not observable in the market and therefore represent a +Level 3 measurement as defined in ASC 820, “Fair Value Measurement and Disclosure.” Key assumptions in estimating the fair value of the intangibles include (1) remaining life of existing technology acquired based on estimate of +percentage of revenue from 0% – 100% for each product, (2) the Company’s internal rate of return of 19.0% and (3) a range of earnings projections from $121,000 – $1,070,000. Key assumptions in estimating the fair value of +the contingent consideration liability (earnout) include (1) the estimated earnout targets over the next seven years of $407,000–$1,280,000, (2) the probability of success (achievement of the various contingent events) from +1.6%–87.2% and (3) a risk-adjusted discount rate of approximately 1.77%–3.35% used to adjust the probability-weighted earnout payments to their present value. The fair value of the contingent liability is revalued every reporting +period based on updated assumptions. Refer above and to Note 20 “Fair Value Measurements” for further details. +Goodwill of $7.4 million, which is not deductible for tax purposes, represents the excess of the purchase price over the estimated +fair value assigned to the tangible and identifiable intangible assets acquired and liabilities assumed from TrojanLabel. The goodwill recognized is attributable to synergies which are expected to enhance and expand the Company’s overall +product portfolio and opportunities in new and existing markets, future technologies that have yet to be determined and TrojanLabel’s assembled work force. The carrying amount of the goodwill was allocated to the Product Identification segment +of the Company. +The following table reflects the fair value of the acquired identifiable intangible assets and related +estimated useful lives: +(In thousands) +Fair +Value +Useful Life +(Years) +Existing Technology +$ +2,327 +7 +Distributor Relations +937 +10 +Total +$ +3,264 +The Existing Technology intangible asset acquired represents the various technologies TrojanLabel has +developed related to its series of printing presses, including hardware components of the presses and the software utilized to optimize their performance. +Beginning February 1, 2017, the results of operations for TrojanLabel have been included in the Company’s statement of income for period ended January 31, 2018 and are reported as part of +the Product Identification segment. Assuming the acquisition of TrojanLabel had occurred on February 1, 2015, the impact would not have had a material effect on the Company’s results for periods ended January 31, 2017 and 2016, as the +acquisition was not considered a significant subsidiary. +RITEC +On June 19, 2015, we completed the acquisition of the aerospace printer product line for civil and commercial aircraft from Rugged +Information Technology Equipment Corporation (RITEC) under the terms of an Asset Purchase Agreement dated June 18, 2015. The products of RITEC consist of aerospace printers for use in commercial aircraft sold primarily to aircraft +manufacturers, tier one contractors and directly to airlines around the world. Our aerospace printer product line is part of the Test & Measurement (T&M) product group and is reported as part of the T&M segment. The Company began +shipment of the RITEC products in the third quarter of fiscal 2016. +The purchase price of the acquisition was +$7.4 million which was funded using available cash and investment securities. The Company withheld $0.8 million of the purchase price in escrow for twelve months following the acquisition date to support the sellers’ indemnifications +in the event of any breach in the +55 +Table of Contents +representations, warranties or covenants of RITEC. The Company retained $0.1 million from the escrow, which was recorded as other income in the consolidated statement of income for the +period ended January 31, 2017. +The assets acquired consist principally of accounts receivable and certain intangible +assets. Acquisition related costs of approximately $0.1 million are included in the general and administrative expenses in the Company’s consolidated statements of income for fiscal year ended 2016. The acquisition was accounted for under +the acquisition method in accordance with the guidance provided by FASB ASC 805, “Business Combinations.” +The +Company also entered into a Transition Services Agreement, under which RITEC provided transition services and continued to manufacture products in the acquired product line until the Company transitioned the manufacturing to its West Warwick, Rhode +Island facility. The TSA concluded in the third quarter of fiscal 2017 and AstroNova purchased the remaining inventory held by RITEC for $0.2 million. +Also as part of the Asset Purchase Agreement, the Company entered into a License Agreement, which grants RITEC certain rights to use the intellectual property acquired by the Company in the design, +development, marketing, manufacture, sale and servicing of aerospace printers for aircraft sold to the military end-user market and printers sold to other non-aircraft +market segments. RITEC will pay royalties equal to 7.5% of the revenue price on all products sold into the military end-user aircraft market during the first five years of the License Agreement. No royalty +revenue was earned or accrued in fiscal 2018 or 2017. +The purchase price of the acquisition has been allocated on the basis of +the fair value as follows: +(In thousands) +Accounts Receivable +$ +50 +Identifiable Intangible Assets +3,780 +Goodwill +3,530 +Total Purchase Price +$ +7,360 +The fair value of the intangible assets acquired was estimated by applying the income approach. This fair +value measurement is based on significant inputs that are not observable in the market and therefore, represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement and Disclosure.” Key assumptions include (1) a +weighted average cost of capital of 15.5%; (2) a range of earnings projections from $0.1-$0.7 million and (3) a range of contract renewal probability from +30%-100%. +Goodwill of $3.5 million, which is deductible for tax purposes, +represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired from RITEC. The carrying amount of the goodwill was allocated to the T&M segment of the Company. +The following table reflects the fair value of the acquired identifiable intangible assets and related estimated useful lives: +(In thousands) +Fair +Value +Useful Life +(Years) +Customer Contract Relationships +$ +2,830 +10 +Non-Competition Agreement +950 +5 +Total +$ +3,780 +Assuming the acquisition of RITEC occurred on February 1, 2015, the impact on net revenue, net income +and earnings per share would not have been material to the Company for the year ended January 31, 2016, as the acquisition was not considered a significant subsidiary. +56 +Table of Contents +Note 3—Intangible Assets +Intangible assets are as follows: +January 31, 2018 +January 31, 2017 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Net +Carrying +Amount +Miltope: +Customer Contract Relationships +$ +3,100 +$ +(1,438 +) +$ +— +$ +1,662 +$ +3,100 +$ +(1,108 +) +$ +1,992 +RITEC: +Customer Contract Relationships +2,830 +(461 +) +— +2,369 +2,830 +(207 +) +2,623 +Non-Competition Agreement +950 +(491 +) +— +459 +950 +(301 +) +649 +TrojanLabel: +Existing Technology +2,327 +(350 +) +313 +2,290 +— +— +— +Distributor Relations +937 +(99 +) +130 +968 +— +— +— +Honeywell: +Customer Contract Relationships +26,843 +(958 +) +— +25,885 +— +— +— +Intangible Assets, net +$ +36,987 +$ +(3,797 +) +$ +443 +$ +33,633 +$ +6,880 +$ +(1,616 +) +$ +5,264 +There were no impairments to intangible assets during the periods ended January 31, 2018, 2017 and +2016. Amortization expense of $2.2 million; $0.7 million and $0.5 million with regard to acquired intangibles has been included in the consolidated statements of income for years ended January 31, 2018, 2017 and 2016, +respectively. +Estimated amortization expense for the next five years is as follows: +(In thousands) +2019 +2020 +2021 +2022 +2023 +Estimated amortization expense +$ +4,093 +$ +4,165 +$ +4,035 +$ +3,947 +$ +3,943 +Note 4—Securities Available for Sale +Pursuant to our investment policy, securities available for sale include state and municipal securities with various contractual or anticipated maturity dates ranging from 1 to 13 months. These securities +are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss), net of taxes, in shareholders’ equity until realized. Realized gains and losses from the sale of available for +sale securities, if any, are determined on a specific identification basis. A decline in the fair value of any available for sale security below cost that is determined to be other than temporary will result in a write-down of its carrying amount to +fair value. No such impairment charges were recorded for any period presented. All short-term investment securities have original maturities greater than 90 days. +The fair value, amortized cost and gross unrealized gains and losses of the securities are as follows: +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair +Value +(In thousands) +January 31, 2018 +State and Municipal Obligations +$ +1,513 +$ +— +$ +(2 +) +$ +1,511 +January 31, 2017 +State and Municipal Obligations +$ +6,732 +$ +— +$ +(9 +) +$ +6,723 +57 +Table of Contents +The contractual maturity dates of these securities are as follows: +January 31 +2018 +2017 +(In thousands) +Less than one year +$ +1,096 +$ +3,563 +One to two years +415 +3,160 +$ +1,511 +$ +6,723 +Actual maturities may differ from contractual dates as a result of revenue or earlier issuer redemptions. +Note 5—Inventories +The components of inventories are as follows: +January 31 +2018 +2017 +(In thousands) +Materials and Supplies +$ +13,715 +$ +11,865 +Work-in-Progress +1,404 +1,216 +Finished Goods +17,210 +10,270 +32,329 +23,351 +Inventory Reserve +(4,720 +) +(3,845 +) +Balance at January 31 +$ +27,609 +$ +19,506 +Finished goods inventory includes $2.0 million and $1.6 million of demonstration equipment at +January 31, 2018 and 2017, respectively. +Note 6—Accrued Expenses +Accrued expenses consisted of the following: +January 31 +2018 +2017 +(In thousands) +Warranty +$ +575 +$ +515 +Professional Fees +392 +584 +Dealer Commissions +232 +180 +Accrued Payroll & Sales Tax +191 +111 +Product Replacement Cost Reserve +158 +174 +Other +866 +607 +$ +2,414 +$ +2,171 +Note 7—Revolving Line of Credit +On February 28, 2017, the Company and its wholly owned Danish subsidiaries, ANI ApS and TrojanLabel ApS (together, the “Parties”), entered into a Credit Agreement with Bank of America, N.A. +(the “Lender”). The Credit Agreement provided for a term loan to ANI ApS in the principal amount of $9.2 million. The Credit Agreement also provided for a $10.0 million revolving credit facility available to the Company for +general corporate purposes. Upon entry into the Credit Agreement, the Company’s prior credit facility with Wells Fargo Bank was terminated. No loans or other amounts were outstanding or owed under that facility at the time of termination. +In connection with the Honeywell Agreement, on September 28, 2017, the Parties entered into a First Amendment to the +Credit Agreement with the Lender. The First Amendment amended the existing Credit +58 +Table of Contents +Agreement to permit the Honeywell Asset Purchase and License Agreement and temporarily increased the amount available for borrowing under the revolving credit facility from $10.0 million to +$15.0 million. The initial upfront payment of $14.6 million for the Honeywell Agreement was paid using borrowings under the Company’s revolving credit facility. +On November 30, 2017, the Parties entered into a Second Amendment to the Credit Agreement with the Lender. The Second Amendment provided for a term loan to the Company in the principal amount of +$15.0 million, in addition to the revolving credit facility for the Company and the term loan previously borrowed by ANI ApS at the original closing under the Credit Agreement. The proceeds from the term loan were used to repay the entire +$14.6 million principal balance of the revolving loans outstanding under the revolving credit facility. The principal amount of the revolving credit facility which had been temporarily increased to $15.0 million was reduced to $10.0 million +effective upon closing of Second Amendment and the maturity date was extended to November 30, 2022. +Revolving credit loans may +be borrowed, at the Company’s option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Krone. Amounts borrowed under the revolving credit facility bear interest at a rate per annum +equal to, at the Company’s option, either (a) the LIBOR rate (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.0% to 1.5% +based on the Company’s consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal funds’ rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate or +(iii) the LIBOR rate plus 1.00%, plus a margin that varies within a range of 0.0% to 0.5% based on the Company’s consolidated leverage ratio. +As of January 31, 2018, there are no borrowings against the revolving credit facility. The Company is required to pay a commitment fee on the undrawn portion of the revolving credit facility at the +rate of 0.25% per annum . +(8) Debt +Long-term debt in the accompanying condensed consolidated balance sheets is as follows: +January 31 +(In thousands) +2018 +2017 +USD Term Loan with a rate equal to LIBOR plus a margin of 1.0% to 1.5%, (2.85% as of January 31, 2018), and maturity date of +November 30, 2022 +$ +15,000 +$ +— +USD Term Loan with a rate equal to LIBOR plus a margin of 1.0% to 1.5%, (3.06% as of January 31, 2018), and maturity date of +January 31, 2022 +8,372 +— +Debt Issuance Costs, net of accumulated amortization +(226 +) +— +Current Portion of Term Loan +(5,498 +) +— +Long-Term Debt +$ +17,648 +$ +— +The schedule of required principal payments remaining during the next five years on long-term debt +outstanding as of January 31, 2018 is as follows: +(In thousands) +Fiscal 2019 +$ +5,498 +Fiscal 2020 +4,840 +Fiscal 2021 +5,208 +Fiscal 2022 +5,576 +Fiscal 2023 +2,250 +$ +23,372 +On February 28, 2017, the Parties entered into a Credit Agreement with the Lender. The Parties also +entered into a related Security and Pledge Agreement with the Lender. The Credit Agreement provided for a term loan to +59 +Table of Contents +ANI ApS in the amount of $9.2 million. On November 30, 2017, the Parties entered into a Second Amendment to the Credit Agreement with the Lender. The Second Amendment provided for a +term loan to the Company in the principal amount of $15.0 million, in addition to the revolving credit facility for the Company and the term loan previously borrowed by ANI ApS at the original closing under the Credit Agreement. The proceeds +from the term loan were used to repay the entire $14.6 million principal balance of the revolving loan outstanding under the revolving credit facility as of that date. +The term loans bear interest at a rate per annum equal to the LIBOR rate plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio. +In connection with the Credit Agreement, AstroNova and ANI ApS entered into certain hedging arrangements with the Lender to +manage the variable interest rate risk and currency risk associated with its payments in respect of the $9.2 million term loan. In connection with the Second Amendment to the Credit Agreement, AstroNova entered into certain hedging arrangements +with the Lender to manage the variable interest rate risk and currency exchange risk associated with its payments in respect of the $15.0 million term loan. Refer to Note 9, “Derivative Financial Instruments and Risk Management” for +further information about these arrangements. +The Parties must comply with various customary financial and non-financial covenants under the Credit Agreement. The financial covenants consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The Credit Agreement contains +limitations, in each case subject to various exceptions and thresholds, on the Company’s and its subsidiaries’ ability to incur future indebtedness, to place liens on assets, to conduct mergers or acquisitions, to sell assets, to alter +their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness. The Credit Agreement permits the Company to pay cash dividends on and repurchase shares of its common stock, +subject to certain limitations. +In connection with the May 1, 2017 stock repurchase (refer to Note 12, +“Shareholders’ Equity”), the Parties entered into a consent and amendment with the Lender, dated as of May 1, 2017, relating to the Credit Agreement solely for purposes of effecting the stock repurchase. The amendment increased +the aggregate amount of certain repurchases of Company equity interests permitted to be made by the Company under the Credit Agreement in the Company’s fiscal year ending January 31, 2018, from $5.0 million to $12.0 million, +subject to certain conditions. The amendment prohibited the Company from making other repurchases of Company equity interests under such permission in the fiscal year ending January 31, 2018. The amendment also provides that the aggregate +amount paid in cash by the Company to effect the stock repurchase shall not be deducted from the Company’s consolidated EBITDA for the purposes of calculating the consolidated fixed charge coverage ratio covenant to which the Company is subject +under the Credit Agreement with respect to any trailing four-fiscal-quarter measurement period through and including the measurement period ending January 31, 2018. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Credit Agreement upon the occurrence of any of various customary events of default, +which include, among other events, the following: failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of the Company’s covenants or representations under the loan documents, default under any +other of the Company’s or its subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to the Company or any of its subsidiaries, a significant unsatisfied judgment against the Company or +any of its subsidiaries, or a change of control of the Company. +The obligations of ANI ApS in respect of the $9.2 million +term loan are guaranteed by the Company and TrojanLabel. The Company’s obligations in respect of the $15.0 million term loan, revolving credit facility and its guarantee in respect of the ANI ApS term loan are secured by substantially all +of the assets of the Company (including a pledge of a portion of the equity interests held by the Company in ANI ApS and the Company’s wholly-owned German subsidiary Astro-Med GmbH), subject to certain +exceptions. +60 +Table of Contents +As of January 31, 2018, we believe the Company is in compliance with all of the +covenants in the Credit Agreement. +(9) Derivative Financial Instruments and Risk Management +The Company has entered into a cross-currency interest rate swap to manage the interest rate risk and foreign currency exchange risk +associated with the floating-rate foreign currency-denominated term loan borrowing by our Danish Subsidiary and an interest rate swap to manage the interest rate risk associated with the variable rate $15.0 million term loan borrowing by the +Company. In accordance with the guidance in ASC 815, both swaps have been designated as cash flow hedges of floating-rate borrowings. +The cross-currency interest rate swap agreement utilized by the Company effectively modifies the Company’s exposure to interest rate risk and foreign currency exchange rate risk by converting +approximately $8.9 million of the Company’s floating-rate debt denominated in U.S. Dollars on our Danish subsidiary’s books to a fixed-rate debt denominated in Danish Krone for the term of the loan, thus reducing the impact of +interest-rate and foreign currency exchange rate changes on future interest expense and principal repayments. This swap involves the receipt of floating rate amounts in U.S. Dollars in exchange for fixed-rate interest payments in Danish Krone, as +well as exchanges of principal at the inception spot rate, over the life of the term loan. As of January 31, 2018, the total notional amount of the Company’s cross-currency interest rate swap was $7.8 million and is included in other +long term liabilities in the Company’s consolidated balance sheet at January 31, 2018, at its fair value amount of $1.5 million. +The interest rate swap agreement utilized by the Company on the $15.0 million term loan effectively modifies the Company’s exposure to interest rate risk by converting the Company’s +floating-rate debt to fixed-rate debt for the next five years, thus reducing the impact of interest-rate changes on future interest expense. This swap involves the receipt of floating rate amounts in U.S. dollars in exchange for fixed rate payments +in U.S. dollars over the life of the term loan. As of January 31, 2018, the total notional amount of the Company’s interest rate swap was $14.3 million and is included in other assets in the Company’s consolidated balance sheet +at January 31, 2018 at its fair value amount of $0.1 million. +The following tables present the impact of the +derivative instruments in our condensed consolidated financial statements for the years ended January 31, 2018 and 2017: +Years Ended +Amount of Gain +(Loss) +Recognized in +OCI +on +Derivative +(Effective Portion) +Location of Gain +(Loss) +Reclassified from +Accumulated OCI +into +Income +(Effective Portion) +Amount of Gain +(Loss) +Reclassified +from +Accumulated OCI into +Income +(Effective Portion) +Cash Flow Hedge +(In thousands) +January 31, +2018 +January 31, +2017 +January 31, +2018 +January 31, +2017 +Swap contracts +$ +(1,330 +) +$ +— +Other Income (Expense) +$ +(1,344 +) +$ +— +The swap contracts resulted in no ineffectiveness for the period ended January 31, 2018, and no gains +or losses were reclassified into earnings as a result of the discontinuance of the swap contracts due to the original forecasted transaction no longer being probable of occurring. At January 31, 2018, the Company expects to reclassify +approximately $0.2 million of net gains on the swap contracts from accumulated other comprehensive income (loss) to earnings during the next 12 months due to changes in foreign exchange rates and the payment of variable interest associated with +the floating-rate debt. +Note 10—Sale of Property +In December of 2016, we sold our Slough UK real estate and related machinery, computers and equipment at that location. Proceeds from the sale amounted to $0.5 million (0.4 million in British +Pounds) and a gain of +61 +Table of Contents +$0.4 million was recognized in other income in the Company’s consolidated statement of income for the period ended January 31, 2017. Our UK branch is currently leasing property for +its operations in Maidenhead, UK. +Note 11—Accumulated Other Comprehensive Loss +The changes in the balance of accumulated other comprehensive loss by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Unrealized Holding +Gain +(Loss) +on Available for +Sale Securities +Net +Unrealized +Gain (Losses) +on Cash Flow +Hedges +Total +Balance at January 31, 2015 +$ +(714 +) +$ +15 +$ +— +$ +(699 +) +Other Comprehensive Loss +(269 +) +(7 +) +— +(276 +) +Amounts Reclassified to Net Income +— +— +— +— +Net Other Comprehensive Loss +(269 +) +(7 +) +— +(276 +) +Balance at January 31, 2016 +$ +(983 +) +$ +8 +— +$ +(975 +) +Other Comprehensive Loss +(65 +) +(16 +) +— +(81 +) +Amounts Reclassified to Net Income +— +— +— +— +Net Other Comprehensive Loss +(65 +) +(16 +) +— +(81 +) +Balance at January 31, 2017 +$ +(1,048 +) +$ +(8 +) +$ +— +$ +(1,056 +) +Other Comprehensive Income (Loss) before reclassification +870 +2 +(1,036 +) +(164 +) +Amounts reclassified from AOCI to Earnings +— +— +1,048 +1,048 +Other Comprehensive Income +870 +2 +12 +884 +Balance at January 31, 2018 +$ +(178 +) +$ +(6 +) +$ +12 +$ +(172 +) +The amounts presented above in other comprehensive loss are net of taxes except for translation +adjustments associated with our German and Danish subsidiaries +Note 12—Shareholders’ Equity +During fiscal 2018, 2017 and 2016, certain of the Company’s employees delivered a total of 26,561, 51,531 and 29,939 shares, +respectively, of the Company’s common stock to satisfy the exercise price and related taxes for stock options exercised and restricted stock vesting. The shares delivered were valued at a total of $0.4 million, $0.8 million and +$0.4 million, respectively, and are included in treasury stock in the accompanying consolidated balance sheets at January 31, 2018, 2017 and 2016. These transactions did not impact the number of shares authorized for repurchase under the +Company’s current repurchase program. +On May 1, 2017, the Company entered into a stock repurchase agreement to +repurchase 826,305 shares of the Company’s common stock held by a trust established by Albert W. Ondis at a per share price of $13.60, for an aggregate repurchase price of $11.2 million. This stock repurchase was consummated on May 2, +2017 and was funded using existing cash on hand. Following this stock repurchase, the Ondis trust owns 36,000 shares of the Company’s common stock. +April L. Ondis, a director of the Company, is a beneficiary of the trust. The stock repurchase was authorized and approved by the Company’s Audit Committee as a related party transaction. Prior to +entering into the agreement, the Company obtained an opinion from an independent investment banking firm that the consideration to be paid by the Company to the trust pursuant to the stock repurchase agreement would be fair to the public +stockholders of the Company, other than the trust, from a financial point of view. +As of January 31, 2018, the +Company’s Board of Directors has authorized the purchase of up to an additional 390,000 shares of the Company’s common stock on the open market or in privately negotiated transactions. +62 +Table of Contents +Note 13—Share-Based Compensation +The Company maintains the following share-based compensation plans: +Stock Plans: +We have one equity incentive plan pursuant to which we grant equity awards – the 2015 Equity Incentive Plan (the “2015 Plan”). Under this plan, the Company may grant incentive stock +options, non-qualified stock options, stock appreciation rights, time or performance-based restricted stock units (RSUs), restricted stock awards (RSAs), and other stock-based awards to executives, key +employees, directors and other eligible individuals. The 2015 Plan will expire in May 2025. Options granted to employees under the plan vest over four years and expire after ten years. The exercise price of each stock option is established at the +discretion of the Compensation Committee; however, all options granted under the 2015 Plan must be issued at an exercise price of not less than the fair market value of the Company’s common stock on the date of grant. The 2015 Plan authorizes +the issuance of up to 500,000 shares (subject to adjustment for stock dividends and stock splits), and at January 31, 2018, 15,709 shares were available for grant under the 2015 Plan. Subsequent to January 31, 2018 un-earned performance-based shares under the Management Long Term Incentive Plan and certain other awards were forfeited, which increased the number of shares available for grant to 100,463. In addition, as of +January 31, 2018, 3,290 unvested shares of restricted stock granted and options to purchase an aggregate of 554,870 shares were outstanding under our 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan expired in May 2017 and +no new awards may be issued under that plan, but outstanding awards will continue to be governed by it. +Under the 2015 Plan, +each non-employee director receives an automatic annual grant of ten-year options to purchase 5,000 shares of stock upon the adjournment of each annual shareholders +meeting. Each such option is exercisable at the fair market value of the Company’s common stock as of the grant date, and vests immediately prior to the next annual shareholders’ meeting. Accordingly, on May 17, 2017, 30,000 options +were issued to the non-employee directors. +The Company has a Non-Employee Director Annual Compensation Program (the “Program”) under which each non-employee director receives an automatic grant of RSAs on the first business +day of each fiscal quarter. Under the Program, the number of whole shares to be granted each quarter is equal to 25% of the number calculated by dividing the director compensation amount by the fair market value of the Company’s stock on such +day. The director annual compensation amount was $55,000 in fiscal year 2017, is $65,000 in fiscal year 2018 and will be $75,000 in fiscal year 2019. In addition, the Chairman of the Board receives RSAs with an aggregate value of $6,000, and the +Chairs of the Audit and Compensation Committees each receive RSAs with an aggregate value of $4,000, also issued in quarterly installments and calculated in the same manner as the directors’ RSA grants. RSAs granted prior to March 30, 2017 +become fully vested on the first anniversary of the date of grant. RSAs granted subsequent to March 30, 2017 become vested three months after the date of grant. A total of 28,062 and 11,379 shares were awarded to the non-employee directors as compensation under the Program in fiscal 2018 and 2017, respectively. +In April 2013 (fiscal year 2014), the Company granted options and RSUs to officers (“2014 RSUs”). The 2014 RSUs vested as follows: twenty-five percent vested on the third anniversary of the +grant date, fifty percent vested upon the Company achieving its cumulative budgeted net revenue target for fiscal years 2014 through 2016 (the “Measurement Period”), and twenty-five percent vested upon the Company achieving a target +average annual ORONA (operating income return on net assets as calculated under the Domestic Management Bonus Plan) for the Measurement Period. The grantee may not sell, transfer or otherwise dispose of more than fifty percent of the common stock +issued upon vesting of the 2014 RSUs until the first anniversary of the vesting date. In April 2016, 9,300 of the 2014 RSUs vested, as the Company achieved the targeted average annual ORONA, as defined in the plan, for the Measurement Period and +another 9,300 vested as a result of the third year anniversary date of the grant. Additionally, on February 1, 2014, the Company accelerated the vesting of 4,166 of the 2014 RSUs held by Everett Pizzuti in connection with his retirement. +In March 2015 (fiscal year 2016), the Company granted 50,000 options and 537 RSAs to its Chief Executive Officer pursuant to +the CEO Equity Incentive Agreement, and 35,000 options to other key employees. +63 +Table of Contents +In May 2015 (fiscal year 2016), the Company granted an aggregate of 80,000 time-based +and 155,000 performance-based RSUs (“2016 RSUs”) to certain officers of the Company. The time-based 2016 RSUs vest in four equal annual installments commencing on the first anniversary of the grant date. The performance-based 2016 RSUs +vest over three years based upon the increase in revenue, if any, achieved each fiscal year relative to a three-year revenue increase goal. Performance-based 2016 RSUs that are earned based on organic revenue growth are fully vested when earned, +while those earned based on revenue growth via acquisitions vest annually over a three-year period following the fiscal year in which the revenue growth occurs. Any performance-based 2016 RSUs that have not been earned at the end of the three-year +performance period will be forfeited. The expense for such shares is recognized in the fiscal year in which the results are achieved, however, the shares are not fully vested until approved by the Compensation Committee in the first quarter of the +following fiscal year. Based upon revenue in fiscal 2018, 2017 and 2016, 33,638, 9,025 and 15,810 shares of the performance based RSUs were earned in the first quarter of fiscal 2019, 2018 and 2017, respectively. +In March 2016 (fiscal year 2017), the Company granted 50,000 options and 4,030 RSAs to its Chief Executive Officer pursuant to an Equity +Incentive Award Agreement dated as of November 24, 2014 (the “CEO Equity Incentive Agreement”). +In May 2016 (fiscal +year 2017) the Company granted 37,000 options to certain key employees. On August 1, 2016 (fiscal year 2017) the Company granted 5,000 options to its Chief Financial Officer. +In March 2017 (fiscal year 2018), the Company granted 50,000 options to the Chief Executive Officer pursuant to the CEO Equity Incentive +Agreement. In February and April 2017 the Company granted 52,189 options to certain other key employees. In December 2017, upon election to the Board, the Company granted 5,000 non-qualified options and 675 RSUs to a Board member. In January 2018, +the Company granted 50,000 non-qualified options and 15,000 RSUs to the newly appointed Chief Financial Officer. +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +Years Ended January 31 +2018 +2017 +2016 +(In thousands) +Stock Options +$ +437 +$ +321 +$ +286 +Restricted Stock Awards and Restricted Stock Units +1,134 +685 +912 +Employee Stock Purchase Plan +12 +13 +11 +Total +$ +1,583 +$ +1,019 +$ +1,209 +64 +Table of Contents +Stock Options: +Aggregated information regarding stock options granted under the plans is summarized below: +Number +of Shares +Weighted- +Average +Exercise +Price Per +Share +Options Outstanding, January 31, 2015 +656,011 +$ +10.01 +Options Granted +115,000 +13.95 +Options Exercised +(93,344 +) +7.95 +Options Forfeited +(5,550 +) +12.75 +Options Cancelled +(14,181 +) +8.82 +Options Outstanding, January 31, 2016 +657,936 +$ +11.00 +Options Granted +122,000 +14.82 +Options Exercised +(87,107 +) +8.73 +Options Forfeited +(4,250 +) +13.91 +Options Cancelled +(3,123 +) +8.95 +Options Outstanding, January 31, 2017 +685,456 +$ +11.96 +Options Granted +187,189 +13.57 +Options Exercised +(84,025 +) +10.08 +Options Forfeited +(18,750 +) +14.49 +Options Cancelled +(24,600 +) +11.76 +Options Outstanding, January 31, 2018 +745,270 +$ +12.52 +Set forth below is a summary of options outstanding at January 31, 2018: +Outstanding +Exercisable +Range of +Exercise prices +Number of +Shares +Weighted- +Average +Exercise Price +Weighted- +Average +Remaining +Contractual Life +Number of +Shares +Weighted- +Average +Exercise Price +Weighted +Average +Remaining +Contractual +Life +$5.00-10.00 +154,656 +$ +7.82 +2.90 +154,656 +$ +7.82 +2.90 +$10.01-15.00 +540,614 +$ +13.64 +7.68 +261,575 +$ +13.49 +6.66 +$15.01-20.00 +50,000 +$ +15.01 +8.12 +12,500 +$ +15.01 +8.12 +745,270 +$ +12.52 +6.72 +428,731 +$ +11.49 +5.35 +The fair value of each stock option granted was estimated on the grant date using the Black-Scholes +option-pricing model with the following weighted-average assumptions: +Years Ended January 31 +2018 +2017 +2016 +Risk-Free Interest Rate +1.9 +% +1.4 +% +1.6 +% +Expected Life (years) +9 +5 +5 +Expected Volatility +39.0 +% +28.3 +% +22.7 +% +Expected Dividend Yield +2.0 +% +1.9 +% +2.0 +% +The weighted-average estimated fair value of options granted during fiscal 2018, 2017 and 2016 was $4.79, +$3.22 and $2.43, respectively. As of January 31, 2018, there was $0.9 million of unrecognized compensation expense related to the unvested stock options granted under the plans. This expense is expected to be recognized over a +weighted-average period of 2.7 years. +As of January 31, 2018, the aggregate intrinsic value (the aggregate difference +between the closing stock price of the Company’s common stock on January 31, 2018, and the exercise price of the outstanding options) +65 +Table of Contents +that would have been received by the option holders if all options had been exercised was $1.0 million for all exercisable options and $1.0 million for all options outstanding. The +total aggregate intrinsic value of options exercised during 2018, 2017 and 2016 was $0.4 million, $0.6 million, and $0.6 million, respectively +Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs): +Aggregated information regarding RSUs and RSAs granted under the Plan is summarized below: +RSAs & RSUs +Weighted-Average +Grant Date Fair Value +Outstanding at January 31, 2015 +72,245 +$ +9.70 +Granted +246,335 +14.05 +Vested +(22,692 +) +14.02 +Forfeited +(2,800 +) +10.07 +Outstanding at January 31, 2016 +293,088 +$ +13.02 +Granted +24,839 +14.89 +Vested +(75,133 +) +12.05 +Forfeited +(28,926 +) +11.49 +Outstanding at January 31, 2017 +213,868 +$ +14.08 +Granted +43,737 +13.78 +Vested +(71,171 +) +14.12 +Forfeited +(9,087 +) +14.05 +Outstanding at January 31, 2018 +177,347 +$ +13.99 +As of January 31, 2018, there was $0.6 million of unrecognized compensation expense related to +unvested RSUs and RSAs. This expense is expected to be recognized over a weighted average period of 1.08 years. +Employee Stock Purchase +Plan (ESPP): +AstroNova’s ESPP allows eligible employees to purchase shares of common stock at a 15% discount from +fair market value on the date of purchase. A total of 247,500 shares were initially reserved for issuance under this plan. Summarized plan activity is as follows: +Years Ended January 31 +2018 +2017 +2016 +Shares Reserved, Beginning +45,224 +51,600 +57,005 +Shares Purchased +(6,017 +) +(6,376 +) +(5,405 +) +Shares Reserved, Ending +39,207 +45,224 +51,600 +Note 14—Income Taxes +The components of income before income taxes are as follows: +January 31 +2018 +2017 +2016 +(In thousands) +Domestic +$ +2,110 +$ +4,026 +$ +5,982 +Foreign +3,047 +2,579 +927 +$ +5,157 +$ +6,605 +$ +6,909 +66 +Table of Contents +The components of the provision for income taxes are as follows: +January 31 +2018 +2017 +2016 +(In thousands) +Current: +Federal +$ +592 +$ +1,269 +$ +1,930 +State +251 +209 +470 +Foreign +284 +725 +276 +1,127 +2,203 +2,676 +Deferred: +Federal +$ +903 +$ +150 +$ +(402 +) +State +(25 +) +37 +126 +Foreign +(134 +) +(13 +) +(16 +) +744 +174 +(292 +) +$ +1,871 +$ +2,377 +$ +2,384 +On December 22, 2017, the President signed +the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote +down our net deferred tax assets as of January 31, 2018 by $1.0 million to reflect the estimated impact of the Tax Act. Accordingly, we recorded a corresponding provisional net +one-time non-cash charge of $1.0 million, related to re-measurement of certain net deferred tax assets using the lower +U.S. corporate income tax rate. The Company was capable of reasonably estimating the impact of the reduction to the U.S. Corporate tax rate on the deferred tax balances, however, the estimate may be affected by other aspects of the Tax Act. +The Tax Act taxes certain unrepatriated earnings and profits (E&P) of our foreign subsidiaries. In order to determine the +Transition Tax, we must determine, along with other information, the amount of our accumulated post-1986 E&P for our foreign subsidiaries, as well as the non U.S. income tax paid by those subsidiaries on such E&P. We were capable of +reasonably estimating the one-time deemed repatriation tax and recorded a provisional expense of $0.1 million. +While we have substantially completed our provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects, the net +one-time charge related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of our calculations, changes in interpretations and assumptions that we have made, +additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions we may take as a result of the Tax Act. We will complete our analysis over a one-year +measurement period ending December 22, 2018, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are +determined. +The Company’s effective tax rate for 2018 was 36.3% compared to 36.0% in 2017 and 34.5% in 2016. The increase +in 2018 from 2017 is primarily related to provisional Tax Act tax expenses related to the remeasurement of U.S. deferred tax assets and liabilities and the Transition Tax, substantially offset by increased R&D credits resulting from a completed +study, a decrease in non-deductible transaction costs, the non-taxable TrojanLabel earn out liability adjustment in TrojanLabel ApS, and a decrease in unrecognized tax +benefits. The increase in 2017 from 2016 is primarily related to non-deductible transaction costs and increased unrecognized tax benefits. The provision for income taxes differs from the amount computed by +applying the United States federal statutory +67 +Table of Contents +income tax rate of 32.9% (34% for FY16 and FY17) to income before income taxes. The reasons for this difference were due to the following: +January 31 +2018 +2017 +2016 +(In thousands) +Income Tax Provision at Statutory Rate +$ +1,697 +$ +2,246 +$ +2,349 +U.S Corporate Rate Change +1,010 +— +— +State Taxes, Net of Federal Tax Effect +149 +162 +277 +Transition Tax on Repatriated Earnings +104 +— +— +Capitalized Transaction Costs +— +179 +— +Unrecognized State Tax Benefits +(20 +) +165 +(67 +) +Domestic Production Deduction +(47 +) +(103 +) +(134 +) +Return to Provision Adjustment +(122 +) +(75 +) +— +TrojanLabel Earn Out Liability Adjustment +(316 +) +— +— +R&D Credits +(537 +) +(168 +) +(176 +) +Other +(47 +) +(29 +) +135 +$ +1,871 +$ +2,377 +$ +2,384 +The components of deferred income tax expense arise from various temporary differences and relate to items +included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31 +2018 +2017 +(In thousands) +Deferred Tax Assets: +Inventory +$ +1,648 +$ +2,151 +Honeywell Royalty Liability +3,382 +— +State R&D Credits +1,161 +679 +Share-Based Compensation +399 +546 +Compensation Accrual +194 +281 +Warranty Reserve +139 +192 +Unrecognized State Tax Benefits +138 +241 +Deferred Service Contract Revenue +84 +176 +Foreign Tax Credit +— +508 +Other +176 +348 +7,321 +5,122 +Deferred Tax Liabilities: +Intangibles +3,679 +— +Accumulated Tax Depreciation in Excess of Book Depreciation +1,028 +1,380 +Other +322 +263 +5,029 +1,643 +Subtotal +2,292 +3,479 +Valuation Allowance +(1,161 +) +(679 +) +Net Deferred Tax Assets +$ +1,131 +$ +2,800 +The valuation allowance of $1.2 million at January 31, 2018 and $0.7 million at +January 31, 2017 related to state research and development tax credit carryforwards which are expected to expire unused. The valuation allowance increased $0.5 million in 2018 and $0.1 million in 2017 due to the decrease in the +Federal tax effect of state taxes from the Federal rate reduction provided for in the Tax Act and the generation of research and development credits in excess of the Company’s ability to currently utilize credits, and the decision to fully +68 +Table of Contents +reserve for the state tax benefits of all R&D tax credit carryforwards, net of the federal benefit. The Company has reached this conclusion after considering the availability of taxable +income in prior carryback years, tax planning strategies, and the likelihood of future state taxable income and credits exclusive of reversing temporary differences and carryforwards in the relevant state jurisdiction. +We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax +expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows: +2018 +2017 +2016 +(In thousands) +Balance at February 1 +$ +708 +$ +591 +$ +707 +Increases in prior period tax positions +— +75 +— +Increases in current period tax positions +55 +133 +49 +Reductions related to lapse of statute of limitations +(98 +) +(91 +) +(165 +) +Balance at January 31 +$ +665 +$ +708 +$ +591 +If the $0.7 million balance as of January 31, 2018 is recognized, $0.6 million would +decrease the effective tax rate in the period in which each of the benefits is recognized and the remainder would be offset by a reversal of deferred tax assets. +During fiscal 2018, 2017 and 2016, the Company recognized an expense of $24,000; an expense of $52,000 and a benefit of $87,000, respectively, related to a change in interest and penalties, which are +included as a component of income tax expense in the accompanying statements of income. The Company has accrued potential interest and penalties of $0.4 million and $0.4 million at the end of January 31, 2018 and 2017, respectively. +The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and +various foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for fiscal years ended prior to January 2014. +U.S. income taxes have been provided on deemed repatriated earnings of $5.2 million related to our non-U.S. companies as of January 31, 2018, as a +result of the enactment of the Tax Act. The additional net transition tax of $104,000 on the deemed repatriated earnings was recorded as a provisional estimate for fiscal 2018. Before the Tax Act, U.S. income taxes and foreign withholding taxes +have not been provided on earnings of $5.2 million that have not been distributed by our non-U.S. companies as of January 31, 2018. Our intention before enactment of the Tax Act was to permanently +reinvest these earnings, thereby indefinitely postponing their remittance to the U.S. We are currently evaluating our intention concerning repatriation of foreign earnings in light of the Tax Act. +Note 15—Nature of Operations, Segment Reporting and Geographical Information +The Company’s operations consist of the design, development, manufacture and sale of specialty printers and data acquisition and +analysis systems, including both hardware and software and related consumable supplies. The Company organizes and manages its business as a portfolio of products and services designed around a common theme of data acquisition and information +output. The Company has two reporting segments consistent with its revenue product groups: Product Identification and Test & Measurement (T&M). +The Product Identification segment produces an array of high-technology digital color and monochrome label printers and mini presses, labeling software and consumables for a variety of commercial +industries worldwide. AstroNova’s T&M segment produces data acquisition systems used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, +energy, industrial and general manufacturing. +69 +Table of Contents +Business is conducted in the United States and through foreign affiliates in Canada, +Europe, China, Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United States are conducted through wholly-owned entities and, to a lesser extent, through +authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction. +On September 28, 2017, AstroNova entered into the Honeywell Agreement to acquire the exclusive perpetual world-wide license to manufacture Honeywell’s narrow format flight deck printers for two +aircraft families. Revenue from the sales of these printers is reported as part of our Product Identification segment beginning in the third quarter of fiscal 2018. Refer to Note 2, “Acquisitions,” for further details. +On February 1, 2017, AstroNova completed its acquisition of TrojanLabel. TrojanLabel is reported as part of our Product +Identification segment beginning with the first quarter of fiscal 2018. Refer to Note 2, “Acquisitions,” for further details. +On June 19, 2015, AstroNova completed the asset purchase of the aerospace printer product line from RITEC. AstroNova’s aerospace printer product line is part of the T&M product group and is +reported as part of the T&M segment. The Company began shipment of the RITEC products in the third quarter of fiscal 2016. Refer to Note 2, “Acquisitions,” for further details. +The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies +herein. The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses. +Summarized below are the Revenue and Segment Operating Profit (both in dollars and as a percentage of Revenue) for each reporting segment: +($ in thousands) +Revenue +Segment Operating Profit +Segment Operating Profit as a +% of Revenue +2018 +2017 +2016 +2018 +2017 +2016 +2018 +2017 +2016 +Product Identification +$ +81,681 +$ +69,862 +$ +67,127 +$ +10,561 +$ +9,821 +$ +9,300 +12.9 +% +14.1 +% +13.9 +% +T&M +31,720 +28,586 +27,531 +3,754 +4,399 +3,664 +11.8 +% +15.4 +% +13.3 +% +Total +$ +113,401 +$ +98,448 +$ +94,658 +14,315 +14,220 +12,964 +12.6 +% +14.4 +% +13.7 +% +Corporate Expenses +8,903 +7,939 +7,030 +Operating Income +5,412 +6,281 +5,934 +Other Income (Expense), Net +(255) +324 +975 +Income Before Income Taxes +5,157 +6,605 +6,909 +Income Tax Provision +1,871 +2,377 +2,384 +Net Income +$ +3,286 +$ +4,228 +$ +4,525 +No customer accounted for greater than 10% of net revenue in fiscal 2018, 2017 and 2016. +Other information by segment is presented below: +(In thousands) +Assets +2018 +2017 +Product Identification +$ +49,842 +$ +30,624 +T&M +60,579 +28,129 +Corporate* +11,903 +24,912 +Total +$ +122,313 +$ +83,665 +* +Corporate assets consist principally of cash, cash equivalents and securities available for sale . +70 +Table of Contents +(In thousands) +Depreciation and +Amortization +Capital Expenditures +2018 +2017 +2016 +2018 +2017 +2016 +Product Identification +$ +1,536 +$ +885 +$ +690 +$ +1,497 +$ +767 +$ +2,284 +T&M +2,458 +1,546 +1,375 +707 +471 +777 +Total +$ +3,994 +$ +2,431 +$ +2,065 +$ +2,204 +$ +1,238 +$ +3,061 +Geographical Data +Presented below is selected financial information by geographic area: +(In thousands) +Revenue +Long-Lived Assets* +2018 +2017 +2016 +2018 +2017 +United States +$ +69,796 +$ +69,850 +$ +68,316 +$ +39,432 +$ +14,205 +Europe +29,947 +18,848 +16,830 +3,808 +168 +Canada +5,373 +5,008 +4,487 +145 +172 +Asia +3,808 +1,664 +1,741 +— +— +Central and South America +3,402 +3,053 +2,436 +— +— +Other +1,075 +25 +848 +— +— +Total +$ +113,401 +$ +98,448 +$ +94,658 +$ +43,385 +$ +14,545 +* +Long-lived assets excludes goodwill assigned to the T&M segment of $4.5 million at both January 31, 2018 and 2017 and $8.5 million assigned to the PI +segment at January 31, 2018. +Note 16—Employee Benefit Plans +Employee Stock Ownership Plan (ESOP): +AstroNova had an ESOP which provided retirement benefits to all eligible employees. Annual contributions of either cash or stock in amounts determined by the Company’s Board of Directors were +invested by the ESOP’s Trustees in shares of common stock of AstroNova. The Company did not make contributions to the ESOP in fiscal years 2017 and 2016. On January 23, 2017, the Compensation Committee of the Board of Directors voted to +terminate the ESOP. AstroNova is in the process of allocating all shares owned by the ESOP to the participants; once completed, the ESOP will be terminated. +Profit-Sharing Plan: +AstroNova sponsors a Profit-Sharing Plan (the +“Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company +makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code. +All contributions are deposited into trust funds. It is the policy of the Company to fund any contributions accrued. The Company’s annual contribution amounts are determined by the Board of +Directors. Contributions paid or accrued amounted to $0.5 million in both fiscal 2018 and 2017 and $0.3 million in 2016. +Note +17—Product Warranty Liability +AstroNova offers a manufacturer’s warranty for the majority of its hardware +products. The specific terms and conditions of warranty vary depending upon the products sold and country in which the Company does business. For products sold in the United States, the Company provides a basic limited warranty, including parts and +labor. The Company estimates the warranty costs based on historical claims experience and records a +71 +Table of Contents +liability in the amount of such estimates at the time product revenue is recognized. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as +necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows: +January 31 +2018 +2017 +2016 +(In thousands) +Balance, beginning of the year +$ +515 +$ +400 +$ +375 +Provision for Warranty Expense +1,294 +971 +887 +Cost of Warranty Repairs +(1,234 +) +(856 +) +(862 +) +Balance, end of the year +$ +575 +$ +515 +$ +400 +Note 18—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is +limited due to the large number and general dispersion of accounts which constitute the Company’s customer base. The Company periodically performs on-going credit evaluations of its customers. The Company +has not historically experienced significant credit losses on collection of its accounts receivable. +Excess cash is invested +principally in investment grade government and state municipal securities. The Company has established guidelines relative to diversification and maturities that maintain safety of principal, liquidity and yield. These guidelines are periodically +reviewed and modified to reflect changes in market conditions. The Company has not historically experienced any significant losses on its cash equivalents or investments. +During the years ended January 31, 2018, 2017 and 2016, one vendor accounted for 31.3%, 33.2% and 23.7% of purchases, and 26.6%, 42.7% and 16.7% of accounts payable, respectively. +Note 19—Commitments and Contingencies +The Company is subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment +claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability +can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of +amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be +materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the Company’s control. +Note 20—Fair Value Measurements +Assets and Liabilities Recorded at Fair Value on a Recurring Basis +Fair value is applied to our financial assets and liabilities including money market funds, available for sale securities, derivative instruments and a contingent consideration liability relating to an +earnout payment on future TrojanLabel operating results. +72 +Table of Contents +The following tables provide a summary of the financial assets and liabilities that are +measured at fair value: +Assets measured at fair value: +Fair value measurement at +January 31, 2018 +Fair value measurement at +January 31, 2017 +(in thousands) +Level 1 +Level 2 +Level 3 +Total +Level 1 +Level 2 +Level 3 +Total +Money Market Funds (included in Cash and Cash Equivalents) +$ +1,798 +$ +— +$ +— +$ +1,798 +$ +2 +$ +— +$ +— +$ +2 +State and Municipal Obligations (included in Securities Available for Sale) +— +1,511 +— +1,511 +— +6,723 +— +6,723 +Swap Contract (include in Other Assets) +— +101 +— +101 +— +— +— +— +Total assets +$ +1,798 +$ +1,612 +$ +— +$ +3,410 +$ +2 +$ +6,723 +$ +— +$ +6,725 +Liabilities measured at fair value: +Fair value measurement at +January 31, 2018 +Fair value measurement at +January 31, 2017 +(in thousands) +Level 1 +Level 2 +Level 3 +Total +Level 1 +Level 2 +Level 3 +Total +Swap Contract (included in Other Liabilities) +$ +— +$ +1,513 +$ +— +$ +1,513 +$ +— +$ +— +$ +— +$ +— +Earnout Liability (included in Other Liabilities) +— +— +15 +15 +— +— +— +— +Total liabilities +$ +— +$ +1,513 +$ +15 +$ +1,528 +$ +— +$ +— +$ +— +$ +— +For our money market funds and municipal obligations, we utilize the market approach to measure fair +value. The market approach is based on using quoted prices for identical or similar assets. +We also use the market approach to +measure fair value of our derivative instruments. Our derivative asset is comprised of an interest rate swap and our derivative liability is comprised of a cross-currency interest rate swap. These derivative instruments were measured at fair value +using readily observable market inputs, such as quotations on interest rates and foreign exchange rates, and are classified as Level 2 because they are +over-the-counter contracts with a bank counterparty that is not traded in an active market. +The following table presents the changes in fair value of our Level 3 financial liability for the year ended January 31, 2018; there were no comparable amounts for fiscal 2017: +Contingent +Earnout +Liability +Total +Level 3 +Liabilities +(In thousands) +Beginning balance +$ +— +$ +— +Fair value of contingent consideration acquired +1,314 +1,314 +Change in fair value of contingent earn out liability included in earnings +(1,438 +) +(1,438 +) +CTA +139 +139 +Balance at January 31, 2018 +$ +15 +$ +15 +The fair value of the earnout liability incurred in connection with the Company’s acquisition of +TrojanLabel was determined using the option approach methodology which includes using significant inputs that are not observable in the market and therefore classified as Level 3. Key assumptions in estimating the fair value of the contingent +consideration liability included (1) the estimated earnout targets over the next seven years of $0.5 million-$1.4 million, (2) the probability of success (achievement of the various contingent events) from 0.0%-0.9% and (3) a risk-adjusted discount rate of approximately 2.68%-4.9% used to adjust the probability- +73 +Table of Contents +weighted earnout payments to their present value. At each reporting period, the contingent consideration liability is recorded at its fair value with changes reflected in general and +administrative expense in the condensed consolidated statements of operations. +Subsequent to the acquisition, the Company +restructured the operating model for the TrojanLabel business such that most of the sales and some of the expenses of the business would be transferred to other legal entities of the Company. This caused the expected earnings targets in the Danish +entity, which was the basis upon which the contingent consideration was structured, to become unlikely to be met. As a result, during fiscal 2018, the value of the contingent consideration was reduced resulting in the Company recognizing an +additional $1.4 million of income for the year which is offset in general and administrative expense on the Company’s Consolidated Income Statement for the period ended January 31, 2018. +Assets and Liabilities Not Recorded at Fair Value on the Consolidated Balance Sheet +The Company’s long-term debt, including the current portion of long-term debt not reflected in the financial statements at fair +value, is reflected in the table below: +Fair Value Measurement at +January 31, 2018 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +24,873 +$ +24,873 +$ +23,372 +The fair value of the Company’s long-term debt, including the current portion, is estimated by +discounting the future cash flows using current interest rates at which similar borrowings with the same maturities would be made to borrowers with similar credit ratings and is classified as Level 3. +SUPPLEMENTARY DATA +Quarterly +Financial Information (Unaudited) +2018 +2017 +(In thousands, except per share data) +Q1 +Q2 +Q3 +Q4 (1) +Q1 +Q2 +Q3 +Q4 +Revenue +$ +24,458 +$ +27,483 +$ +28,760 +$ +32,699 +$ +24,110 +$ +25,339 +$ +23,342 +$ +25,657 +Cost of Revenue +15,152 +17,224 +16,966 +20,057 +14,637 +15,034 +13,701 +15,586 +Gross Profit +9,306 +10,259 +11,794 +12,642 +9,473 +10,305 +9,641 +10,071 +38.0 +% +37.3 +% +41.0 +% +38.7 +% +39.3 +% +40.7 +% +41.3 +% +39.3 +% +Operating Expenses (2): +Selling & Marketing +$ +5,238 +$ +5,315 +$ +5,532 +$ +6,277 +$ +4,831 +$ +4,777 +$ +4,578 +$ +4,770 +Research & Development +1,505 +1,675 +2,033 +2,112 +1,444 +1,755 +1,338 +1,776 +General & Administrative +1,856 +2,327 +2,597 +2,123 +1,651 +2,025 +1,891 +2,373 +Total Operating Expenses +8,599 +9,317 +10,162 +10,512 +7,926 +8,557 +7,807 +8,919 +Operating Income +707 +942 +1,632 +2,130 +1,547 +1,748 +1,834 +1,152 +2.9 +% +3.4 +% +5.7 +% +6.5 +% +6.4 +% +6.9 +% +7.9 +% +4.5 +% +Other Income (Expense), Net +(48 +) +16 +(12 +) +(210 +) +(52 +) +40 +(60 +) +396 +Income Before Taxes +659 +958 +1,620 +1,920 +1,495 +1,788 +1,774 +1,548 +Income Tax Provision +147 +231 +201 +1,292 +476 +496 +623 +782 +Net income +$ +512 +$ +727 +$ +1,419 +$ +628 +$ +1,019 +$ +1,292 +$ +1,151 +$ +766 +Net Income per Common Share—Basic +$ +0.07 +$ +0.11 +$ +0.21 +$ +0.09 +$ +0.14 +$ +0.17 +$ +0.15 +$ +0.10 +Net Income per Common Share—Diluted +$ +0.07 +$ +0.11 +$ +0.21 +$ +0.09 +$ +0.14 +$ +0.17 +$ +0.15 +$ +0.10 +74 +Table of Contents +Annual totals may not agree to the summation of quarterly information due to insignificant rounding and +the required calculation conventions. +(1) +The fourth quarter of fiscal 2018 net income includes (a) income of $0.9 million ($0.7 million net of tax or $0.11 per diluted share) related to the +change in fair value of the Company’s contingent earn out liability; (b) expense of $42,000 ($36,000 net of tax or $0.1 per diluted share) related to the correction of a prior period error in the recording of the Honeywell transaction in +the third quarter fiscal 2018. (Refer to Note 1 for further details) and (c) $1.1 million, or $0.16 per diluted share, of tax expense related to the enactment of the Tax Act. +(2) +Certain amounts in the prior quarters have been reclassified to conform to the Company’s current presentation at year-end. +75 +Table of Contents +ASTRONOVA, INC. +SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision/ +(Benefit) +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts(1): +(In thousands) +Year Ended January 31, +2018 +$ +266 +$ +119 +$ +(8 +) +$ +377 +2017 +$ +404 +$ +(80 +) +$ +(58 +) +$ +266 +2016 +$ +343 +$ +112 +$ +(51 +) +$ +404 +(1) +The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet dates. +(2) +Uncollectible accounts written off, net of recoveries. +76 \ No newline at end of file diff --git a/raw/filings/0000008146/2017/0001193125-18-113108/filing_metadata.csv b/raw/filings/0000008146/2017/0001193125-18-113108/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..c8f5e1bc57523a186271e6a985e8afcce70922e6 --- /dev/null +++ b/raw/filings/0000008146/2017/0001193125-18-113108/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2018-04-10,2018-01-31,2018-04-10T21:09:14.000Z,0001193125-18-113108,d518979d10k.htm,10-K,8937497,1,0,https://www.sec.gov/Archives/edgar/data/8146/000119312518113108/d518979d10k.htm,https://www.sec.gov/Archives/edgar/data/8146/000119312518113108/,2017,2017,1 diff --git a/raw/filings/0000008146/2017/0001193125-18-113108/item1.txt b/raw/filings/0000008146/2017/0001193125-18-113108/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..cb88714d25c3ec795fde1e4ac7721ab7d0369ca0 --- /dev/null +++ b/raw/filings/0000008146/2017/0001193125-18-113108/item1.txt @@ -0,0 +1,116 @@ +Item 1. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and +“us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +AstroNova designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced +technologies in order to acquire, store, analyze, and present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, +communications, distribution, food and beverage, general manufacturing, packaging and transportation. +The Company’s +products are distributed through its own sales force and authorized dealers in the United States. We sell to customers outside of the United States primarily through our branch offices in Canada, Europe, and Asia as well as through independent +dealers and representatives. In fiscal 2018, 38% of the Company’s revenue was from customers located outside the United States. +We operate the business through two operating segments, Product Identification (PI) and Test & Measurement (T&M). Financial information by business segment and geographic area appears in Note +15 to our audited consolidated financial statements included elsewhere in this report. +On September 28, 2017, AstroNova, +Inc. entered into an Asset Purchase and License Agreement with Honeywell International, Inc. pursuant to which it acquired an exclusive perpetual world-wide license to manufacture Honeywell’s narrow-format flight deck printers for the Boeing +737 and Airbus 320 aircraft. Revenue related to that transaction has been included as part of the aerospace printer product line of the T&M segment since the acquisition date. On February 1, 2017, AstroNova completed its acquisition of +TrojanLabel ApS (TrojanLabel) a European manufacturer of digital color label presses and specialty printing systems for a broad range of end user markets. TrojanLabel is reported as part of our PI segment beginning with the first quarter of fiscal +year 2018. Additionally, on June 19, 2015, we completed the acquisition of the aerospace printer product line from Rugged Information Technology Equipment Corporation (RITEC). Our aerospace printer product line is part of the T&M product +group and is reported as part of the T&M segment. We began shipment of the RITEC products in the third quarter of fiscal 2016. Refer to Note 2, “Acquisitions,” in our audited consolidated financial statements included elsewhere in this +report. +The following description of our business should be read in conjunction with “Management’s Discussion and +Analysis of Financial Conditions and Results of Operations” on pages 19 through 29 of this Annual Report on Form 10-K. +3 +Table of Contents +Description of Business +Product Overview +AstroNova leverages its expertise in +data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems and related services for select growing markets on a global basis. The business consists of two segments, Product +Identification (PI), which includes specialty printing systems sold under the brand name QuickLabel ® and +TrojanLabel ® ; and Test & Measurement (T&M), which includes test and measurement systems sold under +the AstroNova ® brand name. Refer to Note 15, “Nature of Operations, Segment Reporting and Geographical +Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding the Company’s segments. +Products sold under the QuickLabel and TrojanLabel brands are used in industrial and commercial product packaging, branding and labeling applications to digitally print custom labels and corresponding +visual content in house. Products sold under the AstroNova brand enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed and analyzed and then +stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide high-resolution light-weight flight deck and cabin printers. +Product Identification +QuickLabel brand products include tabletop and work cell-ready digital color label printers and specialty OEM printing systems as well as a full line of supplies including labels, tags, inks, toner and +thermal transfer ribbons. QuickLabel products are primarily sold to manufacturers, processors, and retailers who label products on a short-run basis. QuickLabel customers benefit from the efficiency, +flexibility and cost-savings of digitally printing their own labels in house and on demand. Industry segments that commonly benefit from short-run digital label printing include chemicals, cosmetics, food and +beverage, medical products, and pharmaceuticals, among many others. +Current QuickLabel models include the Kiaro! family of +high-speed inkjet color label printers, the QL-111 industrial color label printer and the QL-800 wide format color label printer, as well as a family of high-end monochrome printers. +TrojanLabel brand products include tabletop and digital color +label presses and specialty printing systems, as well as overprinting solutions. This highly innovative line of presses offers customers the ability to execute smaller runs with an affordable digital solution. It is commonly sold to larger brand +owners, label converters, commercial printers and packaging manufacturers. +Current TrojanLabel models include the T2-C, an inkjet table top label press; the T2, the full size parent of the T2-C, allowing larger volumes and with a full-size PC +display for comfortable use and fast turnaround; the T4, a complete label finisher which enables print, die cut and lamination all in one machine; and the T3, a highly customizable +all-in-one label production and finishing press offered in multiple OEM integration options. +The Product Identification segment also offers a full line of supplies including labels, tags, inks, toner and thermal transfer ribbons. In addition, the Product Identification segment sells various +specialized software used to operate the printers and presses, design labels and manage printing on an automated basis and provides worldwide training and support. +T&M +Products sold under the AstroNova T&M brand acquire and record +visual data from local and networked data streams and sensors. The recorded data is processed and analyzed and then stored and presented in various visual output formats. The Company supplies a range of products and services that include hardware, +software and supplies to customers in a variety of industries. +4 +Table of Contents +Our T&M products include the Daxus ® distributed data acquisition system; TMX ® high-speed data acquisition system; DDX100 SmartCorder ® portable data acquisition system; EV-500 digital strip chart recording system; ToughWriter ® , Miltope-brand and RITEC-brand airborne printers; the PTA-45B cockpit printer that is subject to the Asset Purchase +and Licenses Agreement with Honeywell and ToughSwitch ® ruggedized Ethernet switches. +AstroNova airborne printers are used in the flight deck and in the cabin of military, commercial and business aircraft to print hard +copies of data required for the safe and efficient operation of aircraft, including navigation maps, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. +ToughSwitch Ethernet switches are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial +flightworthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter airborne printers for numerous aircraft made by Airbus, Boeing, Embraer, Bombardier, Lockheed, Gulfstream and others. +The Company’s family of portable data acquisition systems is used in research and development (R&D), field testing, +production and maintenance applications in a wide range of industries including aerospace and defense, energy, industrial and transportation. The TMX data acquisition system is an +all-in-one solution for applications in which the ability to monitor high channel counts and view a wide variety of input signals, including time-stamped and +synchronized video capture data and audio notation is essential. The DDX100 SmartCorder is an ultra-portable all-in-one solution for facilities maintenance and field +testing. The Daxus is a distributed data acquisition platform that can be connected to the DDX100 SmartCorder to increase channel count or networked as part of a distributed measurement system spanning large distances. +Technology +Our core +technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. +Patents and Copyrights +We hold a number of product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, +trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand name. While we consider our intellectual property to be important to the operation of our business, we do not believe that any existing +patent, license, trademark or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many of the +sub-assemblies and parts in-house including printed circuit board assemblies, harnesses, machined parts and general final assembly. Many not manufactured in-house parts +are standard electronic items available from multiple sources. Other parts are designed by us and manufactured by outside vendors. We purchase certain components, assembled products and supplies used in the manufacture of our products from a single +source or limited supplier source, but these components, products and supplies could be sourced elsewhere with appropriate changes in the design of our products. +Product Development +We maintain an active program of product research and +development. During fiscal 2018, 2017 and 2016, we spent $7.5 million, $6.3 million and $6.9 million, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our +organic growth and expect to continue our focus on research and development efforts in fiscal 2019 and beyond. +5 +Table of Contents +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in tabletop digital +color label printing technology and in aerospace printers. In the data acquisition area, we believe that we are one of the leaders in portable high speed data acquisition systems. +We retain a leadership position by virtue of proprietary technology, product reputation, delivery, technical assistance, and service to +customers. The number of competitors varies by product line. Our management believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our product lines, but include technology, quality, +service and support, distribution network, and breadth of product and service offerings. +Our products are sold by direct field +salespersons as well as independent dealers and representatives. In the United States, the Company has factory-trained direct field salespeople located in major cities from coast to coast specializing in either Product Identification or AstroNova +T&M products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, India, Malaysia, Mexico, Singapore, Spain and the United Kingdom staffed by our own employees and dedicated third party contractors. +Additionally, we utilize over 200 independent dealers and representatives selling and marketing our products in over 75 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +International Sales +In fiscal 2018, 2017 and 2016, revenue from customers +in various geographic areas outside the United States, primarily in Canada and Western Europe, amounted to $43.6 million, $28.6 million and $26.3 million, respectively. Refer to Note 15, “Nature of Operations, Segment +Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for further financial information by geographic areas. +Order Backlog +Our backlog varies regularly. It consists of a blend of +orders for end-user customers as well as original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and customer requirements. Accordingly, the amount of order +backlog may not indicate future sales trends. Backlog at January 31, 2018, 2017 and 2016 was $21.4 million, $17.6 million and $18.2 million, respectively. +Employees +As of January 31, 2018, we employed 352 people. We are +generally able to satisfy our employment requirements. No employees are represented by a union. We believe that employee relations are good. +Other Information +The +Company’s business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form +10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or +furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). These +filings are also accessible on the SEC’s website at http://www.sec.gov. +6 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000008146/2017/0001193125-18-113108/item13.txt b/raw/filings/0000008146/2017/0001193125-18-113108/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..f4c4e810d6f23ac3b574c3eacf20874d98660a1c --- /dev/null +++ b/raw/filings/0000008146/2017/0001193125-18-113108/item13.txt @@ -0,0 +1,4 @@ +Item 13. Certain Relationships, Related Transactions and Director +Independence +The information required by this item is incorporated herein by reference to the Company’s +definitive Proxy Statement for the 2018 Annual Meeting of Shareholders. \ No newline at end of file diff --git a/raw/filings/0000008146/2017/0001193125-18-113108/item9a.txt b/raw/filings/0000008146/2017/0001193125-18-113108/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..8edb7eb63147ffc18c7d4c5330d3e5fdfe7bff12 --- /dev/null +++ b/raw/filings/0000008146/2017/0001193125-18-113108/item9a.txt @@ -0,0 +1,27 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of +the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities +Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2018 to ensure that +the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and +our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s +Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing +and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s +internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting +principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect +misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2018. In +making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the +principal executive officer and principal financial officer believe that as of January 31, 2018, the Company’s internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated +Framework.” +Management’s assessment of and conclusion on the effectiveness of internal control over financial +reporting did not include the internal controls of TrojanLabel acquired on February 1, 2017 which is included in our January 31, 2018 consolidated financial statements and constituted approximately $15.0 million of our total assets as +of January 31, 2018 and $7.5 million of our revenues for the year then ended. +The attestation report of the +Company’s registered public accounting firm regarding internal control over financial reporting appears in Part IV, Item 15 of this Form 10-K and is incorporated herein by reference. +Changes in Internal Controls over Financial Reporting +There have been no changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially +affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2017/0001193125-18-113108/rp_note.txt b/raw/filings/0000008146/2017/0001193125-18-113108/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2017/0001193125-18-113108/rpt_disclosure.txt b/raw/filings/0000008146/2017/0001193125-18-113108/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4bd157f4f1837c00911e09fbeea8f972fa0462d1 --- /dev/null +++ b/raw/filings/0000008146/2017/0001193125-18-113108/rpt_disclosure.txt @@ -0,0 +1,17 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. +In reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +Other than as described below, no officer, director or +nominee for director of the Company or any associate of any of the foregoing had during the fiscal year ended January 31, 2018 any material interest, direct or indirect, in any material transaction or any material proposed transaction in which +the amount exceeds $120,000 and to which the Company was or is to be a party. +29 +During the fiscal year ended January 31, 2018, the Company employed Christopher +Pizzuti, a son of Everett V. Pizzuti, as a Product Identification Field Sales Engineer. The aggregate amount of compensation paid by the Company to Christopher Pizzuti during fiscal year 2018 was $122,050, consisting of $113,013 in salary and sales +commissions, an automobile allowance of $7,644, a vacation payout of $800, and a matching contribution to his Profit Sharing Plan account of $593. +On May 1, 2017, the Company entered into a stock repurchase agreement (the “Stock Repurchase Agreement”) with the trust +established by Albert W. Ondis by Declaration of Trust dated December 4, 2003, as amended (the “Trust”) to repurchase 826,305 shares of the Company’s common stock held by the Trust at a per share price of $13.60, for an aggregate +repurchase price of $11,237,748.00 (the “Stock Repurchase”). The Stock Repurchase was consummated on May 2, 2017 and was funded using existing cash on hand. The Company has been informed that, following the Stock Repurchase, the +Trust owns 36,000 shares of the Company’s common stock. +April L. Ondis, a director of the Company, is a beneficiary of the Trust. The Stock Repurchase was authorized and approved by the Company’s Audit Committee as a related party transaction. Prior to +entering into the Stock Repurchase Agreement, the Company obtained an opinion from an independent investment banking firm that the consideration to be paid by the Company to the Trust pursuant to the Stock Repurchase Agreement would be fair to the +public stockholders of the Company, other than the Trust, from a financial point of view. \ No newline at end of file diff --git a/raw/filings/0000008146/2018/0001193125-19-102788/filing.txt b/raw/filings/0000008146/2018/0001193125-19-102788/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..44c7ab334a96e43fb3eb6a73a12dc7a70d4382a5 --- /dev/null +++ b/raw/filings/0000008146/2018/0001193125-19-102788/filing.txt @@ -0,0 +1,5265 @@ +10-K +1 +d662203d10k.htm +10-K +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31, 2019 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission file +number 0-13200 +AstroNova, +Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue, +West Warwick, Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: +(401) 828-4000 +Securities registered pursuant to Section 12(b) of the +Act: +Title of each class +Name of each exchange +on which registered +Common Stock, $.05 Par Value +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes ☐ No ☒ +Indicate by check mark if the +registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the +Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes ☒ No ☐ +Indicate by check mark +whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for +such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best +of the registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form +10-K. ☐ +Indicate by check mark whether the registrant is a large +accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated +filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☒ +Non-accelerated filer ☐ +Smaller reporting company ☒ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the +extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +The aggregate market value of the registrant’s voting common equity held by non-affiliates at July 27, 2018 was approximately $112,325,000 based on the +closing price on the Nasdaq Global Market on that date. +As of April 5, 2019 there were 6,987,823 shares of Common Stock (par +value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2019 Annual Meeting of Shareholders are incorporated by reference into +Part III of this Annual Report on Form 10-K where indicated. +Table of Contents +ASTRONOVA, INC. +FORM 10-K ANNUAL REPORT +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3-6 +Item 1A. +Risk Factors +6-16 +Item 1B. +Unresolved Staff Comments +16 +Item 2. +Properties +16 +Item 3. +Legal Proceedings +16 +Item 4. +Mine Safety Disclosures +16 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +17 +Item 6. +Selected Financial Data +18 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of +Operations +18-30 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +30-31 +Item 8. +Financial Statements and Supplementary Data +32 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +32 +Item 9A. +Controls and Procedures +32 +Item 9B. +Other Information +32 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +33 +Item 11. +Executive Compensation +34 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholders +Matters +34 +Item 13. +Certain Relationships, Related Transactions and Director Independence +34 +Item 14. +Principal Accountant Fees and Services +34 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +35 +Item 16. +Form 10-K Summary +35 +2 +Table of Contents +ASTRONOVA, INC. +Forward-Looking Statements +Information included in this Annual Report on +Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect +our current expectations concerning future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” +“may,” “will,” and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond +our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those +factors set forth in this Annual Report on Form 10-K under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new +information, future events or otherwise. The reader is cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K. +PART I +Item 1. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and +“us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +AstroNova designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced +technologies to acquire, store, analyze, and present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, +distribution, food and beverage, general manufacturing, packaging and transportation. +The Company’s products are +distributed around the world through its own sales force, authorized dealers and through independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems sold under the +brand names QuickLabel ® , TrojanLabel ® and GetLabels™. The Company’s T&M segment includes test and measurement systems sold under the +AstroNova ® brand name and includes the Company’s line of aerospace flight deck printers. Refer to Note 16, +“Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding the Company’s segments. +On September 28, 2017, AstroNova, Inc. entered into an Asset Purchase and License Agreement with Honeywell International, Inc. +pursuant to which it acquired an exclusive perpetual world-wide license to manufacture Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Revenue related to that transaction has been included as part of +the aerospace printer product line of the Company’s Test & Measurement segment since the acquisition date. On February 1, 2017, AstroNova completed its acquisition of TrojanLabel ApS (“TrojanLabel”), a European +manufacturer of digital color label presses and specialty printing systems for label professionals and commercial printers. TrojanLabel is reported as part of our PI segment beginning with the first quarter of fiscal year 2018. Refer to Note 3, +“Acquisitions,” in our audited consolidated financial statements included elsewhere in this report. +The following +description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 19 through 30 of this Annual Report on Form 10-K. +3 +Table of Contents +Description of Business +Product Overview +AstroNova leverages its expertise in +data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems and related services for select growing markets on a global basis. +Products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in industrial and commercial product packaging, branding and +labeling applications to print custom labels, packaging materials and corresponding visual content in-house digitally. The PI segment offers a variety of hardware and software products and associated supplies +that allow customers to mark, track and enhance the appearance of their products. Products sold under the AstroNova brand enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. +The recorded data is processed and analyzed and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide networking systems and +high-resolution light-weight flight deck and cabin printers. +Product Identification +QuickLabel brand products include tabletop and work cell-ready digital color label printers and specialty OEM printing systems. QuickLabel +products are sold to manufacturers, processors, and retailers who label products on a short-run basis. QuickLabel customers benefit from the efficiency, flexibility and cost-savings of digitally printing their +labels in-house and on demand. Industry segments that commonly benefit from short-run digital label printing include chemicals, cosmetics, food and beverage, medical +products, and pharmaceuticals, among many others. +Current QuickLabel models include a family of high-end monochrome printers, the QL-300, a high performance color toner based printer, the QL-800 wide format inkjet color label printer, and the Kiaro! ® family of high-speed inkjet color label printers which includes the QL-120, +a professional table top digital label printer. +TrojanLabel brand products include professional digital color label presses +and specialty printing systems, as well as overprinting solutions. This highly innovative line of presses expands the Company’s customer base by offering commercial printers (label converters) and packaging manufacturers the ability to execute +smaller runs with an affordable digital solution. It is commonly sold to larger brand owners, label converters, commercial printers and packaging manufacturers. +Our current TrojanLabel portfolio includes the T2-C, a compact, digital mini press designed for 24/7 label production; the parent of the T2-C, the T2, a label press with a full-size PC display that supports mini jumbo label rolls for commercial production; the T4, a professional label press and finishing system +which enables print, die cut and lamination all in one machine with a much smaller footprint than others in the market; and the T3, a modular over-printer offered in multiple OEM integration versions. +GetLabels brand products include a full line of supplies including labels, tags, inks, toners, and thermal transfer ribbons. Quality label +materials and substrates are designed and constructed for an extensive variety of labeling applications. Every one of the label materials and substrates are qualified and tested in our Materials Research Laboratory to ensure durability and +compatibility for the QuickLabel brand, TrojanLabel brand and also a variety of competitor printers to meet the specific labeling needs for a wide diversity of markets. +The Product Identification segment additionally licenses various specialized software used to operate the printers and presses, design labels and manage printing on an automated basis and also provides +worldwide training and support. +4 +Table of Contents +T&M +Products sold under the AstroNova T&M brand acquire and record visual data from local and networked data streams and sensors. The recorded data is processed and analyzed and then stored and presented +in various visual output formats. The Company supplies a range of products and services that include hardware, software and supplies to customers in a variety of industries. +Our T&M products include; the Daxus ® DXS-100 distributed data acquisition system, the TMX ® high-speed data acquisition system, the SmartCorder ® DDX-100 portable data acquisition system, the EV-5000 digital strip chart recording +system, the ToughWriter ® , Miltope-brand and RITEC-brand airborne printers, the +PTA-45B cockpit printer that is subject to the Asset Purchase and Licenses Agreement with Honeywell and ToughSwitch ® ruggedized Ethernet switches. +AstroNova +airborne printers are used in the flight deck and in the cabin of military, commercial and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, arrival and departure +procedures, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. ToughSwitch Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or +Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight worthiness standards for operation under extreme environmental conditions. The Company is currently furnishing +ToughWriter airborne printers for many aircraft made by Airbus, Boeing, Embraer, Bombardier, Lockheed, Gulfstream, and others. +The Company’s portable data acquisition systems are used in research and development (R&D), field testing, production and +maintenance applications in a wide range of industries including aerospace and defense, energy, industrial and transportation. The TMX data acquisition system is an +all-in-one solution for applications in which the ability to monitor high channel counts and view a wide variety of input signals, including time-stamped and +synchronized video capture data and audio notation is essential. The SmartCorder DDX-100 is an ultra-portable all-in-one solution +for facilities maintenance and field testing. The Daxus DXS-100 is a distributed data acquisition platform that can be connected to the SmartCorder DDX-100 to increase +channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, +(3) displaying the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. +Patents and Copyrights +We hold a number of product patents in the United States and in foreign countries. We rely on a combination of copyright, +patent, trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand name. While we consider our intellectual property to be important to the operation of our business, we do not believe that any +existing patent, license, trademark or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many of the +sub-assemblies and parts in-house including printed circuit board assemblies, harnesses, machined parts and general final assembly. Many parts not manufactured in-house are standard electronic items available from multiple sources. Other parts are designed by us and manufactured by outside vendors. We purchase certain components, assembled products and supplies used in the +manufacture of our products from a single source or limited supplier source. While we believe these components, products and supplies could be sourced elsewhere with appropriate changes in the design of our products, such design might not be +feasible on a timely basis and any interruption in these components, products or supplies could adversely affect our business. +5 +Table of Contents +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in tabletop digital +color label printing technology and in aerospace printers. In the data acquisition area, we are one of the leaders in portable, reliable, high-speed data acquisition systems. +We retain a leadership position by virtue of proprietary technology, product reputation, delivery, technical assistance, and service to customers. The number of competitors varies by product line. Our +management believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our product lines, but include technology, quality, service and support, distribution network, and breadth of product +and service offerings. +Our products are sold by direct field salespersons as well as independent dealers and representatives. +In the United States, the Company has factory-trained direct field salespeople located in major cities from coast to coast specializing in either Product Identification or AstroNova T&M products. We also have direct field sales or service +centers in Canada, China, Denmark, France, Germany, India, Malaysia, Mexico, Singapore, Spain and the United Kingdom staffed by our own employees and dedicated third party contractors. Additionally, we utilize over 150 independent dealers and +representatives selling and marketing our products in over 50 countries. +No single customer accounted for 10% or more of +our net revenue in any of the last three fiscal years. +Order Backlog +Our backlog varies regularly. It consists of a blend of orders for end-user customers as well as +original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and customer requirements. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2019, +2018 and 2017 was $25.6 million, $21.4 million and $17.6 million, respectively. +Employees +As of January 31, 2019, we employed 374 people. We are generally able to satisfy our employment requirements. No employees are +represented by a union. We believe that employee relations are good. +Other Information +The Company’s business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, +which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form +10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or +furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). These +filings are also accessible on the SEC’s website at http://www.sec.gov. +Item 1A. Risk Factors +The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on +our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties +not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +6 +Table of Contents +AstroNova’s operating results and financial condition could be harmed if the markets into +which we sell our products decline or do not grow as anticipated. +Any decline in our customers’ markets or in +their general economic conditions would likely result in a reduction in demand for our products. Although we have continued to experience measured progress, as sales have increased steadily from prior years, we are still affected by the continued +global economic uncertainty. Some of our customers may be reluctant to make capital equipment purchases or may defer certain of these purchases to future quarters. Some of our customers may also limit consumable product purchases to quantities +necessary to satisfy immediate needs with no provisions to stock supplies for future use. Also, if our customers’ markets decline, we may not be able to collect on outstanding amounts due to us. Such declines could harm our results of +operations, financial position and cash flows and could limit our ability to continue to remain profitable. +AstroNova’s future +revenue growth depends on our ability to develop and introduce new products and services on a timely basis and achieve market acceptance of these new products and services. +The markets for our products are characterized by rapidly changing technologies and accelerating product introduction cycles. Our future +success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with +technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate our +competitors’ development of new products, and maintain high levels of product quality and reliability. AstroNova spends a significant amount of time and effort related to the development of our airborne and color printer products as well as our +Test and Measurement data recorder products. Failure to further develop any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results. +As we introduce new or enhanced products, we must also successfully manage the transition from older products to minimize disruption in +customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of our existing +products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. Additionally, +when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and +manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or AstroNova’s plans for future support of existing products may +cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +AstroNova is dependent upon contract manufacturers for some of our products. If these manufacturers do not meet our requirements, either in volume +or quality, then we could be materially harmed. +We subcontract the manufacturing and assembly of certain of our +products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Limited control over the manufacturing process; +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; and +• +Reduced control over delivery schedules, manufacturing yields, quality and costs. +7 +Table of Contents +If one of our significant subcontractors becomes unable or unwilling to continue to +manufacture these products in required volumes or fails to meet our quality standards, we will have to identify qualified alternate subcontractors or we will have to take over the manufacturing ourselves. Additional qualified subcontractors may not +be available, or may not be available on a timely or cost competitive basis. Any interruption in the supply or increase in the cost of the products manufactured by third party subcontractors or failure of a subcontractor to meet quality standards +could have a material adverse effect on our business, operating results and financial condition. +For certain components, assembled +products and supplies, AstroNova is dependent upon single or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and +supplies used in the manufacture of our products from a single source or limited supplier sources. If the supply of a key component, assembled products or certain supplies were to be delayed or curtailed or, in the event a key manufacturing or sole +supplier delays shipment of such components or assembled products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. Our business, results of operations and financial position could also be +adversely affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source. Additionally, if any single or limited source +supplier becomes unable or unwilling to continue to supply these components, assembled products or supplies in required volumes, we will have to identify and qualify acceptable replacements or redesign our products with different components. +Alternative sources may not be available, or product redesign may not be feasible on a timely basis. Any interruption in the supply of or increase in the cost of the components, assembled products and supplies provided by single or limited source +suppliers could have a material adverse effect on our business, operating results and financial condition. +AstroNova faces significant +competition, and our failure to compete successfully could adversely affect our results of operations and financial condition. +We operate in an environment of significant competition, driven by rapid technological advances, evolving industry standards, frequent new product introductions and the demands of customers to become more +efficient. Our competitors range from large international companies to relatively small firms. We compete on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in +future performance is largely dependent upon our ability to compete successfully in the markets we currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products with +features that could adversely affect the competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, +we could lose market share and important customers to our competitors which could materially and adversely affect our business, results of operations and financial position. +AstroNova’s profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure. +Our success depends on our ability to obtain adequate pricing for our products and services which provides a reasonable return to our +shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to +offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially +adversely affected. +8 +Table of Contents +We are continually reviewing our operations with a view towards reducing our cost +structure, including but not limited to downsizing our employee base, improving process and system efficiencies and outsourcing some internal functions. From time to time we also engage in restructuring actions to reduce our cost structure. If we +are unable to maintain process and systems changes resulting from cost reduction and prior restructuring actions, our results of operations and financial position could be materially adversely affected. +AstroNova has significant inventories on hand. +We maintain a significant amount of inventory. Although we have provided an allowance for slow-moving and obsolete inventory, any significant unanticipated changes in future product demand or market +conditions, including obsolescence or the uncertainty in the global market, could have an impact on the value of inventory and adversely impact our business, operating results and financial condition. +Economic, political and other risks associated with international sales and operations could adversely affect AstroNova’s results of +operations and financial position. +Because we sell our products worldwide, our business is subject to risks associated +with doing business internationally. Revenue from international operations, which includes both direct and indirect sales to customers outside the U.S., accounted for 39% of our total revenue for fiscal year 2019, and we anticipate that +international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, job functions and facilities located outside the U.S. Accordingly, our business, operating results and financial +condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Differing protection of intellectual property; +• +Unexpected changes in regulatory requirements; and +• +Geopolitical turmoil, including terrorism and war. +AstroNova could incur liabilities as a result of installed product failures due to design or manufacturing defects. +AstroNova has incurred and could incur additional liabilities as a result of installed product failures due to design or manufacturing defects. Our products may have defects despite our internal testing +or testing by current or potential customers. These defects could result in among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance or substantial damage to our reputation. We +could be subject to material claims by customers, and may incur substantial expenses to correct any product defects. +9 +Table of Contents +In addition, through our acquisitions, we have assumed, and may in the future assume, +liabilities related to products previously developed by an acquired company that have not been subjected to the same level of product development, testing and quality control processes used by us, and may have known or undetected errors. Some types +of errors may not be detected until the product is installed in a user environment. This may cause AstroNova to incur significant warranty and repair or re-engineering costs, may divert the attention of +engineering personnel from product development efforts, and may cause significant customer relations problems such as reputational problems with customers resulting in increased costs and lower profitability. +Certain of our products require certifications by regulators or standards organizations, and our failure to obtain or maintain such certifications +could negatively impact our business. +In certain industries and for certain products, such as those used in aircraft, +we must obtain certifications for our products by regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our +business, financial condition, results of operations and cash flows could be materially and adversely affected. +Changes in our tax +rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods. +On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA” or “Tax Act”) was signed into law. The Tax Act +significantly revises the U.S. federal corporate income tax law and includes a broad range of tax reform measures affecting business including among other things, the reduction of the corporate income tax rate from 35% to 21%, the loss of certain +business deductions, the acceleration of first-year expensing of certain capital expenditures and a one-time tax imposed on unremitted cumulative non-U.S. earnings of +foreign subsidiaries. The Tax Act is complex and far-reaching, and we continue to evaluate the actual impact of its enactment on the Company. Any material adverse impact resulting from the Tax Act that has not +yet been identified could have an adverse affect on our business, results of operations, financial condition and cash flow. +Changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the +Tax Act), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, could have a material impact on our estimates of +our effective tax rate and our deferred tax assets and liabilities. The impact of these factors may be substantially different from period-to-period. +In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities. If audits result in payments or assessments different from our reserves, our +future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions +(including changes in the taxation of international income as further described below) could adversely affect our financial statements. +The agreements governing our indebtedness subject us to various restrictions that may limit our ability to pursue business opportunities. +The agreement governing our current credit facility contains, and any future debt agreements may include, a number of +restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to: +• +Incur future indebtedness; +• +Place liens on assets; +• +Pay dividends or distributions on our and our subsidiaries’ capital stock; +• +Repurchase or acquire our capital stock; +• +Conduct mergers or acquisitions; +10 +Table of Contents +• +Sell assets; and/or +• +Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay +subordinated indebtedness. +Such agreements also require us to satisfy other requirements, including +maintaining certain financial ratios and condition tests. Our ability to meet these requirements can be affected by events beyond our control, and we may be unable to meet them. To the extent we fail to meet any such requirements and are in default +under our debt obligations, our financial condition may be materially adversely affected. These restrictions may limit our ability to engage in activities that could otherwise benefit us. To the extent that we are unable to engage in activities that +support the growth, profitability and competitiveness of our business, our business, results of operations and financial condition could be adversely affected. +AstroNova may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may +negatively impact AstroNova’s overall business. +We have made strategic investments in other companies, products +and technologies, including our September 2017 Asset Purchase and License Agreement with Honeywell International, Inc. and our February 2017 acquisition of the digital color label press and specialty printing systems business of the Danish company, +TrojanLabel. We may continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that we will be able to identify suitable +acquisition opportunities. In any acquisition that we complete we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative impact on operating results or other +aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental impact on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse impact on our reputation; and +• +Respective operations, management and personnel will be compatible. +In certain instances as permitted by applicable law and NASDAQ rules, acquisitions may be consummated without seeking and obtaining +shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in a particular acquisition, there can be no +assurance that we will properly ascertain or assess such risks. +We may also divest certain businesses from time to time. +Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture +depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. +Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +11 +Table of Contents +If we are not able to successfully integrate or divest businesses, products, +technologies or personnel that we acquire or divest, or able to realize expected benefits of our acquisitions, divestitures or strategic partnerships, AstroNova’s business, results of operations and financial condition could be adversely +affected. +Adverse conditions in the global banking industry and credit markets could impair our liquidity or interrupt our access to +capital markets, borrowings or financial transactions to hedge certain risks. +At the end of fiscal 2019, we had +approximately $7.5 million of cash and cash equivalents. Our cash and cash equivalents are held in a mix of money market funds, bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets may, in some cases, +result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash +equivalent positions and, in turn, our financial position. +To date, we have been able to access financing that has allowed us +to make investments in growth opportunities and fund working capital requirements as needed. In addition, we occasionally enter into financial transactions to hedge certain foreign exchange and interest rate risks. Our continued access to capital +markets, the stability of our lenders and their willingness to support our needs, and the stability of the counter parties to our financial transactions that hedge risks are essential for us to meet our current and long-term obligations, fund +operations, and fund our future strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could materially and adversely affect our business and financial condition. +AstroNova could experience a significant disruption in, or breach in security of our information technology system which could harm our business +and adversely affect our results of operations. +We employ information technology systems to support our business. Any +security breaches or other disruptions to our information technology infrastructure could interfere with operations, compromise our information and that of our customers and suppliers, and expose us to liability which could adversely impact our +business and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a +variety of business processes and activities. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches. As a result, our +information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems +failures, natural disasters, catastrophic events or other unforeseen events and in any such circumstance our system redundancy and other disaster recovery planning may be ineffective or inadequate. While we have experienced, and expect to continue +to experience, these types of threats to our information technology networks and infrastructure, none of them to date has had a material impact. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, +disruption in operations, and damage to the Company’s brand and reputation, which could adversely affect our business, operating results and financial condition. +AstroNova could experience risks related to the implementation of our new global enterprise resource planning system. +We are currently engaged in a multi-year process of conforming all of our operations to one global enterprise resource planning system (“ERP”). The ERP is designed to improve the efficiency of +our supply chain and financial transaction processes, accurately maintain our books and records, and provide information important to the operation of the business to our management team. The implementation of the ERP will continue to require +significant investment of human and financial resources, and we may experience significant delays, increased costs and other difficulties as a result. Any significant disruption or deficiency in the design, implementation and transition to the new +ERP could negatively impact our ability to: +• +record and process orders, +12 +Table of Contents +• +manufacture and ship our products in a timely manner, and +• +process data and electronic communications among our business locations, +any of which could have a material adverse effect on our business, consolidated financial condition or results of operations. +We also face the challenge of supporting our older systems while we implement the new ERP system. While we have invested significant resources in planning and project management, significant +implementation issues may arise that impact our normal business operations and could have a material adverse impact on our operating results and cash flow. +AstroNova depends on our key employees and other highly qualified personnel and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees +could compromise our future success and our business could be harmed. +Our future success depends upon our ability to +attract and retain professional and executive employees, including sales, operating, marketing, and financial management personnel. There is substantial competition for skilled personnel, and the failure to attract, develop, retain and motivate +qualified personnel could negatively impact our business, financial condition, results of operations and future prospects. In order to hire new personnel or retain or replace our key personnel, we may be required to increase compensation, which +would decrease net income. Additionally, a number of key employees have special knowledge of customers, supplier relationships, business processes, manufacturing operations, and financial management issues and the loss of any of these employees +could harm the company’s ability to perform efficiently and effectively until their knowledge and skills are replaced, which might be difficult to do quickly, and as a result could have a material adverse effect on our business, financial +condition, and results of operations. +AstroNova is subject to laws and regulations; failure to address or comply with these laws and +regulations could harm our business and adversely affect our results of operations. +Our operations are subject to +laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the +need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other +substances in our products. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our +business. +Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to +protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern +the cleanup of contaminated sites. We have used and continue to use various substances in our products and manufacturing operations, and have generated and continue to generate wastes, which have been or may be deemed to be hazardous or dangerous. +As such, our business is subject to and may be materially and adversely affected by compliance obligations and other liabilities under environmental, health and safety laws and regulations. These laws and regulations affect ongoing operations and +require capital costs and operating expenditures in order to achieve and maintain compliance. +Our operations are subject to +anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, and any determination that the Company or any of its subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally +prohibit companies and their intermediaries from making improper payments to government +13 +Table of Contents +officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have +experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that +our internal control policies and procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies. +Unauthorized access to personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights and +compliance with laws designed to prevent unauthorized access of personal data could be costly. +AstroNova collects and +stores certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Security breaches or other +unauthorized access to, or the use or transmission of, personal user information could result in a variety of claims against us, including privacy-related claims. There are numerous laws in the countries in which we operate regarding privacy and the +storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are changing, inconsistent and conflicting and subject to differing interpretations, and new laws of this nature are adopted from time to +time. For example, in 2016 the European Commission adopted the General Data Protection Regulation (GDPR), a comprehensive privacy and data protection reform that became effective in May 2018. The GDPR, which is applicable to all companies +processing data of European Union residents, imposes significant fines and sanctions for violations. Additionally, certain developing countries in which we do business are also considering adopting privacy and data protection laws and regulations +and legislative proposals concerning privacy and the protection of user information are often pending before the U.S. Congress and various U.S. state legislatures. +While we believe that we comply with industry standards and applicable laws and industry codes of conduct relating to privacy and data protection in all material respects, there is no assurance that we +will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event of non-compliance. +Any failure or perceived failure by us (or any third parties with whom we +have contracted to store such information) to comply with applicable privacy and security laws, policies or related contractual obligations or any compromise of security that results in unauthorized access to personal information may result in +governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. In the case of such an event, our reputation may be harmed, we could lose current and potential users +and the competitive positions of our various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations. +We may record future impairment charges, which could materially adversely impact our results of operations. +We test our goodwill balances annually, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit +level and, in evaluating the potential for impairment of goodwill, we make assumptions regarding estimated revenue projections, growth rates, cash flows and discount rates. We monitor the key drivers of fair value to detect events or other changes +that would warrant an interim impairment test of our goodwill and intangible assets. Relatively small declines in the future performance and cash flows of a reporting unit or asset group, changes in our reporting units or in the structure of our +business as a result of future reorganizations, acquisitions or divestitures of assets or businesses, or small changes in other key assumptions, may result in the recognition of significant asset impairment charges, which could have a material +adverse impact on our results of operations. +We also review our long-lived assets including property, plant and equipment, and +other intangibles assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider include significant under-performance relative to expected historical or projected future +14 +Table of Contents +operating results, significant negative industry or economic trends and our market capitalization relative to net book value. We may be required in the future to record a significant charge to +earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such charges could have a significant adverse impact on our results of operations and our financial condition. +Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could +significantly affect our financial results or financial condition. +Generally accepted accounting principles and +related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, +business combinations and intangible asset valuations, leases, and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, +estimates, or judgments could significantly change our reported or expected financial performance or financial condition. +Compliance +with rules governing “conflict minerals” could adversely affect the availability of certain product components and our costs and results of operations could be materially harmed. +SEC rules require disclosures regarding the use of “conflict minerals” mined from the Democratic Republic of the Congo and +adjoining countries necessary to the functionality or production of products manufactured or contracted to be manufactured. We have determined that we use gold, tin and tantalum, each of which is considered a “conflict mineral” under the +SEC rules, as they occur in electronic components supplied to us in the manufacture of our products. Because of this finding, we are required to conduct inquiries designed to determine whether any of the conflict minerals contained in our products +originated or may have originated in the conflict region or come from recycled or scrap sources. There are costs associated with complying with these disclosure requirements, including performing due diligence in regards to the source of any +conflict minerals used in our products, in addition to the cost of remediation or other changes to products, processes or services of supplies that may be necessary as a consequence of such verification activities. As we use contract manufacturers +for some of our products, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement. We may also encounter challenges to satisfy those customers who +require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. As a result, our business, operating results and financial condition could be harmed. +Due to the fact that we have operations located within the United Kingdom (UK), our business and financial results may be negatively +impacted as a result of the UK’s planned exit from the European Union (EU). These risks would be heightened in the event that the UK and the EU are unable to reach a mutually satisfactory exit agreement. +On June 23, 2016, the UK held a referendum in which voters approved an exit from the European Union, commonly referred to as +“Brexit.” On March 29, 2017, the UK Government invoked Article 50 of the Treaty on the European Union, which is expected to result in the UK exiting the EU. The UK Government continues to negotiate the terms of the UK’s future +relationship with the EU, although there is still considerable uncertainty as to the outcome. It is possible that following agreement, the new relationship will result in greater restrictions on imports and exports between the UK and EU countries, +as well as the US. and increased regulatory complexity. There is also the potential for disruption to the movement of raw materials and finished goods in the event that no agreement is reached by the planned exit date. These changes may adversely +affect our operations and financial results. +Additionally, following the referendum on Brexit, the value of the British pound +(GBP) incurred significant fluctuations. If the value of the British Pound Sterling continues to incur similar fluctuations, unfavorable exchange rate changes may negatively affect the value of our operations located in the UK, as translated to +our +15 +Table of Contents +reporting currency, the USD, in accordance with US GAAP, which may impact the revenue and earnings we report. Continued fluctuations in the GBP may also result in the imposition of price +adjustments by EU-based suppliers to our UK operations, as those suppliers seek to compensate for the changes in value of the GBP as compared to the Euro. In addition, a +so-called “Hard Brexit,” where no formal agreement is made between the EU and the UK prior to the UK’s exit, could result in a continued deflation of the British Pound Sterling; additional +increases in prices, fees, taxes or tariffs applicable to goods that are bought and sold between the UK and EU, and a negative impact on end markets in the UK as a result of declines in consumer sentiment or decreased immigration rates into the UK. +Any of these results could have a material adverse effect on our business, financial condition and results of operations. +Item 1B. Unresolved Staff Comments +None. +Item 2. Properties +The following table sets forth information regarding the Company’s principal owned properties, all of which are included in the consolidated balance sheet appearing elsewhere in this annual report. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, USA +135,500 +Corporate headquarters, research and development, manufacturing, sales and service +AstroNova also leases facilities in various other locations. The following information pertains to each +location: +Location +Approximate +Square +Footage +Principal Use +Dietzenbach, Germany +18,630 +Manufacturing, sales and service +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service +Elancourt, France +4,150 +Sales and service +Copenhagen, Denmark +4,800 +R&D +Maidenhead, England +1,000 +Sales and service +Schaumburg, Illinois, USA +3,428 +Sales (Product Identification only) +Shanghai, China +461 +Sales (Product Identification only) +Irvine, California, USA +3,100 +Sales (Product Identification only) +Tambauam Chennai, India +70 +Sales (Product Identification only) +Mexico City, Mexico +65 +Sales (Product Identification only) +We believe our facilities are well maintained, in good operating condition and generally adequate to meet +our needs for the foreseeable future. +Item 3. Legal Proceedings +There are no pending or threatened legal proceedings against the Company believed to be material to the financial position or results of +operations of the Company. +Item 4. Mine Safety Disclosures +Not applicable. +16 +Table of Contents +PART II +Item 5. +Market for the Registrant ’ s Common Stock, Related Stockholder Matters and Issuer +Purchases of Equity Securities +AstroNova common stock trades on the NASDAQ Global Market +under the symbol “ALOT.” +AstroNova had approximately 256 shareholders of record as of April 5, 2019, which does not +reflect shareholders with beneficial ownership in shares held in nominee name. +Dividend Policy +AstroNova began a program of paying quarterly cash dividends in fiscal 1992 and has paid a dividend for 110 consecutive quarters. During +fiscal 2019, 2018 and 2017, we paid a dividend of $0.07 per share in each quarter and anticipate that we will continue to pay comparable cash dividends on a quarterly basis. +Stock Repurchases +Pursuant to an authorization approved by +AstroNova’s Board of Directors in August 2011, the Company is currently authorized to repurchase up to 390,000 shares of common stock, subject to any increase or decrease by the Board of Directors at any time. This is an ongoing authorization +without any expiration date. +During the fourth quarter of fiscal 2019, the Company made the following repurchases of its common stock: +Total Number +of Shares +Repurchased +Average +Price paid +Per Share +Total Number of +Shares Purchased as +Part of Publicly +Announced +Plans +or Programs +Maximum Number +of Shares +That +May Be Purchased +Under The Plans +or Programs +November 1 – November 30 +— +— +— +390,000 +December 1 - December 31 +— +— +— +390,000 +January 1 - January 31 +1,899 +(a) +19.55 +(a) +— +390,000 +(a) An executive of the company delivered 1,899 shares of the Company’s common stock toward the satisfaction of taxes +due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $19.55 per share and are included with treasury stock in the consolidated balance sheet. This transaction did not impact the +number of shares authorized for repurchase under the Company’s current repurchase program. +17 +Table of Contents +Item 6. Selected Financial Data +Historical Financial Summary +Income +Statement Data +(In thousands, except per share data) +For the Fiscal Years Ended January 31, +2019 +2018 +2017 +2016 +2015 +Revenue +$ +136,657 +$ +113,401 +$ +98,448 +$ +94,658 +$ +88,347 +Gross profit +53,999 +44,002 +39,489 +38,158 +36,977 +Operating income +8,720 +5,412 +6,281 +5,934 +7,231 +Income before taxes +7,308 +5,157 +6,605 +6,909 +6,932 +Net income +$ +5,730 +$ +3,286 +$ +4,228 +$ +4,525 +$ +4,662 +Net Income per Common Share—Basic +$ +0.83 +$ +0.48 +$ +0.57 +$ +0.62 +$ +0.61 +Net income per Common Share—Diluted +$ +0.81 +$ +0.47 +$ +0.56 +$ +0.61 +$ +0.60 +Dividends Declared per Common Share +$ +0.28 +$ +0.28 +$ +0.28 +$ +0.28 +$ +0.28 +Balance Sheet Data +(In thousands) +As of January 31, +2019 +2018 +2017 +2016 +2015 +Cash and Marketable Securities +$ +7,534 +$ +11,688 +$ +24,821 +$ +20,419 +$ +23,132 +Current Assets +62,608 +62,948 +61,423 +54,514 +59,289 +Total assets +118,983 +122,313 +83,665 +77,963 +74,330 +Current liabilities +24,665 +25,912 +11,985 +9,548 +9,569 +Debt, including short term portion +18,242 +23,372 +— +— +— +Shareholders’ equity +$ +69,775 +$ +63,647 +$ +70,537 +$ +67,373 +$ +63,511 +Item 7. Management ’ s +Discussion and Analysis of Financial Condition and Results of Operations +Overview +AstroNova is a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, +distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. The Company organizes its structure around a core set of competencies, including research and development, manufacturing, service, +marketing and distribution. It markets and sells its products and services through the following two segments: +• +Product Identification (PI) – offers digital label printers, over-printers, labeling software, spare parts, service contracts and all related +printing supplies such as pressure sensitive labels, tags, inks, toners and thermal transfer ribbons used in those product identification digital printers. +• +Test and Measurement Product Group (T&M) – offers a suite of products and services that acquire data from local and networked data +streams and sensors as well as wired and wireless networks. The recorded data is processed and analyzed and then stored and presented in various visual output formats. The T&M segment also includes a line of aerospace printers that are used to +print hard copies of data required for the safe and efficient operation of aircraft including navigation maps, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, and various air traffic control +data. Aerospace products also include Ethernet switches which are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. +18 +Table of Contents +The Company markets and sells its products and services globally through a diverse +distribution structure of direct sales personnel, manufacturers’ representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on +organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. In fiscal 2019, 2018, and 21017, revenue from customers in +various geographic areas outside the United States, primarily in Western Europe, Canada and Asia, amounted to $53.0 million, $43.6 million and $28.6 million, respectively. +We maintain an active program of product research and development. During fiscal 2019, 2018 and 2017, we spent $7.8 million, +$7.5 million and $6.3 million, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development +efforts in fiscal 2020 and beyond. +We also continue to invest in sales and marketing initiatives by expanding the existing +sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding the challenging economic environment. +On September 28, 2017, AstroNova entered into an Asset Purchase and License Agreement with Honeywell International, Inc. pursuant to which it acquired the exclusive perpetual world-wide license to +manufacture Honeywell’s narrow format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Revenue from the sales of these printers is reported as part of our Test & Measurement segment beginning in the third +quarter of fiscal year 2018. Refer to Note 3, “Acquisitions,” in the audited consolidated financial statements included elsewhere in this report. +On February 1, 2017, AstroNova completed its acquisition of TrojanLabel ApS (TrojanLabel), a European manufacturer of digital color label presses and specialty printing systems for the commercial +label printing and packaging markets. TrojanLabel is reported as part of our Product Identification segment beginning with the first quarter of fiscal year 2018. Refer to Note 3, “Acquisitions,” in the audited consolidated financial +statements included elsewhere in this report. +Results of Operations +Fiscal 2019 compared to Fiscal 2018 +The following table presents the +revenue of each of the Company’s segments, as well as the percentage of total revenue and change from prior year. +($ in thousands) +2019 +2018 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +Product Identification +$ +86,786 +63.5 +% +6.2 +% +$ +81,681 +72.0 +% +T&M +49,871 +36.5 +% +57.2 +% +31,720 +28.0 +% +Total +$ +136,657 +100.0 +% +20.5 +% +$ +113,401 +100.0 +% +Net revenue in fiscal 2019 was $136.7 million, a 20.5% increase compared to prior year revenue of +$113.4 million. Revenue through domestic channels of $83.7 million was up 19.9% from $69.8 million in the prior year due to sales increases in both segments. International revenue of $53.0 million increased 21.5% over prior year international +revenue of $43.6 million primarily due to the impact on revenue from the Honeywell product line and despite lower than expected revenue from European Product Identification sales. Current year international revenue includes a modest favorable +foreign exchange rate impact of $0.5 million. +19 +Table of Contents +Hardware revenue in fiscal 2019 was $53.2 million, a $15.7 million, or 41.9%, increase +compared to prior year revenue of $37.5 million. The largest contribution to this increase was in the T&M segment where the full year impact of the Honeywell acquisition (which was completed on September 28, 2017) caused T&M segment hardware +revenue to increase 61.2%. The increase was also aided, to a much lesser degree, by growth in T&M’s data acquisition product lines. Hardware revenue in the Product Identification segment increased 9.5% compared to prior year primarily due +to increases in the TrojanLabel product lines. +Revenue from supplies in fiscal 2019 was $71.2 million, representing a $ 5.9 +million, or 9.0%, increase compared to prior year revenue of $65.3 million. The dollar increase is primarily attributable to growth from Product Identification inkjet printer inks and labels, with the largest share of that increase related to the +QuickLabel product line. Also contributing to the revenue increase was the impact in the T&M segment of significantly higher sales of the specialized paper used in aerospace printers due to the large inherited installed base of the acquired +Honeywell product line. +Service and other revenue in fiscal 2019 was $12.3 million, a 16.0% increase compared to prior year +revenue of $10.6 million. All of this increase related to the aerospace printer product lines as a result of the acquired Honeywell product line. +The Company achieved gross profit of $54.0 million for fiscal 2019, reflecting a 22.7% improvement compared to the prior year’s gross profit of $44.0 million. The Company’s gross profit margin +of 39.5% in the current year reflects an increase from the prior year’s gross profit margin of 38.8%. The higher gross profit for the current year compared to the prior year is primarily attributable to increased revenue; the current +year’s increase in gross margin is primarily due to an increase in the mix of higher gross margins in the acquired Honeywell product lines. +Operating expenses for the current year were $45.3 million, representing a 17.3% increase from the prior year’s operating expenses of $38.6 million, a growth rate 3.2% lower than the growth rate of +revenues. Specifically, selling and marketing expenses of $ 26.3 million in fiscal 2019 increased 18.5% from the prior year amount of $22.2 million. The increase in selling and marketing expenses for the current year primarily relates to full year +amortization of customer related intangibles acquired in the Honeywell transaction, as well an increase in wages and benefits for fiscal 2019. Selling and marketing expenses represent 19.3% and 19.6% of net revenue for fiscal 2019 and 2018, +respectively. Current year general and administrative (“G&A”) expenses increased by 24.9% from prior year to $11.1 million, primarily as a result of an increase in wages, bonuses and share-based compensation expenses. The current year +increase in G&A is also a result of the fact that fiscal 2018 G&A included $1.4 million of income attributable to the change in the fair value of the Company’s contingent earn out liability related to the TrojanLabel acquisition. The +current year increase in G&A is partly offset by lower professional service costs and the favorable impact of a $1.0 million of income recorded in the first quarter of fiscal 2019 as a result of a change in the accounting estimate for product +costs and operating expenses pursuant to a transition service agreement we entered into with Honeywell. Research & development (“R&D”) costs in fiscal 2019 of $7.8 million increased 4.8% from $7.5 million in fiscal 2018. While +R&D spending increased, primarily due to increased benefit and incentive costs, the R&D spending level for fiscal 2019 represents 5.7% of net revenue, a decrease compared to the prior year level of 6.6%. +Other expense in fiscal 2019 was $1.4 million compared to other expense of $0.3 million in fiscal 2018. Current year other expense +includes interest expense on debt of $0.9 million and foreign exchange loss of $0.7 million, offset by investment income of $0.1 million. Other income in fiscal 2018 included interest expense on debt of $0.4 million and a foreign exchange loss +of $0.2 million, offset by investment income of $0.2 million. +Net income for fiscal 2019 was $5.7 million, or $0.81 per +diluted share, an increase compared to $3.3 million, or $0.47 per diluted share in fiscal 2018. Current year results were impacted by $0.1 million, or $0.01 per diluted share, in taxes as a result of the finalization of the accounting for the +2017 Tax Act. The prior year included a $1.1 million increase in the tax provision consisting of $1.0 million related to revaluation of our deferred tax assets at the new lower corporate tax rate and $0.1 million related to the transition tax on the +un-repatriated earnings of our foreign subsidiaries also included in the Tax Act. During fiscal 2019 the Company +20 +Table of Contents +recognized a $1.6 million income tax expense and had an effective tax rate of 21.6% compared to income tax expense of $1.8 million, or a 36.2% effective tax rate in fiscal 2018. +Fiscal 2018 compared to Fiscal 2017 +The following table presents the revenue of each of the Company’s segments, as well as the percentage of total revenue and change from prior year. +($ in thousands) +2018 +2017 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +Product Identification +$ +81,681 +72.0 +% +16.9 +% +$ +69,862 +71.0 +% +T&M +31,720 +28.0 +% +11.0 +% +28,586 +29.0 +% +Total +$ +113,401 +100.0 +% +15.2 +% +$ +98,448 +100.0 +% +Net revenue in fiscal 2018 was $113.4 million, a 15.2% increase compared to the prior year revenue of +$98.4 million. Revenue through domestic channels of $69.8 million was consistent with prior year domestic revenue of $69.8 million. International revenue of $43.6 million increased 52.4% over the prior year international revenue +of $28.6 million primarily due to the impact on revenue from the Honeywell and TrojanLabel acquisitions. The international revenue for fiscal 2018 includes a favorable foreign exchange rate impact of $0.6 million. +Hardware revenue in fiscal 2018 was $37.5 million, a 10.9% increase compared to the prior year’s revenue of +$33.8 million. Hardware revenue in the Product Identification segment increased 23.5% in fiscal 2018 compared to the prior year due to the integration of TrojanLabel, but was tempered by lower OEM bar code printer sales. Hardware revenue in the +T&M segment increased 4.6% in fiscal 2018 primarily due to the Honeywell acquisition and the introduction of the EV-5000 data recorder. These revenue increases were partially offset by lower sales from the +Aerospace ToughWriter 4 product line. +Revenue from supplies in fiscal 2018 was $65.3 million, representing a 16.2% +increase compared to the prior year revenue of $56.2 million. This increase is primarily attributable to double-digit growth from Product Identification inkjet printer inks and labels. Also contributing to the revenue increase in fiscal 2018 +was the impact of Honeywell and TrojanLabel paper and ink sales. +Service and other revenue in fiscal 2018 was +$10.6 million, a 26.2% increase compared to the prior year revenue of $8.4 million. Product Identification and Test & Measurement segments both generated double-digit growth in service and other revenue as a result of the +TrojanLabel and Honeywell acquisitions. +The Company achieved gross profit of $44.0 million for fiscal 2018, reflecting an +11.4% improvement compared to the prior year’s gross profit of $39.5 million. The Company’s gross profit margin of 38.8% in fiscal 2018 reflects a decrease from the prior year’s gross profit margin of 40.1%. The higher gross +profit for fiscal 2018 compared to the prior year is primarily attributable to increased revenue; fiscal 2018’s decrease in gross margin was due to product mix and higher manufacturing and period costs. +Operating expenses for fiscal 2018 were $38.6 million, representing a 16.2% increase from the prior year’s operating expenses of +$33.2 million. Specifically, selling and marketing expenses of $22.2 million in fiscal 2018 increased 17.3% from the prior year’s amount of $19.0 million. The increase in selling and marketing expenses primarily relates to +increases in wages and amortization related to the TrojanLabel and Honeywell acquisitions. Selling and marketing expenses represent 19.6% and 19.3% of net revenue for fiscal 2018 and 2017, respectively. Fiscal 2018 G&A expenses increased by +12.1% from the prior year to $8.9 million primarily as a result of an increase in share-based compensation expenses, as well as outside and professional service costs, including non-recurring costs +related to expenses incurred pursuant to a transition service agreement we entered into with Honeywell. The increase in G&A was offset by income of $1.4 million due to the change in the fair +21 +Table of Contents +value of the Company’s contingent earn out liability related to the TrojanLabel acquisition. R&D costs in fiscal 2018 of $7.5 million increased 18.0% from $6.3 million in +fiscal 2017, primarily due to the increase related to the absorption of the TrojanLabel R&D team, as well as an increase in wages. This increase was slightly tempered by a decrease in outside service costs and prototype expenses. The R&D +spending level for fiscal 2018 represents 6.6% of net revenue, an increase compared to the prior year’s level of 6.4%. +Other expense in fiscal 2018 was $0.3 million compared to other income of $0.3 million in fiscal 2017. Other expense for fiscal +2018 includes interest expense on debt of $0.4 million and foreign exchange loss of $0.2 million, offset by investment income of $0.2 and income related to a settlement of a trademark infringement litigation. Other income in fiscal 2017 +includes a gain on sale of a property we owned in England of $0.4 million and $0.1 million related to an amount retained from the RITEC escrow partially offset by foreign exchange loss of $0.2 million. +Net income for fiscal 2018 was $3.3 million, or $0.47 per diluted share, a decrease from $4.2 million, or $0.56 per diluted +share in fiscal 2017. The results for fiscal 2018 were impacted by income of $1.4 million ($1.1 million net of tax or $0.16 per diluted share) related to change in the fair value of the Company’s contingent earn out liability and +$1.1 million, or $0.16 per diluted share, in taxes as a result of the enactment of the Tax Act. The $1.1 million increase in tax provision includes $1.0 million related to revaluation of our deferred tax assets at the new lower +corporate tax rate and $0.1 million related to the transition tax on the un-repatriated earnings of our foreign subsidiaries also included in the Tax Act. During fiscal 2017 the Company recognized a +$2.4 million income tax expense and had an effective tax rate of 36.0%. Fiscal 2017 income tax expense included a $0.2 million tax expense related to non-deductible transaction costs for the +TrojanLabel acquisition and a $0.2 million tax expense related to the increase for unrecognized tax benefits. +Segment Analysis +We report two segments consistent with our product revenue groups: Product Identification and Test & Measurement +(T&M). Segment performance is evaluated based on the operating segment’s profit before corporate and financial administration expenses. +The following table summarizes selected financial information by segment. +($ in thousands) +Revenue +Segment Operating Profit +Segment Operating Profit as +a % of Revenue +2019 +2018 +2017 +2019 +2018 +2017 +2019 +2018 +2017 +Product Identification +$ +86,786 +$ +81,681 +$ +69,862 +$ +7,910 +$ +10,561 +$ +9,821 +9.1 +% +12.9 +% +14.1 +% +T&M +49,871 +31,720 +28,586 +11,933 +3,754 +4,399 +23.9 +% +11.8 +% +15.4 +% +Total +$ +136,657 +$ +113,401 +$ +98,448 +19,843 +14,315 +14,220 +14.5 +% +12.6 +% +14.4 +% +Corporate Expenses +11,123 +8,903 +7,939 +Operating Income +8,720 +5,412 +6,281 +Other Income (Expense), Net +(1,412 +) +(255 +) +324 +Income Before Income Taxes +7,308 +5,157 +6,605 +Income Tax Provision +1,578 +1,871 +2,377 +Net Income +$ +5,730 +$ +3,286 +$ +4,228 +22 +Table of Contents +Product Identification +Revenue from the Product Identification segment increased 6.2% in fiscal 2019 with revenue of $86.8 million compared to revenue of +$81.7 million in the prior year. Hardware product lines grew 9.5% and supplies product lines grew 6.0%. The increase in hardware revenue for the current year was primarily due to the contribution from the TrojanLabel line of presses. The supplies +revenue increase in the current year was a result of growth in ink, print head, and label and tag supplies revenue across all product lines. Product Identification current year segment operating profit was $7.9 million, reflecting a profit margin of +9.1%, compared to prior year segment profit of $10.6 million and related profit margin of 12.9%. The decrease in Product Identification current year segment operating profit margin is due to significant investment in fiscal 2019 in new product +development, sales and marketing capabilities, and product introduction costs. +Revenue from the Product Identification segment +increased 16.9% in fiscal 2018 with revenue of $81.7 million compared to revenue of $69.9 million in the prior year. Both the hardware and supplies product lines saw strong growth in fiscal 2018, with increases of 23.5% and 15.2%, +respectively, as compared to the prior year. The increase in hardware revenue for fiscal 2018 was primarily due to the contribution from the TrojanLabel line of presses. The supplies revenue increase in fiscal 2018 was a result of supplies revenue +from the newly acquired TrojanLabel business and continued strong demand for digital color printer ink as well as label and tag products supplies. Fiscal 2018 Product Identification segment operating profit was $10.6 million, reflecting a +profit margin of 12.9%, compared to the prior year segment profit of $9.8 million and related profit margin of 14.1%. The decrease in Product Identification segment operating profit margin in fiscal 2018 was due to unfavorable product mix and +increased operating costs. +Test & Measurement +Revenue from the T&M product group was $49.9 million for fiscal 2019, a 57.2% increase compared to revenue of $31.7 million in the +prior year. The Honeywell product line revenue began in September of 2017, and fiscal year 2019 was the first full year of revenue for this acquisition: it was the primary reason for the significant growth in both the hardware and supplies product +lines. T&M’s segment operating profit for the current fiscal year was $11.9 million, which resulted in a 23.9% profit margin compared to the prior year’s segment operating profit of $3.8 million and related operating margin of 11.8%. +Again, the higher margins were due to the acquisition, which was integrated into the existing facilities without adding significant ongoing facilities expense, and the generally favorable margins on the acquired products, despite the incremental +costs incurred in supporting the integration, certain fees payable to Honeywell in connection with the transition of the product line, and the payment of licensing royalties. +Revenue from the T&M product group was $31.7 million for fiscal 2018, an 11.0% increase compared to revenue of $28.6 million in the prior year. Both the hardware and supplies product lines +saw sustained growth in fiscal 2018, with the overall increase primarily attributable to the contribution of revenue from the entry into the arrangement with Honeywell in September 2017. T&M’s segment operating profit for fiscal 2018 was +$3.8 million which resulted in an 11.8% profit margin compared to the prior year’s segment operating profit of $4.4 million and related operating margin of 15.4%. The lower segment operating profit and related margin in fiscal 2018 +were due to product mix and higher operating costs. +Liquidity and Capital Resources +Overview +Generally, our primary source of liquidity is cash generated from operating activities. We may also utilize amounts available under our +revolving credit facility, as described below, to supplement funding for our operating activities and to fund a portion of our capital expenditures, contractual contingent consideration obligations, and future acquisitions. We believe that our +current level of cash and short-term financing capabilities along with future cash flows from operations will be sufficient to meet our operating and capital needs for at least the next 12 months. +23 +Table of Contents +During fiscal 2019, we converted our securities available for sale to cash. In the +second quarter of fiscal 2019, we drew $3.0 million on our revolving credit facility, of which $1.5 million was repaid and $1.5 million remains outstanding as of January 31, 2019. Our cash and cash equivalents at January 31, +2019, were $7.5 million and we have $8.5 million remaining available for borrowing under our revolving credit facility. +Indebtedness +On +February 28, 2017, the Company and the Company’s wholly owned Danish subsidiary, ANI ApS (together, the “Parties”) entered into a credit agreement with Bank of America, N.A., which provided for a secured credit facility +consisting of a $9.2 million term loan to our wholly owned Danish subsidiary, “ANI ApS,” and a $10.0 million revolving credit facility for the Company. On September 28, 2017, the Parties entered into the First Amendment +to the Credit Agreement to permit the Honeywell Asset Purchase and License Agreement and temporarily increase the amount available for borrowing under the revolving credit line from $10.0 million to $15.0 million. The Company used +$14.6 million of the revolving credit line to complete the Honeywell Asset Purchase and License Agreement. +On +November 30, 2017, the Parties entered into the Second Amendment to the Credit Agreement which, in addition to the revolving credit facility and the term loan previously borrowed by ANI ApS under the original Credit Agreement, provided for a +term loan to the Company in the principal amount of $15.0 million. Upon the closing of the Second Amendment, the Company used the proceeds from the $15.0 million term loan to repay the entire $14.6 million principal balance of the +revolving loan outstanding under the revolving credit facility as of October 28, 2017, with the remaining proceeds retained by the Company to be used for general corporate purposes. The principal amount of the revolving credit facility under +the Credit Agreement, which had been temporarily increased to $15.0 million pursuant to the First Amendment, was reduced to $10.0 million effective upon the closing of the Second Amendment, and the revolving credit facility termination and +maturity date was extended from January 31, 2022 to November 22, 2022. +On April 17, 2018, the Parties entered +into a Third Amendment to the Credit Agreement with the Lender. The Third Amendment provides that no “Immaterial Subsidiary” will be required to become a guarantor or securing party under (unless requested by the Lender during default) or +have its equity pledged pursuant to the Credit Agreement. The Third Amendment defines “Immaterial Subsidiary” as any subsidiary of the Company with (a) consolidated total assets that do not exceed 5.0% of the consolidated total assets +of the Company and its subsidiaries as a whole and (b) revenues that do not exceed 5.0% of the consolidated revenues of the Company and its subsidiaries as a whole, as of the last day of the most recent fiscal quarter. Immaterial Subsidiaries +may not account for, in the aggregate, more than 10% the of consolidated total assets or consolidated revenues of the Company and its subsidiaries. +Revolving credit loans may be borrowed, at the Company’s option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Krone. Amounts borrowed under the +revolving credit facility bear interest at a rate per annum equal to, at the Company’s option, either (a) the LIBOR rate (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable +quoted rate), plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal funds’ rate plus 0.50%, +(ii) Bank of America’s publicly announced prime rate or (iii) the LIBOR rate plus 1.00%, plus a margin that varies within a range of 0.0% to 0.5% based on the Company’s consolidated leverage ratio. The Company is required to pay +a commitment fee on the undrawn portion of the revolving credit facility at the rate of 0.25% per annum . Outstanding borrowings under the revolving credit line during fiscal 2019 bear interest at an annual rate of 5.6% and the Company has +paid $61 thousand of interest expense for revolving credit line borrowings for the year ended January 31, 2019. +24 +Table of Contents +Both term loans bear interest at a rate per annum equal to the LIBOR rate plus a margin +that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio. In connection with our entry into the original Credit Agreement, ANI ApS entered into a hedging agreement to manage the variable interest rate risk +and currency risk associated with its payments in respect to the term loan. Under this combined arrangement, payments of principal and interest with respect to approximately $8.9 million of the principal of the term loan will be made in Danish +Krone, and interest on such principal amount will be payable at a fixed rate of 0.67% per annum for the entire term, subject only to potential changes based on the Company’s consolidated leverage ratio. In connection with our entry into +the Second Amendment of the Credit Agreement, effective November 30, 2017, the Company entered into a hedging agreement to manage the variable interest rate risk associated with its payments in respect to the $15.0 million term loan. Under +this combined arrangement, interest will be payable at a fixed rate of 2.04% per annum for the entire term, plus an incremental margin of 1.0% to 1.5%, based on the Company’s consolidated leverage ratio. +In connection with the Credit Agreement, AstroNova and ANI ApS entered into certain hedging arrangements with the Lender to manage the +variable interest rate risk and currency risk associated with its payments in respect of the term loans. +The obligations of +ANI ApS in respect of the $9.2 million term loan are guaranteed by the Company and TrojanLabel ApS. The Company’s obligations in respect of the $15.0 million term loan, revolving credit facility and its guarantee in respect of the ANI +ApS term loan are secured by substantially all of the assets of the Company (including a pledge of a portion of the equity interests held by the Company in ANI ApS and the Company’s wholly-owned German subsidiary AstroNova GmbH), subject to +certain exceptions. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit +commitment under the Credit Agreement upon the occurrence of any of various customary events of default. +The Parties must +comply with various customary financial and non-financial covenants under the Credit Agreement. +As of January 31, 2019, the Company believes it is in compliance with all of the covenants in the Credit Agreement. +Cash Flow +The statements of cash flows for the years ended +January 31, 2019, 2018 and 2017 are included on page 47 of this Form 10-K. Net cash provided by operating activities was $3.4 million in fiscal 2019 compared to net cash provided by operating +activities of $3.7 million in the previous year. The decrease in net cash provided by operations for the current year is primarily due to payments of prior years’ accrued expenses to Honeywell under the TSA agreement and the increase in +inventory to support the transition of the production of printers to the West Warwick facility in accordance with the Honeywell TSA. The combination of these factors on working capital, along with an increase in accounts receivable due to increased +revenue for the current year resulted in a decrease in cash of $8.3 million for fiscal 2019, compared to a decrease of $5.0 million for the same period in fiscal 2018. The current year decrease in cash provided by operations was somewhat +offset by increased net income and an increase in non-cash amortization related to the Honeywell acquisition. The accounts receivable balance was $23.5 million at the end of the current year compared to +$22.4 million at the end of fiscal 2018, although the collection cycle decreased to 49 days compared to 55 days at year end. The inventory balance increased to $30.2 million at the end of fiscal 2019, compared to $27.6 million at +fiscal 2018 year end with the inventory days on hand decreasing to 120 days at the end of the current year from 124 days at the prior year end. +Net cash provided by operating activities was $3.7 million in fiscal 2018 compared to net cash provided by operating activities of $7.0 million in fiscal 2017. The decrease in net cash from +operations for fiscal 2018 was primarily due to the decrease in net income and the increase in working capital accounts, particularly inventory and accounts receivables. Excluding the impact of the TrojanLabel acquisition, inventory increased +$6.8 million +25 +Table of Contents +to $27.6 million in fiscal 2018 compared to $19.5 million in fiscal 2017, and accounts receivable increased $5.9 million to $22.4 million in fiscal 2018 from +$15.7 million in fiscal 2017. The increase in inventory for fiscal 2018 was due to increased purchasing volume and decreased inventory turns, as inventory days on hand increased to 124 days at fiscal year end 2018 from 114 days at the +prior year end. The increase in accounts receivable for fiscal 2018 was due to increased revenue and an increase in the accounts receivable collection cycle to 55 days at January 31, 2018 compared to 49 days at the prior year end. +Net cash provided by operating activities was $7.0 million in fiscal 2017 compared to net cash provided by operating +activities of $7.7 million in fiscal 2016. The decrease in net cash from operations for fiscal 2017 is primarily due to increased net income and increased cash used for working capital. The combination of changes in accounts receivable, +inventory, and accounts payable and accrued expenses decreased cash by $3.6 million in fiscal 2017, compared to a decrease of $0.5 million in fiscal 2016. The year-over-year decline was due to increased inventory and purchasing volume in +fiscal 2017. The accounts receivable collection cycle decreased to 49 days of revenue at January 31, 2017 compared to 50 days of revenue at the prior year end. Inventory days on hand increased to 114 days at the end of the 2017 fiscal year +from 92 days at the prior year end. +Net cash used by investing activities for fiscal 2019 was $1.5 million, which +included $2.6 million for capital expenditures, consisting of $0.1 million for land and building improvements; $1.5 million for information technology; $0.7 million for machinery and equipment; $0.2 million for tools and +dies; and $0.1 million for furniture, fixtures and other capital expenditures. Cash used for investments in fiscal 2019 was partially offset by $1.5 million of proceeds from sales and maturities of securities available for sale. +Net cash used by investing activities for fiscal 2018 was $20.8 million, which included $23.9 million of cash paid +for the TrojanLabel acquisition and the Honeywell asset purchase and licenses agreement, partially offset by $5.5 million of proceeds from sales and maturities of securities available for sale. Cash used for investing activities for fiscal 2018 +included capital expenditures of $2.2 million, consisting of $0.7 million for land and building improvements; $0.7 million for information technology; $0.5 million for machinery and equipment; $0.2 million for tools and +dies; and $0.1 million for furniture, fixtures and other capital expenditures. +Net cash provided by investing activities +for fiscal 2017 was $3.1 million, which included $4.0 million of proceeds from maturities of securities available for sale and proceeds of $0.5 million related to the sale of the UK property. Cash used for investing activities for +fiscal 2017 included capital expenditures of $1.2 million, consisting of $0.4 million for land and building improvements; $0.3 million for information technology; $0.3 million for machinery and equipment; $0.1 million for +tools and dies; and $0.1 million for furniture, fixtures and other capital expenditures. +Net cash used by financing +activities for fiscal 2019 was $4.1 million, primarily as a result of principal payments of $4.8 million on long-term debt and $1.5 million on the Company’s revolving credit facility. Cash used for financing was partially offset by +borrowings of $3.0 million on the Company’s revolving credit facility in fiscal 2019. The Company did not repurchase any shares of its common stock in fiscal 2019. At January 31, 2019, there is an ongoing authorization by the +Company’s Board of Directors for the purchase of 390,000 shares of the Company’s common stock. Cash provided or used by financing activities also included cash used to pay dividends of $1.9 million in both fiscal 2019 and 2018 and +$2.1 million in fiscal 2017. +Net cash provided by financing activities for fiscal 2018 was $9.1 million and includes +$24.2 million of proceeds related to the issuance of debt under the Company’s credit facility with Bank of America. Offsetting the cash provided by financing activities in fiscal 2018 was $11.2 million of cash used to repurchase +826,305 shares of the Company’s common stock at a per share price of $13.60. The purchase of these shares was from a trust established by the former founder and chief executive officer of the Company and did not impact the shares authorized for +future purchases as part of the Company’s stock buyback program. +26 +Table of Contents +Contractual Obligations, Commitments and Contingencies +At January 31, 2019, the Company’s contractual obligations with initial remaining terms in excess of one year were as follows: +(In thousands) +Total +Less than +1 Year +1-3 +Years +3-5 +Years +More than +5 Years +Purchase Commitments (1) +$ +30,617 +$ +30,146 +$ +471 +$ +— +$ +— +Debt +18,242 +5,208 +10,784 +2,250 +— +Interest on Debt (2) +1,517 +585 +709 +223 +— +Royalty Obligation (3) +11,791 +1,779 +3,651 +3,152 +3,209 +Excess Royalty Obligation (4) +1,265 +1,265 +— +— +— +Operating Lease Obligations +2,616 +574 +907 +567 +568 +$ +64,783 +$ +38,292 +$ +16,522 +$ +6,192 +$ +3,777 +(1) +Purchase obligations include undiscounted amounts committed under legally enforceable contracts or purchase orders for goods and services with +defined terms as to price, quantity and delivery dates. +(2) +Interest rate on variable rate debt is provided at the effective fixed rate paid by the Company per the hedging arrangements plus the maximum +additional margin payable based on the Company’s consolidated leverage ratio of 1.5%. +(3) +The Company is subject to a guaranteed minimum royalty payment obligation over the next ten years pursuant to the Honeywell Asset Purchase and +License Agreement. Refer to Note 3, “Acquisitions,” in the audited consolidated financial statements included elsewhere in this report for further details. +(4) +The Company is subject to excess royalty payments beyond the guaranteed minimum royalty obligation pursuant to the Honeywell Asset Purchase +& License Agreement. Refer to Note 3, “Acquisitions,” in the audited consolidated financial statements included elsewhere in this report for further details. +The Company is also subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range +of matters, such as: contract and employment claims; workers compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to +ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a +material adverse affect on our consolidated financial position or results of operations. It is possible, however, that results of operations for any particular future period could be materially affected by changes in our assumptions or strategies +related to these contingencies or changes out of the Company’s control. +Critical Accounting Policies and Estimates +Our discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial +statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating +financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are +reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on the Company’s historical experience, current trends and information available from other sources, +as appropriate. If different conditions result from those assumptions used in our judgments, the results could be materially different from our estimates. We believe the following critical accounting policies require significant judgments and +estimates in the preparation of our consolidated financial statements: +27 +Table of Contents +Revenue Recognition : +Effective February 1, 2018, we adopted Accounting Standards Update +(ASU) 2014-9, Revenue from Contracts with Customers and the related amendments (also referred to as Topic 606) using the modified retrospective method. Topic 606 was applied +to all contracts within the scope of Topic 606 as of the February 1, 2018 adoption date. Under ASC Topic 606, based on the nature of our contracts and consistent with prior practice, we recognize the large majority of our revenue upon +shipment, which is when the performance obligation has been satisfied. Accordingly, the adoption of this standard did not have a material impact on our revenue recognition and there was no cumulative effective adjustment as of February 1, 2018 +as a result of the adoption of ASC Topic 606. +Our accounting policies relating to the recognition of revenue under Topic +606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which include (i) the existence of a contract with the customer, (ii) the identification of the +performance obligations in the contract, (iii) the value of any variable consideration in the contract, (iv) the stand alone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the +contract, and (v) determining when a performance obligation has been met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery for those +services, could result in inappropriate recognition of revenue, or incorrect timing of revenue recognition, which could have a material affect on our financial condition and results of operations. +We recognize revenue for non-recurring engineering (NRE) fees, as necessary, for product +modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine +whether we have obtained customer acceptance for the specific milestone before recognizing revenue. +Infrequently, the Company +receives requests from customers to hold product being purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements in accordance with the guidance provided by Topic 606, which requires the +transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the +product is currently ready for physical transfer to the customer, and (d) the Company does not have the ability to use the product or direct it to another customer. +Warranty Claims and Bad Debts: Provisions for the estimated costs for future product warranty claims and bad debts are recorded in cost of revenue and general and administrative expense, +respectively. The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that might impact the historical analysis such as new product introduction for warranty and bankruptcies +of particular customers for bad debts. We also periodically evaluate the adequacy of reserves for warranty and bad debts recorded in our consolidated balance sheet as a further test to ensure the adequacy of the recorded provisions. Warranty and bad +debt analysis often involves subjective analysis of a particular customer’s ability to pay. As a result, significant judgment is required in determining the appropriate amounts to record, and such judgments may prove to be incorrect in the +future. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to the actual amounts. +Inventories: Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. The process for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on hand and estimating the net realizable value of the +inventory based on historical experience, current business conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent +periods when the estimates are adjusted to actual experience. +28 +Table of Contents +Income Taxes: A valuation allowance is established when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, including our performance, the market +environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net +deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2019, the Company has provided valuation allowances for future state tax benefits resulting from certain R&D tax credits which +could expire unused. +The calculation of tax liabilities involves significant judgment in estimating the impact of +uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of +whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be +materially impacted. +On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted into law and +the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% +effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as +reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), +which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. All accounting under SAB 118 was finalized during the quarter ending January 31, 2019 with no material changes from +the provisional amounts previously recorded. Refer to Note 15 “Income Taxes” in the audited consolidated financial statements included elsewhere in this report for further details. +Intangible and Long-Lived Assets: Long-lived assets, such as definite-lived intangible assets and property, plant and equipment, +are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from +the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined +by the discounting of future cash flows. +Goodwill: Goodwill is tested for impairment at the reporting unit. A reporting +unit is an operating segment or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are +aggregated as a single reporting unit if they have similar economic characteristics. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash +flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether it is more likely than not that the fair value of a reporting +unit is less than its carrying value. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and +strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative +assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. We estimate the fair value of our reporting units using the income approach based upon a discounted +cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, we use the market approach, which compares +the reporting unit to publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many +29 +Table of Contents +assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit +exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of +the reporting unit, then we record an impairment charge based on that difference. +Share-Based Compensation: Share-based +compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair +value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns +(expected life of the options), the risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the +weighted-average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such +factors. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grants and assessed the expected risk tolerance of +different option groups. The risk-free interest rate used in the model is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the +prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards +(RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the date of grant. Reductions in compensation expense +associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. +Recent Accounting Pronouncements +Reference is made to Note 1 of our +audited consolidated financial statements included elsewhere in this report. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +We have exposure to financial market risks, including changes in foreign currency exchange rates and interest rates. +Financial Exchange Risk +The functional currencies of our foreign subsidiaries and branches are the local currencies – the British Pound in the UK, the Canadian Dollar in Canada, the Danish Krone in Denmark, the +Chinese Yuan in China, and the Euro in France and Germany. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign subsidiaries are translated to U.S. dollars. The assets and liabilities of our +foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at an average exchange rate for the reporting period for revenue and expense +accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The reported results of our foreign subsidiaries will be influenced by their +translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency translation exposure is related to our subsidiaries that have functional currencies denominated in Euro. A hypothetical 10% change in the rates used to +translate the results of our foreign subsidiaries would result in an increase or decrease in our consolidated net income of less than $0.1 million for the year ended January 31, 2019. +30 +Table of Contents +Transactional exposure arises where transactions occur in currencies other than the +functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange +rates prevailing at the balance sheet date and the resulting gains and losses are reported as foreign exchange gain (loss) in the consolidated statements of income. Realized and unrealized foreign exchange losses resulting from transactional +exposure were $0.7 million for the year ended January 31, 2019. +Interest Rate Risk +The Company has exposure to interest rate risk from its variable rate long-term debt. We entered into interest rate swaps to hedge the +interest rate exposure related to our variable rate debt. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. Giving effect to our interest rate swaps, if interest +rates were to decrease by 50 basis points, the fair value of the Company’s debt would increase by approximately $0.2 million. If interest rates were to increase by 50 basis points, the fair value of the Company’s debt would +decrease by approximately $0.2 million. +31 +Table of Contents +Item 8. Financial Statements and Supplementary Data +The consolidated financial statements required under this item are submitted as a separate section of this +report on the pages indicated at Item 15(a)(1). +Item 9. Changes in and Disagreements with +Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of +the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities +Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2019 to ensure that +the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and +our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s +Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing +and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s +internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting +principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect +misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2019. In +making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the +principal executive officer and principal financial officer believe that as of January 31, 2019, the Company’s internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated +Framework.” +The attestation report of the Company’s registered public accounting firm regarding internal control +over financial reporting appears in Part IV, Item 15 of this Form 10-K and is incorporated herein by reference. +Changes in Internal Controls over Financial Reporting +There have been no +changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +32 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item is incorporated herein by reference to the Company’s definitive proxy statement for the 2019 +Annual Meeting of Shareholders. +The following sets forth certain information with respect to all executive officers of the +Company. All officers serve at the pleasure of the Board of Directors. +Name +Age +Position +Gregory A. Woods +60 +President, Chief Executive Officer and Director +David S. Smith +62 +Vice President, Chief Financial Officer and Treasurer +Michael M. Morawetz +59 +Vice President—EMEA +Stephen M. Petrarca +56 +Vice President—Operations +Michael J. Natalizia +55 +Vice President and Chief Technology Officer +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. +Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from +January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to +2010, Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts. +Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner +of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. Mr. Smith has also held a variety of senior finance positions at semiconductor and manufacturing companies, including Senior Vice President and Chief +Financial Officer of Standard Microsystems Corporation, a global semiconductor company, from 2005 to 2008 and Vice President, Finance and Chief Financial Officer of both Dover Corporation, a diversified global manufacturing company, from 2000 to +2002 and Crane Company, a diversified manufacturing company from 1994 to 2000. +Mr. Morawetz was appointed Vice +President—EMEA in 2006. He was previously the General Manager of Branch Operations for the Company’s German subsidiary, having joined the Company in 1989. +Mr. Petrarca was appointed Vice President—Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has +been with the Company since 1980. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company +on March 9, 2012. Prior to this appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +Code of Ethics +The Company has adopted a Code of Conduct which applies to +all directors, officers and employees of the Company, including the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and principal accounting officer which meets the requirements of a “code of ethics” as +defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on the Company’s +website, (www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” The Company intends to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, +principal accounting officer, or persons performing similar functions by posting such information on its website. +33 +Table of Contents +Item 11. Executive Compensation +The information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2019 +Annual Meeting of Shareholders. +The information set forth under the heading “Compensation Committee Report” in the +Company’s definitive Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters +The information required by this item is incorporated herein by reference to the Company’s +definitive Proxy Statement for the 2019 Annual Meeting of Shareholders. +Equity Compensation Plan Information +The following table sets forth information about the Company’s equity compensation plans as of January 31, 2019: +Plan Category +Number of Securities to +be Issued Upon Exercise +of Outstanding +Options, +Warrants and Rights +Weighted- +Average Exercise +Price of +Outstanding +Options, +Warrants +and +Rights +Number of Securities +Remaining Available for +Future Issuance +Under +Equity Compensation Plans +Equity Compensation Plans Approved by Shareholders +901,664 +(1) +$ +14.30 +(2) +290,593 +(3) +Equity Compensation Plans Not Approved by Shareholders +— +— +— +Total +901,664 +(1) +$ +14.30 +(2) +290,593 +(3) +(1) +Includes 417,695 shares issuable upon exercise of outstanding options granted under the Company’s 2007 Equity Incentive Plan; 202,450 +shares issuable upon exercise of outstanding options granted and 50,585 restricted stock units outstanding under the Company’s 2015 Equity Incentive Plan; and 151,000 shares issuable upon exercise of outstanding options granted and 79,934 +restricted stock units outstanding under the Company’s 2018 Equity Incentive Plan +(2) +Does not include restricted stock units. +(3) +Represents 256,740 shares available for grant under the AstroNova, Inc. 2018 Equity Incentive Plan and 33,853 shares available for purchase +under the Employee Stock Purchase Plan. This balance does not include 3,148 shares issued pursuant to outstanding unvested restricted stock awards which are subject to forfeiture. +Additional information regarding these equity compensation plans is contained in Note 14, “Share-Based Compensation,” in the +Company’s Consolidated Financial Statements included in Item 15 hereto. +Item 13. +Certain Relationships, Related Transactions and Director Independence +The information required by +this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2019 Annual Meeting of Shareholders. +Item 14. Principal Accountant Fees and Services +The information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2019 +Annual Meeting of Shareholders. +34 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part +of this Annual Report filed on Form 10-K: +Page +Report of Independent Registered Public Accounting Firm +41-42 +Consolidated Balance Sheets as of January 31, 2019 and 2018 +43 +Consolidated Statements of Income—Years Ended January 31, 2019, 2018 and +2017 +44 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2019, 2018 and +2017 +45 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January +31, 2019, 2018 and 2017 +46 +Consolidated Statements of Cash Flows—Years Ended January 31, 2019, 2018 and +2017 +47 +Notes to Consolidated Financial Statements +48-79 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January +31, 2019, 2018 and 2017 +80 +All other schedules for which provision is made in the applicable accounting regulations of the Securities +and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +Item 16. Form 10-K Summary +Not Applicable. +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Share Purchase Agreement, dated +January 7, 2017, as +amended, by and among ANI ApS, Trojan Holding ApS, as a Seller and as the Sellers’ Representative, and Li Wei Chong filed as Exhibit 2.1 to the Company’s Annual Report on Form 10-K for the year ended January +31, 2017 and incorporated by reference herein* +(3A) +Restated Articles of Incorporation of the Company and all amendments thereto filed as Exhibit +3A to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(3B) +By-laws of the Company as amended to date filed as Exhibit +3B to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. 000-13200) and +incorporated by reference herein. +(4) +Specimen form of common stock certificate of the Company filed as Exhibit 4 to the Company’s +Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(10.1) +AstroNova, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement +filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 annual shareholders meeting and incorporated by reference herein.** +(10.2) +AstroNova, Inc. Management Bonus Plan (Group III) filed as Exhibit +10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended May 3, 2014 incorporated by reference herein.** +35 +Table of Contents +Exhibit +Number +(10.3) +Form of Performance-Based Restricted Stock Unit Award Agreement filed as Exhibit 10.9 +to the Company’s Quarterly Report on Form 10-Q for the period ended April 28, 2012 and incorporated by reference herein.** +(10.4) +Equity Incentive Award Agreement dated as of November +24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended January +31, 2015 and incorporated by reference herein.** +(10.5) +Change in Control Agreement dated as of November +24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended January +31, 2015 and incorporated by reference herein.** +(10.6) +AstroNova Inc. 2015 Equity Incentive Plan filed as Exhibit +A to the Definitive Proxy Statement filed on April 21, 2015 (File No. 000-13200) for the 2015 annual shareholders meeting and incorporated by reference herein.** +(10.7) +Senior Executive Short Term Incentive Plan adopted March +27, 2015 filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended May 2, 2015 and incorporated by reference herein.** +(10.8) +General Manager Employment Contract dated November +18, 2014 by and among AstroNova, Inc. and Michael Morawetz filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended May +2, 2015 and incorporated by reference herein.** +(10.9) +Form of Indemnification Agreement for directors and officers filed as Exhibit 10.1 +to the Company’s Quarterly Report on Form 10-Q for the period ended October 31, 2015 and incorporated by reference herein.** +(10.10) +Credit Agreement dated February +28, 2017 among AstroNova, Inc., as the U.S. Borrower, ANI APS, as the Danish Borrower, Certain Subsidiaries of the U.S. Borrower, as the Guarantors and Bank of America, N.A. filed as Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2017 and incorporated by reference herein. +(10.11) +Security and Pledge Agreement dated February +28, 2017 among AstroNova, Inc. as the U.S. Borrower and such other parties that become Grantors hereunder after the date hereof and Bank of America, N.A. filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2017 and incorporated by reference herein. +(10.12) +AstroNova, Inc. Amended and Restated Non-Employee Director +Annual Compensation Program filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference +herein.** +(10.13) +Form of Restricted Stock Agreement granted under the Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.2 to the Company’s Quarterly Report on Form +10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.14) +Form of Incentive Stock Option Agreement granted under the 2015 Equity Incentive Plan filed +as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.15) +Form of Non-Statutory Stock Option Agreement granted +under the 2015 Equity Incentive Plan filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by +reference herein.** +(10.16) +Form of Non-Employee Director Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.5 to the Company’s Quarterly Report on Form +10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +36 +Table of Contents +Exhibit +Number +(10.17) +Form of Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit +10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.18) +Form of Non-Employee Director Restricted Stock Agreement +granted under the 2015 Equity Incentive Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated +by reference herein.** +(10.19) +Form of Time-Based Restricted Stock Unit Agreement granted under the 2015 Equity Incentive +Plan filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.20) +Form of Performance Restricted Stock Unit Agreement granted under the 2015 Equity Incentive +Plan filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.21) +Stock Purchase Agreement, dated as of May +1, 2017, by and among AstroNova, Inc. and the trust established by Albert W. Ondis by Declaration of Trust dated December 4, 2003, as amended filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date May 1, 2017, filed with the SEC on May 5, 2017 and incorporated by reference herein. +(10.22) +Consent under Credit Agreement, dated as of May +1, 2017, by and among AstroNova, Inc., ANI ApS, Trojanlabel ApS, and Bank of America, N.A. filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date May +1, 2017, filed with the SEC on May 5, 2017 and incorporated by reference herein. +(10.23) +AstroNova, Inc. Amended and Restated Non-Employee Director +Annual Compensation Program, as amended filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended April 29, 2017 and incorporated by +reference herein.** +(10.24) +Stock Purchase Agreement, dated as of May +1, 2017, by and among AstroNova, Inc. and the trust established by Albert W. Ondis by Declaration of Trust dated December 4, 2003, as amended filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date May 1, 2017, filed with the SEC on May 5, 2017 and incorporated by reference herein. +(10.25) +Consent under Credit Agreement, dated as of May +1, 2017, by and among AstroNova, Inc., ANI ApS, Trojanlabel ApS, and Bank of America, N.A. filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date May +1, 2017, filed with the SEC on May 5, 2017 and incorporated by reference herein. +(10.26) +Asset Purchase and License Agreement, dated September +28, 2017, by and between AstroNova, Inc. and Honeywell International, Inc. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date September +28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.27) +First Amendment to the Credit Agreement, dated September +28, 2017, by and among AstroNova, Inc., ANI ApS, Trojan Label ApS and Bank of America, N.A. filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event dated September +28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.28) +Second Amendment to the Credit Agreement, dated November +30, 2017, by and among AstroNova, Inc., ANI ApS, Trojan Label ApS and Bank of America, N.A. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event dated November +30, 2017, filed with the SEC on December 6, 2017 and incorporated by reference herein. +37 +Table of Contents +Exhibit +Number +(10.29) +Amended and Restated AstroNova, Inc. Employee Stock Purchase Plan filed as Exhibit 10.1 +to the Company’s Current Report on Form 8-K/A, event date November 20, 2017, filed with the SEC on December 28, 2017 and incorporated by reference herein. +(10.30) +Letter Agreement dated January +12, 2018 between the Company and David Smith filed as Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended January +31, 2018 and incorporated by reference herein.** +(10.31) +Third Amendment to the Credit Agreement, dated April +17, 2018, by and among AstroNova, Inc., ANI ApS, Trojan Label ApS and Bank of America, N.A. filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended April +28, 2018 and incorporated by reference herein. +(10.32) +AstroNova, Inc. 2018 Equity Incentive Plan filed as Appendix A to the Registrant’s definitive +proxy statement on Schedule 14A filed with the SEC on May 4, 2018 and incorporated by reference herein.** +(10.33) +Form of Performance-based Restricted Stock Unit Award Agreement filed as Exhibit 10.1 to the +Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.34) +Form of Restricted Stock Unit Agreement (time-based vesting) filed as Exhibit 10.2 to the +Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.35) +Form of Incentive Stock Option filed as Exhibit 10.3 to the Company’s Current Report +on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.36) +Form of Non-statutory Stock Option filed as Exhibit +10.4 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.37) +Form of Non-statutory Stock Option (Non-employee Director) filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June +4, 2018 and incorporated by reference herein.** +(10.38) +Form of Restricted Stock Agreement filed as Exhibit 10.6 to the Company’s Current Report +on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.39) +Form of Non-employee Director Restricted Stock Agreement +filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.40) +AstroNova, Inc. Amended and Restated Non-Employee Director +Annual Compensation Program filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed, event date January 31, 2019, filed with the SEC on February 4, 2019 and incorporated by +reference herein.** +(10.41) +AstroNova, Inc. 2018 Equity Incentive Plan Non-Employee Director Restricted Stock Agreement.** +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +38 +Table of Contents +Exhibit +Number +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section +906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section +906 of the Sarbanes-Oxley Act of 2002. +(101) +The following materials from Registrant’s Annual Report on Form 10-K for the year ended January 31, 2019, formatted in XBRL +(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in +Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. Filed electronically herein. +* +Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K. The +Company will furnish copies of any such schedules to the SEC upon request. +** +Management contract or compensatory plan or arrangement. +39 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this +report to be signed on its behalf by the undersigned, thereunto duly authorized. +ASTRONOVA, INC. +(Registrant) +Date: April 10, 2019 +By: +/ S / G REGORY A. +W OODS +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below +by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/ S / G REGORY A. +W OODS +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 10, 2019 +/ S / D AVID S. +S MITH +David S. Smith +Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) +April 10, 2019 +/ S / J EAN A. +B UA +Jean A. Bua +Director +April 10, 2019 +/ S / M ITCHELL I. +Q UAIN +Mitchell I. Quain +Director +April 10, 2019 +/ S / Y VONNE E. +S CHLAEPPI +Yvonne E. Schlaeppi +Director +April 10, 2019 +/ S / H AROLD +S CHOFIELD +Harold Schofield +Director +April 10, 2019 +/ S / R ICHARD S. +W ARZALA +Richard S. Warzala +Director +April 10, 2019 +40 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Shareholders of +AstroNova, Inc. +Opinions on the Financial Statements and Internal Control over Financial +Reporting +We have audited the accompanying consolidated balance sheets of AstroNova, Inc. (the “Company”) as +of January 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended January 31, 2019, and the +related notes and the financial statement schedule listed in Item 15(a)(2)(collectively, the financial statements). We also have audited AstroNova, Inc.’s internal control over financial reporting as of January 31, 2019, based on criteria +established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2019 and 2018, and the results of its +operations and its cash flows for each of the years in the three-year period ended January 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all +material respects, effective internal control over financial reporting as of January 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO. +Basis for Opinion +The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial +reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an +opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board +(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the +audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the +financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits +also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included +obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits +also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial +statements for external purposes in +41 +Table of Contents +accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the +maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation +of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and +(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any +evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Wolf & Company, P.C. +We have +served as the Company’s auditor since 2013. +Boston, Massachusetts +April 10, 2019 +42 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2019 +2018 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +7,534 +$ +10,177 +Securities Available for Sale +— +1,511 +Accounts Receivable, net of reserves of $521 in 2019 and $377 in 2018 +23,486 +22,400 +Inventories +30,161 +27,609 +Prepaid Expenses and Other Current Assets +1,427 +1,251 +Total Current Assets +62,608 +62,948 +Property, Plant and Equipment, net +10,380 +9,752 +Identifiable Intangibles, net +29,674 +33,633 +Goodwill +12,329 +13,004 +Deferred Tax Assets, net +2,928 +1,829 +Other +1,064 +1,147 +TOTAL ASSETS +$ +118,983 +$ +122,313 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +5,956 +$ +11,808 +Accrued Compensation +5,023 +2,901 +Other Accrued Expenses +2,911 +2,414 +Current Portion of Long-Term Debt +5,208 +5,498 +Current Liability —Royalty Obligation +1,875 +1,625 +Revolving Credit Facility +1,500 +— +Current Liability —Excess Royalty Payment Due +1,265 +615 +Income Taxes Payable +554 +684 +Deferred Revenue +373 +367 +Total Current Liabilities +24,665 +25,912 +NON CURRENT LIABILITIES +Long-Term Debt, net of current portion +12,870 +17,648 +Royalty Obligation, net of current portion +9,916 +11,760 +Deferred Tax Liabilities +40 +698 +Other Long Term Liabilities +1,717 +2,648 +TOTAL LIABILITIES +49,208 +58,666 +Commitments and Contingencies (See Note 20) +SHAREHOLDERS’ EQUITY +Preferred Stock, $10 Par Value, Authorized 100,000 shares, None Issued +— +— +Common Stock, $0.05 Par Value, Authorized 13,000,000 shares; Issued 10,218,559 shares in 2019 and 9,996,120 shares in +2018 +511 +500 +Additional Paid-in Capital +53,568 +50,016 +Retained Earnings +49,511 +45,700 +Treasury Stock, at Cost, 3,261,672 shares in 2019 and 3,227,942 shares in 2018 +(32,997 +) +(32,397 +) +Accumulated Other Comprehensive Loss, Net of Tax +(818 +) +(172 +) +TOTAL SHAREHOLDERS’ EQUITY +69,775 +63,647 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +118,983 +$ +122,313 +See Notes to the Consolidated Financial Statements. +43 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share +Data) +2019 +2018 +2017 +Revenue +$ +136,657 +$ +113,401 +$ +98,448 +Cost of Revenue +82,658 +69,399 +58,959 +Gross Profit +53,999 +44,002 +39,489 +Costs and Expenses: +Selling and Marketing +26,343 +22,234 +18,955 +Research and Development +7,813 +7,453 +6,314 +General and Administrative +11,123 +8,903 +7,939 +Operating Expenses +45,279 +38,590 +33,208 +Operating Income +8,720 +5,412 +6,281 +Other Income (Expense): +Interest Expense +(876 +) +(402 +) +— +Investment Income +145 +168 +78 +Other, Net +(681 +) +(21 +) +246 +(1,412 +) +(255 +) +324 +Income before Income Taxes +7,308 +5,157 +6,605 +Income Tax Provision +1,578 +1,871 +2,377 +Net Income +$ +5,730 +$ +3,286 +$ +4,228 +Net Income Per Common Share—Basic +$ +0.83 +$ +0.48 +$ +0.57 +Net Income Per Common Share—Diluted +$ +0.81 +$ +0.47 +$ +0.56 +Weighted Average Number of Common Shares Outstanding—Basic +6,881 +6,911 +7,421 +Dilutive Effect of Common Stock Equivalents +203 +104 +151 +Weighted Average Number of Common Shares Outstanding—Diluted +7,084 +7,015 +7,572 +See Notes to the Consolidated Financial Statements. +44 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2019 +2018 +2017 +Net Income +$ +5,730 +$ +3,286 +$ +4,228 +Other Comprehensive Income (Loss), net of taxes and reclassification adjustments: +Foreign Currency Translation Adjustments +(671 +) +867 +(65 +) +Change in Value of Derivatives Designated as Cash Flow Hedge +622 +(1,036 +) +— +(Gains) Losses from Cash Flow Hedges Reclassified to Income Statement +(600 +) +1,048 +— +Unrealized Gain (Loss) on Securities Available for Sale +— +5 +(16 +) +Realized Gain on Securities Available for Sale Reclassified to Income Statement +3 +— +— +Other Comprehensive Income (Loss) +(646 +) +884 +(81 +) +Comprehensive Income +$ +5,084 +$ +4,170 +$ +4,147 +See Notes to the Consolidated Financial Statements. +45 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Treasury +Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Shares +Amount +Balance January 31, 2016 +9,666,290 +$ +483 +$ +45,675 +$ +42,212 +$ +(20,022 +) +$ +(975 +) +$ +67,373 +Share-based compensation +— +— +1,019 +— +— +— +1,019 +Employee option exercises +93,483 +5 +834 +— +(451 +) +— +388 +Restricted stock awards vested, net +75,133 +4 +(4 +) +— +(308 +) +— +(308 +) +Common Stock – cash dividend—$0.28 per share +— +— +— +(2,082 +) +— +— +(2,082 +) +Net income +— +— +— +4,228 +— +— +4,228 +Other comprehensive loss +— +— +— +— +— +(81 +) +(81 +) +Balance January 31, 2017 +9,834,906 +$ +492 +$ +47,524 +$ +44,358 +$ +(20,781 +) +$ +(1,056 +) +$ +70,537 +Share-based compensation +— +— +1,583 +— +— +— +1,583 +Employee option exercises +90,042 +4 +913 +— +(275 +) +— +642 +Restricted stock awards vested, net +71,172 +4 +(4 +) +— +(103 +) +— +(103 +) +Repurchase of Common Stock +— +— +— +— +(11,238 +) +— +(11,238 +) +Common Stock – cash dividend—$0.28 per share +— +— +— +(1,944 +) +— +— +(1,944 +) +Net income +— +— +— +3,286 +— +— +3,286 +Other comprehensive loss +— +— +— +— +— +884 +884 +Balance January 31, 2018 +9,996,120 +$ +500 +$ +50,016 +$ +45,700 +$ +(32,397 +) +$ +(172 +) +$ +63,647 +Share-based compensation +— +— +1,886 +— +— +— +1,886 +Employee option exercises +150,125 +7 +1,669 +— +(366 +) +— +1,310 +Restricted stock awards vested, net +72,314 +4 +(3 +) +— +(234 +) +— +(233 +) +Reclassification due to adoption of ASU 2018-02 +— +— +— +14 +— +— +14 +Common Stock – cash dividend—$0.28 per share +— +— +— +(1,933 +) +— +— +(1,933 +) +Net income +— +— +— +5,730 +— +— +5,730 +Other comprehensive income +— +— +— +— +— +(646 +) +(646 +) +Balance January 31, 2019 +10,218,559 +$ +511 +$ +53,568 +$ +49,511 +$ +(32,997 +) +$ +(818 +) +$ +69,775 +See Notes to the Consolidated Financial Statements. +46 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2019 +2018 +2017 +Cash Flows from Operating Activities: +Net Income +$ +5,730 +$ +3,286 +$ +4,228 +Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: +Depreciation and Amortization +6,152 +3,994 +2,431 +Amortization of Debt Issuance Costs +51 +34 +— +Share-Based Compensation +1,886 +1,583 +1,019 +Deferred Income Tax Provision (Benefit) +(1,638 +) +744 +174 +Gain on Sale of UK Property +— +— +(419 +) +Changes in Assets and Liabilities, Net of Impact of Acquisitions: +Accounts Receivable +(1,493 +) +(4,722 +) +(416 +) +Inventories +(2,872 +) +(5,509 +) +(4,659 +) +Accounts Payable and Accrued Expenses +(3,967 +) +5,207 +1,426 +Income Taxes Payable +(151 +) +(801 +) +2,187 +Other +(318 +) +(92 +) +982 +Net Cash Provided by Operating Activities +3,380 +3,724 +6,953 +Cash Flows from Investing Activities: +Proceeds from Sales/Maturities of Securities Available for Sale +1,511 +5,539 +4,029 +Purchases of Securities Available for Sale +— +(321 +) +(400 +) +Proceeds from Sale of UK Property +— +— +474 +Cash Paid for TrojanLabel Acquisition, Net of Cash Acquired +— +(9,007 +) +— +Cash Paid for Honeywell Asset Purchase and License Agreement +(400 +) +(14,873 +) +— +Payments Received on Line of Credit and Note Receivable +— +85 +256 +Additions to Property, Plant and Equipment +(2,645 +) +(2,204 +) +(1,238 +) +Net Cash Provided (Used) by Investing Activities +(1,534 +) +(20,781 +) +3,121 +Cash Flows from Financing Activities: +Net Proceeds from Common Shares Issued Under Employee Benefit Plans and Employee Stock Option Plans, Net of Payment of Minimum +Tax Withholdings +1,077 +539 +79 +Purchase of Treasury Stock +— +(11,238 +) +— +Proceeds from Issuance of Long-Term Debt +— +24,200 +— +Borrowings under Revolving Credit Facility +3,000 +— +— +Repayments under Revolving Credit Facility +(1,500 +) +— +— +Change in TrojanLabel Earn Out Liability +— +(1,438 +) +— +Principal Payments on Long-Term Debt +(4,762 +) +(828 +) +— +Payments of Debt Issuance Costs +— +(234 +) +— +Dividends Paid +(1,933 +) +(1,944 +) +(2,082 +) +Net Cash (Used) Provided by Financing Activities +(4,118 +) +9,057 +(2,003 +) +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +(371 +) +79 +(16 +) +Net (Decrease) Increase in Cash and Cash Equivalents +(2,643 +) +(7,921 +) +8,055 +Cash and Cash Equivalents, Beginning of Year +10,177 +18,098 +10,043 +Cash and Cash Equivalents, End of Year +$ +7,534 +$ +10,177 +$ +18,098 +Supplemental Information: +Cash Paid (Received) During the Period for: +Interest +$ +636 +$ +246 +$ +— +Income Taxes, Net of Refunds +$ +3,472 +$ +1,940 +$ +(84 +) +Schedule of non-cash financing activities: +Value of Shares Received in Satisfaction of Option Exercise Price +$ +366 +$ +275 +$ +451 +See Notes to the Consolidated Financial Statements. +47 +Table of Contents +ASTRONOVA, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +January 31, 2019, 2018 and 2017 +Note 1—Summary of Significant Accounting Policies +Basis of +Presentation: The accompanying financial data have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and are presented in conformity with U.S. generally accepted accounting +principles (“U.S. GAAP”). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year. +Principles of Consolidation: The consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated +in consolidation. +Reclassification: Certain amounts in prior year’s financial statements have been reclassified to +conform to the current year’s presentation. +Use of Estimates: The preparation of financial statements in +conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts, inventory +valuation, valuation and estimated lives of intangible assets, impairment of long-lived assets, goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at +the time estimates are made, past historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those +estimates. +Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are +considered to be cash equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. At both January 31, 2019 and 2018, cash of $3.9 million was held in foreign bank accounts. +Securities Available for Sale: Securities available for sale are carried at fair value based on quoted market prices, +where available. The difference between cost and fair value, net of related tax effects, is recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity. +Inventories: Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and include material, labor and manufacturing overhead. +Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is +provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and leasehold improvements—10 to 45 years; machinery and equipment—3 to 10 years and computer equipment and +software—3 to 10 years). +Revenue Recognition: On February 1, 2018 we adopted Accounting Standards Update +(“ASU”) 2014-09, “Revenue from Contracts with Customers (“Topic 606”),” which superseded nearly all existing revenue recognition guidance under U.S. GAAP. The core +principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five +step process to recognize revenue and requires more judgment and estimates within the revenue recognition process than required under previous U.S. GAAP, which includes identifying contracts with customers, identifying performance obligations in the +contract, determining and estimating the amount of any variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation and recognizing revenue when the entity satisfies each +performance obligation. +We adopted this standard using the modified retrospective method and have applied the guidance to all +contracts within the scope of Topic 606 as of the February 1, 2018 adoption date. Under Topic 606, +48 +Table of Contents +based on the nature of our contracts and consistent with prior practice, we recognize the large majority of our revenue upon shipment, which is when the performance obligation has been satisfied. +Accordingly, the adoption of this standard did not have a material impact on our revenue recognition and there was no cumulative effective adjustment as of February 1, 2018 as a result of the adoption of Topic 606. +The vast majority of our revenue is generated from the sale of distinct products. Revenue is measured as the amount of consideration we +expect to receive in exchange for such products, which is generally at the contractually stated prices, and is recognized when we satisfy a performance obligation by transferring control of a product to a customer. The transfer of control generally +occurs at one point in time, upon shipment, when title and risk of loss pass to the customer. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Sales taxes and value added taxes collected concurrently with +revenue generating activities are excluded from revenue. +Many of the contracts entered into with customers are commonly +comprised of a combination of equipment, supplies, installation and/or training services. We determine performance obligations by assessing whether the products or services are distinct from other elements of the contract. In order to be distinct, +the product must perform either on its own or with readily available resources and must be separate within the context of the contract. +The majority of our hardware products contain embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the +systems as a whole, as it is not sold or marketed separately and its production costs are minor compared to those of the hardware system. Hardware and software elements are typically delivered at the same time and are accounted for as a single +performance obligation for which revenue is recognized at the point in time when ownership is transferred to the customer. +Installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a +geographic location and customer preferences, and can range from a few days to a few months. The delivery of installation and training services are not assessed to determine whether they are separate performance obligations, as the amounts are not +material to the contract. +Shipping and handling activities that occur after control over a product has transferred to a +customer are accounted for as fulfillment activities rather than performance obligations, as allowed under a practical expedient provided by Topic 606. The shipping and handling fees charged to customers are recognized as revenue and the related +costs are included in cost of revenue at the point in time when ownership of the product is transferred to the customer. +We +may perform service at the request of the customer, generally for the repair and maintenance of products previously sold. These services are short in duration, typically less than one month, and total less than 9% of revenue for the year ended +January 31, 2019. Revenue is recognized as services are rendered and accepted by the customer. We also provide service agreements on certain of our Product Identification equipment. Service agreements are purchased separately from the equipment +and provide for the right to obtain service and maintenance on the equipment for a period of typically one to two years. Accordingly, revenue on these agreements is recognized over the term of the agreements. The portion of service agreement +contracts that are uncompleted at the end of any reporting period are included in deferred revenue. +We generally provide +warranties for our products. The standard warranty period is typically 12 months for most hardware products except for airborne printers, which typically have warranties that extend for 4-5 years, consistent +with industry practice. Such assurance-type warranties are not deemed to be separate performance obligations from the hardware product and costs associated with providing the warranties are accrued in accordance with ASC 450, +“Contingencies,” as we have the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability. Our estimate of costs to service the warranty obligations is based on historical experience and +expectations of future conditions. To the extent that our experience in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the +49 +Table of Contents +estimated warranty liability are recorded at that time, with an offsetting adjustment to cost of revenue. On occasion, customers request a warranty period longer than our standard warranty. +In those instances, in which extended warranty services are separately quoted to the customer, an additional performance obligation is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the +extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue. +We recognize an asset for the incremental direct costs of obtaining a contract with a customer if we expect the benefit of those costs to +be longer than one year. There has been no change in the Company’s accounting for these contracts as a result of the adoption of Topic 606. We apply the practical expedient to expense costs incurred for costs to obtain a contract when the +amortization period would have been less than a year. These costs include sales commissions paid to the internal direct sales team as well as to third-party representatives and distributors. Contractual agreements with each of these parties +outline commission structures and rates to be paid. Generally speaking, the contracts are all individual procurement decisions by the customers and do not include renewal provisions and as such the majority of the contracts have an economic +life of significantly less than a year. +Accounts Receivables and Allowance for Doubtful Accounts: Standard payment +terms are typically 30 days after shipment, but vary by type and geographic location of our customer. Credit is extended based upon an evaluation of the customer’s financial condition. In circumstances where we are aware of a +customer’s inability to meet its financial obligations, an allowance is established. The remainder of the allowance established is based on a variety of factors, including the age of amounts outstanding relative to their contractual due date, +historical write-off experience and current market assessments. Accounts receivable are stated at their estimated net realizable value. +Research and Development Costs: We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. The following costs are included in +research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies. +Foreign Currency Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and +liabilities are translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues +and expenses are translated at the average monthly exchange rates in effect during the related period. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our subsidiaries in Germany, Denmark and China +since their undistributed earnings are considered to be permanently invested. Our net transactional foreign exchange losses included in the consolidated statements of income were $0.7 million in fiscal 2019 and $0.2 million for both fiscal +2018 and 2017. +Advertising: The Company expenses advertising costs as incurred. Advertising costs including advertising +production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $1.9 million; $1.8 million and $1.6 million in fiscal 2019, 2018 and 2017, respectively. +Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances +indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected +undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. For 2019, 2018 and 2017, there +were no impairment charges for long-lived assets. +Intangible Assets: Intangible assets include the value of customer +and distributor relationships, existing technology and non-competition agreements acquired in connection with business and asset acquisitions and are stated at cost (fair value at acquisition) less accumulated +amortization. These intangible assets have a definite life +50 +Table of Contents +and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for +impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted +cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash +flow analysis. For 2019, 2018 and 2017, there were no impairment charges for intangible assets. +Goodwill: Management +evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate indicate that the carrying value of +an asset might be impaired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment if discrete financial information for that business is +prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. We determined that each of our operating segments +(Product Identification and T&M) represents a reporting unit for purposes of goodwill impairment testing. +The +accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors +that management considers in this qualitative assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the +composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the +reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that +this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, the Company uses the market approach, which compares the reporting unit to +publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital +expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not +impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. +We performed a qualitative assessment for our fiscal 2019 analysis of goodwill. Based on this assessment, management does not believe that +it is more likely than not that the carrying values of the reporting units exceed their fair values. Accordingly, no quantitative assessment was performed, as management believes that there are no impairment issues in regards to goodwill at this +time. +Income Taxes: We use the liability method of accounting for income taxes. Under this method, deferred tax assets +and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. +The Company’s deferred taxes are presented as non-current in the accompanying consolidated balance sheet. An allowance against deferred tax assets is recognized when it is +more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At January 31, 2019 and 2018, a valuation allowance was provided for deferred tax assets attributable to +certain state R&D credit carryforwards. +AstroNova accounts for uncertain tax positions in accordance with the guidance +provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and +requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and +penalties, accounting in interim periods and disclosure. +51 +Table of Contents +On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was +enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate +income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and +liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act +(“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. All accounting under SAB 118 was finalized during the quarter ending January 31, +2019 with no material changes from the provisional amounts previously recorded. Refer to Note 15 “Income Taxes” in the audited consolidated financial statements included elsewhere in this report for further details. +Net Income Per Common Share: Basic net income per share is based on the weighted average number of shares +outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the +period using the treasury stock method. In fiscal years 2019, 2018 and 2017, there were 326,275, 675,600 and 459,700, respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because +their inclusion would be anti-dilutive. +Fair Value Measurement: We measure our financial assets at fair value on a +recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly +transaction between market participants at the measurement date. In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of +observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a +financial instrument based on the best information available in the circumstances. +The fair value hierarchy is summarized as +follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or +liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or +liabilities +Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, other +accrued expenses and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short term nature of these instruments. +Share-Based Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award +when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our +estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend +yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that +period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, the Company has +52 +Table of Contents +observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The +risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No +compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also +based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the grant date. Reductions in compensation expense associated with forfeited awards are estimated at the +date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. +Cash flow +from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) is classified with other income tax cash flows as an operating activity. +Share-based compensation becomes deductible for determining income taxes when the related award vests, is exercised, or is forfeited +depending on the type of share-based award and subject to relevant tax law. +Derivative Financial Instruments: The +Company uses derivative instruments as part of its overall strategy to manage its exposure to market risks primarily associated with fluctuations in foreign currency exchange rates and interest rates. Derivative instruments are recognized as either +assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, +further, on the type of hedging relationship. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of income during the current period. For those derivative instruments that are designated +and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. +For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the +derivative instrument is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the hedged +transaction affects earnings (e.g., in “Interest Expense” when the hedged transactions are interest cash flows associated with floating-rate debt, or “Other, Net” for portions reclassified relating to the remeasurement of the +debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffectiveness portion), or hedge components excluded from the +assessment of effectiveness, are recognized in the statement of income during the current period. +Recent Accounting Pronouncements +Recently Adopted: +Share-Based Compensation +In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07 +“Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 reduces the cost and complexity and improves financial reporting by +expanding the scope of Topic 718 to include share-based payment transactions to nonemployees. ASU 2018-07 is effective for public companies for fiscal years beginning after December 15, 2018, and interim +periods within those fiscal years with early adoption permitted. The Company adopted the provisions of this guidance effective beginning in the second quarter of fiscal 2019. The adoption of this guidance did not have a material impact on +the Company’s consolidated financial statements. +Income Taxes +In March 2018, the FASB issued ASU 2018-05—“Income Taxes (Topic 740): Amendments to +SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” ASU 2018-05 provides guidance for companies +53 +Table of Contents +related to the U.S. government-enacted comprehensive tax legislation commonly referred to as the Tax Act. ASU 2018-05 allows for a measurement +period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. This ASU is effective immediately as new information is available to adjust provisional amounts that were previously recorded. The +Company adopted this standard in the first quarter of fiscal 2019 and has properly reflected the income tax effects of all aspects of the legislation for which the accounting under ASC 740 was impacted. All conclusions under SAB 118 were finalized +during the fourth quarter of 2019 with no material changes to the provisional amounts. Refer to Note 15, “Income Taxes” for further details. +Comprehensive Income +In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU +2018-02 amends ASU Topic 220 and allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act, to eliminate the stranded tax +effects resulting from the Tax Act. This ASU is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The amendments in this update should be applied either in the period of adoption or retrospectively to +each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company early adopted this amendment in the second quarter of fiscal 2019 and reclassified +$14,000 from accumulated other comprehensive income to retained earnings. +Revenue Recognition +In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers +(Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. +GAAP and International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. Under this guidance, revenue is recognized +when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, +timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this guidance effective February 1, 2018 using the modified retrospective method. The adoption of this guidance did not have a material +impact on the Company’s consolidated financial statements. Refer to the significant accounting policy discussion for “Revenue Recognition” included above for further details. +Derivatives and Hedging +In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.” The objective of this new guidance is to improve the financial reporting of hedging relationships by, among +other things, eliminating the requirement to separately measure and record hedge ineffectiveness. ASU 2017-12 is effective for public companies for fiscal years beginning after December 15, 2018, and +interim periods within those fiscal years with early adoption permitted. We adopted the provisions of this guidance effective for the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on the +Company’s consolidated financial statements. +Share-Based Compensation +In May 2017, the FASB issued ASU 2017-09 “Stock Compensation: Scope of Modification +Accounting.” ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC +718. The Company adopted this guidance effective February 1, 2018. The adoption of this guidance did not have a material impact on its consolidated financial statements. +54 +Table of Contents +Statement of Cash Flows +In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU +2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments. The Company adopted this guidance affective +February 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. +Recent Accounting Standards Not Yet Adopted +Internal-Use Software +In August +2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): +Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 reduces complexity for the accounting for costs of implementing a +cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop +or obtain internal-use software (and hosting arrangements that include an internal use software license). This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning +after December 15, 2019 (Q1 fiscal 2021 for AstroNova), with early adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is +currently evaluating the impact this new guidance will have on its consolidated financial statements. +Fair Value Measurement +In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement +(Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying or +adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019 including interim periods within those fiscal years (Q1 fiscal 2021 for AstroNova), with early adoption permitted. The provisions of ASU +2018-13 relating to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be +applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The remaining provisions should be applied retrospectively to all periods presented upon their effective date. The Company is +currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures. +Leases +In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU +2016-02 supersedes current guidance related to accounting for leases and is intended to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities in +the balance sheet for operating leases with lease terms greater than twelve months. The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from +leases. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842” which includes certain clarifications to address potential narrow-scope implementation issues. Additionally +in July 2018 the FASB issued ASU 2018-11, “Leases (Topic 842) Targeted Improvements,” which amends ASU 2016-02 to provide an alternative transition method to +adopt the new lease standard which will not require adjustments to comparative periods nor require modified disclosure in those comparative periods. The new standard will be effective for Astronova at the beginning of fiscal 2020. +Upon the adoption of this guidance, the Company expects to recognize approximately $2.0 million of right-of-use assets and lease liabilities on its consolidated balance sheet related to its operating leases. The +55 +Table of Contents +Company anticipates electing the package of practical expedients, which among other things, allows the carryforward of the historical lease classification. The Company is in the process of +identifying appropriate changes to its accounting policies and procedures, system processes, and related internal controls to support the requirements of this new guidance. This standard will not have a material impact on our liquidity or +debt-covenant compliance under our current credit agreement, and is not expected to have any significant impact on the Company’s results of operations. +No other new accounting pronouncements, issued or effective during fiscal 2019, have had or are expected to have a material impact on our consolidated financial statements. +Note 2—Revenue Recognition +We derive revenue from the sale of (i) hardware including, digital color label printers and specialty OEM printing systems, portable data acquisition systems and airborne printers used in the flight +deck and in the cabin of military, commercial and business aircraft, (ii) related supplies required in the operation of the hardware, (iii) repairs and maintenance of equipment and (iv) service agreements. +Revenues disaggregated by primary geographic markets and major product types are as follows: +Primary geographical markets: +Year Ended +(In thousands) +January 31, +2019 +January 31, +2018 +January 31, +2017 +United States +$ +83,668 +$ +69,795 +$ +69,850 +Europe +31,574 +29,948 +18,848 +Asia +8,207 +3,808 +1,664 +Canada +6,692 +5,373 +5,008 +Central and South America +4,147 +3,402 +3,053 +Other +2,369 +1,075 +25 +Total Revenue +$ +136,657 +$ +113,401 +$ +98,448 +Major product types: +Year Ended +(In thousands) +January 31, +2019 +January 31, +2018 +January 31, +2017 +Hardware +$ +53,207 +$ +37,501 +$ +33,797 +Supplies +71,178 +65,265 +56,169 +Service and Other +12,272 +10,635 +8,482 +Total Revenue +$ +136,657 +$ +113,401 +$ +98,448 +Contract Assets and Liabilities +We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. Our contract liabilities, which represent +billings in excess of revenue recognized, are related to advanced billings for purchased service agreements and extended warranties and were $373,000 and $367,000 at January 31, 2019 and January 31, 2018, respectively, and are recorded as +deferred revenue in the consolidated balance sheet. The slight increase in the deferred revenue at January 31, 2019 is primarily due to approximately $622,000 of revenue recognized during the year that was included in the deferred revenue +balance of the prior year end, offset by cash payments received in advance of satisfying performance obligations. +56 +Table of Contents +Contract Costs +We have determined that certain costs related to obtaining sales contracts for our aerospace printer products meet the requirement to be capitalized. These costs are deferred and amortized based on the +forecasted number of units sold over the estimated benefit term. The balance of these contract assets at January 31, 2018 was $832,000 which was reported in other assets in the consolidated balance sheet. In fiscal 2019, the Company incurred an +additional $150,000 in incremental direct costs which were deferred. The amortization of incremental direct costs was $79,000 for the period ended January 31, 2019. The balance of the deferred incremental direct contract costs net of +accumulated amortization at January 31, 2019 is $903,000, of which $109,000 was reported in other current assets and $794,000 was reported in other assets in the consolidated balance sheet. The contract costs are expected to be amortized over +the estimated remaining period of benefit, which we currently estimate to be approximately 7 years. +Note 3—Acquisitions +Honeywell Asset Purchase and License Agreement +On September 28, 2017, AstroNova, Inc. entered into an Asset Purchase and License Agreement (the “Honeywell Agreement”) with Honeywell International, Inc. (“Honeywell”) to acquire +an exclusive perpetual world-wide license to manufacture Honeywell’s narrow-format flight deck printers for two aircraft families along with certain inventory used in the manufacturing of the licensed printers. The purchase price consisted of +an initial payment of $14.6 million in cash, paid at the closing of the transaction using borrowings from the Company’s revolving credit facility and guaranteed minimum royalty payments of $15.0 million, to be paid over the next ten +years, based on gross revenues from the sales of the printers, paper and repair services of the licensed products. The royalty rates vary based on the year in which they are paid or earned and product sold or service provided, and range from +single-digit to mid double-digit percentages of gross revenue. +This transaction was evaluated under ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” and was accounted for as an asset acquisition. +The minimum royalty payment obligation of $15.0 million was recorded at the present value of the minimum annual royalty payments +using a present value factor of 2.8%, which is based on the estimated after tax cost of debt for similar companies. During fiscal 2019, the Company paid $1.9 million of guaranteed minimum royalty payments. At January 31, 2019, the current +portion of the outstanding guaranteed royalty obligation of $1.875 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $9.9 million is reported as a long-term liability on the +Company’s consolidated balance sheet at January 31, 2019. In addition to the guaranteed minimum royalty payments paid in fiscal 2019 and 2018, the Company incurred $2.8 million and $0.6 million, respectively, in excess royalty +expense, which is included in cost of revenue in the Company’s consolidated statements of income for the years ended January 31, 2019 and 2018, respectively. A total of $1.3 million and $0.6 million of excess royalty is payable +and reported as a current liability on the Company’s consolidated balance sheet at January 31, 2019 and 2018, respectively. +In connection with the Honeywell Agreement, the Company also entered into a Transition Services Agreement (“TSA”) with Honeywell related to the transfer of the manufacturing and repair of the +licensed printers from their current locations to AstroNova’s plant in West Warwick, Rhode Island. During fiscal 2019, the Company paid an additional $0.4 million to acquire another repair facility revenue stream in accordance with the +terms of the TSA. The additional $0.4 million payment was included as part of the Honeywell Agreement purchase price and recorded as an increase to the related intangible asset. +Under the terms of the TSA, the Company is required to pay for certain expenses incurred by Honeywell during the period in which product +manufacturing is transferred to the Company’s facilities. In the first quarter of fiscal 2019, a change in accounting estimates for product costs and operating expenses related to the TSA resulted in an increase of $1.0 million in +operating income ($0.8 million net of tax or $0.12 per diluted share). Additionally, in the first quarter of fiscal 2019, a change in accounting estimates for revenue subject to customer +57 +Table of Contents +rebates under the Honeywell Agreement increased operating income by $0.4 million ($0.3 million net of tax or $0.05 per diluted share). These changes in accounting estimates were the +result of actual amounts billed and received differing from initial estimates. +Transaction costs incurred for this acquisition +were $0.3 million and were included as part of the purchase price. +The assets acquired in connection with the acquisition +were recorded by the Company at their estimated relative fair values as of the acquisition date as follows: +(In thousands) +Inventory +$ +1,411 +Identifiable Intangible Assets +27,243 +* +Total Purchase Price +$ +28,654 +* +Includes additional $0.4 million related to the payment in fiscal 2019 in accordance with the terms of the TSA. +The purchase price, including the initial payment, minimum royalty payment obligation, transaction costs and +subsequent additional TSA obligation payment, was allocated based on the relative fair value of the assets acquired. The fair value of the intangible assets acquired was estimated by applying the income approach. These fair value measurements are +based on significant inputs that are not observable in the market and therefore represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement and Disclosure.” Key assumptions in estimating the fair value of the +intangibles include (1) the remaining life of the intangibles based on the term of the Honeywell Asset Purchase and License Agreement of 10 years, (2) a range of annual earnings projections from $3.9 million – $5.4 million +and (3) the Company’s internal rate of return of 21.0%. +The acquired identifiable intangible assets are as follows: +(In thousands) +Fair +Value +Useful Life +(Years) +Customer Contract Relationships +$ +27,243 +10 +Trojan Label +On February 1, 2017, the Company’s wholly-owned Danish subsidiary, ANI ApS, completed the acquisition of the issued and outstanding equity interests of TrojanLabel ApS (“TrojanLabel”). +The acquisition of TrojanLabel was accounted for as a purchase of a business under the acquisition method in accordance with the guidance provided by FASB ASC 805, “Business Combinations.” +The purchase price of this acquisition was 62.9 million Danish Krone (approximately $9.1 million), net of cash acquired of 976,000 +Danish Krone (approximately $0.1 million), of which 6.4 million Danish Krone (approximately $0.9 million) was placed in escrow to secure certain post-closing working capital adjustments and indemnification obligations of the sellers. The +acquisition was funded using available cash and investment securities. In the first quarter of fiscal 2019, the Company settled the post-closing adjustment with TrojanLabel and recovered approximately 891,000 Danish Krone (approximately $145,000) of +the amount held in the escrow account, which was recognized as an adjustment to the allowance account for TrojanLabel receivables. The remaining escrow balance was retained by TrojanLabel. +Part of the purchase agreement included an additional contingent consideration to be paid to the sellers of TrojanLabel if 80% of +specified earnings targets were achieved by the TrojanLabel business during the seven years following the closing. However, subsequent to the acquisition, the Company restructured the operating model for the TrojanLabel business such that most of +the sales and some of the expenses of the business would +58 +Table of Contents +be transferred to other legal entities of the Company. This caused the expected earnings targets in TrojanLabel, which was the basis upon which the contingent consideration was structured, to +become unlikely to be met. As a result, during fiscal 2018, the estimated fair value of the contingent consideration was reduced resulting in the Company recognizing an additional $1.4 million of income for the year which is offset in general +and administrative expense on the Company’s Consolidated Income Statement for the period ended January 31, 2018. +Total acquisition-related costs were approximately $0.7 million, of which $0.1 million and $0.6 million are included in the +general and administrative expenses in the Company’s consolidated statements of income for the years ending January 31, 2018 and January 31, 2017, respectively. +The US dollar purchase price of the acquisition has been allocated on the basis of fair value as follows: +(In thousands) +Accounts Receivable +$ +1,322 +Inventory +796 +Other Current Assets +166 +Property, Plant and Equipment +15 +Identifiable Intangible Assets +3,264 +Goodwill +7,388 +Accounts Payable and Other Current Liabilities +(1,821 +) +Other Liability +(114 +) +Contingent Liability (Earnout) +(1,314 +) +Deferred Tax Liability +(695 +) +Total Purchase Price +$ +9,007 +The fair value of the intangible assets acquired was estimated by applying the income approach, and the +fair value of the contingent consideration liability was estimated by applying the real options method. These fair value measurements are based on significant inputs that are not observable in the market and therefore represent a Level 3 +measurement as defined in ASC 820, “Fair Value Measurement and Disclosure.” Key assumptions in estimating the fair value of the intangibles include (1) remaining life of existing technology acquired based on estimate of percentage of +revenue from 0% – 100% for each product, (2) the Company’s internal rate of return of 19.0% and (3) a range of earnings projections from $121,000 – $1,070,000. Key assumptions in estimating the fair value of the contingent +consideration liability (earnout) include (1) the estimated earnout targets over the next seven years of $407,000–$1,280,000, (2) the probability of success (achievement of the various contingent events) from 1.6%–87.2% and +(3) a risk-adjusted discount rate of approximately 1.77%–3.35% used to adjust the probability-weighted earnout payments to their present value. The fair value of the contingent liability is revalued every reporting period based on updated +assumptions. Refer above and to Note 21 “Fair Value Measurements” for further details. +Goodwill of +$7.4 million, which is not deductible for tax purposes, represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired and liabilities assumed from TrojanLabel. The +goodwill recognized is attributable to synergies which are expected to enhance and expand the Company’s overall product portfolio and opportunities in new and existing markets, future technologies that have yet to be determined and +TrojanLabel’s assembled work force. The carrying amount of the goodwill was allocated to the Product Identification segment of the Company. +59 +Table of Contents +The following table reflects the fair value of the acquired identifiable intangible +assets and related estimated useful lives: +(In thousands) +Fair +Value +Useful Life +(Years) +Existing Technology +$ +2,327 +7 +Distributor Relations +937 +10 +Total +$ +3,264 +The existing technology intangible asset acquired represents the various technologies TrojanLabel has +developed related to its series of printing presses, including hardware components of the presses and the software utilized to optimize their performance. +Beginning February 1, 2017, the results of operations for TrojanLabel have been included in the Company’s statement of income for the period ended January 31, 2019 and 2018 and are reported +as part of the Product Identification segment. Assuming the acquisition of TrojanLabel had occurred on February 1, 2016, the impact would not have had a material effect on the Company’s results for period ended January 31, 2017, as +the acquisition was not considered a significant subsidiary. +Note 4—Intangible Assets +Intangible assets are as follows: +January 31, 2019 +January 31, 2018 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Miltope: +Customer Contract Relationships +$ +3,100 +$ +(1,723 +) +$ +— +$ +1,377 +$ +3,100 +$ +(1,438 +) +$ +— +$ +1,662 +RITEC: +Customer Contract Relationships +2,830 +(725 +) +— +2,105 +2,830 +(461 +) +— +2,369 +Non-Competition Agreement +950 +(681 +) +— +269 +950 +(491 +) +— +459 +TrojanLabel: +Existing Technology +2,327 +(711 +) +140 +1,756 +2,327 +(350 +) +313 +2,290 +Distributor Relations +937 +(200 +) +56 +793 +937 +(99 +) +130 +968 +Honeywell: +Customer Contract Relationships +27,243 +* +(3,869 +) +— +23,374 +26,843 +(958 +) +— +25,885 +Intangible Assets, net +$ +37,387 +$ +(7,909 +) +$ +196 +$ +29,674 +$ +36,987 +$ +(3,797 +) +$ +443 +$ +33,633 +* +Includes additional $0.4 million related to the payment in fiscal 2019 in accordance with the terms of the TSA. +There were no impairments to intangible assets during the periods ended January 31, 2019, 2018 and +2017. Amortization expense of $4.1 million; $2.2 million and $0.7 million with regard to acquired intangibles has been included in the consolidated statements of income for years ended January 31, 2019, 2018 and 2017, +respectively. +60 +Table of Contents +Estimated amortization expense for the next five years is as follows: +(In thousands) +2020 +2021 +2022 +2023 +2024 +Estimated amortization expense +$ +4,223 +$ +4,093 +$ +4,005 +$ +4,001 +$ +3,997 +Note 5—Securities Available for Sale +Pursuant to our investment policy, securities available for sale include state and municipal securities with contractual or anticipated maturity dates ranging from 1 to 13 months. These securities are +carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss), net of taxes, in shareholders’ equity until realized. Realized gains and losses from the sale of available for +sale securities, if any, are determined on a specific identification basis. A decline in the fair value of any available for sale security below cost that is determined to be other than temporary will result in a write-down of its carrying amount to +fair value. No such impairment charges were recorded for any period presented. All short-term investment securities have original maturities greater than 90 days. +The fair value, amortized cost and gross unrealized gains and losses of the securities are as follows: +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair +Value +(In thousands) +January 31, 2019 +State and Municipal Obligations +$ +— +$ +— +$ +— +$ +— +January 31, 2018 +State and Municipal Obligations +$ +1,513 +$ +— +$ +(2 +) +$ +1,511 +The contractual maturity dates of these securities are as follows: +January 31 +2019 +2018 +(In thousands) +Less than one year +$ +— +$ +1,096 +One to two years +— +415 +$ +— +$ +1,511 +Actual maturities may differ from contractual dates as a result of revenue or earlier issuer redemptions. +Note 6—Inventories +The components of inventories are as follows: +January 31 +2019 +2018 +(In thousands) +Materials and Supplies +$ +17,517 +$ +13,715 +Work-in-Progress +1,633 +1,404 +Finished Goods +15,688 +17,210 +34,838 +32,329 +Inventory Reserve +(4,677 +) +(4,720 +) +Balance at January 31 +$ +30,161 +$ +27,609 +Finished goods inventory includes $2.1 million and $2.0 million of demonstration equipment at +January 31, 2019 and 2018, respectively. +61 +Table of Contents +Note 7—Property, Plant and Equipment +Property, plant and equipment consist of the following: +January 31 +2019 +2018 +(In thousands) +Land and Land Improvements +$ +967 +$ +967 +Buildings and Leasehold Improvements +12,165 +12,056 +Machinery and Equipment +22,810 +22,125 +Computer Equipment and Software +9,385 +7,729 +Gross Property, Plant and Equipment +45,327 +42,877 +Accumulated Depreciation +(34,947 +) +(33,125 +) +Net Property Plant and Equipment +$ +10,380 +$ +9,752 +Depreciation expense on property, plant and equipment was $2.0 million, $1.8 million and +$1.7 million for the years ended January 31, 2019, 2018 and 2017, respectively. +Note 8—Accrued Expenses +Accrued expenses consisted of the following: +January 31 +2019 +2018 +(In thousands) +Warranty +$ +832 +$ +575 +Professional Fees +403 +392 +Dealer Commissions +320 +232 +Accrued Payroll & Sales Tax +97 +191 +Product Replacement Cost Reserve +— +158 +Other +1,259 +866 +$ +2,911 +$ +2,414 +Note 9—Revolving Line of Credit +The Company has a $10.0 million revolving line of credit under its existing Credit Agreement with Bank of America. Revolving credit loans may be borrowed, at the Company’s option, in U.S. +Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Krone. Amounts borrowed under the revolving credit facility bear interest at a rate per annum equal to, at the Company’s option, either +(a) the LIBOR rate (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated +leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal funds’ rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate or (iii) the LIBOR rate plus 1.00%, plus a margin +that varies within a range of 0.0% to 0.5% based on the Company’s consolidated leverage ratio. +During fiscal 2019, +$3.0 million was drawn on the revolving credit facility, of which $1.5 million was repaid and $1.5 million remains outstanding as of January 31, 2019. The outstanding balance bears interest at a weighted average annual rate of +5.6% and $61,000 of interest has been accrued and paid on this obligation and included in other expense in the accompanying consolidated income statement for the period ended January 31, 2019. As of January 31, 2019, there is +$8.5 million available for borrowing under the revolving credit facility. +The Company is required to pay a commitment fee +on the undrawn portion of the revolving credit facility at the rate of 0.25% per annum . +62 +Table of Contents +Note 10—Debt +Long-term debt in the accompanying condensed consolidated balance sheets is as follows: +January 31 +(In thousands) +2019 +2018 +USD Term Loan (4.02% and 2.85% as of January 31, 2019 and 2018, respectively); maturity date November 30, +2022 +$ +11,250 +$ +15,000 +USD Term Loan (4.02% and 3.06% as of January 31, 2019 and 2018, respectively); maturity date of January 31, +2022 +6,992 +8,372 +18,242 +23,372 +Debt Issuance Costs, net of accumulated amortization +(164 +) +(226 +) +Current Portion of Term Loan +(5,208 +) +(5,498 +) +Long-Term Debt +$ +12,870 +$ +17,648 +The schedule of required principal payments remaining during the next five years on long-term debt +outstanding as of January 31, 2019 is as follows: +(In thousands) +Fiscal 2020 +$ +5,208 +Fiscal 2021 +5,208 +Fiscal 2022 +5,576 +Fiscal 2023 +2,250 +Fiscal 2024 +— +$ +18,242 +On February 28, 2017, the Company and the Company’s wholly owned Danish subsidiary, ANI ApS +(together, the “Parties”) entered into a Credit Agreement with Bank of America, N.A. (the “Lender”). The Parties also entered into a related Security and Pledge Agreement with the Lender. The Credit Agreement provided for a term +loan to ANI ApS in the amount of $9.2 million. On November 30, 2017, the Parties entered into a Second Amendment to the Credit Agreement with the Lender. The Second Amendment provided for a term loan to the Company in the principal amount +of $15.0 million, in addition to the revolving credit facility for the Company and the term loan previously borrowed by ANI ApS at the original closing under the Credit Agreement. The proceeds from the term loan were used to repay the entire +$14.6 million principal balance of the revolving loan outstanding under the revolving credit facility as of that date. +The term loans bear interest at a rate per annum equal to the LIBOR rate plus a margin that varies within a range of 1.0% to 1.5% +based on the Company’s consolidated leverage ratio. In connection with the Credit Agreement, AstroNova and ANI ApS entered into certain hedging arrangements with the Lender to manage the variable interest rate risk and currency risk associated +with its payments in respect of the $9.2 million term loan. In connection with the Second Amendment to the Credit Agreement, AstroNova entered into certain hedging arrangements with the Lender to manage the variable interest rate risk and +currency exchange risk associated with its payments in respect of the $15.0 million term loan. Refer to Note 11, “Derivative Financial Instruments and Risk Management” for further information about these arrangements. +The Parties must comply with various customary financial and non-financial covenants under the +Credit Agreement. The financial covenants consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The Credit Agreement contains limitations, in each case subject to various exceptions and thresholds, +on the Company’s and its subsidiaries’ ability to incur future indebtedness, to place liens on assets, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the +nature of their business, and to prepay subordinated indebtedness. The Credit Agreement permits the Company to pay cash dividends on and repurchase shares of its common stock, subject to certain limitations. +63 +Table of Contents +The Lender is entitled to accelerate repayment of the loans and to terminate its +revolving credit commitment under the Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following: failure to pay when due any principal, interest or other amounts in respect +of the loans, breach of any of the Company’s covenants or representations under the loan documents, default under any other of the Company’s or its subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar +event with respect to the Company or any of its subsidiaries, a significant unsatisfied judgment against the Company or any of its subsidiaries, or a change of control of the Company. +The obligations of ANI ApS in respect of the $9.2 million term loan are guaranteed by the Company and TrojanLabel ApS. The +Company’s obligations in respect of the $15.0 million term loan, revolving credit facility and its guarantee in respect of the ANI ApS term loan are secured by substantially all of the assets of the Company (including a pledge of a portion +of the equity interests held by the Company in ANI ApS and the Company’s wholly-owned German subsidiary AstroNova GmbH), subject to certain exceptions. +As of January 31, 2019, the Company believes it is in compliance with all of the covenants in the Credit Agreement. +Note 11—Derivative Financial Instruments and Risk Management +The +Company has entered into a cross-currency interest rate swap to manage the interest rate risk and foreign currency exchange risk associated with the floating-rate foreign currency-denominated term loan borrowing by our Danish Subsidiary and an +interest rate swap to manage the interest rate risk associated with the variable rate term loan borrowing by the Company. In accordance with the guidance in ASC 815, both swaps have been designated as cash flow hedges of floating-rate borrowings and +are recorded at fair value. +The cross-currency interest rate swap agreement utilized by the Company effectively modifies the +Company’s exposure to interest rate risk and foreign currency exchange rate risk by converting the Company’s floating-rate debt denominated in U.S. Dollars on our Danish subsidiary’s books to a fixed-rate debt denominated in Danish +Krone for the term of the loan, thus reducing the impact of interest-rate and foreign currency exchange rate changes on future interest expense and principal repayments. This swap involves the receipt of floating rate amounts in U.S. Dollars in +exchange for fixed-rate interest payments in Danish Krone, as well as exchanges of principal at the inception spot rate, over the life of the term loan. As of January 31, 2019 and 2018, the total notional amount of the Company’s +cross-currency interest rate swap was $6.3 million and $7.8 million, respectively. +The interest rate swap agreement +utilized by the Company on the term loan effectively modifies the Company’s exposure to interest rate risk by converting the Company’s floating-rate debt to fixed-rate debt for the next five years, thus reducing the impact of interest-rate +changes on future interest expense. This swap involves the receipt of floating rate amounts in U.S. dollars in exchange for fixed rate payments in U.S. dollars over the life of the term loan. As of January 31, 2019 and 2018, the total notional +amount of the Company’s interest rate swap was $11.3 million and $14.3 million, respectively. +The following +table provides a summary of the fair values of the Company’s derivatives recorded in the consolidated balance sheets: +Cash Flow Hedges +(In thousands) +Balance Sheet Classification +January 31, +2019 +January 31, +2018 +Cross-currency interest rate swap +Other Long Term Liabilities +$ +600 +$ +1,513 +Interest rate swap +Other Assets +$ +85 +$ +101 +64 +Table of Contents +The following tables present the impact of the derivative instruments in our condensed +consolidated financial statements for the years ended January 31, 2019 and 2018: +Years Ended +Amount of Gain +(Loss) +Recognized in OCI +on +Derivative +Location of Gain +(Loss) +Reclassified from +Accumulated OCI +into +Income +Amount of Gain +(Loss) +Reclassified from +Accumulated OCI into +Income +Cash Flow Hedge +(In thousands) +January 31, +2019 +January 31, +2018 +January 31, +2019 +January 31, +2018 +Swap contracts +$ +797 +$ +(1,330 +) +Other Income (Expense) +$ +769 +$ +(1,344 +) +At January 31, 2019, the Company expects to reclassify approximately $0.4 million of net gains +on the swap contracts from accumulated other comprehensive income (loss) to earnings during the next 12 months due to changes in foreign exchange rates and the payment of variable interest associated with the floating-rate debt. +Note 12—Accumulated Other Comprehensive Loss +The changes in the balance of accumulated other comprehensive loss by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Unrealized Holding +Gain (Loss) +on Available for +Sale Securities +Net +Unrealized +Gain (Losses) +on Cash Flow +Hedges +Total +Balance at January 31, 2016 +$ +(983 +) +$ +8 +— +$ +(975 +) +Other Comprehensive Loss +(65 +) +(16 +) +— +(81 +) +Amounts Reclassified to Net Income +— +— +— +— +Net Other Comprehensive Loss +(65 +) +(16 +) +— +(81 +) +Balance at January 31, 2017 +$ +(1,048 +) +$ +(8 +) +$ +— +$ +(1,056 +) +Other Comprehensive Income (Loss) before reclassification +867 +5 +(1,036 +) +(164 +) +Amounts reclassified from AOCI to Earnings +— +— +1,048 +1,048 +Other Comprehensive Income +867 +5 +12 +884 +Balance at January 31, 2018 +$ +(181 +) +$ +(3 +) +$ +12 +$ +(172 +) +Other Comprehensive Income (Loss) before reclassification +(671 +) +— +622 +(49 +) +Amounts reclassified from AOCI to Earnings +— +3 +(600 +) +(597 +) +Other Comprehensive Income (Loss) +(671 +) +3 +22 +(646 +) +Balance at January 31, 2019 +$ +(852 +) +$ +— +$ +34 +$ +(818 +) +The amounts presented above in other comprehensive income (loss) are net of taxes except for translation +adjustments associated with our German and Danish subsidiaries. +Note 13—Shareholders’ Equity +During fiscal 2019, 2018 and 2017, certain of the Company’s employees delivered a total of 33,430, 26,561 and 51,531 shares, +respectively, of the Company’s common stock to satisfy the exercise price and related taxes for stock options exercised and restricted stock vesting. The shares delivered were valued at a total of $0.6 million, $0.4 million and +$0.8 million, respectively, and are included in treasury stock in the accompanying consolidated balance sheets at January 31, 2019, 2018 and 2017. These transactions did not impact the number of shares authorized for repurchase under the +Company’s current repurchase program. +65 +Table of Contents +On May 1, 2017, the Company entered into a stock repurchase agreement to +repurchase 826,305 shares of the Company’s common stock held by a trust established by Albert W. Ondis at a per share price of $13.60, for an aggregate repurchase price of $11.2 million. This stock repurchase was consummated on May 2, +2017 and was funded using existing cash on hand. Following this stock repurchase, the Ondis trust owns 36,000 shares of the Company’s common stock. +April L. Ondis, who was then a director of the Company, is a beneficiary of the trust. The stock repurchase was authorized and approved by the Company’s Audit Committee as a related party +transaction. Prior to entering into the agreement, the Company obtained an opinion from an independent investment banking firm that the consideration to be paid by the Company to the trust pursuant to the stock repurchase agreement would be fair to +the public stockholders of the Company, other than the trust, from a financial point of view. +As of January 31, 2019, the +Company’s Board of Directors has authorized the purchase of up to an additional 390,000 shares of the Company’s common stock on the open market or in privately negotiated transactions. +Note 14—Share-Based Compensation +The Company maintains the following share-based compensation plans: +Stock +Plans: +During the year ending January 31, 2019, we were authorized to grant equity awards under two equity incentive +plans: the 2015 Equity Incentive Plan (the “2015 Plan”) and the AstroNova, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). +The 2018 Plan was approved by the Company’s shareholders at the Company’s annual meeting of shareholders held on June 4, 2018. The 2018 Plan provides for, among other things, the issuance +of awards with respect to up to 650,000 shares of the Company’s common stock, plus an additional number of shares equal to the number of shares subject to awards granted under the 2018 Plan or the 2015 Plan that are, following the effectiveness +of the 2018 Plan, forfeited, cancelled, satisfied without the issuance of stock, otherwise terminated (other than by exercise), or, for shares of stock issued pursuant to any unvested award, reacquired by the Company at not more than the +grantee’s purchase price (other than by exercise). The 2015 Plan was to expire in May 2025, however following the approval of the 2018 Plan, the Company ceased granting new equity awards pursuant to the 2015 Plan. As of January 31, 2019, +80,934 unvested shares of restricted stock granted and options to purchase an aggregate of 151,000 shares were outstanding under the 2018 Plan. +Under the 2015 Plan, the Company could grant incentive stock options, non-qualified stock options, stock appreciation rights, time or performance-based restricted +stock units (RSUs), restricted stock awards (RSAs), and other stock-based awards to executives, key employees, directors and other eligible individuals. Options granted to employees under the plan vest over four years and expire after ten years. The +exercise price of each stock option is established at the discretion of the Compensation Committee; however, all options granted under the 2015 Plan must be issued at an exercise price of not less than the fair market value of the Company’s +common stock on the date of grant. As of January 31, 2019, 50,585 unvested shares of restricted stock granted and options to purchase an aggregate of 202,450 shares were outstanding under the 2015 Plan. +Under the 2015 Plan, each non-employee director received an automatic annual grant of ten-year options to purchase 5,000 shares of stock upon the adjournment of each annual shareholders meeting. Each such option is exercisable at the fair market value of the Company’s common stock as of the +grant date, and vests immediately prior to the next annual shareholders’ meeting. Accordingly, on May 17, 2017, 30,000 options were issued to the non-employee directors. +In addition to the 2015 Plan and the 2018 Plan, we previously granted equity awards under our 2007 Equity Incentive Plan (the “2007 +Plan”). The 2007 Plan expired in May 2017 and no new awards may be issued under it, +66 +Table of Contents +but outstanding awards will continue to be governed by it. As of January 31, 2019, 2,148 unvested shares of restricted stock granted and options to purchase an aggregate of 417,695 shares +were outstanding under the 2007 Plan. +The Company had a Non-Employee Director Annual +Compensation Program (the “Prior Program”) under which each non-employee director received an automatic grant of RSAs on the first business day of each fiscal quarter. Under the Program, the number +of whole shares to be granted each quarter was equal to 25% of the number calculated by dividing the director compensation amount by the fair market value of the Company’s stock on such day. The director annual compensation amount was $55,000 +in fiscal year 2017, $65,000 in fiscal year 2018 and $75,000 in fiscal year 2019. In addition, the Chairman of the Board received RSAs with an aggregate value of $6,000, and the Chairs of the Audit and Compensation Committees each receive RSAs with +an aggregate value of $4,000, also issued in quarterly installments and calculated in the same manner as the directors’ RSA grants. RSAs granted prior to March 30, 2017 become fully vested on the first anniversary of the date of grant. +RSAs granted subsequent to March 30, 2017 become vested three months after the date of grant. A total of 26,515, 28,062 and 11,379 shares were awarded to the non-employee directors as compensation under +the Program in fiscal 2019, 2018 and 2017, respectively. +Refer to Note 22, “Subsequent Event” for details regarding +the Amended and Restated Non-Employee Director Annual Compensation Program adopted January 31, 2019 and effective beginning on February 1, 2019. +In May 2015 (fiscal year 2016), the Company granted an aggregate of 80,000 time-based and 155,000 performance-based RSUs to certain officers of the Company. Based upon revenue in fiscal 2018, 2017 and +2016, 33,638, 9,025 and 15,810 shares of the performance based RSUs were earned in the first quarter of fiscal 2019, 2018 and 2017, respectively. +In March 2016 (fiscal year 2017), the Company granted 50,000 options and 4,030 RSAs to its Chief Executive Officer pursuant to an Equity Incentive Award Agreement dated as of November 24, 2014 (the +“CEO Equity Incentive Agreement”). +In May 2016 (fiscal year 2017) the Company granted 37,000 options to certain key +employees. On August 1, 2016 (fiscal year 2017) the Company granted 5,000 options to its Chief Financial Officer. +In +March 2017 (fiscal year 2018), the Company granted 50,000 options to the Chief Executive Officer pursuant to the CEO Equity Incentive Agreement. In February and April 2017 the Company granted 52,189 options to certain other key employees. In +December 2017, upon election to the Board, the Company granted 5,000 non-qualified options and 675 RSUs to a Board member. In January 2018, the Company granted 50,000 +non-qualified options and 15,000 RSUs to the newly appointed Chief Financial Officer. +In April 2018 (fiscal year 2019), the Company granted 5,000 non-qualified options. +In May 2018 (fiscal year 2019), the Company granted 40,000 options to certain key employees. +In June 2018 (fiscal year 2019), the Company granted an aggregate of 25,000 non-qualified options +to the members of the Board of Directors. Also in June 2018, the Company granted an aggregate of 126,000 options, 44,275 time-based RSUs and 38,000 performance-based RSUs to certain officers of the Company, all of which vest over three years. Of the +38,000 performance-based RSUs, 35,657 were earned based upon achievement of fiscal 2019 revenue and operating income targets. +67 +Table of Contents +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +Years Ended January 31 +2019 +2018 +2017 +(In thousands) +Stock Options +$ +783 +$ +437 +$ +321 +Restricted Stock Awards and Restricted Stock Units +1,088 +1,134 +685 +Employee Stock Purchase Plan +15 +12 +13 +Total +$ +1,886 +$ +1,583 +$ +1,019 +Stock Options: +Aggregated information regarding stock options granted under the plans is summarized below: +Number +of Shares +Weighted- +Average +Exercise +Price Per +Share +Options Outstanding, January 31, 2016 +657,936 +$ +11.00 +Options Granted +122,000 +14.82 +Options Exercised +(87,107 +) +8.73 +Options Forfeited +(4,250 +) +13.91 +Options Cancelled +(3,123 +) +8.95 +Options Outstanding, January 31, 2017 +685,456 +$ +11.96 +Options Granted +187,189 +13.57 +Options Exercised +(84,025 +) +10.08 +Options Forfeited +(18,750 +) +14.49 +Options Cancelled +(24,600 +) +11.76 +Options Outstanding, January 31, 2018 +745,270 +$ +12.52 +Options Granted +196,000 +18.21 +Options Exercised +(150,125 +) +10.62 +Options Forfeited +(16,300 +) +15.10 +Options Cancelled +(3,700 +) +8.95 +Options Outstanding, January 31, 2019 +771,145 +$ +14.30 +Set forth below is a summary of options outstanding at January 31, 2019: +Outstanding +Exercisable +Range of +Exercise prices +Number of +Shares +Weighted- +Average +Exercise Price +Weighted- +Average +Remaining +Contractual Life +Number of +Shares +Weighted- +Average +Exercise Price +Weighted +Average +Remaining +Contractual +Life +$5.00-10.00 +74,981 +$ +7.72 +2.6 +74,981 +$ +7.72 +2.6 +$10.01-15.00 +453,164 +13.65 +6.8 +313,347 +13.66 +6.3 +$15.01-20.00 +243,000 +17.55 +8.9 +30,000 +15.17 +7.5 +771,145 +$ +14.30 +7.0 +418,328 +$ +12.70 +5.7 +68 +Table of Contents +The fair value of each stock option granted was estimated on the grant date using the +Black-Scholes option-pricing model with the following weighted-average assumptions: +Years Ended January 31 +2019 +2018 +2017 +Risk-Free Interest Rate +2.6 +% +1.9 +% +1.4 +% +Expected Life (years) +9 +9 +5 +Expected Volatility +39.4 +% +39.0 +% +28.3 +% +Expected Dividend Yield +1.5 +% +2.0 +% +1.9 +% +The weighted-average estimated fair value of options granted during fiscal 2019, 2018 and 2017 was $7.43, +$4.79 and $3.22, respectively. As of January 31, 2019, there was $1.5 million of unrecognized compensation expense related to the unvested stock options granted under the plans. This expense is expected to be recognized over a +weighted-average period of 2.3 years. +As of January 31, 2019, the aggregate intrinsic value (the aggregate difference +between the closing stock price of the Company’s common stock on January 31, 2019, and the exercise price of the outstanding options) that would have been received by the option holders if all options had been exercised was +$3.0 million for all exercisable options and $4.4 million for all options outstanding. The total aggregate intrinsic value of options exercised during 2019, 2018 and 2017 was $1.1 million, $0.4 million, and $0.6 million, +respectively +Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs): +Aggregated information regarding RSUs and RSAs granted under the Plan is summarized below: +RSAs & RSUs +Weighted-Average +Grant Date Fair Value +Outstanding at January 31, 2016 +293,088 +$ +13.02 +Granted +24,839 +14.89 +Vested +(75,133 +) +12.05 +Forfeited +(28,926 +) +11.49 +Outstanding at January 31, 2017 +213,868 +$ +14.08 +Granted +43,737 +13.78 +Vested +(71,171 +) +14.12 +Forfeited +(9,087 +) +14.05 +Outstanding at January 31, 2018 +177,347 +$ +13.99 +Granted +108,790 +17.85 +Vested +(67,447 +) +14.26 +Forfeited +(85,023 +) +14.17 +Outstanding at January 31, 2019 +133,667 +$ +16.90 +As of January 31, 2019, there was $1.4 million of unrecognized compensation expense related to +unvested RSUs and RSAs. This expense is expected to be recognized over a weighted average period of 1.9 years. +Employee Stock Purchase +Plan (ESPP): +AstroNova’s ESPP allows eligible employees to purchase shares of common stock at a 15% discount from +fair market value on the date of purchase. A total of 247,500 shares were initially reserved for issuance under this plan. Summarized plan activity is as follows: +Years Ended January 31 +2019 +2018 +2017 +Shares Reserved, Beginning +39,207 +45,224 +51,600 +Shares Purchased +(5,354 +) +(6,017 +) +(6,376 +) +Shares Reserved, Ending +33,853 +39,207 +45,224 +69 +Table of Contents +Note 15—Income Taxes +The components of income before income taxes are as follows: +January 31 +2019 +2018 +2017 +(In thousands) +Domestic +$ +6,859 +$ +2,110 +$ +4,026 +Foreign +449 +3,047 +2,579 +$ +7,308 +$ +5,157 +$ +6,605 +The components of the provision for income taxes are as follows: +January 31 +2019 +2018 +2017 +(In thousands) +Current: +Federal +$ +1,807 +$ +592 +$ +1,269 +State +457 +251 +209 +Foreign +952 +284 +725 +3,216 +1,127 +2,203 +Deferred: +Federal +$ +(843 +) +$ +903 +$ +150 +State +(170 +) +(25 +) +37 +Foreign +(625 +) +(134 +) +(13 +) +(1,638 +) +744 +174 +$ +1,578 +$ +1,871 +$ +2,377 +On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017 (“Tax Act”). +The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our net deferred tax assets as of January 31, 2018 by $1.0 million to reflect the +impact of the Tax Act and recorded a corresponding provisional net one-time non-cash charge of $1.0 million. The Company filed its 2017 federal income tax return in +November 2018, which increased the tax expense related to the one-time non-cash charge by $0.1 million as a result of certain provision to return adjustments. +The Tax Act taxes certain unrepatriated earnings and profits (E&P) of our foreign subsidiaries (“transition +tax”). In order to determine the transition tax, we were required to determine, along with other information, the amount of our accumulated post-1986 E&P for our foreign subsidiaries, as well as the non-U.S. income tax paid by those +subsidiaries on such E&P. We were capable of reasonably estimating the one-time deemed repatriation tax and recorded a provisional expense of $0.1 million. The U.S. Treasury issued certain notices and +proposed regulations (“interpretative guidance”) during fiscal 2019 which provided additional guidance to assist companies in calculating the one-time deemed repatriation tax. The U.S. Treasury +issued final regulations in January 2019. The final regulations did not impact the computation of the final income tax expense. The final one-time deemed repatriation tax remained $0.1 million. +The SEC issued Staff Accounting Bulletin 118 (“SAB 118”) in December 2017, which provides guidance on accounting for +the tax effects of Tax Reform. SAB 118 provides a measurement period in which to finalize the accounting under ASC 740, Income Taxes (“ASC 740”) as it relates to the Tax Act. This measurement period should not extend beyond one year from +the Tax Act enactment date. In accordance with SAB 118, the Company has properly reflected the income tax effects of all aspects of the legislation for which the accounting under ASC 740 was impacted. All conclusions under SAB 118 were finalized +during the fourth quarter of 2018 with no material changes to the provisional amounts. +70 +Table of Contents +The Company’s effective tax rate for 2019 was 21.6% compared to 36.3% in 2018 and +36.0% in 2017. The decrease in 2019 from 2018 is primarily related to the Tax Act. This includes the reduction in the U.S. corporate income tax rate from 35% to 21%, the absence of the one-time U.S. deferred +tax asset and liability remeasurement and transition tax. This decrease was offset by the absence of R&D credits from amended tax returns and the absence of the non-taxable TrojanLabel earn out liability +adjustment in TrojanLabel ApS. The increase in the effective tax rate in 2018 from 2017 is primarily related to provisional Tax Act tax expenses related to the remeasurement of U.S. deferred tax assets and liabilities and the transition tax, +substantially offset by increased R&D credits resulting from a completed study, a decrease in non-deductible transaction costs, the non-taxable TrojanLabel earn out +liability adjustment in TrojanLabel ApS, and a decrease in unrecognized tax benefits. The increase in 2017 from 2016 is primarily related to non-deductible transaction costs and increased unrecognized tax +benefits. The provision for income taxes differs from the amount computed by applying the United States federal statutory income tax rate of 21.0% (32.9% for FY18 and 34% FY17) to income before income taxes. The reasons for this difference were due +to the following: +January 31 +2019 +2018 +2017 +(In thousands) +Income Tax Provision at Statutory Rate +$ +1,534 +$ +1,697 +$ +2,246 +U.S Corporate Rate Change +52 +1,010 +— +State Taxes, Net of Federal Tax Effect +226 +149 +162 +Transition Tax on Repatriated Earnings +14 +104 +— +Capitalized Transaction Costs +— +— +179 +Unrecognized State Tax Benefits +(34 +) +(20 +) +165 +Domestic Production Deduction +— +(47 +) +(103 +) +Return to Provision Adjustment +58 +(122 +) +(75 +) +TrojanLabel Earn Out Liability Adjustment +— +(316 +) +— +R&D Credits +(218 +) +(537 +) +(168 +) +Foreign Deferred Intangible Income +(53 +) +— +— +Other +(1 +) +(47 +) +(29 +) +$ +1,578 +$ +1,871 +$ +2,377 +71 +Table of Contents +The components of deferred income tax expense arise from various temporary differences +and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31 +2019 +2018 +(In thousands) +Deferred Tax Assets: +Inventory +$ +1,800 +$ +1,648 +Honeywell Royalty Liability +3,146 +3,382 +State R&D Credits +1,305 +1,161 +Share-Based Compensation +493 +399 +Compensation Accrual +155 +194 +Warranty Reserve +201 +139 +Unrecognized State Tax Benefits +133 +138 +Deferred Service Contract Revenue +91 +84 +Bad Debt +101 +— +Net Operating Loss +505 +— +Other +142 +176 +8,072 +7,321 +Deferred Tax Liabilities: +Intangibles +2,660 +3,679 +Accumulated Tax Depreciation in Excess of Book Depreciation +982 +1,028 +Other +238 +322 +3,880 +5,029 +Subtotal +4,192 +2,292 +Valuation Allowance +(1,304 +) +(1,161 +) +Net Deferred Tax Assets +$ +2,888 +$ +1,131 +The valuation allowance of $1.3 million at January 31, 2019 and $1.2 million at +January 31, 2018 related to state research and development tax credit carryforwards, which are expected to expire unused. The valuation allowance increased $0.1 million in 2019 and $0.5 million in 2018 due to the decrease in the +federal tax effect of state taxes from the federal rate reduction provided for in the Tax Act and the generation of research and development credits in excess of the Company’s ability to currently utilize them. The Company has reached this +conclusion after considering the availability of taxable income in prior carryback years, tax planning strategies, and the likelihood of future state taxable income and credits exclusive of reversing temporary differences and carryforwards in the +relevant state jurisdiction. +We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest +and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding +interest and penalties are as follows: +2019 +2018 +2017 +(In thousands) +Balance at February 1 +$ +665 +$ +708 +$ +591 +Increases in prior period tax positions +— +— +75 +Increases in current period tax positions +7 +55 +133 +Reductions related to lapse of statute of limitations +(54 +) +(98 +) +(91 +) +Balance at January 31 +$ +618 +$ +665 +$ +708 +72 +Table of Contents +During fiscal 2019, 2018 and 2017, the Company recognized $8,000, $24,000 and $52,000, +respectively, of expenses related to a change in interest and penalties, which are included as a component of income tax expense in the accompanying statements of income. The Company has accrued potential interest and penalties of $0.5 million +and $0.4 million at the end of January 31, 2019 and 2018, respectively. +The Company and its subsidiaries file income +tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for fiscal years ended prior to January 2014. The Company is currently under +audit by the IRS for the tax years ended January 31, 2014, 2015, and 2016. No proposed adjustments have been raised at this time. +U.S. income taxes have not been provided on $6.6 million of undistributed earnings of the Company’s foreign subsidiaries since it is the Company’s intention to permanently reinvest such +earnings offshore. If the earnings were distributed in the form of dividends, the Company would not be subject to U.S. Tax as a result of the Tax Act but could be subject to foreign income and withholding taxes. Determination of the amount of this +unrecognized deferred income tax liability is not practical. +Note 16—Nature of Operations, Segment Reporting and Geographical +Information +The Company’s operations consist of the design, development, manufacture and sale of specialty printers +and data acquisition and analysis systems, including both hardware and software and related consumable supplies. The Company organizes and manages its business as a portfolio of products and services designed around a common theme of data +acquisition and information output. The Company has two reporting segments consistent with its revenue product groups: Product Identification (PI) and Test & Measurement (T&M). +The Product Identification segment produces an array of high-technology digital color and monochrome label printers and mini presses, +labeling software and consumables for a variety of commercial industries worldwide. AstroNova’s T&M segment produces data acquisition systems used worldwide for a variety of recording, monitoring and troubleshooting applications for many +industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing. +Business is conducted +in the United States and through foreign branch offices and subsidiaries in Canada, Europe, China, Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United +States are conducted through wholly-owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction. +On September 28, 2017, AstroNova entered into the Honeywell Agreement to acquire the exclusive perpetual world-wide license to +manufacture Honeywell’s narrow format flight deck printers for two aircraft families. Revenue from the sales of these printers is reported as part of our T&M segment beginning in the third quarter of fiscal 2018. Refer to Note 3, +“Acquisitions,” for further details. +On February 1, 2017, AstroNova completed its acquisition of TrojanLabel. +TrojanLabel is reported as part of our Product Identification segment beginning with the first quarter of fiscal 2018. Refer to Note 3, “Acquisitions,” for further details. +The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies +herein. The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses. +73 +Table of Contents +Summarized below are the revenue and segment operating profit (both in dollars and as a +percentage of revenue) for each reporting segment: +($ in thousands) +Revenue +Segment Operating Profit +Segment Operating Profit as a +% of Revenue +2019 +2018 +2017 +2019 +2018 +2017 +2019 +2018 +2017 +Product Identification +$ +86,786 +$ +81,681 +$ +69,862 +$ +7,910 +$ +10,561 +$ +9,821 +9.1 +% +12.9 +% +14.1 +% +T&M +49,871 +31,720 +28,586 +11,933 +3,754 +4,399 +23.9 +% +11.8 +% +15.4 +% +Total +$ +136,657 +$ +113,401 +$ +98,448 +19,843 +14,315 +14,220 +14.5 +% +12.6 +% +14.4 +% +Corporate Expenses +11,123 +8,903 +7,939 +Operating Income +8,720 +5,412 +6,281 +Other Income (Expense), Net +(1,412) +(255) +324 +Income Before Income Taxes +7,308 +5,157 +6,605 +Income Tax Provision +1,578 +1,871 +2,377 +Net Income +$ +5,730 +$ +3,286 +$ +4,228 +No customer accounted for greater than 10% of net revenue in fiscal 2019, 2018 and 2017. +Other information by segment is presented below: +(In thousands) +Assets +2019 +2018 +Product Identification +$ +49,091 +$ +49,832 +T&M +62,250 +60,579 +Corporate* +7,642 +11,902 +Total +$ +118,983 +$ +122,313 +* +Corporate assets consist principally of cash, cash equivalents and securities available for sale. +(In thousands) +Depreciation and +Amortization +Capital Expenditures +2019 +2018 +2017 +2019 +2018 +2017 +Product Identification +$ +1,888 +$ +1,536 +$ +885 +$ +1,935 +$ +1,497 +$ +767 +T&M +4,264 +2,458 +1,546 +710 +707 +471 +Total +$ +6,152 +$ +3,994 +$ +2,431 +$ +2,645 +$ +2,204 +$ +1,238 +Geographical Data +Presented below is selected financial information by geographic area: +(In thousands) +Revenue +Long-Lived Assets* +2019 +2018 +2017 +2019 +2018 +United States +$ +83,668 +$ +69,795 +$ +69,850 +$ +36,750 +$ +39,432 +Europe +31,574 +29,948 +18,848 +3,223 +3,808 +Asia +8,207 +3,808 +1,664 +— +— +Canada +6,692 +5,373 +5,008 +81 +145 +Central and South America +4,147 +3,402 +3,053 +— +— +Other +2,369 +1,075 +25 +— +— +Total +$ +136,657 +$ +113,401 +$ +98,448 +$ +40,054 +$ +43,385 +74 +Table of Contents +* +Long-lived assets excludes goodwill assigned to the T&M segment of $4.5 million at both January 31, 2019 and 2018 and +$7.8 million assigned to the PI segment at January 31, 2019. +Note 17—Employee Benefit Plans +Employee Stock Ownership Plan (ESOP): +AstroNova had an ESOP which provided retirement benefits to all eligible employees. Annual contributions of either cash or stock in amounts determined by the Company’s Board of Directors were +invested by the ESOP’s Trustees in shares of common stock of AstroNova. On January 23, 2017, the Compensation Committee of the Board of Directors voted to terminate the ESOP and the Company did not make contributions to the ESOP in fiscal +years 2019, 2018 and 2017. AstroNova is in the process of allocating all shares owned by the ESOP to the participants; once completed, the ESOP will be terminated. +Profit-Sharing Plan: +AstroNova sponsors a Profit-Sharing Plan (the +“Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company +makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code. +All contributions are deposited into trust funds. It is the policy of the Company to fund any contributions accrued. The Company’s annual contribution amounts are determined by the Board of +Directors. Contributions paid or accrued amounted to $0.5 million in fiscal years 2019, 2018 and 2017. +Note 18—Product Warranty +Liability +AstroNova offers a manufacturer’s warranty for the majority of its hardware products. The specific terms +and conditions of warranty vary depending upon the products sold and country in which the Company does business. For products sold in the United States, the Company provides a basic limited warranty, including parts and labor. The Company estimates +the warranty costs based on historical claims experience and records a liability in the amount of such estimates at the time product revenue is recognized. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts +the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows: +January 31 +2019 +2018 +2017 +(In thousands) +Balance, beginning of the year +$ +575 +$ +515 +$ +400 +Provision for Warranty Expense +1,680 +1,294 +971 +Cost of Warranty Repairs +(1,423 +) +(1,234 +) +(856 +) +Balance, end of the year +$ +832 +$ +575 +$ +515 +Note 19—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is +limited due to the large number and general dispersion of accounts which constitute the Company’s customer base. The Company periodically performs on-going credit evaluations of its customers. The Company +has not historically experienced significant credit losses on collection of its accounts receivable. +75 +Table of Contents +Excess cash is invested principally in investment grade government and state municipal +securities. The Company has established guidelines relative to diversification and maturities that maintain safety of principal, liquidity and yield. These guidelines are periodically reviewed and modified to reflect changes in market conditions. +The Company has not historically experienced any significant losses on its cash equivalents or investments. +During the years +ended January 31, 2019, 2018 and 2017, one vendor accounted for 21.6%, 31.3% and 33.2% of purchases, and 28.7%, 26.6% and 42.7% of accounts payable, respectively. +Note 20—Commitments and Contingencies +The Company maintains leases +for certain facilities and equipment and has entered into facility agreements, some of which contain provisions for future rent increases. The total amount of rental payments due over the lease term is being charged to rent expense on the +straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent, which is included in other liabilities in the accompanying consolidated balance sheets. +Minimum future rental commitments under all non-cancelable operating leases during the +next five years as of January 31, 2019 are as follows: +(In thousands) +2020 +$ +574 +2021 +520 +2022 +387 +2023 +294 +2024 +273 +Thereafter +568 +$ +2,616 +Rental expense was $0.8 million, $0.7 million and $0.5 million in fiscal 2019, 2018 and +2017, respectively. +The Company is subject to contingencies, including legal proceedings and claims arising in the normal +course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed +probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we +believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, +that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the Company’s control. +Note 21—Fair Value Measurements +Assets and Liabilities Recorded at Fair Value on a Recurring Basis +Fair value is applied to our financial assets and liabilities including money market funds, available for sale securities, derivative instruments and a contingent consideration liability relating to an +earnout payment on future TrojanLabel operating results. +76 +Table of Contents +The following tables provide a summary of the financial assets and liabilities that are +measured at fair value: +Assets measured at fair value: +Fair value measurement at +January 31, 2019 +Fair value measurement at +January 31, 2018 +(in thousands) +Level 1 +Level 2 +Level 3 +Total +Level 1 +Level 2 +Level 3 +Total +Money Market Funds (included in Cash and Cash Equivalents) +$ +— +$ +— +$ +— +$ +— +$ +1,798 +$ +— +$ +— +$ +1,798 +State and Municipal Obligations (included in Securities Available for Sale) +— +— +— +— +— +1,511 +— +1,511 +Swap Contract (include in Other Assets) +— +85 +— +85 +— +101 +— +101 +Total assets +$ +— +$ +85 +$ +— +$ +85 +$ +1,798 +$ +1,612 +$ +— +$ +3,410 +Liabilities measured at fair value: +Fair value measurement at +January 31, 2019 +Fair value measurement at +January 31, 2018 +(in thousands) +Level 1 +Level 2 +Level 3 +Total +Level 1 +Level 2 +Level 3 +Total +Swap Contract (included in Other Liabilities) +$ +— +$ +600 +$ +— +$ +600 +$ +— +$ +1,513 +$ +— +$ +1,513 +Earnout Liability (included in Other Liabilities) +— +— +14 +14 +— +— +15 +15 +Total liabilities +$ +— +$ +600 +$ +14 +$ +614 +$ +— +$ +1,513 +$ +15 +$ +1,528 +For our money market funds and municipal obligations, we utilize the market approach to measure fair +value. The market approach is based on using quoted prices for identical or similar assets. +We also use the market approach to +measure fair value of our derivative instruments. Our derivative asset is comprised of an interest rate swap and our derivative liability is comprised of a cross-currency interest rate swap. These derivative instruments were measured at fair value +using readily observable market inputs, such as quotations on interest rates and foreign exchange rates, and are classified as Level 2 because they are +over-the-counter contracts with a bank counterparty that are not traded in an active market. +The following table presents the changes in fair value of our Level 3 financial liability for the years ended January 31, 2019 and 2018: +Contingent +Earnout +Liability +(In thousands) +Balance at January 31, 2017 +$ +— +Fair value of contingent consideration acquired +1,314 +Change in fair value of contingent earn out liability included in earnings +(1,438 +) +Currency translation adjustment +139 +Balance at January 31, 2018 +$ +15 +Change in fair value of contingent earn out liability included in earnings +— +Currency translation adjustment +(1 +) +Balance at January 31, 2019 +$ +14 +The fair value of the earn out liability incurred in connection with the Company’s acquisition of +TrojanLabel was determined using the option approach methodology which includes using significant inputs that are not observable in the market and therefore classified as Level 3. Key assumptions in estimating the fair value of the contingent +consideration liability included (1) the estimated earnout targets over the next seven years of $0.5 million-$1.4 million, (2) the probability of success (achievement of the various contingent events) from +77 +Table of Contents +0.0%-0.9% and (3) a risk-adjusted discount rate of approximately 2.68%-4.9% used to adjust the +probability-weighted earnout payments to their present value. At each reporting period, the contingent consideration liability is recorded at its fair value with changes reflected in general and administrative expense in the condensed consolidated +statements of operations. +Subsequent to the acquisition of Trojan Label business, the Company restructured the operating model +such that most of the sales and some of the expenses of the business would be transferred to other legal entities of the Company. This caused the expected earnings targets in the Danish entity, which were the basis upon which the contingent +consideration was structured, to become unlikely to be met. As a result, during fiscal 2018, the value of the contingent consideration was reduced resulting in the Company recognizing an additional $1.4 million of income for the year which is +offset in general and administrative expense on the Company’s consolidated income statement for the period ended January 31, 2018. +Assets and Liabilities Not Recorded at Fair Value on the Consolidated Balance Sheet +The Company’s long-term debt, including the current portion of long-term debt not reflected in the financial statements at fair +value, is reflected in the table below: +Fair Value Measurement at +January 31, 2019 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +18,857 +$ +18,857 +$ +18,242 +Fair Value Measurement at +January 31, 2018 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +24,873 +$ +24,873 +$ +23,372 +The fair value of the Company’s long-term debt, including the current portion, is estimated by +discounting the future cash flows using current interest rates at which similar borrowings with the same maturities would be made to borrowers with similar credit ratings and is classified as Level 3. +Note 22—Subsequent Event +On January 31, 2019, the compensation committee of the Company’s board of directors adopted an Amended and Restated Non-Employee Director Annual Compensation Program (the “New Program”), +which became effective as of February 1, 2019 and supersedes the Prior Program. Pursuant to the New Program, beginning with fiscal 2020, each non-employee director will automatically receive a grant of restricted stock on the date of their +re-election to the Company’s board of directors. The number of whole shares to be granted will be equal to the number calculated by dividing the stock component of the director compensation amount determined by the compensation committee for +that year by the fair market value of our stock on that day. The value of the restricted stock award for fiscal 2020 is $60,000. To account for the partial year beginning on February 1, 2019 and continuing through the 2019 annual meeting and thereby +provide for the alignment of the timing of annual grants of restricted stock under the New Program with the election of directors at the annual meeting, on February 1, 2019, each non-employee director was granted shares of restricted stock with a +fair market value of $18,000. Other than the shares granted on February 1, 2019, which will vest on June 1, 2019, shares of restricted stock granted under the New Program will become vested on the first anniversary of the date of grant, conditioned +upon the recipient’s continued service on the Board through that date. +78 +Table of Contents +SUPPLEMENTARY DATA +Quarterly Financial Information (Unaudited) +2019 +2018 +(In thousands, except per share data) +Q1 (1) +Q2 +Q3 +Q4 (2) +Q1 +Q2 +Q3 +Q4 (3) +Revenue +$ +31,487 +$ +33,807 +$ +34,196 +$ +37,167 +$ +24,458 +$ +27,483 +$ +28,760 +$ +32,699 +Cost of Revenue +19,377 +20,408 +20,288 +22,585 +15,152 +17,224 +16,966 +20,057 +Gross Profit +12,110 +13,399 +13,908 +14,582 +9,306 +10,259 +11,794 +12,642 +38.5 +% +39.6 +% +40.7 +% +39.2 +% +38.0 +% +37.3 +% +41.0 +% +38.7 +% +Operating Expenses (4): +Selling & Marketing +$ +6,500 +$ +6,397 +$ +6,587 +$ +6,858 +$ +5,238 +$ +5,187 +$ +5,532 +$ +6,177 +Research & Development +1,692 +2,029 +2,123 +1,969 +1,505 +1,803 +2,033 +2,112 +General & Administrative +2,653 +2,808 +2,836 +2,825 +1,856 +2,327 +2,597 +2,123 +Total Operating Expenses +10,845 +11,234 +11,546 +11,652 +8,599 +9,317 +10,162 +10,512 +Operating Income +1,265 +2,165 +2,362 +2,930 +707 +942 +1,632 +2,130 +4.0 +% +6.4 +% +6.9 +% +7.9 +% +2.9 +% +3.4 +% +5.7 +% +6.5 +% +Other Income (Expense), Net +(270 +) +(512 +) +(538 +) +(92 +) +(48 +) +16 +(12 +) +(210 +) +Income Before Taxes +995 +1,653 +1,824 +2,838 +659 +958 +1,620 +1,920 +Income Tax Provision +181 +459 +407 +532 +147 +231 +201 +1,292 +Net income +$ +814 +$ +1,194 +$ +1,417 +$ +2,306 +$ +512 +$ +727 +$ +1,419 +$ +628 +Net Income per Common Share—Basic +$ +0.12 +$ +0.17 +$ +0.21 +$ +0.33 +$ +0.07 +$ +0.11 +$ +0.21 +$ +0.09 +Net Income per Common Share—Diluted +$ +0.12 +$ +0.17 +$ +0.20 +$ +0.32 +$ +0.07 +$ +0.11 +$ +0.21 +$ +0.09 +Annual totals may not agree to the summation of quarterly information due to insignificant rounding and the required +calculation conventions. +(1) +The first quarter of fiscal 2019 includes (a) income of $1.0 million ($0.8 million net of tax or $0.12 per diluted share) for a +change in accounting estimate for product costs and operating expenses related to the Honeywell TSA and (b) income of $0.4 million ($0.3 million net of tax or $0.05 per diluted share) for change in accounting estimates for revenue +subject to customer rebates under the Honeywell Agreement. Both of these changes in accounting estimates were the result of actual amounts billed and received differing from initial estimates. +(2) +The fourth quarter of fiscal 2019 includes $0.1 million, or $0.01 per diluted share, of tax expense related to the enactment of the Tax +Act. +(3) +The fourth quarter of fiscal 2018 includes (a) income of $0.9 million ($0.7 million net of tax or $0.11 per diluted share) +related to the change in fair value of the Company’s contingent earn out liability; (b) expense of $42,000 ($36,000 net of tax or $0.1 per diluted share) related to the correction of a prior period error in the recording of the Honeywell +transaction in the third quarter fiscal 2018 and (c) $1.1 million, or $0.16 per diluted share, of tax expense related to the enactment of the Tax Act. +(4) +Certain amounts reported in the prior quarters have been reclassified to conform to the Company’s current presentation at year-end. +79 +Table of Contents +ASTRONOVA, INC. +SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision/ +(Benefit) +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts(1): +(In thousands) +Year Ended January 31, +2019 +$ +377 +$ +310 +$ +(166 +) +$ +521 +2018 +$ +266 +$ +119 +$ +(8 +) +$ +377 +2017 +$ +404 +$ +(80 +) +$ +(58 +) +$ +266 +(1) +The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet +dates. +(2) +Uncollectible accounts written off, net of recoveries. +80 \ No newline at end of file diff --git a/raw/filings/0000008146/2018/0001193125-19-102788/filing_metadata.csv b/raw/filings/0000008146/2018/0001193125-19-102788/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..3ec09dad1d790f5125ed14896688b638b7d770eb --- /dev/null +++ b/raw/filings/0000008146/2018/0001193125-19-102788/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2019-04-10,2019-01-31,2019-04-10T19:59:00.000Z,0001193125-19-102788,d662203d10k.htm,10-K,9275110,1,0,https://www.sec.gov/Archives/edgar/data/8146/000119312519102788/d662203d10k.htm,https://www.sec.gov/Archives/edgar/data/8146/000119312519102788/,2018,2018,1 diff --git a/raw/filings/0000008146/2018/0001193125-19-102788/item1.txt b/raw/filings/0000008146/2018/0001193125-19-102788/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..ad708eceb55d3b25613991f6146d6c407da71fcb --- /dev/null +++ b/raw/filings/0000008146/2018/0001193125-19-102788/item1.txt @@ -0,0 +1,108 @@ +Item 1. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and +“us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +AstroNova designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced +technologies to acquire, store, analyze, and present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, +distribution, food and beverage, general manufacturing, packaging and transportation. +The Company’s products are +distributed around the world through its own sales force, authorized dealers and through independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems sold under the +brand names QuickLabel ® , TrojanLabel ® and GetLabels™. The Company’s T&M segment includes test and measurement systems sold under the +AstroNova ® brand name and includes the Company’s line of aerospace flight deck printers. Refer to Note 16, +“Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding the Company’s segments. +On September 28, 2017, AstroNova, Inc. entered into an Asset Purchase and License Agreement with Honeywell International, Inc. +pursuant to which it acquired an exclusive perpetual world-wide license to manufacture Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Revenue related to that transaction has been included as part of +the aerospace printer product line of the Company’s Test & Measurement segment since the acquisition date. On February 1, 2017, AstroNova completed its acquisition of TrojanLabel ApS (“TrojanLabel”), a European +manufacturer of digital color label presses and specialty printing systems for label professionals and commercial printers. TrojanLabel is reported as part of our PI segment beginning with the first quarter of fiscal year 2018. Refer to Note 3, +“Acquisitions,” in our audited consolidated financial statements included elsewhere in this report. +The following +description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 19 through 30 of this Annual Report on Form 10-K. +3 +Table of Contents +Description of Business +Product Overview +AstroNova leverages its expertise in +data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems and related services for select growing markets on a global basis. +Products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in industrial and commercial product packaging, branding and +labeling applications to print custom labels, packaging materials and corresponding visual content in-house digitally. The PI segment offers a variety of hardware and software products and associated supplies +that allow customers to mark, track and enhance the appearance of their products. Products sold under the AstroNova brand enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. +The recorded data is processed and analyzed and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide networking systems and +high-resolution light-weight flight deck and cabin printers. +Product Identification +QuickLabel brand products include tabletop and work cell-ready digital color label printers and specialty OEM printing systems. QuickLabel +products are sold to manufacturers, processors, and retailers who label products on a short-run basis. QuickLabel customers benefit from the efficiency, flexibility and cost-savings of digitally printing their +labels in-house and on demand. Industry segments that commonly benefit from short-run digital label printing include chemicals, cosmetics, food and beverage, medical +products, and pharmaceuticals, among many others. +Current QuickLabel models include a family of high-end monochrome printers, the QL-300, a high performance color toner based printer, the QL-800 wide format inkjet color label printer, and the Kiaro! ® family of high-speed inkjet color label printers which includes the QL-120, +a professional table top digital label printer. +TrojanLabel brand products include professional digital color label presses +and specialty printing systems, as well as overprinting solutions. This highly innovative line of presses expands the Company’s customer base by offering commercial printers (label converters) and packaging manufacturers the ability to execute +smaller runs with an affordable digital solution. It is commonly sold to larger brand owners, label converters, commercial printers and packaging manufacturers. +Our current TrojanLabel portfolio includes the T2-C, a compact, digital mini press designed for 24/7 label production; the parent of the T2-C, the T2, a label press with a full-size PC display that supports mini jumbo label rolls for commercial production; the T4, a professional label press and finishing system +which enables print, die cut and lamination all in one machine with a much smaller footprint than others in the market; and the T3, a modular over-printer offered in multiple OEM integration versions. +GetLabels brand products include a full line of supplies including labels, tags, inks, toners, and thermal transfer ribbons. Quality label +materials and substrates are designed and constructed for an extensive variety of labeling applications. Every one of the label materials and substrates are qualified and tested in our Materials Research Laboratory to ensure durability and +compatibility for the QuickLabel brand, TrojanLabel brand and also a variety of competitor printers to meet the specific labeling needs for a wide diversity of markets. +The Product Identification segment additionally licenses various specialized software used to operate the printers and presses, design labels and manage printing on an automated basis and also provides +worldwide training and support. +4 +Table of Contents +T&M +Products sold under the AstroNova T&M brand acquire and record visual data from local and networked data streams and sensors. The recorded data is processed and analyzed and then stored and presented +in various visual output formats. The Company supplies a range of products and services that include hardware, software and supplies to customers in a variety of industries. +Our T&M products include; the Daxus ® DXS-100 distributed data acquisition system, the TMX ® high-speed data acquisition system, the SmartCorder ® DDX-100 portable data acquisition system, the EV-5000 digital strip chart recording +system, the ToughWriter ® , Miltope-brand and RITEC-brand airborne printers, the +PTA-45B cockpit printer that is subject to the Asset Purchase and Licenses Agreement with Honeywell and ToughSwitch ® ruggedized Ethernet switches. +AstroNova +airborne printers are used in the flight deck and in the cabin of military, commercial and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, arrival and departure +procedures, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. ToughSwitch Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or +Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight worthiness standards for operation under extreme environmental conditions. The Company is currently furnishing +ToughWriter airborne printers for many aircraft made by Airbus, Boeing, Embraer, Bombardier, Lockheed, Gulfstream, and others. +The Company’s portable data acquisition systems are used in research and development (R&D), field testing, production and +maintenance applications in a wide range of industries including aerospace and defense, energy, industrial and transportation. The TMX data acquisition system is an +all-in-one solution for applications in which the ability to monitor high channel counts and view a wide variety of input signals, including time-stamped and +synchronized video capture data and audio notation is essential. The SmartCorder DDX-100 is an ultra-portable all-in-one solution +for facilities maintenance and field testing. The Daxus DXS-100 is a distributed data acquisition platform that can be connected to the SmartCorder DDX-100 to increase +channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, +(3) displaying the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. +Patents and Copyrights +We hold a number of product patents in the United States and in foreign countries. We rely on a combination of copyright, +patent, trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand name. While we consider our intellectual property to be important to the operation of our business, we do not believe that any +existing patent, license, trademark or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on the Company’s business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many of the +sub-assemblies and parts in-house including printed circuit board assemblies, harnesses, machined parts and general final assembly. Many parts not manufactured in-house are standard electronic items available from multiple sources. Other parts are designed by us and manufactured by outside vendors. We purchase certain components, assembled products and supplies used in the +manufacture of our products from a single source or limited supplier source. While we believe these components, products and supplies could be sourced elsewhere with appropriate changes in the design of our products, such design might not be +feasible on a timely basis and any interruption in these components, products or supplies could adversely affect our business. +5 +Table of Contents +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in tabletop digital +color label printing technology and in aerospace printers. In the data acquisition area, we are one of the leaders in portable, reliable, high-speed data acquisition systems. +We retain a leadership position by virtue of proprietary technology, product reputation, delivery, technical assistance, and service to customers. The number of competitors varies by product line. Our +management believes that we have a market leadership position in many of the markets we serve. Key competitive factors vary among our product lines, but include technology, quality, service and support, distribution network, and breadth of product +and service offerings. +Our products are sold by direct field salespersons as well as independent dealers and representatives. +In the United States, the Company has factory-trained direct field salespeople located in major cities from coast to coast specializing in either Product Identification or AstroNova T&M products. We also have direct field sales or service +centers in Canada, China, Denmark, France, Germany, India, Malaysia, Mexico, Singapore, Spain and the United Kingdom staffed by our own employees and dedicated third party contractors. Additionally, we utilize over 150 independent dealers and +representatives selling and marketing our products in over 50 countries. +No single customer accounted for 10% or more of +our net revenue in any of the last three fiscal years. +Order Backlog +Our backlog varies regularly. It consists of a blend of orders for end-user customers as well as +original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and customer requirements. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2019, +2018 and 2017 was $25.6 million, $21.4 million and $17.6 million, respectively. +Employees +As of January 31, 2019, we employed 374 people. We are generally able to satisfy our employment requirements. No employees are +represented by a union. We believe that employee relations are good. +Other Information +The Company’s business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, +which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form +10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or +furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). These +filings are also accessible on the SEC’s website at http://www.sec.gov. \ No newline at end of file diff --git a/raw/filings/0000008146/2018/0001193125-19-102788/item13.txt b/raw/filings/0000008146/2018/0001193125-19-102788/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..a9fcc691b233e8982cf04dec68ce01aad1255949 --- /dev/null +++ b/raw/filings/0000008146/2018/0001193125-19-102788/item13.txt @@ -0,0 +1,4 @@ +Item 13. +Certain Relationships, Related Transactions and Director Independence +The information required by +this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2019 Annual Meeting of Shareholders. \ No newline at end of file diff --git a/raw/filings/0000008146/2018/0001193125-19-102788/item9a.txt b/raw/filings/0000008146/2018/0001193125-19-102788/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..c65679e9e9a63141888c20e04dcf7d8d18196240 --- /dev/null +++ b/raw/filings/0000008146/2018/0001193125-19-102788/item9a.txt @@ -0,0 +1,24 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of +the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities +Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2019 to ensure that +the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and +our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s +Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing +and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s +internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting +principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect +misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2019. In +making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the +principal executive officer and principal financial officer believe that as of January 31, 2019, the Company’s internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated +Framework.” +The attestation report of the Company’s registered public accounting firm regarding internal control +over financial reporting appears in Part IV, Item 15 of this Form 10-K and is incorporated herein by reference. +Changes in Internal Controls over Financial Reporting +There have been no +changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2018/0001193125-19-102788/rp_note.txt b/raw/filings/0000008146/2018/0001193125-19-102788/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2018/0001193125-19-102788/rpt_disclosure.txt b/raw/filings/0000008146/2018/0001193125-19-102788/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8432c0fc6a8bda446e6bb21347289c49c8c908b3 --- /dev/null +++ b/raw/filings/0000008146/2018/0001193125-19-102788/rpt_disclosure.txt @@ -0,0 +1,6 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. In +reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +No officer, director or nominee for director of the Company or any associate of any of the foregoing had during the period beginning on +February 1, 2018 through the date of this proxy statement any material interest, direct or indirect, in any material transaction or any material proposed transaction in which the amount exceeds $120,000 and to which the Company was or is to be +a party. \ No newline at end of file diff --git a/raw/filings/0000008146/2019/0001193125-20-103834/filing.txt b/raw/filings/0000008146/2019/0001193125-20-103834/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..15f493e70bc1805e6f35b2c7101f4e4a1b432e06 --- /dev/null +++ b/raw/filings/0000008146/2019/0001193125-20-103834/filing.txt @@ -0,0 +1,5107 @@ +10-K +1 +d816550d10k.htm +10-K +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31, 2020 +OR +:=¨ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +Commission file number 0-13200 +AstroNova, Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue, +West Warwick, Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: +(401) 828-4000 +Securities registered pursuant to Section 12(b) of the +Act: +Title of each class +Trading Symbol +Name of each exchange +on which registered +Common Stock, $.05 Par Value +ALOT +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes :=¨ No ☒ +Indicate by check mark if the +registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes :=¨ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the +Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes ☒ No :=¨ +Indicate by check mark +whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for +such shorter period that the registrant was required to submit such files). Yes ☒ No :=¨ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an +emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 +of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☒ +Non-accelerated filer ☐ +Smaller reporting company ☒ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the +extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. :=¨ +The aggregate market value of the registrant’s voting common equity held by non-affiliates at August 2, 2019 was approximately $158,496,000 based on the +closing price on the Nasdaq Global Market on that date. +As of April 3, 2020, there were 7,097,000 shares of Common Stock +(par value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated by reference into +Part III of this Annual Report on Form 10-K where indicated. +Table of Contents +ASTRONOVA, INC. +FORM 10-K ANNUAL REPORT +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3-7 +Item 1A. +Risk Factors +7-19 +Item 1B. +Unresolved Staff Comments +19 +Item 2. +Properties +20 +Item 3. +Legal Proceedings +20 +Item 4. +Mine Safety Disclosures +20 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +21 +Item 6. +Selected Financial Data +22 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of +Operations +22-33 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +33-34 +Item 8. +Financial Statements and Supplementary Data +35 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +35 +Item 9A. +Controls and Procedures +35 +Item 9B. +Other Information +35 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +36 +Item 11. +Executive Compensation +37 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters +37 +Item 13. +Certain Relationships, Related Transactions and Director Independence +37 +Item 14. +Principal Accountant Fees and Services +38 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +39 +Item 16. +Form 10-K Summary +39 +2 +Table of Contents +ASTRONOVA, INC. +Forward-Looking Statements +Information included in this Annual Report on +Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect +our current expectations concerning future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” +“may,” “will,” and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond +our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those +factors set forth in this Annual Report on Form 10-K under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new +information, future events or otherwise. The reader is cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K. +PART I +Item 1 . Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” +and “us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +AstroNova designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced +technologies to acquire, store, analyze, and present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, +distribution, food and beverage, general manufacturing, packaging and transportation. +The Company’s products are +distributed around the world through its own sales force, authorized dealers and through independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related +supplies sold under the brand names QuickLabel ® , TrojanLabel ® and GetLabels ™ . The T&M +segment includes the Company’s line of aerospace flight deck printers and test and measurement data acquisition systems sold under the AstroNova ® brand name. Refer to Note 15, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements +elsewhere in this report for financial information regarding the Company’s segments. +The following description of our +business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 21 through 33 of this Annual Report on Form 10-K. +Description of Business +Product Overview +AstroNova leverages its expertise in data visualization +technologies to design, manufacture and market specialty printing systems, test and measurement systems and related services for select growing markets on a global basis. +3 +Table of Contents +Product Identification products sold under the QuickLabel, TrojanLabel and GetLabels +brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding and labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers, +high-volume presses and specialty OEM printing systems, as well as a wide range of label, tag and flexible packaging material substrates and other supplies, including ink and toner, that allow customers to mark, track, protect and enhance the +appearance of their products. In the T&M segment, the Company has a long history of using its technologies to provide networking systems and high-resolution light-weight flight deck and cabin printers for the aerospace market. In addition, the +T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed +and analyzed and then stored and presented in various visual output formats. +Product Identification +AstroNova’s PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. Printers and supplies are sold to brand owners, +manufacturers and retailers who label or mark products on a short to mid-size run basis. AstroNova PI customers benefit from the efficiency, flexibility and cost-savings of digitally printing labels in their +facility, on-demand, with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready +digital color label printers and specialty OEM printing systems for either standalone output or inline integration with existing pre-processing and finishing systems. Customers use the Company’s digital label printer products in a wide variety +of industries, including chemical, cosmetics, food and beverage, medical products, nutraceutical, pharmaceutical, and many others. TrojanLabel expands the Company’s customer market by providing a range of higher volume digital color printers, +OEM printing systems and supplies that target the more demanding needs of commercial printers, label converters and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post printing +applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners and thermal transfer ribbons designed for optimal performance with the Company’s printing hardware. In addition, +GetLabels media is compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models +include a selection of professional tabletop digital color label printers. The high-speed QL-120X was built on AstroNova’s pioneering and successful Kiaro! platform. Introduced early in 2019, the +high-performance QL-300 was the first 5-color toner-based electrophotographic tabletop production label printer in the market. In addition, our QuickLabel line of +printers includes the QL-850, our next-generation wide-format inkjet color label printer, the QL-30 and QL-60 series, a family of +high-end monochrome printers, and the QLS-4100 XE, a unique solution with the ability to digitally print full color labels and tags using thermal transfer ribbon +technology. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to +large-scale all-in-one inline specialty printing systems. The T2-C, a compact, digital mini-press designed for 24/7 label +production, includes numerous differentiating features for several end-use market applications. The T2-L is a narrow format digital press designed specifically for +flexible packaging substrates. Beyond label printing, the T3-OPX, introduced in late 2019, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many +other items using pigment inks that are water-resistant and highly resistant to UV exposure. A professional label press and finishing system, the T4, enables print, die-cut, and lamination in an all-in-one machine with a much smaller footprint than others in the market. Expanding on the T4 with additional features, the T5 incorporates capabilities of a compact +converter unit featuring UV varnish, lamination, rotary die-cutting, slitting and waste removal to offer an all-in-one digital +print and finish inline labeling solution. +GetLabels provides a broad range of high-quality supplies for both AstroNova +printers and third-party printers. Supplies include label and tag materials, inks, toner and thermal transfer material. Label materials and +4 +Table of Contents +substrates are specifically designed and constructed for a wide variety of labeling applications. Each label material and substrate is qualified and tested in our +on-site Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +The PI segment additionally develops and licenses various specialized software used to design and manage labels and print images, as well +as manage and operate our printers and presses and coordinate printing on an automated basis directly over networked systems. PI also provides worldwide training and support. +T&M +Products sold under AstroNova’s T&M segment are designed +and manufactured for airborne printing solutions and for data acquisition. AstroNova’s aerospace applications include flight deck printing solutions, networking hardware and thermal paper. The Company’s data acquisition systems are used in +research and development, flight testing, missile/rocket telemetry production monitoring and maintenance applications. These products are sold to customers in a variety of industries, including aerospace & defense, automotive, commercial +airline, energy, manufacturing and transportation, to meet the need to acquire and record data from local and networked data streams and sensors. +Airborne printers include the Company’s flagship ToughWriter ® +series used in the flight decks and cabins of military, commercial and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, arrival and departure information, flight +itineraries, weather maps, performance data, passenger data, and various air traffic control data. ToughSwitch ® +Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight +worthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter airborne printers for many aircraft made by Airbus, Boeing, Embraer, Bombardier, Lockheed, Gulfstream and others. In addition +to the ToughWriter products, the Company manufactures other flight deck printers, including Miltope-brand and RITEC-brand airborne printers that the Company acquired in 2015 and 2014, respectively, and the +PTA-45 cockpit printer. The PTA-45B is subject to the Asset Purchase and Licenses Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), +pursuant to which in 2017 the Company acquired an exclusive perpetual world-wide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Over time we expect that customers +will chose to replace those printers with ToughWriter products because they have numerous technical features and functional advantages and significant weight savings. +Other T&M products include: the TMX ® all-in-one high speed data acquisition system for applications requiring high channel +counts and acquisition rates, the Daxus ® DXS-100 distributed data +acquisition platform, the SmartCorder ® DDX-100, a portable all-in-one data acquisition system for facilities maintenance and field testing and the Everest ® EV-5000 digital strip chart recording system used mainly in telemetry applications. The Daxus +DXS-100 can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that +relate to (1) acquiring data, (2) conditioning the data, (3) displaying or printing the data on hard copy, monitor or electronic storage media and (4) analyzing the data. To service data visualization, AstroNova maintains +technological core competencies and trade know-how concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and contain aspects of electronic, software, +mechanical and industrial engineering. Additionally, AstroNova possesses engineering expertise in the areas of digital signal processing, image processing, fluidics, color theory, high-speed material handling and design for airworthiness. +Patents and Copyrights +We hold several product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, trademark and trade secret laws in the United States and other jurisdictions +to protect our +5 +Table of Contents +technology and brand name. We consider our intellectual property to be important to the operation of our business. In particular, we believe that the loss of the trademarks QuickLabel, +TrojanLabel, ToughWriter or ToughSwitch or the loss of the license provided under the Honeywell Agreement could have a material adverse impact on the Company’s business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we +design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many of the sub-assemblies and parts in-house, +including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts not manufactured in-house are standard +electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We purchase certain components, assembled products and supplies used in +the manufacture of our products from a single source or limited supplier source. While we believe the majority of these sole or limited source components, assembled products and supplies could be sourced elsewhere with appropriate changes in the +design of our products, such design might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that the Company may not be +able to acquire such components, products or supplies on a timely basis, the Company’s practice is to procure a sufficient quantity in advance. In the past we have made such advance purchases primarily for aerospace products and in quantities +that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in +tabletop digital color label printing technology, a market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose portable, high-speed data +acquisition systems. +Our management believes that we have a market leadership position in many of the markets we serve. We +retain our leadership position by virtue of proprietary technology, product reputation, delivery, our channels to market, technical assistance and service to customers. The number of competitors varies by product line. Key competitive factors vary +among our product lines, but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our products are sold by direct field salespersons as well as independent dealers and representatives. In the United States, the Company has factory-trained direct field salespeople located in major +cities from coast to coast specializing in either Product Identification or Test & Measurement products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United +Kingdom staffed by our own employees and dedicated third party contractors. Additionally, we utilize over 225 independent dealers and representatives selling and marketing our products in over 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our +backlog varies regularly. It consists of a blend of orders for end-user customers as well as original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and +customer requirements. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2020 and 2019 was $25.2 million and $25.6 million, respectively. +Employees +As of +January 31, 2020, we employed 365 people. We are generally able to satisfy our employment requirements. No employees are represented by a union. We believe that our employee relations are good. +6 +Table of Contents +Other Information +The Company’s business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 +as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). These filing are also accessible on the SEC’s website at http://www.sec.gov. +Item 1A. Risk Factors +The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on +our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties +not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +The ongoing COVID-19 pandemic may adversely affect our revenues, results of operations and financial condition. +Our business could be materially adversely affected by the widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus known as COVID-19. COVID-19 has been declared by the World Health Organization to be a “pandemic” and has spread to many of the countries in which we, our customers, our +suppliers and our other business partners do business. National, state and local governments in affected regions have implemented and may continue to implement safety precautions, including quarantines, travel restrictions, business closures, +cancellations of public gatherings and other measures. Other organizations and individuals are taking additional steps to avoid or reduce infection, including limiting travel and staying home from work. These measures are disrupting normal business +operations both in and outside of affected areas and have had significant negative impacts on businesses and financial markets worldwide. +We continue to monitor our operations and government recommendations and have made modifications to our normal operations because of the COVID-19 outbreak, +including requiring most non-production related team members to work remotely. We have maintained a substantial portion of our manufacturing operational capacity at our manufacturing facilities located in West +Warwick, Rhode Island, as well as our manufacturing facilities in Canada and Germany, at this time, and we have instituted heightened cleaning and sanitization standards and several health and safety protocols and procedures to safeguard our team +members. +However, the COVID-19 outbreak has caused the Company to experience a number +of adverse impacts, including reductions in demand for its products, delays and cancellations of orders for its products, difficulties in obtaining raw materials and components for its products, shortages of labor to manufacture products, +inefficiencies caused by remote worker’s difficulties in performing their normal work outputs, closures of the facilities of some of its suppliers and customers, and delays in collecting accounts receivable. +While it is not possible at this time to estimate the entirety of the impact that COVID-19 will +have on our business, customers, suppliers or other business partners, we expect that the continued spread of COVID-19, the measures taken by the governments of affected countries, actions taken to protect +employees, and the impact of the pandemic on all business activities to further adversely impact our operational capacity and the efficiency of our team members and will materially adversely affect our results of operations and financial condition. +Disruptions in the capital markets as a result of the COVID-19 outbreak may also +adversely affect the Company if these impacts continue for a prolonged period and the Company needs additional liquidity. +7 +Table of Contents +The aerospace industry, which we serve through our aerospace product line, has been +significantly disrupted by the COVID-19 outbreak, both inside and outside of the United States. The impact of the decline in air travel will likely have a material adverse impact on the Company’s +financial results, the scope of which cannot be estimated at this time. Should one of more of our airplane OEM manufacturing customers or a significant number of airline customers fail to continue business as a going concern or declare bankruptcy, +or otherwise reduce the demand for our products as a result of the impact of the COVID-19 pandemic crisis, it would have a material adverse impact on our business operations and financial results. +AstroNova’s operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as +anticipated. +Any decline in our customers’ markets or in their general economic conditions would likely result in +a reduction in demand for our products. For example, the current grounding and suspension of production of the Boeing 737 MAX has reduced demand for our airborne printers that are placed on that aircraft, as well as the related repairs and supplies, +and that has negatively affected our results of operations. In addition, the current worldwide COVID-19 pandemic has negatively impacted the airline industry as a whole, which could result in a reduction in +orders by the airlines for new planes and reduce demand for retrofitting airplanes already in service and, therefore, a further reduction in demand for our airborne printer products. The effect of the COVID-19 +pandemic and any future action relating to the 737 MAX on our business is currently unknown, but we expect any resulting changes in production schedules will likely have an adverse effect on our business, which could be material. Some of our +customers may be reluctant to make capital equipment purchases or may defer certain of these purchases to future quarters. Some of our customers may also limit consumable product purchases to quantities necessary to satisfy immediate needs with no +provisions to stock supplies for future use. Also, if our customers’ markets decline, we may not be able to collect on outstanding amounts due to us. Such declines could harm our results of operations, financial position and cash flows and +could limit our ability to continue to remain profitable. +AstroNova’s future revenue growth depends on our ability to develop and +introduce new products and services on a timely basis and achieve market acceptance of these new products and services. +The markets for our products are characterized by rapidly changing technologies and accelerating product introduction cycles. Our future +success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with +technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate our +competitors’ development of new products, and maintain high levels of product quality and reliability. AstroNova spends a significant amount of time and effort related to the development of our airborne and color printer products as well as our +data recorder products. Failure to meet our customers’ changing business needs or to further develop any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results. +As we introduce new or enhanced products, we must also successfully manage the transition from older products to minimize +disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of +our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. +Additionally, when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost +structures, and manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or AstroNova’s plans for future support of existing +products may cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +8 +Table of Contents +AstroNova is dependent upon contract manufacturers for some of our products. If these +manufacturers do not meet our requirements, either in volume or quality, then we could be materially harmed. +We +subcontract the manufacturing and assembly of certain of our products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Disruptions in the global supply chain as a result of the COVID-19 outbreak; +• +Limited control over the manufacturing process; +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; and +• +Reduced control over delivery schedules, manufacturing yields, quality and costs. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture or provide these products in required +volumes or fails to meet our quality standards, we will have to identify qualified alternate subcontractors or take over the manufacturing ourselves. Additional qualified subcontractors may not be available or may not be available on a timely or +cost competitive basis. Any interruption in the supply or increase in the cost of the products manufactured by third party subcontractors or failure of a subcontractor to meet quality standards could have a material adverse effect on our business, +operating results and financial condition. +For certain components, assembled products and supplies, AstroNova is dependent upon single +or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and supplies used in the manufacture of our products from a single source +or limited supplier sources. If the supply of a key component, assembled products or certain supplies were to be delayed or curtailed or, in the event a key manufacturing or sole supplier delays shipment of such components or assembled products, our +ability to ship products in desired quantities and in a timely manner would be adversely affected. For example, due to the recent outbreak of COVID-19, there has been and likely will continue to be disruption +to our supply chain due to the delays of component shipments from our vendors in China and other jurisdictions in which normal business operations are disrupted. Our business, results of operations and financial position could also be adversely +affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source. Additionally, if any single or limited source supplier +becomes unable or unwilling to continue to supply these components, assembled products or supplies in required volumes, we will have to identify and qualify acceptable replacements or redesign our products with different components. Alternative +sources may not be available, or product redesign may not be feasible on a timely basis. Any interruption in the supply of or increase in the cost of the components, assembled products and supplies provided by single or limited source suppliers +could have a material adverse effect on our business, operating results and financial condition. +AstroNova faces significant +competition, and our failure to compete successfully could adversely affect our results of operations and financial condition. +We operate in an environment of significant competition, especially in the markets in which we sell our PI printers and T&M data acquisition products. This competition is driven by rapid technological +advances, evolving industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete based on technology, +performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we +9 +Table of Contents +currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products or services with features that could adversely +affect the competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, our customers could seek +alternative solutions from our competitors and we could lose market share, which could materially and adversely affect our business, results of operations and financial position. +AstroNova’s profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure. +Our success depends on our ability to obtain adequate pricing for our products and services which provides a reasonable return to our +shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to +offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially +adversely affected. +We are continually reviewing our operations with a view towards reducing our cost structure, including but +not limited to reducing our labor cost-to-revenue ratio, improving process and system efficiencies and outsourcing certain internal functions. From time to time we also +engage in restructuring actions to reduce our cost structure. If we are unable to maintain process and systems changes resulting from cost reduction and prior restructuring actions, our results of operations and financial position could be +materially adversely affected. +AstroNova’s inability to adequately enforce and protect our intellectual property, defend against +assertions of infringement or lose certain licenses could prevent or restrict our ability to compete. +We rely on +patents, trademarks, licenses, and proprietary knowledge and technology, both internally developed and acquired, in order to maintain a competitive advantage. Our competitors may develop technologies that are similar or superior to the +Company’s proprietary technologies or design technologies around the intellectual property protections or licenses that the Company currently owns. The loss of the trademarks QuickLabel, TrojanLabel, ToughWriter and ToughSwitch or the loss of +the licenses provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. Operating outside the United States also exposes us to additional intellectual property risk. The laws and enforcement +practices of certain jurisdictions in which we operate do not protect our intellectual property rights to the same extent as in the United States. Any diminution in our ability to defend against the unauthorized use of these rights and assets could +have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement, which could result in significant costs and divert +our management’s focus away from operations. +AstroNova has significant inventories on hand. +We maintain a significant amount of inventory. Although we have provided an allowance for slow-moving and obsolete inventory, any +significant unanticipated changes in future product demand or market conditions, including obsolescence or the uncertainty in the global market, as well as prolonged reduced demand for the Company’s products due to the COVID-19 outbreak, could have an impact on the value of inventory and adversely affect our business, operating results and financial condition. +Economic, political and other risks associated with international sales and operations could adversely affect AstroNova’s results of operations and financial position. +Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Revenue from +international operations, which includes both direct and indirect sales to customers +10 +Table of Contents +outside the U.S., accounted for 37% of our total revenue for fiscal year 2020, and we anticipate that international sales will continue to account for a significant portion of our revenue. In +addition, we have employees, suppliers, contractors and facilities located outside the U.S. Accordingly, our business, operating results and financial condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Differing protection of intellectual property; +• +Unexpected changes in regulatory requirements; and +• +Geopolitical turmoil, including terrorism, war and public health disruptions, such as that caused by the current +COVID-19 outbreak. +Brexit +The U.K. formally left the E.U. on January 31, 2020 and has entered a transition period until December 31, 2020. During the +transition period, the U.K. and the E.U. will seek to negotiate a trade deal, and the U.K. will remain in both the E.U. customs union and single market. The announcement of Brexit caused significant volatility in global stock markets and currency +exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against the foreign currencies in which we conduct business. The withdrawal of the U.K. from the E.U. may also create further global economic uncertainty, which may +adversely impact the economies of the U.K., the E.U. countries and other nations. Brexit could subject us to disruptions in trade and the free movement of goods, services and people to and from the UK, increased foreign exchange volatility with +respect to the British pound and disruptions to our workforce and that of our suppliers and business partners. +AstroNova could incur +liabilities as a result of installed product failures due to design or manufacturing defects. +AstroNova has incurred +and could incur additional liabilities as a result of installed product failures due to design or manufacturing defects. Our products may have defects despite our internal testing or testing by current or potential customers. These defects could +result in among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance or substantial damage to our reputation. We could be subject to material claims by customers and may incur +substantial expenses to correct any product defects. +In addition, through our acquisitions, we have assumed, and may in the +future assume, liabilities related to products previously developed by an acquired company that have not been subjected to the same level of product development, testing and quality control processes we employ, and may have unknown or undetected +errors. Some types of errors may not be detected until the product is installed in a user environment. This may cause +11 +Table of Contents +AstroNova to incur significant warranty and repair or re-engineering costs and may divert the attention of engineering personnel from product development +efforts which may cause significant customer relations problems such as reputational problems with customers resulting in increased costs and lower profitability. +Certain of our products require certifications by customers, regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business. +In certain industries and for certain products, such as those used in aircraft, we must obtain certifications for our +products by customers, regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our business, financial +condition, results of operations and cash flows could be materially and adversely affected. +Changes in our tax rates or exposure to +additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods. +As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate +is based on the tax rates in effect where we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each jurisdiction. Our effective tax rate may vary as a result of numerous factors, including +changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, whether we secure or sustain acceptable arrangements with tax authorities, adjustments to the value of our +uncertain tax positions, changes in accounting for income taxes and changes in tax laws, including the 2017 U.S. Tax Cuts and Jobs Act (the “Tax Act”). Any of these factors could cause us to experience an effective tax rate significantly +different from previous periods or our current expectations. +The Tax Act significantly revises the U.S. federal corporate +income tax law and includes a broad range of tax reform measures affecting business including among other things, the reduction of the corporate income tax rate from 35% to 21%, the loss of certain business deductions, the acceleration of first-year +expensing of certain capital expenditures and a one-time tax imposed on unremitted cumulative non-U.S. earnings of foreign subsidiaries. The Tax Act is complex and far-reaching, and we continue to evaluate the actual impact of its enactment on the Company. Any material adverse impact resulting from the Tax Act that has not yet been identified could have an adverse effect on +our business, results of operations, financial condition and cash flow. +Further changes in the tax laws of foreign +jurisdictions could arise as a result of the base erosion and profit shifting (BEPS) project undertaken by the Organisation for Economic Co-operation and Development (OECD), which represents a coalition of member countries. On October 5, 2015, the +OECD issued a series of reports recommending changes to numerous long-standing tax principles. Many of these recommendations or similar concepts are being adopted by various countries in which we do business and may increase our taxes in these +countries. Changes to these and other areas in relation to international tax reform, including future actions taken by foreign governments in response to the Tax Act, could increase uncertainty and may adversely affect our tax rate and cash flow in +future years. +Changes to tax laws and regulations or changes to the interpretation thereof (including regulations and +interpretations pertaining to the Tax Act), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, could have a +material impact on our estimates of our effective tax rate and our deferred tax assets and liabilities. The impact of these factors may be substantially different +from period-to-period. +In addition, the +amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax +liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as +further described below) could adversely affect our financial statements. +12 +Table of Contents +We may have exposure to additional tax liabilities, which could negatively impact our income tax +expense, net income and cash flow. +We are subject to income and other taxes in both the U.S. and the foreign +jurisdictions in which we operate. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires significant judgment and estimation. In the ordinary course of our business, there are many +transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit by both domestic and foreign tax authorities and to the prospective and retrospective effects of changing tax regulations and +legislation. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the amounts recorded in our consolidated financial statements and may materially affect our income tax benefit or expense, net +loss or income, and cash flows in the period in which such determination is made. As of January 31, 2020, we did not record any liabilities for uncertain tax positions. +Deferred tax assets are recognized for the expected future tax consequences of temporary differences between the carrying amount for financial reporting purposes and the tax bases of assets and +liabilities, and for net operating losses and tax credit carry forwards. In some cases, we may record a valuation allowance to reduce our deferred tax assets to estimated realizable value. We review our deferred tax assets and valuation allowance +requirements quarterly. If we are unable to demonstrate that it is more likely than not that we will not be able to generate sufficient future taxable income to realize the net carrying value of deferred tax assets, we will record a valuation +allowance to reduce the deferred tax assets to estimated realizable value, which could result in a material income tax charge. As part of our review, we consider positive and negative evidence, including cumulative results of recent years. +The agreements governing our indebtedness subject us to various restrictions that limit our ability to pursue business opportunities. +The credit agreement governing our credit facility with Bank of America, N.A., as amended, contains, and any future +debt agreements may include, several restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to: +• +Incur future indebtedness; +• +Place liens on assets; +• +Pay dividends or distributions on our and our subsidiaries’ capital stock; +• +Repurchase or acquire our capital stock; +• +Conduct mergers or acquisitions; +• +Sell assets; and/or +• +Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay +subordinated indebtedness. +Our credit agreement with Bank of America also requires us to satisfy other +requirements, including maintaining certain financial ratios and condition tests. Our ability to meet these requirements can be affected by events beyond our control, and specifically because of the decline in revenue caused by the demand for +aircraft cockpit printers for the 737 MAX, the anticipated decline in revenue due to the demand for aircraft due to the current COVID-19 pandemic driven decline in revenue passenger miles, as well as the +likely decline in demand for some of our PI and other T&M products as a result of the COVID-19 driven slowdown in general economic activity. At this time, we expect that it is likely that we will violate +the current terms of our credit agreement with Bank of America at the end of our first or second quarter of fiscal year 2021. While we expect to be able to renegotiate the terms of the credit agreement, if we are unable to do so or to secure +alternative financing on acceptable terms, it will have a material adverse impact on us. To the extent we fail to meet any such requirements and are in default under our debt obligations, our financial condition may be materially adversely +13 +Table of Contents +affected. These restrictions may limit our ability to engage in activities that could otherwise benefit us. To the extent that we are unable to engage in activities that support the growth, +profitability and competitiveness of our business, results of operations and financial condition could be adversely affected. +In addition, the agreement governing our credit facility permits us to elect to pay interest on our revolving line of credit based on +LIBOR or a base rate as specified in the agreement. We also have term loans under our credit facility, as well as derivative instruments with variable interest rates, that are indexed to LIBOR. In July 2017, the Financial Conduct Authority, the +authority that regulates LIBOR, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed the Secured Overnight Financing +Rate (SOFR) as the preferred alternative to U.S. Dollar LIBOR (“USD-LIBOR”) for use in debt instruments, derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition +plan to SOFR from USD-LIBOR, and organizations are currently working on an industry wide and/or company specific transition from LIBOR to an alternative that will not result in financial market disruptions, significant increases in benchmark rates +or financing costs to borrowers. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United States or elsewhere. To the extent these changes cause the interest rates on +our borrowings to increase, our interest expense will increase, which could adversely affect our financial condition, operating results and cash flows. +AstroNova may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may +negatively impact AstroNova’s overall business. +We have made strategic investments in other companies, products +and technologies. We may continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that we will be able to identify suitable +acquisition opportunities. In any acquisition that we complete we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative impact on operating results or other +aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental impact on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse impact on our reputation; and +• +Respective operations, management and personnel will be compatible. +In certain instances, as permitted by applicable law and NASDAQ rules, acquisitions may be consummated without seeking and obtaining +shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in an acquisition, there can be no assurance that we +will properly ascertain or assess such risks. +We may also divest certain businesses from time to time. Divestitures will +likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture depends on various +factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +14 +Table of Contents +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. +Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If we are not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize expected benefits of our acquisitions, divestitures or +strategic partnerships, AstroNova’s business, results of operations and financial condition could be adversely affected. +Adverse +conditions in the global banking industry and credit markets could impair our liquidity or interrupt our access to capital markets, borrowings or financial transactions to hedge certain risks. +At the end of fiscal 2020, we had approximately $4.2 million of cash and cash equivalents. Our cash and cash equivalents are held in +a mix of money market funds, bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets such as those caused by the current COVID-19 outbreak may, in some cases, result in an +inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent +positions and, in turn, our financial position. +To date, we have been able to access financing that has allowed us to make +investments in growth opportunities and fund working capital requirements as needed. In addition, we occasionally enter into financial transactions to hedge certain foreign exchange and interest rate risks. Our continued access to capital markets, +the stability of our lenders and their willingness to support our needs, and the stability of the counter parties to our financial transactions that hedge risks are essential for us to meet our current and long-term obligations, fund operations, and +fund our future strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could materially and adversely affect our business and financial condition. +AstroNova could experience a significant disruption in or security breach of our information technology system which could harm our business and +adversely affect our results of operations. +We employ information technology systems to support our business. Any +security breaches or other disruptions to our information technology infrastructure could interfere with operations, compromise our information and that of our customers and suppliers, and expose us to liability which could adversely impact our +business and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic proprietary or confidential information +regarding our customers, employees, suppliers and others including personally identifiable information, credit card data, and other confidential information. While we continually work to safeguard our systems and mitigate potential risks, there is +no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches. As a result, our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers +or breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events or other unforeseen events and in any such circumstance our system redundancy and other +disaster recovery planning may be ineffective or inadequate. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of them to date has had a material +impact. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to the Company’s brand and reputation, which could adversely affect our business, operating +results and financial condition. +15 +Table of Contents +AstroNova could experience risks related to the implementation of our new global enterprise +resource planning system. +We are currently engaged in a multi-year process of conforming all our operations to one +global enterprise resource planning (“ERP”) system. The ERP system is designed to improve the efficiency of our supply chain and financial transaction processes, improve the efficiency of how we accurately maintain our books and records +and enhance the speed and quality of information provided to our management team for use in the operation and management of our business. The implementation of the ERP system will continue to require significant investment of human and financial +resources. As a result of the COVID-19 outbreak, we will experience delays and increased costs as factors such as limited on-site availability of Company personnel and +outside consultants due to travel restrictions and remote work conditions, as well as a redirection of personnel efforts toward responding to the COVID-19 outbreak from the implementation of the new ERP +system. Significant disruption in the implementation and transition to the new ERP system as a result of the COVID-19 outbreak could negatively impact our ability to obtain the benefits that the new ERP system +is intended to bring. The length of these delays and the related cost are unknown because of the uncertainty of the duration of the COVID-19 pandemic crisis. Additionally, any significant disruption or +deficiency in the design, implementation and transition to the new ERP system could negatively impact our ability to: +• +record and process orders, +• +manufacture and ship our products in a timely manner, and +• +process data and electronic communications among our business locations, +any of which could have a material adverse effect on our business, consolidated financial condition or results of operations. +We also face the challenge of supporting our older systems while we implement the new ERP system. While we have invested significant resources in planning and project management, significant +implementation issues may arise that impact our normal business operations and could have a material adverse impact on our operating results and cash flow. +AstroNova depends on our key employees and other highly qualified personnel and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees +could compromise our future success and our business could be harmed. +Our future success depends upon our ability to +attract and retain professional and executive employees, including sales, operating, marketing, and financial management personnel. There is substantial competition for skilled personnel, and the failure to attract, develop, retain and motivate +qualified personnel could negatively impact our business, financial condition, results of operations and prospects. In order to hire new personnel or retain or replace our key personnel, we may be required to increase compensation, which would +decrease net income. Additionally, a number of key employees have special knowledge of customers, supplier relationships, business processes, manufacturing operations, and financial management issues and the loss of any of these employees could harm +the company’s ability to perform efficiently and effectively until their knowledge and skills are replaced, which might be difficult to do quickly, and as a result could have a material adverse effect on our business, financial condition, and +results of operations. +AstroNova is subject to laws and regulations; failure to address or comply with these laws and regulations could +harm our business and adversely affect our results of operations. +Our operations are subject to laws, rules, +regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify +our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our +products. If we do not +16 +Table of Contents +comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial +compliance costs or otherwise adversely affect our business. +Our operations are subject to numerous federal, state, +local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of +solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. We have used and continue to use various substances in our products and manufacturing operations, and have generated and continue to generate wastes, which have +been or may be deemed to be hazardous or dangerous. As such, our business is subject to and may be materially and adversely affected by compliance obligations and other liabilities under environmental, health and safety laws and regulations. These +laws and regulations affect ongoing operations and require capital costs and operating expenditures in order to achieve and maintain compliance. +As the result of the COVID-19 pandemic crisis, we have been required by U.S. federal and state governmental authorities and governmental authorities in non-U.S. +jurisdictions, as well as our own desire to adhere to best health and safety practices, to implement a number of policies and procedures that have increased our costs and added complexity and inefficiency to our manufacturing operations and all +administrative and office-based functions. +Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt +Practices Act, and any determination that the Company or any of its subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies +and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world +that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no +assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies. +Unauthorized access to personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights and +compliance with laws designed to prevent unauthorized access of personal data could be costly. +AstroNova collects and +stores certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Security breaches or other +unauthorized access to, or the use or transmission of, personal user information could result in a variety of claims against us, including privacy-related claims. There are numerous federal, state, local, and international laws and regulations +regarding privacy and the storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are changing, inconsistent and conflicting and subject to differing interpretations. +We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and +information security proposed and enacted in various jurisdictions. For example, in 2016 the European Commission adopted the General Data Protection Regulation (GDPR), a comprehensive privacy and data protection reform that became effective in +May 2018. The GDPR, which is applicable to all companies processing data of European Union residents, imposes significant fines and sanctions for violations. Similarly, the California Consumer Privacy Act of 2018 , which was enacted in June 2018 and +came into effect +17 +Table of Contents +on January 1, 2020, provides a new private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers +about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. +Additionally, other jurisdictions have enacted or are enacting data localization laws that require data generated in or relating to the residents of those jurisdictions to be physically stored within +those jurisdictions. In many cases, these laws and regulations apply not only to transfers between unrelated third parties but also to transfers between the Company and its subsidiaries. All of these evolving compliance and operational requirements +impose significant costs that are likely to increase over time. +While we continue to assess these requirements and the ways +they may impact the conduct of our business, we believe that we materially comply with applicable laws and industry codes of conduct relating to privacy and data protection. There is no assurance that we will not be subject to claims that we have +violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event we are found not to be in compliance with such laws or codes +of conduct. +Any failure or perceived failure by us (or any third parties with whom we have contracted to store such +information) to comply with applicable privacy and security laws, policies or related contractual obligations or any compromise of security that results in unauthorized access to personal information may result in governmental enforcement actions, +significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. In the case of such an event, our reputation may be harmed, we could lose current and potential users and the competitive positions of +our various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations. +We may record future impairment charges, which could materially adversely impact our results of operations. +We test our goodwill balances annually, or more frequently if indicators are present or changes in circumstances suggest that impairment +may exist. We assess goodwill for impairment at the reporting unit level and, in evaluating the potential for impairment of goodwill, we make assumptions regarding estimated revenue projections, growth rates, cash flows and discount rates. We +monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Relatively small declines in the future performance and cash flows of a reporting unit or +asset group, changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses, or small changes in other key assumptions, may result in the recognition of +significant asset impairment charges, which could have a material adverse impact on our results of operations. +We also review +our long-lived assets including property, plant and equipment, and other intangibles assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider, whether as result of the COVID-19 outbreak, the 737 MAX grounding or otherwise, include significant under-performance relative to expected historical or projected future operating results, significant negative industry or economic trends +and our market capitalization relative to net book value. We may be required in the future to record a significant charge to earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such +charges could have a significant adverse impact on our results of operations and our financial condition. +Inadequate self-insurance +accruals or insurance coverage for employee health care benefits, could have an adverse effect on our business, financial results or financial condition. +In the U.S., we maintain an employee health insurance coverage plan on a self-insured basis backed by stop-loss coverage which sets a limit on our liability for both individual and aggregate claim costs. +We record expenses based on actual claims incurred and estimates of the costs of expected claims, administrative costs, and stop-loss insurance premiums. +18 +Table of Contents +We record a liability for our estimated cost of U.S. claims incurred and unpaid as of +each balance sheet date. Our estimated liability is recorded on an undiscounted basis and is based on historical trends. Our history of claims activity is closely monitored, and liabilities are adjusted as warranted based on changing circumstances. +It is possible, however, that our actual liabilities may exceed our estimates of loss. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, which could cause us to record +additional expenses, which could adversely impact our business, financial condition, results of operations and cash flow. We believe, that the liabilities we have recorded to date will be sufficient to provide for losses we may incur due to +increased COVID-19 related employee health care insurance costs. However, the ultimate amount of these costs cannot be estimated at this time, and a prolonged period of spread of the disease could further +increase our costs and liabilities, the impact of which may be material. +Changes in accounting standards and subjective assumptions, +estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition. +Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, +such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, leases, and litigation, are highly complex and involve many subjective assumptions, estimates and +judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition. +Compliance with rules governing “conflict minerals” could adversely affect the availability of certain product components and our costs +and results of operations could be materially harmed. +SEC rules require disclosures +regarding the use of “conflict minerals” mined from the Democratic Republic of the Congo and adjoining countries necessary to the functionality or production of products manufactured or contracted to be manufactured. We have determined +that we use gold, tin and tantalum, each of which is considered a “conflict mineral” under the SEC rules, as they occur in electronic components supplied to us in the manufacture of our products. Because of this finding, we are required to +conduct inquiries designed to determine whether any of the conflict minerals contained in our products originated or may have originated in the conflict region or come from recycled or scrap sources. There are costs associated with complying with +these disclosure requirements, including performing due diligence in regards to the source of any conflict minerals used in our products, in addition to the cost of remediation or other changes to products, processes or services of supplies that may +be necessary as a consequence of such verification activities. As we use contract manufacturers for some of our products, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence +procedures that we implement. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do +so. As a result, our business, operating results and financial condition could be harmed. +Item 1B. +Unresolved Staff Comments +None. +19 +Table of Contents +Item 2. Properties +The following table sets forth information regarding the Company’s principal owned properties, all of which are included in the +consolidated balance sheet appearing elsewhere in this annual report. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, United States +135,500 +Corporate headquarters, research and development, manufacturing, sales and service +AstroNova also leases facilities in various other locations. The following information pertains to each +location: +Location +Approximate +Square +Footage +Principal Use +Dietzenbach, Germany +18,630 +Manufacturing, sales and service +Copenhagen, Denmark +4,800 +R&D, sales and service +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service +Elancourt, France +4,150 +Sales and service +Schaumburg, Illinois, United States +3,428 +Sales (Product Identification only) +Irvine, California, United States +3,100 +Sales (Product Identification only) +Shah Alam, Selangor, Malaysia +2,067 +Sales (Product Identification only) +Mexico City, Mexico +1,023 +Sales (Product Identification only) +Maidenhead, England +1,021 +Sales and service +Shanghai, China +461 +Sales (Product Identification only) +We believe our facilities are well maintained, in good operating condition and generally adequate to meet +our needs for the foreseeable future. +Item 3. Legal Proceedings +We are not a party to any pending, material legal proceedings. However, because of the nature of our business, we may be subject in the +future to lawsuits or other claims, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters . +Item 4. Mine Safety Disclosures +Not applicable. +20 +Table of Contents +PART II +Item 5. +Market for the Registrant ’ s Common Stock, Related Stockholder Matters and Issuer +Purchases of Equity Securities +AstroNova common stock trades on the NASDAQ Global Market +under the symbol “ALOT.” +AstroNova had approximately 252 shareholders of record as of April 3, 2020, which does +not reflect shareholders with beneficial ownership in shares held in nominee name. +Stock Repurchases +During the fourth quarter of fiscal 2020, the Company made the following repurchases of its common stock: +Total Number +of Shares +Repurchased +Average +Price paid +Per Share +Total Number of +Shares Purchased as +Part of Publicly +Announced +Plans +or Programs +Maximum Number +of Shares That +May Be Purchased +Under the +Plans +or Programs +November 1 – November 30 +— +— +— +— +December 1 – December 31 +— +— +— +— +January 1 – January 31 +1,870 +(a) +12.71 +(a) +— +— +(a) An executive of the company delivered 1,870 shares of the Company’s common stock toward the satisfaction of taxes +due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $12.71 per share and are included with treasury stock in the consolidated balance sheet. +21 +Table of Contents +Item 6. Selected Financial Data +Historical Financial Summary +Income +Statement Data +(In thousands, except per share data) +For the Fiscal Years Ended January 31, +2020 +2019 +2018 +2017 +2016 +Revenue +$ +133,446 +$ +136,657 +$ +113,401 +$ +98,448 +$ +94,658 +Gross profit +48,758 +53,999 +44,002 +39,489 +38,158 +Operating income +2,433 +8,720 +5,412 +6,281 +5,934 +Income before taxes +1,370 +7,308 +5,157 +6,605 +6,909 +Net income +$ +1,759 +$ +5,730 +$ +3,286 +$ +4,228 +$ +4,525 +Net Income per Common Share—Basic +$ +0.25 +$ +0.83 +$ +0.48 +$ +0.57 +$ +0.62 +Net income per Common Share—Diluted +$ +0.24 +$ +0.81 +$ +0.47 +$ +0.56 +$ +0.61 +Dividends Declared per Common Share +$ +0.28 +$ +0.28 +$ +0.28 +$ +0.28 +$ +0.28 +Balance Sheet Data +(In thousands) +As of January 31, +2020 +2019 +2018 +2017 +2016 +Cash and Marketable Securities +$ +4,249 +$ +7,534 +$ +11,688 +$ +24,821 +$ +20,419 +Current Assets +60,151 +62,608 +62,948 +61,423 +54,514 +Total assets +116,664 +118,983 +122,313 +83,665 +77,963 +Revolving Credit Facility +6,500 +1,500 +— +— +— +Current liabilities +26,767 +24,665 +25,912 +11,985 +9,548 +Debt, including short term portion +13,034 +18,242 +23,372 +— +— +Shareholders’ equity +$ +71,375 +$ +69,775 +$ +63,647 +$ +70,537 +$ +67,373 +Item 7. Management ’ s +Discussion and Analysis of Financial Condition and Results of Operations +Overview +AstroNova is a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, +distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. The Company organizes its structure around a core set of competencies, including research and development, manufacturing, service, +marketing and distribution. We market and sell our products and services through the following two segments: +• +Product Identification (“PI”) – offers color and monochromatic digital label printers, over-printers and custom OEM printers. PI also +offers software to design, manage and print labeling and packaging images locally and across networked printing systems, as well as all related printing supplies such as pressure sensitive labels, tags, inks, toners and thermal transfer ribbons used +by digital printers. PI also provides on-site and remote service, spare parts and various service contracts. +• +Test and Measurement (“T&M”) – offers a suite of products and services that acquire data from local and networked data streams +and sensors as well as wired and wireless networks. The acquired data is processed and analyzed and then stored and presented in various visual output formats. The T&M segment includes a line of aerospace printers that are used to print hard +copies of data required for the safe and efficient operation of aircraft including navigation maps, clearances, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, and various air traffic control +data. Aerospace products also include Ethernet switches which are used in military aircraft and military vehicles to connect multiple computers or Ethernet devices. +22 +Table of Contents +The Company markets and sells its products and services globally through a diverse +distribution structure of direct sales personnel, manufacturers’ representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on +organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. In fiscal 2020, 2019 and 2018, revenue from customers in various +geographic areas outside the United States, primarily in Western Europe, Canada and Asia, amounted to $49.8 million, $53.0 million and $43.6 million, respectively. +We maintain an active program of product research and development. During fiscal 2020, 2019 and 2018, we spent $8.1 million, +$7.8 million and $7.5 million, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development +efforts in fiscal 2020 and beyond. +We also continue to invest in sales and marketing initiatives by expanding the existing +sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding the challenging economic environment. +In fiscal 2018, AstroNova entered into an Asset Purchase and License Agreement (“Honeywell Agreement”) with Honeywell International, Inc. (“Honeywell”) pursuant to which, the Company +acquired the exclusive perpetual world-wide license to manufacture Honeywell’s narrow format flight deck printers for the Boeing 737 and Airbus 320 aircraft. +In March 2019 all major civil aviation authorities worldwide grounded the Boeing 737 MAX aircraft for safety reasons. In April 2019 Boeing reduced the number of aircraft produced per month from 52 to 42, +and in January 2020, Boeing ceased production of the 737 MAX completely. AstroNova manufactures all three certified printer models in the Boeing catalog for the 737 MAX. The printer on the 737 MAX is buyer furnished equipment (BFE), which means the +aircraft purchaser can choose which printer to have installed in the aircraft. Because the printer is BFE the purchaser of the aircraft purchases the printer directly from AstroNova and AstroNova delivers it to Boeing for installation on their +aircraft. In some cases, a 737 MAX purchaser may choose to have the aircraft delivered without a printer. In such cases a printer can be added to the aircraft after delivery. Our records indicate that the vast majority of new 737 MAX of aircraft are +delivered with one of our printers installed by Boeing. In addition to the drop off in orders for new aircraft printers, the 737 MAX grounding has negatively impacted our overall 737 printer upgrade business because operators have fewer available +aircraft, so they are not in a position to take older model 737s out of service for upgrades. The grounding of the 737 MAX aircraft has also resulted in a reduced demand for aviation printer paper. These factors, in combination, had a material +adverse impact on our revenues and profitability for fiscal 2020. At this time, it is not known when the Boeing 737 MAX will be certified for return to service, and it is also not known when Boeing will resume manufacturing and delivery. We expect +that when manufacturing and delivery schedules are known, customers will begin to order printers from us for those aircraft. We also expect that the adverse impact on our revenue and profitability will continue until customer demand recovers. At +this time, we believe that the demand for this aircraft will ultimately recover and further grow and we are making our operating decisions on that basis. +On March 11, 2020, the World Health Organization announced that COVID-19, a respiratory illness, caused by a novel coronavirus is a pandemic. COVID-19 has spread to many of the countries in which we, our customers, our suppliers and our other business partners conduct business. Governments in affected regions have implemented, and may +continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and +its employees are taking additional steps to avoid or reduce infection, including limiting travel and staying home from work. These measures are disrupting normal business operations both in and outside of affected areas and have had significant +negative impacts on businesses and financial markets worldwide. +We continue to monitor our operations and government +recommendations and have made modifications to our normal operations because of the COVID-19 outbreak, including requiring most non-production related team +23 +Table of Contents +members to work remotely. We have maintained a substantial portion of our manufacturing operational capacity at our primary manufacturing facilities located in West Warwick, Rhode Island, as well +as in our manufacturing facilities in Canada and Germany, at this time, and we have instituted heightened cleaning and sanitization standards and several health and safety protocols and procedures to safeguard our team members. +The COVID-19 outbreak has caused the Company to experience a number of adverse impacts, including +reductions in demand for its products, delays and cancellations of orders for its products, difficulties in obtaining raw materials and components for its products, shortages of labor to manufacture products, inefficiencies caused by remote +worker’s difficulties in performing their normal work outputs, closures of the facilities of some of its suppliers and customers, delays in collecting accounts receivable. Disruptions in the capital markets as a result of the COVID-19 outbreak may also adversely affect the Company if these impacts continue for a prolonged period and the Company needs additional liquidity. +The rapid development and uncertainty of the impacts of the COVID-19 pandemic precludes any +prediction as to the ultimate adverse impact of the COVID-19 outbreak on the Company’s business. However, COVID-19 and the measures taken to contain it present +material uncertainty and risk with respect to the Company’s performance and financial results. In particular, the aerospace industry, which the Company serves through its aerospace printer product line, has been significantly disrupted by the COVID-19 outbreak, both inside and outside of the United States. The decline in air travel and the impact of that decline on demand for our products from our airplane manufacturing customers, the airlines to which +we sell directly and through the manufacturers, and the repair and overhaul market and the market for the paper consumed in the printers, could have a material adverse impact on the company’s financial results. +We have reduced direct labor staffing levels in our aerospace manufacturing operations modestly, but the bulk of our expenses related to +the aerospace product lines business will be unchanged because of the continued need to support our customers, and to provide the required sales, engineering, quality, and regulatory compliance and audit activities (among others) necessary to +support the rest of the aerospace product line business. +Results of Operations +Fiscal 2020 compared to Fiscal 2019 +The following table presents the revenue of each of the Company’s segments, as well as the percentage of total revenue and change from the prior year. +($ in thousands) +2020 +2019 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +Product Identification +$ +88,116 +66.0 +% +1.5 +% +$ +86,786 +63.5 +% +T&M +45,330 +34.0 +% +(9.1 +)% +49,871 +36.5 +% +Total +$ +133,446 +100.0 +% +(2.3 +)% +$ +136,657 +100.0 +% +Net revenue in fiscal 2020 was $133.4 million, a 2.3% decrease compared to net revenue of +$136.7 million for fiscal 2019. Current year revenue through domestic channels was $83.7 million, consistent with fiscal 2019 domestic revenue. International revenue of $49.8 million for fiscal 2020 decreased 6.1% compared to prior +year international revenue of $53.0 million. Fiscal 2020 international revenue reflects an unfavorable foreign exchange rate impact of $1.4 million, compared to a favorable impact of $0.6 million in fiscal 2019. International revenue +declined primarily due to lower sales of Product Identification supplies in Europe. +Hardware revenue in fiscal 2020 was +$49.0 million, a $4.2 million, or 8.0%, decrease compared to fiscal 2019 revenue of $53.2 million. The current year decrease in hardware revenue is primarily related to the decline in the aerospace printer product lines as a result of +the effects of the Boeing 737 MAX grounding. This decline of aerospace printer hardware sales in the T&M segment was offset by a modest increase in sales of data acquisition recorders and other aerospace printers. The overall decline in hardware +revenue for the current year was also +24 +Table of Contents +attributable to the decline in sales in the PI segment of certain older model QuickLabel printers such as the QL-120 and +QL-800, tempered by the product launch of the new QL-300 and QL-850 printers and increased sales of the TrojanLabel printers. +Revenue from supplies in fiscal 2020 was $71.8 million, representing a $ 0.6 million, or 0.8%, increase compared to +fiscal 2019 supplies revenue of $71.2 million. The dollar increase is primarily attributable to growth from Product Identification inkjet printer supplies. The current year increase in supplies revenue is tempered by older model lower thermal +transfer and electrophotographic printer supplies revenue in the Quick Label product line, as well as a decline in revenue from the sale of specialized aerospace printer paper in the T&M segment. +Service and other revenue in fiscal 2020 was $12.6 million, a 3.1% increase compared to fiscal 2019 service and other revenue of +$12.3 million. The current year increase is primarily due to the increase in parts sales and service revenue in the PI segment as a result of the increase in the installed base of printers. The current year increase in parts revenues in the +AstroNova aerospace product line and increase in customer demand for parts in the data recorder product line in the T&M segment also contributed to the current year increase in service and other revenue. +Gross profit was $48.8 million for fiscal 2020, reflecting a 9.7% decline compared to fiscal 2019 gross profit of $54.0 million. +The Company’s gross profit margin of 36.5% in fiscal 2020 reflects a decrease compared to fiscal 2019 gross profit margin of 39.5%. The lower gross profit for the current year compared to the prior year is primarily attributable to a decline in +revenue as well as higher period costs and adverse product mix. +Operating expenses for the current year were +$46.3 million, representing a 2.3% increase from the prior year’s operating expenses of $45.3 million. Specifically, selling and marketing expenses of $26.9 million in fiscal 2020 increased 2.1% from the prior year amount of +$26.3 million. The increase in selling and marketing expenses for the current year is due primarily to increases in wages and outside services expense which were slightly offset by lower employee benefits and commission expenses. Selling and +marketing expenses represent 20.1% and 19.3% of net revenue for fiscal 2020 and 2019, respectively. Current year general and administrative (“G&A”) expenses increased by 2.1% from the prior year to $11.4 million, primarily as a +result of an increase in expenses for outside services and professional fees. The current year increase in G&A is partly offset by lower bonuses and share-based compensation. Research & development (“R&D”) costs in fiscal +2020 of $8.1 million increased 3.5% from $7.8 million in fiscal 2019 primarily due to an increase in outside service expenses which were partially offset by lower bonus expenses in fiscal 2020. The R&D spending level for fiscal 2020 +represents 6.1% of net revenue, an increase compared to the prior year level of 5.7%. +Other expense in fiscal 2020 was +$1.1 million compared to $1.4 million in fiscal 2019. Current year other expense includes interest expense on debt of $0.8 million and foreign exchange loss of $0.5 million, offset by investment and other income of +$0.1 million. Other income in fiscal 2019 included interest expense on debt of $0.9 million and a foreign exchange loss of $0.7 million, offset by investment income and other of $0.2 million. +Net income for fiscal 2020 was $1.8 million, or $0.24 per diluted share, a decrease compared to $5.7 million, or $0.81 per +diluted share in fiscal 2019. Prior year results were impacted by $0.1 million, or $0.01 per diluted share, in taxes as a result of the Company’s finalization of its accounting for the 2017 Tax Act. During fiscal 2020 the Company +recognized a $0.4 million income tax benefit and had an effective tax rate of negative 28.4% compared to an income tax provision of $1.6 million, or a 21.6% effective tax rate for fiscal 2019. The decrease in the fiscal 2020 tax rate as +compared to fiscal 2019 is primarily related to lower pre-tax income. Specific items decreasing the effective tax rate in fiscal 2020 include foreign derived intangible income, the release of ASC 740 +liabilities, foreign tax credit utilization, and return to provision adjustments. This decrease was offset by valuation allowances recorded on unbenefited losses in China and on carryforward foreign tax credits expected to expire unused. +Fiscal 2019 compared to Fiscal 2018 +For a comparison of our results of operations for the fiscal years ended January 31, 2019 and January 31, 2018, see “Part II, Item 7. Management’s Discussion and Analysis of Financial +Condition and Results of +25 +Table of Contents +Operations” of our annual report on Form 10-K for the fiscal year ended January 31, 2019, filed with the SEC on April 10, 2019. +Segment Analysis +We +report two segments consistent with our product revenue groups: PI and T&M. Segment performance is evaluated based on the operating segment’s profit before corporate and financial administration expenses. The following table summarizes +selected financial information by segment. +($ in thousands) +Revenue +Segment Operating Profit +Segment Operating Profit as a +% of Revenue +2020 +2019 +2018 +2020 +2019 +2018 +2020 +2019 +2018 +PI +$ +88,116 +$ +86,786 +$ +81,681 +$ +7,509 +$ +7,910 +$ +10,561 +8.5 +% +9.1 +% +12.9 +% +T&M +45,330 +49,871 +31,720 +6,281 +11,933 +3,754 +13.9 +% +23.9 +% +11.8 +% +Total +$ +133,446 +$ +136,657 +$ +113,401 +13,790 +19,843 +14,315 +10.3 +% +14.5 +% +12.6 +% +Corporate Expenses +11,357 +11,123 +8,903 +Operating Income +2,433 +8,720 +5,412 +Other Expense, Net +(1,063 +) +(1,412 +) +(255 +) +Income Before Income Taxes +1,370 +7,308 +5,157 +Income Tax Provision (Benefit) +(389 +) +1,578 +1,871 +Net Income +$ +1,759 +$ +5,730 +$ +3,286 +Product Identification +Revenue from the PI segment increased 1.5% in fiscal 2020 with revenue of $88.1 million compared to revenue of $86.8 million in the prior year. The current year increase is primarily +attributable to growth in demand for ink jet supplies for both the QuickLabel and Trojan Label product lines. Also contributing to the increase in revenue for the current year was an increase in service and parts revenue. Hardware revenue in the PI +segment declined slightly compared to the prior year; however, the segment did experience a significant revenue contribution from the introduction of QuickLabel’s new QL-300, QL-120X and QL-850 printers, as well as continued growth in revenue from sales of both QuickLabel monochromatic printers and TrojanLabel brand printers. This growth was +tempered by lower sales of other inkjet color printers within the QuickLabel product group, particularly the older models, QL-120 and QL-800. PI current year segment +operating profit was $7.5 million with a profit margin of 8.5%, compared to the prior year segment operating profit of $7.9 million and related profit margin of 9.1%. The decrease in current year segment operating profit and margin is +primarily due to higher operating costs and unfavorable product mix. +Test & Measurement +Revenue from the T&M product group was $45.3 million for fiscal 2020, a 9.1% decrease compared to revenue of $49.9 million +in the prior year. The decrease in revenue for the current year is primarily attributable to the decline in the aerospace printer product lines impacted by the Boeing 737 MAX grounding. The decline was slightly offset by an increase in the hardware +product line as a result of increased sales of T&M data recorders and AstroNova aerospace printers for programs other than the 737 MAX. The T&M segment also experienced an increase in parts revenue in the aerospace product line for fiscal +2020. T&M’s current year segment operating profit was $6.3 million resulting in a 13.9% profit margin compared to the prior year segment operating profit of $11.9 million and related operating margin of 23.9%. The lower segment +operating profit and related margin for the current year is due to lower revenue, adverse product mix and higher manufacturing and period costs. +26 +Table of Contents +Liquidity and Capital Resources +Overview +Generally, our primary sources of liquidity are cash +generated from operating activities and borrowings under our revolving credit facility, as described below. These sources also fund a portion of our capital expenditures and contractual contingent consideration obligations. Our level of cash and +short-term financing capabilities along with cash flows from operations have historically been sufficient to meet our operating and capital needs. We believe that during the next 12 months the COVID-19 +pandemic is likely to impact general economic activity and demand in our end markets, especially the Aerospace sector, to an extent that we will have to rely more heavily on external financing sources to meet our operating and capital needs. As a +result of the impact of the COVID-19 pandemic, our customers may also experience liquidity pressure and be unable to pay us for products and services on a timely basis. Conditions in the credit markets may +also deteriorate and the availability of credit may be reduced as a result of the COVID-19 pandemic such that we would not be able to access sufficient financing to support our operations, which would have a +material adverse impact on our business. At this time, we expect that it is likely that we will violate the current terms of our credit agreement with Bank of America at the end of our first or second quarter of fiscal 2021. However, based on +discussions with our lender, we expect to be able to renegotiate the terms of our credit agreement prior to any violations. If we are unable to renegotiate the terms of our credit agreement or secure alternative financing on acceptable terms, it +will have a material adverse impact on the Company. +During the current year, the Company borrowed an additional +$5.0 million on its revolving credit facility, and at January 31, 2020 the Company had $6.5 million of borrowings outstanding under that facility. During fiscal 2019, we converted our securities available for sale to cash. Our cash and cash +equivalents at January 31, 2020, were $4.2 million and we had $11.0 million remaining available for borrowing under our revolving credit facility. +In April 2020, the Company applied for a loan in the amount of approximately $4.4 million from Bank of America, N.A. pursuant to the Paycheck Protection Program administered by the United States Small +Business Administration and authorized by the Keeping American Workers Employed and Paid Act, which is part of the Coronavirus Aid, Relief, and Economic Security Act, enacted on March 27, 2020. There can be no assurance that the Company will receive +any or all of the requested loan proceeds under this program. +Indebtedness +The Company and the Company’s wholly owned Danish subsidiaries, ANI ApS and TrojanLabel ApS (collectively, the “Parties”), +are parties to a credit agreement (“Credit Agreement”) with Bank of America, N.A. The Credit Agreement and its subsequent amendments through fiscal 2019 provided for a secured credit facility consisting of a term loan to ANI ApS in +the principal amount of $9.2 million, a term loan to the Company in the principal amount of $15.0 million and a $10.0 million revolving credit facility for the Company. On December 9, 2019, the Parties entered into a Fourth +Amendment (the “Fourth Amendment”) to the Credit Agreement. The Fourth Amendment amended the Credit Agreement to, among other things, (i) increase the aggregate amount available for borrowings under the revolving line of credit prior +to November 1, 2020 from $10.0 million to $17.5 million through the second quarter of fiscal 2021 and (ii) modify the financial covenants with which the Company must comply thereunder by excluding certain capital expenditures +from the calculation of the Company’s consolidated fixed charge coverage ratio, providing that the minimum consolidated fixed charge coverage ratio covenant will be suspended through the second quarter of fiscal 2021, and adding a minimum +consolidated EBITDA covenant commencing with the fourth quarter of fiscal 2020 and continuing through the second quarter of fiscal 2021. +Both term loans bear interest at a rate per annum equal to the LIBOR rate plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio. +In connection with our entry into the Credit Agreement, ANI ApS entered into a hedging agreement to manage the variable interest rate risk +and currency risk associated with its payments in respect to the term loan. +27 +Table of Contents +Under this combined arrangement, payments of principal and interest with respect to approximately $8.9 million of the principal of the term loan will be made in Danish Kroner, and interest +on such principal amount will be payable at a fixed rate of 0.67% per annum for the entire term, subject only to potential changes based on the Company’s consolidated leverage ratio. Additionally, the Company entered into a hedging +agreement to manage the variable interest rate risk associated with its payments with respect to the $15.0 million term loan. Under this combined arrangement, interest will be payable at a fixed rate of 2.04% per annum for the entire term, +plus an incremental margin of 1.0% to 1.5%, based on the Company’s consolidated leverage ratio. +Revolving credit loans +may be borrowed, at the Company’s option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. Amounts borrowed under the revolving credit facility bear interest at a rate per annum +equal to, at the Company’s option, either (a) the LIBOR rate (or, in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.0% to +1.5% based on the Company’s consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal funds’ rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate or +(iii) the LIBOR rate plus 1.00%, plus a margin that varies within a range of 0.0% to 0.5% based on the Company’s consolidated leverage ratio. The Company is required to pay a commitment fee on the undrawn portion of the revolving credit +facility at the rate of 0.25% per annum . Outstanding borrowings under the revolving credit line during fiscal 2020 bore interest at a weighted average annual rate of 4.81% and the Company has incurred $0.5 million of interest expense for +revolving credit line borrowings for the year ended January 31, 2020. +The obligations of ANI ApS in respect of the +$9.2 million term loan are guaranteed by the Company and TrojanLabel ApS. The Company’s obligations in respect of the $15.0 million term loan, revolving credit facility and its guarantee in respect of the ANI ApS term loan are secured +by substantially all of the assets of the Company (including a pledge of a portion of the equity interests held by the Company in ANI ApS and the Company’s wholly-owned German subsidiary, AstroNova GmbH), subject to certain exceptions. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Credit +Agreement upon the occurrence of any of various customary events of default. +The Parties must comply with various customary +financial and non-financial covenants under the Credit Agreement. +As of +January 31, 2020, the Company believes it is in compliance with all of the covenants in the Credit Agreement. +Cash Flow +The statements of cash flows for the years ended January 31, 2020, 2019 and 2018 are included on page 49 of +this Form 10-K. Net cash provided by operating activities was $3.2 million in fiscal 2020 compared to net cash provided by operating activities of $5.0 million in the previous year. The decrease in +net cash provided by operations for the current year is primarily due to a decrease in net income of $4.0 million partially offset by a decrease in cash used for working capital of $2.1 million from fiscal 2019. The changes in accounts +receivable, inventory, income taxes, accounts payable and accrued expenses for the current year decreased cash by $4.8 million in fiscal compared to $6.9 million the prior year. +The accounts receivable balance decreased to $19.8 million at January 31, 2020, compared to $23.5 at January 31, 2019. The +$3.7 million decrease in the accounts receivable balance is directly related to the decrease in sales for the fourth quarter of the current year to $30.5 million from $37.2 million in the prior year. +The year-end inventory balance increased to $33.9 million at January 31, 2020. versus +$30.2 million at January 31, 2019 and the days inventory on hand increased to 151 days at the end of fiscal 2020 as compared to 120 days at the end of the fiscal 2019. The current period increase in inventory and related days on hand is +due to lower-than-forecasted sales, as well as a buildup of inventory for new product launches in our Product +28 +Table of Contents +Identification segment and build-up of safety stock to fulfill requirements related to the transitioning of certain aerospace customers as a result of the +Honeywell Agreement. Also contributing to the inventory increase were delayed shipments to customers in both segments that were subsequently shipped after year end and last-time buy parts and safety stock increases in the T&M segment. +Net cash provided by operating activities was $5.0 million in fiscal 2019 compared to net cash provided by operating +activities of $3.7 million in the previous year. The increase in net cash provided by operations for fiscal year 2019 is primarily due to an increase in net income of $2.4 million, an increase in +non-cash amortization related to the Honeywell acquisition partially offset by the payment of the prior year’s accrued expenses to Honeywell under the TSA agreement. +The accounts receivable balance was $23.5 million at the end of fiscal year 2019 compared to $22.4 million at the end of fiscal +2018, although the collection cycle decreased to 49 days compared to 55 days at year end. The inventory balance increased to $30.2 million at the end of fiscal 2019, compared to $27.6 million at the end of fiscal 2018 with the inventory +days on hand decreasing to 120 days at the end of the current year from 124 days at the prior year end. +Net cash used by +investing activities for fiscal 2020 was $2.9 million for capital expenditures, consisting of $0.4 million for land and building improvements; $1.9 million for information technology; $0.2 million for machinery and equipment; +$0.2 million for tools and dies; and $0.2 million for furniture, fixtures and other capital expenditures. +Net cash +used by investing activities for fiscal 2019 was $1.5 million, which included $2.6 million for capital expenditures, consisting of $0.1 million for land and building improvements; $1.5 million for information technology; +$0.7 million for machinery and equipment; $0.2 million for tools and dies; and $0.1 million for furniture, fixtures and other capital expenditures. Cash used for investments in fiscal 2019 was partially offset by $1.5 million of +proceeds from sales and maturities of securities available for sale. +Net cash used by investing activities for fiscal 2018 was +$20.8 million, which included $23.9 million of cash paid for the TrojanLabel acquisition and the Honeywell Agreement, partially offset by $5.5 million of proceeds from sales and maturities of securities available for sale. Cash used +for investing activities for fiscal 2018 included capital expenditures of $2.2 million, consisting of $0.7 million for land and building improvements; $0.7 million for information technology; $0.5 million for machinery and +equipment; $0.2 million for tools and dies; and $0.1 million for furniture, fixtures and other capital expenditures. +Net cash used by financing activities for fiscal 2020 was $3.7 million, consisting primarily of principal payments on long-term debt +of $5.2 million and the guaranteed royalty obligation of $1.9 million. Cash used for financing was partially offset by borrowings of $5.0 million on the Company’s revolving credit facility in fiscal 2020. The Company did not +repurchase any shares of its common stock in fiscal 2020. Cash provided or used by financing activities also included cash used to pay dividends of $2.0 million in fiscal 2020 and $1.9 million in both fiscal 2019 and 2018. +Net cash used by financing activities for fiscal 2019 was $6.1 million, primarily as a result of principal payments of +$5.1 million on long-term debt, $1.5 million on the Company’s revolving credit facility and $1.6 million on the guaranteed royalty obligations. Cash used for financing was partially offset by borrowings of $3.0 million on +the Company’s revolving credit facility in fiscal 2019. The Company did not repurchase any shares of its common stock in fiscal 2019. +Net cash provided by financing activities for fiscal 2018 was $9.1 million and includes $24.2 million of proceeds related to the issuance of debt under the Company’s credit facility with +Bank of America. Offsetting the cash provided by financing activities in fiscal 2018 was $11.2 million of cash used to repurchase 826,305 shares of the Company’s common stock at a per share price of $13.60. The purchase of these shares was +from a trust established by the former founder and chief executive officer of the Company and did not impact the shares authorized for future purchases as part of the Company’s stock buyback program. +29 +Table of Contents +Contractual Obligations, Commitments and Contingencies +At January 31, 2020, the Company’s contractual obligations with initial remaining terms in excess of one year were as follows: +(In thousands) +Total +Less than +1 Year +1-3 +Years +3-5 +Years +More than +5 Years +Purchase Commitments (1) +$ +22,380 +$ +21,216 +$ +1,164 +$ +— +$ +— +Debt +13,034 +5,208 +7,826 +— +— +Interest on Debt (2) +2,124 +586 +1,295 +243 +— +Royalty Obligation (3) +10,012 +2,000 +3,402 +2,643 +1,967 +Excess Royalty Obligation (4) +773 +773 +— +— +— +Operating Lease Obligations +1,905 +416 +658 +442 +389 +$ +50,228 +$ +30,199 +$ +14,345 +$ +3,328 +$ +2,356 +(1) +Purchase obligations include undiscounted amounts committed under legally enforceable contracts or purchase orders for goods and services with +defined terms as to price, quantity and delivery dates. +(2) +Interest rate on variable rate debt is provided at the effective fixed rate paid by the Company per the hedging arrangements plus the maximum +additional margin payable based on the Company’s consolidated leverage ratio of 1.5%. +(3) +The Company is subject to a guaranteed minimum royalty payment obligation over the next ten years pursuant to the Honeywell Asset Purchase and +License Agreement. Refer to Note 9, “Royalty Obligation” in the audited consolidated financial statements included elsewhere in this report for further details. +(4) +The Company is subject to excess royalty payments beyond the guaranteed minimum royalty obligation pursuant to the Honeywell Asset +Purchase & License Agreement. Refer to Note 9, “Royalty Obligation,” in the audited consolidated financial statements included elsewhere in this report for further details. +The Company is also subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range +of matters, such as: contract and employment claims; workers compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to +ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a +material adverse effect on our consolidated financial position or results of operations. It is possible, however, that results of operations for any future period could be materially affected by changes in our assumptions or strategies related to +these contingencies or changes out of the Company’s control. +Critical Accounting Policies and Estimates +Our discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial +statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating +financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are +reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on the Company’s historical experience, current trends and information available from other sources, +as appropriate. If different conditions result from those assumptions used in our judgments, the results could be materially different from our estimates. We believe the following critical accounting policies require significant judgments and +estimates in the preparation of our consolidated financial statements: +Revenue Recognition : Effective February 1, +2018, we adopted Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers and the related amendments (also referred to as +30 +Table of Contents +Topic 606) using the modified retrospective method. Topic 606 was applied to all contracts within the scope of Topic 606 as of the February 1, 2018 adoption date. +Under ASC Topic 606, based on the nature of our contracts and consistent with prior practice, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied. Accordingly, the adoption of this +standard did not have a material impact on our revenue recognition and there was no cumulative effective adjustment as of February 1, 2018 as a result of the adoption of ASC Topic 606. +Our accounting policies relating to the recognition of revenue under Topic 606 require management to make estimates, determinations and +judgments based on historical experience and on various other assumptions, which include (i) the existence of a contract with the customer, (ii) the identification of the performance obligations in the contract, (iii) the value of any +variable consideration in the contract, (iv) the stand alone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the contract, and (v) determining when a performance obligation has been +met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery for those services, could result in inappropriate recognition of revenue, or incorrect +timing of revenue recognition, which could have a material effect on our financial condition and results of operations. +We +recognize revenue for non-recurring engineering (NRE) fees, as necessary, for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to +completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. +Infrequently, the Company receives requests from customers to hold product being purchased from us for the customers’ convenience. We +recognize revenue for such bill and hold arrangements in accordance with the guidance provided by Topic 606, which requires the transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the +reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) the Company does not have the +ability to use the product or direct it to another customer. +Allowance for Doubtful Accounts: Accounts receivable +consists primarily of receivables from our customers arising from the sale of our products. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves +for doubtful accounts. +We estimate the collectability of our receivables and establish allowances for accounts receivable that +we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our accounts receivable are outstanding and the financial condition of individual customers. In situations where we are aware of a +specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. We believe that our procedure for estimating such amounts are reasonable +and historically have not resulted in material adjustments in subsequent periods. Bad debt expense was less than 1% of net sales in each of fiscal 2020 and 2019. +Warranty Claims: The Company offers warranties on some of its products. The Company establishes a reserve for estimated costs of warranties at the time the product revenue is recognized. This +reserve requires us to make estimates regarding the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and +the customer’s usage affect estimated warranty cost. If actual warranty costs differ from the Company’s estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of revenue, and the +reserve balance recorded as an accrued expense. While the Company maintains product quality programs and processes, its warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or +corrective costs differ from the estimates, the Company revises its estimated warranty liability accordingly. +31 +Table of Contents +Inventories: Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. The process for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on +hand and estimating the net realizable value of the inventory based on historical experience, current business conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have +not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income +Taxes: A valuation allowance is established when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative +evidence must be considered, including our performance, the market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the +estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2020, the Company has provided valuation allowances for future tax +benefits resulting from certain domestic R&D tax credits, foreign tax credit carryforwards, and net operating loss carryforwards in China, all of which could expire unused. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although +guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by +management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted. +On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted into law in the U.S. and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the +tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, +the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond +one year of the enactment date. All accounting under SAB 118 was finalized during the quarter ending January 31, 2019 with no material changes from the provisional amounts previously recorded. +Intangible and Long-Lived Assets: Long-lived assets, such as definite-lived intangible assets and property, plant and equipment, +are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from +the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined +by the discounting of future cash flows. +Goodwill: Goodwill is tested for impairment at the reporting unit. A reporting +unit is an operating segment or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are +aggregated as a single reporting unit if they have similar economic characteristics. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash +flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether it is more likely than not that the fair value of a reporting +unit is less than its carrying value. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and +strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative +assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. We +32 +Table of Contents +estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value +estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to publicly traded companies and transactions involving similar business, to +support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax +rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets +including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. +Self-Insurance Liability Accrual: We maintain self-insured group medical and dental programs for qualifying employees and maintain stop-loss coverage from a third party which limits our exposure to +large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In estimating this accrual, we utilize an independent +third-party broker to estimate of expected losses, which are based on analyses of historical data. Our assumptions are closely monitored and adjusted when warranted by changing circumstances. Should claims occur or medical costs increase in greater +amounts than we have expected, accruals may not be sufficient, and we may record additional expenses. +Share-Based +Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity +grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires several complex and subjective assumptions including our stock price +volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a +period equivalent to the weighted-average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded +that there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grants and assessed the expected +risk tolerance of different option groups. The risk-free interest rate used in the model is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption +is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted +stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the date of grant. Reductions in compensation +expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. +Recent Accounting Pronouncements +Reference is +made to Note 1 of our audited consolidated financial statements included elsewhere in this report. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +We have exposure to financial market risks, including changes in foreign currency exchange rates and interest rates. +33 +Table of Contents +Financial Exchange Risk +The functional currencies of our foreign subsidiaries and branches are the local currencies – the British Pound in the +U.K., the Canadian Dollar in Canada, the Danish Kroner in Denmark, the Chinese Yuan in China, and the Euro in France and Germany. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign +subsidiaries are translated to U.S. dollars. The assets and liabilities of our foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, +and at an average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The +reported results of our foreign subsidiaries will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency translation exposure is related to our subsidiaries that have functional +currencies denominated in Euro. A hypothetical 10% change in the rates used to translate the results of our foreign subsidiaries would result in an increase or decrease in our consolidated net income of less than $0.1 million for the year ended +January 31, 2020. +Transactional exposure arises where transactions occur in currencies other than the functional +currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates +prevailing at the balance sheet date and the resulting gains and losses are reported as foreign exchange gain (loss) in the consolidated statements of income. Realized and unrealized foreign exchange losses resulting from transactional exposure were +$0.4 million for the year ended January 31, 2020. +Interest Rate Risk +The Company has exposure to interest rate risk from its variable rate long-term debt. We entered into interest rate swaps to hedge the +interest rate exposure related to our variable rate debt. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. Giving effect to our interest rate swaps, if interest +rates were to decrease by 50 basis points, the fair value of the Company’s debt would increase by approximately $0.1 million. If interest rates were to increase by 50 basis points, the fair value of the Company’s debt would +decrease by approximately $0.1 million. +34 +Table of Contents +Item 8. Financial Statements and Supplementary Data +The consolidated financial statements required under this item are submitted as a separate section of this +report on the pages indicated at Item 15(a)(1). +Item 9. Changes in and Disagreements with +Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of +the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities +Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2020 to ensure that +the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and +our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s +Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing +and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s +internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting +principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect +misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2020. In +making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the +principal executive officer and principal financial officer believe that as of January 31, 2020, the Company’s internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated +Framework.” +The attestation report of the Company’s registered public accounting firm regarding internal control +over financial reporting appears in Part IV, Item 15 of this Form 10-K and is incorporated herein by reference. +Changes in Internal Controls over Financial Reporting +There have been no +changes in the Company’s internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +35 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item is incorporated herein by reference to the Company’s definitive proxy statement to be filed for its 2020 Annual Meeting of Shareholders. +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of +the Board of Directors. +Name +Age +Position +Gregory A. Woods +61 +President, Chief Executive Officer and Director +David S. Smith +63 +Vice President, Chief Financial Officer and Treasurer +Stephen M. Petrarca +57 +Vice President—Operations +Michael J. Natalizia +56 +Chief Technology Officer and Vice President of Strategic Technical Alliances +Tom Carll +53 +Vice President and General Manager—Aerospace +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. +Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from +January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to +2010, Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts. +Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner +of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. Mr. Smith has also held a variety of senior finance positions at semiconductor and manufacturing companies, including Senior Vice President and Chief +Financial Officer of Standard Microsystems Corporation, a global semiconductor company, from 2005 to 2008 and Vice President, Finance and Chief Financial Officer of both Dover Corporation, a diversified global manufacturing company, from 2000 to +2002 and Crane Company, a diversified manufacturing company from 1994 to 2000. +Mr. Petrarca was appointed Vice +President—Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company on March 9, 2012. Prior to this +appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +Mr. Carll +joined the Company in 1989 and has held the position of Vice President and General Manager—Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product +group and from its formation in 2004, the AstroNova Aerospace business group. +Code of Ethics +The Company has adopted a Code of Conduct which applies to all directors, officers and employees of the Company, including the Chief +Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation +S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on the Company’s website, (www.astronovainc.com) , +under the heading +36 +Table of Contents +“Investors—Corporate Governance—Governance Documents.” The Company intends to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, +principal accounting officer, or persons performing similar functions by posting such information on its website. +Item 11. Executive Compensation +The information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement to be filed for +its 2020 Annual Meeting of Shareholders. +The information set forth under the heading “Compensation Committee Report” +in the Company’s definitive Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters +The information required by this item is incorporated herein by reference to the Company’s +definitive Proxy Statement to be filed for its 2020 Annual Meeting of Shareholders. +Equity Compensation Plan Information +The following table sets forth information about the Company’s equity compensation plans as of January 31, 2020: +Plan Category +Number of Securities to +be Issued Upon Exercise +of Outstanding +Options, +Warrants and Rights +Weighted- +Average Exercise +Price of +Outstanding +Options, +Warrants +and +Rights +Number of Securities +Remaining Available for +Future Issuance +Under +Equity Compensation Plans +Equity Compensation Plans Approved by Shareholders +801,111 +(1) +$ +14.46 +(2) +681,759 +(3) +Equity Compensation Plans Not Approved by Shareholders +— +— +— +Total +801,111 +(1) +$ +14.46 +(2) +681,759 +(3) +(1) +Includes 373,345 shares issuable upon exercise of outstanding options granted under the Company’s 2007 Equity Incentive Plan; 166,700 +shares issuable upon exercise of outstanding options granted and 22,718 restricted stock units outstanding under the Company’s 2015 Equity Incentive Plan; and 138,999 shares issuable upon exercise of outstanding options granted and 99,349 +restricted stock units outstanding under the Company’s 2018 Equity Incentive Plan. +(2) +Does not include restricted stock units. +(3) +Represents 656,785 shares available for grant under the AstroNova, Inc. 2018 Equity Incentive Plan and 24,974 shares available for purchase +under the Employee Stock Purchase Plan. This balance does not include 12,567 shares issued pursuant to outstanding unvested restricted stock awards which are subject to forfeiture. +Additional information regarding these equity compensation plans is contained in Note 13, “Share-Based Compensation,” in the +Company’s Consolidated Financial Statements included in Item 15 hereto. +Item 13. +Certain Relationships, Related Transactions and Director Independence +The information required by +this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2020 Annual Meeting of Shareholders. +37 +Table of Contents +Item 14. Principal Accountant Fees and Services +The information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement +for the 2020 Annual Meeting of Shareholders. +38 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part of this Annual Report filed on Form 10-K: +Page +Report of Independent Registered Public Accounting Firm +44-45 +Consolidated Balance Sheets as of January 31, 2020 and 2019 +46 +Consolidated Statements of Income—Years Ended January 31, 2020, 2019 and +2018 +47 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2020, 2019 and +2018 +48 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January +31, 2020, 2019 and 2018 +49 +Consolidated Statements of Cash Flows—Years Ended January 31, 2020, 2019 and +2018 +50 +Notes to Consolidated Financial Statements +51-77 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January +31, 2020, 2019 and 2018 +78 +All other schedules for which provision is made in the applicable accounting regulations of the Securities +and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +Item 16. Form 10-K Summary +Not Applicable. +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Share Purchase Agreement, dated +January 7, 2017, as +amended, by and among ANI ApS, Trojan Holding ApS, as a Seller and as the Sellers’ Representative, and Li Wei Chong filed as Exhibit 2.1 to the Company’s Annual Report on Form 10-K for the year ended January +31, 2017 and incorporated by reference herein* +(3A) +Restated Articles of Incorporation of the Company and all amendments thereto filed as Exhibit +3A to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(3B) +By-laws of the Company as amended to date filed as Exhibit +3B to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. 000-13200) and incorporated +by reference herein. +(4.1) +Specimen form of common stock certificate of the Company filed as Exhibit 4 to the Company’s +Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(4.2) +Description of securities registered pursuant to Section 12 of the Exchange Act. +(10.1) +AstroNova, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement +filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 annual shareholders meeting and incorporated by reference herein.** +39 +Table of Contents +Exhibit +Number +(10.2) +AstroNova, Inc. Management Bonus Plan (Group III) filed as Exhibit +10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended May 3, 2014 incorporated by reference herein.** +(10.3) +Form of Performance-Based Restricted Stock Unit Award Agreement filed as Exhibit 10.9 +to the Company’s Quarterly Report on Form 10-Q for the period ended April 28, 2012 and incorporated by reference herein.** +(10.4) +Equity Incentive Award Agreement dated as of November +24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended January +31, 2015 and incorporated by reference herein.** +(10.5) +Change in Control Agreement dated as of November +24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended January +31, 2015 and incorporated by reference herein.** +(10.6) +AstroNova Inc. 2015 Equity Incentive Plan filed as Exhibit +A to the Definitive Proxy Statement filed on April 21, 2015 (File No. 000-13200) for the 2015 annual shareholders meeting and incorporated by reference herein.** +(10.7) +Senior Executive Short Term Incentive Plan adopted March +27, 2015 filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended May 2, 2015 and incorporated by reference herein.** +(10.8) +General Manager Employment Contract dated November +18, 2014 by and among AstroNova, Inc. and Michael Morawetz filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended May +2, 2015 and incorporated by reference herein.** +(10.9) +Form of Indemnification Agreement for directors and officers filed as Exhibit 10.1 +to the Company’s Quarterly Report on Form 10-Q for the period ended October 31, 2015 and incorporated by reference herein.** +(10.10) +Credit Agreement dated February +28, 2017 among AstroNova, Inc., as the U.S. Borrower, ANI APS, as the Danish Borrower, Certain Subsidiaries of the U.S. Borrower, as the Guarantors and Bank of America, N.A. filed as Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2017 and incorporated by reference herein. +(10.11) +Security and Pledge Agreement dated February +28, 2017 among AstroNova, Inc. as the U.S. Borrower and such other parties that become Grantors hereunder after the date hereof and Bank of America, N.A. filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2017 and incorporated by reference herein. +(10.12) +Form of Restricted Stock Agreement granted under the Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit +10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.13) +Form of Incentive Stock Option Agreement granted under the 2015 Equity Incentive Plan filed +as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.14) +Form of Non-Statutory Stock Option Agreement granted +under the 2015 Equity Incentive Plan filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by +reference herein.** +(10.15) +Form of Non-Employee Director Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit +10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +40 +Table of Contents +Exhibit +Number +(10.16) +Form of Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit +10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.17) +Form of Non-Employee Director Restricted Stock Agreement +granted under the 2015 Equity Incentive Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated +by reference herein.** +(10.18) +Form of Time-Based Restricted Stock Unit Agreement granted under the 2015 Equity Incentive +Plan filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.19) +Form of Performance Restricted Stock Unit Agreement granted under the 2015 Equity Incentive +Plan filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.20) +Asset Purchase and License Agreement, dated September +28, 2017, by and between AstroNova, Inc. and Honeywell International, Inc. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date September +28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.21) +First Amendment to the Credit Agreement, dated September +28, 2017, by and among AstroNova, Inc., ANI ApS, Trojan Label ApS and Bank of America, N.A. filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event dated September +28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.22) +Second Amendment to the Credit Agreement, dated November +30, 2017, by and among AstroNova, Inc., ANI ApS, Trojan Label ApS and Bank of America, N.A. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event dated November +30, 2017, filed with the SEC on December 6, 2017 and incorporated by reference herein. +(10.23) +Amended and Restated AstroNova, Inc. Employee Stock Purchase Plan filed as Exhibit 10.1 +to the Company’s Current Report on Form 8-K/A, event date November 20, 2017, filed with the SEC on December 28, 2017 and incorporated by reference herein. +(10.24) +Letter Agreement dated January +12, 2018 between the Company and David Smith filed as Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended January +31, 2018 and incorporated by reference herein.** +(10.25) +Third Amendment to the Credit Agreement, dated April +17, 2018, by and among AstroNova, Inc., ANI ApS, Trojan Label ApS and Bank of America, N.A. filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended April +28, 2018 and incorporated by reference herein. +(10.26) +Form of Performance-based Restricted Stock Unit Award Agreement filed as Exhibit 10.1 to the +Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.27) +Form of Restricted Stock Unit Agreement (time-based vesting) filed as Exhibit 10.2 to the +Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.28) +Form of Incentive Stock Option filed as Exhibit 10.3 to the Company’s Current Report +on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.29) +Form of Non-statutory Stock Option filed as Exhibit +10.4 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +41 +Table of Contents +Exhibit +Number +(10.30) +Form of Non-statutory Stock Option (Non-employee Director) filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June +4, 2018 and incorporated by reference herein.** +(10.31) +Form of Restricted Stock Agreement filed as Exhibit 10.6 to the Company’s Current Report +on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.32) +Form of Non-employee Director Restricted Stock Agreement +filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.33) +AstroNova, Inc. Amended and Restated Non-Employee Director +Annual Compensation Program filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed, event date January 31, 2019, filed with the SEC on February 4, 2019 and +incorporated by reference herein.** +(10.34) +AstroNova, Inc. 2018 Equity Incentive Plan Non-Employee +Director Restricted Stock Agreement filed as Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019 and incorporated by reference to +herein.* +(10.35) +Amendment No. +1 to General Manager Employment Contract dated as of March 21, 2019 between AstroNova, Inc. and Michael Morawetz filed as Exhibit 10.1 to the Company’s Current Report on Form +8-K, event date March 20, 2019, filed with the SEC on March 26, 2019 and incorporated by reference herein.* +(10.36) +AstroNova, Inc. 2018 Equity Incentive Plan, as amended, filed as Appendix A to the Company’s +Definitive Proxy Statement filed with the SEC on May 25, 2019 on Schedule 14A and incorporated by reference herein.* +(10.37) +Fourth Amendment to Credit Agreement, dated as of December +9, 2019, by and among AstroNova, Inc. ANI ApS, Trojan Label ApS and Bank of America, N.A. filed as Exhibit 10.1 to the Company’s Quarterly Report on Form +10-Q for the period ended November 2, 2019 and incorporated by reference herein.** +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section +906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section +906 of the Sarbanes-Oxley Act of 2002. +(101) +The following materials from Registrant’s Annual Report on Form 10-K for the year ended January 31, 2020, formatted in XBRL +(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in +Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. Filed electronically herein. +* +Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K. The +Company will furnish copies of any such schedules to the SEC upon request. +** +Management contract or compensatory plan or arrangement. +42 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this +report to be signed on its behalf by the undersigned, thereunto duly authorized. +ASTRONOVA, INC. +(Registrant) +Date: April 10, 2020 +By: +/ S / G REGORY A. +W OODS +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below +by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/s/ G REGORY A. W OODS +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 10, 2020 +/s/ D AVID S. S MITH +David S. Smith +Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) +April 10, 2020 +/s/ J EAN A. B UA +Jean A. Bua +Director +April 10, 2020 +/s/ M ITCHELL I. Q UAIN +Mitchell I. Quain +Director +April 10, 2020 +/s/ Y VONNE E. S CHLAEPPI +Yvonne E. Schlaeppi +Director +April 10, 2020 +/s/ H AROLD S CHOFIELD +Harold Schofield +Director +April 10, 2020 +/s/ R ICHARD S. W ARZALA +Richard S. Warzala +Director +April 10, 2020 +43 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Shareholders and Board of Directors and Shareholders of +AstroNova, Inc. +Opinions on the +Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated +balance sheets of AstroNova, Inc. (the “Company”) as of January 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in +the three-year period ended January 31, 2020 and the related notes and the financial statement schedule listed in Item 15(a)(2)(collectively, the “financial statements”). We also have audited the Company’s internal control over +financial reporting as of January 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company +as of January 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 2020 in conformity with accounting principles generally accepted in the United States of +America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control—Integrated Framework +(2013) issued by the COSO. +Basis for Opinion +The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal +control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the +Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with +respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are +free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures +that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant +estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, +assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered +necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of +Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process +designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in +44 +Table of Contents +accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the +maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation +of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and +(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, +projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Wolf & Company, P.C. +We have served as the Company’s auditor since 2013. +Boston, Massachusetts +April 10, 2020 +45 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2020 +2019 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +4,249 +$ +7,534 +Accounts Receivable, net of reserves of $856 in 2020 and $521 in 2019 +19,784 +23,486 +Inventories +33,925 +30,161 +Prepaid Expenses and Other Current Assets +2,193 +1,427 +Total Current Assets +60,151 +62,608 +Property, Plant and Equipment, net +11,268 +10,380 +Identifiable Intangibles, net +25,383 +29,674 +Goodwill +12,034 +12,329 +Deferred Tax Assets, net +5,079 +2,928 +Right of Use Asset +1,661 +— +Other +1,088 +1,064 +TOTAL ASSETS +$ +116,664 +$ +118,983 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +4,409 +$ +5,956 +Accrued Compensation +2,700 +5,023 +Other Accrued Expenses +4,711 +2,911 +Revolving Credit Facility +6,500 +1,500 +Current Portion of Long-Term Debt +5,208 +5,208 +Current Liability—Royalty Obligation +2,000 +1,875 +Current Liability—Excess Royalty Payment Due +773 +1,265 +Deferred Revenue +466 +373 +Income Taxes Payable +— +554 +Total Current Liabilities +26,767 +24,665 +NON CURRENT LIABILITIES +Long-Term Debt, net of current portion +7,715 +12,870 +Royalty Obligation, net of current portion +8,012 +9,916 +Lease Liabilities, net of current portion +1,279 +— +Deferred Tax Liabilities +435 +40 +Other Long-Term Liabilities +1,081 +1,717 +TOTAL LIABILITIES +45,289 +49,208 +Commitments and Contingencies (See Note 19) +SHAREHOLDERS’ EQUITY +Preferred Stock, $10 Par Value, Authorized 100,000 shares, None Issued +— +— +Common Stock, $0.05 Par Value, Authorized 13,000,000 shares; Issued 10,343,610 shares in 2020 and 10,218,559 shares in +2019 +517 +511 +Additional Paid-in Capital +56,130 +53,568 +Retained Earnings +49,298 +49,511 +Treasury Stock, at Cost, 3,281,701 shares in 2020 and 3,261,672 shares in 2019 +(33,477 +) +(32,997 +) +Accumulated Other Comprehensive Loss, net of tax +(1,093 +) +(818 +) +TOTAL SHAREHOLDERS’ EQUITY +71,375 +69,775 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +116,664 +$ +118,983 +See Notes to the Consolidated Financial Statements. +46 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share +Data) +2020 +2019 +2018 +Revenue +$ +133,446 +$ +136,657 +$ +113,401 +Cost of Revenue +84,688 +82,658 +69,399 +Gross Profit +48,758 +53,999 +44,002 +Costs and Expenses: +Selling and Marketing +26,884 +26,343 +22,234 +Research and Development +8,084 +7,813 +7,453 +General and Administrative +11,357 +11,123 +8,903 +Operating Expenses +46,325 +45,279 +38,590 +Operating Income +2,433 +8,720 +5,412 +Other Expense: +Interest Expense +(826 +) +(876 +) +(402 +) +Investment Income +143 +145 +168 +Other, Net +(380 +) +(681 +) +(21 +) +(1,063 +) +(1,412 +) +(255 +) +Income before Income Taxes +1,370 +7,308 +5,157 +Income Tax Provision (Benefit) +(389 +) +1,578 +1,871 +Net Income +$ +1,759 +$ +5,730 +$ +3,286 +Net Income Per Common Share—Basic +$ +0.25 +$ +0.83 +$ +0.48 +Net Income Per Common Share—Diluted +$ +0.24 +$ +0.81 +$ +0.47 +Weighted Average Number of Common Shares Outstanding—Basic +7,024 +6,881 +6,911 +Dilutive Effect of Common Stock Equivalents +214 +203 +104 +Weighted Average Number of Common Shares Outstanding—Diluted +7,238 +7,084 +7,015 +See Notes to the Consolidated Financial Statements. +47 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2020 +2019 +2018 +Net Income +$ +1,759 +$ +5,730 +$ +3,286 +Other Comprehensive Income (Loss), net of taxes and reclassification adjustments: +Foreign Currency Translation Adjustments +(133 +) +(671 +) +867 +Change in Value of Derivatives Designated as Cash Flow Hedge +122 +622 +(1,036 +) +(Gains) Losses from Cash Flow Hedges Reclassified to Income Statement +(264 +) +(600 +) +1,048 +Unrealized Gain (Loss) on Securities Available for Sale +— +— +5 +Realized Gain on Securities Available for Sale Reclassified to Income Statement +— +3 +— +Other Comprehensive Income (Loss) +(275 +) +(646 +) +884 +Comprehensive Income +$ +1,484 +$ +5,084 +$ +4,170 +See Notes to the Consolidated Financial Statements. +48 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Treasury +Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Shares +Amount +Balance January 31, 2017 +9,834,906 +$ +492 +$ +47,524 +$ +44,358 +$ +(20,781 +) +$ +(1,056 +) +$ +70,537 +Share-based compensation +— +— +1,583 +— +— +— +1,583 +Employee option exercises +90,042 +4 +913 +— +(275 +) +— +642 +Restricted stock awards vested, net +71,172 +4 +(4 +) +— +(103 +) +— +(103 +) +Repurchase of Common Stock +— +— +— +— +(11,238 +) +— +(11,238 +) +Common Stock – cash dividend—$0.28 per share +— +— +— +(1,944 +) +— +— +(1,944 +) +Net income +— +— +— +3,286 +— +— +3,286 +Other comprehensive income +— +— +— +— +— +884 +884 +Balance January 31, 2018 +9,996,120 +$ +500 +$ +50,016 +$ +45,700 +$ +(32,397 +) +$ +(172 +) +$ +63,647 +Share-based compensation +— +— +1,886 +— +— +— +1,886 +Employee option exercises +150,125 +7 +1,669 +— +(366 +) +— +1,310 +Restricted stock awards vested, net +72,314 +4 +(3 +) +— +(234 +) +— +(233 +) +Reclassification due to adoption of ASU 2018-02 +— +— +— +14 +— +— +14 +Common Stock—cash dividend—$0.28 per share +— +— +— +(1,933 +) +— +— +(1,933 +) +Net income +— +— +— +5,730 +— +— +5,730 +Other comprehensive loss +— +— +— +— +— +(646 +) +(646 +) +Balance January 31, 2019 +10,218,559 +$ +511 +$ +53,568 +$ +49,511 +$ +(32,997 +) +$ +(818 +) +$ +69,775 +Share-based compensation +— +— +1,775 +— +— +— +1,775 +Employee option exercises +65,121 +3 +790 +— +(11 +) +— +782 +Restricted stock awards vested, net +59,930 +3 +(3 +) +— +(469 +) +— +(469 +) +Common Stock – cash dividend—$0.28 per share +— +— +— +(1,972 +) +— +— +(1,972 +) +Net income +— +— +— +1,759 +— +— +1,759 +Other comprehensive loss +— +— +— +— +— +(275 +) +(275 +) +Balance January 31, 2020 +10,343,610 +$ +517 +$ +56,130 +$ +49,298 +$ +(33,477 +) +$ +(1,093 +) +$ +71,375 +See Notes to the Consolidated Financial Statements. +49 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2020 +2019 +2018 +Cash Flows from Operating Activities: +Net Income +$ +1,759 +$ +5,730 +$ +3,286 +Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: +Depreciation and Amortization +6,284 +6,152 +3,994 +Amortization of Debt Issuance Costs +49 +51 +34 +Share-Based Compensation +1,775 +1,886 +1,583 +Deferred Income Tax Provision (Benefit) +(1,638 +) +(1,638 +) +744 +Changes in Assets and Liabilities, Net of Impact of Acquisitions: +Accounts Receivable +3,594 +(1,493 +) +(4,722 +) +Inventories +(3,938 +) +(2,872 +) +(5,509 +) +Accounts Payable and Accrued Expenses +(2,732 +) +(2,342 +) +5,207 +Income Taxes Payable +(1,773 +) +(151 +) +(801 +) +Other +(156 +) +(318 +) +(92 +) +Net Cash Provided by Operating Activities +3,224 +5,005 +3,724 +Cash Flows from Investing Activities: +Proceeds from Sales/Maturities of Securities Available for Sale +— +1,511 +5,539 +Purchases of Securities Available for Sale +— +— +(321 +) +Cash Paid for TrojanLabel Acquisition, Net of Cash Acquired +— +— +(9,007 +) +Cash Paid for Honeywell Asset Purchase and License Agreement +— +(400 +) +(14,873 +) +Payments Received on Line of Credit and Note Receivable +— +— +85 +Additions to Property, Plant and Equipment +(2,906 +) +(2,645 +) +(2,204 +) +Net Cash Used by Investing Activities +(2,906 +) +(1,534 +) +(20,781 +) +Cash Flows from Financing Activities: +Net Proceeds from Common Shares Issued Under Employee Benefit Plans and Employee Stock Option Plans, Net of Payment of Minimum +Tax Withholdings +313 +1,077 +539 +Purchase of Treasury Stock +— +— +(11,238 +) +Proceeds from Issuance of Long-Term Debt +— +— +24,200 +Borrowings under Revolving Credit Facility, net +5,000 +1,500 +— +Change in TrojanLabel Earn Out Liability +— +— +(1,438 +) +Payment of Minimum Guarantee Royalty Obligation +(1,875 +) +(1,625 +) +— +Principal Payments on Long-Term Debt +(5,208 +) +(5,130 +) +(828 +) +Payments of Debt Issuance Costs +— +— +(234 +) +Dividends Paid +(1,972 +) +(1,933 +) +(1,944 +) +Net Cash (Used) Provided by Financing Activities +(3,742 +) +(6,111 +) +9,057 +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +139 +(3 +) +79 +Net Decrease in Cash and Cash Equivalents +(3,285 +) +(2,643 +) +(7,921 +) +Cash and Cash Equivalents, Beginning of Year +7,534 +10,177 +18,098 +Cash and Cash Equivalents, End of Year +$ +4,249 +$ +7,534 +$ +10,177 +Supplemental Information: +Cash Paid During the Period for: +Interest +$ +531 +$ +636 +$ +246 +Income Taxes, Net of Refunds +$ +2,913 +$ +3,472 +$ +1,940 +Schedule of non-cash financing activities: +Value of Shares Received in Satisfaction of Option Exercise Price +$ +11 +$ +366 +$ +275 +See Notes to the Consolidated Financial Statements. +50 +Table of Contents +ASTRONOVA, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +January 31, 2020, 2019 and 2018 +Note 1—Summary of Significant Accounting +Policies +Basis of Presentation: The accompanying financial data have been prepared by us pursuant to the rules and +regulations of the U.S. Securities and Exchange Commission (“SEC”) and are presented in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Our fiscal year end is January 31. Unless otherwise stated, +all years and dates refer to our fiscal year. +Principles of Consolidation: The consolidated financial statements +include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation. +Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and +assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts, inventory valuation, valuation and estimated lives of intangible assets, impairment of +long-lived assets, goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, +general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates. +Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are considered to be cash +equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. At January 31, 2020 and 2019, $3.4 million and $3.9 million, respectively, was held in foreign bank +accounts. +Inventories: Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and include material, labor and manufacturing overhead. +Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is +provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and leasehold improvements—10 to 45 years; machinery and equipment—3 to 10 years and computer equipment and +software—3 to 10 years). +Revenue Recognition: On February 1, 2018 we adopted Accounting Standards Update +(“ASU”) 2014-09, “Revenue from Contracts with Customers (“Topic 606”),” which superseded nearly all existing revenue recognition guidance under U.S. GAAP. The core +principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five +step process to recognize revenue and requires more judgment and estimates within the revenue recognition process than required under previous U.S. GAAP, which includes identifying contracts with customers, identifying performance obligations in the +contract, determining and estimating the amount of any variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation and recognizing revenue when the entity satisfies each +performance obligation. +We adopted this standard using the modified retrospective method and have applied the guidance to all +contracts within the scope of Topic 606 as of the February 1, 2018 adoption date. Under Topic 606, based on the nature of our contracts and consistent with prior practice, we recognize most of our revenue upon shipment, which is when +the performance obligation has been satisfied. Accordingly, the adoption of this standard did not have a material impact on our revenue recognition and there was no cumulative effective adjustment as of February 1, 2018 as a result of the +adoption of Topic 606. +51 +Table of Contents +The vast majority of our revenue is generated from the sale of distinct products. +Revenue is measured as the amount of consideration we expect to receive in exchange for such products, which is generally at the contractually stated prices, and is recognized when we satisfy a performance obligation by transferring control of a +product to a customer. The transfer of control generally occurs at one point in time, upon shipment, when title and risk of loss pass to the customer. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Sales +taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue. +Many of the +contracts entered into with customers are commonly comprised of a combination of equipment, supplies, installation and/or training services. We determine performance obligations by assessing whether the products or services are distinct from other +elements of the contract. In order to be distinct, the product must perform either on its own or with readily available resources and must be separate within the context of the contract. +Most of our hardware products contain embedded operating systems and data management software which is included in the purchase price of +the equipment. The software is deemed incidental to the systems as a whole, as it is not sold or marketed separately, and its production costs are minor compared to those of the hardware system. Hardware and software elements are typically delivered +at the same time and are accounted for as a single performance obligation for which revenue is recognized at the point in time when ownership is transferred to the customer. +Installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few +days to a few months. The delivery of installation and training services are not assessed to determine whether they are separate performance obligations, as the amounts are not material to the contract. +Shipping and handling activities that occur after control over a product has transferred to a customer are accounted for as fulfillment +activities rather than performance obligations, as allowed under a practical expedient provided by Topic 606. The shipping and handling fees charged to customers are recognized as revenue and the related costs are included in cost of revenue at the +point in time when ownership of the product is transferred to the customer. +We may perform service at the request of the +customer, generally for the repair and maintenance of products previously sold. These services are short in duration, typically less than one month, and total less than 10% of revenue for the year ended January 31, 2020. Revenue is recognized +as services are rendered and accepted by the customer. We also provide service agreements on certain of our Product Identification equipment. Service agreements are purchased separately from the equipment and provide for the right to obtain service +and maintenance on the equipment for a period of typically one to two years. Accordingly, revenue on these agreements is recognized over the term of the agreements. The portion of service agreement contracts that are uncompleted at the end of +any reporting period are included in deferred revenue. +We generally provide warranties for our products. The standard warranty +period is typically 12 months for most hardware products except for airborne printers, which typically have warranties that extend for 4-5 years, consistent with industry practice. Such assurance-type +warranties are not deemed to be separate performance obligations from the hardware product and costs associated with providing the warranties are accrued in accordance with ASC 450, “Contingencies,” as we have the ability to ascertain the +likelihood of the liability and can reasonably estimate the amount of the liability. Our estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions. To the extent that our experience +in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the estimated warranty liability are recorded at that time, with an offsetting adjustment to cost of revenue. On occasion, +customers request a warranty period longer than our standard warranty. In those instances, in which extended warranty services are separately quoted to the customer, an additional performance obligation is created, and the associated revenue is +deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in +deferred revenue. +52 +Table of Contents +We recognize an asset for the incremental direct costs of obtaining a contract with a +customer if we expect the benefit of those costs to be longer than one year. There has been no change in the Company’s accounting for these contracts as a result of the adoption of Topic 606. Costs related to obtaining sales contracts for +our aerospace printer products have been capitalized and are being amortized based on the forecasted number of units sold over the estimated benefit term. We apply the practical expedient to expense costs incurred for costs to obtain a contract when +the amortization period would have been less than a year These costs include sales commissions paid to the internal direct sales team as well as to third-party representatives and distributors. Contractual agreements with each of these parties +outline commission structures and rates to be paid. Generally speaking, the contracts are all individual procurement decisions by the customers and do not include renewal provisions and as such the majority of the contracts have an economic +life of significantly less than a year. +Accounts Receivables and Allowance for Doubtful Accounts: Standard payment +terms are typically 30 days after shipment but vary by type and geographic location of our customer. Credit is extended based upon an evaluation of the customer’s financial condition. In circumstances where we are aware of a +customer’s inability to meet its financial obligations, an allowance is established. The remainder of the allowance established is based on a variety of factors, including the age of amounts outstanding relative to their contractual due date, +historical write-off experience and current market assessments. Accounts receivable are stated at their estimated net realizable value. +Research and Development Costs: We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. The following costs are included in +research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies. +Foreign Currency Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and +liabilities are translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues +and expenses are translated at the average monthly exchange rates in effect during the related period. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our subsidiaries in Germany, Denmark and China +since their undistributed earnings are considered to be permanently invested. Our net transactional foreign exchange losses included in the consolidated statements of income were $0.4 million in fiscal 2020, $0.7 million in fiscal 2019 and +$0.2 million for fiscal 2018. +Advertising: The Company expenses advertising costs as incurred. Advertising costs +including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $1.8 million; $1.9 million and $1.8 million in fiscal 2020, 2019 and 2018, respectively. +Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in +circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the +projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. For 2020, 2019 and 2018, +there were no impairment charges for long-lived assets. +Intangible Assets: Intangible assets include the value of +customer and distributor relationships, existing technology and non-competition agreements acquired in connection with business and asset acquisitions and are stated at cost (fair value at acquisition) less +accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life +are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated +undiscounted cash flows used in +53 +Table of Contents +determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally +determined using a discounted cash flow analysis. For 2020, 2019 and 2018, there were no impairment charges for intangible assets. +Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material +adverse changes in the business climate indicate that the carrying value of an asset might be impaired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below an +operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic +characteristics. We determined that each of our operating segments (Product Identification and T&M) represents a reporting unit for purposes of goodwill impairment testing. +The accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of +whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this qualitative assessment include macroeconomic conditions, industry and market considerations, +overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair +value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. We estimate the fair +value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating +cash flow performance. In addition, the Company uses the market approach, which compares the reporting unit to publicly traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The +income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the +carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the +reporting unit, then we record an impairment charge based on that difference. +We performed a qualitative assessment for our +fiscal 2020 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying values of the reporting units exceed their fair values. Accordingly, no quantitative assessment was performed, +as management believes that there are no impairment issues in regard to goodwill at this time. +Leases: On +February 1, 2019 the Company adopted ASC 842, Leases. This new guidance requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (ROU) asset and a lease +liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using a discount rate determined at +lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate for the expected lease term is used. The Company’s incremental borrowing rate approximates the rate the Company would +have to pay to borrow on a collateralized basis over a similar term at lease inception. The value of the ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement +date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received. Several of the Company’s lease contracts include options to extend the lease term and the Company includes the renewal options +for these leases in the determination of the ROU asset and lease liability when the likelihood of renewal is determined to be reasonably certain. +The Company enters into lease contracts for certain of its facilities at various locations worldwide. At inception of a contract, the Company determines whether the contract is or contains a lease. If the +Company has a +54 +Table of Contents +right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. +There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. The Company +has made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. All of the Company’s leases are classified as operating leases. Operating lease +expense is recognized on a straight-line basis over the lease term and included in general and administrative expense on the consolidated statement of income. ROU assets are classified in other long-term assets, short-term lease liabilities are +classified in other current liabilities, and long-term lease liabilities are classified in other long-term liabilities on the consolidated balance sheet at January 31, 2020. On the statement of cash flow, payments for operating leases are +classified as operating activities for the year ending January 31, 2020. +In addition, several of our lease agreements +include non-lease components for items such as common area maintenance and utilities which are accounted for separately from the lease component. +Income Taxes: We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities +are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. The +Company’s deferred taxes are presented as non-current in the accompanying consolidated balance sheet. An allowance against deferred tax assets is recognized when it is +more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At January 31, 2020 and 2019, a valuation allowance was provided for deferred tax assets attributable to +certain domestic R&D credit carryforwards. In addition, during fiscal 2020, the Company provided a valuation allowance for deferred tax assets attributable to foreign tax credit carryforwards and net operating loss carryforwards in China, both +of which would expire unused. +AstroNova accounts for uncertain tax positions in accordance with the guidance provided in ASC +740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of +tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in +interim periods and disclosure. +On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted +into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax +rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as +well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act +(“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. All accounting under SAB 118 was finalized during the quarter ending January 31, +2019 with no material changes from the provisional amounts previously recorded. +Net Income Per Common Share: Basic net +income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, +restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2020, 2019 and 2018, there were 202,187, 326,275 and 675,600, respectively, of common equivalent shares that were not +included in the computation of diluted net income per common share because their inclusion would be anti-dilutive. +Fair +Value Measurement: We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures,” which defines fair value as +55 +Table of Contents +the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, ASC 820 establishes a +three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when +available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances. +The fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or +liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or +liabilities +Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, other +accrued expenses and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short-term nature of these instruments. +Self-Insurance: We are self-insured for U.S. medical and dental benefits for qualifying employees and maintain stop-loss coverage +from a third party which limits our exposure to large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In +estimating this accrual, we utilize an independent third-party broker to estimate expected losses, which are based on analyses of historical data. Assumptions are closely monitored and adjusted when warranted by changing circumstances. Our liability +for self-insured claims is included within accrued compensation in our consolidated balance sheets and was $0.6 million and $0.1 million, as of January 31, 2020 and 2019. +Share-Based Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award +when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our +estimate of share-based compensation requires several complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend +yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that +period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms +of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for +bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the +employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on +the closing market price of the Company’s common stock on the grant date. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based +on actual forfeiture experience. +Cash flow from tax deductions in excess of the compensation cost recognized for those options +(excess tax benefits) is classified with other income tax cash flows as an operating activity. +56 +Table of Contents +Share-based compensation becomes deductible for determining income taxes when the +related award vests, is exercised, or is forfeited depending on the type of share-based award and subject to relevant tax law. +Derivative Financial Instruments: The Company uses derivative instruments as part of its overall strategy to manage its exposure to +market risks primarily associated with fluctuations in foreign currency exchange rates and interest rates. Derivative instruments are recognized as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the +fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For derivative instruments not designated as +hedging instruments, the gain or loss is recognized in the statement of income during the current period. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based +upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. +For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the +derivative instrument is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the hedged +transaction affects earnings (e.g., in “Interest Expense” when the hedged transactions are interest cash flows associated with floating-rate debt, or “Other, Net” for portions reclassified relating to the remeasurement of the +debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, are recognized in the statement of income during the current period. +Recent Accounting Pronouncements +Recently Adopted: +Leases +In February 2016, the Financial Accounting Standards Board (“FASB”) issued +ASU2016-02, “Leases (Topic 842).” ASU 2016-02 and its subsequent amendments superseded previous guidance related to accounting for leases and are intended to +increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities in the balance sheet for operating leases with lease terms greater than twelve months. The updates also require improved disclosures +to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. +The Company applied ASU 2016-02 to all leases in effect at February 1, 2019 and adopted this +standard using the non-comparative transition option, which does not require the restatement of prior years. Accordingly, comparative information has not been adjusted and continues to be reported under the +previous accounting guidance. The Company has elected the package of practical expedients, which allows entities to not reassess (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. Also, +the Company has made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. On February 1, 2019, the Company recognized $2.0 million of +Right of Use (“ROU”) assets and lease liabilities on its consolidated balance sheet and currently has $1.7 million of ROU assets as of January 31, 2020. The adoption did not have a material impact on the Company’s results of +operations or cash flows. +Recent Accounting Standards Not Yet Adopted: +Fair Value Measurement +In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the +disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019 including interim periods within those +57 +Table of Contents +fiscal years (Q1 fiscal 2021 for AstroNova), with early adoption permitted. The provisions of ASU 2018-13 relating to changes in unrealized gains and +losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim +or annual period presented in the initial fiscal year of adoption. The remaining provisions should be applied retrospectively to all periods presented upon their effective date. This standard is not expected to have a material impact on the +Company’s consolidated financial statements and related disclosures. +No other new accounting pronouncements, issued or +effective during fiscal 2020, have had or are expected to have a material impact on our consolidated financial statements. +Note +2—Revenue Recognition +We derive revenue from the sale of (i) hardware including, digital color label printers +and specialty OEM printing systems, portable data acquisition systems and airborne printers used in the flight deck and in the cabin of military, commercial and business aircraft, (ii) related consumable supplies including paper, labels, tags, +inks, toners and ribbons, (iii) repairs and maintenance of equipment and (iv) service agreements. +Revenues disaggregated by +primary geographic markets and major product types are as follows: +Primary geographical markets: +Year Ended +(In thousands) +January 31, +2020 +January 31, +2019 +January 31, +2018 +United States +$ +83,671 +$ +83,668 +$ +69,795 +Europe +29,617 +31,574 +29,948 +Asia +8,316 +8,207 +3,808 +Canada +5,719 +6,692 +5,373 +Central and South America +4,145 +4,147 +3,402 +Other +1,978 +2,369 +1,075 +Total Revenue +$ +133,446 +$ +136,657 +$ +113,401 +Major product types: +Year Ended +(In thousands) +January 31, +2020 +January 31, +2019 +January 31, +2018 +Hardware +$ +48,959 +$ +53,207 +$ +37,501 +Supplies +71,838 +71,178 +65,265 +Service and Other +12,649 +12,272 +10,635 +Total Revenue +$ +133,446 +$ +136,657 +$ +113,401 +Contract Assets and Liabilities +We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. Our contract liabilities, which represent +billings in excess of revenue recognized, are related to advanced billings for purchased service agreements and extended warranties. Contract liabilities were $466,000 and $373,000 at January 31, 2020 and January 31, 2019, respectively and +are recorded as deferred revenue in the consolidated balance sheet. During the year ended January 31, 2020, the Company recognized $361,000 of revenue that was included in the contract liability balance at the beginning of the period. +58 +Table of Contents +Contract Costs +We have determined that certain costs related to obtaining sales contracts for our aerospace printer products meet the requirement to be capitalized. These costs are deferred and amortized based on the +forecasted number of units sold over the estimated benefit term. The balance of these contract assets at January 31, 2019 was $903,000 of which $109,000 was reported in other current assets and $794,000 was reported in other assets in the +consolidated balance sheet. In fiscal 2020, the Company incurred an additional $120,000 in incremental direct costs which were deferred. Amortization of incremental direct costs was $79,000 for the period ended January 31, 2020. The balance of +the deferred incremental direct contract costs net of accumulated amortization at January 31, 2020 is $944,000, of which $59,000 was reported in other current assets and $885,000 was reported in other assets in the consolidated balance sheet. +The contract costs are expected to be amortized over the estimated remaining period of benefit, which we currently estimate to be approximately 6 years. +Note 3—Intangible Assets +Intangible assets are as follows: +January 31, 2020 +January 31, 2019 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Miltope: +Customer Contract Relationships +$ +3,100 +$ +(2,021 +) +$ +— +$ +1,079 +$ +3,100 +$ +(1,723 +) +$ +— +$ +1,377 +RITEC: +Customer Contract Relationships +2,830 +(1,076 +) +— +1,754 +2,830 +(725 +) +— +2,105 +Non-Competition Agreement +950 +(871 +) +— +79 +950 +(681 +) +— +269 +TrojanLabel: +Existing Technology +2,327 +(1,053 +) +78 +1,352 +2,327 +(711 +) +140 +1,756 +Distributor Relations +937 +(297 +) +27 +667 +937 +(200 +) +56 +793 +Honeywell: +Customer Contract Relationships +27,243 +(6,791 +) +— +20,452 +27,243 +(3,869 +) +— +23,374 +Intangible Assets, net +$ +37,387 +$ +(12,109 +) +$ +105 +$ +25,383 +$ +37,387 +$ +(7,909 +) +$ +196 +$ +29,674 +There were no impairments to intangible assets during the periods ended January 31, 2020 and 2019. +Amortization expense of $4.2 million; $4.1 million and $2.2 million with regard to acquired intangibles has been included in the consolidated statements of income for years ended January 31, 2020, 2019 and 2018, respectively. +Estimated amortization expense for the next five fiscal years is as follows: +(In thousands) +2021 +2022 +2023 +2024 +2025 +Estimated amortization expense +$ +4,069 +$ +3,972 +$ +3,966 +$ +3,969 +$ +3,394 +59 +Table of Contents +Note 4—Inventories +The components of inventories are as follows: +January 31 +2020 +2019 +(In thousands) +Materials and Supplies +$ +20,151 +$ +17,517 +Work-in-Progress +1,408 +1,633 +Finished Goods +17,992 +15,688 +39,551 +34,838 +Inventory Reserve +(5,626 +) +(4,677 +) +Balance at January 31 +$ +33,925 +$ +30,161 +Finished goods inventory includes $3.4 million and $2.1 million of demonstration equipment at +January 31, 2020 and 2019, respectively. +Note 5—Property, Plant and Equipment +Property, plant and equipment consist of the following: +January 31 +2019 +2019 +(In thousands) +Land and Land Improvements +$ +967 +$ +967 +Buildings and Leasehold Improvements +12,524 +12,165 +Machinery and Equipment +23,167 +22,810 +Computer Equipment and Software +11,388 +9,385 +Gross Property, Plant and Equipment +48,046 +45,327 +Accumulated Depreciation +(36,778 +) +(34,947 +) +Net Property Plant and Equipment +$ +11,268 +$ +10,380 +Depreciation expense on property, plant and equipment was $2.0 million for both of the years ended +January 31, 2020 and 2019 and $1.8 million for the year ended January 31, 2018. +Note 6—Accrued Expenses +Accrued expenses consisted of the following: +January 31 +2020 +2019 +(In thousands) +Warranty +$ +850 +$ +832 +Professional Fees +697 +403 +Lease Liability +416 +— +Dealer Commissions +236 +320 +Stockholder Relation Fees +194 +40 +Accrued Payroll & Sales Tax +193 +97 +Other Accrued Expenses +2,125 +1,219 +$ +4,711 +$ +2,911 +60 +Table of Contents +Note 7—Long- Term Debt and Other Financing Arrangements +Long-term debt in the accompanying condensed consolidated balance sheets is as follows: +January 31 +(In thousands) +2020 +2019 +USD Term Loan (3.03% and 4.02% as of January 31, 2020 and 2019, respectively); maturity date November 30, +2022 +$ +8,250 +$ +11,250 +USD Term Loan (3.03% and 4.02% as of January 31, 2020 and 2019, respectively); maturity date of January 31, +2022 +4,784 +6,992 +13,034 +18,242 +Debt Issuance Costs, net of accumulated amortization +(111 +) +(164 +) +Current Portion of Term Loan +(5,208 +) +(5,208 +) +Long-Term Debt +$ +7,715 +$ +12,870 +The schedule of required principal payments remaining during the next five years on long-term debt +outstanding as of January 31, 2020 is as follows: +(In thousands) +Fiscal 2021 +$ +5,208 +Fiscal 2022 +5,576 +Fiscal 2023 +2,250 +Fiscal 2024 +— +Fiscal 2025 +— +$ +13,034 +Revolving Line of Credit +The Company has a $17.5 million revolving line of credit under its existing Credit Agreement with Bank of America. Revolving credit loans may be borrowed, at the Company’s option, in U.S. +Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. Amounts borrowed under the revolving credit facility bear interest at a rate per annum equal to, at the Company’s option, either +(a) the LIBOR rate (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated +leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal funds’ rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate or (iii) the LIBOR rate plus 1.00%, plus a margin +that varies within a range of 0.0% to 0.5% based on the Company’s consolidated leverage ratio. +At January 31, 2020, +the Company had an outstanding balance of $6.5 million on the revolving credit line. As of January 31, 2020. the outstanding balance bore interest at a weighted average annual rate of 3.68% and $0.1 million of interest was incurred on +this obligation and included in other expense in the accompanying consolidated income statement for the period ended January 31, 2020. As of January 31, 2020, there is $11.0 million available for borrowing under the revolving credit +facility. +The Company is required to pay a commitment fee on the undrawn portion of the revolving credit facility at the rate +of 0.25% per annum . +Credit Agreement +The Company and the Company’s wholly owned Danish subsidiaries, ANI ApS and TrojanLabel ApS (collectively the “Parties”), are parties to a credit agreement (the “Credit +Agreement”) with Bank of America, N.A. The Credit Agreement and its subsequent amendments through fiscal 2019 provided for a secured credit facility consisting of a term loan to ANI ApS in the principal amount of $9.2 million, a term +loan to the Company in the principal amount of $15.0 million and a revolving credit facility for the Company. +61 +Table of Contents +The term loans bear interest at a rate per annum equal to the LIBOR rate plus a +margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio. In connection with the Credit Agreement, AstroNova and ANI ApS entered into certain hedging arrangements with the Lender to manage the +variable interest rate risk and currency risk associated with its payments in respect of the $9.2 million term loan. In connection with the Second Amendment to the Credit Agreement, AstroNova entered into certain hedging arrangements with the +Lender to manage the variable interest rate risk and currency exchange risk associated with its payments in respect of the $15.0 million term loan. Refer to Note 8, “Derivative Financial Instruments and Risk Management” for further +information about these arrangements. +The Parties must comply with various customary financial and non-financial covenants under the Credit Agreement. The Credit Agreement contains limitations, in each case subject to various exceptions and thresholds, on the Company’s and its subsidiaries’ ability to +incur future indebtedness, to place liens on assets, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated +indebtedness. The Credit Agreement permits the Company to pay cash dividends on and repurchase shares of its common stock, subject to certain limitations. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Credit Agreement upon the occurrence of any of various customary events of default, +which include, among other events, the following: failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of the Company’s covenants or representations under the loan documents, default under any +other of the Company’s or its subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to the Company or any of its subsidiaries, a significant unsatisfied judgment against the Company or +any of its subsidiaries, or a change of control of the Company. +The obligations of ANI ApS in respect of the $9.2 million +term loan are guaranteed by the Company and TrojanLabel ApS. The Company’s obligations in respect of the $15.0 million term loan, revolving credit facility and its guarantee in respect of the ANI ApS term loan are secured by substantially +all of the assets of the Company (including a pledge of a portion of the equity interests held by the Company in ANI ApS and the Company’s wholly-owned German subsidiary AstroNova GmbH), subject to certain exceptions. +On December 9, 2019, the Parties entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement. The +Fourth Amendment amended the Credit Agreement to, among other things, (i) increase the aggregate amount available for borrowings under the revolving line of credit from $10.0 million to $17.5 million through the second quarter of +fiscal 2021 and (ii) modify the financial covenants with which the Company must comply thereunder by excluding certain capital expenditures from the calculation of the Company’s consolidated fixed charge coverage ratio, providing that the +minimum consolidated fixed charge coverage ratio covenant will be suspended through the second quarter of fiscal 2021, and adding a minimum consolidated EBITDA covenant commencing with the fourth quarter of fiscal 2020 and continuing through the +second quarter of fiscal 2021. As of January 31, 2020, the Company believes it is in compliance with all of the covenants in the Credit Agreement. +Note 8—Derivative Financial Instruments and Risk Management +The +Company has entered into a cross-currency interest rate swap to manage the interest rate risk and foreign currency exchange risk associated with the floating-rate foreign currency-denominated term loan borrowing by our Danish Subsidiary and an +interest rate swap to manage the interest rate risk associated with the variable rate term loan borrowing by the Company. Both swaps have been designated as cash flow hedges of floating-rate borrowings and are recorded at fair value. +The cross-currency interest rate swap agreement utilized by the Company effectively modifies the Company’s exposure to interest rate +risk and foreign currency exchange rate risk by converting the Company’s floating-rate debt denominated in U.S. Dollars on our Danish subsidiary’s books to a fixed-rate debt denominated in Danish Kroner for the term of the loan, thus +reducing the impact of interest-rate and foreign currency exchange rate changes on future interest expense and principal repayments. This swap involves the receipt of +62 +Table of Contents +floating rate amounts in U.S. Dollars in exchange for fixed-rate interest payments in Danish Kroner, as well as exchanges of principal at the inception spot rate, over the life of the term loan. +The interest rate swap agreement utilized by the Company on the term loan effectively modifies the Company’s exposure to +interest rate risk by converting the Company’s floating-rate debt to fixed-rate debt for the next five years, thus reducing the impact of interest-rate changes on future interest expense. This swap involves the receipt of floating rate amounts +in U.S. dollars in exchange for fixed rate payments in U.S. dollars over the life of the term loan. +The following table +summarizes the notional amount and fair value of the Company’s derivative instrument: +Cash Flow Hedges +(In thousands) +January 31, 2020 +January 31, 2019 +Fair Value Derivatives +Fair Value Derivatives +Notional Amount +Asset +Liability +Notional Amount +Asset +Liability +Cross-currency Interest Rate Swap +$ +4,489 +$ +— +$ +250 +$ +6,329 +$ +— +$ +600 +Interest Rate Swap +$ +8,250 +$ +— +$ +96 +$ +11,250 +$ +85 +$ +— +The following tables present the impact of the derivative instruments in our consolidated financial +statements for the years ended January 31, 2020 and 2019: +Years Ended +Amount of Gain +Recognized in OCI +on +Derivative +Location of Gain +Reclassified from +Accumulated OCI +into +Income +Amount of Gain +Reclassified from +Accumulated OCI into +Income +Cash Flow Hedge +(In thousands) +January 31, +2020 +January 31, +2019 +January 31, +2020 +January 31, +2019 +Swap contracts +$ +159 +$ +797 +Other Income +$ +338 +$ +769 +At January 31, 2020, the Company expects to reclassify approximately $0.1 million of net gains +on the swap contracts from accumulated other comprehensive loss to earnings during the next 12 months due to changes in foreign exchange rates and the payment of variable interest associated with the floating-rate debt. +Note 9—Royalty Obligation +In fiscal 2018, AstroNova, Inc. entered into an Asset Purchase and License Agreement with Honeywell International, Inc. to acquire an exclusive, perpetual, world-wide license to manufacture +Honeywell’s narrow-format flight deck printers for two aircraft families along with certain inventory used in the manufacturing of the licensed printers. The purchase price included a guaranteed minimum royalty payment of $15.0 million, to +be paid in quarterly installments over a ten year period. Royalty payments are based on gross revenues from the sales of the printers, paper and repair services of the licensed products. The royalty rates vary based on the year in which they are +paid or earned and product sold or service provided, and range from single-digit to mid double-digit percentages of gross revenue. +The guaranteed minimum royalty payment obligation was recorded at the present value of the minimum annual royalty payments using a present value factor of 2.8%, which is based on the estimated after-tax cost of debt for similar companies. As of January 31, 2020, the Company had paid an aggregate of $3.5 million of the guaranteed minimum royalty obligation. At January 31, 2020, the current +portion of the outstanding guaranteed minimum royalty obligation of $2.0 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $8.0 million is reported as a long-term liability on the +Company’s consolidated balance sheet. In addition to the guaranteed minimum royalty payments, for the periods ended January 31, 2020 and January 31, 2019, the Company also incurred excess royalty expense of $1.2 million and +$2.8 million, respectively, which is included in cost of revenue in the Company’s consolidated statements of income. A total of $0.8 million of excess royalty is payable and reported as a current liability on the Company’s +condensed consolidated balance sheet at January 31, 2020. +63 +Table of Contents +Note 10—Leases +The Company enters into lease contracts for certain of its facilities at various locations worldwide. Our leases have remaining lease terms of one to eight years, some of which include options to extend +the lease term for periods of up to five years when it is reasonably certain the Company will exercise such options. +The +company leases office space from an affiliate. This lease is classified as an operating lease with annual rental payments of approximately $63,000 and $61,000 as of January 31, 2020 and 2019, respectively. +Balance sheet and other information related to our leases is as follows: +Operating Leases +(In thousands) +Balance Sheet Classification +January 31, +2020 +Lease Assets +Right of Use Assets +$ +1,661 +Lease Liabilities—Current +Other Liabilities and Accrued Expenses +416 +Lease Liabilities—Long Term +Lease Liabilities +$ +1,279 +Lease cost information is as follows: +Operating Leases +(In thousands) +Statement of Income Classification +Year Ended +January +31, +2020 +Operating Lease Costs +General and Administrative Expense +$ +449 +Maturities of operating lease liabilities are as follows: +(In thousands) +January 31, +2020 +2021 +$ +416 +2022 +358 +2023 +300 +2024 +273 +2025 +169 +Thereafter +389 +Total Lease Payments +1,905 +Less: Imputed Interest +(210 +) +Total Lease Liabilities +$ +1,695 +As of January 31, 2020, the weighted-average remaining lease term and weighted-average discount rate +for our operating leases are 5.6 years and 3.96%, respectively. We calculated the weighted-average discount rate using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis +over a similar term. +Supplemental cash flow information related to leases is as follows: +(In thousands) +Year Ended +January +31, +2020 +Cash paid for operating lease liabilities +$ +406 +64 +Table of Contents +Note 11—Accumulated Other Comprehensive Loss +The changes in the balance of accumulated other comprehensive loss by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Unrealized +Holding +Gain (Loss) +on Available +for Sale +Securities +Net +Unrealized +Gain (Losses) +on Cash Flow +Hedges +Total +Balance at January 31, 2017 +$ +(1,048 +) +$ +(8 +) +$ +— +$ +(1,056 +) +Other Comprehensive Loss Income (Loss) before reclassification +867 +5 +(1,036 +) +(164 +) +Amounts Reclassified to Net Income +— +— +1,048 +1,048 +Net Other Comprehensive Income +867 +5 +12 +884 +Balance at January 31, 2018 +$ +(181 +) +$ +(3 +) +$ +12 +$ +(172 +) +Other Comprehensive Income (Loss) before reclassification +(671 +) +— +622 +(49 +) +Amounts reclassified from AOCI to Earnings +— +3 +(600 +) +(597 +) +Other Comprehensive Income (Loss) +(671 +) +3 +22 +(646 +) +Balance at January 31, 2019 +$ +(852 +) +$ +— +$ +34 +$ +(818 +) +Other Comprehensive Income (Loss) before reclassification +(133 +) +— +122 +(11 +) +Amounts reclassified from AOCI to Earnings +— +— +(264 +) +(264 +) +Other Comprehensive Loss +(133 +) +— +(142 +) +(275 +) +Balance at January 31, 2020 +$ +(985 +) +$ +— +$ +(108 +) +$ +(1,093 +) +The amounts presented above in other comprehensive income (loss) are net of taxes except for translation +adjustments associated with our German and Danish subsidiaries. +Note 12—Shareholders’ Equity +During fiscal 2020, 2019 and 2018, certain of the Company’s employees delivered a total of 20,329, 33,430 and 26,561 shares, +respectively, of the Company’s common stock to satisfy the exercise price and related taxes for stock options exercised and restricted stock vesting. The shares delivered were valued at a total of $0.5 million, $0.6 million and +$0.4 million, respectively, and are included in treasury stock in the accompanying consolidated balance sheets at January 31, 2020, 2019 and 2018. These transactions did not impact the number of shares authorized for repurchase under the +Company’s current repurchase program. +Note 13—Share-Based Compensation +The Company maintains the following share-based compensation plans: +Stock Plans: +We have one equity incentive plan from which we are authorized to grant equity awards, the AstroNova, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for, among other +things, the issuance of awards, including incentive stock options, non-qualified stock options, stock appreciation rights, time-based restricted stock units (RSUs), performance-based restricted stock units +(PSUs)and restricted stock awards (RSAs). At our annual meeting of shareholders held on June 4, 2019, the 2018 Plan was amended to increase the number of shares of the Company’s common stock available for issuance by 300,000, bringing the +total number of shares available for issuance under the 2018 Plan from 650,000 to 950,000, plus an additional number of shares equal to the number of shares subject to awards granted under the 2018 Plan or our 2015 Equity Incentive +65 +Table of Contents +Plan (the “2015 Plan”) that are forfeited, cancelled, satisfied without the issuance of stock, otherwise terminated (other than by exercise), or, for shares of stock issued pursuant to +any unvested award, reacquired by the Company at not more than the grantee’s purchase price (other than by exercise). Under the 2018 Plan, all awards to employees generally have a minimum vesting period of one year. Options granted under the +2018 Plan must be issued at an exercise price of not less than the fair market value of the Company’s common stock on the date of grant and expire after ten years. As of January 31, 2020, 110,909 unvested shares of restricted stock and +options to purchase an aggregate of 138,999 shares were outstanding under the 2018 Plan. +In addition +to the 2018 Plan, we previously granted equity awards under the 2015 Plan and our 2007 Equity Incentive Plan (the “2007 Plan”). No new awards may be issued under the 2015 Plan or the 2007 Plan, but outstanding awards will continue to be +governed by those plans. As of January 31, 2020, 1,007 unvested shares of restricted stock and options to purchase an aggregate of 373,345 shares were outstanding under the 2007 Plan and 22,718 unvested shares of restricted stock and options to +purchase an aggregate of 166,700 shares were outstanding under the 2015 Plan. +On January 31, 2019, the compensation +committee of the Company’s board of directors adopted an Amended and Restated Non-Employee Director Annual Compensation Program (the “New Program”), which became effective as of February 1, +2019. Pursuant to the New Program, beginning with fiscal 2020, each non-employee director automatically receives a grant of restricted stock on the date of their +re-election to the Company’s board of directors. The number of whole shares to be granted equals the number calculated by dividing the stock component of the director compensation amount determined by the +compensation committee for that year by the fair market value of our stock on that day. The value of the restricted stock award for fiscal 2020 was $60,000. To account for the partial year beginning on February 1, 2019 and continuing through +the 2019 annual meeting and thereby provide for the alignment of the timing of annual grants of restricted stock under the New Program with the election of directors at the annual meeting, on February 1, 2019, each non-employee director was granted shares of restricted stock with a fair market value of $18,000. Other than the shares granted on February 1, 2019, which vested on June 1, 2019, shares of restricted stock +granted under the New Program will become vested on the first anniversary of the date of grant, conditioned upon the recipient’s continued service on the Board through that date. +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +Years Ended January 31 +2020 +2019 +2018 +(In thousands) +Stock Options +$ +616 +$ +783 +$ +437 +Restricted Stock Awards and Restricted Stock Units +1,136 +1,088 +1,134 +Employee Stock Purchase Plan +23 +15 +12 +Total +$ +1,775 +$ +1,886 +$ +1,583 +66 +Table of Contents +Stock Options: +Aggregated information regarding stock options granted under the plans is summarized below: +Number +of Shares +Weighted- +Average +Exercise +Price Per +Share +Options Outstanding, January 31, 2017 +685,456 +$ +11.96 +Options Granted +187,189 +13.57 +Options Exercised +(84,025 +) +10.08 +Options Forfeited +(18,750 +) +14.49 +Options Cancelled +(24,600 +) +11.76 +Options Outstanding, January 31, 2018 +745,270 +$ +12.52 +Options Granted +196,000 +18.21 +Options Exercised +(150,125 +) +10.62 +Options Forfeited +(16,300 +) +15.10 +Options Cancelled +(3,700 +) +8.95 +Options Outstanding, January 31, 2019 +771,145 +$ +14.30 +Options Granted +— +— +Options Exercised +(57,175 +) +11.60 +Options Forfeited +(34,526 +) +15.73 +Options Cancelled +(400 +) +6.22 +Options Outstanding, January 31, 2020 +679,044 +$ +14.46 +Set forth below is a summary of options outstanding at January 31, 2020: +Outstanding +Exercisable +Range of +Exercise prices +Number of +Shares +Weighted- +Average +Exercise Price +Weighted- +Average +Remaining +Contractual Life +Number of +Shares +Weighted- +Average +Exercise Price +Weighted +Average +Remaining +Contractual +Life +$5.00-10.00 +54,881 +$ +7.97 +2.1 +54,881 +$ +7.97 +2.1 +$10.01-15.00 +396,564 +13.61 +5.8 +322,094 +13.64 +5.4 +$15.01-20.00 +227,599 +17.50 +7.8 +112,445 +17.07 +7.6 +679,044 +$ +14.46 +6.2 +489,420 +$ +13.79 +5.6 +The fair value of each stock option granted was estimated on the grant date using the Black-Scholes +option-pricing model with the following weighted-average assumptions: +Years Ended January 31 +2019 +2018 +Risk-Free Interest Rate +2.6 +% +1.9 +% +Expected Life (years) +9 +9 +Expected Volatility +39.4 +% +39.0 +% +Expected Dividend Yield +1.5 +% +2.0 +% +No options were granted during fiscal 2020. The weighted-average estimated fair value of options granted +during fiscal 2019 and 2018 was $7.43 and $4.79, respectively. As of January 31, 2020, there was $0.8 million of unrecognized compensation expense related to the unvested stock options granted under the plans. This expense is expected to +be recognized over a weighted-average period of 1.5 years. +As of January 31, 2020, the aggregate intrinsic value (the +aggregate difference between the closing stock price of the Company’s common stock on January 31, 2020, and the exercise price of the outstanding options) +67 +Table of Contents +that would have been received by the option holders if all options had been exercised was $0.3 million for all exercisable options and $0.3 million for all options outstanding. The +total aggregate intrinsic value of options exercised during 2020, 2019 and 2018 was $0.5 million, $1.1 million and $0.4 million, respectively . +Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs): +Aggregated information regarding RSUs and RSAs granted under the Plan is summarized below: +RSAs & RSUs +Weighted-Average +Grant Date Fair Value +Outstanding at January 31, 2017 +213,868 +$ +14.08 +Granted +43,737 +13.78 +Vested +(71,171 +) +14.12 +Forfeited +(9,087 +) +14.05 +Outstanding at January 31, 2018 +177,347 +$ +13.99 +Granted +108,790 +17.85 +Vested +(67,447 +) +14.26 +Forfeited +(85,023 +) +14.17 +Outstanding at January 31, 2019 +133,667 +$ +16.90 +Granted +119,522 +19.86 +Vested +(59,930 +) +14.50 +Forfeited +(58,625 +) +19.00 +Outstanding at January 31, 2020 +134,634 +$ +16.79 +As of January 31, 2020, there was $1.5 million of unrecognized compensation expense related to +unvested RSUs and RSAs. This expense is expected to be recognized over a weighted average period of 1.0 years. +Employee +Stock Purchase Plan (ESPP): +AstroNova’s ESPP allows eligible employees to purchase shares of common stock at a 15% +discount from fair market value on the date of purchase. A total of 247,500 shares were initially reserved for issuance under this plan. Summarized plan activity is as follows: +Years Ended January 31 +2020 +2019 +2018 +Shares Reserved, Beginning +33,853 +39,207 +45,224 +Shares Purchased +(8,879 +) +(5,354 +) +(6,017 +) +Shares Reserved, Ending +24,974 +33,853 +39,207 +Note 14—Income Taxes +The components of income (loss) before income taxes are as follows: +January 31 +2020 +2019 +2018 +(In thousands) +Domestic +$ +1,930 +$ +6,859 +$ +2,110 +Foreign +(560 +) +449 +3,047 +$ +1,370 +$ +7,308 +$ +5,157 +68 +Table of Contents +The components of the (benefit) provision for income taxes are as follows: +January 31 +2020 +2019 +2018 +(In thousands) +Current: +Federal +$ +660 +$ +1,807 +$ +592 +State +221 +457 +251 +Foreign +368 +952 +284 +1,249 +3,216 +1,127 +Deferred: +Federal +$ +(1,364 +) +$ +(843 +) +$ +903 +State +(282 +) +(170 +) +(25 +) +Foreign +8 +(625 +) +(134 +) +(1,638 +) +(1,638 +) +744 +$ +(389 +) +$ +1,578 +$ +1,871 +Total income tax (benefit)/provision differs from the expected tax (benefit)/provision as a result of the +following: +January 31 +2020 +2019 +2018 +(In thousands) +Income Tax Provision at Statutory Rate +$ +288 +$ +1,534 +$ +1,697 +U.S. Corporate Rate Change +— +52 +1,010 +State Taxes, Net of Federal Tax Effect +(48 +) +226 +149 +Foreign Rate Deferential +315 +558 +752 +Transition Tax on Repatriated Earnings +— +14 +104 +Meals and Entertainment +31 +56 +40 +Share Based Compensation +(145 +) +(127 +) +24 +Change in Valuation Allowance +256 +— +— +Change in Reserves Related to ASC 740 Liability +(352 +) +(34 +) +(20 +) +Domestic Production Deduction +— +— +(47 +) +Return to Provision Adjustment +(207 +) +58 +(122 +) +TrojanLabel Earn Out Liability Adjustment +— +— +(316 +) +Global Intangible Low Taxed Income +107 +— +— +R&D Credits +(209 +) +(218 +) +(537 +) +Foreign Derived Intangible Income +(107 +) +(53 +) +— +Foreign Tax Credits +(344 +) +(477 +) +(833 +) +Other +26 +(11 +) +(30 +) +$ +(389 +) +$ +1,578 +$ +1,871 +The Company’s effective tax rate for 2020 was (28.4)% compared to 21.6% in 2019 and 36.3% in 2018. +The decrease in the effective tax rate in 2020 from 2019 is primarily related to lower pre-tax income in 2020 compared to 2019 and 2018. Specific items decreasing the effective tax rate include foreign derived +intangible income (“FDII”), the release of ASC 740 liabilities, R&D credit utilization, and return to provision adjustments. This decrease was offset by valuation allowances recorded on unbenefited losses in China and on carryforward +foreign tax credits expected to expire unused. +The decrease in the effective tax rate for 2019 as compared to 2018 is +primarily related to impacts of the Tax Act including the reduction in the statutory tax rate from 35% to 21% along with the absence of the one-time U.S. deferred remeasurement and Transition Tax charges. This +decrease was offset by the absence of R&D +69 +Table of Contents +credits from amended tax returns and the absence of the non-taxable TrojanLabel earn out liability adjustment in TrojanLabel ApS impacting the fiscal 2018 +effective tax rate. +The components of deferred income tax expense arise from various temporary differences and relate to items +included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31 +2020 +2019 +(In thousands) +Deferred Tax Assets: +Inventory +$ +2,094 +$ +1,800 +Honeywell Royalty Liability +2,583 +3,146 +State R&D Credits +1,496 +1,305 +Share-Based Compensation +582 +493 +Compensation Accrual +159 +155 +Warranty Reserve +205 +201 +Unrecognized State Tax Benefits +116 +133 +Deferred Service Contract Revenue +111 +91 +Bad Debt +165 +101 +Net Operating Loss +443 +505 +Foreign Tax Credit +113 +— +Other +295 +142 +8,362 +8,072 +Deferred Tax Liabilities: +Intangibles +776 +2,660 +Accumulated Tax Depreciation in Excess of Book Depreciation +1,002 +982 +Other +188 +238 +1,966 +3,880 +Subtotal +6,396 +4,192 +Valuation Allowance +(1,752 +) +(1,304 +) +Net Deferred Tax Assets +$ +4,644 +$ +2,888 +The valuation allowance of $1.8 million at January 31, 2020 and $1.3 million at +January 31, 2019 related to domestic research and development tax credit carryforwards, foreign tax credit carryforwards, and net operating loss carryforwards in China, all of which are expected to expire unused. The valuation allowance +increased $0.5 million in 2020 due to the generation of domestic research and development credits, and foreign tax credits in excess of the Company’s ability to currently utilize them. The Company also recorded a full valuation allowance +against the carryforward net operating losses in China, as the future realization is not reasonably assured. The Company has reached these conclusions after considering the availability of taxable income in prior carryback years, tax planning +strategies, and the likelihood of future taxable income and credits exclusive of reversing temporary differences and carryforwards in the relevant jurisdictions. +70 +Table of Contents +We believe that it is reasonably possible that some unrecognized tax benefits, accrued +interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, +excluding interest and penalties are as follows: +2020 +2019 +2018 +(In thousands) +Balance at February 1 +$ +618 +$ +665 +$ +708 +Increases in current period tax positions +2 +7 +55 +Reductions related to lapse of statutes of limitations +(26 +) +(54 +) +(98 +) +Reductions related to settlement with tax authorities +(232 +) +— +— +Balance at January 31 +$ +362 +$ +618 +$ +665 +During fiscal 2020, the Company recognized $114,000 of income and $8,000 and $24,000 of expense in 2019 +and 2018, respectively, related to a change in interest and penalties, which are included as a component of income tax expense in the accompanying statements of income. The Company has accrued potential interest and penalties of $0.3 million +and $0.5 million at the end of January 31, 2020 and 2019, respectively. +The Company and its subsidiaries file income +tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company was previously under audit by the IRS for the tax years ended January 31, 2015, 2016, and 2017. On June 6, 2019, the +Company received formal communication regarding the close of the audit with no additional changes made by the IRS. Therefore, the Company’s reserves for federal uncertain tax positions relating to the years in question have been released. The +Company released $232,000 relating to the federal tax exposure for the years previously under audit and $74,000 of related interest (net of federal benefit) and penalties. +The Company was also notified of an income tax audit from the state of Rhode Island, but, no significant items have been raised at this time other than information requests. No assessments have been made +as of January 31, 2020. +U.S. income taxes have not been provided on $4.9 million of undistributed earnings of the +Company’s foreign subsidiaries since it is the Company’s intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, the Company would not be subject to U.S. tax as a result of the +Tax Act but could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical. +Note 15—Nature of Operations, Segment Reporting and Geographical Information +The Company’s operations consist of the design, development, manufacture and sale of specialty printers and data acquisition and analysis systems, including both hardware and software and +related consumable supplies. The Company organizes and manages its business as a portfolio of products and services designed around a common theme of data acquisition and information output. The Company has two reporting segments consistent with its +revenue product groups: Product Identification (“PI”) and Test & Measurement (“T&M”). +The PI +segment produces an array of high-technology digital color and monochrome label printers and mini presses, labeling software and supplies for a variety of commercial industries worldwide. AstroNova’s T&M segment produces data acquisition +systems used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing. The T&M segment also includes the +Company’s line of aerospace flight deck and cockpit printers. +Business is conducted in the United States and through +foreign branch offices and subsidiaries in Canada, Europe, China, Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United States are conducted through +wholly-owned entities +71 +Table of Contents +and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction. +The accounting policies of the reporting segments are the same as those described in the summary of significant accounting +policies herein. The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses. +Summarized below are the revenue and segment operating profit (both in dollars and as a percentage of revenue) for each reporting segment: +($ in thousands) +Revenue +Segment Operating Profit +Segment Operating Profit as a +% of Revenue +2020 +2019 +2018 +2020 +2019 +2018 +2020 +2019 +2018 +Product Identification +$ +88,116 +$ +86,786 +$ +81,681 +$ +7,509 +$ +7,910 +$ +10,561 +8.5 +% +9.1 +% +12.9 +% +T&M +45,330 +49,871 +31,720 +6,281 +11,933 +3,754 +13.9 +% +23.9 +% +11.8 +% +Total +$ +133,446 +$ +136,657 +$ +113,401 +13,790 +19,843 +14,315 +10.3 +% +14.5 +% +12.6 +% +Corporate Expenses +11,357 +11,123 +8,903 +Operating Income +2,433 +8,720 +5,412 +Other Expense, Net +(1,063) +(1,412) +(255) +Income Before Income Taxes +1,370 +7,308 +5,157 +Income Tax Provision (Benefit) +(389 +) +1,578 +1,871 +Net Income +$ +1,759 +$ +5,730 +$ +3,286 +No customer accounted for greater than 10% of net revenue in fiscal 2020, 2019 or 2018. +Other information by segment is presented below: +(In thousands) +Assets +2020 +2019 +Product Identification +$ +55,427 +$ +51,639 +T&M +56,988 +59,702 +Corporate* +4,249 +7,642 +Total +$ +116,664 +$ +118,983 +* +Corporate assets consist principally of cash, cash equivalents and securities available for sale. +(In thousands) +Depreciation and +Amortization +Capital Expenditures +2020 +2019 +2018 +2020 +2019 +2018 +Product Identification +$ +1,928 +$ +1,888 +$ +1,536 +$ +2,001 +$ +1,935 +$ +1,497 +T&M +4,356 +4,264 +2,458 +905 +710 +707 +Total +$ +6,284 +$ +6,152 +$ +3,994 +$ +2,906 +$ +2,645 +$ +2,204 +72 +Table of Contents +Geographical Data +Presented below is selected financial information by geographic area: +(In thousands) +Revenue +Long-Lived Assets* +2020 +2019 +2018 +2020 +2019 +United States +$ +83,671 +$ +83,668 +$ +69,795 +$ +34,072 +$ +36,750 +Europe +29,617 +31,574 +29,948 +2,544 +3,223 +Asia +8,316 +8,207 +3,808 +— +— +Canada +5,719 +6,692 +5,373 +35 +81 +Central and South America +4,145 +4,147 +3,402 +— +— +Other +1,978 +2,369 +1,075 +— +— +Total +$ +133,446 +$ +136,657 +$ +113,401 +$ +36,651 +$ +40,054 +* +Long-lived assets exclude goodwill assigned to the T&M segment of $4.5 million at both January 31, 2020 and 2019 and +$7.5 million and $7.8 million assigned to the PI segment at January 31, 2020 and 2019, respectively. +Note +16—Employee Benefit Plans +AstroNova sponsors a Profit-Sharing Plan (the “Plan”) which provides retirement +benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified +levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code. +All +contributions are deposited into trust funds. It is the policy of the Company to fund any contributions accrued. The Company’s annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to +$0.5 million in each year in fiscal 2020, 2019 and 2018. +Note 17—Product Warranty Liability +AstroNova offers a manufacturer’s warranty for the majority of its hardware products. The specific terms and conditions of warranty +vary depending upon the products sold and country in which the Company does business. The Company estimates the warranty costs based on historical claims experience and records a liability in the amount of such estimates at the time product revenue +is recognized. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying +consolidated balance sheet, is as follows: +January 31 +2020 +2019 +2018 +(In thousands) +Balance, beginning of the year +$ +832 +$ +575 +$ +515 +Provision for Warranty Expense +1,733 +1,680 +1,294 +Cost of Warranty Repairs +(1,715 +) +(1,423 +) +(1,234 +) +Balance, end of the year +$ +850 +$ +832 +$ +575 +Note 18—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is +limited due to the large number and general dispersion of accounts which constitute the Company’s customer base. The Company periodically performs on-going credit evaluations of its customers. The Company +has not historically experienced significant credit losses on collection of its accounts receivable. +73 +Table of Contents +During the years ended January 31, 2020, 2019 and 2018, one vendor accounted for +21.2%, 21.6% and 31.3% of purchases, and 28.0%, 28.7% and 26.6% of accounts payable, respectively, as of January 31, 2020, 2019 and 2018. +Note 19—Commitments and Contingencies +The Company is subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment +claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability +can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of +amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be +materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the Company’s control. +Note 20—Fair Value Measurements +Assets and Liabilities Recorded at Fair Value on a Recurring Basis +The following tables provide a summary of the financial assets and liabilities that are measured at fair value: +Assets measured at fair value: +Fair value measurement at +January 31, 2020 +Fair value measurement at +January 31, 2019 +(in thousands) +Level 1 +Level 2 +Level 3 +Total +Level 1 +Level 2 +Level 3 +Total +Interest Rate Swap Contract (included in Other Assets) +$ +— +$ +— +$ +— +$ +— +$ +— +$ +85 +$ +— +$ +85 +Total assets +$ +— +$ +— +$ +— +$ +— +$ +— +$ +85 +$ +— +$ +85 +Liabilities measured at fair value: +Fair value measurement at +January 31, 2020 +Fair value measurement at +January 31, 2019 +(in thousands) +Level 1 +Level 2 +Level 3 +Total +Level 1 +Level 2 +Level 3 +Total +Cross-Currency Interest Rate Swap Contract (included in Other Long-Term Liabilities) +$ +— +$ +250 +$ +— +$ +250 +$ +— +$ +600 +$ +— +$ +600 +Interest Rate Swap Contract (included in Other Long-Term Liabilities) +— +96 +— +96 +— +— +— +— +Earnout Liability (included in Other Liabilities) +— +— +14 +14 +— +— +14 +14 +Total liabilities +$ +— +$ +346 +$ +14 +$ +360 +$ +— +$ +600 +$ +14 +$ +614 +We use the market approach to measure fair value of our derivative instruments. These derivative +instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates and foreign exchange rates and are classified as Level 2 because they are over-the-counter contracts with a bank counterparty that are not traded in an active market. +The fair value of the earn out liability incurred in connection with the Company’s 2017 acquisition of TrojanLabel was determined using the option approach methodology which includes using +significant inputs that are not observable in the market and therefore classified as Level 3. Key assumptions in estimating the initial fair +74 +Table of Contents +value of the contingent consideration liability included (1) the estimated earnout targets over the next seven years of $0.5 million-$1.4 million, (2) the probability of +success (achievement of the various contingent events) from 0.0%-0.9% and (3) a risk-adjusted discount rate of approximately 2.68%-4.9% used to adjust the +probability-weighted earnout payments to their present value. At each reporting period, the contingent consideration liability is recorded at its fair value with changes reflected in general and administrative expense in the condensed consolidated +statements of operations. +Assets and Liabilities Not Recorded at Fair Value on the Consolidated Balance Sheet +The Company’s long-term debt, including the current portion of long-term debt not reflected in the financial statements at fair +value, is reflected in the table below: +Fair Value Measurement at +January 31, 2020 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +13,258 +$ +13,258 +$ +13,034 +Fair Value Measurement at +January 31, 2019 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +18,857 +$ +18,857 +$ +18,242 +The fair value of the Company’s long-term debt, including the current portion, is estimated by +discounting the future cash flows using current interest rates at which similar borrowings with the same maturities would be made to borrowers with similar credit ratings and is classified as Level 3. +Note 21—Subsequent Event +On March 11, 2020, the World Health Organization announced that COVID-19, a respiratory illness, caused by a novel coronavirus first identified in China, is a pandemic. COVID-19 has spread to many of the countries in which we, our customers, our suppliers and our other business partners conduct business. Governments in affected regions have implemented, and may +continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and +its employees are taking additional steps to avoid or reduce infection, including limiting travel and staying home from work. These measures are disrupting normal business operations both in and outside of affected areas and have had significant +negative impacts on businesses and financial markets worldwide. +The Company continues to monitor its operations and government +recommendations and has made modifications to its normal operations because of the COVID-19 outbreak, including requiring most of its non-production related team members +to work remotely. The Company has maintained a substantial portion of its manufacturing operational capacity at its primary manufacturing facility located at West Warwick, Rhode Island, as well as its manufacturing facilities in Canada and Germany, +at this time, and has instituted heightened cleaning and sanitization standards and several health and safety protocols and procedures to safeguard its team members. +The COVID-19 outbreak has caused the Company to experience a number of adverse impacts, including reductions in demand for its products, delays and cancellations of +orders for its products, difficulties in obtaining raw materials and components for its products, shortages of labor to manufacture products, inefficiencies caused by remote worker’s difficulties in performing their normal work outputs, +closures of the facilities of some of its suppliers and customers, and delays in collecting accounts receivable. Disruptions in the capital markets as a result of the COVID-19 outbreak may also adversely +affect the Company if these impacts continue for a prolonged period and the Company needs additional liquidity. +The rapid +development and uncertainty of the impacts of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of the COVID-19 outbreak on the +Company’s business. However, COVID-19 +75 +Table of Contents +and the measures taken to contain it present material uncertainty and risk with respect to the Company’s performance and financial results. In particular, the +aerospace industry, which the Company serves through its aerospace printer product line, has been significantly disrupted by the COVID-19 outbreak, both inside and outside of the United States. The +decline in air travel and the impact of that decline on demand for the Company’s products from its airplane manufacturing customers, the airlines to which it sells directly and through the manufacturers, and the repair and overhaul market and +the market for the paper consumed in the printers, could have a material adverse impact on the Company’s financial results. +In April 2020, the Company applied for a loan in the amount of approximately $4.4 million from Bank of America, N.A. pursuant to the +Paycheck Protection Program administered by the United States Small Business Administration and authorized by the Keeping American Workers Employed and Paid Act, which is part of the Coronavirus Aid, Relief, and Economic Security Act, enacted on +March 27, 2020. There can be no assurance that the Company will receive any or all of the requested loan proceeds under this program. +76 +Table of Contents +SUPPLEMENTARY DATA +Quarterly Financial Information (Unaudited) +2020 +2019 +(In thousands, except per share data) +Q1 +Q2 +Q3 +Q4 +Q1 (1) +Q2 +Q3 +Q4 (2) +Revenue +$ +36,181 +$ +33,468 +$ +33,318 +$ +30,479 +$ +31,487 +$ +33,807 +$ +34,196 +$ +37,167 +Cost of Revenue +21,942 +21,491 +21,021 +20,234 +19,377 +20,408 +20,288 +22,585 +Gross Profit +14,239 +11,977 +12,297 +10,245 +12,110 +13,399 +13,908 +14,582 +39.4 +% +35.8 +% +36.9 +% +33.6 +% +38.5 +% +39.6 +% +40.7 +% +39.2 +% +Operating Expenses (3): +Selling & Marketing +$ +6,765 +$ +6,413 +$ +6,944 +$ +6,762 +$ +6,500 +$ +6,397 +$ +6,587 +$ +6,858 +Research & Development +2,007 +1,785 +2,076 +2,216 +1,692 +2,029 +2,123 +1,969 +General & Administrative +2,999 +2,616 +2,830 +2,912 +2,653 +2,808 +2,836 +2,825 +Total Operating Expenses +11,771 +10,814 +11,850 +11,890 +10,845 +11,234 +11,546 +11,652 +Operating Income +2,468 +1,163 +447 +(1,645 +) +1,265 +2,165 +2,362 +2,930 +6.8 +% +3.5 +% +1.3 +% +(5.4 +)% +4.0 +% +6.4 +% +6.9 +% +7.9 +% +Other Expense, Net +(368 +) +(183 +) +(238 +) +(275 +) +(270 +) +(512 +) +(538 +) +(92 +) +Income (Loss) Before Taxes +2,100 +980 +209 +(1,920 +) +995 +1,653 +1,824 +2,838 +Income Tax (Benefit) Provision +400 +29 +(247 +) +(572 +) +181 +459 +407 +532 +Net Income (Loss) +$ +1,700 +$ +951 +$ +456 +$ +(1,348 +) +$ +814 +$ +1,194 +$ +1,417 +$ +2,306 +Net Income (Loss) per Common Share—Basic +$ +0.24 +$ +0.14 +$ +0.06 +$ +(0.19 +) +$ +0.12 +$ +0.17 +$ +0.21 +$ +0.33 +Net Income (Loss) per Common Share—Diluted +$ +0.23 +$ +0.13 +$ +0.06 +$ +(0.19 +) +$ +0.12 +$ +0.17 +$ +0.20 +$ +0.32 +Annual totals may not agree to the summation of quarterly information due to insignificant rounding and the required +calculation conventions. +(1) +The first quarter of fiscal 2019 includes (a) income of $1.0 million ($0.8 million net of tax or $0.12 per diluted share) for a +change in accounting estimate for product costs and operating expenses related to the Honeywell TSA and (b) income of $0.4 million ($0.3 million net of tax or $0.05 per diluted share) for change in accounting estimates for revenue +subject to customer rebates under the Honeywell Agreement. Both changes in accounting estimates were the result of actual amounts billed and received differing from initial estimates. +(2) +The fourth quarter of fiscal 2019 includes $0.1 million, or $0.01 per diluted share, of tax expense related to the enactment of the Tax +Act. +(3) +Certain amounts reported in the prior quarters have been reclassified to conform to the Company’s current presentation at year-end. +77 +Table of Contents +ASTRONOVA, INC. +SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision/ +(Benefit) +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts(1): +(In thousands) +Year Ended January 31, +2020 +$ +521 +$ +546 +$ +(211 +) +$ +856 +2019 +$ +377 +$ +310 +$ +(166 +) +$ +521 +2018 +$ +266 +$ +119 +$ +(8 +) +$ +377 +(1) +The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet +dates. +(2) +Uncollectible accounts written off, net of recoveries. +78 \ No newline at end of file diff --git a/raw/filings/0000008146/2019/0001193125-20-103834/filing_metadata.csv b/raw/filings/0000008146/2019/0001193125-20-103834/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..cc9a45532d035c0eb2ecb8e690093dd8618a51c1 --- /dev/null +++ b/raw/filings/0000008146/2019/0001193125-20-103834/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2020-04-10,2020-01-31,2020-04-10T20:22:55.000Z,0001193125-20-103834,d816550d10k.htm,10-K,11804080,1,0,https://www.sec.gov/Archives/edgar/data/8146/000119312520103834/d816550d10k.htm,https://www.sec.gov/Archives/edgar/data/8146/000119312520103834/,2019,2019,1 diff --git a/raw/filings/0000008146/2019/0001193125-20-103834/item1.txt b/raw/filings/0000008146/2019/0001193125-20-103834/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..114bde972fc5c1c0c378057226e6795ef68c3db4 --- /dev/null +++ b/raw/filings/0000008146/2019/0001193125-20-103834/item1.txt @@ -0,0 +1,121 @@ +Item 1 . Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” +and “us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +AstroNova designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced +technologies to acquire, store, analyze, and present data in multiple formats. Target markets for hardware and software products of the Company include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, +distribution, food and beverage, general manufacturing, packaging and transportation. +The Company’s products are +distributed around the world through its own sales force, authorized dealers and through independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related +supplies sold under the brand names QuickLabel ® , TrojanLabel ® and GetLabels ™ . The T&M +segment includes the Company’s line of aerospace flight deck printers and test and measurement data acquisition systems sold under the AstroNova ® brand name. Refer to Note 15, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements +elsewhere in this report for financial information regarding the Company’s segments. +The following description of our +business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 21 through 33 of this Annual Report on Form 10-K. +Description of Business +Product Overview +AstroNova leverages its expertise in data visualization +technologies to design, manufacture and market specialty printing systems, test and measurement systems and related services for select growing markets on a global basis. +3 +Table of Contents +Product Identification products sold under the QuickLabel, TrojanLabel and GetLabels +brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding and labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers, +high-volume presses and specialty OEM printing systems, as well as a wide range of label, tag and flexible packaging material substrates and other supplies, including ink and toner, that allow customers to mark, track, protect and enhance the +appearance of their products. In the T&M segment, the Company has a long history of using its technologies to provide networking systems and high-resolution light-weight flight deck and cabin printers for the aerospace market. In addition, the +T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed +and analyzed and then stored and presented in various visual output formats. +Product Identification +AstroNova’s PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. Printers and supplies are sold to brand owners, +manufacturers and retailers who label or mark products on a short to mid-size run basis. AstroNova PI customers benefit from the efficiency, flexibility and cost-savings of digitally printing labels in their +facility, on-demand, with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready +digital color label printers and specialty OEM printing systems for either standalone output or inline integration with existing pre-processing and finishing systems. Customers use the Company’s digital label printer products in a wide variety +of industries, including chemical, cosmetics, food and beverage, medical products, nutraceutical, pharmaceutical, and many others. TrojanLabel expands the Company’s customer market by providing a range of higher volume digital color printers, +OEM printing systems and supplies that target the more demanding needs of commercial printers, label converters and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post printing +applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners and thermal transfer ribbons designed for optimal performance with the Company’s printing hardware. In addition, +GetLabels media is compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models +include a selection of professional tabletop digital color label printers. The high-speed QL-120X was built on AstroNova’s pioneering and successful Kiaro! platform. Introduced early in 2019, the +high-performance QL-300 was the first 5-color toner-based electrophotographic tabletop production label printer in the market. In addition, our QuickLabel line of +printers includes the QL-850, our next-generation wide-format inkjet color label printer, the QL-30 and QL-60 series, a family of +high-end monochrome printers, and the QLS-4100 XE, a unique solution with the ability to digitally print full color labels and tags using thermal transfer ribbon +technology. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to +large-scale all-in-one inline specialty printing systems. The T2-C, a compact, digital mini-press designed for 24/7 label +production, includes numerous differentiating features for several end-use market applications. The T2-L is a narrow format digital press designed specifically for +flexible packaging substrates. Beyond label printing, the T3-OPX, introduced in late 2019, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many +other items using pigment inks that are water-resistant and highly resistant to UV exposure. A professional label press and finishing system, the T4, enables print, die-cut, and lamination in an all-in-one machine with a much smaller footprint than others in the market. Expanding on the T4 with additional features, the T5 incorporates capabilities of a compact +converter unit featuring UV varnish, lamination, rotary die-cutting, slitting and waste removal to offer an all-in-one digital +print and finish inline labeling solution. +GetLabels provides a broad range of high-quality supplies for both AstroNova +printers and third-party printers. Supplies include label and tag materials, inks, toner and thermal transfer material. Label materials and +4 +Table of Contents +substrates are specifically designed and constructed for a wide variety of labeling applications. Each label material and substrate is qualified and tested in our +on-site Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +The PI segment additionally develops and licenses various specialized software used to design and manage labels and print images, as well +as manage and operate our printers and presses and coordinate printing on an automated basis directly over networked systems. PI also provides worldwide training and support. +T&M +Products sold under AstroNova’s T&M segment are designed +and manufactured for airborne printing solutions and for data acquisition. AstroNova’s aerospace applications include flight deck printing solutions, networking hardware and thermal paper. The Company’s data acquisition systems are used in +research and development, flight testing, missile/rocket telemetry production monitoring and maintenance applications. These products are sold to customers in a variety of industries, including aerospace & defense, automotive, commercial +airline, energy, manufacturing and transportation, to meet the need to acquire and record data from local and networked data streams and sensors. +Airborne printers include the Company’s flagship ToughWriter ® +series used in the flight decks and cabins of military, commercial and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, arrival and departure information, flight +itineraries, weather maps, performance data, passenger data, and various air traffic control data. ToughSwitch ® +Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight +worthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriter airborne printers for many aircraft made by Airbus, Boeing, Embraer, Bombardier, Lockheed, Gulfstream and others. In addition +to the ToughWriter products, the Company manufactures other flight deck printers, including Miltope-brand and RITEC-brand airborne printers that the Company acquired in 2015 and 2014, respectively, and the +PTA-45 cockpit printer. The PTA-45B is subject to the Asset Purchase and Licenses Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), +pursuant to which in 2017 the Company acquired an exclusive perpetual world-wide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Over time we expect that customers +will chose to replace those printers with ToughWriter products because they have numerous technical features and functional advantages and significant weight savings. +Other T&M products include: the TMX ® all-in-one high speed data acquisition system for applications requiring high channel +counts and acquisition rates, the Daxus ® DXS-100 distributed data +acquisition platform, the SmartCorder ® DDX-100, a portable all-in-one data acquisition system for facilities maintenance and field testing and the Everest ® EV-5000 digital strip chart recording system used mainly in telemetry applications. The Daxus +DXS-100 can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that +relate to (1) acquiring data, (2) conditioning the data, (3) displaying or printing the data on hard copy, monitor or electronic storage media and (4) analyzing the data. To service data visualization, AstroNova maintains +technological core competencies and trade know-how concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and contain aspects of electronic, software, +mechanical and industrial engineering. Additionally, AstroNova possesses engineering expertise in the areas of digital signal processing, image processing, fluidics, color theory, high-speed material handling and design for airworthiness. +Patents and Copyrights +We hold several product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, trademark and trade secret laws in the United States and other jurisdictions +to protect our +5 +Table of Contents +technology and brand name. We consider our intellectual property to be important to the operation of our business. In particular, we believe that the loss of the trademarks QuickLabel, +TrojanLabel, ToughWriter or ToughSwitch or the loss of the license provided under the Honeywell Agreement could have a material adverse impact on the Company’s business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we +design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many of the sub-assemblies and parts in-house, +including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts not manufactured in-house are standard +electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We purchase certain components, assembled products and supplies used in +the manufacture of our products from a single source or limited supplier source. While we believe the majority of these sole or limited source components, assembled products and supplies could be sourced elsewhere with appropriate changes in the +design of our products, such design might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that the Company may not be +able to acquire such components, products or supplies on a timely basis, the Company’s practice is to procure a sufficient quantity in advance. In the past we have made such advance purchases primarily for aerospace products and in quantities +that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +The Company competes worldwide in multiple markets. In the specialty printing field, we believe we are a market leader in +tabletop digital color label printing technology, a market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose portable, high-speed data +acquisition systems. +Our management believes that we have a market leadership position in many of the markets we serve. We +retain our leadership position by virtue of proprietary technology, product reputation, delivery, our channels to market, technical assistance and service to customers. The number of competitors varies by product line. Key competitive factors vary +among our product lines, but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our products are sold by direct field salespersons as well as independent dealers and representatives. In the United States, the Company has factory-trained direct field salespeople located in major +cities from coast to coast specializing in either Product Identification or Test & Measurement products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United +Kingdom staffed by our own employees and dedicated third party contractors. Additionally, we utilize over 225 independent dealers and representatives selling and marketing our products in over 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our +backlog varies regularly. It consists of a blend of orders for end-user customers as well as original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and +customer requirements. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2020 and 2019 was $25.2 million and $25.6 million, respectively. +Employees +As of +January 31, 2020, we employed 365 people. We are generally able to satisfy our employment requirements. No employees are represented by a union. We believe that our employee relations are good. +6 +Table of Contents +Other Information +The Company’s business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 +as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). These filing are also accessible on the SEC’s website at http://www.sec.gov. \ No newline at end of file diff --git a/raw/filings/0000008146/2019/0001193125-20-103834/item13.txt b/raw/filings/0000008146/2019/0001193125-20-103834/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..18131fe5e124f5ff01199036e18000794c0c35de --- /dev/null +++ b/raw/filings/0000008146/2019/0001193125-20-103834/item13.txt @@ -0,0 +1,6 @@ +Item 13. +Certain Relationships, Related Transactions and Director Independence +The information required by +this item is incorporated herein by reference to the Company’s definitive Proxy Statement for the 2020 Annual Meeting of Shareholders. +37 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000008146/2019/0001193125-20-103834/item9a.txt b/raw/filings/0000008146/2019/0001193125-20-103834/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..6446f1db9d14ccf6e37eac703f9c958ff0e97b31 --- /dev/null +++ b/raw/filings/0000008146/2019/0001193125-20-103834/item9a.txt @@ -0,0 +1,24 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of +the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities +Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2020 to ensure that +the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and +our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s +Annual Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing +and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s +internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting +principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect +misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2020. In +making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the +principal executive officer and principal financial officer believe that as of January 31, 2020, the Company’s internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated +Framework.” +The attestation report of the Company’s registered public accounting firm regarding internal control +over financial reporting appears in Part IV, Item 15 of this Form 10-K and is incorporated herein by reference. +Changes in Internal Controls over Financial Reporting +There have been no +changes in the Company’s internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2019/0001193125-20-103834/rp_note.txt b/raw/filings/0000008146/2019/0001193125-20-103834/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2019/0001193125-20-103834/rpt_disclosure.txt b/raw/filings/0000008146/2019/0001193125-20-103834/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8b8e083daab2f6e4ac7d6a532d7ef48f547bb4ea --- /dev/null +++ b/raw/filings/0000008146/2019/0001193125-20-103834/rpt_disclosure.txt @@ -0,0 +1,6 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. In reviewing and +evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +No officer, director or nominee for director of the Company or any associate of any of the foregoing had during the period beginning on February 1, 2019 +through the date of this proxy statement any material interest, direct or indirect, in any material transaction or any material proposed transaction in which the amount exceeds $120,000 and to which the Company was or is to be a party. +27 \ No newline at end of file diff --git a/raw/filings/0000008146/2020/0001193125-21-114283/filing.txt b/raw/filings/0000008146/2020/0001193125-21-114283/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..123b17f0394bc7719048351c0ec364f8304658ce --- /dev/null +++ b/raw/filings/0000008146/2020/0001193125-21-114283/filing.txt @@ -0,0 +1,4700 @@ +10-K +Table of Contents +false FY 0000008146 --01-31 P1Y us-gaap:OperatingLeaseLiabilityCurrent us-gaap:OperatingLeaseLiabilityCurrent 0000008146 2020-02-01 2021-01-31 0000008146 2020-01-31 0000008146 2021-01-31 0000008146 2019-02-01 2020-01-31 0000008146 2018-02-01 2019-01-31 0000008146 2019-01-31 0000008146 2020-07-31 0000008146 2021-04-09 0000008146 2018-01-31 0000008146 us-gaap:CustomerContractsMember alot:MiltopeCorporationMember 2020-01-31 0000008146 us-gaap:CustomerContractsMember alot:RuggedInformationTechnologyEquipmentCorporationMember 2020-01-31 0000008146 us-gaap:NoncompeteAgreementsMember alot:RuggedInformationTechnologyEquipmentCorporationMember 2020-01-31 0000008146 alot:ExistingTechnologyMember alot:TrojanlabelApSMember 2020-01-31 0000008146 alot:DistributorRelationsMember alot:TrojanlabelApSMember 2020-01-31 0000008146 us-gaap:CustomerContractsMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2020-01-31 0000008146 alot:TermLoanDueJuneFifteenTwoThousandAndTwentyTwoMember 2020-01-31 0000008146 alot:TermLoanDueNovemberThirtyTwoThousandAndTwentyTwoMember 2020-01-31 0000008146 alot:TermLoanDueJanuaryThirtyOneTwoThousandAndTwentyTwoMember 2020-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2020-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2020-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2020-01-31 0000008146 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2020-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2020-01-31 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2020-01-31 0000008146 country:US 2020-01-31 0000008146 srt:EuropeMember 2020-01-31 0000008146 country:CA 2020-01-31 0000008146 alot:ProductIdentificationMember 2020-01-31 0000008146 alot:TestAndMeasurementMember 2020-01-31 0000008146 alot:CrossCurrencyInterestRateSwapMember alot:CashFlowHedgeMember 2020-01-31 0000008146 us-gaap:InterestRateSwapMember alot:CashFlowHedgeMember 2020-01-31 0000008146 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2020-01-31 0000008146 us-gaap:FairValueMeasurementsRecurringMember 2020-01-31 0000008146 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2020-01-31 0000008146 us-gaap:DomesticCountryMember 2020-01-31 0000008146 us-gaap:CustomerContractsMember alot:MiltopeCorporationMember 2021-01-31 0000008146 us-gaap:CustomerContractsMember alot:RuggedInformationTechnologyEquipmentCorporationMember 2021-01-31 0000008146 us-gaap:NoncompeteAgreementsMember alot:RuggedInformationTechnologyEquipmentCorporationMember 2021-01-31 0000008146 alot:ExistingTechnologyMember alot:TrojanlabelApSMember 2021-01-31 0000008146 alot:DistributorRelationsMember alot:TrojanlabelApSMember 2021-01-31 0000008146 us-gaap:CustomerContractsMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2021-01-31 0000008146 alot:TermLoanDueJuneFifteenTwoThousandAndTwentyTwoMember 2021-01-31 0000008146 alot:TermLoanDueNovemberThirtyTwoThousandAndTwentyTwoMember 2021-01-31 0000008146 alot:TermLoanDueJanuaryThirtyOneTwoThousandAndTwentyTwoMember 2021-01-31 0000008146 alot:TermLoanMember 2021-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember 2021-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2021-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2021-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2021-01-31 0000008146 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2021-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2021-01-31 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2021-01-31 0000008146 country:US 2021-01-31 0000008146 srt:EuropeMember 2021-01-31 0000008146 country:CA 2021-01-31 0000008146 alot:TwoThousandSevenEquityIncentivePlanMember 2021-01-31 0000008146 alot:TwoThousandFifteenEquityIncentivePlanMember 2021-01-31 0000008146 alot:TwoThousandFifteenEquityIncentivePlanMember us-gaap:RestrictedStockMember 2021-01-31 0000008146 alot:RangeThreeMember 2021-01-31 0000008146 alot:RangeFourMember 2021-01-31 0000008146 alot:RangeFiveMember 2021-01-31 0000008146 alot:TestAndMeasurementMember 2021-01-31 0000008146 alot:ProductIdentificationMember 2021-01-31 0000008146 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2021-01-31 0000008146 country:CN 2021-01-31 0000008146 stpr:DE 2021-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember us-gaap:RestrictedStockMember 2021-01-31 0000008146 us-gaap:EmployeeStockOptionMember 2021-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2021-01-31 0000008146 srt:MaximumMember 2021-01-31 0000008146 srt:MinimumMember 2021-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2021-01-31 0000008146 alot:GreenWoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2021-01-31 0000008146 alot:PaycheckProtectionProgramLoanMember 2021-01-31 0000008146 alot:TermLoanMember alot:BankOfAmericaMember 2021-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2021-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember 2021-01-31 0000008146 country:US 2018-02-01 2019-01-31 0000008146 srt:EuropeMember 2018-02-01 2019-01-31 0000008146 country:CA 2018-02-01 2019-01-31 0000008146 srt:AsiaMember 2018-02-01 2019-01-31 0000008146 alot:CentralAndSouthAmericaMember 2018-02-01 2019-01-31 0000008146 alot:OthersCountriesMember 2018-02-01 2019-01-31 0000008146 alot:HardwareProductsMember 2018-02-01 2019-01-31 0000008146 alot:SuppliesMember 2018-02-01 2019-01-31 0000008146 alot:ServiceAndOtherMember 2018-02-01 2019-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2018-02-01 2019-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2018-02-01 2019-01-31 0000008146 alot:OtherCountriesMember 2018-02-01 2019-01-31 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember 2018-02-01 2019-01-31 0000008146 alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember 2018-02-01 2019-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2018-02-01 2019-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2018-02-01 2019-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2018-02-01 2019-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2018-02-01 2019-01-31 0000008146 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-02-01 2019-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-02-01 2019-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2018-02-01 2019-01-31 0000008146 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-02-01 2019-01-31 0000008146 us-gaap:EmployeeStockMember 2018-02-01 2019-01-31 0000008146 us-gaap:OperatingSegmentsMember 2018-02-01 2019-01-31 0000008146 us-gaap:TreasuryStockMember 2018-02-01 2019-01-31 0000008146 us-gaap:CommonStockMember 2018-02-01 2019-01-31 0000008146 us-gaap:RetainedEarningsMember 2018-02-01 2019-01-31 0000008146 country:US 2019-02-01 2020-01-31 0000008146 srt:EuropeMember 2019-02-01 2020-01-31 0000008146 country:CA 2019-02-01 2020-01-31 0000008146 srt:AsiaMember 2019-02-01 2020-01-31 0000008146 alot:CentralAndSouthAmericaMember 2019-02-01 2020-01-31 0000008146 alot:OthersCountriesMember 2019-02-01 2020-01-31 0000008146 alot:HardwareProductsMember 2019-02-01 2020-01-31 0000008146 alot:SuppliesMember 2019-02-01 2020-01-31 0000008146 alot:ServiceAndOtherMember 2019-02-01 2020-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2019-02-01 2020-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2019-02-01 2020-01-31 0000008146 alot:OtherCountriesMember 2019-02-01 2020-01-31 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember 2019-02-01 2020-01-31 0000008146 alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember 2019-02-01 2020-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2019-02-01 2020-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2019-02-01 2020-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2019-02-01 2020-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2019-02-01 2020-01-31 0000008146 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-02-01 2020-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-02-01 2020-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2019-02-01 2020-01-31 0000008146 us-gaap:EmployeeStockMember 2019-02-01 2020-01-31 0000008146 us-gaap:OperatingSegmentsMember 2019-02-01 2020-01-31 0000008146 srt:MaximumMember us-gaap:CustomerConcentrationRiskMember us-gaap:SalesRevenueNetMember 2019-02-01 2020-01-31 0000008146 us-gaap:TreasuryStockMember 2019-02-01 2020-01-31 0000008146 us-gaap:CommonStockMember 2019-02-01 2020-01-31 0000008146 us-gaap:DomesticCountryMember 2019-02-01 2020-01-31 0000008146 us-gaap:RetainedEarningsMember 2019-02-01 2020-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2019-02-01 2020-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2019-02-01 2020-01-31 0000008146 us-gaap:CrossCurrencyInterestRateContractMember alot:CashFlowHedgeMember 2019-02-01 2020-01-31 0000008146 alot:ProductIdenificationMember 2019-02-01 2020-01-31 0000008146 country:US 2020-02-01 2021-01-31 0000008146 srt:EuropeMember 2020-02-01 2021-01-31 0000008146 country:CA 2020-02-01 2021-01-31 0000008146 srt:AsiaMember 2020-02-01 2021-01-31 0000008146 alot:CentralAndSouthAmericaMember 2020-02-01 2021-01-31 0000008146 alot:OthersCountriesMember 2020-02-01 2021-01-31 0000008146 alot:HardwareProductsMember 2020-02-01 2021-01-31 0000008146 alot:SuppliesMember 2020-02-01 2021-01-31 0000008146 alot:ServiceAndOtherMember 2020-02-01 2021-01-31 0000008146 alot:RangeThreeMember 2020-02-01 2021-01-31 0000008146 alot:RangeFourMember 2020-02-01 2021-01-31 0000008146 alot:RangeFiveMember 2020-02-01 2021-01-31 0000008146 alot:TermLoanDueJuneFifteenTwoThousandAndTwentyTwoMember 2020-02-01 2021-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2020-02-01 2021-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2020-02-01 2021-01-31 0000008146 alot:OtherCountriesMember 2020-02-01 2021-01-31 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember 2020-02-01 2021-01-31 0000008146 alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember 2020-02-01 2021-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2020-02-01 2021-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2020-02-01 2021-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2020-02-01 2021-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2020-02-01 2021-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-02-01 2021-01-31 0000008146 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2020-02-01 2021-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2020-02-01 2021-01-31 0000008146 us-gaap:LandImprovementsMember srt:MaximumMember 2020-02-01 2021-01-31 0000008146 alot:BuildingAndLeaseholdImprovementsMember srt:MaximumMember 2020-02-01 2021-01-31 0000008146 us-gaap:MachineryAndEquipmentMember srt:MaximumMember 2020-02-01 2021-01-31 0000008146 us-gaap:LandImprovementsMember srt:MinimumMember 2020-02-01 2021-01-31 0000008146 alot:BuildingAndLeaseholdImprovementsMember srt:MinimumMember 2020-02-01 2021-01-31 0000008146 us-gaap:MachineryAndEquipmentMember srt:MinimumMember 2020-02-01 2021-01-31 0000008146 alot:ComputerEquipmentAndSoftwareMember srt:MinimumMember 2020-02-01 2021-01-31 0000008146 alot:ComputerEquipmentAndSoftwareMember srt:MaximumMember 2020-02-01 2021-01-31 0000008146 us-gaap:CrossCurrencyInterestRateContractMember 2020-02-01 2021-01-31 0000008146 us-gaap:EmployeeStockMember 2020-02-01 2021-01-31 0000008146 us-gaap:OperatingSegmentsMember 2020-02-01 2021-01-31 0000008146 srt:MaximumMember us-gaap:CustomerConcentrationRiskMember us-gaap:SalesRevenueNetMember 2020-02-01 2021-01-31 0000008146 us-gaap:CommonStockMember 2020-02-01 2021-01-31 0000008146 alot:AirborneProductMember srt:MinimumMember 2020-02-01 2021-01-31 0000008146 alot:AirborneProductMember srt:MaximumMember 2020-02-01 2021-01-31 0000008146 us-gaap:TreasuryStockMember 2020-02-01 2021-01-31 0000008146 us-gaap:RetainedEarningsMember 2020-02-01 2021-01-31 0000008146 us-gaap:EmployeeStockOptionMember 2020-02-01 2021-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2020-02-01 2021-01-31 0000008146 alot:EmployeeStockPurchasePlanMember 2020-02-01 2021-01-31 0000008146 country:CN 2020-02-01 2021-01-31 0000008146 alot:RestrictedStockAwardMember 2020-02-01 2021-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2020-02-01 2021-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2020-02-01 2021-01-31 0000008146 us-gaap:CrossCurrencyInterestRateContractMember alot:CashFlowHedgeMember 2020-02-01 2021-01-31 0000008146 us-gaap:CashFlowHedgingMember us-gaap:CrossCurrencyInterestRateContractMember 2020-02-01 2021-01-31 0000008146 alot:GreenWoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2020-02-01 2021-01-31 0000008146 us-gaap:OtherExpenseMember alot:GreenWoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2020-02-01 2021-01-31 0000008146 alot:BankOfAmericaMember 2020-02-01 2021-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember us-gaap:OtherExpenseMember 2020-02-01 2021-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember 2020-02-01 2021-01-31 0000008146 alot:TermLoanMember 2020-02-01 2021-01-31 0000008146 us-gaap:LondonInterbankOfferedRateLIBORMember us-gaap:RevolvingCreditFacilityMember srt:MinimumMember 2020-02-01 2021-01-31 0000008146 us-gaap:LondonInterbankOfferedRateLIBORMember us-gaap:RevolvingCreditFacilityMember srt:MaximumMember 2020-02-01 2021-01-31 0000008146 us-gaap:FederalFundsEffectiveSwapRateMember us-gaap:RevolvingCreditFacilityMember 2020-02-01 2021-01-31 0000008146 us-gaap:LondonInterbankOfferedRateLIBORMember us-gaap:RevolvingCreditFacilityMember 2020-02-01 2021-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember 2020-02-01 2021-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MaximumMember 2020-02-01 2021-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember alot:PromissoryNoteMember 2020-02-01 2021-01-31 0000008146 alot:ProductIdenificationMember 2020-02-01 2021-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:InterestExpenseMember 2020-02-01 2021-01-31 0000008146 alot:PaycheckProtectionProgramLoanMember alot:GreenWoodCreditUnionMember 2020-05-06 0000008146 us-gaap:CashFlowHedgingMember 2020-05-03 2020-08-01 0000008146 alot:TermLoanMember 2020-05-03 2020-08-01 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2018-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2019-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2019-01-31 0000008146 alot:BankOfAmericaMember alot:ExistingCreditAgreementMember alot:TermLoanMember us-gaap:SubsequentEventMember 2021-03-24 2021-03-24 0000008146 alot:BankOfAmericaMember alot:TermLoanMember alot:FirstAmendmentToCreditAgreementMember 2021-03-24 2021-03-24 0000008146 us-gaap:SubsequentEventMember us-gaap:RevolvingCreditFacilityMember alot:FirstAmendmentToCreditAgreementMember us-gaap:LondonInterbankOfferedRateLIBORMember srt:MinimumMember 2021-03-24 2021-03-24 0000008146 us-gaap:LondonInterbankOfferedRateLIBORMember us-gaap:RevolvingCreditFacilityMember alot:FirstAmendmentToCreditAgreementMember srt:MaximumMember us-gaap:SubsequentEventMember 2021-03-24 2021-03-24 0000008146 us-gaap:SubsequentEventMember us-gaap:RevolvingCreditFacilityMember alot:FirstAmendmentToCreditAgreementMember us-gaap:LondonInterbankOfferedRateLIBORMember 2021-03-24 2021-03-24 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember 2021-03-24 2021-03-24 0000008146 us-gaap:RevolvingCreditFacilityMember alot:FirstAmendmentToCreditAgreementMember us-gaap:SubsequentEventMember 2021-03-24 2021-03-24 0000008146 us-gaap:SubsequentEventMember alot:FirstAmendmentToCreditAgreementMember us-gaap:RevolvingCreditFacilityMember srt:MinimumMember 2021-03-24 2021-03-24 0000008146 us-gaap:SubsequentEventMember alot:FirstAmendmentToCreditAgreementMember us-gaap:RevolvingCreditFacilityMember srt:MaximumMember 2021-03-24 2021-03-24 0000008146 alot:BankOfAmericaMember alot:ExistingCreditAgreementMember alot:TermLoanMember us-gaap:SubsequentEventMember 2021-03-24 0000008146 alot:BankOfAmericaMember alot:TermLoanMember alot:FirstAmendmentToCreditAgreementMember us-gaap:SubsequentEventMember 2021-03-24 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember alot:FirstAmendmentToCreditAgreementMember us-gaap:SubsequentEventMember 2021-03-24 0000008146 alot:TermLoanMember srt:MinimumMember 2020-05-02 2020-07-31 0000008146 alot:TermLoanMember srt:MaximumMember 2020-05-02 2020-07-31 0000008146 alot:TermLoanMember 2020-08-02 2020-10-31 0000008146 alot:TermLoanMember srt:MinimumMember 2020-11-01 2021-01-31 0000008146 alot:TermLoanMember srt:MaximumMember 2020-11-01 2021-01-31 0000008146 alot:TermLoanMember srt:ScenarioForecastMember 2021-02-01 2021-04-30 0000008146 alot:TermLoanMember srt:ScenarioForecastMember 2022-02-01 2022-04-30 0000008146 alot:TermLoanMember alot:FirstAmendmentToCreditAgreementMember srt:ScenarioForecastMember 2021-04-30 2021-04-30 0000008146 alot:TermLoanMember alot:FirstAmendmentToCreditAgreementMember srt:ScenarioForecastMember 2021-07-31 2021-07-31 0000008146 alot:TermLoanMember alot:FirstAmendmentToCreditAgreementMember srt:ScenarioForecastMember 2021-10-31 2021-10-31 0000008146 alot:TermLoanMember alot:FirstAmendmentToCreditAgreementMember srt:ScenarioForecastMember 2022-01-31 2022-01-31 0000008146 alot:TermLoanMember alot:FirstAmendmentToCreditAgreementMember srt:ScenarioForecastMember 2022-04-30 2022-04-30 0000008146 srt:ScenarioForecastMember alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2022-07-31 2022-07-31 0000008146 alot:FirstAmendmentToCreditAgreementMember srt:ScenarioForecastMember alot:TermLoanMember 2023-04-30 2023-04-30 0000008146 alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2021-04-24 2021-04-24 0000008146 srt:ScenarioForecastMember alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2024-07-31 2024-07-31 0000008146 srt:ScenarioForecastMember alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2024-10-31 2024-10-31 0000008146 alot:TermLoanMember alot:FirstAmendmentToCreditAgreementMember srt:ScenarioForecastMember 2025-01-01 2025-01-01 0000008146 srt:ScenarioForecastMember alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2023-07-31 2023-07-31 0000008146 srt:ScenarioForecastMember alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2023-10-31 2023-10-31 0000008146 alot:TermLoanMember alot:FirstAmendmentToCreditAgreementMember srt:ScenarioForecastMember 2024-01-01 2024-01-01 0000008146 srt:ScenarioForecastMember alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2024-04-30 2024-04-30 0000008146 srt:ScenarioForecastMember alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2025-04-30 2025-04-30 0000008146 srt:ScenarioForecastMember alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2025-07-31 2025-07-31 0000008146 srt:ScenarioForecastMember alot:FirstAmendmentToCreditAgreementMember alot:TermLoanMember 2023-01-01 2023-01-01 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-31 0000008146 us-gaap:TreasuryStockMember 2018-01-31 0000008146 us-gaap:RetainedEarningsMember 2018-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2018-01-31 0000008146 us-gaap:CommonStockMember 2018-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2018-01-31 0000008146 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-01-31 0000008146 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2018-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2018-01-31 0000008146 us-gaap:EmployeeStockMember 2018-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2019-01-31 0000008146 us-gaap:EmployeeStockMember 2019-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2019-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2019-01-31 0000008146 us-gaap:RetainedEarningsMember 2019-01-31 0000008146 us-gaap:TreasuryStockMember 2019-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-31 0000008146 us-gaap:CommonStockMember 2019-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2019-01-31 0000008146 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2020-01-31 0000008146 us-gaap:EmployeeStockMember 2020-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2020-01-31 0000008146 us-gaap:CommonStockMember 2020-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2020-01-31 0000008146 us-gaap:RetainedEarningsMember 2020-01-31 0000008146 us-gaap:TreasuryStockMember 2020-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2020-01-31 0000008146 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2020-01-31 0000008146 alot:ProductIdenificationMember 2019-01-31 0000008146 alot:TMMember 2019-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2021-01-31 0000008146 us-gaap:EmployeeStockMember 2021-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2021-01-31 0000008146 us-gaap:CommonStockMember 2021-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2021-01-31 0000008146 us-gaap:RetainedEarningsMember 2021-01-31 0000008146 us-gaap:TreasuryStockMember 2021-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2021-01-31 0000008146 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2021-01-31 0000008146 alot:ProductIdenificationMember 2020-01-31 0000008146 alot:TMMember 2020-01-31 0000008146 alot:ProductIdenificationMember 2021-01-31 0000008146 alot:TMMember 2021-01-31 iso4217:USD xbrli:shares xbrli:pure utr:Year iso4217:USD xbrli:shares alot:Segment +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM +10-K +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31, 2021 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +Commission file number +0-13200 +AstroNova, Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue , +West Warwick , Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: +( 401 ) 828-4000 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol +Name of each exchange +on which registered +Common Stock , $.05 Par Value +ALOT +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation +S-T +(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a +non-accelerated +filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule +12b-2 +of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☐ +Non-accelerated filer ☒ +Smaller reporting company +☒ +Emerging growth company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. +☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule +12b-2 +of the Act). ☐ Yes ☒ No +The aggregate market value of the registrant’s voting common equity held by +non-affiliates +at July 31, 2020 was approximately $ 47,045,000 based on the closing price on the Nasdaq Global Market on that date. +As of April +9 +, 2021, there were 7,212,977 shares of Common Stock (par value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form +10-K +where indicated. +Table of Contents +ASTRONOVA, INC. +FORM +10-K +ANNUAL REPORT +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3-7 +Item 1A. +Risk Factors +8-20 +Item 1B. +Unresolved Staff Comments +20 +Item 2. +Properties +20-21 +Item 3. +Legal Proceedings +21 +Item 4. +Mine Safety Disclosures +21 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +22 +Item 6. +Selected Financial Data +23 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +23-38 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +38 +Item 8. +Financial Statements and Supplementary Data +39 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +39 +Item 9A. +Controls and Procedures +39 +Item 9B. +Other Information +39 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +40 +Item 11. +Executive Compensation +41 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +41 +Item 13. +Certain Relationships, Related Transactions and Director Independence +41 +Item 14. +Principal Accountant Fees and Services +41 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +42 +Item 16. +Form 10-K Summary +42 +2 +Table of Contents +ASTRONOVA, INC. +Forward-Looking Statements +Information included in this Annual Report on Form +10-K +may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” “may,” “will,” and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in this Annual Report on Form +10-K +under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form +10-K. +PART I +Item 1 +. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form +10-K +refer to AstroNova, Inc. and its consolidated subsidiaries. +We design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation. +Our products are distributed around the world through our own sales force, authorized dealers, and through independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel +® +, TrojanLabel +® +and GetLabels +™ +brand names. The T&M segment includes our line of aerospace printers and test and measurement data acquisition systems sold under the AstroNova +® +brand name. Refer to Note 17, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 23 through 28 of this Annual Report on Form +10-K. +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets on a global basis. +Product Identification products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding and +3 +Table of Contents +labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers, high-volume presses and specialty OEM printing systems, as well as a wide range of label, tag and flexible packaging material substrates and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution light-weight flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed and stored and presented in various visual output formats. +Product Identification +Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. The segment provides a wide array of digital +end-to-end +product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Our customers typically label or mark products on a short to +mid-size +run basis and benefit from the efficiency, flexibility and cost-savings of digitally printing labels or packaging in their facility, +on-demand, +with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready digital color label printers and specialty OEM printing systems for either standalone output or inline integration with existing +pre-processing +and finishing systems. Customers use our digital printing products in a wide variety of industries, including chemical, cosmetics, food and beverage, medical products, nutraceutical, pharmaceutical, and many others. TrojanLabel expands our customer market by providing a range of higher volume digital color printers, OEM printing systems and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners and thermal transfer ribbons designed for optimal performance with our printing hardware, while also being compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models include a selection of professional tabletop digital color label printers. The high-speed +QL-120X +was built on our pioneering and successful Kiaro! platform. Introduced early in 2019, the high-performance +QL-300 +was the first +5-color +toner-based electrophotographic tabletop production label printer in the market. In addition, our QuickLabel line of printers includes the +QL-850, +our next-generation wide-format inkjet color label printer, the +QL-30 +and +QL-60 +series, a family of +high-end +monochrome printers, and the +QLS-4100 +XE, a unique solution with the ability to digitally print full-color labels and tags using thermal transfer ribbon technology. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to large-scale +all-in-one +inline specialty printing systems for both brand owners, OEMs and commercial printers. The +T2-C, +a compact, digital mini-press designed for 24/7 label production, includes numerous differentiating features for several +end-use +market applications. The +T2-L +is a narrow format digital press designed specifically for flexible packaging substrates. Beyond label printing, the +T3-OPX, +introduced in late 2019, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many other items using pigment inks that are water-resistant and highly resistant to UV exposure. A professional label press and finishing system, the T4, enables print, +die-cut, +and lamination in an +all-in-one +machine with a much smaller footprint than others in the market. +GetLabels provides a broad range of high-quality supplies for both our printers and third-party printers including label and tag materials, inks, toner and thermal transfer material, all specifically designed and constructed for a wide variety of labeling applications. Label material and substrates are carefully qualified and tested in our Rhode Island Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +4 +Table of Contents +The PI segment also develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems. PI also provides worldwide training and support. +T&M +Products sold under our T&M segment are designed and manufactured for airborne printing solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace grade thermal paper. Our data acquisition systems are used in research and development, flight testing, missile/rocket telemetry production monitoring, power and maintenance applications. These products are sold to customers in a variety of industries, including aerospace & defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Airborne printers include our flagship ToughWriter +® +series used in the flight decks and cabins of military, commercial and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, performance data, passenger data, and air traffic control data. ToughSwitch +® +Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter airborne printers for many aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream and others. In addition to the ToughWriter products, we manufacture other flight deck printers, including the TP/NP series, the RTP80 series and the +PTA-45B +series of airborne printers. The +PTA-45B +is subject to the Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which in 2017 we acquired an exclusive perpetual world-wide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Over time we expect customers will replace the +PTA-45B +printers with ToughWriter products because they have numerous technical features and functional advantages and significant weight savings. +Other T&M products include the TMX +® +all-in-one +high-speed data acquisition system for applications requiring high channel counts and acquisition rates; the Daxus +® +DXS-100 +distributed data acquisition platform; the SmartCorder +® +DDX-100, +a portable +all-in-one +data acquisition system for facility maintenance and field testing; and the Everest +® +EV-5000 +digital strip chart recording system used mainly in telemetry applications. The Daxus +DXS-100 +can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying or printing the data on hard copy, monitor or electronic storage media and (4) analyzing the data. To service data visualization, we maintain technological core competencies and trade +know-how +concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling and airworthiness design. +Patents and Copyrights +We hold several product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand names. We consider our intellectual property to be critical to the operation of our business. In particular, we believe that the loss of the trademarks QuickLabel, TrojanLabel, ToughWriter or ToughSwitch +5 +Table of Contents +or the loss of the license provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many +sub-assemblies +and parts +in-house, +including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts not manufactured +in-house +are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We purchase certain components, assembled products and supplies used to manufacture our products from a single source or limited supplier sources. Although we believe the majority of these sole or limited source components, assembled products and supplies could be sourced elsewhere with appropriate changes in the design of our products, such design might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past we have made such advance purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our expanding network of manufacturing, sales and support facilities, we now do business in over 150 countries. +We believe we are a market leader in tabletop digital color label printing technology in the specialty printing field, a market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose portable, high-speed data acquisition systems. +Management believes that we have a market leadership position in many of the markets we serve. We retain our leadership position by virtue of our proprietary technology, product reputation, delivery, our channels to market, technical assistance and service to customers. The number of competitors varies by product line. Key competitive factors vary among our product lines, but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our Product Identification products are sold by direct field salespersons as well as independent dealers and representatives, while our Test & Measurement products are sold predominantly through direct sales and manufacturers’ representatives. In the United States, we have factory-trained direct field salespeople located throughout the country specializing in Product Identification products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by our own employees and dedicated third party contractors. Additionally, we utilize over 200 independent dealers and representatives selling and marketing our products in over 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our backlog varies regularly. It consists of a blend of orders for +end-user +customers, as well as original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and +built-to-order +customer requirements. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2021 and 2020 was $22.5 million and $25.2 million, respectively. +Employees +As of January 31, 2021, we employed 327 people full-time employees. Of our full-time employees, 230 were in the United States, 78 in Europe, 10 in Canada, seven in Asia and two in Mexico. +6 +Table of Contents +None of our employees are represented by a labor union or covered by a collective bargaining agreement; except for our employees in France, where collective bargaining agreements are generally required by local regulations. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments in the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other actions to improve overall engagement with our key employees. +Culture +We have ingrained a strong and definable company culture that shapes the way we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values, including: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business to achieve continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand the changing needs and expectations of our customers. +Our core values guide our employees’ behavior and dictate the way our business is conducted. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities, and are also demonstrated through teamwork, leadership, and everyday interactions. +Diversity and Inclusion +We believe that our culture and core values are strengthened through diversity and inclusion. Our diversity initiatives include—but are not limited to—our practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions; transfers; social and recreational programs; layoffs; terminations; and the ongoing development of a work environment built on the premise of gender and diversity equity. These initiatives include periodic evaluation of our workforce demographics as compared to the demographics in the workforce market, and an affirmative effort to attract, recruit, retain and train a diverse workforce that is representative of the populations in the regions in which we do business. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form +10-K, +Quarterly Reports on Form +10-Q, +Current Reports on Form +8-K +and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnishes it to, the Securities and Exchange Commission (SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. +7 +Table of Contents +Item 1A. +Risk Factors +The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +Business and Industry Risks +The ongoing +COVID-19 +pandemic has adversely affected and will likely continue to adversely affect our revenues, results of operations and financial condition. +Our business has been and will likely continue to be materially adversely affected by the global +COVID-19 +pandemic. We operate in several regions of the world, with the largest concentration of team members in North America and Europe, and a small presence in Asia. We, and many other businesses and other organizations with which we do business directly or which otherwise impact us, have taken and are continuing to take steps to avoid or reduce infection, including limiting business travel and staying home from work when recommended by the public health authorities. These measures have disrupted and continue to disrupt our normal business operations both inside and outside of affected areas and have had significant negative impacts on our business, the businesses of our suppliers and customers, and on businesses and financial markets worldwide. Until vaccine availability and inoculation rates reach the point where public health authorities determine that the quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures that national, state and local governments have implemented as a result of the pandemic are no longer necessary, we expect our business to be negatively impacted. +In response to the +COVID-19 +pandemic, we have established new procedures to monitor government recommendations and regulations and made good faith efforts to comply with those regulations and the best practices recommendations issued by a variety of governmental health authorities and manufacturing industry organizations to which we belong. In addition, we have made significant modifications to our normal operations because of the +COVID-19 +pandemic, including requiring most +non-production +related team members to work remotely, at least part-time. At this time, we expect that these measures will continue to remain in place for the near term, and we do not know when or if it will become practical to relax or eliminate these measures altogether. Since the start of the pandemic, we have maintained most of manufacturing operational capacity at our facilities located in West Warwick, Rhode Island, as well as our manufacturing facilities in Canada and Germany. However, there were periods when a number of team members were unable to keep work schedules due to the effects of the pandemic, which resulted in reduced production capacity that led to longer order fulfillment lead times and as a result, reduced revenues. The extent to which the COVID-19 pandemic continues to negatively impact our manufacturing production will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and any associated variants, the efficacy and timing of distribution of vaccines, and the actions to +contain COVID-19 or +treat its impact, among others. We also do not yet know to what extent our operations will be impacted permanently by remote work, increased safety protocols and the other adaptations undertaken during the pandemic. +During the +COVID-19 +pandemic, we have experienced some difficulties in obtaining raw materials and components for our products. We have been able to recover from these difficulties, but we have had to incur some additional costs in expedited and express shipping fees. These difficulties have impacted our efficiency and our ability to satisfy customer requirements, but we do not believe that they have materially impacted our financial results or our relationships with our customers. We are currently monitoring the world-wide delays in transit time, as freight carriers are now experiencing significant delays in overseas shipments. We are addressing these issues through long range planning and supplementing inventories as needed. We are also monitoring the extended lead times on active electronic components and utilizing several strategies, including blanket orders, +8 +Table of Contents +vendor-bonded inventories, and extended commitments to our supply base. Additionally, we have taken actions to maintain regular contact with our important vendors and have increased our forecasting horizon for our products to help us better manage our supply chain. Our strategies to counteract the impact of the pandemic have tended to increase the amount of inventory we maintain, but because of the complexity of our supply chain and update our mitigation strategies as we determine to be appropriate. We will continue to monitor our supply chain a priority going forward. We are not able to predict what the full impact of the current supply chain difficulties, as it depends on how the course of the +COVID-19 +pandemic continues and its impacts on the economy evolve. +The aerospace industry, which we serve through our aerospace product line, has also been significantly disrupted by the +COVID-19 +pandemic, both inside and outside of the United States. The decline in air travel has had and will continue to have a material adverse impact on our financial results, the ultimate scope of which we cannot estimate at this time. Should one or more of our airplane OEM manufacturing customers or a significant number of airline customers fail to continue business as a going concern, declare bankruptcy, or otherwise permanently reduce the demand for our products as a result of the impact of the +COVID-19 +pandemic, it would have a material adverse impact on our business operations and financial results. +While it is not possible at this time to estimate the full scope of the impact that +COVID-19 +will have on our business, customers, suppliers or other business partners, in the long run we expect that the lasting presence of +COVID-19, +will continue to adversely impact our operational capacity and the efficiency of our team members and will continue to negatively affect our results of operations and financial condition for the near term. +Our operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated. +Any decline in our customers’ markets or in their general economic conditions would likely result in a reduction in demand for our products. For example, the 2020 grounding, suspension and subsequent slow restart of production of the Boeing 737 MAX has reduced demand for our airborne printers that are installed on that aircraft, as well as the related repairs and supplies, which has negatively affected our results of operations. In addition, the current worldwide +COVID-19 +pandemic has negatively impacted the airline industry as a whole, which could result in a reduction in orders by the airlines for new planes and reduce demand for retrofitting airplanes already in service and, therefore, a further reduction in demand for our airborne printer products. The effect of the +COVID-19 +pandemic and any future action relating to the 737 MAX on our business is currently unknown, but we expect any resulting reductions in production schedules will likely have an adverse effect on our business, which could be material. Some of our customers may be reluctant to make capital equipment purchases or may defer certain of these purchases to future quarters. Some of our customers may also limit consumable product purchases to quantities necessary to satisfy immediate needs with no provisions to stock supplies for future use. Also, if our customers’ markets decline enough to impact their financial capacity, we may not be able to collect on outstanding amounts due to us. Such declines could harm our results of operations, financial position and cash flows and could limit our ability to continue to remain profitable. +Our future revenue growth depends on our ability to develop and introduce new products and services on a timely basis and achieve market acceptance of these new products and services. +The markets for our products are characterized by evolving technologies which in turn effect our product introduction cycles. Our future success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate our competitors’ development of new products, and maintain high levels of product quality and reliability. We spend a significant amount of time and effort on the development of our airborne and color printer products as well as our acquisition and data recorder products. Failure to meet our customers’ changing business needs or to further develop any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results. +9 +Table of Contents +As we introduce new or enhanced products, we must also successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. Additionally, when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or our plans for future support of existing products may cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +Operational and Business Strategy Risks: +We are dependent upon contract manufacturers for some of our products. If these manufacturers do not meet our requirements, either in volume or quality, then we could be materially harmed. +We subcontract the manufacturing and assembly of certain of our products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Disruptions in the global supply chain as a result of the +COVID-19 +pandemic; +• +Limited control over the manufacturing process; +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; and +• +Reduced control over delivery schedules, manufacturing yields, quality and costs. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture or provide these products in required volumes or fails to meet our quality standards, we will have to identify qualified alternate subcontractors or take over the manufacturing ourselves. Additional qualified subcontractors may not be available or may not be available on a timely or cost competitive basis. Any interruption in the supply, increase in the cost of the products manufactured by a third party subcontractor or failure of a subcontractor to meet quality standards could have a material adverse effect on our business, operating results and financial condition. +For certain components, assembled products and supplies, we are dependent upon single or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and supplies used in the manufacture of our products from a single source or limited supplier sources. If the supply of a key component, assembled products or certain supplies were to be delayed or curtailed or, in the event a key manufacturing or sole supplier delays shipment of such components or assembled products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. For example, due to the continued global +COVID-19 +pandemic, there has been and likely will continue to be disruption to our supply chain due to the delays of component shipments from our vendors in China and other jurisdictions in which normal business operations are disrupted. Our business, results of operations and financial position could also be adversely affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source. Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply these +10 +Table of Contents +components, assembled products or supplies in required volumes, we will have to identify and qualify acceptable replacements or redesign our products with different components. Alternative sources may not be available, or product redesign may not be feasible on a timely basis. Any interruption in the supply of or increase in the cost of the components, assembled products and supplies provided by single or limited source suppliers could have a material adverse effect on our business, operating results and financial condition. +We face significant competition, and our failure to compete successfully could adversely affect our results of operations and financial condition. +We operate in an environment of significant competition, especially in the markets in which we sell our PI printers and T&M data acquisition products. This competition is driven by rapid technological advances, evolving industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete based on technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products or services with features that could adversely affect the competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, our customers could seek alternative solutions from our competitors and we could lose market share, which could materially and adversely affect our business, results of operations and financial position. +Our profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure +. +Our success depends on our ability to obtain adequate pricing for our products and services which provides a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially adversely affected. +We are continually reviewing our operations with a view towards reducing our cost structure, including but not limited to reducing our labor +cost-to-revenue +ratio, improving process and system efficiencies and outsourcing certain internal functions. From time to time, we also engage in restructuring actions to reduce our cost structure. If we are unable to maintain process and systems changes resulting from cost reduction and prior restructuring actions, our results of operations and financial position could be materially adversely affected. +Our inability to adequately enforce and protect our intellectual property, defend against assertions of infringement or lose certain licenses could prevent or restrict our ability to compete. +We rely on patents, trademarks, licenses, and proprietary knowledge and technology, both internally developed and acquired, in order to maintain a competitive advantage. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design technologies around the intellectual property protections or licenses that we currently own. The loss of the trademarks QuickLabel, TrojanLabel, ToughWriter and ToughSwitch or the loss of the licenses provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. Operating outside the United States also exposes us to additional intellectual property risk. The laws and enforcement practices of certain jurisdictions in which we operate do not protect our intellectual property rights to the same extent as in the United States. Any diminution in our ability to defend against the unauthorized use of these rights and assets could have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement, which could result in significant costs and divert our management’s focus away from operations. +11 +Table of Contents +We have significant inventories on hand. +We maintain a significant amount of inventory. Although we have provided an allowance for slow-moving and obsolete inventory, any significant unanticipated changes in future product demand or market conditions, including obsolescence or the uncertainty in the global market, as well as continued reduced demand for our products if the +COVID-19 +pandemic is further prolonged, could have an impact on the value of inventory and adversely affect our business, operating results and financial condition. +We could incur liabilities as a result of installed product failures due to design or manufacturing defects. +We have incurred and could incur additional liabilities as a result of installed product failures due to design or manufacturing defects. Our products may have defects despite our internal testing or testing by customers. These defects could result in among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance or substantial damage to our reputation. We could be subject to material claims by customers and may incur substantial expenses to correct any product defects. +In addition, through our acquisitions, we have assumed, and may in the future assume, liabilities related to products previously developed by an acquired company that have not been subjected to the same level of product development, testing and quality control processes we employ, and may have unknown or undetected defects. Some types of defects may not be detected until the product is installed in a user environment. This may cause us to incur significant warranty, repair or +re-engineering +costs. As such, it could also divert the attention of engineering personnel from product development efforts which may result in increased costs and lower profitability. +We could experience a significant disruption in or security breach of our information technology system which could harm our business and adversely affect our results of operations. +We employ information technology systems to support our business. Any security breaches or other disruptions to our information technology infrastructure could interfere with operations, compromise our information and that of our customers and suppliers, and expose us to liability which could adversely impact our business and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic proprietary or confidential information regarding our customers, employees, suppliers and others including personally identifiable information, credit card data, and other confidential information. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches. As a result, our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events or other unforeseen events and in any such circumstance our system redundancy and other disaster recovery planning may be ineffective or inadequate. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of them to date has had a material impact. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our brand and reputation, which could adversely affect our business, operating results and financial condition. +We could experience disruptions related to the implementation of our new global enterprise resource planning system. +We are currently engaged in a multi-year process of conforming all our operations to one global enterprise resource planning (“ERP”) system. The ERP system is designed to improve the efficiency of our supply chain and financial transaction processes, improve the efficiency of how we accurately maintain our books and records and enhance the speed and quality of information provided to our management team for use in the operation and management of our business. The implementation of the ERP system will continue to require significant +12 +Table of Contents +investment of human and financial resources. As a result of the +COVID-19 +pandemic, we have and will continue to experience delays and increased costs as a result of factors such as limited +on-site +availability of Company personnel and outside consultants due to travel restrictions and remote work conditions. The significant disruption in the implementation and transition to the new ERP system as a result of the +COVID-19 +pandemic could delay or otherwise negatively impact our ability to obtain the benefits that the new ERP system is intended to provide. Additionally, while we have taken steps to ensure that we prevent adverse developments, any significant disruption or deficiency in the design, implementation and transition to the new ERP system could negatively impact our ability to: +• +record and process orders, +• +manufacture and ship our products in a timely manner, and +• +process data and electronic communications among our business locations, +any of which could have a material adverse effect on our business, consolidated financial condition or results of operations. +We also face the challenge of supporting our older systems while we implement the new ERP system. Although we have invested significant resources in planning and project management, significant unforeseen implementation issues may arise that could impact our normal business operations and have a material adverse impact on our operating results and cash flow. +We depend on our key employees and other highly qualified personnel and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees, as well as challenges with respect to the management of human capital resources could compromise our future success and our business could be harmed. +Our future success depends upon our ability to attract and retain, through competitive compensation and benefits programs, professional and executive employees, including sales, operating, marketing, and financial management personnel as well as our ability to manage human capital resources. There is substantial competition for skilled personnel, and the failure to attract, develop, retain and motivate qualified personnel could negatively impact our business, financial condition, results of operations and prospects. In order to hire new personnel or retain or replace our key personnel, we must maintain competitive compensation and benefits and we may also be required to increase compensation, which would decrease net income. Additionally, several key employees have special knowledge of customers, supplier relationships, business processes, manufacturing operations, and financial management issues. The loss of any of these employees as the result of competitive compensation pressures or ineffective management of human capital resources could harm our ability to perform efficiently and effectively until their knowledge and skills are replaced, which might be difficult to do quickly, and as a result could have a material adverse effect on our business, financial condition, and results of operations. +We may record future impairment charges, which could materially adversely impact our results of operations. +We test our goodwill balances annually, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit level and, in evaluating the potential for impairment of goodwill, we make assumptions regarding estimated revenue projections, growth rates, cash flows and discount rates. We monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Declines in the future performance and cash flows of a reporting unit or asset group, changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses, or changes in other key assumptions, may result in the recognition of significant asset impairment charges, which could have a material adverse impact on our results of operations. +We also review our long-lived assets including property, plant and equipment, and other intangibles assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. +13 +Table of Contents +Factors we consider include significant under-performance relative to expected historical or projected future operating results, significant negative industry or economic trends and our market capitalization relative to net book value. We may be required in the future to record a significant charge to earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such charges could have a significant adverse impact on our results of operations and our financial condition. +Financial and Economic Risks: +Economic, political and other risks associated with international sales and operations could adversely affect our results of operations and financial position. +Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect sales to customers outside the U.S., accounted for approximately 40% of our total revenue for fiscal year 2021, and we anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, contractors and facilities located outside the U.S. Accordingly, our business, operating results and financial condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Differing protection of intellectual property; +• +Unexpected changes in regulatory requirements; +• +Uncertainty surrounding the implementation and effects of the United Kingdom’s withdrawal from the EU, commonly known as “Brexit”; and +• +Geopolitical turmoil, including terrorism, war and public health disruptions, such as that caused by the current +COVID-19 +pandemic. +Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods +. +As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is based on the tax rates in effect where we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each jurisdiction. Our effective tax rate may vary as a result of numerous factors, including changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, whether we secure or sustain acceptable arrangements with tax authorities, adjustments to the value of our uncertain tax positions, changes in accounting for income taxes and changes in tax laws, including the 2017 U.S. Tax Cuts and Jobs Act (the “Tax Act”). Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations. +14 +Table of Contents +The Tax Act significantly revised the U.S. federal corporate income tax law and included a broad range of tax reform measures affecting business including among other things, the reduction of the corporate income tax rate from 35% to 21%, the loss of certain business deductions, the acceleration of first-year expensing of certain capital expenditures and a +one-time +tax imposed on unremitted cumulative +non-U.S. +earnings of foreign subsidiaries. The Tax Act is complex and +far-reaching, +and we continue to evaluate the actual impact of its enactment on the Company. Any material adverse impact resulting from the Tax Act that has not yet been identified could have an adverse effect on our business, results of operations, financial condition and cash flow. +Further changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting (BEPS) project undertaken by the Organisation for Economic +Co-operation +and Development (OECD), which represents a coalition of member countries. On October 5, 2015, the OECD issued a series of reports recommending changes to numerous long-standing tax principles. Many of these recommendations or similar concepts are being adopted by various countries in which we do business and may increase our taxes in these countries. Changes to these and other areas in relation to international tax reform, including future actions taken by foreign governments in response to the Tax Act, could increase uncertainty and may adversely affect our tax rate and cash flow in future years. +Changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the Tax Act), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, could have a material impact on our estimates of our effective tax rate and our deferred tax assets and liabilities. The impact of these factors may be substantially different +from period-to-period. +In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions +(including changes in the taxation of international income as further described below) could adversely affect our financial statements. +We may have exposure to additional tax liabilities, which could negatively impact our income tax expense, net income and cash flow. +We are subject to income and other taxes in both the U.S. and the foreign jurisdictions in which we operate. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires significant judgment and estimation. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit by both domestic and foreign tax authorities and to the prospective and retrospective effects of changing tax regulations and legislation. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the amounts recorded in our consolidated financial statements and may materially affect our income tax benefit or expense, net loss or income, and cash flows in the period in which such determination is made. +Deferred tax assets are recognized for the expected future tax consequences of temporary differences between the carrying amount for financial reporting purposes and the tax bases of assets and liabilities, and for net operating losses and tax credit carry forwards. In some cases, we may record a valuation allowance to reduce our deferred tax assets to estimated realizable value. We review our deferred tax assets and valuation allowance requirements quarterly. If we are unable to demonstrate that it is more likely than not that we will not be able to generate sufficient future taxable income to realize the net carrying value of deferred tax assets, we will record a valuation allowance to reduce the deferred tax assets to estimated realizable value, which could result in a material income tax charge. As part of our review, we consider positive and negative evidence, including cumulative results of recent years. +15 +Table of Contents +If we are unable to successfully comply with our credit agreement with Bank of America or secure alternative financing, our business and financial condition could be materially adversely affected. +Our credit agreement with Bank of America requires us, among other things, to satisfy certain financial ratios on an ongoing basis, consisting of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. We are also required to comply with other covenants and conditions, set forth in the credit agreement, including, among others, limitations on our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the credit agreement. If we were to violate the terms of the credit agreement and we were unable to renegotiate its terms at that time or secure alternative financing, it could have a material adverse impact on us. +The agreements governing our indebtedness subject us to various restrictions that limit our ability to pursue business opportunities. +The credit agreement governing our credit facility with Bank of America, N.A., as amended, contains, and any future debt agreements may include, several restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to: +• +Incur future indebtedness; +• +Place liens on assets; +• +Pay dividends or distributions on our and our subsidiaries’ capital stock; +• +Repurchase or acquire our capital stock; +• +Conduct mergers or acquisitions; +• +Sell assets; and/or +• +Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness. +In addition, the agreement governing our credit facility permits us to elect to pay interest on our term loan and revolving line of credit based on LIBOR or an alternative rate as specified in the agreement. In July 2017, the Financial Conduct Authority, the authority that regulates LIBOR, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate (“SOFR”) as the preferred alternative to U.S. Dollar LIBOR +(“USD-LIBOR”). +Additionally, it is uncertain if applicable tenors of LIBOR will cease to exist after calendar year 2021, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates will gain market acceptance as a replacement for LIBOR. At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement. Our credit facility provides for the transition to a SOFR-based alternative benchmark at such time that LIBOR rates are no longer available. We will continue to monitor the situation and address the potential reference rate changes in future debt obligations that we may incur. Accordingly, the potential effect of the +phase-out +or replacement of LIBOR on our cost of capital cannot yet be determined. Further, the use of an alternative base rate or a benchmark replacement rate as a basis for calculating interest with respect to any outstanding variable rate indebtedness could lead to an increase in the interest we pay and a corresponding increase in our costs of capital. +We may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may negatively impact our overall business. +We have made strategic investments in other companies, products and technologies. We will continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, +16 +Table of Contents +products and technology. However, there can be no assurance that we will be able to identify suitable acquisition opportunities. In any acquisition that we complete we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative impact on operating results or other aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental impact on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse impact on our reputation; and +• +Respective operations, management and personnel will be compatible. +In certain instances, as permitted by applicable law and NASDAQ rules, acquisitions may be consummated without seeking and obtaining shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in an acquisition, there can be no assurance that we will properly ascertain or assess such risks. +We may also divest certain businesses from time to time. Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If we are not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize expected benefits of our acquisitions, divestitures or strategic partnerships, our business, results of operations and financial condition could be adversely affected. +Adverse conditions in the global banking industry and credit markets could impair our liquidity or interrupt our access to capital markets, borrowings or financial transactions to hedge certain risks. +At the end of fiscal 2021, we had approximately $11.4 million of cash and cash equivalents. Our cash and cash equivalents are held in a mix of money market funds, bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets such as those caused by the current +COVID-19 +pandemic may, in some cases, result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our financial position. +To date, we have been able to access financing that has allowed us to make investments in growth opportunities and fund working capital requirements as needed. In addition, we occasionally enter into financial transactions to hedge certain foreign exchange and interest rate risks. Our continued access to capital markets, the stability of our lenders and their willingness to support our needs, and the stability of the counter-parties to our +17 +Table of Contents +financial transactions that hedge risks are essential for us to meet our current and long-term obligations, fund operations, and fund our future strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could materially and adversely affect our business and financial condition. +Inadequate self-insurance accruals or insurance coverage for employee health care benefits could have an adverse effect on our business, financial results or financial condition. +In the U.S., we maintain an employee health insurance coverage plan on a self-insured basis backed by stop-loss coverage which sets a limit on our liability for both individual and aggregate claim costs. We record expenses based on actual claims incurred and estimates of the costs of expected claims, administrative costs, and stop-loss insurance premiums. +We record a liability for our estimated cost of U.S. claims incurred and unpaid as of each balance sheet date. Our estimated liability is recorded on an undiscounted basis and is based on historical trends. Our history of claims activity is closely monitored, and liabilities are adjusted as warranted based on changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of loss. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, which could cause us to record additional expenses, which could adversely impact our business, financial condition, results of operations and cash flow. We believe that the liabilities we have recorded to date will be sufficient to provide for losses we may incur due to increased +COVID-19 +related employee health care insurance costs. However, the ultimate amount of these costs cannot be estimated at this time, and a prolonged period of spread of the disease could further increase our costs and liabilities, the impact of which may be material. +Legal and Regulatory Risks: +Certain of our products require certifications by customers, regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business. +In certain industries and for certain products, such as those used in aircraft, we must obtain certifications for our products by customers, regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +We are subject to laws and regulations; failure to address or comply with these laws and regulations could harm our business and adversely affect our results of operations. +Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our products. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our business. +Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. We have used and continue to use various substances in our products and manufacturing operations, and have generated and continue to generate wastes, which have been or may be deemed to be hazardous or dangerous. As such, our business is subject to and may be materially +18 +Table of Contents +and adversely affected by compliance obligations and other liabilities under environmental, health and safety laws and regulations. These laws and regulations affect ongoing operations and require capital costs and operating expenditures in order to achieve and maintain compliance. +As the result of the +COVID-19 +pandemic crisis, we have been required by U.S. federal and state governmental authorities and governmental authorities in +non-U.S. +jurisdictions, as well as our own desire to adhere to best health and safety practices, to implement a number of policies and procedures that have increased our costs and added complexity and inefficiency to our manufacturing operations and all administrative and office-based functions. +Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, and any determination that we or any of our subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies. +Unauthorized access to personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights and compliance with laws designed to prevent unauthorized access of personal data could be costly. +We collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Security breaches or other unauthorized access to, or the use or transmission of, personal user information could result in a variety of claims against us, including privacy-related claims. There are numerous federal, state, local, and international laws and regulations regarding privacy and the storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are changing, inconsistent and conflicting and subject to differing interpretations. +We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. For example, in 2016 the European Commission adopted the General Data Protection Regulation (GDPR), a comprehensive privacy and data protection reform that became effective in May 2018. The GDPR, which is applicable to all companies processing data of European Union residents, imposes significant fines and sanctions for violations. Similarly, the California Consumer Privacy Act of 2018, which was enacted in June 2018 and came into effect on January 1, 2020, provides a new private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. +Additionally, other jurisdictions have enacted or are enacting data localization laws that require data generated in or relating to the residents of those jurisdictions to be physically stored within those jurisdictions. In many cases, these laws and regulations apply not only to transfers between unrelated third parties but also to transfers between us and our subsidiaries. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time. +While we continue to assess these requirements and the ways they may impact the conduct of our business, we believe that we materially comply with applicable laws and industry codes of conduct relating to privacy and +19 +Table of Contents +data protection. There is no assurance that we will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event we are found not to be in compliance with such laws or codes of conduct. +Any failure or perceived failure by us (or any third parties with whom we have contracted to store such information) to comply with applicable privacy and security laws, policies or related contractual obligations or any compromise of security that results in unauthorized access to personal information may result in governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. In the case of such an event, our reputation may be harmed, we could lose current and potential users and the competitive positions of our various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations. +Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition. +Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, leases, and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition. +Item 1B. Unresolved Staff Comments +None. +Item 2. +Properties +The following table sets forth information regarding our principal owned property. This property is subject to a security agreement and a mortgage in favor of the lender under our credit facility. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, United States +135,500 +Corporate headquarters, research and development, manufacturing, sales and service +We also lease facilities in various other locations. The following information pertains to each location: +Location +Approximate +Square +Footage +Principal Use +Dietzenbach, Germany +18,630 +Manufacturing, sales and service +Copenhagen, Denmark +4,800 +R&D, sales and service +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service +Elancourt, France +4,150 +Sales and service +Schaumburg, Illinois, United States +3,428 +Sales) +Irvine, California, United States +3,100 +Sales +Shah Alam, Selangor, Malaysia +2,067 +Sales +Maidenhead, England +1,021 +Sales and service +Shanghai, China +461 +Sales +Mexico City, Mexico +97 +Sales +20 +Table of Contents +We believe our facilities are well maintained, in good operating condition and generally adequate to meet our needs for the foreseeable future. +Item 3. +Legal Proceedings +We are not a party to any pending, material legal proceedings. However, because of the nature of our business, we may be subject in the future to lawsuits or other claims, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters +. +Item 4. +Mine Safety Disclosures +Not applicable. +21 +Table of Contents +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock trades on the NASDAQ Global Market under the symbol “ALOT.” +We had approximately 270 shareholders of record as of April 9, 2021, which does not reflect shareholders with beneficial ownership in shares held in nominee name. +Stock Repurchases +During the fourth quarter of fiscal 2021, we made the following repurchases of our common stock: +Total Number +of Shares +Repurchased +Average +Price paid +Per Share ($) +Total Number of +Shares Purchased as +Part of Publicly +Announced Plans +or Programs +Maximum Number +of Shares That +May Be Purchased +Under the Plans +or Programs +November 1 – November 30 +— +— +— +— +December 1 – December 31 +— +— +— +— +January 1 – January 31 +1,870 +(a) +10.53 +(a) +— +— +(a) An executive of the company delivered 1,870 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $10.53 per share and are included with treasury stock in the consolidated balance sheet. +22 +Table of Contents +Item 6. +Selected Financial Data +Historical Financial Summary +Income Statement Data +(In thousands, except per share data) +For the Fiscal Years Ended January 31, +2021 +2020 +2019 +2018 +2017 +Revenue +$ +116,033 +$ +133,446 +$ +136,657 +$ +113,401 +$ +98,448 +Gross Profit +41,360 +48,758 +53,999 +44,002 +39,489 +Operating Income +2,433 +2,433 +8,720 +5,412 +6,281 +Income before Taxes +2,179 +1,370 +7,308 +5,157 +6,605 +Net Income +$ +1,284 +$ +1,759 +$ +5,730 +$ +3,286 +$ +4,228 +Net Income per Common Share—Basic +$ +0.18 +$ +0.25 +$ +0.83 +$ +0.48 +$ +0.57 +Net income per Common Share—Diluted +$ +0.18 +$ +0.24 +$ +0.81 +$ +0.47 +$ +0.56 +Dividends Declared per Common Share +$ +0.07 +$ +0.28 +$ +0.28 +$ +0.28 +$ +0.28 +Balance Sheet Data +(In thousands) +As of January 31, +2021 +2020 +2019 +2018 +2017 +Cash and Marketable Securities +$ +11,439 +$ +4,249 +$ +7,534 +$ +11,688 +$ +24,821 +Current Assets +60,721 +60,151 +62,608 +62,948 +61,423 +Total Assets +115,473 +116,664 +118,983 +122,313 +83,665 +Revolving Credit Facility +— +6,500 +1,500 +— +— +Current Liabilities +20,968 +26,767 +24,665 +25,912 +11,985 +Debt, including short term portion +12,576 +13,034 +18,242 +23,372 +— +Shareholders’ Equity +$ +74,683 +$ +71,375 +$ +69,775 +$ +63,647 +$ +70,537 +Item 7. +Management +’ +s Discussion and Analysis of Financial Condition and Results of Operations +Overview +We are a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. We organize our structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following two segments: +• +Product Identification (“PI”) – offers color and monochromatic digital label printers, over-printers and custom OEM printers. PI also provides software to design, manage and print labeling and packaging images locally and across networked printing systems, as well as all related printing supplies such as pressure sensitive labels, tags, inks, toners and thermal transfer ribbons used by digital printers. PI also provides +on-site +and remote service, spare parts and various service contracts. +• +Test and Measurement (“T&M”) – offers a suite of products and services that acquire data from local and networked data streams and sensors as well as wired and wireless networks. The T&M segment includes a line of aerospace printers used to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, clearances, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. Aerospace products also include aircraft networking systems for high-speed onboard data transfer. T&M also provides repairs, service and spare parts. +23 +Table of Contents +We market and sell our products and services globally through a diverse distribution structure of direct sales personnel, manufacturers’ representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. In fiscal 2021, 2020 and 2019, revenue from customers in various geographic areas outside the United States, primarily in Western Europe, Canada and Asia, amounted to $45.1 million, $49.8 million and $53.0 million, respectively. +We maintain an active program of product research and development. During fiscal 2021, 2020 and 2019, we spent $6.2 million, $8.1 million and $7.8 million, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2021 and beyond. +We also continue to invest in sales and marketing initiatives by expanding the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding the challenging economic environment. +In fiscal 2018, we entered into an Asset Purchase and License Agreement (“Honeywell Agreement”) with Honeywell International, Inc. (“Honeywell”) pursuant to which, we acquired the exclusive perpetual world-wide license to manufacture Honeywell’s narrow format flight deck printers for the Boeing 737 and Airbus 320 aircraft. +COVID-19 +Update—Overview +Our business has been materially adversely affected by the global +COVID-19 +pandemic, and will likely continue to be negatively impacted until the vaccine availability and inoculation rates reach the point where public health authorities conclude that the quarantines, travel restrictions, business closures, cancellations of public gatherings and other similar measures are no longer necessary. We operate in several regions of the world, with the largest concentration of team members in North America and Europe, and a small presence in Asia. Due to the +COVID-19 +pandemic, we and many other businesses and organizations with which we do business directly or which otherwise impact us have taken and are continuing to take steps to avoid or reduce infection, including limiting business travel and working from home as advised by the public health authorities. These measures have been and continue to be disrupting normal business operations both inside and outside of affected areas and have had significant negative impacts on our business, the businesses of our suppliers and customers, and on businesses and financial markets worldwide. +Since the +COVID-19 +pandemic began to impact us in early March 2020, we have closely monitored the government and health authority recommendations applicable to us and have made modifications to our operations based on that guidance and on our growing experience and knowledge of the situation. We responded by reducing our staffing levels and reducing other costs. +In response to the pandemic, we have established new procedures to monitor government recommendations and regulations and made good faith efforts to comply with both those regulations and the best practices recommendations issued by a variety of governmental health authorities and manufacturing industry organizations to which we belong. In addition, we have made significant modifications to our normal operations, including requiring most +non-production +related team members to work remotely, for at least part-time. At this time, we expect that these measures will continue to remain in place for the near term, and we do not know when or if it will become practical to relax or eliminate them altogether. Since the start of the pandemic, we have maintained most of manufacturing operational capacity at our facilities located in West Warwick, Rhode Island, as well as our manufacturing facilities in Canada and Germany. However, there have been periods when a number of team members were unable to keep work schedules due to the effect of the COVID +-19 +pandemic, resulting in reduced production capacity and longer order fulfillment lead times and as a result, reduced revenues. The extent to which COVID-19 impacts our manufacturing production in the future will depend on future +24 +Table of Contents +COVID-19 +developments, which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and any associated variants, the efficacy and distribution of vaccines, and the actions to +contain COVID-19 or +treat its impact, among others. We also do not yet know to what extent our operations will be impacted permanently by remote work, increased safety protocols and the other temporary adaptations undertaken during the pandemic. +During the +COVID-19 +pandemic, we have experienced some difficulties in obtaining raw materials and components for our products. We have been able to recover from these difficulties, but we have had to incur some additional costs in expedited and express shipping fees. These difficulties have impacted our efficiency and our ability to satisfy customer requirements, but we have been able to keep these impacts to a minimum. We are currently monitoring the world-wide delays in transit time, as freight carriers are now experiencing significant delays in overseas shipments. We are addressing these issues through long range planning and supplementing inventories as needed. We are also monitoring the extended lead times on active electronic components and utilizing several strategies, including blanket orders, vendor bonded inventories, and extended commitments to our supply base. Additionally, we have taken actions to maintain regular contact with our important vendors and have increased our forecasting horizon for our products to help us better manage our supply chain. Our strategies to counteract the impact of the pandemic have tended to increase the amount of inventory we have had to maintain, but because of the complexity of our supply chain it is impossible to isolate the exact impact. We will continue to monitor our supply chain. +While it is not possible at this time to estimate the full scope of the impact that +COVID-19 +will have on our business, customers, suppliers or other business partners in the long run, we expect that the lasting presence of +COVID-19 +will continue to adversely impact our operational capacity and the efficiency of our team members and will continue to negatively affect our results of operations and financial condition for the near term. +Product Identification Update +The global +COVID-19 +pandemic has also negatively impacted sales of our Product Identification hardware products primarily as a result of the impact of travel restrictions on our sales efforts, as most customers historically have preferred +in-person +demonstrations of these printers at their production sites prior to placing orders with us and those visits have been severely limited. Additionally, the widespread cancellation of trade shows, which traditionally provided an effective forum for customers to consider our products, has also had an adverse impact on traditional methods of sales lead generation. However, we believe we have been able to ameliorate these negative impacts by placing a greater reliance on various forms of digital advertising and internet-based marketing techniques, including remote video demonstrations and support, which has proven effective in obtaining sales. Despite favorable market reception to our recently refreshed and expanded product lines, the degree to which we will be able to maintain or grow the level of hardware revenues through the changes we have made to our +go-to-market +strategies remains unclear. When the +COVID-19 +pandemic abates, and it is possible again for our direct sales force and distributors to travel to visit customers and attend and present products at trade shows (if they are even offered) it is likely that some reversion to those historical sales methods will occur, but some of the +COVID-19 +induced adaptations are also likely to become permanent. We do not know how that mix of sales strategies will evolve and how they will impact the results of operations for this segment. +Despite the pandemic, underlying overall demand remained strong through this period and in general, we believe that the diversified nature of our end markets and the relative concentration of business in consumer +non-durable +market related applications impart a greater degree of near- and longer-term stability to our Product Identification segment. +Test & Measurement Update +Our sales of flight deck printers for Boeing 737 aircraft have been severely impacted by the chain of events that occurred after two 737 MAX aircraft crashed. In March 2019, all major civil aviation authorities worldwide grounded the Boeing 737 MAX aircraft for safety reasons. In April 2019, Boeing reduced the number of 737 +25 +Table of Contents +MAX aircraft produced per month from 52 to 42, and in January 2020, Boeing ceased production of the 737 MAX completely. On May 27, 2020, in anticipation of an eventual certification, Boeing announced that it would +re-start +production at low initial rates and gradually increase production in the future. +On August 3, 2020, the United States Federal Aviation Administration (the “FAA”) issued a notice of proposed rulemaking for a Boeing 737 MAX airworthiness directive, and on November 18, 2020 the FAA certified the model for return to service in the United States. On January 27, 2021, the European Union Aviation Safety Agency (EASA) approved the return to service of the Boeing 737 MAX in Europe. The exact timing of +re-certification +by other worldwide civil aviation authorities is unknown but we expect that most will permit a return to service later in 2021. Before any individual 737 MAX aircraft can return to commercial service, all civilian aviation authority agency certification requirements relevant to each carrier must be met. As these requirements vary, and can be quite extensive, the exact timing of the recertification and return to service of the 737 MAX fleet in each geographical area is unclear at this time and will depend on the ability of Boeing and each airline to complete the required steps. +Aircraft manufacturing rather than aircraft deliveries drives demand for our airborne printer products. We have experienced very low levels of 737 MAX new printer orders and shipments since the production halt, as Boeing is now producing a small number of new aircraft per month. The majority of our future 737 MAX printer sales volume will be tied to the pace of Boeing’s manufacturing dates and delivery schedules, and the recovery is expected to be prolonged. We believe that Boeing has already installed our printers in most of the airplanes that it has completed and that require our printers to be installed prior to delivery. Further, due to the +COVID-19 +pandemic, global air travel demand precipitously declined, and the number of flights scheduled by airlines declined sharply. As a result, order demand from airlines for new deliveries of most aircraft models has declined. The demand for air travel and the demand for new airplanes from the airlines is expected to remain lower for an unknown period due to the unpredictable course of the pandemic and the perceived infection risk of air travel. Aircraft manufacturers have reduced their projected production rates across most or all of their product lines. As the +COVID-19 +pandemic impact on the air travel industry continues, the financial health of the airlines and airframe manufacturers may become further stressed, and the ultimate impact on the structure of the industry and the individual companies that comprise it is unknown. Because we are the primary source for aircraft cabin printers to the airframe manufacturers for a majority of aircraft models produced in the world, the longer-term demand for our products is defined less by the impact of +COVID-19 +on particular airlines within the industry than the health of the industry as a whole. Although we do not know what the timing and rate of recovery will be, we do expect that the industry, and hence the demand for our products, will continue to recover slowly after effective vaccines and treatments for +COVID-19 +become both widely available and accepted, and as demand for air travel recovers. +Demand for aerospace spare products, paper, parts and repairs has also been significantly impacted by the decline in air travel, as requirements for these products and services are based primarily upon aircraft usage. Although we have experienced modest increases in demand for spare products, paper, parts and repairs as flight hours have increased since the second quarter of fiscal 2021, it is unknown whether this will continue or increase, or at what pace. +The decline in demand for our aerospace products has had a material adverse impact on our revenues and results of operations, which we expect will continue until demand recovers. +While we have reduced and plan to continue to reduce our costs as much as we are prudently able to, our strategy and operational plans are to maintain sufficient capabilities and staffing to fully support our customers and meet the stringent quality requirements the market requires, and to be able to rapidly increase production as demand returns, the decline in revenue has adversely impacted our profitability. +26 +Table of Contents +Results of Operations +Fiscal 2021 compared to Fiscal 2020 +The following table presents the revenue of each of our segments, as well as the percentage of total revenue and change from the prior year. +($ in thousands) +2021 +2020 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +Product Identification +$ +90,268 +77.8 +% +2.4 +% +$ +88,116 +66.0 +% +T&M +25,765 +22.2 +% +(43.2 +)% +45,330 +34.0 +% +Total +$ +116,033 +100.0 +% +(13.0 +)% +$ +133,446 +100.0 +% +Net revenue in fiscal 2021 was $116.0 million, a 13.0% decrease compared to net revenue of $133.4 million for fiscal 2020. Current year revenue through domestic channels was $70.9 million, a decline of 15.3% from prior year domestic revenue of $83.7 million. International revenue of $45.1 million for fiscal 2021 decreased 9.4% compared to prior year international revenue of $49.8 million. Fiscal 2021 international revenue reflects a favorable foreign exchange rate impact of $0.8 million, compared to an unfavorable impact of $1.4 million in fiscal 2020. International revenue declined primarily due to lower international sales of aerospace printers in Europe. +Hardware revenue in fiscal 2021 was $34.1 million, a $14.8 million, or 30.3%, decrease compared to fiscal 2020 hardware revenue of $49.0 million. The current year decrease in hardware revenue is primarily due to the decline in revenue in the T&M segment resulting from lower aerospace printer product lines sales as a result of the effects of the Boeing 737 MAX grounding and the impact of the sharp decline in air travel due to +COVID-19. +T&M hardware revenue for the current year was also impacted by a decline in sales of data recorders. Also contributing to the overall decline in hardware revenue for the current year was a more modest the decline in sales in the PI segment of certain QuickLabel model printers which was entirely offset by sales related to printers in the TrojanLabel product group. +Revenue from supplies in fiscal 2021 was $71.8 million, which was consistent with the fiscal 2020 supplies revenue. The PI segment recognized an increase in current year supply revenue primarily due to increased demand for Trojan Label product supplies due to increased market penetration of these printers, offset somewhat by lower sales of QuickLabel supplies compared to a very strong prior year. This increase was offset to a large extent by a decline in sales supplies for the aerospace product group due to the declines in commercial aircraft flight hours within the T&M segment. +Service and other revenue in fiscal 2021 was $10.1 million, a 19.8% decrease compared to fiscal 2020 service and other revenue of $12.6 million. The current year decrease is due primarily to declines in repair and part revenue related to the aerospace printer product line in the T&M segment as the result of declines in commercial aircraft flight hours. +Gross profit was $41.4 million for fiscal 2021, reflecting a 15.2% decline compared to fiscal 2020 gross profit of $48.8 million. Our gross profit margin of 35.6% in fiscal 2021 reflects a decrease compared to fiscal 2020 gross profit margin of 36.5%. The lower gross profit for the current year compared to the prior year is primarily attributable to the adverse effects of the decline in revenue in the aerospace printer product line and related product mix, which were slightly offset by the favorable impact of reductions on our manufacturing and period costs. +Operating expenses for the current year were $38.9 million, representing a 16.0% decrease from the prior year’s operating expenses of $46.3 million. Specifically, selling and marketing expenses of $23.3 million in fiscal 2021 decreased 13.3% from the prior year amount of $26.9 million. The decrease in selling and marketing expenses for the current year is primarily due to decreased travel and entertainment, advertising trade shows and commission expenses. Selling and marketing expenses represent 20.1% of net revenue for both fiscal 2021 and +27 +Table of Contents +2020. Current year general and administrative (“G&A”) expenses of $9.4 million decreased by 17.1% from the prior year amount of $11.4 million, primarily as a result of decreased IT costs, a decline in employee fees and lower travel and entertainment expenses due to the impact of +COVID-19. +G&A expenses represented 8.1% of net revenue for fiscal 2021, compared to 8.5% in fiscal 2020. The decline in G&A expenses in the current year is partially offset by an increase in expenses for outside services fees. Research & development (“R&D”) costs in fiscal 2021 of $6.2 million decreased 23.2% from $8.1 million in fiscal 2020, primarily due to a decrease in wages, benefits and outside services. The R&D spending level for fiscal 2021 represents 5.3% of net revenue, a decrease compared to the prior year level of 6.1%. +Other expense in fiscal 2021 was $0.3 million compared to $1.1 million in fiscal 2020. Current year other expense includes $1.0 million of interest expense on debt and revolving line of credit, offset by a net foreign exchange gain of $0.6 million and other income of $0.1 million. Other expense in fiscal 2020 includes interest expense on debt of $0.7 million and a foreign exchange loss of $0.5 million, which were partially offset by investment and other income of $0.1 million. +Net income for fiscal 2021 was $1.3 million, or $0.18 per diluted share, a decrease compared to $1.8 million, or $0.24 per diluted share in fiscal 2020. During fiscal 2021 we recognized a $0.9 million income tax expense, or a 41.1% effective tax rate compared to an income tax benefit of $0.4 million, or a 28.4% negative effective tax rate for fiscal 2020. The increase in the effective tax rate in 2021 from 2020 is primarily related to the change in mix of income between relevant jurisdictions in which we are subject to income taxes. Specific items increasing the fiscal 2021 effective tax rate include foreign rate differential, Denmark statutory audit adjustments, stock-based compensation, and Canada withholding taxes. This increase was offset by the foreign derived intangible income deduction, the release of a valuation allowance in China, and R&D tax credits expected to be utilized. +Fiscal 2020 compared to Fiscal 2019 +For a comparison of our results of operations for the fiscal years ended January 31, 2020 and January 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form +10-K +for the fiscal year ended January 31, 2020, filed with the SEC on April 10, 2020. +Segment Analysis +We report two segments consistent with our product revenue groups: PI and T&M. Segment performance is evaluated based on the operating segment’s profit (loss) before corporate and financial administration expenses. The following table summarizes selected financial information by segment. +($ in thousands) +Revenue +Segment Operating Profit (Loss) +Segment Operating Profit +(Loss) as a % of Revenue +2021 +2020 +2019 +2021 +2020 +2019 +2021 +2020 +2019 +PI +$ +90,268 +$ +88,116 +$ +86,786 +$ +12,885 +$ +7,509 +$ +7,910 +14.3 +% +8.5 +% +9.1 +% +T&M +25,765 +45,330 +49,871 +(1,032 +) +6,281 +11,933 +(4.0 +)% +13.9 +% +23.9 +% +Total +$ +116,033 +$ +133,446 +$ +136,657 +11,853 +13,790 +19,843 +(10.2 +)% +10.3 +% +14.5 +% +Corporate Expenses +9,420 +11,357 +11,123 +Operating Income +2,433 +2,433 +8,720 +Other Expense, Net +(254 +) +(1,063 +) +(1,412 +) +Income Before Income Taxes +2,179 +1,370 +7,308 +Income Tax Provision (Benefit) +895 +(389 +) +1,578 +Net Income +$ +1,284 +$ +1,759 +$ +5,730 +28 +Table of Contents +Product Identification +Revenue from the PI segment increased 2.4% in fiscal 2021, with revenue of $90.3 million compared to revenue of $88.1 million in the prior year. The current year increase is primarily attributable to growth in demand for ink jet and media supplies for the Trojan Label product line and to a lesser degree, the increase in current year sales of QuickLabel’s electrophotographic printer supplies. Also contributing to the increase in revenue for the current year was an increase in hardware sales in the Trojan Label product group, including contributions from the launch of new products such as the +T3-OPX +label press. PI current year segment operating profit was $12.9 million with a profit margin of 14.3%, compared to the prior year segment operating profit of $7.5 million and related profit margin of 8.5%. The increase in current year segment operating profit and margin is primarily due to increased revenue and lower operating and period costs. +Test & Measurement +Revenue from the T&M product group was $25.8 million for fiscal 2021, a 43.2% decrease compared to revenue of $45.3 million in the prior year. The decrease in revenue for the current year is primarily attributable to the decline in the aerospace printer product lines impacted by the Boeing 737 MAX grounding and the dramatic drop in air travel due to the impact of +COVID-19. +To a lesser degree, the decrease in the current year revenue was also impacted by the declines in certain T&M’s data acquisition hardware sales, as well as a decline in supplies, service and other revenue in the aerospace product lines, due to +Covid-19 +induced declines in commercial airline flights. T&M current year segment operating loss was $1.0 million resulting in a negative 4.0% profit margin compared to the +prior year segment operating profit of $6.3 million and related operating margin of 13.9%. Despite lower manufacturing and period costs, the segment operating loss and related margin for the current year is primarily due to the decline in current year revenue. +Liquidity and Capital Resources +Overview +Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. These sources have also funded a portion of our capital expenditures and contractual contingent consideration obligations. We have typically funded acquisitions by borrowing under bank term loan facilities. +The onset of the +COVID-19 +pandemic and the decline in revenues in the T&M segment due to the decline in aerospace printer sales, combined with the period of +COVID-19 +pandemic induced credit risk avoidance in the capital markets, led to a period of liquidity concerns for us through the second quarter of fiscal 2021 despite our efforts to reduce expenses as rapidly as possible and preserve liquidity. As a result of the availability of the PPP loan during our fiscal second quarter of 2021discussed below, we were able, despite a pending default on our credit facility, to secure an amendment at the end of the second quarter of fiscal 2021 that provided additional liquidity. Those two sources of capital allowed us the time necessary to retain employment levels and focus on continuing efforts to reduce costs, and as those cost reductions took hold, to improve operating profit and cash flow. Based on improved conditions in the credit market and in recognition of the substantial cost and working capital reductions we accomplished, we were able to reduce our debt, and, subsequent to the end of fiscal year 2021, renegotiate the amendment to the credit agreement we had signed in the second quarter of fiscal 2021, which, together with our improved performance, restored us to a solid liquidity position. +On May 6, 2020, we entered into a loan agreement (the “Loan Agreement”) with and executed a promissory note (the “Promissory Note”) in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed $4.4 million (the “PPP Loan”) from Greenwood pursuant to the Paycheck Protection Program (the “PPP”) administered by the United States Small Business Administration (the “SBA”) and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020. The terms +29 +Table of Contents +of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020 (the “PPP Flexibility Act”), which was enacted on June 5, 2020. We believe that our obtaining the PPP Loan and suspending the payment of dividends on our common stock were instrumental in our ability to successfully negotiate the A&R Credit Agreement, as defined below. +At the end of the first quarter of fiscal 2021, the deterioration of our financial condition and operating results due to the decline in 737 +MAX-related +revenue and +COVID-19 +impacts caused us to violate the financial covenants in our Credit Agreement dated February 28, 2017 (the “Prior Credit Agreement”) with Bank of America, N.A. (the “Lender”). On June 22, 2020, we entered into a letter agreement with the Lender wherein it agreed to waive compliance with those financial covenants for the measurement period ended May 2, 2020. +On July 30, 2020, we entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) with the Lender, our wholly owned subsidiary ANI ApS, a Danish private limited liability company and ANI ApS’s wholly-owned subsidiary TrojanLabel ApS, a Danish private limited liability company (“TrojanLabel”). The A&R Credit Agreement amended and restated the Prior Credit Agreement. In connection with our entry into the A&R Credit Agreement, we entered into an Amended and Restated Security and Pledge Agreement and a mortgage in favor of the Lender with respect to our owned real property in West Warwick, Rhode Island. Under the A&R Credit Agreement, AstroNova, Inc. is the sole borrower, and, prior to the effectiveness of the Amendment (as defined below), its obligations were guaranteed by ANI ApS and TrojanLabel. +Immediately prior to the closing of the A&R Credit Agreement, we repaid $1.5 million in principal amount of term loans outstanding under the Prior Credit Agreement. +The A&R Credit Agreement provided for (i) a term loan in the principal amount of $15.2 million, which we used to refinance the outstanding term loans borrowed by us and ANI ApS under the Prior Credit Agreement and a portion of the outstanding revolving loans borrowed by us under the Prior Credit Agreement, and (ii) a $10.0 million revolving credit facility available to us for general corporate purposes. Revolving credit loans may be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. +At January 31, 2021, our cash and cash equivalents were $11.4 million. There was no outstanding balance on our revolving line of credit at January 31, 2021 and we had $10.0 million available for borrowing under the A&R Credit Agreement. +On March 24, 2021, subsequent to year end, we entered into a First Amendment to Credit Agreement (the “Amendment”) to our A&R Credit Agreement (the “A&R Credit Agreement amended by the Amendment, the “Amended Credit Agreement”) with the Lender, ANI ApS and TrojanLabel. Immediately prior to the closing of the Amendment, we repaid $ 2.6 million in principal amount of the term loan outstanding under the A&R Credit Agreement, resulting in an outstanding balance of the term loan of $10.0 million and no amount drawn and outstanding under the revolving credit facility under the Amended Credit Agreement. +The Amended Credit Agreement expires on September 30, 2025, a significant extension of tenor. It also eliminated a minimum adjusted EBITDA covenant, an asset coverage covenant and a minimum liquidity covenant, and, subject to ongoing covenant compliance, significantly reduced limitations on restricted payments such as dividends, eliminated restrictions on capital expenditures and increased operating flexibility with respect to funding our global operations. +The Amended Credit Agreement provides for (i) a term loan in the principal amount of $10.0 million, and (ii) a $22.5 million revolving credit facility available for general corporate purposes. At the closing of the Amended Credit Agreement, we borrowed the entire $10.0 million term loan which was used to refinance in full the outstanding term loan under the A&R Credit Agreement. Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. +30 +Table of Contents +While we expected that as a result of the impact of the +COVID-19 +pandemic, some of our customers would experience liquidity pressure and be unable to pay us for products on a timely basis, in general our recent receivables collection experience has been consistent with our historical experience and a significant deterioration in receivables collection has not occurred through the end of fiscal year. We believe that this favorable result in T&M was due in part to the terms of the contractual relationships with our customers, and in part due to the critical nature of the nature of repairs and supplies relationships. In Product Identification it was due to the critical nature of our relationships with our customers and the general resilience of the markets we generally serve. For both segments, we have experienced improved collections efforts. During the first quarter of fiscal 2021, we experienced a limited number of cases in which certain of our aerospace customers failed to pay us on a timely basis and we increased our reserves for potential losses on those accounts. In the second quarter of fiscal 2021, two small airlines with whom we had small receivable balances for which we had previously fully reserved, entered bankruptcy, but in general, in the following quarters, the aerospace customer problems abated such that we did not increase our reserves. If the impact of the +COVID-19 +pandemic continues for a prolonged period or worsens, we may experience further adverse impacts of delayed aerospace receivable collections. +In response to the +COVID-19 +pandemic and related economic dislocation, we have implemented and will continue to implement a variety of expense reduction and cash preservation initiatives. On April 27, 2020, our board of directors suspended our quarterly cash dividend beginning with the second quarter of our fiscal year 2021. +We currently have $22.5 million available for borrowing under our Amended Credit Agreement and we believe that our available cash and credit facilities combined with our cash generated from operations will be sufficient to support our operating requirements, so long as the impact of +COVID-19 +does not worsen. +Indebtedness +Term Loan +The Amended Credit Agreement requires that the term loan be paid as follows: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2021 through January 31, 2022 is $187,500; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2022 through January 31, 2023 is $250,000; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2023 through January 31, 2025 is $312,500; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2025 and July 31, 2025 is $500,000; and the entire remaining principal balance of the term loan is required to be paid on September 30, 2025. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than September 30, 2025, at which time any outstanding revolving loans will be due and payable in full, and the revolving credit facility will terminate. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. +The Amended Credit Agreement includes an uncommitted accordion provision under which the term loan and/or revolving credit facility commitments may be increased in an aggregate principal amount not exceeding $10,000,000, subject to obtaining the agreement of the Lender and the satisfaction of certain other conditions. +As under the A&R Credit Agreement, the loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. +31 +Table of Contents +Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. +The interest rates under the A&R Credit Agreement were modified in the Amended Credit Agreement as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the LIBOR Rate as defined in the A&R Credit Agreement (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60% to 2.30% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate, (iii) the LIBOR Rate plus 1.00% or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.30% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.30% based on our consolidated leverage ratio. +We must comply with various customary financial and +non-financial +covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The minimum EBITDA, minimum consolidated asset coverage ratio, minimum liquidity and maximum capital expenditures covenants with which we were required to comply under the A&R Credit Agreement were eliminated by the Amendment. The primary +non-financial +covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Amendment. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests held by us in ANI ApS, in our wholly-owned German subsidiary AstroNova GmbH, and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island. Pursuant to the Amendment, the guarantees of our obligations under the A&R Credit Agreement that were previously provided by ANI ApS and TrojanLabel were released. +PPP Loan +The PPP Loan, which will mature on May 6, 2022, is unsecured and bears interest at a rate of 1.0% per annum, accruing from the loan date and is payable monthly. No payments are due on the PPP Loan at this time, but interest accrues during the deferral period. Interest accrued in the amount of $33,000 is included in other expense for the period ended January 31, 2021. +The PPP Loan may be prepaid at any time without penalty. The Loan Agreement and Promissory Note include customary provisions for a loan of this type, including prohibitions on our payment of dividends or repurchase of shares of our stock while the PPP Loan remains outstanding and events of default relating to, among other things, payment defaults, breaches of the provisions of the Loan Agreement or the Promissory Note and cross-defaults on other loans. +32 +Table of Contents +Subject to the limitations and conditions set forth in the CARES Act, the PPP Flexibility Act and the regulations and guidance provided by the SBA with respect to the PPP, a portion of the PPP Loan may be forgiven in an amount up to the amount of the PPP Loan proceeds we spent on payroll, rent, utilities and interest on certain debt during the twenty-four week period following incurrence of the PPP Loan; interest accrued on the forgiven portion of the principal amount of the PPP Loan is also forgiven. The amount of the PPP Loan to be forgiven in respect of rent, utilities and interest on certain debt will be capped at 40% of the forgiven amount, with the remaining forgiven amount allocated to payroll costs. We fully utilized the PPP Loan proceeds for qualifying expenses and have applied for forgiveness of the PPP Loan (including all associated accrued interest) subsequent to year end. Whether our application for forgiveness will be granted and in what amount is subject to an application to, and approval by, the SBA and may also be subject to further requirements in any regulations and guidelines the SBA may adopt. +Cash Flow +The statements of cash flows for the years ended January 31, 2021, 2020 and 2019 are included on page 53 of this Form +10-K. +Net cash provided by operating activities was $15.5 million in fiscal 2021 compared to net cash provided by operating activities of $3.2 million in the previous year. The increase in net cash provided by operations for the current year is primarily due to an increase in cash provided by working capital of $12.4 million from fiscal 2020. The changes in accounts receivable, inventory, income taxes, accounts payable and accrued expenses for the current year increased cash by $7.4 million in fiscal 2021 compared to a decrease to cash of $5.0 million in the prior year. +The accounts receivable balance decreased to $17.4 million at January 31, 2021, compared to $19.8 at January 31, 2020. The $2.4 million decrease in the accounts receivable balance is directly related to lower full year revenues in fiscal 2021 compared to the prior year. The days sales outstanding dropped to 51 days at year end compared to 55 days at the end of fiscal 2020 contributing to the lower receivables balance at January 31, 2021. The days sales outstanding decrease in the current year is due to customer mix, as aerospace receivables typically take longer to collect, and these revenues were down significantly in fiscal 2021. +The +year-end +inventory balance decreased to $30.1 million at January 31, 2021 versus $33.9 million at January 31, 2020 and the days inventory on hand decreased to 147 days at the end of fiscal 2021 as compared to 151 days at the end of the fiscal 2020. The current period decrease in inventory is due to lower production demand, particularly in the Test & Measurement segment and the related days on hand decline is a reflection of improved procurement strategies and production scheduling. +Net cash used by investing activities for fiscal 2021 was $2.6 million for capital expenditures, consisting of $0.1 million for land and building improvements; $2.4 million for information technology; and $0.1 million for tools and dies. +Net cash used by financing activities for fiscal 2021 was $5.1 million, consisting primarily of $6.5 million net cash decrease on the revolving line of credit, $4.0 million of principal payments of long-term debt, $2.0 million payment on the guaranteed royalty obligation payment, and $0.5 million of dividends, offset by $4.4 million of proceeds received from the PPP loan and a net of $3.5 million of proceeds received in the second quarter of fiscal 2021 related to the refinance of long-term debt.. +Fiscal 2020 compared to Fiscal 2019 +For a comparison of our cash flow for the fiscal years ended January 31, 2020 and January 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Liquidity and Capital Resources” in our annual report on Form +10-K +for the fiscal year ended January 31, 2020, filed with the SEC on April 10, 2020. +33 +Table of Contents +Contractual Obligations, Commitments and Contingencies +At January 31, 2021, our contractual obligations with initial remaining terms in excess of one year were as follows: +(In thousands) +Total +Less than +1 Year +1-3 +Years +3-5 +Years +More than +5 Years +Purchase Commitments (1) +$ +15,250 +$ +14,959 +$ +291 +$ +— +$ +— +Debt (2) +12,576 +5,326 +7,250 +— +— +Interest on Debt (3) +648 +496 +152 +— +— +Royalty Obligation (4) +8,161 +1,300 +3,652 +1,959 +1,250 +Excess Royalty Obligation (5) +177 +177 +— +— +— +Operating Lease Obligations +1,599 +372 +610 +347 +270 +$ +38,411 +$ +22,630 +$ +11,955 +$ +2,306 +$ +1,520 +(1) +Purchase obligations include undiscounted amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity and delivery dates. +(2) +Based on the term loan balance outstanding under the A&R Credit Agreement as of January 31, 2021. +(3) +Interest rate on variable rate debt is based on the LIBOR Rate, plus a margin that varies within a range of 2.15% to 3.65% based on our consolidated leverage ratio for the outstanding loan under the A&R Credit Agreement as of January 31, 2021. +(4) +We are subject to a guaranteed minimum royalty payment obligation over the next seven years pursuant to the Honeywell Asset Purchase and License Agreement. Refer to Note 11, “Royalty Obligation” in the audited consolidated financial statements included elsewhere in this report for further details. +(5) +We are subject to excess royalty payments beyond the guaranteed minimum royalty obligation pursuant to the Honeywell Asset Purchase & License Agreement. Refer to Note 11, “Royalty Obligation,” in the audited consolidated financial statements included elsewhere in this report for further details. +We are also subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, such as: contract and employment claims; workers compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided, or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +Critical Accounting Policies and Estimates +Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and +year-end +reporting requirements. These judgments and estimates are based on our historical experience, current trends and information available from other sources, as appropriate. If actual conditions differ from the assumptions used in our judgments, our financial results could be materially different from our estimates. We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements: +34 +Table of Contents +Revenue Recognition +: We recognize revenue in accordance with Accounting Standards Update +(ASU) 2014-9, Revenue +from Contracts with Customers (also referred to as Topic 606). Under Topic 606, based on the nature of our contracts and consistent with prior practice, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied. +Our accounting policies relating to the recognition of revenue under Topic 606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which include (i) the existence of a contract with the customer, (ii) the identification of the performance obligations in the contract, (iii) the value of any variable consideration in the contract, (iv) the stand alone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the contract, and (v) determining when a performance obligation has been met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery for those services, could result in inappropriate recognition of revenue, or incorrect timing of revenue recognition, which could have a material effect on our financial condition and results of operations. +We recognize revenue for +non-recurring +engineering (NRE) fees, as necessary, for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. +Infrequently, we receive requests from customers to hold product being purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements in accordance with the guidance provided by Topic 606, which requires the transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) we do not have the ability to use the product or direct it to another customer. +Allowance for Doubtful Accounts: +Accounts receivable consists primarily of receivables from our customers arising from the sale of our products. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts. +We estimate the collectability of our receivables and establish allowances for accounts receivable that we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our accounts receivable are outstanding and the financial condition of individual customers. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. We believe that our procedure for estimating such amounts is reasonable and historically have not resulted in material adjustments in subsequent periods. Bad debt expense was less than 1% of net sales in each of fiscal 2021 and 2020. +Warranty Claims: +We offer warranties on some of our products. We establish a reserve for estimated costs of warranties at the time the product revenue is recognized. This reserve requires us to make estimates regarding the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect estimated warranty cost. If actual warranty costs differ from our estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of revenue, and the reserve balance recorded as an accrued expense. While we maintain product quality programs and processes, our warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, we revise our estimated warranty liability accordingly. +Inventories: +Inventories are stated at the lower of cost +(first-in, +first-out) +or net realizable value. The process for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on hand and estimating the net realizable value of the inventory based on historical experience, current business +35 +Table of Contents +conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income Taxes: +A valuation allowance is established when it is +“more-likely-than-not” +that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, including our performance, the market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2021, we had provided valuation allowances for future tax benefits resulting from certain domestic R&D tax credits and foreign tax credit carryforwards, both of which could expire unused. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted. +On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted into law in the U.S. and the new legislation contains several key tax provisions that affected us, including a +one-time +mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. All accounting under SAB 118 was finalized during the quarter ending January 31, 2019 with no material changes from the provisional amounts previously recorded. +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The legislation had sweeping effects including various types of economic relief for impacted businesses and industries. One such relief provision was the Paycheck Protection Program, which provided short-term cash flow assistance to finance employee payroll and qualified expenses. On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed $4.4 million (the “PPP Loan”). On December 27, 2020 the Consolidated Appropriations Act, 2021, H.R. 133 was signed into law. The legislation permits the deductibility of expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan (covered loan) guaranteed under the Paycheck Protection Program. We have fully utilized the PPP Loan proceeds for qualifying expenses and subsequent to year end have applied for forgiveness of the PPP Loan (including all associated accrued interest) in accordance with the terms of the CARES Act, as amended by the PPP Flexibility Act. Consistent with the legislation, we expect to deduct the full $4.4 million of qualified expenses on our 2020 federal tax return. +Intangible and Long-Lived Assets: +Long-lived assets, such as definite-lived intangible assets and property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows. +Goodwill: +Goodwill is tested for impairment at the reporting unit. A reporting unit is an operating segment or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment +36 +Table of Contents +are aggregated as a single reporting unit if they have similar economic characteristics. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to publicly traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. +Due to the consideration of the impact of the decline in the global economy due to the global +COVID-19 +pandemic, coupled with the grounding of the 737 MAX in March, 2019 and the 737 MAX production halt in January, 2020 which negatively impacted revenues and margins in fiscal 2020 and 2021, we elected to forgo the qualitative assessment and perform a quantitative goodwill impairment test to determine whether the carrying values of the reporting units are greater than the fair values. We utilized a blended income and market approach. The income approach was based upon a discounted cash flow model which we believe provides a fair values estimate of the reporting unit’s expected long-term operating performance. The market approach compares the reporting units to similar publicly traded companies. Based on our quantitative impairment assessment as of January 31, 2021, we determined that the fair value of the reporting units were in excess of their carrying values and therefore, no goodwill impairment has occurred. +Self-Insurance Liability Accrual: +We maintain self-insured group medical and dental programs for qualifying employees in the United States and maintain stop-loss coverage from a third party which limits our exposure to large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In estimating this accrual, we utilize an independent third-party broker to estimate a range of expected losses, which are based on analyses of historical data. Our assumptions are closely monitored and adjusted when warranted by changing circumstances. Should claims occur or medical costs increase in greater amounts than we have expected, accruals may not be sufficient, and we may record additional expenses. +Share-Based Compensation: +Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires several complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and our dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted-average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, we have observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grants and assessed the expected risk tolerance of different option groups. The risk-free interest rate used in the model is based on the actual +37 +Table of Contents +U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of our common stock on the date of grant. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. +Recent Accounting Pronouncements +Reference is made to Note 1 of our audited consolidated financial statements included elsewhere in this report. +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +Our primary financial market risks consists of foreign currency exchange rates risk and the impact of changes in interest rates that fluctuate with the market on our variable rate credit borrowings under our existing credit agreement. +Financial Exchange Risk +The functional currencies of our foreign subsidiaries and branches are the local currencies—the British Pound in the U.K., the Canadian Dollar in Canada, the Danish Kroner in Denmark, the Chinese Yuan in China, and the Euro in France and Germany. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign subsidiaries are translated to U.S. dollars. The assets and liabilities of our foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at an average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The reported results of our foreign subsidiaries will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency translation exposure is related to our subsidiaries that have functional currencies denominated in Danish Kroner and the Euro. A hypothetical 10% change in the rates used to translate the results of our foreign subsidiaries would result in an increase or decrease in our consolidated net income of approximately $0.3 million for the year ended January 31, 2021. +Transactional exposure arises where transactions occur in currencies other than the functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the balance sheet date and the resulting gains and losses are reported as foreign exchange gain (loss) in the consolidated statements of income. Foreign exchange gains resulting from transactional exposure were $0.6 million for the year ended January 31, 2021. +Interest Rate Risk +At January 31, 2021, our total indebtedness included $12.6 million of term loan variable-rate debt. At January 31, 2021, the term loan under the A&R Credit Agreement bears interest at the LIBOR rate plus a margin that varies within a range of 2.15% to 3.65% based on our consolidated leverage ratio. The impact on our results of operations of a 100basis point change in the interest rate on the outstanding balance of our variable-rate debt at January 31, 2021, would be approximately $0.1 million annually. +38 +Table of Contents +Item 8. +Financial Statements and Supplementary Data +The consolidated financial statements required under this item are submitted as a separate section of this report on the pages indicated at Item 15(a)(1). +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. +Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form +10-K +pursuant to Rules +13a-15(e) +and +15d-15(e) +under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2021 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules +13a-15(f) +and +15d-15(f) +under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2021. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2021, our internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +Changes in Internal Controls over Financial Reporting +There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. +Other Information +None. +39 +Table of Contents +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed for our 2021 Annual Meeting of Shareholders. +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of the Board of Directors. +Name +Age +Position +Gregory A. Woods +62 +President, Chief Executive Officer and Director +David S. Smith +64 +Vice President, Chief Financial Officer and Treasurer +Stephen M. Petrarca +58 +Vice President—Operations +Michael J. Natalizia +57 +Chief Technology Officer and Vice President of Strategic Technical Alliances +Tom Carll +54 +Vice President and General Manager—Aerospace +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to 2010, Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts. +Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. Mr. Smith has also held a variety of senior finance positions at semiconductor and manufacturing companies, including Senior Vice President and Chief Financial Officer of Standard Microsystems Corporation, a global semiconductor company, from 2005 to 2008 and Vice President, Finance and Chief Financial Officer of both Dover Corporation, a diversified global manufacturing company, from 2000 to 2002 and Crane Company, a diversified manufacturing company from 1994 to 2000. +Mr. Petrarca was appointed Vice President—Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +Mr. Carll joined the Company in 1989 and has held the position of Vice President and General Manager—Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product group and from its formation in 2004, the AstroNova Aerospace business group. +Code of Ethics +We have adopted a Code of Conduct which applies to all of our directors, officers and employees of the Company, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation +S-K. +A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on our website, +(www.astronovainc.com) +, under the heading “Investors—Corporate Governance—Governance Documents.” We intend to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, principal accounting officer, or persons performing similar functions by posting such information on our website. +40 +Table of Contents +Item 11. +Executive Compensation +The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed for our 2021 Annual Meeting of Shareholders. +The information set forth under the heading “Compensation Committee Report” in our definitive Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended. +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed for our 2021 Annual Meeting of Shareholders. +Equity Compensation Plan Information +The following table sets forth information about our equity compensation plans as of January 31, 2021: +Plan Category +Number of Securities to +be Issued Upon Exercise +of Outstanding Options, +Warrants and Rights +Weighted- +Average Exercise +Price of +Outstanding +Options, +Warrants and +Rights +Number of Securities +Remaining Available for +Future Issuance Under +Equity Compensation Plans +Equity Compensation Plans Approved by Shareholders +771,496 +(1) +$ +14.63 +(2) +538,853 +(3) +Equity Compensation Plans Not Approved by Shareholders +— +— +— +Total +771,496 +(1) +$ +14.63 +(2) +538,853 +(3) +(1) +Includes 337,958 shares issuable upon exercise of outstanding options granted under our 2007 Equity Incentive Plan; 148,625 shares issuable upon exercise of outstanding options granted and 10,833 restricted stock units outstanding under our 2015 Equity Incentive Plan; and 135,500 shares issuable upon exercise of outstanding options granted and 138,580 restricted stock units outstanding under our 2018 Equity Incentive Plan. This balance does not include 48,000 of unvested restricted stock which are subject to forfeiture. +(2) +Does not include restricted stock units. +(3) +Represents 528,479 shares available for grant under the AstroNova, Inc. 2018 Equity Incentive Plan and 10,374 shares available for purchase under the Employee Stock Purchase Plan. +Additional information regarding these equity compensation plans is contained in Note 15, “Share-Based Compensation,” in our Consolidated Financial Statements included in Item 15 hereto. +Item 13. +Certain Relationships, Related Transactions and Director Independence +The information required by this item is incorporated herein by reference to our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders. +Item 14. +Principal Accountant Fees and Services +The information required by this item is incorporated herein by reference to our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders. +41 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part of this Annual Report filed on Form +10-K: +Page +Report of Independent Registered Public Accounting Firm +47-48 +Consolidated Balance Sheets as of January 31, 2021 and 2020 +49 +Consolidated Statements of Income—Years Ended January 31, 2021, 2020 and 2019 +50 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2021, 2020 and 2019 +51 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January 31, 2021, 2020 and 2019 +52 +Consolidated Statements of Cash Flows—Years Ended January 31, 2021, 2020 and 2019 +53 +Notes to Consolidated Financial Statements +54-81 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January 31, 2021, 2020 and 2019 +83 +All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +Item 16. Form +10-K +Summary +Not Applicable. +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Share Purchase Agreement, dated January 7, 2017, as amended, by and among ANI ApS, Trojan Holding ApS, as a Seller and as the Sellers’ Representative, and Li Wei Chong filed as Exhibit 2.1 to our Annual Report on Form 10-K for the year ended January 31, 2017 and incorporated by reference herein* +(3A) +Restated Articles of Incorporation of the Company and all amendments thereto filed as Exhibit 3A to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(3B) +By-laws of the Company as amended to date filed as Exhibit 3B to our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. 000-13200) and incorporated by reference herein. +(4.1) +Specimen form of common stock certificate of the Company filed as Exhibit 4 to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(4.2) +Description of securities registered pursuant to Section 12 of the Exchange Act filed as Exhibit 4.2 to our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (File No. 000-13200) and incorporated by reference herein. +(10.1) +We , Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 annual shareholders meeting and incorporated by reference herein.** +42 +Table of Contents +Exhibit +Number +(10.2) +Equity Incentive Award Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.12 to our Annual Report on Form 10-K for the year ended January 31, 2015 and incorporated by reference herein.** +(10.3) +Change in Control Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended January 31, 2015 and incorporated by reference herein.** +(10.4) +AstroNova Inc. 2015 Equity Incentive Plan filed as Exhibit A to the Definitive Proxy Statement filed on April 21, 2015 (File No. 000-13200) for the 2015 annual shareholders meeting and incorporated by reference herein.** +(10.5) +Form of Indemnification Agreement for directors and officers filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended October 31, 2015 and incorporated by reference herein.** +(10.6) +Form of Restricted Stock Agreement granted under the Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.7) +Form of Incentive Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.8) +Form of Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.9) +Form of Non-Employee Director Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.10) +Form of Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.11) +Form of Non-Employee Director Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.12) +Form of Time-Based Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.13) +Form of Performance Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.14) +Asset Purchase and License Agreement, dated September 28, 2017, by and between AstroNova, Inc. and Honeywell International, Inc. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date September 28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.15) +Amended and Restated AstroNova, Inc. Employee Stock Purchase Plan filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A, event date November 20, 2017, filed with the SEC on December 28, 2017 and incorporated by reference herein. +43 +Table of Contents +Exhibit +Number +(10.16) +Letter Agreement dated January 12, 2018 between the Company and David Smith filed as Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2018 and incorporated by reference herein.** +(10.17) +Form of Performance-based Restricted Stock Unit Award Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.18) +Form of Restricted Stock Unit Agreement (time-based vesting) filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.19) +Form of Incentive Stock Option filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.20) +Form of Non-statutory Stock Option filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.21) +Form of Non-statutory Stock Option (Non-employee Director) filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.22) +Form of Restricted Stock Agreement filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.23) +Form of Non-employee Director Restricted Stock Agreement filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.24) +AstroNova, Inc. Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed, event date January 31, 2019, filed with the SEC on February 4, 2019 and incorporated by reference herein.** +(10.25) +AstroNova, Inc. 2018 Equity Incentive Plan Non-Employee Director Restricted Stock Agreement filed as Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019 and incorporated by reference to herein.* +(10.26) +AstroNova, Inc. 2018 Equity Incentive Plan, as amended, filed as Appendix A to the Company’s Definitive Proxy Statement filed with the SEC on May 25, 2019 on Schedule 14A and incorporated by reference herein.* +(10.27) +Loan Agreement effective as of May 6, 2020, by and between AstroNova, Inc. and Greenwood Credit Union, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 2, 2020 and incorporated by reference herein. +(10.28) +Promissory Note dated May 6, 2020, by and between AstroNova, Inc. and Greenwood Credit Union, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 2, 2020 and incorporated by reference herein. +(10.29) +Letter of Agreement dated June 22, 2020 between AstroNova, Inc. and Bank of America, N.A. , filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 2, 2020 and incorporated by reference herein. +44 +Table of Contents +Exhibit +Number +(10.30) +Amended and Restated Credit Agreement dated as of July 30, 2020 among AstroNova, Inc., ANI ApS, TrojanLabel ApS, and Bank of America, N.A. filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020 and incorporated by reference herein. +(10.31) +Amended and Restated Security and Pledge Agreement dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A. , filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date July 30, 2020, and incorporated by reference herein. +(10.32) +Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A. , filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date July 30, 2020, and incorporated by reference herein. +(10.33) +Change in Control Agreement dated September 8, 2020 by and between AstroNova, Inc. and David S. Smith. filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020 and incorporated by reference herein.** +(10.34) +First Amendment to Credit Agreement dated as of March 24, 2021 among AstroNova, Inc. ANI ApS, TrojanLabel ApS and Bank of America, N.A. +(10.35) +First Amendment to Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of March 24, 2021 among AstroNova, Inc. and Bank of America, N.A. +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(101.INS) +XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document +(101.SCH) +Inline XBRL Taxonomy Extension Schema Document +(101.CAL) +Inline XBRL Taxonomy Extension Calculation Linkbase Document +(101.DEF) +Inline XBRL Taxonomy Extension Definition Linkbase Document +(101.LAB) +Inline XBRL Taxonomy Extension Label Linkbase Document +(101.PRE) +Inline XBRL Taxonomy Extension Presentation Linkbase Document +(104) +Cover Page Interactive Data File (embedded within the Inline XBRL document). +* +Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation +S-K. +The Company will furnish copies of any such schedules to the SEC upon request. +** +Management contract or compensatory plan or arrangement. +45 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +ASTRONOVA, INC. +(Registrant) +Date: April 13, 2021 +By: +/ S / G REGORY A. W OODS +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/s/ G REGORY A. W OODS +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 13, 2021 +/s/ D AVID S. S MITH +David S. Smith +Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) +April 13, 2021 +/s/ J EAN A. B UA +Jean A. Bua +Director +April 13, 2021 +/s/ M ITCHELL I. Q UAIN +Mitchell I. Quain +Director +April 13, 2021 +/s/ Y VONNE E. S CHLAEPPI +Yvonne E. Schlaeppi +Director +April 13, 2021 +/s/ H AROLD S CHOFIELD +Harold Schofield +Director +April 13, 2021 +/s/ R ICHARD S. W ARZALA +Richard S. Warzala +Director +April 13, 2021 +46 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Shareholders and Board of Directors and Shareholders of +AstroNova, Inc. +Opinions on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of AstroNova, Inc. (the “Company”) as of January 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended January 31, 2021 and the related notes and the financial statement schedule listed in Item 15(a)(2)(collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 2021 in conformity with accounting principles generally accepted in the United States of America. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matters +The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +Goodwill Impairment Assessment +As discussed in Note 3 to the financial statements, the Company’s consolidated goodwill balance was approximately $12.8 million as of January 31, 2021. Company management tests goodwill for impairment at the reporting unit level, at least annually, at the end of the fiscal year. As a result of the decline in revenues and +47 +Table of Contents +margins in the current year, management performed a quantitative goodwill impairment test as of January 31, 2021. The quantitative assessment utilizes a combination of the income approach and market approach to estimate the fair value of each reporting unit. +We have identified the evaluation of goodwill for impairment as a critical audit matter as a result of (i) the significant judgment by management when developing the fair value measurements and; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to financial projections. +Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others (i) evaluating the qualifications of the third-party expert engaged by management; (ii) testing management’s, and the third-party expert’s, process for developing the fair value estimates, including consideration of the appropriateness of the methods used; (iii) testing the completeness and accuracy of underlying data used in the fair value estimates; and (iv) evaluating the significant assumptions used in developing financial projections. In evaluating management’s assumptions used in the development of financial projections we considered (i) the current and past performance of the reporting units; (ii) whether these assumptions were consistent with evidence obtained in other areas of the audit and (iii) the sensitivity to change of the assumptions used. +/s/ Wolf & Company, P.C. +We have served as the Company’s auditor since 2013. +Boston, Massachusetts +April 13, 2021 +48 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2021 +2020 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +11,439 +$ +4,249 +Accounts Receivable, net of reserves of $ 1,054 in 2021 and $ 856 in 2020 +17,415 +19,784 +Inventories +30,060 +33,925 +Prepaid Expenses and Other Current Assets +1,807 +2,193 +Total Current Assets +60,721 +60,151 +Property, Plant and Equipment, net +12,011 +11,268 +Identifiable Intangibles, net +21,502 +25,383 +Goodwill +12,806 +12,034 +Deferred Tax Assets, net +5,941 +5,079 +Right of Use Asset +1,389 +1,661 +Other +1,103 +1,088 +TOTAL ASSETS +$ +115,473 +$ +116,664 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +5,734 +$ +4,409 +Accrued Compensation +2,852 +2,700 +Other Accrued Expenses +3,939 +4,711 +Revolving Credit Facility +— +6,500 +Current Portion of Long-Term Debt +5,326 +5,208 +Current Liability—Royalty Obligation +2,000 +2,000 +Current Liability—Excess Royalty Payment Due +177 +773 +Income Taxes Payable +655 +— +Deferred Revenue +285 +466 +Total Current Liabilities +20,968 +26,767 +NON CURRENT LIABILITIES +Long-Term Debt, net of current portion +7,109 +7,715 +Royalty Obligation, net of current portion +6,161 +8,012 +Long-Term Debt—PPP Loan +4,422 +— +Lease Liabilities, net of current portion +1,065 +1,279 +Income Taxes Payable +681 +1,081 +Deferred Tax Liabilities +384 +435 +TOTAL LIABILITIES +40,790 +45,289 +Commitments and Contingencies (See Note 21) +SHAREHOLDERS’ EQUITY +Preferred Stock, $ 10 Par Value, Authorized 100,000 shares, No ne Issued +— +— +Common Stock, $ 0.05 Par Value, Authorized 13,000,000 shares; Issued 10,425,094 shares in 2021 and 10,343,610 shares in 2020 +521 +517 +Additional +Paid-in +Capital +58,049 +56,130 +Retained Earnings +50,085 +49,298 +Treasury Stock, at Cost, 3,297,058 shares in 2021 and 3,281,701 shares in 2020 +( 33,588 +) +( 33,477 +) +Accumulated Other Comprehensive Loss, net of tax +( 384 +) +( 1,093 +) +TOTAL SHAREHOLDERS’ EQUITY +74,683 +71,375 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +115,473 +$ +116,664 +See Notes to the Consolidated Financial Statements. +49 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share Data) +2021 +2020 +2019 +Revenue +$ +116,033 +$ +133,446 +$ +136,657 +Cost of Revenue +74,673 +84,688 +82,658 +Gross Profit +41,360 +48,758 +53,999 +Costs and Expenses: +Selling and Marketing +23,301 +26,884 +26,343 +Research and Development +6,206 +8,084 +7,813 +General and Administrative +9,420 +11,357 +11,123 +Operating Expenses +38,927 +46,325 +45,279 +Operating Income +2,433 +2,433 +8,720 +Other Expense: +Interest Income (Expense), net +( 955 +) +( 682 +) +( 731 +) +Gain (Loss) on Foreign Currency Transactions +590 +( 448 +) +( 745 +) +Other, net +111 +67 +64 +( 254 +) +( 1,063 +) +( 1,412 +) +Income before Income Taxes +2,179 +1,370 +7,308 +Income Tax Provision (Benefit) +895 +( 389 +) +1,578 +Net Income +$ +1,284 +$ +1,759 +$ +5,730 +Net Income Per Common Share—Basic +$ +0.18 +$ +0.25 +$ +0.83 +Net Income Per Common Share—Diluted +$ +0.18 +$ +0.24 +$ +0.81 +Weighted Average Number of Common Shares Outstanding—Basic +7,104 +7,024 +6,881 +Dilutive Effect of Common Stock Equivalents +62 +214 +203 +Weighted Average Number of Common Shares Outstanding—Diluted +7,166 +7,238 +7,084 +See Notes to the Consolidated Financial Statements. +50 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2021 +2020 +2019 +Net Income +$ +1,284 +$ +1,759 +$ +5,730 +Other Comprehensive Income (Loss), net of taxes and reclassification adjustments: +Foreign Currency Translation Adjustments +710 +( 133 +) +( 671 +) +Change in Value of Derivatives Designated as Cash Flow Hedge +( 239 +) +122 +622 +(Gains) Losses from Cash Flow Hedges Reclassified to Income Statement +193 +( 264 +) +( 600 +) +Cross-Currency Interest Rate Swap Terminations +45 +— +— +Realized Gain on Securities Available for Sale Reclassified to Income Statement +— +— +3 +Other Comprehensive Income (Loss) +709 +( 275 +) +( 646 +) +Comprehensive Income +$ +1,993 +$ +1,484 +$ +5,084 +See Notes to the Consolidated Financial Statements. +5 +1 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Treasury +Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Shares +Amount +Balance January 31, 2018 +9,996,120 +$ +500 +$ +50,016 +$ +45,700 +$ +( 32,397 +) +$ +( 172 +) +$ +63,647 +Share-based compensation +— +— +1,886 +— +— +— +1,886 +Employee option exercises +154,992 +7 +1,669 +— +( 366 +) +— +1,310 +Restricted stock awards vested, net +67,447 +4 +( 3 +) +— +( 234 +) +— +( 233 +) +Reclassification due to adoption of ASU +2018-02 +— +— +— +14 +— +— +14 +Common Stock—cash dividend—$ 0.28 per share +— +— +— +( 1,933 +) +— +— +( 1,933 +) +Net income +— +— +— +5,730 +— +— +5,730 +Other comprehensive loss +— +— +— +— +— +( 646 +) +( 646 +) +Balance January 31, 2019 +10,218,559 +$ +511 +$ +53,568 +$ +49,511 +$ +( 32,997 +) +$ +( 818 +) +$ +69,775 +Share-based compensation +— +— +1,775 +— +— +— +1,775 +Employee option exercises +65,121 +3 +790 +— +( 11 +) +— +782 +Restricted stock awards vested, net +59,930 +3 +( 3 +) +— +( 469 +) +— +( 469 +) +Common Stock—cash dividend—$ 0.28 per share +— +— +— +( 1,972 +) +— +— +( 1,972 +) +Net income +— +— +— +1,759 +— +— +1,759 +Other comprehensive loss +— +— +— +— +— +( 275 +) +( 275 +) +Balance January 31, 2020 +10,343,610 +$ +517 +$ +56,130 +$ +49,298 +$ +( 33,477 +) +$ +( 1,093 +) +$ +71,375 +Share-based compensation +— +— +1,819 +— +— +— +1,819 +Employee option exercises +16,487 +1 +103 +— +— +— +104 +Restricted stock awards vested, net +64,997 +3 +( 3 +) +— +( 111 +) +— +( 111 +) +Common Stock—cash dividend—$ 0.07 per share +— +— +— +( 497 +) +— +— +( 497 +) +Net income +— +— +— +1,284 +— +— +1,284 +Other comprehensive income +— +— +— +— +— +709 +709 +Balance January 31, 2021 +10,425,094 +$ +521 +$ +58,049 +$ +50,085 +$ +( 33,588 +) +$ +( 384 +) +$ +74,683 +See Notes to the Consolidated Financial Statements. +52 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2021 +2020 +2019 +Cash Flows from Operating Activities: +Net Income +$ +1,284 +$ +1,759 +$ +5,730 +Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: +Depreciation and Amortization +5,983 +6,284 +6,152 +Amortization of Debt Issuance Costs +75 +49 +51 +Share-Based Compensation +1,819 +1,775 +1,886 +Deferred Income Tax Provision (Benefit) +( 1,021 +) +( 1,638 +) +( 1,638 +) +Changes in Assets and Liabilities: +Accounts Receivable +2,702 +3,594 +( 1,493 +) +Inventories +4,247 +( 3,938 +) +( 2,872 +) +Accounts Payable and Accrued Expenses +( 57 +) +( 2,732 +) +( 2,342 +) +Income Taxes Payable +1,482 +( 1,773 +) +( 151 +) +Other +( 970 +) +( 156 +) +( 318 +) +Net Cash Provided by Operating Activities +15,544 +3,224 +5,005 +Cash Flows from Investing Activities: +Proceeds from Sales/Maturities of Securities Available for Sale +— +— +1,511 +Cash Paid for Honeywell Asset Purchase and License Agreement +— +— +( 400 +) +Additions to Property, Plant and Equipment +( 2,587 +) +( 2,906 +) +( 2,645 +) +Net Cash Used by Investing Activities +( 2,587 +) +( 2,906 +) +( 1,534 +) +Cash Flows from Financing Activities: +Net Proceeds Employee Stock Option Plans +9 +654 +1,228 +Net Cash Proceeds from Share Purchases under Employee Stock Purchase Plan +95 +128 +82 +Net Cash Used for Payment of Taxes Related to Vested Restricted Stock +( 111 +) +( 469 +) +( 233 +) +Net +( +Repayments +) +/Borrowing +s +under Revolving Credit Facility +( 6,500 +) +5,000 +1,500 +Payment of Minimum Guarantee Royalty Obligation +( 2,000 +) +( 1,875 +) +( 1,625 +) +Proceeds from Long-Term Debt – PPP Loan +4,422 +— +— +Proceeds from Long-Term Debt Borrowings +15,232 +— +— +Payoff of Long-Term Debt +( 11,732 +) +— +— +Principal Payments on Long-Term Debt +( 3,958 +) +( 5,208 +) +( 5,130 +) +Payments of Debt Issuance Costs +( 100 +) +— +— +Dividends Paid +( 497 +) +( 1,972 +) +( 1,933 +) +Net Cash Used by Financing Activities +( 5,140 +) +( 3,742 +) +( 6,111 +) +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +( 627 +) +139 +( 3 +) +Net Increase (Decrease) in Cash and Cash Equivalents +7,190 +( 3,285 +) +( 2,643 +) +Cash and Cash Equivalents, Beginning of Year +4,249 +7,534 +10,177 +Cash and Cash Equivalents, End of Year +$ +11,439 +$ +4,249 +$ +7,534 +Supplemental Information: +Cash Paid During the Period for: +Interest +$ +677 +$ +531 +$ +636 +Income Taxes, Net of Refunds +$ +446 +$ +2,913 +$ +3,472 +Schedule of +non-cash +financing activities: +Value of Shares Received in Satisfaction of Option Exercise Price +$ +— +$ +11 +$ +366 +See Notes to the Consolidated Financial Statements. +53 +Table of Contents +ASTRONOVA, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +January 31, 2021, 2020 and 2019 +Note 1—Summary of Significant Accounting Policies +Basis of Presentation: +The accompanying financial statements and accompanying notes have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and are presented in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year. +Principles of Consolidation: +The consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: +Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation. +Use of Estimates: +The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts, inventory valuation, valuation and estimated lives of intangible assets, impairment of long-lived assets, goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates. +Cash and Cash Equivalents: +Highly liquid investments with an original maturity of 90 days or less are considered to be cash equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. At January 31, 2021 and 2020, $ 4.6 million and $ 3.4 million, respectively, was held in foreign bank accounts. +Inventories: +Inventories are stated at the lower of cost +(first-in, +first-out) +or net realizable value and include material, labor and manufacturing overhead. +Property, Plant and Equipment: +Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements— 10 to 20 years; buildings and leasehold improvements— 10 to 45 years; machinery and equipment— 3 to 10 years and computer equipment and software— 3 to 10 years). +Revenue Recognition: +We recognize revenue in accordance with Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (“Topic 606”).” The core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five step process to recognize revenue and requires more judgment and estimates within the revenue recognition process than required under previous U.S. GAAP, including identifying contracts with customers, identifying performance obligations in the contract, determining and estimating the amount of any variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation and recognizing revenue when the entity satisfies each performance obligation. +The vast majority of our revenue is generated from the sale of distinct products. Revenue is measured as the amount of consideration we expect to receive in exchange for such products, which is generally at the contractually stated prices, and is recognized when we satisfy a performance obligation by transferring control of a product to a customer. The transfer of control generally occurs at one point in time, upon shipment, when title and risk of loss pass to the customer. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Sales taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue. +5 +4 +Table of Contents +Many of the contracts entered into with customers are commonly comprised of a combination of equipment, supplies, installation and/or training services. We determine performance obligations by assessing whether the products or services are distinct from other elements of the contract. In order to be distinct, the product must perform either on its own or with readily available resources and must be separate within the context of the contract. +Most of our hardware products contain embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole, as it is not sold or marketed separately, and its production costs are minor compared to those of the hardware system. Hardware and software elements are typically delivered at the same time and are accounted for as a single performance obligation for which revenue is recognized at the point in time when ownership is transferred to the customer. +Installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. The delivery of installation and training services are not assessed to determine whether they are separate performance obligations, as the amounts are not material to the contract. +Shipping and handling activities that occur after control over a product has transferred to a customer are accounted for as fulfillment activities rather than performance obligations, as allowed under a practical expedient provided by Topic 606. The shipping and handling fees charged to customers are recognized as revenue and the related costs are included in cost of revenue at the point in time when ownership of the product is transferred to the customer. +We may perform service at the request of the customer, generally for the repair and maintenance of products previously sold. These services are short in duration and total less than 10 % of revenue for the years ended January 31, 2021 and 2020. Revenue is recognized as services are rendered and accepted by the customer. We also provide service agreements on certain of our Product Identification equipment. Service agreements are purchased separately from the equipment and provide for the right to obtain service and maintenance on the equipment for a period of typically one to two years. Accordingly, revenue on these agreements is recognized over the term of the agreements. The portion of service agreement contracts that are uncompleted at the end of any reporting period are included in deferred revenue. +We generally provide warranties for our products. The standard warranty period is typically 12 months for most hardware products except for airborne printers, which typically have warranties that extend for +3 - 5 +years, consistent with industry practice. Such assurance-type warranties are not deemed to be separate performance obligations from the hardware product and costs associated with providing the warranties are accrued in accordance with ASC 450, “Contingencies,” as we have the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability. Our estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions. To the extent that our experience in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the estimated warranty liability are recorded at that time, with an offsetting adjustment to cost of revenue. On occasion, customers request a warranty period longer than our standard warranty. In those instances, in which extended warranty services are separately quoted to the customer, an additional performance obligation is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue. +We recognize an asset for the incremental direct costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. Costs related to obtaining sales contracts for our aerospace printer products have been capitalized and are being amortized based on the forecasted number of units sold over the estimated benefit term. We apply the practical expedient to expense costs incurred for costs to obtain a contract when the amortization period would have been less than a year. These costs include sales commissions paid to the internal direct sales team as well as to third-party representatives and distributors. Contractual +5 +5 +Table of Contents +agreements with each of these parties outline commission structures and rates to be paid. Generally speaking, the contracts are all individual procurement decisions by the customers and do not include renewal provisions and as such the majority of the contracts have an economic life of significantly less than a year. +Accounts Receivables and Allowance for Doubtful Accounts: +Standard payment terms are typically 30 days after shipment but vary by type and geographic location of our customer. Credit is extended based upon an evaluation of the customer’s financial condition. In circumstances where we are aware of a customer’s inability to meet its financial obligations, an allowance is established. The remainder of the allowance established is based on a variety of factors, including the age of amounts outstanding relative to their contractual due date, historical +write-off +experience and current market assessments. Accounts receivable are stated at their estimated net realizable value. +Research and Development Costs: +We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. The following costs are included in research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies. +Foreign Currency Translation: +The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at +year-end +exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the average monthly exchange rates in effect during the related period. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our subsidiaries in Germany, Denmark and China since their undistributed earnings are considered to be permanently invested. Included in our consolidated statements of income was a net transactional foreign exchange gain of $ 0.6 million in fiscal 2021, and a net transaction foreign exchange loss of $ 0.4 million in fiscal 2020 and $ 0.7 million for fiscal 2019. +Advertising: +We +expense advertising costs as incurred. Advertising costs including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $ 0.9 million; $ 1.8 million and $ 1.9 million in fiscal 2021, 2020 and 2019, respectively. +Long-Lived Assets: +Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. There were no impairment charges for our long-lived assets in fiscal years 2021, 2020 or 2019. +Intangible Assets: +Intangible assets include the value of customer and distributor relationships, existing technology and +non-competition +agreements acquired in connection with business and asset acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. There were no impairment charges for our intangible assets in fiscal years 2021, 2020 or 2019. +Goodwill: +Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate indicate that the carrying value of an asset might be +5 +6 +Table of Contents +impaired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. We determined that each of our operating segments (Product Identification and T&M) represents a reporting unit for purposes of goodwill impairment testing. +The accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this qualitative assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. The quantitative assessment compares the fair value of the reporting unit with its carrying value. We estimate the fair value of our reporting units using a blended income and market approach. The income approach is based on a discounted cash flow model and provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. The market approach, compares the reporting unit to publicly traded companies and transactions involving similar business, and requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. We performed a quantitative analysis of the reporting units as of January 31, 2021 and determined that the fair value was in excess of our carrying value and therefore, no goodwill impairment has occurred. See Note 3, “Goodwill,” for further details. +Leases: +On February 1, 2019 we adopted ASC 842, Leases. This guidance requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (ROU) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using a discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate for the expected lease term is used. Our incremental borrowing rate approximates the rate we would have to pay to borrow on a collateralized basis over a similar term at lease inception. The value of the ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received. Several of our lease contracts include options to extend the lease term and we include the renewal options for these leases in the determination of the ROU asset and lease liability when the likelihood of renewal is determined to be reasonably certain. +We enter into lease contracts for certain of our facilities at various locations worldwide. At inception of a contract, we determine whether the contract is or contains a lease. If we have a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. +There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. We have made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. All of our leases are classified as operating leases. Operating lease expense is recognized on a straight-line basis over the lease term and included in general and administrative expense on the consolidated statement of income. ROU assets are classified in other long-term assets, short-term lease liabilities are classified in other current liabilities, and long-term lease liabilities are classified in other long-term liabilities in the consolidated balance sheet. In the statement of cash flow, payments for operating leases are classified as operating activities. +5 +7 +Table of Contents +In addition, several of our lease agreements include +non-lease +components for items such as common area maintenance and utilities which are accounted for separately from the lease component. +Income Taxes: +We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. Our deferred taxes are presented as +non-current +in the accompanying consolidated balance sheet. An allowance against deferred tax assets is recognized when it is +more-likely-than-not +that some portion or all of the deferred tax assets will not be realized. At January 31, 2021 and 2020, a valuation allowance was provided for deferred tax assets attributable to certain domestic R&D credit carryforwards. In addition, during fiscal 2021, we provided a valuation allowance for deferred tax assets attributable to foreign tax credit carryforwards which would expire unused. +We account for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a +more-likely-than-not +threshold. ASC 740 also provides guidance on +de-recognition, +classification, interest and penalties, accounting in interim periods and disclosure. +On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected us, including a +one-time +mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. All accounting under SAB 118 was finalized during the quarter ending January 31, 2019 with no material changes from the provisional amounts previously recorded. +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The legislation had sweeping effects including various types of economic relief for impacted businesses and industries. One such relief provision was the Paycheck Protection Program, which provided short-term cash flow assistance to finance employee payroll and qualified expenses. On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed $ 4.4 million (the “PPP Loan”). On December 27, 2020 the Consolidated Appropriations Act, 2021, H.R. 133 was signed into law. The legislation permits the deductibility of expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan (covered loan) guaranteed under the Paycheck Protection Program. We have fully utilized the PPP Loan proceeds for qualifying expenses and, subsequent to year end, have applied for forgiveness of the PPP Loan (including all associated accrued interest) in accordance with the terms of the CARES Act, as amended by the PPP Flexibility Act. Consistent with the legislation, we expect to deduct the full $ 4.4 million of qualified expenses on our 2020 federal tax return. +Net Income Per Common Share: +Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2021, 2020 and 2019, there were 642,623 ; 202,187 and 326,275 , respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive. +Fair Value Measurement: +We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between +58 +Table of Contents +market participants at the measurement date. In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances. +The fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities +Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, other accrued expenses and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short-term nature of these instruments. +Self-Insurance: +We are self-insured for U.S. medical and dental benefits for qualifying employees and maintain stop-loss coverage from a third party which limits our exposure to large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In estimating this accrual, we utilize an independent third-party broker to estimate a range of expected losses, which are based on analyses of historical data. Assumptions are closely monitored and adjusted when warranted by changing circumstances. Our liability for self-insured claims is included within accrued compensation in our consolidated balance sheets and was $ 0.2 million and $ 0.6 million, as of January 31, 2021 and 2020. +Share-Based Compensation: +Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires several complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and our dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, we have observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of our common stock on the grant date. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. +Cash flow from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) is classified with other income tax cash flows as an operating activity. +Share-based compensation becomes deductible for determining income taxes when the related award vests, is exercised, or is forfeited depending on the type of share-based award and subject to relevant tax law. +59 +Table of Contents +Derivative Financial Instruments: +We occasionally uses derivative instruments as part of its overall strategy to manage its exposure to market risks primarily associated with fluctuations in foreign currency exchange rates and interest rates. Derivative instruments are recognized as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of income during the current period. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. +For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) (OCI) and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the hedged transaction affects earnings (e.g., in “Interest Expense” when the hedged transactions are interest cash flows associated with floating-rate debt, or “Other, Net” for portions reclassified relating to the remeasurement of the debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, are recognized in the statement of income during the current period. +Recent Accounting Pronouncements +Recently Adopted: +Fair Value Measurement +In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) +2018-13, +“Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU +2018-13 +modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The provisions of ASU +2018-13 +relating to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The remaining provisions should be applied retrospectively to all periods presented upon their effective date. We adopted the provisions of this guidance effective February 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and accompanying disclosures. +Recent Accounting Standards Not Yet Adopted: +Income Taxes +In December 2019, the FASB issued an ASU +2019-12, +“Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU +2019-12 +is effective for fiscal years beginning after December 15, 2020. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are not electing to early adopt and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and accompanying disclosures. +No other new accounting pronouncements, issued or effective during fiscal 2021, have had or are expected to have a material impact on our consolidated financial statements. +6 +0 +Table of Contents +Note 2—Revenue Recognition +We derive revenue from the sale of (i) hardware including, digital color label printers and specialty OEM printing systems, portable data acquisition systems and airborne printers used in the flight deck and in the cabin of military, commercial and business aircraft, (ii) related consumable supplies including paper, labels, tags, inks, toners and ribbons, (iii) repairs and maintenance of equipment and (iv) service agreements. +Revenues disaggregated by primary geographic markets and major product types are as follows: +Primary geographical markets: +Year Ended +(In thousands) +January 31, +2021 +January 31, +2020 +January 31, +2019 +United States +$ +70,911 +$ +83,671 +$ +83,668 +Europe +29,029 +29,617 +31,574 +Canada +5,574 +5,719 +6,692 +Asia +5,105 +8,316 +8,207 +Central and South America +3,950 +4,145 +4,147 +Other +1,464 +1,978 +2,369 +Total Revenue +$ +116,033 +$ +133,446 +$ +136,657 +Major product types: +Year Ended +(In thousands) +January 31, +2021 +January 31, +2020 +January 31, +2019 +Hardware +$ +34,111 +$ +48,959 +$ +53,207 +Supplies +71,772 +71,838 +71,178 +Service and Other +10,150 +12,649 +12,272 +Total Revenue +$ +116,033 +$ +133,446 +$ +136,657 +Contract Assets and Liabilities +We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. +Our contract liabilities, which represent billings in excess of revenue recognized, are related to advanced billings for purchased service agreements and extended warranties. Contract liabilities were $ 285,000 and $ 466,000 at January 31, 2021 and January 31, 2020, respectively, and are recorded as deferred revenue in the consolidated balance sheet. The decrease in the deferred revenue balance during the period ended January 31, 2021 is primarily due to $ 466,000 of revenue recognized during the period that was included in the deferred revenue balance at January 31, 2020 offset by cash payments received in advance of satisfying performance obligations. +Contract Costs +We have determined that certain costs related to obtaining sales contracts for our aerospace printer products meet the requirement to be capitalized. These costs are deferred and amortized based on the forecasted number of units sold over the estimated benefit term. The balance of these contract assets at January 31, 2020 was $ 944,000 , of which $ 59,000 was reported in other current assets and $ 885,000 was reported in other assets in the consolidated balance sheet. Amortization of incremental direct costs was $ 26,940 for the period ended +6 +1 +Table of Contents +January 31, 2021. The balance of the deferred incremental direct contract costs net of accumulated amortization at January 31, 202 +1 +is $ +917,000 +, of which $ +36,000 +was reported in other current assets and $ +881,000 +was reported in other assets in the consolidated balance sheet. The contract costs are expected to be amortized over the estimated remaining period of benefit, which we currently estimate to be approximately +5 +years. +Note 3—Goodwill +Goodwill by reporting unit is as follows: +(In thousands) +Product +Identification +T&M +Total +Balance at January 31, 2019 +$ +7,807 +$ +4,522 +$ +12,329 +Foreign currency translation +( 295 +) +— +( 295 +) +Balance at January 31, 2020 +$ +7,512 +$ +4,522 +$ +12,034 +) +Foreign currency translation +772 +— +772 +Balance at January 31, 2021 +$ +8,284 +$ +4,522 +$ +12,806 +After consideration of the impact of the decline in the global economy due to the COVID-19 pandemic, coupled with the grounding of the 737 MAX in March, 2019 and the production halt in January, 2020 which negatively impacted revenues and margins in fiscal 2020 and 2021, we elected to forgo the qualitative assessment and instead performed a quantitative goodwill impairment test to determine if the carrying values of the reporting units are greater than the fair values. We utilized a blended income and market approach. The income approach was based upon a discounted cash flow model which we believe provides a fair value estimate of the reporting unit’s expected long-term operating performance. The market approach compares the reporting units to similar publicly traded companies. Based on our quantitative impairment assessment as of January 31, 2021, we determined that the fair value of the reporting units were in excess of their carrying values and therefore, no goodwill impairment had occurred. +Note 4—Intangible Assets +Intangible assets are as follows: +January 31, 2021 +January 31, 2020 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Miltope: +Customer Contract Relationships +$ +3,100 +$ +( 2,284 +) +$ +— +$ +816 +$ +3,100 +$ +( 2,021 +) +$ +— +$ +1,079 +RITEC: +Customer Contract Relationships +2,830 +( 1,423 +) +— +1,407 +2,830 +( 1,076 +) +— +1,754 +Non-Competition +Agreement +950 +( 950 +) +— +— +950 +( 871 +) +— +79 +TrojanLabel: +Existing Technology +2,327 +( 1,405 +) +196 +1,118 +2,327 +( 1,053 +) +78 +1,352 +Distributor Relations +937 +( 396 +) +89 +630 +937 +( 297 +) +27 +667 +Honeywell: +Customer Contract Relationships +27,243 +( 9,712 +) +— +17,531 +27,243 +( 6,791 +) +— +20,452 +Intangible Assets, net +$ +37,387 +$ +( 16,170 +) +$ +285 +$ +21,502 +$ +37,387 +$ +( 12,109 +) +$ +105 +$ +25,383 +62 +Table of Contents +There were no impairments to intangible assets during the periods ended January 31, 2021 and 2020. Amortization expense of $ 4.1 million; $ 4.2 million and $ 4.1 million with regard to acquired intangibles has been included in the consolidated statements of income for years ended January 31, 2021, 2020 and 2019, respectively. +Estimated amortization expense for the next five fiscal years is as follows: +(In thousands) +2022 +2023 +2024 +2025 +2026 +Estimated amortization expense +$ +3,938 +$ +3,956 +$ +4,055 +$ +3,416 +$ +3,021 +Note 5—Inventories +The components of inventories are as follows: +January 31 +2021 +2020 +(In thousands) +Materials and Supplies +$ +20,265 +$ +20,151 +Work-in-Progress +2,076 +1,408 +Finished Goods +16,371 +17,992 +38,712 +39,551 +Inventory Reserve +( 8,652 +) +( 5,626 +) +$ +30,060 +$ +33,925 +Finished goods inventory includes $ 4.0 million and $ 3.4 million of demonstration equipment at January 31, 2021 and 2020, respectively. +Note 6—Property, Plant and Equipment +Property, plant and equipment consist of the following: +January 31 +2021 +2020 +(In thousands) +Land and Land Improvements +$ +1,004 +$ +967 +Buildings and Leasehold Improvements +12,642 +12,524 +Machinery and Equipment +23,346 +23,167 +Computer Equipment and Software +13,847 +11,388 +Gross Property, Plant and Equipment +50,839 +48,046 +Accumulated Depreciation +( 38,828 +) +( 36,778 +) +Net Property Plant and Equipment +$ +12,011 +$ +11,268 +Depreciation expense on property, plant and equipment was $ 1.9 million for the year ended January 31, 2021 and $ 2.0 million for both of the years ended January 31, 2020 and 2019. +63 +Table of Contents +Note 7—Accrued Expenses +Accrued expenses consisted of the following: +January 31 +2021 +2020 +(In thousands) +Warranty +$ +730 +$ +850 +Professional Fees +546 +697 +Lease Liabilit y +372 +416 +Accrued Payroll & Sales Tax +292 +193 +Stockholder Relation Fees +91 +194 +Dealer Commissions +57 +236 +Other Accrued Expenses +1,851 +2,125 +$ +3,939 +$ +4,711 +Note 8—Credit Agreement and Long- +Term Debt +Credit Agreement +On July 30, 2020, we entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) with Bank of America, N.A., as lender (the “Lender”), our wholly owned subsidiary, ANI ApS, a Danish private limited liability company and TrojanLabel ApS, a Danish private limited liability company and wholly-owned subsidiary of ANI ApS (“TrojanLabel”). The A&R Credit Agreement amended and restated the Credit Agreement dated as of February 28, 2017 (the “Prior Credit Agreement”) by and among us, ANI ApS, TrojanLabel and the Lender. In connection with the A&R Credit Agreement, we entered into an Amended and Restated Security and Pledge Agreement and a mortgage in favor of the Lender with respect to our owned real property in West Warwick, Rhode Island. Under the A&R Credit Agreement, AstroNova, Inc. is the sole borrower, and at January 31, 2021, its obligations are guaranteed by ANI ApS and TrojanLabel. +Immediately prior to the closing of the A&R Credit Agreement, we repaid $ 1.5 million in principal amount of term loans outstanding under the +Prior +Credit Agreement. +The A&R Credit Agreement provides for (i) a term loan in the principal amount of $ 15.2 million, which we used to refinance the outstanding term loans borrowed by us and ANI ApS under the +Prior +Credit Agreement +and a portion of the outstanding revolving loans borrowed by us under the +Pr +i +or +Credit Agreement, and (ii) a $ 10.0 million revolving credit facility available to us for general corporate purposes. Revolving credit loans may be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. +During the third quarter of fiscal year 2021, we repaid the entire outstanding balance under the revolving line of credit. Balances outstanding under the revolving line of credit during the year ended January 31, 2021 bore interest at a weighted average annual rate of 3.41 %, and $ 188,000 of interest was incurred and is included in other income (expense) in the accompanying condensed consolidated income statement for the year ended January 31, 2021. At January 31, 2021, there was no balance outstanding under the revolving line of credit and $ 10.0 million was available for borrowing under the revolving credit facility. +The A&R Credit Agreement was accounted for as a debt modification in a +non- +troubled +debt restructuring. We incurred $ 0.2 million of new debt issuance costs related to the term loan, of which $ 0.1 million of new lender fees were recorded against the debt as debt issuance costs and will be amortized over the term of the loan and $ 0.1 million of third party fees that were expensed as incurred. Additionally, $ 0.1 million of unamortized debt issuance costs related to the prior term debt will be amortized over the remaining life of the new term loan. We also incurred $ 0.1 million of new debt issuance fees in connection with the revolving line of credit which are included as a component of prepaid expenses and other current assets and will be amortized over the remaining life of the A&R Credit Agreement. +64 +Table of Contents +Under the A&R Credit Agreement, the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about July 31, 2020 and October 31, 2020 was $ 0.8 million; the principal amount of the quarterly installment required to be paid on the last day of our fiscal quarter ending January 31, 2021 was $ 1.1 million; the principal amount of the quarterly installment required to be paid on the last day of the our fiscal quarter ending on or about April 30, 2021 will be $ 1.1 million; the principal amount of each quarterly installment required to be paid on the last day of each of the our fiscal quarters ending on or about July 31, 2021, October 31, 2021, January 31, 2022 and April 30, 2022 is $ 1.4 million, and the entire remaining principal balance of the term loan is required to be paid on June 15, 2022 . We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than June 15, 2022, and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate, on such date. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. +Under the A&R Credit Agreement the term loan and revolving credit loans bear interest at a rate per annum equal to, at the our option, either (a) the LIBOR Rate (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 2.15 % to 3.65 % based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50 %, (ii) Bank of America’s publicly announced prime rate, (iii) the LIBOR Rate plus 1.00 % or (iv) 1.00 %, plus a margin that varies within a range of 1.15 % to 2.65 % based on our consolidated leverage ratio. We are also required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.25 % and 0.675 % based on our consolidated leverage ratio. +The loans under the A&R Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. +Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the A&R Credit Agreement. No amount of the term loan that is repaid may be reborrowed. +Under the A&R Credit Agreement, we must comply with various customary financial and +non-financial +covenants including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, a minimum level of EBITDA, a consolidated asset coverage ratio and a minimum level of liquidity. The primary +non-financial +covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on capital stock, to repurchase or acquire capital stock, to conduct mergers or acquisitions, to sell assets, to alter the capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the A&R Credit Agreement. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the A&R Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or our undergoing a change of control. +In addition to the guarantees by ANI ApS and TrojanLabel, our obligations under the A&R Credit Agreement are also secured by substantially all of AstroNova, Inc.’s personal property assets (including a pledge of the equity interests it holds in ANI ApS, in our wholly-owned German subsidiary AstroNova GmbH, and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island. +65 +Table of Contents +Long-Term Debt +Long-term debt in the accompanying condensed consolidated balance sheets under the A&R Credit Agreement is as follows: +January 31 +(In thousands) +2021 +2020 +USD Term Loan ( 4.65 % as of January 31, 2021); maturity date of June 15, 2022 +$ +12,576 +$ +— +USD Term Loan ( 3.03 % as of January 31, 2021); maturity date November 30, 2022 +— +8,250 +USD Term Loan ( 3.03 % as of January 31, 2021); maturity date of January 31, 2022 +— +4,784 +12,576 +13,034 +Debt Issuance Costs, net of accumulated amortization +( 141 +) +( 111 +) +Current Portion of Term Loan +( 5,326 +) +( 5,208 +) +Long-Term Debt +$ +7,109 +$ +7,715 +During the years ended January 31, 2021, 2020 and 2019, we recognized $ 0.5 million, $ 0.4 million and $ 0.6 million of interest expense, respectively, which was included in other income (expense) in the accompanying consolidated income statement. +The schedule of required principal payments remaining under the A&R Credit Agreement on long-term debt outstanding as of January 31, 2021 is as follows: +(In thousands) +Fiscal 2022 +$ +5,326 +Fiscal 2023 +7,250 +$ +12,576 +Refer to Note 23, “Subsequent Event” for details regarding the First Amendment to Credit Agreement to our A&R Credit Agreement, which was entered into subsequent to year end on March 24, 2021. +Note 9—Paycheck Protection Program Loan +On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed $ 4.4 million (the “PPP Loan”) from Greenwood pursuant to the Paycheck Protection Program (“PPP”) administered by the United States Small Business Administration (the “SBA”) and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020. The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020 (the “PPP Flexibility Act”) which was enacted on June 5, 2020. +The PPP Loan, which will mature on May 6, 2022 , is unsecured and bears interest at a rate of 1.0 % per annum, accruing from the loan date, and is payable monthly. No payments are due on the PPP Loan until the date on which the SBA determines the amount of the PPP Loan that is eligible for forgiveness, so long as we apply for forgiveness within the ten months from the end of the twenty-four week period following the date of loan disbursement, but interest will continue to accrue during the deferral period. We accrued interest for the PPP Loan in the amount of $ 33,000 , which is included in other income (expense) in the accompanying consolidated statements of income for the year ended January 31, 2021. +The PPP Loan may be prepaid at any time without penalty. The loan agreement and promissory note include customary provisions for a loan of this type, including prohibitions on our payment of dividends or repurchase of +66 +Table of Contents +shares of our stock while the PPP Loan remains outstanding. The loan agreement and promissory note also include events of default relating to, among other things, payment defaults, breaches of the provisions of the loan agreement or the promissory note, and cross-defaults on other loans. +Subject to the limitations and conditions set forth in the CARES Act, the PPP Flexibility Act, and the regulations and guidance provided by the SBA with respect to the PPP, a portion of the PPP Loan may be forgiven in an amount up to the amount of the PPP Loan proceeds that we spent on payroll, rent, utilities and interest on certain debt during the twenty-four-week period following incurrence of the PPP Loan. Interest accrued on the forgiven portion of the principal amount of the PPP Loan is also forgiven. The amount of the PPP Loan to be forgiven in respect of rent, utilities and interest on certain debt will be capped at 40 % of the forgiven amount, with the remaining forgiven amount allocated to payroll costs. We have fully utilized the PPP Loan proceeds for qualifying expenses during fiscal year 2021 and subsequent to year end we applied for forgiveness of the PPP Loan (including all associated accrued interest) in accordance with the terms of the CARES Act, as amended by the PPP Flexibility Act. Whether our application for forgiveness will be granted and in what amount is subject to approval by the SBA and may also be subject to further requirements in any regulations and guidelines the SBA may adopt. The PPP Loan is classified as long-term debt in the condensed consolidated balance sheet until the forgiveness determination has been made by the SBA. +Note 10—Derivative Financial Instruments and Risk Management +On February 28, 2017, as part of the Prior Credit Agreement, we entered into a cross-currency interest rate swap to manage the interest rate risk and foreign currency exchange risk associated with the floating-rate foreign currency-denominated term loan borrowing by ANI ApS and an interest rate swap to manage the interest rate risk associated with our variable rate term loan borrowing (the “Swaps”). Both Swaps were designated as cash flow hedges of floating-rate borrowings. +Our cross-currency interest rate swap agreement effectively modified our exposure to interest rate risk and foreign currency exchange rate risk by converting our floating-rate debt denominated in U.S. Dollars on ANI ApS’s books to a fixed-rate debt denominated in Danish Kroner for the term of the loan, thus reducing the impact of interest-rate and foreign currency exchange rate changes on future interest expense and principal repayments. This swap involved the receipt of floating interest rate amounts in U.S. Dollars in exchange for fixed-rate interest payments in Danish Kroner, as well as exchanges of principal at the inception spot rate, over the life of the term loan. +Subsequently, concurrent with our borrowings to fund the payments for the Asset Purchase and License Agreement with Honeywell International, we entered into an interest rate swap agreement to modify our exposure to interest rate risk by effectively converting our floating-rate borrowings to fixed-rate debt over the term of the loan, thus reducing the impact of interest-rate changes on future interest expense. This swap involved the receipt of floating interest rate amounts in U.S. Dollars in exchange for fixed interest rate payments in U.S. dollars over the life of the term loan. +As a direct result of the terms of the Lender’s conditions for entry into the A&R Credit Agreement, on July 30, 2020, we terminated the two Swaps that we used to manage the interest rate and foreign currency exchange risks associated with our prior borrowings under the +Prior +Credit Agreement. The terms of the A&R Credit Agreement caused those swaps to cease to be effective hedges of the underlying exposures. The termination of the Swaps was contracted immediately prior to the end of the second quarter of fiscal 2021 at a cash cost of approximately $ 0.7 million, which was settled in the third quarter. Upon termination, the remaining balance of $ 58,000 in accumulated other comprehensive loss related to the cross-currency interest rate swap was reclassified into earnings as the forecasted foreign currency interest payments will not occur and such balance is included in other expense in the accompanying consolidated statements of income for the period ended January 31, 2021. The remaining balance in accumulated other comprehensive loss related to the interest rate swap of $ 0.1 million is being amortized into earnings through the original term of the hedge relationship as the underlying floating interest rate debt still exists. +67 +Table of Contents +The following table summarizes the notional amount and fair value of our derivative instruments: +Cash Flow Hedges +(In thousands) +January 31, 2021 +January 31, 2020 +Notional Amount +Fair Value Derivatives +Notional Amount +Fair Value Derivatives +Asset +Liability +Asset +Liability +Cross-currency Interest Rate Swap +$ +— +$ +— +$ +— +$ +4,489 +$ +— +$ +250 +Interest Rate Swap +$ +— +$ +— +$ +— +$ +8,250 +$ +— +$ +96 +The following tables present the impact of the derivative instruments in our consolidated financial statements for the years ended January 31, 2021 and 2020: +Years Ended +Cash Flow Hedge +(In thousands) +Amount of Gain(Loss) +Recognized in OCI +on +Derivative +Location of Gain (Loss) +Reclassified from +Accumulated OCI into +Income +Amount of Gain (Loss) +Reclassified from +Accumulated OCI into +Income +January 31, +2021 +January 31, +2020 +January 31, +2021 +January 31, +2020 +Swap contracts +$ +( 301 +) +$ +159 +Other Income +$ +( 248 +) +$ +338 +At January 31, 2021, we expect to reclassify approximately $ 0.1 million of net gains on the swap contracts from accumulated other comprehensive loss to earnings during the next 12 months due to changes in foreign exchange rates and the payment of variable interest associated with the floating-rate debt. +Note 11—Royalty Obligation +In fiscal 2018, AstroNova, Inc. entered into an Asset Purchase and License Agreement with Honeywell International, Inc. to acquire an exclusive, perpetual, world-wide license to manufacture Honeywell’s narrow-format flight deck printers for two aircraft families along with certain inventory used in the manufacturing of the licensed printers. The purchase price included a guaranteed minimum royalty payment of $ 15.0 million, to be paid in quarterly installments over a +ten-year +period. Royalty payments are based on gross revenues from the sales of the printers, paper and repair services of the licensed products. The royalty rates vary based on the year in which they are paid or earned and product sold or service provided, and range from single-digit to mid double-digit percentages of gross revenue. +The guaranteed minimum royalty payment obligation was recorded at the present value of the minimum annual royalty payments using a present value factor of 2.8 %, which is based on the estimated +after-tax +cost of debt for similar companies. As of January 31, 2021, we had paid an aggregate of $ 5.5 million of the guaranteed minimum royalty obligation. At January 31, 2021, the current portion of the outstanding guaranteed minimum royalty obligation of $ 2.0 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $ 6.1 million is reported as a long-term liability on our consolidated balance sheet. In addition to the guaranteed minimum royalty payments, for the periods ended January 31, 2021 and January 31, 2020, we also incurred excess royalty expense of $ 31 thousand and $ 1.2 million, respectively, which is included in cost of revenue in our consolidated statements of income. A total of $ 0.2 million of excess royalty is payable and reported as a current liability on our consolidated balance sheet at January 31, 2021. +Note 12—Leases +We enter into lease contracts for certain of its facilities at various locations worldwide. Our leases have remaining lease terms of one to eight years , some of which include options to extend the lease term for periods of up to five years when it is reasonably certain the Company will exercise such options. +68 +Table of Contents +We lease office space from an affiliate. This lease is classified as an operating lease with annual rental payments of $ 63,000 for both January 31, 2021 and January 31, 2020. +Balance sheet and other information related to our leases is as follows: +Operating Leases +(In thousands) +Balance Sheet Classification +January 31, +2021 +January 31, +2020 +Lease Assets +Right of Use Assets +$ +1,389 +$ +1,661 +Lease Liabilities +— +Current +Other Accrued Expenses +372 +416 +Lease Liabilities +— +Long Term +Lease Liabilities +$ +1,065 +$ +1,279 +Lease cost information is as follows: +Operating Leases +(In thousands) +Statement of Income Classification +Year Ended +January 31, +2021 +Year Ended +January 31, +2020 +Operating Lease Costs +General and Administrative Expense +$ +485 +$ +449 +Maturities of operating lease liabilities are as follows: +(In thousands) +January 31, +2021 +2022 +$ +372 +2023 +318 +2024 +292 +2025 +184 +2026 +163 +Thereafter +270 +Total Lease Payments +1,599 +Less: Imputed Interest +( 162 +) +Total Lease Liabilities +$ +1,437 +As of January 31, 2021, the weighted-average remaining lease term and weighted-average discount rate for our operating leases are 5.2 years and 4.00 %, respectively. We calculated the weighted-average discount rate using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term. +Supplemental cash flow information related to leases is as follows: +(In thousands) +Year Ended +January 31, +2021 +Year Ended +January 31, +2020 +Cash paid for operating lease liabilities +$ +429 +$ +406 +69 +Table of Contents +Note 13—Accumulated Other Comprehensive Income (Loss) +The changes in the balance of accumulated other comprehensive income (loss) by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Unrealized +Holding +Gain (Loss) +on Available +for Sale +Securities +Net +Unrealized +Gain (Losses) +on Cash Flow +Hedges +Total +Balance at January 31, 2018 +$ +( 181 +) +$ +( 3 +) +$ +12 +$ +( 172 +) +Other Comprehensive Income (Loss) before reclassification +( 671 +) +— +622 +( 49 +) +Amounts reclassified from AOCI to Earnings +— +3 +( 600 +) +( 597 +) +Other Comprehensive Income (Loss) +( 671 +) +3 +22 +( 646 +) +Balance at January 31, 2019 +$ +( 852 +) +$ +— +$ +34 +$ +( 818 +) +Other Comprehensive Income (Loss) before reclassification +( 133 +) +— +122 +( 11 +) +Amounts reclassified from AOCI to Earnings +— +— +( 264 +) +( 264 +) +Other Comprehensive Income (Loss) +( 133 +) +— +( 142 +) +( 275 +) +Balance at January 31, 2020 +$ +( 985 +) +$ +— +$ +( 108 +) +$ +( 1,093 +) +Other Comprehensive Income (Loss) before reclassification +710 +— +( 239 +) +471 +Amounts Reclassified from AOCI to Earnings +— +— +193 +193 +Cross-Currency Interest Rate Swap Termination +— +— +45 +45 +Other Comprehensive Income (Loss) +710 +— +( 1 +) +709 +Balance at January 31, 2021 +$ +( 275 +) +$ +— +$ +( 109 +) +$ +( 384 +) +The amounts presented above in other comprehensive income (loss) are net of taxes except for translation adjustments associated with our German and Danish subsidiaries. +Note 14—Shareholders’ Equity +During fiscal 2021, 2020 and 2019, certain of our employees delivered a total of 15,357 , 20,329 and 33,430 shares, respectively, of our common stock to satisfy the exercise price and related taxes for stock options exercised and restricted stock vesting. The shares delivered were valued at a total of $ 0.1 million; $ 0.5 million and $ 0.6 million, respectively, and are included in treasury stock in the accompanying consolidated balance sheets at January 31, 2021, 2020 and 2019. These transactions did not impact the number of shares authorized for repurchase under our current repurchase program. +Note 15—Share-Based Compensation +The Company maintains the following share-based compensation plans: +Stock Plans: +We have one equity incentive plan from which we are authorized to grant equity awards, the AstroNova, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for, among other things, the issuance of awards, including incentive stock options, +non-qualified +stock options, stock appreciation rights, time-based restricted stock units (“RSUs”), or performance-based restricted stock units (“PSUs”) and restricted stock awards (RSAs). The 2018 Plan authorizes the issuance of up to 950,000 shares of common stock, plus an additional number of shares equal to the number of shares subject to awards granted under the previous equity incentive plans that are forfeited, cancelled, satisfied without the issuance of stock, otherwise terminated (other than by exercise), or, for shares of stock issued pursuant to any unvested award, that are reacquired by us at not more +70 +Table of Contents +than the grantee’s purchase price (other than by exercise). Under the 2018 Plan, all awards to employees generally have a minimum vesting period of one year. Options granted under the 2018 Plan must be issued at an exercise price of not less than the fair market value of our common stock on the date of grant and expire after ten years. Under the 2018 Plan, 186,500 unvested shares of restricted stock and options to purchase an aggregate of 135,500 shares were outstanding as of January 31, 2021. +In addition to the 2018 Plan, we previously granted equity awards under our 2015 Equity Incentive Plan (the “2015 Plan”) and our 2007 Equity Incentive Plan (the “2007 Plan”). No new awards may be issued under either the 2007 or 2015 Plans, but outstanding awards will continue to be governed by those plans. As of January 31, 2021, options to purchase an aggregate of 337,958 shares were outstanding under the 2007 Plan and 10,833 unvested shares of restricted stock and options to purchase an aggregate of 148,625 shares were outstanding under the 2015 Plan. +We also have a +Non-Employee +Director Annual Compensation Program (the “Program”), under which each of our +non-employee +directors automatically receives a grant of restricted stock on the date of their +re-election +to our board of directors. The number of whole shares granted is equal to the number calculated by dividing the stock component of the director compensation amount determined by the compensation committee for that year by the fair market value of our stock on that day. The value of the restricted stock award for fiscal 2021 was $ 60,000 . Shares of restricted stock granted under the Program become vested on the first anniversary of the date of grant, conditioned upon the recipient’s continued service on our board of directors through that date. +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +Years Ended January 31 +2021 +2020 +2019 +(In thousands) +Stock Options +$ +517 +$ +616 +$ +783 +Restricted Stock Awards and Restricted Stock Units +1,285 +1,136 +1,088 +Employee Stock Purchase Plan +17 +23 +15 +Total +$ +1,819 +$ +1,775 +$ +1,886 +71 +Table of Contents +Stock Options: +Aggregated information regarding stock options granted under the plans is summarized below: +Number +of Shares +Weighted- +Average +Exercise +Price Per +Share +Options Outstanding, January 31, 2018 +745,270 +$ +12.52 +Options Granted +196,000 +18.21 +Options Exercised +( 150,125 +) +10.62 +Options Forfeited +( 16,300 +) +15.10 +Options Cancelled +( 3,700 +) +8.95 +Options Outstanding, January 31, 2019 +771,145 +$ +14.30 +Options Granted +— +— +Options Exercised +( 57,175 +) +11.60 +Options Forfeited +( 34,526 +) +15.73 +Options Cancelled +( 400 +) +6.22 +Options Outstanding, January 31, 2020 +679,044 +$ +14.46 +Options Granted +— +— +Options Exercised +( 1,200 +) +7.60 +Options Forfeited +( 54,361 +) +12.89 +Options Cancelled +( 1,400 +) +7.36 +Options Outstanding, January 31, 2021 +622,083 +$ +14.63 +Set forth below is a summary of options outstanding at January 31, 2021: +Outstanding +Exercisable +Range of +Exercise prices +Number of +Shares +Weighted- +Average +Exercise Price +Weighted- +Average +Remaining +Contractual Life +Number of +Shares +Weighted- +Average +Exercise Price +Weighted +Average +Remaining +Contractual +Life +$ 5.00 - 10.00 +41,044 +$ +7.97 +1.3 +41,044 +$ +7.97 +1.3 +$ 10.01 - 15.00 +359,314 +13.63 +4.9 +326,741 +13.65 +4.7 +$ 15.01 - 20.00 +221,725 +17.48 +6.8 +167,367 +17.22 +6.7 +622,083 +$ +14.63 +5.3 +535,152 +$ +14.33 +5.1 +No options were granted during fiscal 2021 or +fis +cal +2020. The weighted-average estimated fair value of options granted during fiscal 2019 was $ 7.43 . As of January 31, 2021, there was $ 0.2 million of unrecognized compensation expense related to the unvested stock options granted under the plans. This expense is expected to be recognized over a weighted-average period of 0.8 years. +As of January 31, 2021, the aggregate intrinsic value (the aggregate difference between the closing stock price of our common stock on January 31, 2021, and the exercise price of the outstanding options) that would have been received by the option holders if all options had been exercised was $ 0.1 million for all exercisable options and $ 0.1 million for all options outstanding. The total aggregate intrinsic value of options exercised during 2021, 2020 and 2019 was $ 4,000 , $ 0.5 million and $ 1.1 million, respectively. +7 +2 +Table of Contents +Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs): +Aggregated information regarding RSUs and RSAs granted under the Plan is summarized below: +RSAs & RSUs +Weighted-Average +Grant Date Fair Value +Outstanding at January 31, 2018 +177,347 +$ +13.99 +Granted +108,790 +17.85 +Vested +( 67,447 +) +14.26 +Forfeited +( 85,023 +) +14.17 +Outstanding at January 31, 2019 +133,667 +$ +16.90 +Granted +119,522 +19.86 +Vested +( 59,930 +) +14.50 +Forfeited +( 58,625 +) +19.00 +Outstanding at January 31, 2020 +134,634 +$ +16.79 +Granted +245,131 +7.61 +Vested +( 64,997 +) +17.28 +Forfeited +( 117,355 +) +8.83 +Outstanding at January 31, 2021 +197,413 +$ +9.96 +As of January 31, 2021, there was $ 1.1 million of unrecognized compensation expense related to unvested RSUs and RSAs. This expense is expected to be recognized over a weighted average period of 0.8 years. +Employee Stock Purchase Plan (ESPP): +Our +ESPP allows eligible employees to purchase shares of common stock at a 15 % discount from fair market value on the date of purchase. A total of 247,500 shares were initially reserved for issuance under this plan. Summarized plan activity is as follows: +Years Ended January 31 +2021 +2020 +2019 +Shares Reserved, Beginning +24,974 +33,853 +39,207 +Shares Purchased +( 14,600 +) +( 8,879 +) +( 5,354 +) +Shares Reserved, Ending +10,374 +24,974 +33,853 +Note 16—Income Taxes +The components of income (loss) before income taxes are as follows: +January 31 +2021 +2020 +2019 +(In thousands) +Domestic +$ +( 1,193 +) +$ +1,930 +$ +6,859 +Foreign +3,372 +( 560 +) +449 +$ +2,179 +$ +1,370 +$ +7,308 +73 +Table of Contents +The components of the provision/(benefit) for income taxes are as follows: +January 31 +2021 +2020 +2019 +(In thousands) +Current: +Federal +$ +1,272 +$ +660 +$ +1,807 +State +224 +221 +457 +Foreign +420 +368 +952 +1,916 +1,249 +3,216 +Deferred: +Federal +$ +( 910 +) +$ +( 1,364 +) +$ +( 843 +) +State +( 189 +) +( 282 +) +( 170 +) +Foreign +78 +8 +( 625 +) +( 1,021 +) +( 1,638 +) +( 1,638 +) +$ +895 +$ +( 389 +) +$ +1,578 +Total income tax provision/(benefit) +differs from the expected tax provision/(benefit) as a result of the following: +January 31 +2021 +2020 +2019 +(In thousands) +Income Tax Provision at Statutory Rate +$ +458 +$ +288 +$ +1,534 +Denmark Statutory Audit +341 +— +— +Foreign Rate Deferential +197 +315 +558 +Share Based Compensation +171 +( 145 +) +( 127 +) +Canada Withholding Taxes +62 +— +— +State Taxes, Net of Federal Tax Effect +28 +( 48 +) +226 +Global Intangible Low Taxed Incom +e +14 +107 +— +Meals and Entertainment +11 +31 +56 +U.S. Corporate Rate Change +— +— +52 +Transition Tax on Repatriated Earnings +— +— +14 +Return to Provision Adjustment +( 2 +) +( 207 +) +58 +Change in Reserves Related to ASC 740 Liability +( 10 +) +( 352 +) +( 34 +) +Change in Valuation Allowance +( 81 +) +256 +— +R&D Credits +( 157 +) +( 209 +) +( 218 +) +Foreign Derived Intangible Income +( 150 +) +( 107 +) +( 53 +) +Foreign Tax Credits +— +( 344 +) +( 477 +) +Other +13 +26 +( 11 +) +$ +895 +$ +( 389 +) +$ +1,578 +Our effective tax rate for 2021 was 41.1 % compared to negative 28.4 % in 2020 and 21.6 % in 2019. The increase in the effective tax rate in 2021 from 2020 is primarily related to the change in mix of income between relevant jurisdictions in which +we +are +subject to income taxes. Specific items increasing the effective tax rate include foreign rate differential, Denmark statutory audit adjustments, stock-based compensation, and Canada withholding taxes. This increase was offset by the foreign derived intangible income (“FDII”) deduction, the release of a valuation allowance in China, and R&D tax credits expected to be utilized. +The decrease in the effective tax rate in 2020 from 2019 is primarily related to lower +pre-tax +income in 2020 compared to 2019.. Specific items decreasing the effective tax rate include FDII, the release of ASC 740 liabilities, R&D credit utilization, and return to provision adjustments. This decrease was offset by valuation +74 +Table of Contents +allowances recorded on unbenefited losses in China and on carryforward foreign tax credits expected to expire unused. +The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31 +2021 +2020 +(In thousands) +Deferred Tax Assets: +Inventory +$ +2,700 +$ +2,094 +Honeywell Royalty Liability +2,590 +2,583 +State R&D Credits +1,546 +1,496 +Share-Based Compensation +600 +582 +Bad Debt +245 +165 +Warranty Reserve +176 +205 +Compensation Accrual +159 +159 +Net Operating Loss +154 +443 +ASU 842 Adjustment—Lease Liability +125 +— +Unrecognized State Tax Benefits +101 +116 +Foreign Tax Credit +83 +113 +Deferred Service Contract Revenue +68 +111 +Other +308 +295 +8,855 +8,362 +Deferred Tax Liabilities: +Accumulated Tax Depreciation in Excess of Book Depreciation +752 +1,002 +Intangibles +399 +776 +ASU 842 Adjustment – Lease Liability +119 +— +Other +307 +188 +1,577 +1,966 +Subtotal +7,278 +6,396 +Valuation Allowance +( 1,721 +) +( 1,752 +) +Net Deferred Tax Assets +$ +5,557 +$ +4,644 +The valuation allowance of $ 1.7 million at January 31, 2021 relate +s +to domestic research and development tax credit carryforwards and foreign tax credit carryforwards which are expected to expire unused. The valuation allowance of $ 1.8 million at January 31, 2020 included a valuation allowance on China net operating losses, which was released during 2021. +At January 31, 2021, we had net operating loss carryforwards of $ 0.4 million in China, which expire in 2022 through 2026 . We have net operating loss carryforwards of $ 0.2 million in Germany, which can be carried forward indefinitely. We expect to utilize the net operating loss carryforwards in China and Germany before expiration. +At January 31, 2021, we had state research credit carryforwards of approximately $ 1.5 million which expire in 2021 through 2028 . We maintain a full valuation allowance against these credits as we expect these credits to expire unused. +75 +Table of Contents +We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as +follows: +2021 +2020 +2019 +(In thousands) +Balance at February 1 +$ +362 +$ +618 +$ +665 +Increases in prior period tax position +s +59 +— +— +Increases in current period tax positions +5 +2 +7 +Reductions related to lapse of statutes of limitations +( 42 +) +( 26 +) +( 54 +) +Reductions related to settlement with tax authorities +— +( 232 +) +— +Balance at January 31 +$ +384 +$ +362 +$ +618 +During fiscal 2021 and 2020, we released $ 50,000 and $ 114,000 , respectively, of accrued interest and penalties relating to a change in various unrecognized tax positions. During fiscal 2019, we recognized $ 8,000 of expense related to a change in interest and penalties, which are included as a component of income tax expense in the accompanying statements of income for the period ended January 31, 2019. The Company has accrued potential interest and penalties of $ 0.3 million included in Income Taxes Payable in the consolidated balance sheet at the end of both January 31, 2021 and 2020. +The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company was previously under audit by the IRS for the tax years ended January 31, 2015, 2016, and 2017, but on June 6, 2019, we received formal communication regarding the close of the audit with no additional changes made by the IRS. Therefore, the reserves for federal uncertain tax positions relating to the years in question have been released. In fiscal 2020, we released $ 232,000 relating to the federal tax exposure for the years previously under audit and $ 74,000 of related interest (net of federal benefit) and penalties. +The Company was also notified of an income tax audit from the state of Rhode Island, but no significant items have been raised at this time other than information requests. No assessments have been made as of January 31, 2021. +U.S. income taxes have not been provided on $ 5.7 million of undistributed earnings of our foreign subsidiaries since it is our intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, the Company would not be subject to U.S. tax as a result of the Tax Act but could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical. +Note 17—Nature of Operations, Segment Reporting and Geographical Information +Our operations consist of the design, development, manufacture and sale of specialty printers and data acquisition and analysis systems, including both hardware and software and related consumable supplies. We organize and manage our business as a portfolio of products and services designed around a common theme of data acquisition and information output. We have two reporting segments consistent with our revenue product groups: Product Identification (“PI”) and Test & Measurement (“T&M”). +Our PI segment produces an array of high-technology digital color and monochrome label printers and mini presses, labeling software and supplies for a variety of commercial industries worldwide. AstroNova’s T&M segment produces data acquisition systems used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing. The T&M segment also includes our line of aerospace flight deck and cabin printers. +7 +6 +Table of Contents +Business is conducted in the United States and through foreign branch offices and subsidiaries in Canada, Europe, China, Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United States are conducted through wholly-owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction. +The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies herein. We evaluate segment performance based on the segment profit before corporate and financial administration expenses. +Summarized below are the revenue and segment operating profit (loss) (both in dollars and as a percentage of revenue) for each reporting segment: +($ in thousands) +Revenue +Segment Operating Profit (Loss) +Segment Operating Profit (Loss) +as a % of Revenue +2021 +2020 +2019 +2021 +2020 +2019 +2021 +2019 +2018 +Product Identification +$ +90,268 +$ +88,116 +$ +86,786 +$ +12,885 +$ +7,509 +$ +7,910 +14.3 +% +8.5 +% +9.1 +% +T&M +25,765 +45,330 +49,871 +( 1,032 +) +6,281 +11,933 +( 4.0 +)% +13.9 +% +23.9 +% +Total +$ +116,033 +$ +133,446 +$ +136,657 +11,853 +13,790 +19,843 +( 10.3 +)% +10.3 +% +14.5 +% +Corporate Expenses +9,420 +11,357 +11,123 +Operating Income +2,433 +2,433 +8,720 +Other Expense, Net +( 254 +) +( 1,063 +) +( 1,412 +) +Income Before Income Taxes +2,179 +1,370 +7,308 +Income Tax Provision (Benefit) +895 +( 389 +) +1,578 +Net Income +$ +1,284 +$ +1,759 +$ +5,730 +No customer accounted for greater than 10% of net revenue in fiscal 2021, 2020 or 2019. +Other information by segment is presented below: +(In thousands) +Assets +2021 +2020 +Product Identification +$ +50,047 +$ +51,439 +T&M +51,262 +57,050 +Corporate* +14,164 +8,175 +Total +$ +115,473 +$ +116,664 +* +Corporate assets consist principally of cash, cash equivalents, deferred tax assets and refunds, and certain prepaid corporate assets. +(In thousands) +Depreciation and +Amortization +Capital Expenditures +2021 +2020 +2019 +2021 +2020 +2019 +Product Identification +$ +1,835 +$ +1,928 +$ +1,888 +$ +1,563 +$ +2,001 +$ +1,935 +T&M +4,148 +4,356 +4,264 +1,024 +905 +710 +Total +$ +5,983 +$ +6,284 +$ +6,152 +$ +2,587 +$ +2,906 +$ +2,645 +77 +Table of Contents +Geographical Data +Presented below is selected financial information by geographic area: +(In thousands) +Revenue +Long-Lived Assets* +2021 +2020 +2019 +2021 +2020 +United States +$ +70,911 +$ +83,671 +$ +83,668 +$ +31,226 +$ +34,072 +Europe +29,029 +29,617 +31,574 +2,274 +2,544 +Canada +5,574 +5,719 +6,692 +13 +35 +Asia +5,105 +8,316 +8,207 +— +— +Central and South America +3,950 +4,145 +4,147 +— +— +Other +1,464 +1,978 +2,369 +— +— +Total +$ +116,033 +$ +133,446 +$ +136,657 +$ +33,513 +$ +36,651 +* +Long-lived assets exclude goodwill assigned to the T&M segment of $ 4.5 million at both January 31, 2021 and 2020 and $ 8.3 million and $ 7.5 million assigned to the PI segment at January 31, 2021 and 2020, respectively. +Note 18—Employee Benefit Plans +We sponsor a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code. +All contributions are deposited into trust funds. It +is +our +policy +to fund any +contributions accrued. Our annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $ 0.4 million in fiscal 2021 and $ 0.5 million in both fiscal 2020 and 2019. +Note 19—Product Warranty Liability +We offer a manufacturer’s warranty for the majority of our hardware products. The specific terms and conditions of warranty vary depending upon the products sold and country in which we do business. We estimate the warranty costs based on historical claims experience and record a liability in the amount of such estimates at the time product revenue is recognized. We regularly assess the adequacy of our recorded warranty liabilities and adjusts the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows: +January 31 +2021 +2020 +2019 +(In thousands) +Balance, beginning of the year +$ +850 +$ +832 +$ +575 +Provision for Warranty Expense +855 +1,733 +1,680 +Cost of Warranty Repair +s +( 975 +) +( 1,715 +) +( 1,423 +) +Balance, end of the year +$ +730 +$ +850 +$ +832 +Note 20—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts which constitute our customer base. We periodically perform +on-going +credit evaluations of our customers. We have not historically experienced significant credit losses on collection of our accounts receivable. +78 +Table of Contents +During the years ended January 31, 2021, 2020 and 2019, one vendor accounted for 23.2 %, 21.2 % and 21.6 % of purchases, and 23.8 %, 28.0 % and 28.7 % of accounts payable, respectively, as of January 31, 2021, 2020 and 2019. +Note 21—Commitments and Contingencies +We are subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +Note 22—Fair Value Measurements +Assets and Liabilities Recorded at Fair Value on a Recurring Basis +The following tables provide a summary of the financial liabilities that are measured at fair value: +Liabilities measured at fair value: +Fair value measurement at +January 31, 2021 +Fair value measurement at +January 31, 2020 +(in thousands) +Level 1 +Level 2 +Level 3 +Total +Level 1 +Level 2 +Level 3 +Total +Cross-Currency Interest Rate Swap Contract (included in Other Long-Term Liabilities) +$ +— +$ +— +$ +— +$ +— +$ +— +$ +250 +$ +— +$ +250 +Interest Rate Swap Contract (included in Other Long-Term Liabilities) +— +— +— +— +— +96 +— +96 +Earnout Liability (included in Other Liabilities) +— +— +— +— +— +— +14 +14 +Total liabilities +$ +— +$ +— +$ +— +$ +— +$ +— +$ +346 +$ +14 +$ +360 +We used the market approach to measure fair value of our derivative instruments. These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates and foreign exchange rates and are classified as Level 2 because they are +over-the-counter +contracts with a bank counterparty that are not traded in an active market. +79 +Table of Contents +Assets and Liabilities Not Recorded at Fair Value on the Consolidated Balance Sheet +Our long-term debt, including the current portion of long-term debt not reflected in the financial statements at fair value, is reflected in the table below: +Fair Value Measurement at +January 31, 2021 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +12,586 +$ +12,586 +$ +12,576 +Fair Value Measurement at +January 31, 2020 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +13,258 +$ +13,258 +$ +13,034 +The above table does not include the PPP loan, as the fair value of the PPP loan approximates its carrying value. +The fair value of our long-term debt, including the current portion, is estimated by discounting the future cash flows using current interest rates at which similar borrowings with the same maturities would be made to borrowers with similar credit ratings and is classified as Level 3. +Note 2 +3 +—Subsequent Event +On March 24, 2021, we entered into a First Amendment to Credit Agreement (the “Amendment”) to the A&R Credit Agreement +(the “A&R Credit Agreement,” +as +amended by the Amendment; the “Amended Credit Agreement”) with Bank of America, N.A., as lender (the “Lender”), ANI ApS and TrojanLabel. Immediately prior to the closing of the Amendment, we repaid $ 2.6 million in principal amount of the term loan outstanding under the A&R Credit Agreement, resulting in an outstanding balance of the term loan of $ 10.0 million and no amount drawn and outstanding under the revolving credit facility under the A&R Credit Agreement. +The Amended Credit Agreement provides for (i) a term loan in the principal amount of $ 10.0 million, and (ii) a $ 22.5 million revolving credit facility available for general corporate purposes. At the closing of the Amend +ment +, +w +e +borrowed the entire $ 10.0 million term loan which was used to refinance, in full, the outstanding term loan under the A&R Credit Agreement. Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. +The Amended Credit Agreement requires that the term loan be paid as follows: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2021 through January 31, 2022 is $ 187,500 ; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2022 through January 31, 2023 is $ 250,000 ; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2023 through January 31, 2025 is $ 312,500 ; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2025 and July 31, 2025 is $ 500,000 ; and the entire remaining principal balance of the term loan is required to be paid on September 30, 2025. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than September 30, 2025, at which time any outstanding revolving loans will be due and payable in full, and the revolving credit facility will terminate. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. +8 +0 +Table of Contents +The Amended Credit Agreement includes an uncommitted accordion provision under which the term loan and/or revolving credit facility commitments may be increased in an aggregate principal amount not exceeding $ 10.0 million, subject to obtaining the agreement of the Lender and the satisfaction of certain other conditions. +The interest rates under the +Prior +Credit Agreement were modified in the Amended Credit Agreement as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the LIBOR Rate as de +fin +ed +in the Amended Credit Agreement (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60 % to 2.30 % based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50 %, (ii) Bank of America’s publicly announced prime rate, (iii) the LIBOR Rate plus 1.00 % or (iv) 0.50 %, plus a margin that varies within a range of 0.60 % to 1.30 % based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15 % and 0.30 % based on our consolidated leverage ratio. The commitment fee paid on the undrawn portion of the revolving credit facility was $ 28,000 for fiscal year 2021 and is included in the interest expense line in the consolidated income statement for the period ended January 31, 2021. +As under the Prior Credit Agreement, the loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. +Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. +We must comply with various customary financial and +non-financial +covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The minimum EBITDA, minimum consolidated asset coverage ratio, minimum liquidity and maximum capital expenditures covenants with which we were required to comply under the Prior Credit Agreement were eliminated by the Amendment. The primary +non-financial +covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Amendment. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests held in ANI ApS, in our wholly-owned German subsidiary AstroNova GmbH, and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island. Pursuant to the Amendment, the guarantees of our obligations under the Prior Credit Agreement that were previously provided by ANI ApS and TrojanLabel were released. +8 +1 +Table of Contents +SUPPLEMENTARY DATA +Quarterly Financial Information (Unaudited) +2021 +2020 +(In +thousands, +except +per +share +data) +Q1 +Q2 +Q3 +Q4 +Q1 +Q2 +Q3 +Q4 +Revenue +$ +30,919 +$ +27,658 +$ +28,017 +$ +29,438 +$ +36,181 +$ +33,468 +$ +33,318 +$ +30,479 +Cost of Revenue +20,064 +17,871 +18,282 +18,456 +21,942 +21,491 +21,021 +20,234 +Gross Profit +10,855 +9,787 +9,735 +10,982 +14,239 +11,977 +12,297 +10,245 +35.1 +% +35.4 +% +34.7 +% +37.3 +% +39.4 +% +35.8 +% +36.9 +% +33.6 +% +Operating Expenses (1): +Selling & Marketing +$ +5,925 +$ +5,555 +$ +5,553 +$ +6,267 +$ +6,765 +$ +6,413 +$ +6,944 +$ +6,762 +Research & Development +1,940 +1,493 +1,412 +1,361 +2,007 +1,785 +2,076 +2,216 +General & Administrative +2,327 +2,535 +2,353 +2,206 +2,999 +2,616 +2,830 +2,912 +Total Operating Expenses +10,192 +9,583 +9,318 +9,834 +11,771 +10,814 +11,850 +11,890 +Operating Income (Loss) +663 +204 +417 +1,148 +2,468 +1,163 +447 +(1,645 +) +2.1 +% +0.7 +% +1.5 +% +3.9 +% +6.8 +% +3.5 +% +1.3 +% +(5.4 +)% +Other Income (Expense), Net +(349 +) +328 +(437 +) +204 +(368 +) +(183 +) +(238 +) +(275 +) +Income (Loss) Before Taxes +314 +532 +(20 +) +1,352 +2,100 +980 +209 +(1,920 +) +Income Tax Provision (Benefit) +(118 +) +529 +(32 +) +516 +400 +29 +(247 +) +(572 +) +Net Income (Loss) +$ +432 +$ +3 +$ +12 +$ +836 +$ +1,700 +$ +951 +$ +456 +$ +(1,348 +) +Net Income (Loss) per Common Share—Basic +$ +0.06 +$ +0.00 +$ +0.00 +$ +0.12 +$ +0.24 +$ +0.14 +$ +0.06 +$ +(0.19 +) +Net Income (Loss) per Common Share—Diluted +$ +0.06 +$ +0.00 +$ +0.00 +$ +0.12 +$ +0.23 +$ +0.13 +$ +0.06 +$ +(0.19 +) +Annual totals may not agree to the summation of quarterly information due to insignificant rounding and the required calculation conventions. +(1) +Certain amounts reported in the prior quarters may have been reclassified to conform to our current presentation at +year-end. +82 +Table of Contents +ASTRONOVA, INC. +SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision/ +(Benefit) +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts(1): +(In thousands) +Year Ended January 31, +2021 +$ +856 +$ +194 +$ +4 +$ +1,054 +2020 +$ +521 +$ +546 +$ +( 211 +) +$ +856 +2019 +$ +377 +$ +310 +$ +( 166 +) +$ +521 +(1) +The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet dates. +(2) +Uncollectible accounts written off, net of recoveries. +8 +3 \ No newline at end of file diff --git a/raw/filings/0000008146/2020/0001193125-21-114283/filing_metadata.csv b/raw/filings/0000008146/2020/0001193125-21-114283/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..d686effd7d315c57a6de00196c014673e5619bc1 --- /dev/null +++ b/raw/filings/0000008146/2020/0001193125-21-114283/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2021-04-13,2021-01-31,2021-04-13T16:01:36.000Z,0001193125-21-114283,d56468d10k.htm,10-K,11321575,1,1,https://www.sec.gov/Archives/edgar/data/8146/000119312521114283/d56468d10k.htm,https://www.sec.gov/Archives/edgar/data/8146/000119312521114283/,2020,2020,1 diff --git a/raw/filings/0000008146/2020/0001193125-21-114283/item1.txt b/raw/filings/0000008146/2020/0001193125-21-114283/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..f3145468a810adf9eb75dec0ac2224f89a710829 --- /dev/null +++ b/raw/filings/0000008146/2020/0001193125-21-114283/item1.txt @@ -0,0 +1,162 @@ +Item 1 +. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form +10-K +refer to AstroNova, Inc. and its consolidated subsidiaries. +We design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation. +Our products are distributed around the world through our own sales force, authorized dealers, and through independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel +® +, TrojanLabel +® +and GetLabels +™ +brand names. The T&M segment includes our line of aerospace printers and test and measurement data acquisition systems sold under the AstroNova +® +brand name. Refer to Note 17, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 23 through 28 of this Annual Report on Form +10-K. +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets on a global basis. +Product Identification products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding and +3 +Table of Contents +labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers, high-volume presses and specialty OEM printing systems, as well as a wide range of label, tag and flexible packaging material substrates and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution light-weight flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed and stored and presented in various visual output formats. +Product Identification +Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. The segment provides a wide array of digital +end-to-end +product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Our customers typically label or mark products on a short to +mid-size +run basis and benefit from the efficiency, flexibility and cost-savings of digitally printing labels or packaging in their facility, +on-demand, +with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready digital color label printers and specialty OEM printing systems for either standalone output or inline integration with existing +pre-processing +and finishing systems. Customers use our digital printing products in a wide variety of industries, including chemical, cosmetics, food and beverage, medical products, nutraceutical, pharmaceutical, and many others. TrojanLabel expands our customer market by providing a range of higher volume digital color printers, OEM printing systems and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners and thermal transfer ribbons designed for optimal performance with our printing hardware, while also being compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models include a selection of professional tabletop digital color label printers. The high-speed +QL-120X +was built on our pioneering and successful Kiaro! platform. Introduced early in 2019, the high-performance +QL-300 +was the first +5-color +toner-based electrophotographic tabletop production label printer in the market. In addition, our QuickLabel line of printers includes the +QL-850, +our next-generation wide-format inkjet color label printer, the +QL-30 +and +QL-60 +series, a family of +high-end +monochrome printers, and the +QLS-4100 +XE, a unique solution with the ability to digitally print full-color labels and tags using thermal transfer ribbon technology. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to large-scale +all-in-one +inline specialty printing systems for both brand owners, OEMs and commercial printers. The +T2-C, +a compact, digital mini-press designed for 24/7 label production, includes numerous differentiating features for several +end-use +market applications. The +T2-L +is a narrow format digital press designed specifically for flexible packaging substrates. Beyond label printing, the +T3-OPX, +introduced in late 2019, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many other items using pigment inks that are water-resistant and highly resistant to UV exposure. A professional label press and finishing system, the T4, enables print, +die-cut, +and lamination in an +all-in-one +machine with a much smaller footprint than others in the market. +GetLabels provides a broad range of high-quality supplies for both our printers and third-party printers including label and tag materials, inks, toner and thermal transfer material, all specifically designed and constructed for a wide variety of labeling applications. Label material and substrates are carefully qualified and tested in our Rhode Island Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +4 +Table of Contents +The PI segment also develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems. PI also provides worldwide training and support. +T&M +Products sold under our T&M segment are designed and manufactured for airborne printing solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace grade thermal paper. Our data acquisition systems are used in research and development, flight testing, missile/rocket telemetry production monitoring, power and maintenance applications. These products are sold to customers in a variety of industries, including aerospace & defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Airborne printers include our flagship ToughWriter +® +series used in the flight decks and cabins of military, commercial and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, performance data, passenger data, and air traffic control data. ToughSwitch +® +Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter airborne printers for many aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream and others. In addition to the ToughWriter products, we manufacture other flight deck printers, including the TP/NP series, the RTP80 series and the +PTA-45B +series of airborne printers. The +PTA-45B +is subject to the Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which in 2017 we acquired an exclusive perpetual world-wide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Over time we expect customers will replace the +PTA-45B +printers with ToughWriter products because they have numerous technical features and functional advantages and significant weight savings. +Other T&M products include the TMX +® +all-in-one +high-speed data acquisition system for applications requiring high channel counts and acquisition rates; the Daxus +® +DXS-100 +distributed data acquisition platform; the SmartCorder +® +DDX-100, +a portable +all-in-one +data acquisition system for facility maintenance and field testing; and the Everest +® +EV-5000 +digital strip chart recording system used mainly in telemetry applications. The Daxus +DXS-100 +can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying or printing the data on hard copy, monitor or electronic storage media and (4) analyzing the data. To service data visualization, we maintain technological core competencies and trade +know-how +concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling and airworthiness design. +Patents and Copyrights +We hold several product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, trademark and trade secret laws in the United States and other jurisdictions to protect our technology and brand names. We consider our intellectual property to be critical to the operation of our business. In particular, we believe that the loss of the trademarks QuickLabel, TrojanLabel, ToughWriter or ToughSwitch +5 +Table of Contents +or the loss of the license provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many +sub-assemblies +and parts +in-house, +including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts not manufactured +in-house +are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We purchase certain components, assembled products and supplies used to manufacture our products from a single source or limited supplier sources. Although we believe the majority of these sole or limited source components, assembled products and supplies could be sourced elsewhere with appropriate changes in the design of our products, such design might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past we have made such advance purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our expanding network of manufacturing, sales and support facilities, we now do business in over 150 countries. +We believe we are a market leader in tabletop digital color label printing technology in the specialty printing field, a market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose portable, high-speed data acquisition systems. +Management believes that we have a market leadership position in many of the markets we serve. We retain our leadership position by virtue of our proprietary technology, product reputation, delivery, our channels to market, technical assistance and service to customers. The number of competitors varies by product line. Key competitive factors vary among our product lines, but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our Product Identification products are sold by direct field salespersons as well as independent dealers and representatives, while our Test & Measurement products are sold predominantly through direct sales and manufacturers’ representatives. In the United States, we have factory-trained direct field salespeople located throughout the country specializing in Product Identification products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by our own employees and dedicated third party contractors. Additionally, we utilize over 200 independent dealers and representatives selling and marketing our products in over 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our backlog varies regularly. It consists of a blend of orders for +end-user +customers, as well as original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and +built-to-order +customer requirements. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2021 and 2020 was $22.5 million and $25.2 million, respectively. +Employees +As of January 31, 2021, we employed 327 people full-time employees. Of our full-time employees, 230 were in the United States, 78 in Europe, 10 in Canada, seven in Asia and two in Mexico. +6 +Table of Contents +None of our employees are represented by a labor union or covered by a collective bargaining agreement; except for our employees in France, where collective bargaining agreements are generally required by local regulations. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments in the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other actions to improve overall engagement with our key employees. +Culture +We have ingrained a strong and definable company culture that shapes the way we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values, including: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business to achieve continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand the changing needs and expectations of our customers. +Our core values guide our employees’ behavior and dictate the way our business is conducted. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities, and are also demonstrated through teamwork, leadership, and everyday interactions. +Diversity and Inclusion +We believe that our culture and core values are strengthened through diversity and inclusion. Our diversity initiatives include—but are not limited to—our practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions; transfers; social and recreational programs; layoffs; terminations; and the ongoing development of a work environment built on the premise of gender and diversity equity. These initiatives include periodic evaluation of our workforce demographics as compared to the demographics in the workforce market, and an affirmative effort to attract, recruit, retain and train a diverse workforce that is representative of the populations in the regions in which we do business. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form +10-K, +Quarterly Reports on Form +10-Q, +Current Reports on Form +8-K +and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnishes it to, the Securities and Exchange Commission (SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. +7 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000008146/2020/0001193125-21-114283/item13.txt b/raw/filings/0000008146/2020/0001193125-21-114283/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..fd747ec11b456a788640899fa4c8f3f5092261d9 --- /dev/null +++ b/raw/filings/0000008146/2020/0001193125-21-114283/item13.txt @@ -0,0 +1,3 @@ +Item 13. +Certain Relationships, Related Transactions and Director Independence +The information required by this item is incorporated herein by reference to our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders. \ No newline at end of file diff --git a/raw/filings/0000008146/2020/0001193125-21-114283/item9a.txt b/raw/filings/0000008146/2020/0001193125-21-114283/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..f2c28dce47f6018040f06cb4a7c7698703c682d3 --- /dev/null +++ b/raw/filings/0000008146/2020/0001193125-21-114283/item9a.txt @@ -0,0 +1,20 @@ +Item 9A. +Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form +10-K +pursuant to Rules +13a-15(e) +and +15d-15(e) +under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2021 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules +13a-15(f) +and +15d-15(f) +under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2021. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2021, our internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +Changes in Internal Controls over Financial Reporting +There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2020/0001193125-21-114283/rp_note.txt b/raw/filings/0000008146/2020/0001193125-21-114283/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2020/0001193125-21-114283/rpt_disclosure.txt b/raw/filings/0000008146/2020/0001193125-21-114283/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..fdf10e41d47d26245cd79bc5cb87cf9740c349cb --- /dev/null +++ b/raw/filings/0000008146/2020/0001193125-21-114283/rpt_disclosure.txt @@ -0,0 +1,7 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. In +reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +No officer, director or nominee for director of the Company or any associate of any of the foregoing had during the period beginning on +February 1, 2020 through the date of this proxy statement any material interest, direct or indirect, in any material transaction or any material proposed transaction in which the amount exceeds $120,000 and to which the Company was or is to be +a party. +27 \ No newline at end of file diff --git a/raw/filings/0000008146/2021/0001193125-22-108120/filing.txt b/raw/filings/0000008146/2021/0001193125-22-108120/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..b0973c4ac0b86de5d179d9617812c0d743ed5e4b --- /dev/null +++ b/raw/filings/0000008146/2021/0001193125-22-108120/filing.txt @@ -0,0 +1,4092 @@ +10-K +false FY 0000008146 P1Y http://fasb.org/us-gaap/2021-01-31#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2021-01-31#AccruedLiabilitiesCurrent 0000008146 2021-02-01 2022-01-31 0000008146 2022-01-31 0000008146 2021-01-31 0000008146 2019-02-01 2020-01-31 0000008146 2020-02-01 2021-01-31 0000008146 2018-02-01 2019-01-31 0000008146 2020-01-31 0000008146 2021-07-31 0000008146 2022-04-13 0000008146 2022-07-01 0000008146 2019-01-31 0000008146 alot:TrojanlabelApSMember alot:DistributorRelationsMember 2022-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember us-gaap:CustomerContractsMember 2022-01-31 0000008146 alot:MiltopeCorporationMember us-gaap:CustomerContractsMember 2022-01-31 0000008146 us-gaap:CustomerContractsMember alot:RuggedInformationTechnologyEquipmentCorporationMember 2022-01-31 0000008146 alot:ExistingTechnologyMember alot:TrojanlabelApSMember 2022-01-31 0000008146 alot:TermLoanDueSeptemberThirtyTwoThousandAndTwentyFiveMember 2022-01-31 0000008146 alot:TermLoanMember srt:MaximumMember alot:BankOfAmericaMember 2022-01-31 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2022-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2022-01-31 0000008146 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2022-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2022-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2022-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2022-01-31 0000008146 alot:TermLoanMember 2022-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember 2022-01-31 0000008146 alot:TwoThousandSevenEquityIncentivePlanMember 2022-01-31 0000008146 alot:TwoThousandFifteenEquityIncentivePlanMember us-gaap:RestrictedStockMember 2022-01-31 0000008146 country:US 2022-01-31 0000008146 srt:EuropeMember 2022-01-31 0000008146 country:CA 2022-01-31 0000008146 srt:AsiaMember 2022-01-31 0000008146 alot:RangeThreeMember 2022-01-31 0000008146 alot:RangeFourMember 2022-01-31 0000008146 alot:RangeFiveMember 2022-01-31 0000008146 alot:TestAndMeasurementMember 2022-01-31 0000008146 alot:ProductIdentificationMember 2022-01-31 0000008146 country:CN 2022-01-31 0000008146 stpr:DE 2022-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember us-gaap:PerformanceSharesMember 2022-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember us-gaap:RestrictedStockMember 2022-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember alot:TwoThousandEighteenEquityIncentivePlanMember 2022-01-31 0000008146 us-gaap:EmployeeStockOptionMember 2022-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2022-01-31 0000008146 alot:TaxCreditsCarryForwardsMember 2022-01-31 0000008146 srt:MaximumMember 2022-01-31 0000008146 srt:MinimumMember 2022-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2022-01-31 0000008146 alot:GreenWoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2022-01-31 0000008146 alot:TermLoanMember alot:BankOfAmericaMember 2022-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2022-01-31 0000008146 alot:AdditionalForeignTaxCreditMember 2022-01-31 0000008146 alot:TrojanlabelApSMember alot:DistributorRelationsMember 2021-01-31 0000008146 alot:ExistingTechnologyMember alot:TrojanlabelApSMember 2021-01-31 0000008146 alot:RuggedInformationTechnologyEquipmentCorporationMember us-gaap:CustomerContractsMember 2021-01-31 0000008146 us-gaap:CustomerContractsMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2021-01-31 0000008146 us-gaap:CustomerContractsMember alot:MiltopeCorporationMember 2021-01-31 0000008146 alot:TermLoanDueJanuaryThirtyOneTwoThousandAndTwentyOneMember 2021-01-31 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2021-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2021-01-31 0000008146 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2021-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2021-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2021-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2021-01-31 0000008146 country:US 2021-01-31 0000008146 srt:EuropeMember 2021-01-31 0000008146 country:CA 2021-01-31 0000008146 alot:ProductIdentificationMember 2021-01-31 0000008146 alot:TestAndMeasurementMember 2021-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember 2021-01-31 0000008146 country:US 2021-02-01 2022-01-31 0000008146 srt:EuropeMember 2021-02-01 2022-01-31 0000008146 country:CA 2021-02-01 2022-01-31 0000008146 srt:AsiaMember 2021-02-01 2022-01-31 0000008146 alot:CentralAndSouthAmericaMember 2021-02-01 2022-01-31 0000008146 alot:OthersCountriesMember 2021-02-01 2022-01-31 0000008146 alot:HardwareProductsMember 2021-02-01 2022-01-31 0000008146 alot:SuppliesMember 2021-02-01 2022-01-31 0000008146 alot:ServiceAndOtherMember 2021-02-01 2022-01-31 0000008146 alot:TermLoanDueSeptemberThirtyTwoThousandAndTwentyFiveMember 2021-02-01 2022-01-31 0000008146 alot:RangeFiveMember 2021-02-01 2022-01-31 0000008146 alot:RangeFourMember 2021-02-01 2022-01-31 0000008146 alot:RangeThreeMember 2021-02-01 2022-01-31 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2021-02-01 2022-01-31 0000008146 alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2021-02-01 2022-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2021-02-01 2022-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2021-02-01 2022-01-31 0000008146 alot:OtherCountriesMember 2021-02-01 2022-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2021-02-01 2022-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2021-02-01 2022-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-02-01 2022-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2021-02-01 2022-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2021-02-01 2022-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2021-02-01 2022-01-31 0000008146 alot:ComputerEquipmentAndSoftwareMember srt:MaximumMember 2021-02-01 2022-01-31 0000008146 alot:ComputerEquipmentAndSoftwareMember srt:MinimumMember 2021-02-01 2022-01-31 0000008146 srt:MaximumMember us-gaap:MachineryAndEquipmentMember 2021-02-01 2022-01-31 0000008146 us-gaap:MachineryAndEquipmentMember srt:MinimumMember 2021-02-01 2022-01-31 0000008146 alot:BuildingAndLeaseholdImprovementsMember srt:MaximumMember 2021-02-01 2022-01-31 0000008146 srt:MinimumMember alot:BuildingAndLeaseholdImprovementsMember 2021-02-01 2022-01-31 0000008146 us-gaap:LandImprovementsMember srt:MaximumMember 2021-02-01 2022-01-31 0000008146 us-gaap:LandImprovementsMember srt:MinimumMember 2021-02-01 2022-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2021-02-01 2022-01-31 0000008146 us-gaap:CrossCurrencyInterestRateContractMember 2021-02-01 2022-01-31 0000008146 us-gaap:EmployeeStockMember 2021-02-01 2022-01-31 0000008146 us-gaap:OperatingSegmentsMember 2021-02-01 2022-01-31 0000008146 srt:MaximumMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2021-02-01 2022-01-31 0000008146 us-gaap:CommonStockMember 2021-02-01 2022-01-31 0000008146 srt:MaximumMember alot:AirborneProductMember 2021-02-01 2022-01-31 0000008146 alot:AirborneProductMember srt:MinimumMember 2021-02-01 2022-01-31 0000008146 us-gaap:ForeignExchangeMember 2021-02-01 2022-01-31 0000008146 us-gaap:TreasuryStockMember 2021-02-01 2022-01-31 0000008146 us-gaap:RetainedEarningsMember 2021-02-01 2022-01-31 0000008146 us-gaap:EmployeeStockOptionMember 2021-02-01 2022-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2021-02-01 2022-01-31 0000008146 alot:EmployeeStockPurchasePlanMember 2021-02-01 2022-01-31 0000008146 country:CN 2021-02-01 2022-01-31 0000008146 alot:RestrictedStockAwardMember 2021-02-01 2022-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2021-02-01 2022-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2021-02-01 2022-01-31 0000008146 alot:CashFlowHedgeMember us-gaap:CrossCurrencyInterestRateContractMember 2021-02-01 2022-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember us-gaap:OtherExpenseMember 2021-02-01 2022-01-31 0000008146 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember 2021-02-01 2022-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MaximumMember 2021-02-01 2022-01-31 0000008146 alot:PaycheckProtectionProgramLoanMember alot:GreenWoodCreditUnionMember 2021-02-01 2022-01-31 0000008146 us-gaap:InterestExpenseMember 2021-02-01 2022-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember 2021-02-01 2022-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember srt:MinimumMember 2021-02-01 2022-01-31 0000008146 srt:MaximumMember us-gaap:LondonInterbankOfferedRateLIBORMember us-gaap:RevolvingCreditFacilityMember 2021-02-01 2022-01-31 0000008146 us-gaap:FederalFundsEffectiveSwapRateMember us-gaap:RevolvingCreditFacilityMember 2021-02-01 2022-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember 2021-02-01 2022-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember 2021-02-01 2022-01-31 0000008146 alot:PaycheckProtectionProgramLoanMember alot:GreenwoodCreditUnionMember alot:PromissoryNoteMember 2021-02-01 2022-01-31 0000008146 us-gaap:IntangibleAssetsAmortizationPeriodMember us-gaap:CustomerContractsMember 2021-02-01 2022-01-31 0000008146 alot:CaresActMember 2021-02-01 2022-01-31 0000008146 us-gaap:CustomerContractsMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2021-02-01 2022-01-31 0000008146 us-gaap:IntangibleAssetsAmortizationPeriodMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember us-gaap:CustomerContractsMember 2021-02-01 2022-01-31 0000008146 us-gaap:CustomerContractsMember alot:RuggedInformationTechnologyEquipmentCorporationMember 2021-02-01 2022-01-31 0000008146 us-gaap:IntangibleAssetsAmortizationPeriodMember alot:RuggedInformationTechnologyEquipmentCorporationMember us-gaap:CustomerContractsMember 2021-02-01 2022-01-31 0000008146 us-gaap:CostOfSalesMember 2021-02-01 2022-01-31 0000008146 us-gaap:SellingAndMarketingExpenseMember 2021-02-01 2022-01-31 0000008146 us-gaap:ResearchAndDevelopmentExpenseMember 2021-02-01 2022-01-31 0000008146 us-gaap:NonoperatingIncomeExpenseMember 2021-02-01 2022-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2021-02-01 2022-01-31 0000008146 country:US 2020-02-01 2021-01-31 0000008146 srt:EuropeMember 2020-02-01 2021-01-31 0000008146 country:CA 2020-02-01 2021-01-31 0000008146 srt:AsiaMember 2020-02-01 2021-01-31 0000008146 alot:CentralAndSouthAmericaMember 2020-02-01 2021-01-31 0000008146 alot:OthersCountriesMember 2020-02-01 2021-01-31 0000008146 alot:HardwareProductsMember 2020-02-01 2021-01-31 0000008146 alot:SuppliesMember 2020-02-01 2021-01-31 0000008146 alot:ServiceAndOtherMember 2020-02-01 2021-01-31 0000008146 alot:TermLoanDueJanuaryThirtyOneTwoThousandAndTwentyOneMember 2020-02-01 2021-01-31 0000008146 alot:CustomerMember us-gaap:SupplierConcentrationRiskMember us-gaap:CostOfGoodsTotalMember 2020-02-01 2021-01-31 0000008146 alot:CustomerMember us-gaap:SupplierConcentrationRiskMember alot:TradeAccountsPayablesMember 2020-02-01 2021-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2020-02-01 2021-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2020-02-01 2021-01-31 0000008146 alot:OtherCountriesMember 2020-02-01 2021-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2020-02-01 2021-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2020-02-01 2021-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-02-01 2021-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-02-01 2021-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2020-02-01 2021-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2020-02-01 2021-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2020-02-01 2021-01-31 0000008146 us-gaap:EmployeeStockMember 2020-02-01 2021-01-31 0000008146 us-gaap:OperatingSegmentsMember 2020-02-01 2021-01-31 0000008146 us-gaap:CustomerConcentrationRiskMember us-gaap:SalesRevenueNetMember srt:MaximumMember 2020-02-01 2021-01-31 0000008146 us-gaap:CommonStockMember 2020-02-01 2021-01-31 0000008146 us-gaap:ForeignExchangeMember 2020-02-01 2021-01-31 0000008146 us-gaap:TreasuryStockMember 2020-02-01 2021-01-31 0000008146 us-gaap:RetainedEarningsMember 2020-02-01 2021-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2020-02-01 2021-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2020-02-01 2021-01-31 0000008146 alot:CashFlowHedgeMember us-gaap:CrossCurrencyInterestRateContractMember 2020-02-01 2021-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember us-gaap:OtherExpenseMember 2020-02-01 2021-01-31 0000008146 us-gaap:InterestExpenseMember 2020-02-01 2021-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember 2020-02-01 2021-01-31 0000008146 country:US 2019-02-01 2020-01-31 0000008146 srt:EuropeMember 2019-02-01 2020-01-31 0000008146 country:CA 2019-02-01 2020-01-31 0000008146 srt:AsiaMember 2019-02-01 2020-01-31 0000008146 alot:CentralAndSouthAmericaMember 2019-02-01 2020-01-31 0000008146 alot:OthersCountriesMember 2019-02-01 2020-01-31 0000008146 alot:HardwareProductsMember 2019-02-01 2020-01-31 0000008146 alot:SuppliesMember 2019-02-01 2020-01-31 0000008146 alot:ServiceAndOtherMember 2019-02-01 2020-01-31 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2019-02-01 2020-01-31 0000008146 alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2019-02-01 2020-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2019-02-01 2020-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2019-02-01 2020-01-31 0000008146 alot:OtherCountriesMember 2019-02-01 2020-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2019-02-01 2020-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2019-02-01 2020-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-02-01 2020-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-02-01 2020-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2019-02-01 2020-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2019-02-01 2020-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2019-02-01 2020-01-31 0000008146 us-gaap:EmployeeStockMember 2019-02-01 2020-01-31 0000008146 us-gaap:OperatingSegmentsMember 2019-02-01 2020-01-31 0000008146 us-gaap:CommonStockMember 2019-02-01 2020-01-31 0000008146 us-gaap:TreasuryStockMember 2019-02-01 2020-01-31 0000008146 us-gaap:ForeignExchangeMember 2019-02-01 2020-01-31 0000008146 us-gaap:DomesticCountryMember 2019-02-01 2020-01-31 0000008146 us-gaap:RetainedEarningsMember 2019-02-01 2020-01-31 0000008146 us-gaap:InterestExpenseMember 2019-02-01 2020-01-31 0000008146 alot:BankOfAmericaMember 2021-03-24 2021-03-24 0000008146 alot:PaycheckProtectionProgramLoanMember alot:GreenWoodCreditUnionMember 2020-05-06 0000008146 alot:PaycheckProtectionProgramLoanMember alot:GreenwoodCreditUnionMember 2020-05-06 0000008146 alot:GreenWoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2021-06-15 2021-06-15 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2021-06-15 2021-06-15 0000008146 alot:CaresActMember 2021-01-01 2021-06-30 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2018-01-31 0000008146 us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember 2021-02-01 2021-07-31 0000008146 us-gaap:ChangeInAccountingMethodAccountedForAsChangeInEstimateMember 2021-05-02 2021-07-31 0000008146 us-gaap:CashFlowHedgingMember us-gaap:CrossCurrencyInterestRateContractMember 2020-05-03 2020-08-01 0000008146 us-gaap:CrossCurrencyInterestRateContractMember 2020-05-03 2020-08-01 0000008146 us-gaap:CashFlowHedgingMember 2020-05-03 2020-08-01 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2020-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2020-01-31 0000008146 us-gaap:DomesticCountryMember 2020-01-31 0000008146 alot:CaresActMember us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember 2022-02-01 2022-07-31 0000008146 us-gaap:SubsequentEventMember 2022-03-22 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2021-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2021-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2021-01-31 0000008146 us-gaap:EmployeeStockMember 2021-01-31 0000008146 us-gaap:EmployeeStockMember 2022-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2022-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2022-01-31 0000008146 us-gaap:CommonStockMember 2022-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2022-01-31 0000008146 us-gaap:RetainedEarningsMember 2022-01-31 0000008146 us-gaap:TreasuryStockMember 2022-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2022-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2022-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2020-01-31 0000008146 us-gaap:EmployeeStockMember 2020-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2021-01-31 0000008146 us-gaap:CommonStockMember 2021-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2021-01-31 0000008146 us-gaap:RetainedEarningsMember 2021-01-31 0000008146 us-gaap:TreasuryStockMember 2021-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-31 0000008146 us-gaap:TreasuryStockMember 2019-01-31 0000008146 us-gaap:RetainedEarningsMember 2019-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2019-01-31 0000008146 us-gaap:CommonStockMember 2019-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2019-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2019-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2019-01-31 0000008146 us-gaap:EmployeeStockMember 2019-01-31 0000008146 alot:RestrictedStockAwardAndRestrictedStockUnitMember 2020-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-31 0000008146 us-gaap:TreasuryStockMember 2020-01-31 0000008146 us-gaap:RetainedEarningsMember 2020-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2020-01-31 0000008146 us-gaap:CommonStockMember 2020-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2020-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-01-31 iso4217:USD xbrli:shares xbrli:pure utr:Year iso4217:USD xbrli:shares alot:Segment +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM +10-K +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31 , 2022 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +Commission file number +0-13200 +AstroNova, Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue , +West Warwick , Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: +( 401 ) 828-4000 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol +Name of each exchange +on which registered +Common Stock , $.05 Par Value +ALOT +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has +submitted electronically +every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation +S-T +(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a +non-accelerated +filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule +12b-2 +of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☒ +Non-accelerated filer +Smaller reporting company ☒ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule +12b-2 +of the Act). ☐ Yes ☒ No +The aggregate market value of the registrant’s voting common equity held by +non-affiliates +at July 31, 2021 was approximately $ 109,942,000 based on the closing price on the Nasdaq Global Market on that date. +As of April +1 +3 +, 2022, there were 7,315,168 shares of Common Stock (par value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form +10-K +where indicated. +Auditor Firm Id: +PCAOB +ID +No. 392 +Auditor Name: +Wolf & Company, P.C +. +Auditor +Location: +Boston, MA +Table of Contents +ASTRONOVA, INC. +FORM +10-K +ANNUAL REPORT +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3-8 +Item 1A. +Risk Factors +8-20 +Item 1B. +Unresolved Staff Comments +20 +Item 2. +Properties +20 +Item 3. +Legal Proceedings +20 +Item 4. +Mine Safety Disclosures +20 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +21 +Item 6. +Reserved +21 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +21-34 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +34-35 +Item 8. +Financial Statements and Supplementary Data +35 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +35 +Item 9A. +Controls and Procedures +35-36 +Item 9B. +Other Information +36 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +36 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +37 +Item 11. +Executive Compensation +38 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +38 +Item 13. +Certain Relationships, Related Transactions and Director Independence +38 +Item 14. +Principal Accountant Fees and Services +38 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +39 +Item 16. +Form 10-K Summary +39 +2 +Table of Contents +ASTRONOVA, INC. +Forward-Looking Statements +Information included in this Annual Report on +Form 10-K +may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” “may,” “will,” and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in this Annual Report on +Form 10-K +under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on +Form 10-K. +PART I +Item 1 +. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form +10-K +refer to AstroNova, Inc. and its consolidated subsidiaries. +We design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation. +Our products are distributed worldwide through our own sales force, authorized dealers, and independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel +® +, TrojanLabel +® +and GetLabels +™ +brand names. The T&M segment includes our line of aerospace printers and test and measurement data acquisition systems sold under the AstroNova +® +brand name. Refer to Note 17, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 21 through 34 of this Annual Report on +Form 10-K. +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets globally. +Product Identification products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and +3 +Table of Contents +labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers, +direct-to-package +printers, high-volume presses and specialty OEM printing systems, as well as a wide range of label, tag and flexible packaging material substrates and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution light-weight flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed and stored and presented in various visual output formats. +Product Identification +Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. The segment provides a wide array of digital +end-to-end +product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Our customers typically label or mark products on a short to +mid-size +run basis and benefit from the efficiency, flexibility, and cost-savings of digitally printing labels or packaging in their facility, +on-demand, +with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready digital color label printers, and specialty OEM printing systems for either standalone output or inline integration with existing +pre-processing +and finishing systems. Customers use our digital printing products in a wide variety of industries, including chemical, cosmetics, food and beverage, medical products, nutraceutical, pharmaceutical, and many others. TrojanLabel expands our customer market by providing a range of higher volume digital color printers, OEM printing systems, and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners and thermal transfer ribbons designed for optimal performance with our printing hardware, while also being compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models include a selection of professional tabletop digital color label printers. The high-speed +QL-120X +was built on our pioneering and successful Kiaro! platform. To expand the product line further, in 2021, the +QL-120Xe, +a sister product to the dye ink +QL-120X, +was introduced in 2021 as a lower price point option for +low-volume +applications and price-sensitive customers. In 2020, we introduced the +QL-120D +which features high-performance pigment inks that can produce durable BS5609 certified labels and labels that can withstand a wide range of demanding environmental conditions from sterilization to cryogenic freezing. Introduced early in 2019, the high-performance +QL-300 +was the first +5-color +toner-based electrophotographic tabletop production label printer in the market. In addition, our QuickLabel line of printers includes the +QL-850, +our next-generation wide-format inkjet color label printer, the +QL-30 +and +QL-60 +series, a family of +high-end +monochrome printers, and the +QLS-4100 +XE, a unique solution with the ability to digitally print full-color labels and tags using thermal transfer ribbon technology. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to large-scale +all-in-one +inline specialty printing systems for both brand owners, OEMs, and commercial printers. The +T2-C, +a compact, digital mini-press designed for 24/7 label production, includes numerous differentiating features for several +end-use +market applications. The +T2-L +is a narrow format digital press designed specifically for flexible packaging substrates. Beyond label printing, the +T3-OPX, +the first of its kind +direct-to-package +printer, which was introduced in late 2019, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many other items using pigment inks that are resistant to both water and UV exposure. A professional label press and finishing system, the T4, enables print, +die-cut, +and lamination in an +all-in-one +machine with a much smaller footprint than others in the market. +GetLabels provides a broad range of high-quality supplies for both our printers and third-party printers including label and tag materials, inks, toner and thermal transfer material, all specifically designed and +4 +Table of Contents +constructed for a wide variety of labeling applications. Label material and substrates are carefully qualified and tested in our Rhode Island Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +The PI segment also develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems. PI also provides worldwide training and support. +Test &Measurement +Products sold under our T&M segment are designed and manufactured for airborne printing solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace-grade thermal paper. Our data acquisition systems are used in research and development, flight testing, missile/rocket telemetry production monitoring, power and maintenance applications. These products are sold to customers in various industries, including aerospace & defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Airborne printers include our flagship ToughWriter +® +series used in the flight decks and cabins of military, commercial, and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, performance data, passenger data, and air traffic control data. ToughSwitch +® +Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter airborne printers for many aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream, and others. In addition to the ToughWriter products, we manufacture other flight deck printers, including the TP/NP series, the RTP80 series and the +PTA-45B +series of airborne printers. The +PTA-45B +is subject to the Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which in 2017 we acquired an exclusive perpetual world-wide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Over time we expect customers to replace the +PTA-45B +printers with ToughWriter products because they have numerous technical features and functional advantages and significant weight savings. +Other T&M products include the TMX +® +all-in-one +high-speed data acquisition system for applications requiring high channel counts and acquisition rates; the Daxus +® +DXS-100 +distributed data acquisition platform; the SmartCorder +® +DDX-100, +a portable +all-in-one +data acquisition system for facility maintenance and field testing; and the Everest +® +EV-5000 +digital strip chart recording system used mainly in telemetry applications. The Daxus +DXS-100 +can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying or printing the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. To service data visualization, we maintain technological core competencies and trade +know-how +concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling, and airworthiness design. +Patents and Copyrights +We hold several product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions to protect our +5 +Table of Contents +technology and brand names. We consider our intellectual property to be critical to the operation of our business. In particular, we believe that the loss of the trademarks QuickLabel, TrojanLabel, ToughWriter, or ToughSwitch or the loss of the license provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many +sub-assemblies +and parts +in-house, +including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts not manufactured +in-house +are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We purchase certain components, assembled products, and supplies used to manufacture our products from a single source or limited supplier sources. Although we believe the majority of these sole or limited source components, assembled products, and supplies could be sourced elsewhere with appropriate changes in the design of our products, such design might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past, we have made such advance purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our expanding network of manufacturing, sales and support facilities, we do business in over 150 countries. +We believe we are a market leader in tabletop digital color label printing technology in the specialty printing field, a market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose portable, high-speed data acquisition systems. +Management believes that we have a market leadership position in many of the markets we serve. We retain our leadership position by virtue of our proprietary technology, product reputation, delivery, our channels to market, technical assistance and service to customers. The number of competitors varies by product line. Key competitive factors vary among our product lines, but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our Product Identification products are sold by direct field salespersons as well as independent dealers and representatives, while our Test & Measurement products are sold predominantly through direct sales and manufacturers’ representatives. In the United States, we have factory-trained direct field salespeople located throughout the country specializing in Product Identification products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize approximately 200 independent dealers and representatives selling and marketing our products in 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our backlog varies regularly. It consists of a blend of orders for +end-user +customers, as well as original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and +built-to-order +customer requirements. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2022 and 2021 was $27.8 million and $22.5 million, respectively. +6 +Table of Contents +Government Regulation +We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our business particularly with respect to our aircraft cockpit printer business which sells in a highly regulated industry, and others of which apply to us for other reasons, such as our status as a publicly held company or the places in which we sell certain types or amounts of products. Existing and future laws and regulations may result in increasing expense and may impede our growth. Applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, privacy, data protection, pricing, content, distribution, energy consumption, environmental regulation, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. +Our business outside of the U.S. exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. +Environmental Matters +We believe that we are in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment, or otherwise relating to the protection of the environment. We have not experienced any material costs in connection with environmental compliance, and do not believe that such compliance will have any material effect upon the financial position, results of operations, cash flows, or competitive position of the Company. +Employees +As of January 31, 2022, we employed 339 full-time employees. Of our full-time employees, 238 were in the United States, 80 in Europe, 10 in Canada, nine in Asia and two in Mexico. +None of our employees are represented by a labor union or covered by a collective bargaining agreement; except for our employees in France, where local regulations generally require collective bargaining agreements. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments in the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other actions to improve overall engagement with our key employees. +Culture +We have ingrained a strong and definable company culture that shapes how we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business to achieve continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure our business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand our customers’ changing needs and expectations. +7 +Table of Contents +Our core values guide our employees’ behavior and dictate how our business is conducted. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities and are also demonstrated through teamwork, leadership, and everyday interactions. +Diversity and Inclusion +We believe that our culture and core values are strengthened through diversity and inclusion. Our diversity initiatives include—but are not limited to—our practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions; transfers; social and recreational programs; layoffs; terminations; and the ongoing development of a work environment built on the premise of gender and diversity equity. These initiatives include periodic evaluation of our workforce demographics as compared to the demographics in the workforce market, and an affirmative effort to attract, recruit, retain and train a diverse workforce that is representative of the populations in the regions in which we do business. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form +10-K, +Quarterly Reports on Form +10-Q, +Current Reports on Form +8-K +and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. +Item 1A. +Risk Factors +The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +Business and Industry Risks: +The ongoing +COVID-19 +pandemic has adversely affected and will likely continue to adversely affect our revenues, results of operations and financial condition. +All of our global operations have been materially adversely affected by the worldwide +COVID-19 +pandemic during the past two years. We expect this adverse impact to continue to a degree that we cannot predict. +We made significant modifications to our global +pre-pandemic +operations because of the +COVID-19 +pandemic. We initially required most +non-production +related team members to work remotely. Although this no longer is required for health and safety reasons, for many of our team members, remote work has become a preference and we believe we have to a large degree successfully adapted to it through the use of technology and changed management practices, but further adaptations, unknown at this time, may be required. As the result of the changes that have been required by the response to the +COVID-19 +pandemic, we expect that the mix of +on-site +and remote work will be permanently changed, as will our increased safety protocols and the other adaptations undertaken during the pandemic, but our practices and plans are still developing, and we cannot predict the result yet. +8 +Table of Contents +Since the +COVID-19 +pandemic began we have experienced difficulties in obtaining raw materials and components for our products. Some of the structural dislocations in the global economy caused by the pandemic are deepening and prolonging these difficulties. We have had to incur additional costs, such as expedited and express shipping fees (i.e., air rather than ocean freight.) These difficulties have also negatively impacted our efficiency, delayed shipments and caused product shortages +. +We are currently monitoring the world-wide delays in transit time, as freight carriers continue to experience significant delays in overseas shipments. We are addressing these issues through long range planning and procuring higher inventory on severely allocated items to help mitigate potential shortages whenever practicable. We are also monitoring and reacting to extended lead times on electronic components and utilizing a variety of strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have taken actions to increase regular contact with our essential vendors and increased our forecasting horizon for our products to help us better manage our supply chain. In some cases, we are working with our vendors to help them procure components. Our strategies to counteract the impact of the pandemic and the related supply chain dislocations have increased the amount of inventory we maintain to support our product sales. We have also experienced several situations where component shortages and scarcity have required us to pay significantly higher costs to obtain those components. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our results of operations. +Our Product Identification business has been negatively impacted by the +COVID-19 +pandemic because our ability to meet with customers to demonstrate our products at trade shows and +on-site +in their facilities has been curtailed. We have partially countered this through a variety of virtual, +on-line +selling and digital marketing strategies, but the degree to which this will be successful to mitigate the lack of +face-to-face +selling is unclear. +The aerospace industry, which we serve through our aerospace product line, has also been significantly disrupted by the +COVID-19 +pandemic, both inside and outside of the United States because of the severe decline in the demand for air travel, demand for aircraft, and a general curtailment of aircraft production rates. This has had a material adverse impact on our financial results. While air travel demand and aircraft production demand has recovered to some extent, it remains unclear whether these demand factors will continue to recover, and to what extent. The secondary impacts of the demand decline and resulting financial losses on the economic structure of the airline industry could become a negative factor for demand for aircraft due to industry consolidation. Individually or in combination, these factors may continue to have a material adverse impact on our business operations and financial results. +Our operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated. +Any decline in our customers’ markets or their general economic conditions would likely result in a reduction in demand for our products. For example, the 2020 grounding, suspension and subsequent slow restart of production of the Boeing 737 MAX, and then the effect of the +COVID-19 +pandemic on the demand for new aircraft, reduced demand for our airborne printers that are installed on that aircraft, as well as the related repairs and supplies, which has negatively affected our results of operations. While these effects have begun to abate, demand remains lower than it was beforehand, and the outlook is uncertain. Some of our customers have been and may remain reluctant to make capital equipment purchases and may continue to defer certain of these purchases to future periods. While demand for air travel has recently increased, the impact of another period of +COVID-19 +infections could negatively impact this trend in the future. Also, we believe our customers’ markets have declined and the impact on their financial capacity has been material enough to alter their strategies and industry dynamics. These factors may cause demand for aircraft to grow slowly or decline, which would reduce our demand, and in turn which could harm our results of operations, financial position and cash flows. +9 +Table of Contents +Our future revenue growth depends on our ability to develop and introduce new products and services on a timely basis and achieve market acceptance of these new products and services. +The markets for our products are characterized by evolving technologies which in turn effect our product introduction cycles. Our future success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate our competitors’ development of new products, and maintain high levels of product quality and reliability. We spend a significant amount of time and effort on the development of our airborne and color printer products as well as our acquisition and data recorder products. Failure to meet our customers’ changing business needs or to further develop any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results. +As we introduce new or enhanced products, we must also successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. Additionally, when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or our plans for future support of existing products may cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +Operational and Business Strategy Risks: +We are dependent upon contract manufacturers for some of our products. If these manufacturers do not meet our requirements, either in volume or quality, then we could be materially harmed. +We subcontract the manufacturing and assembly of certain of our products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Disruptions in the global supply chain; +• +Limited control over the manufacturing process; +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; and +• +Reduced control over delivery schedules, manufacturing yields, quality and costs. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture or provide these products in required volumes or fails to meet our quality standards, we will have to identify qualified alternate subcontractors or take over the manufacturing ourselves. Additional qualified subcontractors may not be available or may not be available on a timely or cost competitive basis. Any interruption in the supply, increase in the cost of the products manufactured by a third-party subcontractor or failure of a subcontractor to meet quality standards could have a material adverse effect on our business, operating results and financial condition. +10 +Table of Contents +For certain components, assembled products and supplies, we are dependent upon single or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and supplies used in the manufacture of our products from a single source or limited supplier sources. If the supply of a key component, assembled products or certain supplies were to be delayed or curtailed or, in the event a key manufacturing or sole supplier delays shipment of such components or assembled products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. For example, due to the continued global +COVID-19 +pandemic, there has been and likely will continue to be disruption to our supply chain due to the delays of component shipments from our vendors in China and other jurisdictions in which normal business operations are disrupted. Our business, results of operations and financial position could also be adversely affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source. Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply these components, assembled products or supplies in required volumes, we will have to identify and qualify acceptable replacements or redesign our products with different components. Alternative sources may not be available, or product redesign may not be feasible on a timely basis. Any interruption in the supply of or increase in the cost of the components, assembled products and supplies provided by single or limited source suppliers could have a material adverse effect on our business, operating results, and financial condition. +We face significant competition, and our failure to compete successfully could adversely affect our results of operations and financial condition. +We operate in an environment of significant competition, especially in the markets in which we sell our PI printers and T&M data acquisition products. This competition is driven by rapid technological advances, evolving industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete based on technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products or services with features that could adversely affect the competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, our customers could seek alternative solutions from our competitors and we could lose market share, which could materially and adversely affect our business, results of operations and financial position. +Our profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure +. +Our success depends on our ability to obtain adequate pricing for our products and services. For a variety of complex reasons, many of which were triggered by the +COVID-19 +pandemic, the general economy has been significantly impacted by supply chain disruptions. Examples of some of these impacts on us include reduced availability of certain electronic components and the need to pay premium prices to obtain them, and noticeably higher costs for a wide array of other parts and raw material components. This has been exacerbated by significant increases in the cost of transportation to expedite incoming components and supplies. In many cases we have had to expedite delivery of critical materials through significantly higher cost airfreight methods. Our ability to offset these effects through pricing actions for our products and services may not prove sufficient to offset these or further cost increases. Attempts to increase prices may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially adversely affected. +We are also continually reviewing our operations with a view towards reducing our cost structure, including but not limited to reducing our labor +cost-to-revenue +ratio, improving process and system efficiencies and +11 +Table of Contents +outsourcing certain internal functions. From time to time, we also engage in restructuring actions to reduce our cost structure. However, if these efforts to constrain the cost of our operations are inadequate to offset higher product and employee wage costs, our results of operations and financial position could be materially adversely affected. +Our inability to adequately enforce and protect our intellectual property, defend against assertions of infringement or lose certain licenses could prevent or restrict our ability to compete. +We rely on patents, trademarks, licenses, and proprietary knowledge and technology, both internally developed and acquired, in order to maintain a competitive advantage. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design technologies around the intellectual property protections or licenses that we currently own. The loss of the trademarks QuickLabel, TrojanLabel, ToughWriter and ToughSwitch or the loss of the licenses provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. Operating outside the United States also exposes us to additional intellectual property risk. The laws and enforcement practices of certain jurisdictions in which we operate do not protect our intellectual property rights to the same extent as in the United States. Any diminution in our ability to defend against the unauthorized use of these rights and assets could have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement, which could result in significant costs and divert our management’s focus away from operations. +We have significant inventories on hand. +We maintain a significant amount of inventory, and a result of recent supply chain disruption expect to increase the amount of inventory we maintain +on-hand. +Although we have provided an allowance for slow-moving and obsolete inventory, any significant unanticipated changes in future product demand or market conditions, including obsolescence or the uncertainty in the global market, as well as continued reduced demand for our products if the +COVID-19 +pandemic is further prolonged, could have an impact on the value of inventory and adversely affect our business, operating results and financial condition. +We could incur liabilities as a result of installed product failures due to design or manufacturing defects. +We have incurred and could in the future incur additional liabilities because of product failures due to design or manufacturing defects. Our products may have defects despite our internal testing or testing by customers. These defects could result in among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance or damage to our reputation. We could be subject to material claims by customers and may incur substantial expenses to correct any product defects. While in the past, we have successfully obtained partial compensation from suppliers for their contribution to product quality issues, we may not be successful in such a recovery in the future, and these recoveries have not in the past and are not in the future likely to fully offset the full financial impact on us. +In addition, through our acquisitions, we have assumed, and may in the future assume, liabilities related to products previously developed by an acquired company that have not been subjected to adequate product development, testing and quality control processes, and may have unknown or undetected defects. Some types of defects may not be detected until the product is installed in a user environment. This may cause us to incur significant warranty, repair or +re-engineering +costs. As such, it could also divert the attention of engineering personnel from product development efforts which may result in increased costs and lower profitability. +We could experience a significant disruption in or security breach of our information technology system which could harm our business and adversely affect our results of operations. +We rely on +on-premises +and cloud-based information technology systems, some of which are managed by or licensed from third parties, to support many critical aspects of our business, as well as, to process, transmit and +12 +Table of Contents +store our own electronic proprietary or confidential information, and confidential information of customers, employees, suppliers and others including personally identifiable information, credit card data, and other proprietary confidential information. These systems are vulnerable to damage, disruptions and/or shutdowns due to attack by cyber-criminals, data breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events or other unforeseen events. These vulnerabilities could interfere with our operations, compromise our data processing capacity and the security of our information and that of our customers and suppliers, and expose us to liability which could adversely impact our business and reputation. We actively manage these risks through a variety of hardware and software-based techniques that we own, license or otherwise procure from third parties under contract to safeguard our systems, and we own or procure from third parties system data storage redundancy and disaster recovery capability. In particular we have increased our investment in tools, techniques and training that we believe will reduce our vulnerability to attacks from cyber-criminals. However due to the complexity of our systems, and especially due to the ever-increasing sophistication of cyber-criminals, there is no assurance that our efforts will be sufficient to prevent cyber-attacks, security breaches, or the other potential exploitation of vulnerabilities or systems failures. In any such circumstance, our system redundancy and other disaster recovery planning may be ineffective or inadequate. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of them to date has had a material impact. However, in the future such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our brand and reputation, all of which could adversely affect our business, operating results and financial condition. +We depend on our key employees and other highly qualified personnel and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees, as well as challenges with respect to the management of human capital resources, could compromise our future success and our business could be harmed. +Our future success depends upon our ability to attract and retain, through competitive compensation and benefits programs, professional and executive employees, including sales, operating, marketing, and financial management personnel as well as our ability to manage human capital resources. There is substantial competition for skilled personnel, and the failure to attract, develop, retain and motivate qualified personnel could negatively impact our business, financial condition, results of operations and prospects. In order to hire new personnel or retain or replace our key personnel, we must maintain competitive compensation and benefits, and we may also be required to increase compensation, which would decrease net income. Additionally, several key employees have special knowledge of customers, supplier relationships, business processes, manufacturing operations, and financial management issues. The loss of any of these employees as the result of competitive compensation pressures or ineffective management of human capital resources could harm our ability to perform efficiently and effectively until their knowledge and skills are replaced, which might be difficult to do quickly, and as a result could have a material adverse effect on our business, financial condition, and results of operations. Failure to retain or attract key personnel could impede our ability to grow and could result in our inability to operate our business profitably. +Although we have not experienced any material disruptions due to labor shortages to date, we have observed an overall tightening and increasingly competitive labor market, and the demand for qualified individuals is expected to remain strong for the foreseeable future. Any sustained labor shortage or increased turnover rates within our employee base, whether caused by +COVID-19 +or as a result of general macroeconomic factors or wage competition, could lead to increased costs and lost profitability and could otherwise compromise us in efficiently operating our business. +We may record future impairment charges, which could materially adversely impact our results of operations. +We test our goodwill balances annually, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit level +13 +Table of Contents +and, monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Declines in the future performance and cash flows of a reporting unit or asset group, changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses, or changes in other key assumptions, may result in the recognition of significant asset impairment charges, which could have a material adverse impact on our results of operations. +We also review our long-lived assets including property, plant and equipment, and other intangibles assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider include significant under-performance relative to expected historical or projected future operating results, significant negative industry or economic trends and our market capitalization relative to net book value. We may be required in the future to record a significant charge to earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such charges could have a significant adverse impact on our results of operations and our financial condition. +Financial and Economic Risks: +Economic, political and other risks associated with international sales and operations could adversely affect our results of operations and financial position. +Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect sales to customers outside the U.S., accounted for approximately 40% of our total revenue for fiscal year 2022, and we anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, contractors and facilities located outside the U.S. Accordingly, our business, operating results and financial condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Failure to comply with complex and rapidly changing government economic sanctions measures against other countries, especially arising from responses to armed conflict; +• +Unexpected changes in regulatory requirements; +• +Uncertainty surrounding the implementation and effects of the United Kingdom’s withdrawal from the EU, commonly known as “Brexit”; and +• +Geopolitical turmoil, including terrorism, war and public health disruptions, such as that caused by the current +COVID-19 +pandemic. +To date the impact of the Russian invasion of Ukraine and the resulting governmental sanctions and our decision to halt all activities in the affected areas has had an immaterial impact on revenues. +14 +Table of Contents +Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods +. +As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is based on the tax rates in effect where we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each jurisdiction. Our effective tax rate may vary as a result of numerous factors, including changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, whether we secure or sustain acceptable arrangements with tax authorities, adjustments to the value of our uncertain tax positions, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations. +Changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the 2017 Tax Cuts and Jobs Act), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, could have a material impact on our estimates of our effective tax rate and our deferred tax assets and liabilities. The impact of these factors may be substantially different +from period-to-period. +In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions +(including changes in the taxation of international income as further described below) could adversely affect our financial statements. +We may have exposure to additional tax liabilities, which could negatively impact our income tax expense, net income and cash flow. +We are subject to income and other taxes in both the U.S. and the foreign jurisdictions in which we operate. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit by both domestic and foreign tax authorities and to the prospective and retrospective effects of changing tax regulations and legislation. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the amounts recorded in our consolidated financial statements and may materially affect our income tax benefit or expense, net loss or income, and cash flows in the period in which such determination is made. +Deferred tax assets are recognized for the expected future tax consequences of temporary differences between the carrying amount for financial reporting purposes and the tax bases of assets and liabilities, and for net operating losses and tax credit carry forwards. In some cases, we may record a valuation allowance to reduce our deferred tax assets to estimated realizable value. We review our deferred tax assets and valuation allowance requirements quarterly. If we are unable to demonstrate that it is more likely than not that we will not be able to generate sufficient future taxable income to realize the net carrying value of deferred tax assets, we will record a valuation allowance to reduce the deferred tax assets to estimated realizable value, which could result in a material income tax charge. As part of our review, we consider positive and negative evidence, including cumulative results of recent years. +If we are unable to successfully comply with our credit agreement with Bank of America or secure alternative financing, our business and financial condition could be materially adversely affected. +Our credit agreement with Bank of America requires us, among other things, to satisfy certain financial ratios on an ongoing basis, consisting of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. We are also required to comply with other covenants and conditions, set forth in the credit agreement, including, among others, limitations on our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or +15 +Table of Contents +acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the credit agreement. If we were to violate the terms of the credit agreement and we were unable to renegotiate its terms at that time or secure alternative financing, it could have a material adverse impact on us. +The agreements governing our indebtedness subject us to various restrictions that limit our ability to pursue business opportunities. +The credit agreement governing our credit facility with Bank of America, N.A., as amended, contains, and any future debt agreements may include, several restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to: +• +Incur future indebtedness; +• +Place liens on assets; +• +Pay dividends or distributions on our and our subsidiaries’ capital stock; +• +Repurchase or acquire our capital stock; +• +Conduct mergers or acquisitions; +• +Sell assets; and/or +• +Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness. +We may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may negatively impact our overall business. +We have made strategic investments in other companies, products and technologies. We will continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that we will be able to identify suitable acquisition opportunities. In any acquisition that we complete we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative impact on operating results or other aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental impact on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse impact on our reputation; and +• +Respective operations, management and personnel will be compatible. +In certain instances, as permitted by applicable law and NASDAQ rules, acquisitions may be consummated without seeking and obtaining shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in an acquisition, there can be no assurance that we will properly ascertain or assess such risks. +16 +Table of Contents +We may also divest certain businesses from time to time. Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If we are not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize expected benefits of our acquisitions, divestitures or strategic partnerships, our business, results of operations and financial condition could be adversely affected. +Adverse conditions in the global banking industry and credit markets could impair our liquidity or interrupt our access to capital markets, borrowings or financial transactions to hedge certain risks. +At the end of fiscal 2022, we had approximately $5.3 million of cash and cash equivalents. Our cash and cash equivalents are held in a mix of money market funds, bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets such as those caused by the current +COVID-19 +pandemic may, in some cases, result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our financial position. +To date, we have been able to access financing that has allowed us to make investments in growth opportunities and fund working capital requirements as needed. In addition, we occasionally enter into financial transactions to hedge certain foreign exchange and interest rate risks. Our continued access to capital markets, the stability of our lenders and their willingness to support our needs, and the stability of the counter-parties to our financial transactions that hedge risks are essential for us to meet our current and long-term obligations, fund operations, and fund our future strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could materially and adversely affect our business and financial condition. +Inadequate self-insurance accruals or insurance coverage for employee health care benefits could have an adverse effect on our business, financial results or financial condition. +In the U.S., we maintain an employee health insurance coverage plan on a self-insured basis backed by stop-loss coverage which sets a limit on our liability for both individual and aggregate claim costs. We record expenses based on actual claims incurred and estimates of the costs of expected claims, administrative costs, and stop-loss insurance premiums. +We record a liability for our estimated cost of U.S. claims incurred and unpaid as of each balance sheet date. Our estimated liability is recorded on an undiscounted basis and is based on historical trends. Our history of claims activity is closely monitored, and liabilities are adjusted as warranted based on changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of loss. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, which could cause us to record additional expenses, which could adversely impact our business, financial condition, results of operations and cash flow. We believe that the liabilities we have recorded to date will be sufficient to provide for losses we may incur due to increased +COVID-19 +related employee health care insurance costs. However, the ultimate amount of these costs cannot be estimated at this time, and a prolonged period of spread of the disease could further increase our costs and liabilities, the impact of which may be material. +17 +Table of Contents +Legal and Regulatory Risks: +Certain of our products require certifications by customers, regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business. +In certain industries and for certain products, such as those used in aircraft, we must obtain certifications for our products by customers, regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +We are subject to laws and regulations; failure to address or comply with these laws and regulations could harm our business and adversely affect our results of operations. +Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our products. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our business. +Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. As such, our business is subject to and may be materially and adversely affected by compliance obligations and other liabilities under those environmental, health and safety laws and regulations. Certain of our products contain, and some of manufacturing operations use various substances which have been or may be deemed to be hazardous or dangerous. Thus, we have and will continue to generate a generally limited amounts of hazardous wastes in our operations. We manage our compliance with laws and regulations and the proper mitigation of risks internally and through the input or external consultants and outside service providers and we believe we are in material compliance with all applicable environmental laws and regulations. We desire to reduce and ultimately eliminate any adverse environmental impact of our business and to comply with relevant laws and regulations. We expect this effort to affect our ongoing operations and require additional capital and operating expenditures. If we were to fail to manage our environmental compliance effectively, we could suffer economic or reputational harm. +As the result of the +COVID-19 +pandemic crisis, we have been required by U.S. federal and state governmental authorities and governmental authorities in +non-U.S. +jurisdictions, as well as our own desire to adhere to best health and safety practices, and have implemented new policies and procedures to reduce infection risk in our operations. These initiatives have increased our costs and added complexity and inefficiency to our manufacturing operations and all administrative and office-based functions. +Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, and any determination that we or any of our subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption +18 +Table of Contents +to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies. +Unauthorized access to personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights and compliance with laws designed to prevent unauthorized access of personal data could be costly. +We collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Security breaches or other unauthorized access to, or the use or transmission of, personal user information could result in a variety of claims against us, including privacy-related claims. There are numerous federal, state, local, and international laws and regulations regarding privacy and the storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are changing, inconsistent and conflicting and subject to differing interpretations. +We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. For example, in 2016 the European Commission adopted the General Data Protection Regulation (GDPR), a comprehensive privacy and data protection reform that became effective in May 2018. The GDPR, which is applicable to all companies processing data of European Union residents, imposes significant fines and sanctions for violations. Similarly, the California Consumer Privacy Act of 2018, which was enacted in June 2018 and came into effect on January 1, 2020, provides a new private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. +Additionally, other jurisdictions have enacted or are enacting data localization laws that require data generated in or relating to the residents of those jurisdictions to be physically stored within those jurisdictions. In many cases, these laws and regulations apply not only to transfers between unrelated third parties but also to transfers between us and our subsidiaries. All these evolving compliance and operational requirements impose significant costs that are likely to increase over time. +While we continue to assess these requirements and the ways they may impact the conduct of our business, we believe that we materially comply with applicable laws and industry codes of conduct relating to privacy and data protection. There is no assurance that we will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event we are found not to be in compliance with such laws or codes of conduct. +Any failure or perceived failure by us (or any third parties with whom we have contracted to store such information) to comply with applicable privacy and security laws, policies or related contractual obligations or any compromise of security that results in unauthorized access to personal information may result in governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. In the case of such an event, our reputation may be harmed, we could lose current and potential users and the competitive positions of our various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations. +Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition. +Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as +19 +Table of Contents +revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, leases, and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition. +Item 1B. Unresolved Staff Comments +None. +Item 2. +Properties +The following table sets forth information regarding our principal owned property. This property is subject to a security agreement and a mortgage in favor of the lender under our credit facility. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, United States +135,500 +Corporate headquarters, research and development, manufacturing, sales and service +We also lease facilities in various other locations. The following information pertains to each location: +Location +Approximate +Square +Footage +Principal Use +Dietzenbach, Germany +18,630 +Manufacturing, sales and service +Copenhagen, Denmark +4,800 +R&D, sales and service +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service +Elancourt, France +4,150 +Sales and service +Schaumburg, Illinois, United States +3,428 +Sales +Irvine, California, United States +3,100 +Sales +Shah Alam, Selangor, Malaysia +2,067 +Sales +Guangzhou, China +1,252 +Sales and service +Maidenhead, England +1,021 +Sales and service +Shanghai, China +425 +Sales +Mexico City, Mexico +97 +Sales +The West Warwick facility is used by both of our business segments, but the leased locations are primarily used by the Product Identification segment. We believe our facilities are well maintained, in good operating condition and generally adequate to meet our needs for the foreseeable future. +Item 3. +Legal Proceedings +We are not a party to any pending, material legal proceedings. However, because of the nature of our business, we may be subject in the future to lawsuits or other claims, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters +. +Item 4. +Mine Safety Disclosures +Not applicable. +20 +Table of Contents +PART II +Item 5. +Market for the Registrant +’ +s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock trades on the NASDAQ Global Market under the symbol “ALOT.” +We had approximately 214 shareholders of record as of April 12, 2022, which does not reflect shareholders with beneficial ownership in shares held in nominee name. +Stock Repurchases +During the fourth quarter of fiscal 2022, we made the following repurchases of our common stock: +Total Number +of Shares +Repurchased +Average +Price paid +Per Share ($) +Total Number of +Shares Purchased as +Part of Publicly +Announced Plans +or Programs +Maximum Number +of Shares That +May Be Purchased +Under the Plans +or Programs +November 1 – November 30 +— +— +— +— +December 1 – December 31 +483 +(a) +15.88 +(a) +— +— +January 1 – January 31 +1,682 +(b) +13.10 +(b) +— +— +(a) An executive of the company delivered 483 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $15.88 per share and are included with treasury stock in the consolidated balance sheet. +(b) An executive of the company delivered 1,682 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $13.10 per share and are included with treasury stock in the consolidated balance sheet. +Item 6. (Reserved) +Item 7. +Management +’ +s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis are meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts of cash flows from operations and outside resources, liquidity and certain other factors that may affect future results so as to allow investors to better view our company from management’s perspective. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and other financial information included elsewhere in this annual report on Form +10-K. +Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form +10-K, +including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. Carefully review the “Forward-Looking Statements” and “Risk Factors” sections of this annual report on Form +10-K +for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. +Overview +We are a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. We organize our structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following two segments: +• +Product Identification (“PI”) – offers color and monochromatic digital label printers, over-printers and custom OEM printers. PI also provides software to design, manage and print labeling and packaging +21 +Table of Contents +images locally and across networked printing systems, as well as all related printing supplies such as pressure sensitive labels, tags, inks, toners and thermal transfer ribbons used by digital printers. PI also provides +on-site +and remote service, spare parts and various service contracts. +• +Test and Measurement (“T&M”) – offers a suite of products and services that acquire data from local and networked data streams and sensors as well as wired and wireless networks. The T&M segment includes a line of aerospace printers used to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, clearances, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. Aerospace products also include aircraft networking systems for high-speed onboard data transfer. T&M also provides repairs, service and spare parts. +We market and sell our products and services globally through a diverse distribution structure of direct sales personnel, manufacturers’ representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. In fiscal 2022, 2021 and 2020, revenue from customers in various geographic areas outside the United States, primarily in Western Europe, Canada and Asia, amounted to $49.3 million, $45.1 million and $49.8 million, respectively. +We maintain an active program of product research and development. During fiscal 2022, 2021 and 2020, we spent $6.8 million, $6.2 million and $8.1 million, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2022 and beyond. +We also continue to invest in sales and marketing initiatives by expanding the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding the challenging economic environment. +COVID-19 +Update +All of our global operations have been materially adversely affected by the worldwide +COVID-19 +pandemic during the past two years. We expect this adverse impact to continue to a degree that we cannot predict. +We made significant modifications to our global +pre-pandemic +operations because of the +COVID-19 +pandemic. We initially required most +non-production +related team members to work remotely. Although this is no longer required for health and safety reasons, for many of our team members, remote work has become a preference and we believe we have to a large degree successfully adapted to it through the use of technology and changed management practices, but further adaptations, unknown at this time, may be required. We expect that our operations and modalities of +on-site +and remote work will be impacted permanently, as will our increased safety protocols and the other adaptations undertaken during the pandemic, but our practices and plans are still developing and we cannot predict the results yet. +Since the +COVID-19 +pandemic began we have experienced difficulties in obtaining raw materials and components for our products. Some of the structural dislocations in the global economy caused by the pandemic are deepening and prolonging these difficulties. We have had to incur additional costs, such as expedited and express shipping fees (i.e., air rather than ocean freight). These difficulties have also negatively impacted our efficiency, delayed shipments and caused product shortages +. +We are currently monitoring the world-wide delays in transit time, as freight carriers continue to experience significant delays in overseas shipments. We are addressing these issues through long range planning and procuring higher inventory on severely allocated items to help mitigate potential shortages whenever practicable. We are also monitoring and reacting to extended lead times on electronic components and utilizing a variety of strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have +22 +Table of Contents +taken actions to increase regular contact with our essential vendors and increased our forecasting horizon for our products to help us better manage our supply chain. In some cases, we are working with our vendors to help them procure components. Our strategies to counteract the impact of the pandemic and the related supply chain dislocations have increased the amount of inventory we maintain to support our product sales. We have also experienced several situations where component shortages and scarcity have required us to pay significantly higher costs to obtain those components. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our results of operations. +Product Identification Update +Our Product Identification business has been negatively impacted by the +COVID-19 +pandemic because our ability to meet with customers to demonstrate our products at trade shows and +on-site +in their facilities has been curtailed. We have partially countered this through a variety of virtual, +on-line +selling and digital marketing strategies, but the degree to which this will be successful to mitigate the lack of +face-to-face +selling is unclear. +Test & Measurement Update +The aerospace industry, which we serve through our aerospace product line, has also been significantly disrupted by the +COVID-19 +pandemic, both inside and outside of the United States because of the severe decline in the demand for air travel and aircraft, and a general curtailment of aircraft production rates. This has had a material adverse impact on our financial results. While air travel demand and aircraft production demand has recovered to some extent, it remains unclear whether these demand factors will continue to recover and to what extent. The secondary impacts of the demand decline and resulting financial losses on the economic structure of the airline industry could become a negative factor for demand for aircraft due to industry consolidation. Individually or in combination, these factors may continue to have a material adverse impact on our business operations and financial results. +PPP Loan Forgiveness +On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed $4.4 million (the “PPP Loan”) from Greenwood pursuant to the Paycheck Protection Program (“PPP”) administered by the United States Small Business Administration (the “SBA”) and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020. The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020 (the “PPP Flexibility Act”) which was enacted on June 5, 2020. +On June 15, 2021, the SBA approved our application for forgiveness of the entire $4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, we recorded a $4.5 million gain on extinguishment of debt, which is included in the accompanying consolidated income statement for the period ended January 31, 2022. +Employee Retention Credits +The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes. On December 27, 2020, Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which amended and extended ERC availability under Section 2301 of the CARES Act. Before the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we were ineligible for the ERC because we received the PPP Loan. Following enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we and other businesses that received loans under that program became retroactively eligible for the ERC. +23 +Table of Contents +In the second quarter of fiscal 2022, we determined that we qualified for an employee retention credit of $3.1 million for wages paid in calendar year 2020 and the first calendar quarter of 2021. We recorded a receivable in the second quarter of fiscal 2022 within prepaid expenses and other current assets in the condensed consolidated balance sheet. Such amount remains outstanding as of January 31, 2022 and was received subsequent to year end on March 22, 2022. +The $3.1 million of ERCs was recognized as a reduction in employer payroll taxes and allocated to the financial statement captions from which the employer’s payroll taxes were originally incurred. As a result, we recorded a reduction in expenses of $1.7 million in cost of revenue, $0.8 million in selling and marketing, $0.3 million in research and development and $0.3 million in general and administrative which is included in the accompanying condensed consolidated income statement for the period ended January 31, 2022. +Results of Operations +Fiscal 2022 compared to Fiscal 2021 +The following table presents the revenue of each of our segments, as well as the percentage of total revenue and change from the prior year. +($ in thousands) +2022 +2021 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +Product Identification +$ +90,915 +77.4 +% +0.7 +% +$ +90,268 +77.8 +% +T&M +26,565 +22.6 +% +3.1 +% +25,765 +22.2 +% +Total +$ +117,480 +100.0 +% +1.2 +% +$ +116,033 +100.0 +% +Net revenue in fiscal 2022 was $117.5 million, a 1.2% increase compared to net revenue of $116.0 million for fiscal 2021. Current year revenue through domestic channels was $68.2 million, a decline of 3.8% from prior year domestic revenue of $70.9 million. International revenue of $49.3 million for fiscal 2022 increased 9.2% compared to prior year international revenue of $45.1 million. Fiscal 2022 international revenue reflects a favorable foreign exchange rate impact of $1.1 million, compared to a favorable impact of $0.8 million in fiscal 2021. +Hardware revenue in fiscal 2022 was $31.5 million, a $2.6 million or 7.7% decrease compared to fiscal 2021 hardware revenue of $34.1 million. The current year decrease in hardware revenue is due to the decline in hardware revenue in both the PI and T&M segments. The decrease in hardware revenue is primarily due to a 10.1% decline in hardware sales in the T&M segment resulting from overall lower aerospace printer product line sales in the T&M segment as a result of the continuing effects of the Boeing 737 MAX grounding and the impact of the sharp decline in air travel due to +COVID-19. +T&M hardware revenue for the current year was also negatively impacted by a decline in sales of data recorders. Also contributing to the overall decline in hardware revenue for the current year was a more modest decline in sales in the PI segment of QuickLabel model printers which was partially offset by sales related to printers in the TrojanLabel product group. +Revenue from supplies in fiscal 2022 was $73.2 million, a 2.1% increase compared to fiscal 2021 supplies revenue of $71.8 million. Supplies revenue increased in both the PI and T&M segment in the current year, with the increase primarily due to increased demand for Trojan Label product supplies due to increased market penetration of these printers. Also contributing to the current year increase in supplies revenue was the increase in sales of supplies in both our aerospace printer and data recorder product lines, and a slight increase in ink jet supply sales in the QuickLabel product group. The current year increase was offset to a large extent by a decline in sales of EP and Thermal film supplies in the QuickLabel product group due to a shift from legacy thermal transfer and electrophotographic products to newer ink jet products. +Service and other revenue in fiscal 2022 was $12.7 million, a 25.6% increase compared to fiscal 2021 service and other revenue of $10.2 million. The increase is due primarily to overall increased repair and parts revenue in both the T&M and PI segments. +24 +Table of Contents +Gross profit was $43.7 million for fiscal 2022, reflecting a 5.8% increase compared to fiscal 2021 gross profit of $41.4 million. Our gross profit margin of 37.2% in fiscal 2022 reflects a 2.4 percentage point increase compared to fiscal 2021 gross profit margin of 35.6%. The higher profit and related margin for the current year compared to the prior year is primarily attributable to increased revenue and the impact of the ERC, which reduced manufacturing payroll taxes in the amount of $1.7 million in the second quarter of the current year. +Operating expenses for the current year were $39.5 million, representing a 1.4% increase from the prior year’s operating expenses of $38.9 million. Specifically, selling and marketing expenses of $23.2 million in fiscal 2022 decreased 0.5% from the prior year amount of $23.3 million. The decrease in selling and marketing expenses for the current year is primarily due to a decrease in payroll taxes in the second quarter of the current year related to the ERC, as well as a decrease in amortization expense related to the second quarter’s change in the remaining useful lives and amortization methods for certain of our customer relationship intangibles. The current year decline in selling and marketing expenses was partially offset by an increase in employee wages and bonuses as well as increased travel and entertainment, commissions, and advertising expenses. General and administrative expenses increased 1.4% to $9.6 million in the current year compared to $9.4 million in the prior year, primarily due to an increase in outside service fees, employee wages, bonuses and fees, partially offset by a decrease in payroll taxes related to the ERC. Research & development (“R&D”) costs in fiscal 2022 of $6.8 million increased 8.8% from $6.2 million in fiscal 2021, primarily due to an increase in employee wages and bonus and outside consulting fees. The current year increase in R&D costs was partially offset by a decline in payroll taxes related to the ERC. The R&D spending level for fiscal 2022 represents 5.7% of net revenue, compared to the prior year level of 5.3%. +Other income in fiscal 2022 was $2.8 million compared to other expense of $0.3 million in fiscal 2021. Current year other income includes $4.5 million related to the forgiveness of our PPP Loan, partially offset by $0.7 million related to the +write-off +of our Oracle EnterpriseOne ERP system and related prepaid service and maintenance contracts as a result of the full implementation of a new ERP system in our US based operations in the fourth quarter of fiscal 2022, interest expense on debt of $0.7 million, and net foreign exchange loss of $0.3 million. Prior year other expense includes $1.0 million of interest expense on debt and revolving line of credit, offset by a net foreign exchange gain of $0.6 million and other income of $0.1 million. +We recognized $0.6 million of income tax expense for the current fiscal year, resulting in an effective tax rate of 8.6%. The decrease in the effective tax rate in 2022 from 2021 is primarily related to the PPP loan forgiveness +tax-exempt +income. Specific items decreasing the effective tax rate include PPP loan forgiveness +tax-exempt +income, R&D tax credits, foreign derived intangible income (“FDII”) deductions, and a change in reserves related to ASC 740 liabilities. This decrease was offset by state taxes, return to provision adjustments, and taxes on foreign earnings. The PPP Loan forgiveness is excluded from taxable income under Section 1106(i) of the CARES Act. During fiscal 2021 we recognized a $0.9 million income tax expense, or a 41.1% effective tax rate. The effective tax rate in this period was directly impacted by the change in mix of income between relevant jurisdictions in which we are subject to income taxes. Specific items increasing the fiscal 2021 effective tax rate include foreign rate differential, Denmark statutory audit adjustments, stock-based compensation, and Canada withholding taxes. This increase was offset by the foreign derived intangible income deduction, the release of a valuation allowance in China, and R&D tax credits expected to be utilized. +Net income for fiscal 2022 was $6.4 million, or $0.88 per diluted share. The results for the current period were impacted by income of $4.5 million ($4.4 million net of tax or $0.60 per diluted share) related to the forgiveness of our PPP Loan, income of $2.1 million ($1.6 million net of tax or $0.22 per diluted share) related to the net ERC and expense of $0.7 million ($0.5 million net of tax or $0.07 per diluted share) related to the +write-off +of our Oracle EnterpriseOne ERP system and related prepaid service and maintenance contracts. Net income for the prior year was $1.3 million or $0.18 per diluted share. Return on revenue was 5.5% for fiscal 2022 compared to 1.1% for fiscal 2021. +25 +Table of Contents +Fiscal 2021 compared to Fiscal 2020 +For a comparison of our results of operations for the fiscal years ended January 31, 2021, and January 31, 2020, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form +10-K +for the fiscal year ended January 31, 2021, filed with the SEC on April 13, 2021. +Segment Analysis +We report two segments consistent with our product revenue groups: PI and T&M. Segment performance is evaluated based on the operating segment’s profit (loss) before corporate and financial administration expenses. The following table summarizes selected financial information by segment. +($ in thousands) +Revenue +Segment Operating Profit (Loss) +Segment Operating Profit +(Loss) as a % of Revenue +2022 +2021 +2020 +2022 +2021 +2020 +2022 +2021 +2020 +PI +$ +90,915 +$ +90,268 +$ +88,116 +$ +10,411 +$ +12,885 +$ +7,509 +11.5 +% +14.3 +% +8.5 +% +T&M +26,565 +25,765 +45,330 +3,398 +(1,032 +) +6,281 +12.8 +% +(4.0 +)% +13.9 +% +Total +$ +117,480 +$ +116,033 +$ +133,446 +13,809 +11,853 +13,790 +11.8 +% +10.2 +% +10.3 +% +Corporate Expenses +9,553 +9,420 +11,357 +Operating Income +4,256 +2,433 +2,433 +Other Expense, Net +2,778 +(254 +) +(1,063 +) +Income Before Income Taxes +7,034 +2,179 +1,370 +Income Tax Provision (Benefit) +605 +895 +(389 +) +Net Income +$ +6,429 +$ +1,284 +$ +1,759 +Product Identification +Revenue from the PI segment increased 0.7% in fiscal 2022, with revenue of $90.9 million compared to revenue of $90.3 million in the prior year. The current year increase is primarily attributable to growth in demand for ink jet and media supplies for the Trojan Label product line, the increase in current year sales of QuickLabel’s ink jet printer supplies and an increase in parts and repairs revenue in both the QuickLabel and Trojan Label product groups. Also contributing to the increase in revenue for the current year was an increase in hardware sales in the Trojan Label product group for certain new products such as the Trojan Two Compact printer and the +T3-OPX +label press. PI current year segment operating profit was $10.4 million with a profit margin of 11.5%, compared to the prior year segment operating profit of $12.9 million and related profit margin of 14.3%. The decrease in current year segment operating profit and margin is primarily due to increased operating expenses. +Test & Measurement +Revenue from the T&M product group was $26.6 million for fiscal 2022, a 3.1% increase compared to revenue of $25.8 million in the prior year. The increase in revenue for the current year is primarily attributable to the increase in repairs and parts sales for the aerospace printer product lines. To a lesser degree, the increase in the current year revenue was also impacted by the increase in supplies revenue in the aerospace product lines. T&M current year segment operating profit was $3.4 million resulting in a 12.8% profit margin compared to the prior year segment operating loss of $1.0 million and related negative operating margin of 4.0%. The increased profit and margins are a result of increased sales and lower manufacturing and operating costs. +26 +Table of Contents +Liquidity and Capital Resources +Overview +Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. These sources have also funded a portion of our capital expenditures and contractual contingent consideration obligations. We have typically funded acquisitions by borrowing under bank term loan facilities. +On July 30, 2020, we entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) with Bank of America, N.A. (the “Lender”), our wholly owned subsidiary ANI ApS, a Danish private limited liability company and ANI ApS’s wholly-owned subsidiary TrojanLabel ApS, a Danish private limited liability company (“TrojanLabel”). The A&R Credit Agreement amended and restated the Credit Agreement dated as of February 28, 2017, by and among us, ANI ApS, TrojanLabel and the Lender. In connection with our entry into the A&R Credit Agreement, we entered into an Amended and Restated Security and Pledge Agreement and a mortgage in favor of the Lender with respect to our owned real property in West Warwick, Rhode Island. Under the A&R Credit Agreement, AstroNova, Inc. is the sole borrower, and, prior to the effectiveness of the Amendment (as defined below), its obligations were guaranteed by ANI ApS and TrojanLabel. +On March 24, 2021, we entered into a First Amendment to Credit Agreement (the “Amendment”) to our A&R Credit Agreement (the “A&R Credit Agreement amended by the Amendment, the “Amended Credit Agreement”) with the Lender, ANI ApS and TrojanLabel. Immediately prior to the closing of the Amendment, we repaid $2.6 million in principal amount of the term loan outstanding under the A&R Credit Agreement, resulting in an outstanding balance of the term loan of $10.0 million and no amount drawn and outstanding under the revolving credit facility under the Amended Credit Agreement. +The Amended Credit Agreement expires on September 30, 2025, a significant extension of tenor. It also eliminated a minimum adjusted EBITDA covenant, an asset coverage covenant and a minimum liquidity covenant, and, subject to ongoing covenant compliance, significantly reduced limitations on restricted payments such as dividends, eliminated restrictions on capital expenditures and increased operating flexibility with respect to funding our global operations. +The Amended Credit Agreement provides for (i) a term loan in the principal amount of $10.0 million, and (ii) a $22.5 million revolving credit facility available for general corporate purposes. At the closing of the Amended Credit Agreement, we borrowed the entire $10.0 million term loan which was used to refinance in full the outstanding term loan under the A&R Credit Agreement. Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. +While we expected that as a result of the impact of the +COVID-19 +pandemic, some of our customers would experience liquidity pressure and be unable to pay us for products on a timely basis, in general our recent receivables collection experience has been consistent with our historical experience and a significant deterioration in receivables collection has not occurred. +In response to the +COVID-19 +pandemic and related economic dislocation, we have implemented and will continue to implement a variety of expense reduction and cash preservation initiatives. On April 27, 2020, our board of directors suspended our quarterly cash dividend beginning with the second quarter of our fiscal year 2021. +At January 31, 2022, our cash and cash equivalents were $5.3 million. There was no outstanding balance on our revolving line of credit at January 31, 2022 and we have $22.5 million available for borrowing under that facility. We believe that our available cash and credit facilities combined with our cash generated from operations will be sufficient to support our operating requirements including our capital expenditure commitments. +27 +Table of Contents +Indebtedness +Term Loan +The Amended Credit Agreement requires that the term loan be paid as follows: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2021 through January 31, 2022 is $187,500; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2022 through January 31, 2023 is $250,000; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2023 through January 31, 2025 is $312,500; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2025 and July 31, 2025 is $500,000; and the entire remaining principal balance of the term loan is required to be paid on September 30, 2025. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than September 30, 2025, at which time any outstanding revolving loans will be due and payable in full, and the revolving credit facility will terminate. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. +The Amended Credit Agreement includes an uncommitted accordion provision under which the term loan and/or revolving credit facility commitments may be increased in an aggregate principal amount not exceeding $10.0 million, subject to obtaining the agreement of the Lender and the satisfaction of certain other conditions. +As under the A&R Credit Agreement, the loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. +Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. +On December 14, 2021, we and Bank of America, N.A. entered into a LIBOR Transition Amendment (the “LIBOR Amendment”) with regard to the Amended Credit Agreement. The LIBOR Amendment, among other things, (i) changes the rate under the Amended Credit Agreement for borrowings denominated in U.S. Dollars from a LIBOR-based rate to a BSBY (Bloomberg Short-Term Bank Yield Index)-based rate, subject to certain adjustments, (ii) changes the rate under the Amended Credit Agreement for borrowings denominated in British Pounds Sterling from a LIBOR-based rate to a SONIA (Sterling Overnight Index Average)-based rate, subject to certain adjustments, (iii) changes the rate under the Amended Credit Agreement for borrowings denominated in Euros from a LIBOR-based rate to a EURIBOR (Euro Interbank Offered Rate)-based rate, subject to certain adjustments, and (iv) updates certain other provisions of the Amended Credit Agreement regarding successor interest rates to LIBOR. +Prior to giving effect to the LIBOR Amendment, the interest rates under Amended Credit Agreement were as follows: the term loan and revolving credit loans bore interest at a rate per annum equal to, at our option, either (a) the LIBOR Rate as defined in the A&R Credit Agreement (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varied within a range of 1.60% to 2.30% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate, (iii) the LIBOR Rate plus 1.00% or (iv) 0.50%, plus a margin that varied within a range of 0.60% to 1.30% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.30% based on our consolidated leverage ratio. +28 +Table of Contents +The interest rates under the Amended Credit Agreement, giving effect to the LIBOR Amendment, are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the LIBOR Amendment (or in the case of revolving credit loans denominated in a Pounds Sterling, Euros or another currency other than U.S. Dollars, the SONIA Rate as defined in the LIBOR Amendment, EURIOBOR Rate as defined in the LIBOR Amendment, or the applicable quoted rate, respectively), plus a margin that varies within a range of 1.60% to 2.30% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate, (iii) the BSBY Rate, SONIA Rate, EURIBOR Rate or other applicable quoted rate plus 1.00% or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.30% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.30% based on our consolidated leverage ratio. +We must comply with various customary financial and +non-financial +covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The minimum EBITDA, minimum consolidated asset coverage ratio, minimum liquidity and maximum capital expenditures covenants with which we were required to comply under the A&R Credit Agreement were eliminated by the Amendment. The primary +non-financial +covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Amendment. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests held by us in ANI ApS, in our wholly-owned German subsidiary AstroNova GmbH, and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island. Pursuant to the Amendment, the guarantees of our obligations under the A&R Credit Agreement that were previously provided by ANI ApS and TrojanLabel were released. +PPP Loan +On May 6, 2020, we entered into a Loan Agreement with and executed a promissory note in favor of Greenwood Credit Union pursuant to which we borrowed $4.4 million from Greenwood pursuant to the Paycheck Protection Program administered by the United States Small Business Administration (the “SBA”) and authorized by the CARES Act enacted on March 27, 2020. The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020, which was enacted on June 5, 2020. We believe that our obtaining the PPP Loan and suspending the payment of dividends on our common stock were instrumental in our ability to successfully negotiate the A&R Credit Agreement. +The PPP Loan, which would have matured on May 6, 2022, was unsecured and bore interest at a rate of 1.0% per annum, accruing from the loan date. No payments would have been due on the PPP Loan until the date on which the lender determined the amount of the PPP Loan that was eligible for forgiveness. +29 +Table of Contents +On June 15, 2021, Greenwood notified us that the SBA approved our application for forgiveness of the entire $4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, we recorded a $4.5 million gain on extinguishment of debt in other income (expense) which is included in our consolidated income statement for the period ended January 31, 2022. +Cash Flow +The statements of cash flows for the years ended January 31, 2022, 2021 and 2020 are included on page 50 of this Form +10-K. +Net cash provided by operating activities was $1.4 million in fiscal 2022 compared to net cash provided by operating activities of $15.5 million in the previous year. The decrease in net cash provided by operations for the current year is primarily due to a decrease in cash provided by working capital of $11.3 million from fiscal 2021. The changes in accounts receivable, inventory, income taxes, accounts payable and accrued expenses for the current year decreased cash by $3.9 million in fiscal 2022 compared to an increase to cash of $7.4 million in the prior year. The decrease in cash from operations for fiscal 2022 was also impacted by the $3.1 million ERC receivable and the $4.5 million gain on the forgiveness of the PPP Loan. +The accounts receivable balance decreased to $17.1 million at January 31, 2022, compared to $17.4 at January 31, 2021. The slight decrease in the accounts receivable balance is related to sales product mix in fiscal 2022 compared to the prior year. The days sales outstanding dropped to 45 days at year end compared to 51 days at the end of fiscal 2021 contributing to the lower receivables balance at January 31, 2022. The days sales outstanding decrease in the current year is due to customer mix, as aerospace receivables typically take longer to collect, and these revenues continued to represent a lesser percentage of total sales in fiscal 2022. +The +year-end +inventory balance increased to $34.6 million at January 31, 2022 versus $30.1 million at January 31, 2021, and the days inventory on hand increased to 156 days at the end of fiscal 2022 as compared to 147 days at the end of the fiscal 2021. The current period increase in inventory is due to increased production demand. +Net cash used by investing activities for fiscal 2022 was $1.8 million for capital expenditures, of which $1.6 million related to the capitalization of our new ERP system and the related hardware, and the remaining $0.2 million was for machinery and tools. +Net cash used by financing activities for fiscal 2022 was $5.6 million. Cash outflows for financing activities for fiscal 2022 included the refinancing of debt, which resulted in a net outflow of cash of $2.6 million, and principal payments on the new long-term debt and the guaranteed royalty obligation of $0.8 million and $2.0 million, respectively. +Fiscal 2021 compared to Fiscal 2020 +For a comparison of our cash flow for the fiscal years ended January 31, 2021 and January 31, 2020, see “Part II, Item 7. Management’s Discussion and Analysis of Liquidity and Capital Resources” in our annual report on Form +10-K +for the fiscal year ended January 31, 2021, filed with the SEC on April 13, 2021. +Contractual Obligations, Commitments and Contingencies +As of January 31, 2022, we had contractual obligations related to lease arrangements, debt and royalty obligation arrangements and purchase commitments. +The lease arrangements are for certain of our facilities at various locations worldwide. As of January 31, 2022, we had fixed lease payment obligations of $1.1 million, with $0.3 million due within 12 months. Refer to Note 12, “Leases,” in our audited consolidated financial statements included in this Annual Report on Form +10-K +for further details. +30 +Table of Contents +Debt arrangements under our Amended Credit Agreement with Bank of America, N.A., consist of the balance due of $9.3 million at January 31, 2022. For additional details regarding our long-term debt obligations, see Note 7, “Debt,” in our audited consolidated financial statements included in this Annual Report on Form +10-K. +We are subject to a guaranteed minimum royalty payment obligation over the next six years pursuant to the Honeywell Agreement, which, at January 31, 2022, included a balance due of $6.4 million, with $2.0 million due within 12 months. Refer to Note 11, “Royalty Obligation,” in our audited consolidated financial statements included in this Annual Report on Form +10-K +for further details. +In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. At January 31, 2022 our purchase commitments totaled $37.5 million, with $35.4 million due within 12 months, most of which are +non-cancelable. +We are also subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, such as: contract and employment claims; workers compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided, or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +Critical Accounting Policies and Estimates +Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and +year-end +reporting requirements. These judgments and estimates are based on our historical experience, current trends and information available from other sources, as appropriate. We do not believe there is a great likelihood that materially different amounts would be reported using different assumptions pertaining to the accounting policies described below, however, if actual conditions differ from the assumptions used in our judgments, our financial results could be materially different from our estimates. +We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements: +Revenue Recognition +: We recognize revenue in accordance with Accounting Standards Update +(ASU) 2014-9, Revenue +from Contracts with Customers (also referred to as Topic 606). Under Topic 606, based on the nature of our contracts and consistent with prior practice, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied. +Our accounting policies relating to the recognition of revenue under Topic 606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which include (i) the existence of a contract with the customer, (ii) the identification of the performance obligations in the contract, (iii) the value of any variable consideration in the contract, (iv) the stand alone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the contract, and (v) determining when a performance obligation has been met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery +31 +Table of Contents +for those services, could result in inappropriate recognition of revenue, or incorrect timing of revenue recognition, which could have a material effect on our financial condition and results of operations. +We recognize revenue for +non-recurring +engineering (NRE) fees, as necessary, for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. +Infrequently, we receive requests from customers to hold product being purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements in accordance with the guidance provided by Topic 606, which requires the transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) we do not have the ability to use the product or direct it to another customer. +Allowance for Doubtful Accounts: +Accounts receivable consists primarily of receivables from our customers arising from the sale of our products. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts. +We estimate the collectability of our receivables and establish allowances for accounts receivable that we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our accounts receivable are outstanding and the financial condition of individual customers. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. We believe that our procedure for estimating such amounts is reasonable and historically have not resulted in material adjustments in subsequent periods. Bad debt expense was less than 1% of net sales in each of fiscal 2022 and 2021. +Warranty Claims: +We offer warranties on some of our products. We establish a reserve for estimated costs of warranties at the time the product revenue is recognized. This reserve requires us to make estimates regarding the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect estimated warranty cost. If actual warranty costs differ from our estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of revenue, and the reserve balance recorded as an accrued expense. While we maintain product quality programs and processes, our warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, we revise our estimated warranty liability accordingly. +Inventories: +Inventories are stated at the lower of cost or net realizable value. The process for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on hand and estimating the net realizable value of the inventory based on historical experience, current business conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income Taxes: +A valuation allowance is established when it is +“more-likely-than-not” +that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, including our performance, the market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2022, we had provided valuation allowances for future tax benefits resulting from certain domestic R&D tax credits and foreign tax credit carryforwards, both of which could expire unused. +32 +Table of Contents +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted. +On March 27, 2020, the CARES Act was signed into law. The legislation had sweeping effects including various types of economic relief for impacted businesses and industries. One such relief provision was the Paycheck Protection Program (”PPP”), which provided short-term cash flow assistance to finance employee payroll and qualified expenses. On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood pursuant to which we borrowed $4.4 million. On December 27, 2020, the Consolidated Appropriations Act, 2021, H.R. 133 was signed into law. The legislation permits the deductibility of expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan (covered loan) guaranteed under the PPP. We have fully utilized the PPP Loan proceeds for qualifying expenses and subsequent to year end have applied for forgiveness of the PPP Loan (including all associated accrued interest) in accordance with the terms of the CARES Act, as amended by the PPP Flexibility Act. Consistent with the legislation, we deducted the full $4.4 million of qualified expenses on our 2020 federal tax return. On June 15, 2021, Greenwood notified us that the SBA approved our application for forgiveness of the entire $4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, in the second quarter of fiscal 2022, we recorded a $4.5 million gain on extinguishment of debt. The PPP loan forgiveness recognized in the second quarter of fiscal 2022 is excluded from taxable income under Section 1106(i) of the CARES Act. +Intangible and Long-Lived Assets: +Long-lived assets, such as definite-lived intangible assets and property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows. +Goodwill: +Goodwill is tested for impairment at the reporting unit. A reporting unit is an operating segment or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. If a quantitative assessment is required, we estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to publicly traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the +33 +Table of Contents +carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. +Share-Based Compensation: +Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires several complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and our dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted-average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, we have observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grants and assessed the expected risk tolerance of different option groups. The risk-free interest rate used in the model is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of our common stock on the date of grant. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. +Recent Accounting Pronouncements +Reference is made to Note 1 of our audited consolidated financial statements included elsewhere in this report. +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +Our primary financial market risks consist of foreign currency exchange rates risk and the impact of changes in interest rates that fluctuate with the market on our variable rate credit borrowings under our existing credit agreement. +Financial Exchange Risk +The functional currencies of our foreign subsidiaries and branches are the local currencies—the British Pound in the U.K., the Canadian Dollar in Canada, the Danish Kroner in Denmark, the Chinese Yuan in China, and the Euro in France and Germany. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign subsidiaries are translated to U.S. dollars. The assets and liabilities of our foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at an average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The reported results of our foreign subsidiaries will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency translation exposure is related to our subsidiaries that have functional currencies denominated in Danish Kroner and the Euro. A hypothetical 10% change in the rates used to translate the results of our foreign subsidiaries would result in an increase or decrease in our consolidated net income of approximately $0.2 million for the year ended January 31, 2022. +34 +Table of Contents +Transactional exposure arises where transactions occur in currencies other than the functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the balance sheet date and the resulting gains and losses are reported as foreign exchange gain (loss) in the consolidated statements of income. Foreign exchange losses resulting from transactional exposure were $0.3 million for the year ended January 31, 2022. +Interest Rate Risk +At January 31, 2022, our total indebtedness included $9.25 million of term loan variable-rate debt. At January 31, 2022, under the LIBOR Transition Amendment to the Amended Credit Agreement, the term loan bears interest at a BSBY (Bloomberg Short-Term Bank Yield) rate plus a margin that varies between 1.60% and 2.30% based on our consolidated leverage ratio. During fiscal 2022, the interest rate on our variable rate debt ranged between 2.35% to 4.65% . The impact on our results of operations of a 100 basis point change in the interest rate on the outstanding balance of our variable-rate debt, would be approximately $0.1 million annually. +Item 8. +Financial Statements and Supplementary Data +The consolidated financial statements required under this item are submitted as a separate section of this report on the pages indicated at Item 15(a)(1). +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. +Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form +10-K +pursuant to Rules +13a-15(e) +and +15d-15(e) +under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2022 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules +13a-15(f) +and +15d-15(f) +under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2022. In making this assessment, management used the criteria set forth in the Internal Control- +35 +Table of Contents +Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2022, our internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +Changes in Internal Controls over Financial Reporting +There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. +Other Information +None. +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +36 +Table of Contents +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed for our 2022 Annual Meeting of Shareholders. +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of the Board of Directors. +Name +Age +Position +Gregory A. Woods +63 +President, Chief Executive Officer and Director +David S. Smith +65 +Vice President, Chief Financial Officer and Treasurer +Stephen M. Petrarca +59 +Vice President—Operations +Michael J. Natalizia +58 +Chief Technology Officer and Vice President of Strategic Technical Alliances +Tom Carll +55 +Vice President and General Manager—Aerospace +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to 2010, Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts. +Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. Mr. Smith has also held a variety of senior finance positions at semiconductor and manufacturing companies, including Senior Vice President and Chief Financial Officer of Standard Microsystems Corporation, a global semiconductor company, from 2005 to 2008 and Vice President, Finance and Chief Financial Officer of both Dover Corporation, a diversified global manufacturing company, from 2000 to 2002 and Crane Company, a diversified manufacturing company from 1994 to 2000. +Mr. Petrarca was appointed Vice President—Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +Mr. Carll joined the Company in 1989 and has held the position of Vice President and General Manager—Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product group and from its formation in 2004, the AstroNova Aerospace business group. +Code of Ethics +We have adopted a Code of Conduct which applies to all of our directors, officers and employees of the Company, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation +S-K. +A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on our website, +(www.astronovainc.com) +, under the heading “Investors—Corporate Governance—Governance Documents.” We intend to disclose any amendment to, or waiver of, a +37 +Table of Contents +provision of the Code of Conduct for the CEO, CFO, principal accounting officer, or persons performing similar functions by posting such information on our website. +Item 11. +Executive Compensation +The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed for our 2022 Annual Meeting of Shareholders. +The information set forth under the heading “Compensation Committee Report” in our definitive Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended. +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed for our 2022 Annual Meeting of Shareholders. +Equity Compensation Plan Information +The following table sets forth information about our equity compensation plans as of January 31, 2022: +Plan Category +Number of Securities to +be Issued Upon Exercise +of Outstanding Options, +Warrants and Rights +Weighted- +Average Exercise +Price of +Outstanding +Options, +Warrants and +Rights +Number of Securities +Remaining Available for +Future Issuance Under +Equity Compensation Plans +Equity Compensation Plans Approved by Shareholders +776,975 +(1) +$ +14.67 +(2) +401,893 +(3) +Equity Compensation Plans Not Approved by Shareholders +— +— +— +Total +776,975 +(1) +$ +14.67 +(2) +401,893 +(3) +(1) +Includes 323,468 shares issuable upon exercise of outstanding options granted under our 2007 Equity Incentive Plan; 139,075 shares issuable upon exercise of outstanding options granted under our 2015 Equity Incentive Plan; and 135,500 shares issuable upon exercise of outstanding options granted, 135,403 restricted stock units and 43,529 unvested performance stock units outstanding under our 2018 Equity Incentive Plan. This balance does not include 20,410 of unvested restricted stock which are subject to forfeiture. +(2) +Does not include restricted stock units. +(3) +Represents 399,611 shares available for grant under the AstroNova, Inc. 2018 Equity Incentive Plan and 2,282 shares available for purchase under the Employee Stock Purchase Plan. +Additional information regarding these equity compensation plans is contained in Note 15, “Share-Based Compensation,” in our audited consolidated financial statements included in this Annual Report on Form +10-K. +Item 13. +Certain Relationships, Related Transactions and Director Independence +The information required by this item is incorporated herein by reference to our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders. +Item 14. +Principal Accountant Fees and Services +The information required by this item is incorporated herein by reference to our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders. +38 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part of this Annual Report filed on Form +10-K: +Page +Report of Independent Registered Public Accounting Firm +44-45 +Consolidated Balance Sheets as of January 31, 2022 and 2021 +46 +Consolidated Statements of Income—Years Ended January 31, 2022, 2021 and 2020 +47 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2022, 2021 and 2020 +48 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January 31, 2022, 2021 and 2020 +49 +Consolidated Statements of Cash Flows—Years Ended January 31, 2022, 2021 and 2020 +50 +Notes to Consolidated Financial Statements +51-75 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January 31, 2022, 2021 and 2020 +76 +All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +Item 16. Form +10-K +Summary +Not Applicable. +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Share Purchase Agreement, dated January 7, 2017, as amended, by and among ANI ApS, Trojan Holding ApS, as a Seller and as the Sellers’ Representative, and Li Wei Chong filed as Exhibit 2.1 to our Annual Report on Form 10-K for the year ended January 31, 2017 and incorporated by reference herein* +(3A) +Restated Articles of Incorporation of the Company and all amendments thereto filed as Exhibit 3A to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(3B) +By-laws of the Company as amended to date filed as Exhibit 3B to our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. 000-13200) and incorporated by reference herein. +(4.1) +Specimen form of common stock certificate of the Company filed as Exhibit 4 to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(4.2) +Description of securities registered pursuant to Section 12 of the Exchange Act filed as Exhibit 4.2 to our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (File No. 000-13200) and incorporated by reference herein. +(10.1) +2. Astro-Med, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 annual shareholders meeting and incorporated by reference herein.** +39 +Table of Contents +Exhibit +Number +(10.2) +Change in Control Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended January 31, 2015 and incorporated by reference herein.** +(10.3) +AstroNova Inc. 2015 Equity Incentive Plan filed as Exhibit A to the Definitive Proxy Statement filed on April 21, 2015 (File No. 000-13200) for the 2015 annual shareholders meeting and incorporated by reference herein.** +(10.4) +Form of Indemnification Agreement for directors and officers filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended October 31, 2015 and incorporated by reference herein.** +(10.5) +Form of Restricted Stock Agreement granted under the Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.6) +Form of Incentive Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.7) +Form of Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.8) +Form of Non-Employee Director Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.9) +Form of Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.10) +Form of Non-Employee Director Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.11) +Form of Time-Based Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.12) +Form of Performance Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.13) +Asset Purchase and License Agreement, dated September 28, 2017, by and between AstroNova, Inc. and Honeywell International, Inc. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date September 28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.14) +Amended and Restated AstroNova, Inc. Employee Stock Purchase Plan filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A, event date November 20, 2017, filed with the SEC on December 28, 2017 and incorporated by reference herein. +(10.16) +Form of Performance-based Restricted Stock Unit Award Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +40 +Table of Contents +Exhibit +Number +(10.17) +Form of Restricted Stock Unit Agreement (time-based vesting) filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.18) +Form of Incentive Stock Option filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.19) +Form of Non-statutory Stock Option filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.20) +Form of Non-statutory Stock Option (Non-employee Director) filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.21) +Form of Restricted Stock Agreement filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.22) +Form of Non-employee Director Restricted Stock Agreement filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.23) +AstroNova, Inc. Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed, event date January 31, 2019, filed with the SEC on February 4, 2019 and incorporated by reference herein.** +(10.24) +AstroNova, Inc. 2018 Equity Incentive Plan Non-Employee Director Restricted Stock Agreement filed as Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019 and incorporated by reference to herein.* +(10.25) +AstroNova, Inc. 2018 Equity Incentive Plan, as amended, filed as Appendix A to the Company’s Definitive Proxy Statement filed with the SEC on May 25, 2019 on Schedule 14A and incorporated by reference herein.* +(10.26) +Amended and Restated Credit Agreement dated as of July 30, 2020 among AstroNova, Inc., ANI ApS, TrojanLabel ApS, and Bank of America, N.A. filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020 and incorporated by reference herein. +(10.27) +Amended and Restated Security and Pledge Agreement dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A. , filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date July 30, 2020, and incorporated by reference herein. +(10.28) +Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date July 30, 2020, and incorporated by reference herein. +(10.29) +Change in Control Agreement dated September 8, 2020 by and between AstroNova, Inc. and David S. Smith filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020 and incorporated by reference herein.** +41 +Table of Contents +Exhibit +Number +(10.30) +First Amendment to Credit Agreement dated as of March 24, 2021 among AstroNova, Inc. ANI ApS, TrojanLabel ApS and Bank of America, N.A., filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2021, and incorporated by reference herein. +(10.31) +First Amendment to Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of March 24, 2021 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2021, and incorporated by reference herein. +(10.32) +Form of Indemnification Agreement for directors and officers, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2021, and incorporated by reference herein.** +(10.33)† +LIBOR Transition Amendment dated as of December 14, 2021 among AstroNova, Inc. and Bank of America, N.A. +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(101.INS) +XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document +(101.SCH) +Inline XBRL Taxonomy Extension Schema Document +(101.CAL) +Inline XBRL Taxonomy Extension Calculation Linkbase Document +(101.DEF) +Inline XBRL Taxonomy Extension Definition Linkbase Document +(101.LAB) +Inline XBRL Taxonomy Extension Label Linkbase Document +(101.PRE) +Inline XBRL Taxonomy Extension Presentation Linkbase Document +(104) +Cover Page Interactive Data File (embedded within the Inline XBRL document). +* +Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation +S-K. +The Company will furnish copies of any such schedules to the SEC upon request. +** +Management contract or compensatory plan or arrangement. +† +Filed herewith. +42 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +ASTRONOVA, INC. +(Registrant) +Date: April 18, 2022 +By: +/S/ G +REGORY +A. W +OODS +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/s/ G +REGORY +A. W +OODS +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 18, 2022 +/s/ D +AVID +S. S +MITH +David S. Smith +Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) +April 18, 2022 +/s/ J +EAN +A. B +UA +Jean A. Bua +Director +April 18, 2022 +/s/ M +ITCHELL +I. Q +UAIN +Mitchell I. Quain +Director +April 18, 2022 +/s/ Y +VONNE +E. S +CHLAEPPI +Yvonne E. Schlaeppi +Director +April 18, 2022 +/s/ H +AROLD +S +CHOFIELD +Harold Schofield +Director +April 18, 2022 +/s/ R +ICHARD +S. W +ARZALA +Richard S. Warzala +Director +April 18, 2022 +43 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Shareholders and Board of Directors of +AstroNova, Inc. +Opinions on the Financial Statements and Internal Control Over Financial Reporting +We have audited the accompanying consolidated balance sheets of AstroNova, Inc. (the “Company”) as of January 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended January 31, 2022 and the related notes and the financial statement schedule listed in Item 15(a)(2) (collectively, the “financial statements”). We also have audited the Company’s internal control over financial reporting as of January 31, 2022, based on criteria established in +Internal Control—Integrated Framework +issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2022, based on criteria established in +Internal Control—Integrated Framework +issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +Basis for Opinions +The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in +44 +Table of Contents +accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Critical Audit Matters +Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We have determined that there are no critical audit matters. +/s/ Wolf & Company, P.C. +We have served as the Company’s auditor since 2013. +Boston, Massachusetts +April 18, 2022 +45 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2022 +2021 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +5,276 +$ +11,439 +Accounts Receivable, net of reserves of $ 826 in 2022 and $ 1,054 in 2021 +17,124 +17,415 +Inventories +34,609 +30,060 +Employee Retention Credit Receivable +3,135 +— +Prepaid Expenses and Other Current Assets +3,634 +1,807 +Total Current Assets +63,778 +60,721 +Property, Plant and Equipment, net +11,441 +12,011 +Identifiable Intangibles, net +19,200 +21,502 +Goodwill +12,156 +12,806 +Deferred Tax Assets, net +5,591 +5,941 +Right of Use Asset +1,094 +1,389 +Other +1,695 +1,103 +TOTAL ASSETS +$ +114,955 +$ +115,473 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +8,590 +$ +5,734 +Accrued Compensation +3,512 +2,917 +Other Accrued Expenses +4,113 +3,874 +Current Portion of Long-Term Debt +1,000 +5,326 +Current Liability—Royalty Obligation +2,000 +2,000 +Current Liability—Excess Royalty Payment Due +235 +177 +Income Taxes Payable +323 +655 +Deferred Revenue +262 +285 +Total Current Liabilities +20,035 +20,968 +NON +- +CURRENT LIABILITIES +Long-Term Debt, net of current portion +8,154 +7,109 +Royalty Obligation, net of current portion +4,361 +6,161 +Long-Term Debt—PPP Loan +— +4,422 +Lease Liabilities, net of current portion +808 +1,065 +Income Taxes Payable +399 +681 +Deferred Tax Liabilities +186 +384 +TOTAL LIABILITIES +33,943 +40,790 +Commitments and Contingencies (See Note 22) +SHAREHOLDERS’ EQUITY +Preferred Stock, $ 10 Par Value, Authorized 100,000 shares, None Issued +— +— +Common Stock, $ 0.05 Par Value, Authorized 13,000,000 shares; Issued 10,566,404 shares in 2022 and 10,425,094 shares in 2021 +528 +521 +Additional +Paid-in +Capital +59,692 +58,049 +Retained Earnings +56,514 +50,085 +Treasury Stock, at Cost, 3,324,280 shares in 2022 and 3,297,058 shares in 2021 +( 33,974 +) +( 33,588 +) +Accumulated Other Comprehensive Loss, net of tax +( 1,748 +) +( 384 +) +TOTAL SHAREHOLDERS’ EQUITY +81,012 +74,683 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +114,955 +$ +115,473 +See Notes to the Consolidated Financial Statements. +46 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share Data) +2022 +2021 +2020 +Revenue +$ +117,480 +$ +116,033 +$ +133,446 +Cost of Revenue +73,741 +74,673 +84,688 +Gross Profit +43,739 +41,360 +48,758 +Costs and Expenses: +Selling and Marketing +23,177 +23,301 +26,884 +Research and Development +6,753 +6,206 +8,084 +General and Administrative +9,553 +9,420 +11,357 +Operating Expenses +39,483 +38,927 +46,325 +Operating Income +4,256 +2,433 +2,433 +Other +Income (Expense): +Gain on Extinguishment +of Debt – PPP Loan +4,466 +— +— +Loss on Disposal of Assets +( 696 +) +— +— +Interest Expense +( 677 +) +( 955 +) +( 682 +) +Gain (Loss) on Foreign Currency Transactions +( 288 +) +590 +( 448 +) +Other, net +( 27 +) +111 +67 +2,778 +( 254 +) +( 1,063 +) +Income before Income Taxes +7,034 +2,179 +1,370 +Income Tax Provision (Benefit) +605 +895 +( 389 +) +Net Income +$ +6,429 +$ +1,284 +$ +1,759 +Net Income Per Common Share—Basic +$ +0.89 +$ +0.18 +$ +0.25 +Net Income Per Common Share—Diluted +$ +0.88 +$ +0.18 +$ +0.24 +Weighted Average Number of Common Shares Outstanding—Basic +7,207 +7,104 +7,024 +Dilutive Effect of Common Stock Equivalents +132 +62 +214 +Weighted Average Number of Common Shares Outstanding—Diluted +7,339 +7,166 +7,238 +See Notes to the Consolidated Financial Statements. +47 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2022 +2021 +2020 +Net Income +$ +6,429 +$ +1,284 +$ +1,759 +Other Comprehensive Income (Loss), net of taxes and reclassification adjustments: +Foreign Currency Translation Adjustments +( 1,426 +) +710 +( 133 +) +Change in Value of Derivatives Designated as Cash Flow Hedge +— +( 239 +) +122 +(Gains) Losses from Cash Flow Hedges Reclassified to Income Statement +62 +193 +( 264 +) +Cross-Currency Interest Rate Swap Terminations +— +45 +— +Other Comprehensive Income (Loss) +( 1,364 +) +709 +( 275 +) +Comprehensive Income +$ +5,065 +$ +1,993 +$ +1,484 +See Notes to the Consolidated Financial Statements. +48 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Treasury +Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Shares +Amount +Balance January 31, 2019 +10,218,559 +$ +511 +$ +53,568 +$ +49,511 +$ +( 32,997 +) +$ +( 818 +) +$ +69,775 +Share-Based Compensation +— +— +1,775 +— +— +— +1,775 +Employee +O +ption +E +xercises +65,121 +3 +790 +— +( 11 +) +— +782 +Restricted Stock Awards Vested, net +59,930 +3 +( 3 +) +— +( 469 +) +— +( 469 +) +Common Stock— +C +ash +D +ividend—$ 0.28 per share +— +— +— +( 1,972 +) +— +— +( 1,972 +) +Net +I +ncome +— +— +— +1,759 +— +— +1,759 +Other +C +omprehensive +L +oss +— +— +— +— +— +( 275 +) +( 275 +) +Balance January 31, 2020 +10,343,610 +$ +517 +$ +56,130 +$ +49,298 +$ +( 33,477 +) +$ +( 1,093 +) +$ +71,375 +Share- +B +ased +C +ompensation +— +— +1,819 +— +— +— +1,819 +Employee +O +ption +E +xercises +16,487 +1 +103 +— +— +— +104 +Restricted +S +tock +A +wards +V +ested, net +64,997 +3 +( 3 +) +— +( 111 +) +— +( 111 +) +Common Stock— +C +ash +D +ividend—$ 0.07 per share +— +— +— +( 497 +) +— +— +( 497 +) +Net +I +ncome +— +— +— +1,284 +— +— +1,284 +Other +C +omprehensive +I +ncome +— +— +— +— +— +709 +709 +Balance January 31, 2021 +10,425,094 +$ +521 +$ +58,049 +$ +50,085 +$ +( 33,588 +) +$ +( 384 +) +$ +74,683 +Share-Based Compensation +— +— +1,493 +— +— +— +1,493 +Employee Option Exercises +14,371 +1 +156 +— +— +— +157 +Restricted Stock Awards Vested, net +126,939 +6 +( 6 +) +— +( 386 +) +— +( 386 +) +Net Income +— +— +— +6,429 +— +— +6,429 +Other Comprehensive Loss +— +— +— +— +— +( 1,364 +) +( 1,364 +) +Balance January 31, 2022 +10,566,404 +$ +528 +$ +59,692 +$ +56,514 +$ +( 33,974 +) +$ +( 1,748 +) +$ +81,012 +See Notes to the Consolidated Financial Statements. +49 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2022 +2021 +2020 +Cash Flows from Operating Activities: +Net Income +$ +6,429 +$ +1,284 +$ +1,759 +Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: +Depreciation and Amortization +3,994 +5,983 +6,284 +Amortization of Debt Issuance Costs +44 +75 +49 +Share-Based Compensation +1,493 +1,819 +1,775 +Loss on Disposal of Assets +696 +— +— +Gain on Extinguishment of Debt +( 4,466 +) +— +— +Deferred Income Tax Provision (Benefit) +210 +( 1,021 +) +( 1,638 +) +Changes in Assets and Liabilities: +Accounts Receivable +77 +2,702 +3,594 +Other Receivable – Employee Retention Credit Receivable +( 3,135 +) +— +— +Inventories +( 4,883 +) +4,247 +( 3,938 +) +Accounts Payable and Accrued Expenses +4,052 +( 57 +) +( 2,732 +) +Income Taxes Payable +( 2,043 +) +1,482 +( 1,773 +) +Other +( 1,074 +) +( 970 +) +( 156 +) +Net Cash Provided by Operating Activities +1,394 +15,544 +3,224 +Cash Flows from Investing Activities: +Additions to Property, Plant and Equipment +( 1,796 +) +( 2,587 +) +( 2,906 +) +Net Cash Used by Investing Activities +( 1,796 +) +( 2,587 +) +( 2,906 +) +Cash Flows from Financing Activities: +Net Cash Proceeds from Employee Stock Option Plans +60 +9 +654 +Net Cash Proceeds from Share Purchases under Employee Stock Purchase Plan +96 +95 +128 +Net Cash Used for Payment of Taxes Related to Vested Restricted Stock +( 386 +) +( 111 +) +( 469 +) +Net (Repayments)/Borrowings under Revolving Credit Facility +— +( 6,500 +) +5,000 +Payment of Minimum Guarantee Royalty Obligation +( 2,000 +) +( 2,000 +) +( 1,875 +) +Proceeds from Long-Term Debt – PPP Loan +— +4,422 +— +Proceeds from Long-Term Debt Borrowings +10,000 +15,232 +— +Payoff of Long-Term Debt +( 12,576 +) +( 11,732 +) +— +Principal Payments on Long-Term Debt +( 750 +) +( 3,958 +) +( 5,208 +) +Payments of Debt Issuance Costs +— +( 100 +) +— +Dividends Paid +— +( 497 +) +( 1,972 +) +Net Cash Used by Financing Activities +( 5,556 +) +( 5,140 +) +( 3,742 +) +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +( 205 +) +( 627 +) +139 +Net Increase (Decrease) in Cash and Cash Equivalents +( 6,163 +) +7,190 +( 3,285 +) +Cash and Cash Equivalents, Beginning of Year +11,439 +4,249 +7,534 +Cash and Cash Equivalents, End of Year +$ +5,276 +$ +11,439 +$ +4,249 +Supplemental Information: +Cash Paid During the Period for: +Interest +$ +342 +$ +677 +$ +531 +Income Taxes, Net of Refunds +$ +2,414 +$ +446 +$ +2,913 +See Notes to the Consolidated Financial Statements. +50 +Table of Contents +ASTRONOVA, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +January 31, 2022, 2021 and 2020 +Note 1—Summary of Significant Accounting Policies +Basis of Presentation: +The accompanying financial statements and accompanying notes have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and are presented in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year. +Principles of Consolidation: +The consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: +Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation. +Use of Estimates: +The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes using information that is reasonably available to us at this time. Some of the more significant estimates relate to revenue recognition; the allowances for doubtful accounts; inventory valuation; income taxes; estimated useful life and valuation of long-lived assets and goodwill; share-based compensation; and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters, including our expectations at the time regarding the duration, scope and severity of the +COVID-19 +pandemic. Consequently, actual results could differ from those estimates. +Cash and Cash Equivalents: +Highly liquid investments with an original maturity of +90 days or less +are considered to be cash equivalents. At January 31, 2022 and 2021, +$ 3.7 million and $ 4.6 million, respectively, was held in foreign bank accounts. +Inventories: +Inventories are stated at the lower of standard and average cost or net realizable value and include material, labor and manufacturing overhead. +Property, Plant and Equipment: +Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements— 10 to 20 years; buildings and leasehold improvements— 10 to 45 years; machinery and equipment— 3 to 10 years and computer equipment and software— 3 to 10 years). +Revenue Recognition: +We recognize revenue in accordance with Accounting Standards Update (“ASU”) +2014- +09 +, “Revenue +from Contracts with Customers (“Topic 606”).” The core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five step process to recognize revenue and requires judgment and estimates within the revenue recognition process, including identifying contracts with customers, identifying performance obligations in the contract, determining and estimating the amount of any variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation and recognizing revenue when the entity satisfies each performance obligation. +The vast majority of our revenue is generated from the sale of distinct products. Revenue is measured as the amount of consideration we expect to receive in exchange for such products, which is generally at the contractually stated prices, and is recognized when we satisfy a performance obligation by transferring control of a product to a customer. The transfer of control generally occurs at one point in time, upon shipment, when title and risk of loss pass to the customer. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Sales taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue. +51 +Table of Contents +Many of the contracts entered into with customers are commonly comprised of a combination of equipment, supplies, installation and/or training services. We determine performance obligations by assessing whether the products or services are distinct from other elements of the contract. In order to be distinct, the product must perform either on its own or with readily available resources and must be separate within the context of the contract. +Most of our hardware products contain embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole, as it is not sold or marketed separately, and its production costs are minor compared to those of the hardware system. Hardware and software elements are typically delivered at the same time and are accounted for as a single performance obligation for which revenue is recognized at the point in time when ownership is transferred to the customer. +Installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. The delivery of installation and training services are not assessed to determine whether they are separate performance obligations, as the amounts are not material to the contract. +Shipping and handling activities that occur after control over a product has transferred to a customer are accounted for as fulfillment activities rather than performance obligations, as allowed under a practical expedient provided by Topic 606. The shipping and handling fees charged to customers are recognized as revenue and the related costs are included in cost of revenue at the point in time when ownership of the product is transferred to the customer. +We may perform service at the request of the customer, generally for the repair and maintenance of products previously sold. These services are short in duration and total less than 11 % and 9 % of revenue for the years ended January 31, 2022 and 2021, respectively. Revenue is recognized as services are rendered and accepted by the customer. We also provide service agreements on certain of our Product Identification equipment. Service agreements are purchased separately from the equipment and provide for the right to obtain service and maintenance on the equipment for a period of typically one to two years. Accordingly, revenue on these agreements is recognized over the term of the agreements. The portion of service agreement contracts that are uncompleted at the end of any reporting period are included in deferred revenue. +We generally provide warranties for our products. The standard warranty period is typically +12 +months for most hardware products except for airborne printers, which typically have warranties that extend for +3 - 5 +years, consistent with industry practice. Such assurance-type warranties are not deemed to be separate performance obligations from the hardware product and costs associated with providing the warranties are accrued in accordance with ASC 450, “Contingencies,” as we have the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability. Our estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions. To the extent that our experience in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the estimated warranty liability are recorded at that time, with an offsetting adjustment to cost of revenue. On occasion, customers request a warranty period longer than our standard warranty. In those instances, in which extended warranty services are separately quoted to the customer, an additional performance obligation is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue. +We recognize an asset for the incremental direct costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. Costs related to obtaining sales contracts for our aerospace printer products have been capitalized and are being amortized based on the forecasted number of units sold over the estimated benefit term. We apply the practical expedient to expense costs incurred for costs to obtain a contract when the amortization period would have been less than a year. These costs include sales commissions paid to the internal direct sales team as well as to third-party representatives and distributors. Contractual +5 +2 +Table of Contents +agreements with each of these parties outline commission structures and rates to be paid. Generally speaking, the contracts are all individual procurement decisions by the customers and do not include renewal provisions and as such the majority of the contracts have an economic life of significantly less than a year. +Accounts Receivables and Allowance for Doubtful Accounts: +Standard payment terms are typically +30 +days after shipment but vary by type and geographic location of our customer. Credit is extended based upon an evaluation of the customer’s financial condition. In circumstances where we are aware of a customer’s inability to meet its financial obligations, an allowance is established. The remainder of the allowance established is based on a variety of factors, including the age of amounts outstanding relative to their contractual due date, historical +write-off +experience and current market assessments. Accounts receivable are stated at their estimated net realizable value. +Research and Development Costs: +We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. The following costs are included in research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies. +Foreign Currency Translation: +The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at +year-end +exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the average monthly exchange rates in effect during the related period. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our subsidiaries in Germany, Denmark and China since their undistributed earnings are considered to be permanently invested. Included in our consolidated statements of income was a net transactional foreign exchange loss of $ 0.3 +million in fiscal 2022, a net transaction foreign exchange gain of +$ 0.6 +million in fiscal 2021, and a net transaction foreign exchange loss of +$ 0.4 +million in fiscal 2020. +Advertising: +We expense advertising costs as incurred. Advertising costs including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $ 1.3 million; $ 0.9 million and $ 1.8 million in fiscal 2022, 2021 and 2020, respectively. +Long-Lived Assets: +Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. There were no impairment charges for our long-lived assets in fiscal years 2022, 2021 or 2020. +Intangible Assets: +Intangible assets include the value of customer and distributor relationships, existing technology and +non-competition +agreements acquired in connection with business and asset acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. There were no impairment charges for our intangible assets in fiscal years 2022, 2021 or 2020. +Goodwill: +Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash +5 +3 +Table of Contents +flows, or material adverse changes in the business climate indicate that the carrying value of an asset might be impaired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. We determined that each of our operating segments (Product Identification and T&M) represents a reporting unit for purposes of goodwill impairment testing. +The accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this qualitative assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. The quantitative assessment compares the fair value of the reporting unit with its carrying value. If the quantitative assessment is performed, we estimate the fair value of our reporting units using a blended income and market approach. The income approach is based on a discounted cash flow model and provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. The market approach, compares the reporting unit to publicly traded companies and transactions involving similar business, and requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. We performed a qualitative assessment for our fiscal 2022 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying values of the reporting units exceed their fair values. Accordingly, no quantitative assessment was performed. There were no impairment charges for our goodwill in fiscal years 2022, 2021 or 2020. +Leases: +We account for our leases in accordance with Accounting Standard Codification (“ASC”) 842, Leases. ASC +842 +requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (ROU) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using a discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate for the expected lease term is used. Our incremental borrowing rate approximates the rate we would have to pay to borrow on a collateralized basis over a similar term at lease inception. The value of the ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received. Several of our lease contracts include options to extend the lease term and we include the renewal options for these leases in the determination of the ROU asset and lease liability when the likelihood of renewal is determined to be reasonably certain. +We enter into lease contracts for certain of our facilities at various locations worldwide. At inception of a contract, we determine whether the contract is or contains a lease. If we have a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. +There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. We have made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. All of our leases are classified as operating leases. Operating lease expense is recognized on a straight-line basis over the lease term and included in general +5 +4 +Table of Contents +and administrative expense on the consolidated statement of income. ROU assets are classified as such on the consolidated balance sheet, short-term lease liabilities are classified in accrued expenses, and long-term lease liabilities are classified as such in the consolidated balance sheet. In the statement of cash flow, payments for operating leases are classified as operating activities. +In addition, several of our lease agreements include +non-lease +components for items such as common area maintenance and utilities which are accounted for separately from the lease component. +Income Taxes: +We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. Our deferred taxes are presented as +non-current +in the accompanying consolidated balance sheet. An allowance against deferred tax assets is recognized when it is +more-likely-than-not +that some portion or all of the deferred tax assets will not be realized. At January 31, 2022 and 2021, a valuation allowance was provided for deferred tax assets attributable to certain domestic R&D and foreign tax credit carryforwards which are expected to expire unused. +We account for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a +more-likely-than-not +threshold. ASC 740 also provides guidance on +de-recognition, +classification, interest and penalties, accounting in interim periods and disclosure. +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The legislation had sweeping effects including various types of economic relief for impacted businesses and industries. One such relief provision was the Paycheck Protection Program, which provided short-term cash flow assistance to finance employee payroll and qualified expenses. On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed +$ 4.4 +million (the “PPP Loan”). On December 27, 2020 the Consolidated Appropriations Act, 2021, H.R. 133 was signed into law. The legislation permits the deductibility of expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan (covered loan) guaranteed under the Paycheck Protection Program. We have fully utilized the PPP Loan proceeds for qualifying expenses and applied for forgiveness of the PPP Loan. Consistent with the legislation, we deducted the full +$ 4.4 +million of qualified expenses on our 2020 federal tax return. On June 15, 2021, Greenwood notified us that the United States Small Business Administration (the “SBA”) approved our application for forgiveness of the entire +$ 4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, in the second quarter of fiscal 2022, we recorded a +$ 4.5 +million gain on extinguishment of debt. The PPP loan forgiveness is excluded from taxable income under Section 1106(i) of the CARES Act. +Net Income Per Common Share: +Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2022, 2021 and 2020, there were 345,085 ; 642,623 +and 202,187 , respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive. +Fair Value Measurement: +We measure our assets and liabilities at fair value on a recurring and non-recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about +5 +5 +Table of Contents +the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances. +The fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities +Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, other accrued expenses and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short-term nature of these instruments. +Self-Insurance: +We are self-insured for U.S. medical and dental benefits for qualifying employees and maintain stop-loss coverage from a third party which limits our exposure to large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In estimating this accrual, we utilize an independent third-party broker to estimate a range of expected losses, which are based on analyses of historical data. Assumptions are closely monitored and adjusted when warranted by changing circumstances. Our liability for self-insured claims is included within accrued compensation in our consolidated balance sheets and was $ 0.2 million a +t +January 31, 2022 and 2021. +Share-Based Compensation: +Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires several complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and our dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, we have observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of our common stock on the grant date. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. +Cash flow from tax deductions in excess of the compensation cost +recognized +for those options (excess tax benefits) is classified with other income tax cash flows as an operating activity. +Share-based compensation becomes deductible for determining income taxes when the related award vests, is exercised, or is forfeited depending on the type of share-based award and subject to relevant tax law. +Derivative Financial Instruments: +We occasionally use derivative instruments as part of our overall strategy to manage exposure to market risks primarily associated with fluctuations in foreign currency exchange rates +and +5 +6 +Table of Contents +interest rates. Derivative instruments are recognized as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of income during the current period. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. +For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) (OCI) and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the hedged transaction affects earnings (e.g., in “Interest Expense” when the hedged transactions are interest cash flows associated with floating-rate debt, or “Other, Net” for portions reclassified relating to the remeasurement of the debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, are recognized in the statement of income during the current period. +Recent Accounting Pronouncements +Recently Adopted: +Income Taxes +In December 2019, the FASB issued ASU +2019-12, +“Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU +2019-12 +is effective for fiscal years beginning after December 15, 2020. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements and accompanying disclosures. +No other new accounting pronouncements, issued or effective during fiscal 2022, have had or are expected to have a material impact on our consolidated financial statements. +Note 2—Revenue Recognition +We derive revenue from the sale of (i) hardware including, digital color label printers and specialty OEM printing systems, portable data acquisition systems and airborne printers used in the flight deck and in the cabin of military, commercial and business aircraft, (ii) related consumable supplies including paper, labels, tags, inks, toners and ribbons, (iii) repairs and maintenance of equipment and (iv) service agreements. +Revenues disaggregated by primary geographic markets and major product types are as follows: +Primary geographical markets: +(In thousands) +2022 +2021 +2020 +United States +$ +68,185 +$ +70,911 +$ +83,671 +Europe +31,922 +29,029 +29,617 +Canada +6,519 +5,574 +5,719 +Asia +5,926 +5,105 +8,316 +Central and South America +3,271 +3,950 +4,145 +Other +1,657 +1,464 +1,978 +Total Revenue +$ +117,480 +$ +116,033 +$ +133,446 +57 +Table of Contents +Major product types: +(In thousands) +2022 +2021 +2020 +Hardware +$ +31,492 +$ +34,111 +$ +48,959 +Supplies +73,244 +71,772 +71,838 +Service and Other +12,744 +10,150 +12,649 +Total Revenue +$ +117,480 +$ +116,033 +$ +133,446 +Contract Assets and Liabilities +We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. +Our contract liabilities, which represent billings in excess of revenue recognized, are related to advanced billings for purchased service agreements and extended warranties. Contract liabilities were $ 262,000 and $ 285,000 at January 31, +2022 and January 31, 2021, respectively, and are recorded as deferred revenue in the consolidated balance sheet. The decrease in the deferred revenue balance during the period ended January 31, +2022 is primarily due to $ 269,000 of revenue recognized during the period that was included in the deferred revenue balance at January 31, 2021 offset by cash payments received in advance of satisfying performance obligations. +Contract Costs +We have determined that certain costs related to obtaining sales contracts for our aerospace printer products meet the requirement to be capitalized. In the second quarter of +fiscal 2022 +, we extended the remaining useful life of these deferred costs from 6 years to 20 years and changed the amortization method from units sold to the straight-line method. We believe these changes, based on the life of the aircraft under the applicable sales contracts, appropriately reflects a more systematic and rational approach. This change is being treated as a change in accounting estimate that is affected by a change in accounting principle. The impact on net income was immaterial for the period ended January 31, 2022. The balance of these contract assets at January 31, 2021 was $ 0.9 million and in the second quarter of the current year, we incurred an additional $ 0.4 million in contract costs which will be amortized over 20 years. We amortized $ 60,000 of direct costs for the period ended January 31, 2022, +and the balance of deferred incremental direct costs net of accumulated amortization at January 31, 2022 +, +was $ 1.3 million of which $ 0.1 million is reported in other current assets and $ 1.2 million is reported in other assets in the accompanying consolidated balance sheet. +58 +Table of Contents +Note 3—Intangible Assets +Intangible assets are as follows: +January 31, 2022 +January 31, 2021 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Miltope: +Customer Contract Relationships +$ +3,100 +$ +( 2,515 +) +$ +— +$ +585 +$ +3,100 +$ +( 2,284 +) +$ +— +$ +816 +RITEC: +Customer Contract Relationships +2,830 +( 1,557 +) +— +1,273 +2,830 +( 1,423 +) +— +1,407 +TrojanLabel: +Existing Technology +2,327 +( 1,767 +) +127 +687 +2,327 +( 1,405 +) +196 +1,118 +Distributor Relations +937 +( 498 +) +46 +485 +937 +( 396 +) +89 +630 +Honeywell: +Customer Contract Relationships +27,243 +( 11,073 +) +— +16,170 +27,243 +( 9,712 +) +— +17,531 +Intangible Assets, net +$ +36,437 +$ +( 17,410 +) +$ +173 +$ +19,200 +$ +36,437 +$ +( 15,220 +) +$ +285 +$ +21,502 +In the second quarter of the current year, we extended the remaining useful life of the customer contract relationship intangibles for Honeywell International, Inc. (“Honeywell”) from 6 years to 20 years and for the RITEC intangibles we changed the amortization method which was based on revenue with a remaining life of 4 +years to the straight-line method with a +20 -year +remaining life. We believe these changes, based on the life of the aircraft related to these intangibles, appropriately reflects a more systematic and rational approach to distributing the cost of these intangibles over their useful lives. The change in the amortization of the Honeywell customer contract relationship intangibles is being treated as a change in accounting estimate and the change in the amortization of the RITEC customer contract relationship intangibles is being treated as a change in accounting estimate that is effected by a change in accounting principle. The changes in amortization resulted in a $ 1.8 million decrease in amortization expense and a $ 1.8 million increase to net income for the period ended January 31, 2022 +. +There were no impairments to intangible assets during the periods ended January 31, 2022 and 2021. Amortization expense of $ 2.2 million +, +$ 4.1 million and $ 4.2 million with regard to acquired intangibles has been included in the consolidated statements of income for +the +years ended January 31, 2022, 2021 and 2020, respectively. +Estimated amortization expense for the next five fiscal years is as follows: +(In thousands) +2023 +2024 +2025 +2026 +2027 +Estimated amortization expense +$ +1,632 +$ +1,693 +$ +1,008 +$ +1,008 +$ +1,008 +59 +Table of Contents +Note 4—Inventories +The components of inventories are as follows: +January 31, +2022 +2021 +(In thousands) +Materials and Supplies +$ +22,709 +$ +20,265 +Work-in-Progress +1,489 +2,076 +Finished Goods +19,718 +16,371 +43,916 +38,712 +Inventory Reserve +( 9,307 +) +( 8,652 +) +$ +34,609 +$ +30,060 +Finished goods inventory includes $ 3.4 million and $ 4.0 million of demonstration equipment at January 31, 2022 and 2021, respectively. +Note 5—Property, Plant and Equipment +Property, plant and equipment consist of the following: +January 31, +2022 +2021 +(In thousands) +Land and Land Improvements +$ +1,004 +$ +1,004 +Buildings and Leasehold Improvements +12,666 +12,642 +Machinery and Equipment +23,238 +23,346 +Computer Equipment and Software +13,913 +13,847 +Gross Property, Plant and Equipment +50,821 +50,839 +Accumulated Depreciation +( 39,380 ) +( 38,828 ) +Net Property Plant and Equipment +$ +11,441 +$ +12,011 +Depreciation expense on property, plant and equipment was $ 1.7 million for the year ended January 31, +2022 and $ 1.9 million and $ 2.0 million for the years ended January 31, 2020 and 2019, respectively. +During the current fiscal year, we +wrote-off +our Oracle EnterpriseOne enterprise resource planning (“ERP”) system due to the full implementation of a new ERP system in our US operations. The book value and related accumulated depreciation of the Oracle EnterpriseOne ERP system along with the balance of the related prepaid service and maintenance contracts have been removed from the accompanying consolidated balance sheet at January 31, 2022, and we have recorded a net loss on the disposal +of $ 696,000 , which is included in other income (expense) in the accompanying consolidated income statement for the year ended January 31, 2022. +6 +0 +Table of Contents +Note 6—Accrued Expenses +Accrued expenses consist of the following: +January 31, +2022 +2021 +(In thousands) +Warranty +$ +834 +$ +730 +Professional Fees +411 +546 +Freight +347 +57 +Lease Liability +327 +372 +Accrued Property & Sales Tax +316 +443 +Stockholder Relation Fees +102 +91 +Dealer Commissions +139 +57 +Other Accrued Expenses +1,637 +1,578 +$ +4,113 +$ +3,874 +Note 7—Credit Agreement and Long-Term Debt +Credit Agreement +On March 24, 2021, we entered into a First Amendment to Credit Agreement (the “Amendment”) to our Amended & Restated Credit Agreement (the “A&R Credit Agreement,” as amended by the Amendment; the “Amended Credit Agreement”) with Bank of America, N.A., as lender (the “Lender”), and our subsidiaries, ANI ApS and TrojanLabel. The A&R Credit Agreement, which we entered into on July, 30, 2020, amended and restated the Credit Agreement dated as of February 28, 2017 (the “Prior Credit Agreement”) by and among us, ANI ApS, TrojanLabel and the Lender. Immediately prior to the closing of the Amendment, we repaid +$ 2.6 +million in principal amount of the term loan outstanding under the A&R Credit Agreement +The Amended Credit Agreement provides for (i) a term loan in the principal amount of $ 10.0 million, and (ii) a $ 22.5 million revolving credit facility available for general corporate purposes. At the closing of the Amendment, we borrowed the entire $ 10.0 +million term loan which was used to refinance, in full, the outstanding term loan under the A&R Credit Agreement. Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. +Balances outstanding under the revolving line of credit for the years ended January 31, 2022 and 2021, bore interest at weighted average annual rates +of 4.10 % and 3.41 %, respectively and we incurred $ 4,000 and $ 188,000 +in fiscal 2022 and 2021 +, respectively, for interest on this obligation. Additionally, for +fiscal year +s +ended January 31, 2022 and 2021, we incurred $ 50,000 and $ 8,300 , respectively, for commitment fees on the undrawn portion of our revolving credit facility. Both the interest expense and commitment fees are included as interest expense in the accompanying consolidated income statement. At January 31, 2022, there is no balance outstanding on the revolving line of credit and the entire $ 22.5 million is available for borrowing. +The Amended Credit Agreement requires that the term loan be paid in quarterly installments on the last day of each of our fiscal quarters with the final payment due on September 30, 2025. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later +than September 30, 2025 , at which time any outstanding revolving loans will be due and payable in full, and the revolving credit facility will terminate. We may reduce or terminate the revolving line of credit at any time, +subject to certain thresholds and conditions, without premium or penalty. +The Amended Credit Agreement includes an uncommitted accordion provision under which the term loan and/or revolving credit facility commitments may be increased in an aggregate principal amount not exceeding $ 10.0 million, subject to obtaining the agreement of the Lender and the satisfaction of certain other conditions. +61 +Table of Contents +On December 14, 2021, we and the Lender entered into a LIBOR Transition Amendment (the “LIBOR Amendment”) with regard to the Amended Credit Agreement. The LIBOR Amendment, among other things, (i) changes the rate under the Amended Credit Agreement for borrowings denominated in U.S. Dollars from a LIBOR-based rate to a BSBY (Bloomberg Short-Term Bank Yield Index)-based rate, subject to certain adjustments, (ii) changes the rate under the Amended Credit Agreement for borrowings denominated in British Pounds Sterling from a LIBOR-based rate to a SONIA (Sterling Overnight Index Average)-based rate, subject to certain adjustments, (iii) changes the rate under the Amended Credit Agreement for borrowings denominated in Euros from a LIBOR-based rate to a EURIBOR (Euro Interbank Offered Rate)-based rate, subject to certain adjustments, and (iv) updates certain other provisions of the Amended Credit Agreement regarding successor interest rates to LIBOR. +The interest rates under +the +Amended Credit Agreement, giving effect to the LIBOR Amendment, are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the LIBOR Amendment (or in the case of revolving credit loans denominated in a Pounds Sterling, Euros or another currency other than U.S. Dollars, the SONIA Rate as defined in the LIBOR Amendment, EURIOBOR Rate as defined in the LIBOR Amendment, or the applicable quoted rate, respectively), plus a margin that varies within a range of 1.60 % to 2.30 % based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50 %, (ii) Bank of America’s publicly announced prime rate, (iii) the BSBY Rate, SONIA Rate, EURIBOR Rate or other applicable quoted rate plus 1.00 % or (iv) 0.50 %, plus a margin that varies within a range of 0.60 % to 1.30 % based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15 % and 0.30 % based on our consolidated leverage ratio. +As under the A&R Credit Agreement, the loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. +Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. +We must comply with various customary financial and +non-financial +covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The primary +non-financial +covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Amendment. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests held in ANI ApS, in our wholly-owned German subsidiary AstroNova GmbH, and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island. +6 +2 +Table of Contents +Long-Term Debt +Long-term debt in the accompanying condensed consolidated balance sheets under the Amended Credit Agreement is as follows: +January 31, +(In thousands) +2022 +2021 +USD Term Loan ( 2.35 % as of January 31, 2022); maturity date of September 30, 2025 +$ +9,250 +$ +— +USD Term Loan ( 4.65 % as of January 31, 2021 ) +— +12,576 +9,250 +12,576 +Debt Issuance Costs, net of accumulated amortization +( 96 +) +( 141 +) +Current Portion of Term Loan +( 1,000 +) +( 5,326 +) +Long-Term Debt +$ +8,154 +$ +7,109 +During the years ended January 31, 2022, 2021 and 2020, we recognized $ 0.3 million, $ 0.5 million and $ 0.4 million of interest expense +on our long-term debt +, respectively, which was included in interest expense in the accompanying consolidated income statement. +The schedule of required principal payments remaining under the Amended Credit Agreement on long-term debt outstanding as of January 31, 2022 is as follows: +(In thousands) +Fiscal 2023 +$ +1,000 +Fiscal 2024 +1,000 +Fiscal 2025 +1,250 +Fiscal 2026 +6,000 +$ 9,250 +Note 8—Paycheck Protection Program Loan +On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood pursuant to which we borrowed +$ 4.4 million +(the “PPP Loan”) from Greenwood under the Paycheck Protection Program (“PPP”) administered by the SBA and authorized by the CARES Act. +The PPP Loan, originally scheduled to mature on May 6, 2022 , was unsecured and bore interest at a rate of 1.0 % per annum, accruing from the loan date . No payments were due on the PPP Loan until the date on which +the lender determined the amount of the PPP Loan that is eligible for forgiveness. The PPP Loan was classified as long-term debt—PPP Loan in the condensed consolidated balance sheet at January 31, 2021. +On June 15, +2021 +, Greenwood notified us that the SBA approved our application for forgiveness of the entire $ 4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, in the second quarter of fiscal 2022, we recorded a $ 4.5 million gain on extinguishment of debt, which is included in the accompanying consolidated income statement for the period ended January 31, 2022. +Note 9—Derivative Financial Instruments and Risk Management +In 2017, we entered into a cross-currency interest rate swap to manage the interest rate risk and foreign currency exchange risk associated with the floating-rate foreign currency-denominated term loan borrowing by ANI ApS and an interest rate swap to manage the interest rate risk associated with our variable rate term loan borrowing. Both swaps were designated as cash flow hedges of floating-rate borrowings. +Our cross-currency interest rate swap agreement effectively modified our exposure to interest rate risk and foreign currency exchange rate risk by converting our floating-rate debt denominated in U.S. Dollars on ANI +63 +Table of Contents +ApS’s books to a fixed-rate debt denominated in Danish Kroner for the term of the loan, thus reducing the impact of interest-rate and foreign currency exchange rate changes on future interest expense and principal repayments. This swap involved the receipt of floating interest rate amounts in U.S. Dollars in exchange for fixed-rate interest payments in Danish Kroner, as well as exchanges of principal at the inception spot rate, over the life of the term loan. +The interest rate swap agreement effectively modified our exposure to interest rate risk by effectively converting our floating-rate term-loan debt to fixed-rate debt, thus reducing the impact of interest-rate changes on future interest expense. This swap involved the receipt of floating rate amounts in U.S. Dollars in exchange for fixed-rate payments in U.S. dollars over the life of the term loan. +As a direct result of the terms of the Lender’s conditions for entry into the A&R Credit Agreement, on July 30, 2020, we terminated these two +s +waps. The terms of the A&R Credit Agreement caused those swaps to cease to be effective hedges of the underlying exposures. The termination of the +s +waps was contracted immediately prior to the end of the second quarter of fiscal 2021 at a cash cost of approximately $ 0.7 million, which was settled in the third quarter of fiscal 2021. Upon termination, the remaining balance of $ 58,000 in accumulated other comprehensive loss related to the cross-currency interest rate swap was reclassified into earnings as the forecasted foreign currency interest payments will not occur and is included in other expense in the accompanying consolidated statements of income for the period ended January 31, 2021. The remaining balance in accumulated other comprehensive loss related to the interest rate swap of $ 0.2 million is being amortized into earnings through the original term of the hedge relationship as the underlying floating interest rate debt still exists. +The following tables present the impact of the derivative instruments in our consolidated financial statements for the years ended January 31, 2022 and 2021: +Years Ended +Cash Flow Hedge +(In thousands) +Amount of Gain(Loss) +Recognized in OCI +on +Derivative +Location of Gain (Loss) +Reclassified from +Accumulated OCI into +Income +Amount of Gain (Loss) +Reclassified from +Accumulated OCI into +Income +January 31, +2022 +January 31, +2021 +January 31, +2022 +January 31, +2021 +Swap contracts +$ +— +$ +( 360 +) +Other Income +$ +( 79 +) +$ +( 288 +) +At January 31, 202 +2 +, we expect to reclassify approximately $ 0.1 million of +net losses on the frozen OCI balance associated with the terminated interest rate swap from accumulated other comprehensive loss to earnings during the next 12 months due to the payment of variable interest associated with the floating interest rate debt. +Note 10—Employee Retention Credit +The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes. On December 27, 2020, Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which amended and extended ERC availability under Section 2301 of the CARES Act. Before the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we were ineligible for the ERC because we received the PPP Loan. Following enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we and other businesses that received loans under that program became retroactively eligible for the ERC. +As a result of the foregoing legislation, we were eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to seventy percent ( 70 %) of the qualified wages that we paid to our employees between December 31, 2020 and June 30, 2021. Qualified wages are limited to $ 10,000 per employee per calendar quarter in 2021 for a maximum ERC per employee of $ 7,000 per calendar quarter in 2021. +We evaluated our eligibility for the ERC in the second quarter of calendar year 2021. In order to qualify for the ERC, we needed to experience a 20 % reduction in gross receipts from either (1) the same quarter in calendar +64 +Table of Contents +year 2019 or (2) the immediately preceding quarter to the corresponding calendar quarter in 2019. We determined that we qualified for the employee retention credit under the first scenario for wages paid in calendar year 2020 and the first calendar quarter of 2021. In the second quarter of the current year, we amended certain payroll tax filings and applied for a refund of $ 3.1 million. Since there is no US GAAP guidance for +for-profit +business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, we determined the appropriate accounting treatment by analogy to other guidance. We accounted for the employee retention credit by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, of International Financial Reporting Standards (IFRS). Under an IAS 20 analogy, a business entity would recognize the credit on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (i.e., tax credit) is intended to compensate when there is reasonable assurance (i.e., it is probable) that the entity will comply with any conditions attached to the grant and the grant (i.e., tax credit) will be received. +We recorded a $ 3.1 million receivable in the second quarter of fiscal 2022 for the ERC rece +i +vable. This amount remains outstanding as of January 31, 2022 and is included as such in the accompanying consolidated balance sheet. Th +e $ 3.1 million of ERCs was recognized as a reduction in employer payroll taxes and allocated to the financial statement captions from which the employee’s taxes were originally incurred. As a result, we recorded a reduction in expenses of $ 1.7 million in cost of revenue, $ 0.8 million in selling and marketing, $ 0.3 million in research and development and $ 0.3 milli +on +in general and administrative which is reflected in the accompanying consolidated income statement for the year ended January 31, 2022. +Subsequent to year end, on March 22, +2022 +, we received the $ 3.1 million for the ERC. +Note 11—Royalty Obligation +In fiscal 2018, AstroNova, Inc. entered into an Asset Purchase and License Agreement with Honeywell International, Inc. to acquire an exclusive, perpetual, world-wide license to manufacture Honeywell’s narrow-format flight deck printers for two aircraft families along with certain inventory used in the manufacturing of the licensed printers. The purchase price included a guaranteed minimum royalty payment of $ 15.0 million, to be paid in quarterly installments over a +ten-year +period. Royalty payments are based on gross revenues from the sales of the printers, paper and repair services of the licensed products. The royalty rates vary based on the year in which they are paid or earned and product sold or service provided, and range from single-digit to mid double-digit percentages of gross revenue. +The guaranteed minimum royalty payment obligation was recorded at the present value of the minimum annual royalty payments using a present value factor of 2.8 %, which is based on the estimated +after-tax +cost of +debt for similar +companies. As of January 31, 2022, we had paid an aggregate of $ 7.5 +million of the guaranteed minimum royalty obligation. At January 31, 2022, the current portion of the outstanding guaranteed minimum royalty obligation of $ 2.0 +million is to be paid over the next twelve months and is reported as a current liability and the remainder of $ 4.4 +million is reported as a long-term liability on our consolidated balance sheet. In addition to the guaranteed minimum royalty payments, for the periods ended January 31, 2022 and January 31, 2021, we also incurred excess royalty expense of $ 0.5 +million and $ 31 +thousand, respectively, which is included in cost of revenue in our consolidated statements of income. A total of $ 0.2 +million of excess royalty is payable and reported as a current liability on our consolidated balance sheet at January 31, 2022. +Note 12—Leases +We enter into lease contracts for certain of our facilities at various locations worldwide. Our leases have remaining lease terms of one to six years , some of which include options to extend the lease term for periods of up to five years when it is reasonably certain +that we +will exercise such options. +65 +Table of Contents +Balance sheet and other information related to our leases is as follows: +Operating Leases +(In thousands) +Balance Sheet Classification +January 31, +2022 +January 31, +2021 +Lease Assets +Right of Use Assets +$ +1,094 +$ +1,389 +Lease Liabilities—Current +Other Accrued Expenses +327 +372 +Lease Liabilities—Long Term +Lease Liabilities +$ +808 +$ +1,065 +Lease cost information is as follows: +Operating Leases +(In thousands) +Statement of Income Classification +2022 +2021 +Operating Lease Costs +General and Administrative Expense +$ +510 +$ +485 +At January 31, 2022, maturities of operating lease liabilities are as follows: +(In thousands) +2023 +$ +327 +2024 +308 +2025 +203 +2026 +159 +2027 +153 +Thereafter +91 +Total Lease Payments +1,241 +Less: Imputed Interest +( 106 +) +Total Lease Liabilities +$ +1,135 +As of January 31, 2022, the weighted-average remaining lease term and weighted-average discount rate for our operating leases are 4.5 years and 3.85 %, respectively. We calculated the weighted-average discount rate using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term. +Supplemental cash flow information related to leases is as follows: +(In thousands) +2022 +2021 +Cash paid for operating lease liabilities +$ +372 +$ +429 +Note 13—Accumulated Other Comprehensive Income (Loss) +The changes in the balance of accumulated other comprehensive income (loss) by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Net +Unrealized +Gain (Losses) +on Cash Flow +Hedges +Total +Balance at January 31, 2019 +$ +( 852 +) +$ +34 +$ +( 818 +) +Other Comprehensive Income (Loss) before reclassification +( 133 +) +122 +( 11 +) +Amounts reclassified from AOCI to Earnings +— +( 264 +) +( 264 +) +Other Comprehensive Loss +( 133 +) +( 142 +) +( 275 +) +Balance at January 31, 2020 +$ +( 985 +) +$ +( 108 +) +$ +( 1,093 +) +Other Comprehensive Income (Loss) before reclassification +710 +( 239 +) +471 +Amounts Reclassified from AOCI to Earnings +— +193 +193 +Cross-Currency Interest Rate Swap Termination +— +45 +45 +Other Comprehensive Income (Loss) +710 +( 1 +) +709 +Balance at January 31, 202 +1 +$ +( 275 +) +$ +( 109 +) +$ +( 384 +) +Other Comprehensive Loss before reclassificatio +n +( 1,426 +) +— +( 1,426 +) +Amounts Reclassified from AOCI to Earning +s +— +62 +62 +Other Comprehensive Income (Loss +) +( 1,426 +) +62 +( 1,364 +) +Balance at January 31, 202 +2 +$ +( 1,701 +) +$ +( 47 +) +$ +( 1,748 +) +66 +Table of Contents +The amounts presented above in other comprehensive income (loss) are net of taxes except for translation adjustments associated with our German and Danish subsidiaries. +Note 14—Shareholders’ Equity +During fiscal 2022 and 2021, certain of our employees delivered a total of 27,222 and 15,357 shares, respectively, of our common stock to satisfy the exercise price and related taxes for stock options exercised and restricted stock vesting. The shares delivered were valued at a total of $ 0.4 million and $ 0.1 million, respectively, and are included in treasury stock in the accompanying consolidated balance sheets at January 31, 2022 and 2021. These transactions did not impact the number of shares authorized for repurchase under our current repurchase program. +Note 15—Share-Based Compensation +The Company maintains the following share-based compensation plans: +Stock Plans: +We have one equity incentive plan from which we are authorized to grant equity awards, the AstroNova, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for, among other things, the issuance of awards, including incentive stock options, +non-qualified +stock options, stock appreciation rights, time-based restricted stock units (“RSUs”), or performance-based restricted stock units (“PSUs”) and restricted stock awards (RSAs). The 2018 Plan authorizes the issuance of up to +950,000 +shares of common stock, plus an additional number of shares equal to the number of shares subject to awards granted under the previous equity incentive plans that are forfeited, cancelled, satisfied without the issuance of stock, otherwise terminated (other than by exercise), or, for shares of stock issued pursuant to any unvested award, that are reacquired by us at not more +than the grantee’s purchase price (other than by exercise). Under the 2018 Plan, all awards to employees generally have a minimum vesting period of one year. Options granted under the 2018 Plan must be issued at an exercise price of not less than the fair market value of our common stock on the date of grant and expire after ten years. Under the 2018 Plan, there were 135,403 +unvested RSUs; +43,529 +unvested PSUs +; 20,410 unvested RSAs and options to purchase an aggregate of 135,500 shares outstanding as of January 31, 2022. +In addition to the 2018 Plan, we previously granted equity awards under our 2015 Equity Incentive Plan (the “2015 Plan”) and our 2007 Equity Incentive Plan (the “2007 Plan”). No new awards may be issued under either the 2007 or 2015 Plans, but outstanding awards will continue to be governed by those plans. As of January 31, 2022, options to purchase an aggregate of 323,468 shares were outstanding under the 2007 Plan and options to purchase an aggregate of 139,075 shares were outstanding under the 2015 Plan. +We also have a +Non-Employee +Director Annual Compensation Program (the “Program”), under which each of our +non-employee +directors automatically receives a grant of restricted stock on the date of their +re-election +to our board of directors. The number of whole shares granted is equal to the number calculated by dividing the stock component of the director compensation amount determined by the compensation committee for that year by the fair market value of our stock on that day. The value of the restricted stock award for fiscal 2022 was +$ 60,000 . Shares of restricted stock granted under the Program become vested on the first anniversary of the date of grant, conditioned upon the recipient’s continued service on our board of directors through that date. +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +(In thousands) +Stock Options +$ +210 +$ +517 +$ +616 +Restricted Stock Awards and Restricted Stock Units +1,266 +1,285 +1,136 +Employee Stock Purchase Plan +17 +17 +23 +Total +$ +1,493 +$ +1,819 +$ +1,775 +67 +Table of Contents +Stock Options: +Aggregated information regarding stock options granted under the plans is summarized below: +Number +of Shares +Weighted- +Average +Exercise +Price Per +Share +Options Outstanding, January 31, 2019 +771,145 +$ +14.30 +Options Granted +— +— +Options Exercised +( 57,175 +) +11.60 +Options Forfeited +( 34,526 +) +15.73 +Options Cancelled +( 400 +) +6.22 +Options Outstanding, January 31, 2020 +679,044 +$ +14.46 +Options Granted +— +— +Options Exercised +( 1,200 +) +7.60 +Options Forfeited +( 54,361 +) +12.89 +Options Cancelled +( 1,400 +) +7.36 +Options Outstanding, January 31, 2021 +622,083 +$ +14.63 +Options Granted +— +— +Options Exercised +( 6,425 +) +9.34 +Options Forfeited +( 17,615 +) +15.09 +Options Cancelled +— +— +Options Outstanding, January 31, 2022 +598,043 +$ +14.67 +Set forth below is a summary of options outstanding at January 31, 2022: +Outstanding +Exercisable +Range of +Exercise prices +Number of +Shares +Weighted- +Average +Exercise Price +Weighted- +Average +Remaining +Contractual Life +Number of +Shares +Weighted- +Average +Exercise Price +Weighted +Average +Remaining +Contractual +Life +$ 5.00 - 10.00 +35,844 +$ +7.97 +0.5 +35,844 +$ +7.97 +0.5 +$ 10.01 - 15.00 +345,749 +13.62 +3.9 +345,749 +13.62 +3.9 +$ 15.01 - 20.00 +216,450 +17.48 +5.8 +209,900 +17.43 +5.8 +598,043 +$ +14.67 +4.4 +591,493 +$ +14.63 +4.3 +No options were granted during fiscal 2022 or fiscal 2021. As of January 31, 2022, there was $ 8,000 of unrecognized compensation expense related to the unvested stock options granted under the plans. This expense is expected to be recognized over a weighted-average period of 0.3 years. +As of January 31, 2022, the aggregate intrinsic value (the aggregate difference between the closing stock price of our common stock on January 31, 2022, and the exercise price of the outstanding options) that would have been received by the option holders if all options had been exercised was $ 0.3 million for all exercisable options and $ 0.3 million for all options outstanding. The total aggregate intrinsic value of options exercised during fiscal 2022, 2021 and 2020 was $ 26,000 , $ 4,000 and $ 0.5 million, respectively. +68 +Table of Contents +Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs): +Aggregated information regarding RSUs and RSAs granted under the Plan is summarized below: +RSAs & RSUs +Weighted-Average +Grant Date Fair Value +Outstanding at January 31, 2019 +133,667 +$ +16.90 +Granted +119,522 +19.86 +Vested +( 59,930 +) +14.50 +Forfeited +( 58,625 +) +19.00 +Outstanding at January 31, 2020 +134,634 +$ +16.79 +Granted +245,131 +7.61 +Vested +( 64,997 +) +17.28 +Forfeited +( 117,355 +) +8.83 +Outstanding at January 31, 2021 +197,413 +$ +9.96 +Granted +151,406 +14.51 +Vested +( 126,939 +) +10.43 +Forfeited +( 22,538 +) +14.26 +Outstanding at January 31, 2022 +199,342 +$ +12.63 +As of January 31, 2022, there was $ 1.7 million of unrecognized compensation expense related to unvested RSUs and RSAs. This expense is expected to be recognized over a weighted average period of 1.0 years. +Employee Stock Purchase Plan (ESPP): +Our ESPP allows eligible employees to purchase shares of common stock at a 15 % discount from fair market value on the date of purchase. A total of 247,500 shares were initially reserved for issuance under this plan. Summarized plan activity is as follows: +2022 +2021 +2020 +Shares Reserved, Beginning +10,374 +24,974 +33,853 +Shares Purchased +( 8,092 +) +( 14,600 +) +( 8,879 +) +Shares Reserved, Ending +2,282 +10,374 +24,974 +Note 16—Income Taxes +The components of income (loss) before income taxes are as follows: +2022 +2021 +2020 +(In thousands) +Domestic +$ +5,046 +$ +( 1,193 +) +$ +1,930 +Foreign +1,988 +3,372 +( 560 +) +$ +7,034 +$ +2,179 +$ +1,370 +69 +Table of Contents +The components of the provision/(benefit) for income taxes are as follows: +2022 +2021 +2020 +(In thousands) +Current: +Federal +$ +( 183 +) +$ +1,272 +$ +660 +State +76 +224 +221 +Foreign +501 +420 +368 +394 +1,916 +1,249 +Deferred: +Federal +$ +180 +$ +( 910 +) +$ +( 1,364 +) +State +177 +( 189 +) +( 282 +) +Foreign +( 146 +) +78 +8 +211 +( 1,021 +) +( 1,638 +) +$ +605 +$ +895 +$ +( 389 +) +Total income tax provision/(benefit) differs from the expected tax provision/(benefit) as a result of the following: +2022 +2021 +2020 +(In thousands) +Income Tax Provision at Statutory Rate +$ +1,477 +$ +458 +$ +288 +Return to Provision Adjustment +368 +( 2 +) +( 207 +) +State Taxes, Net of Federal Tax Effect +143 +28 +( 48 +) +Denmark Statutory Audit +— +341 +— +Foreign Rate Differential +61 +197 +315 +Change in Valuation Allowance +57 +( 81 +) +256 +Meals and Entertainment +9 +11 +31 +Canada Withholding Taxes +— +62 +— +Global Intangible Low Taxed Income +— +14 +107 +Foreign Tax Credits +— +— +( 344 +) +Foreign Derived Intangible Income +( 55 +) +( 150 +) +( 107 +) +Share Based Compensation +( 95 +) +171 +( 145 +) +R&D Credits +( 180 +) +( 157 +) +( 209 +) +Change in Reserves Related to ASC 740 Liability +( 245 +) +( 10 +) +( 352 +) +PPP Loan Forgiveness +( 937 +) +— +— +Other +2 +13 +26 +$ +605 +$ +895 +$ +( 389 +) +Our effective tax rate for 2022 was 8.6 % compared to 41.1 % in 2021 and ( 28.4 )% in 2020. The decrease in the effective tax rate in 2022 from 2021 is primarily related to the PPP loan forgiveness +tax-exempt +income. Specific items decreasing the effective tax rate include PPP loan forgiveness +tax-exempt +income, R&D tax credits, foreign derived intangible income (“FDII”) deduction, and change in reserves related to ASC 740 liabilities. This decrease was offset by state taxes, return to provision adjustments, and taxes on foreign earnings. +The increase in the effective tax rate in 2021 from 2020 is primarily related to the change in mix of income between relevant jurisdictions in which we are subject to income taxes. Specific items increasing the effective tax rate include foreign rate differential, Denmark statutory audit adjustments, stock-based compensation, and Canada withholding taxes. This increase was offset by the foreign derived intangible income (“FDII”) deduction, the release of a valuation allowance in China, and R&D tax credits expected to be utilized. +7 +0 +Table of Contents +The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31, +2022 +2021 +(In thousands) +Deferred Tax Assets: +Inventory +$ +2,159 +$ +2,700 +Honeywell Royalty Liability +2,655 +2,590 +State R&D Credits +1,925 +1,546 +Share-Based Compensation +593 +600 +Bad Debt +213 +245 +Warranty Reserve +198 +176 +Compensation Accrual +322 +159 +Net Operating Loss +152 +154 +ASU 842 Adjustment +– +Lease Liability +93 +125 +Unrecognized State Tax Benefits +64 +101 +Foreign Tax Credit +154 +83 +Deferred Service Contract Revenue +61 +68 +Other +224 +308 +8,813 +8,855 +Deferred Tax Liabilities: +Accumulated Tax Depreciation in Excess of Book Depreciation +455 +752 +Intangibles +767 +399 +ASU 842 Adjustment – Lease Liability +90 +119 +Other +318 +307 +1,630 +1,577 +Subtotal +7,183 +7,278 +Valuation Allowance +( 1,778 +) +( 1,721 +) +Net Deferred Tax Assets +$ +5,405 +$ +5,557 +Deferred taxes are reflected in the consolidated balance sheet as follows: +January 31, +2022 +2021 +Deferred Tax Assets +5,651 +5,941 +Deferred Tax Liabilities +( 246 +) +( 384 +) +Total Net Deferred Tax Assets +$ +5,405 +$ +5,557 +The valuation allowances of $ 1.8 million at January 31, 2022 and $ 1.7 million at January 31, 2021, relate to domestic research and development tax credit carryforwards and foreign tax credit carryforwards which are expected to expire unused. +At January 31, 2022, we had net operating loss carryforwards of $ 0.6 million in China, which expire in 2023 through 2027 . We have net operating loss carryforwards of less than $ 0.1 million in France, which can be carried forward indefinitely. We expect to utilize the net operating loss carryforwards in China and France before expiration. +At January 31, 2022, we had state research credit carryforwards of approximately $ 1.6 million which expire in 2022 through 2029 . Additionally, we had $ 0.2 million of foreign tax credit +s +. We maintain a full valuation allowance against these credits as we expect these credits to expire unused. +7 +1 +Table of Contents +We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows: +2022 +2021 +2020 +(In thousands) +Balance +, beginning of the year +$ +384 +$ +362 +$ +618 +Increases in prior period tax positions +63 +59 +— +Increases in current period tax positions +67 +5 +2 +Reductions related to lapse of statutes of limitations +( 211 +) +( 42 +) +( 26 +) +Reductions related to settlement with tax authorities +— +— +( 232 +) +Balance, end of the year +$ +303 +$ +384 +$ +362 +During fiscal 2022 and 2021, we released $ 211,000 and $ 50,000 , respectively, of accrued interest and penalties relating to a change in various unrecognized tax positions. We have accrued potential interest and penalties of $ 95,000 included in Income Taxes Payable in the consolidated balance sheet at January 31, 2022. +The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company was previously under audit by the IRS for the tax years ended January 31, 2015, 2016, and 2017, but on June 6, 2019, we received formal communication regarding the close of the audit with no additional changes made by the IRS. Therefore, the reserves for federal uncertain tax positions relating to the years in question have been released. In fiscal 2020, we released $ 232,000 relating to the federal tax exposure for the years previously under audit and $ 74,000 of related interest (net of federal benefit) and penalties. +U.S. income taxes have not been provided on $ 7.3 million of undistributed earnings of our foreign subsidiaries since it is our intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, the Company would not be subject to U.S. tax as a result of the Tax Act but could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical. +Note 17—Nature of Operations, Segment Reporting and Geographical Information +Our operations consist of the design, development, manufacture and sale of specialty printers and data acquisition and analysis systems, including both hardware and software and related consumable supplies. We organize and manage our business as a portfolio of products and services designed around a common theme of data acquisition and information output. We have two reporting segments consistent with our revenue product groups: Product Identification (“PI”) and Test & Measurement (“T&M”). +Our PI segment produces an array of high-technology digital color and monochrome label printers and mini presses, labeling software and supplies for a variety of commercial industries worldwide. AstroNova’s T&M segment produces data acquisition systems used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing. The T&M segment also includes our line of aerospace flight deck and cabin printers. +Business is conducted in the United States and through foreign branch offices and subsidiaries in Canada, Europe, China, Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United States are conducted through wholly-owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction. +The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies herein. We evaluate segment performance based on the segment profit before corporate and financial administration expenses. +7 +2 +Table of Contents +Summarized below are the revenue and segment operating profit (loss) (both in dollars and as a percentage of revenue) for each reporting segment: +($ in thousands) +Revenue +Segment Operating Profit +(Loss) +Segment Operating Profit (Loss) +as a % of Revenue +2022 +2021 +2020 +2022 +2021 +2020 +2022 +2021 +2019 +Product Identification +$ +90,915 +$ +90,268 +$ +88,116 +$ +10,411 +$ +12,885 +$ +7,509 +11.5 +% +14.3 +% +8.5 +% +T&M +26,565 +25,765 +45,330 +3,398 +( 1,032 +) +6,281 +12.8 +% +( 4.0 +)% +13.9 +% +Total +$ +117,480 +$ +116,033 +$ +133,446 +13,809 +11,853 +13,790 +11.8 +% +10.2 +% +10.3 +% +Corporate Expenses +9,553 +9,420 +11,357 +Operating Income +4,256 +2,433 +2,433 +Other Income (Expense), Net +2,778 +( 254 ) +( 1,063 ) +Income Before Income Taxes +7,034 +2,179 +1,370 +Income Tax Provision (Benefit) +605 +895 +( 389 +) +Net Income +$ +6,429 +$ +1,284 +$ +1,759 +No customer accounted for greater than 10 % of net revenue in fiscal 2022, 2021 or 2020. +Other information by segment is presented below: +(In thousands) +Assets +January 31, +2022 +2021 +Product Identification +$ +51,732 +$ +50,047 +T&M +50,374 +51,262 +Corporate* +12,849 +14,164 +Total +$ +114,955 +$ +115,473 +* +Corporate assets consist principally of cash, cash equivalents, deferred tax assets and refunds, and certain prepaid corporate assets. +(In thousands) +Depreciation and +Amortization +Capital Expenditures +2022 +2021 +2020 +2022 +2021 +2020 +Product Identification +$ +1,157 +$ +1,835 +$ +1,928 +$ +847 +$ +1,563 +$ +2,001 +T&M +2,837 +4,148 +4,356 +949 +1,024 +905 +Total +$ +3,994 +$ +5,983 +$ +6,284 +$ +1,796 +$ +2,587 +$ +2,906 +7 +3 +Table of Contents +Geographical Data +Presented below is selected financial information by geographic area: +Long-Lived Assets* +(In thousands) +Revenue +January 31, +2022 +2021 +2020 +2022 +2021 +United States +$ +68,185 +$ +70,911 +$ +83,671 +$ +29,131 +$ +31,226 +Europe +31,922 +29,029 +29,617 +1,486 +2,274 +Canada +6,519 +5,574 +5,719 +9 +13 +Asia +5,926 +5,105 +8,316 +15 +— +Central and South America +3,271 +3,950 +4,145 +— +— +Other +1,657 +1,464 +1,978 +— +— +Total +$ +117,480 +$ +116,033 +$ +133,446 +$ +30,641 +$ +33,513 +* +Long-lived assets exclude goodwill assigned to the T&M segment of $ 4.5 million at both January 31, 2022 and 2021 and $ 7.6 million and $ 8.3 million assigned to the PI segment at January 31, 2022 and 2021, respectively. +Note 18—Employee Benefit Plans +We sponsor a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code. +All contributions are deposited into trust funds. It is our policy to fund any contributions accrued. Our annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $ 0.5 million in fiscal 2022, $ 0.4 million in fiscal 2021 and $ 0.5 million in fiscal 2020. +Note 19—Product Warranty Liability +We offer a manufacturer’s warranty for the majority of our hardware products. The specific terms and conditions of warranty vary depending upon the products sold and country in which we do business. We estimate the warranty costs based on historical claims experience and record a liability in the amount of such estimates at the time product revenue is recognized. We regularly assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows: +2022 +2021 +2020 +(In thousands) +Balance, beginning of the year +$ +730 +$ +850 +$ +832 +Provision for Warranty Expense +2,174 +855 +1,733 +Cost of Warranty Repairs +( 2,070 +) +( 975 +) +( 1,715 +) +Balance, end of the year +$ +834 +$ +730 +$ +850 +During fiscal 2022, we incurred incremental costs because of a product quality issue with one of our vendors. As the result of discussions with the vendor, which was responsible for the product quality issue, we entered into an agreement whereby the vendor paid us $ 975,000 as partial reimbursement of the costs we incurred in supporting our customers with respect to the product quality issue. We have recorded this payment to offset cost of goods in our Product Identification segment for the product lines effected by the product quality issue to partially reverse the accounting impact when the original costs of the quality issues were incurred during the year. +7 +4 +Table of Contents +Note 20—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts which constitute our customer base. We periodically perform +on-going +credit evaluations of our customers. We have not historically experienced significant credit losses on collection of our accounts receivable. +During the years ended January 31, 2022, 2021 and 2020, one vendor accounted for 23.3 %, 23.2 % and 21.2 % of purchases, and 15.4 %, 28.3 % and 28.0 % of accounts payable, respectively, as of January 31, 2022, 2021 and 2020. +Note 21 +—Commitments and Contingencies +We are subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +Note 2 +2 +—Fair Value Measurements +Assets and Liabilities Not Recorded at Fair Value on the Consolidated Balance Sheet +Our long-term debt, including the current portion of long-term debt not reflected in the financial statements at fair value, is reflected in the table below: +Fair Value Measurement at +January 31, 2022 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +9,255 +$ +9,255 +$ +9,250 +Fair Value Measurement at +January 31, 2021 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +12,586 +$ +12,586 +$ +12,576 +The fair value of our long-term debt, including the current portion, is estimated by discounting the future cash flows using current interest rates at which similar borrowings with the same maturities would be made to borrowers with similar credit ratings and is classified as Level 3. +7 +5 +Table of Contents +ASTRONOVA, INC. +SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision/ +(Benefit) +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts +(1): +(In thousands) +Year Ended January 31, +2022 +$ +1,054 +$ +50 +$ +( 278 +) +$ +826 +2021 +$ +856 +$ +194 +$ +4 +$ +1,054 +2020 +$ +521 +$ +546 +$ +( 211 +) +$ +856 +(1) +The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet dates. +(2) +Uncollectible accounts written off, net of recoveries. +7 +6 \ No newline at end of file diff --git a/raw/filings/0000008146/2021/0001193125-22-108120/filing_metadata.csv b/raw/filings/0000008146/2021/0001193125-22-108120/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..f2cf0246297f9cdb3e0abad46fb2b4575f482493 --- /dev/null +++ b/raw/filings/0000008146/2021/0001193125-22-108120/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2022-04-18,2022-01-31,2022-04-18T21:02:28.000Z,0001193125-22-108120,d234033d10k.htm,10-K,10850494,1,1,https://www.sec.gov/Archives/edgar/data/8146/000119312522108120/d234033d10k.htm,https://www.sec.gov/Archives/edgar/data/8146/000119312522108120/,2021,2021,1 diff --git a/raw/filings/0000008146/2021/0001193125-22-108120/item1.txt b/raw/filings/0000008146/2021/0001193125-22-108120/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..3f608bd68ec0eef9c823a45e8cc09b5d7fa047da --- /dev/null +++ b/raw/filings/0000008146/2021/0001193125-22-108120/item1.txt @@ -0,0 +1,180 @@ +Item 1 +. Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form +10-K +refer to AstroNova, Inc. and its consolidated subsidiaries. +We design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation. +Our products are distributed worldwide through our own sales force, authorized dealers, and independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel +® +, TrojanLabel +® +and GetLabels +™ +brand names. The T&M segment includes our line of aerospace printers and test and measurement data acquisition systems sold under the AstroNova +® +brand name. Refer to Note 17, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 21 through 34 of this Annual Report on +Form 10-K. +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets globally. +Product Identification products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and +3 +Table of Contents +labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers, +direct-to-package +printers, high-volume presses and specialty OEM printing systems, as well as a wide range of label, tag and flexible packaging material substrates and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution light-weight flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed and stored and presented in various visual output formats. +Product Identification +Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. The segment provides a wide array of digital +end-to-end +product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Our customers typically label or mark products on a short to +mid-size +run basis and benefit from the efficiency, flexibility, and cost-savings of digitally printing labels or packaging in their facility, +on-demand, +with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready digital color label printers, and specialty OEM printing systems for either standalone output or inline integration with existing +pre-processing +and finishing systems. Customers use our digital printing products in a wide variety of industries, including chemical, cosmetics, food and beverage, medical products, nutraceutical, pharmaceutical, and many others. TrojanLabel expands our customer market by providing a range of higher volume digital color printers, OEM printing systems, and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners and thermal transfer ribbons designed for optimal performance with our printing hardware, while also being compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models include a selection of professional tabletop digital color label printers. The high-speed +QL-120X +was built on our pioneering and successful Kiaro! platform. To expand the product line further, in 2021, the +QL-120Xe, +a sister product to the dye ink +QL-120X, +was introduced in 2021 as a lower price point option for +low-volume +applications and price-sensitive customers. In 2020, we introduced the +QL-120D +which features high-performance pigment inks that can produce durable BS5609 certified labels and labels that can withstand a wide range of demanding environmental conditions from sterilization to cryogenic freezing. Introduced early in 2019, the high-performance +QL-300 +was the first +5-color +toner-based electrophotographic tabletop production label printer in the market. In addition, our QuickLabel line of printers includes the +QL-850, +our next-generation wide-format inkjet color label printer, the +QL-30 +and +QL-60 +series, a family of +high-end +monochrome printers, and the +QLS-4100 +XE, a unique solution with the ability to digitally print full-color labels and tags using thermal transfer ribbon technology. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to large-scale +all-in-one +inline specialty printing systems for both brand owners, OEMs, and commercial printers. The +T2-C, +a compact, digital mini-press designed for 24/7 label production, includes numerous differentiating features for several +end-use +market applications. The +T2-L +is a narrow format digital press designed specifically for flexible packaging substrates. Beyond label printing, the +T3-OPX, +the first of its kind +direct-to-package +printer, which was introduced in late 2019, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many other items using pigment inks that are resistant to both water and UV exposure. A professional label press and finishing system, the T4, enables print, +die-cut, +and lamination in an +all-in-one +machine with a much smaller footprint than others in the market. +GetLabels provides a broad range of high-quality supplies for both our printers and third-party printers including label and tag materials, inks, toner and thermal transfer material, all specifically designed and +4 +Table of Contents +constructed for a wide variety of labeling applications. Label material and substrates are carefully qualified and tested in our Rhode Island Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +The PI segment also develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems. PI also provides worldwide training and support. +Test &Measurement +Products sold under our T&M segment are designed and manufactured for airborne printing solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace-grade thermal paper. Our data acquisition systems are used in research and development, flight testing, missile/rocket telemetry production monitoring, power and maintenance applications. These products are sold to customers in various industries, including aerospace & defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Airborne printers include our flagship ToughWriter +® +series used in the flight decks and cabins of military, commercial, and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, performance data, passenger data, and air traffic control data. ToughSwitch +® +Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter airborne printers for many aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream, and others. In addition to the ToughWriter products, we manufacture other flight deck printers, including the TP/NP series, the RTP80 series and the +PTA-45B +series of airborne printers. The +PTA-45B +is subject to the Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which in 2017 we acquired an exclusive perpetual world-wide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Over time we expect customers to replace the +PTA-45B +printers with ToughWriter products because they have numerous technical features and functional advantages and significant weight savings. +Other T&M products include the TMX +® +all-in-one +high-speed data acquisition system for applications requiring high channel counts and acquisition rates; the Daxus +® +DXS-100 +distributed data acquisition platform; the SmartCorder +® +DDX-100, +a portable +all-in-one +data acquisition system for facility maintenance and field testing; and the Everest +® +EV-5000 +digital strip chart recording system used mainly in telemetry applications. The Daxus +DXS-100 +can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying or printing the data on hard copy, monitor or electronic storage media, and (4) analyzing the data. To service data visualization, we maintain technological core competencies and trade +know-how +concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling, and airworthiness design. +Patents and Copyrights +We hold several product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions to protect our +5 +Table of Contents +technology and brand names. We consider our intellectual property to be critical to the operation of our business. In particular, we believe that the loss of the trademarks QuickLabel, TrojanLabel, ToughWriter, or ToughSwitch or the loss of the license provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many +sub-assemblies +and parts +in-house, +including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts not manufactured +in-house +are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We purchase certain components, assembled products, and supplies used to manufacture our products from a single source or limited supplier sources. Although we believe the majority of these sole or limited source components, assembled products, and supplies could be sourced elsewhere with appropriate changes in the design of our products, such design might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past, we have made such advance purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our expanding network of manufacturing, sales and support facilities, we do business in over 150 countries. +We believe we are a market leader in tabletop digital color label printing technology in the specialty printing field, a market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose portable, high-speed data acquisition systems. +Management believes that we have a market leadership position in many of the markets we serve. We retain our leadership position by virtue of our proprietary technology, product reputation, delivery, our channels to market, technical assistance and service to customers. The number of competitors varies by product line. Key competitive factors vary among our product lines, but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our Product Identification products are sold by direct field salespersons as well as independent dealers and representatives, while our Test & Measurement products are sold predominantly through direct sales and manufacturers’ representatives. In the United States, we have factory-trained direct field salespeople located throughout the country specializing in Product Identification products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize approximately 200 independent dealers and representatives selling and marketing our products in 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our backlog varies regularly. It consists of a blend of orders for +end-user +customers, as well as original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and +built-to-order +customer requirements. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2022 and 2021 was $27.8 million and $22.5 million, respectively. +6 +Table of Contents +Government Regulation +We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our business particularly with respect to our aircraft cockpit printer business which sells in a highly regulated industry, and others of which apply to us for other reasons, such as our status as a publicly held company or the places in which we sell certain types or amounts of products. Existing and future laws and regulations may result in increasing expense and may impede our growth. Applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, privacy, data protection, pricing, content, distribution, energy consumption, environmental regulation, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. +Our business outside of the U.S. exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. +Environmental Matters +We believe that we are in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment, or otherwise relating to the protection of the environment. We have not experienced any material costs in connection with environmental compliance, and do not believe that such compliance will have any material effect upon the financial position, results of operations, cash flows, or competitive position of the Company. +Employees +As of January 31, 2022, we employed 339 full-time employees. Of our full-time employees, 238 were in the United States, 80 in Europe, 10 in Canada, nine in Asia and two in Mexico. +None of our employees are represented by a labor union or covered by a collective bargaining agreement; except for our employees in France, where local regulations generally require collective bargaining agreements. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments in the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other actions to improve overall engagement with our key employees. +Culture +We have ingrained a strong and definable company culture that shapes how we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business to achieve continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure our business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand our customers’ changing needs and expectations. +7 +Table of Contents +Our core values guide our employees’ behavior and dictate how our business is conducted. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities and are also demonstrated through teamwork, leadership, and everyday interactions. +Diversity and Inclusion +We believe that our culture and core values are strengthened through diversity and inclusion. Our diversity initiatives include—but are not limited to—our practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions; transfers; social and recreational programs; layoffs; terminations; and the ongoing development of a work environment built on the premise of gender and diversity equity. These initiatives include periodic evaluation of our workforce demographics as compared to the demographics in the workforce market, and an affirmative effort to attract, recruit, retain and train a diverse workforce that is representative of the populations in the regions in which we do business. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form +10-K, +Quarterly Reports on Form +10-Q, +Current Reports on Form +8-K +and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). These filings are also accessible on the SEC’s website at http://www.sec.gov. \ No newline at end of file diff --git a/raw/filings/0000008146/2021/0001193125-22-108120/item13.txt b/raw/filings/0000008146/2021/0001193125-22-108120/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c6c11f33ca1402eedec177d0fc7bebfb06059fc7 --- /dev/null +++ b/raw/filings/0000008146/2021/0001193125-22-108120/item13.txt @@ -0,0 +1,3 @@ +Item 13. +Certain Relationships, Related Transactions and Director Independence +The information required by this item is incorporated herein by reference to our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders. \ No newline at end of file diff --git a/raw/filings/0000008146/2021/0001193125-22-108120/item9a.txt b/raw/filings/0000008146/2021/0001193125-22-108120/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..b2aedda694d1479c991c15d1cda684efb9e8440a --- /dev/null +++ b/raw/filings/0000008146/2021/0001193125-22-108120/item9a.txt @@ -0,0 +1,23 @@ +Item 9A. +Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form +10-K +pursuant to Rules +13a-15(e) +and +15d-15(e) +under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2022 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules +13a-15(f) +and +15d-15(f) +under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2022. In making this assessment, management used the criteria set forth in the Internal Control- +35 +Table of Contents +Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2022, our internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +Changes in Internal Controls over Financial Reporting +There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2021/0001193125-22-108120/rp_note.txt b/raw/filings/0000008146/2021/0001193125-22-108120/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2021/0001193125-22-108120/rpt_disclosure.txt b/raw/filings/0000008146/2021/0001193125-22-108120/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..2b030bfe7df5714321f3ae5115ae628d3ecf0334 --- /dev/null +++ b/raw/filings/0000008146/2021/0001193125-22-108120/rpt_disclosure.txt @@ -0,0 +1,7 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. In +reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +No officer, director or nominee for director of the Company or any associate of any of the foregoing had during the period beginning on +February 1, 2020 through the date of this proxy statement any material interest, direct or indirect, in any material transaction or any material proposed transaction in which the amount exceeds $120,000 and to which the Company was or is to be +a party. +26 \ No newline at end of file diff --git a/raw/filings/0000008146/2022/0001193125-23-103662/filing.txt b/raw/filings/0000008146/2022/0001193125-23-103662/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..ed82026edcfc75685cd08e31764223349a7b4099 --- /dev/null +++ b/raw/filings/0000008146/2022/0001193125-23-103662/filing.txt @@ -0,0 +1,3821 @@ +10-K +false FY 0000008146 Beginning in fiscal 2023, changes to Section 174 of the Internal Revenue Code made by the Tax Cuts and Jobs Act of 2017 no longer permit an immediate deduction for research and development expenditures in the tax year that such costs are incurred. These costs are capitalized resulting in an increase in deferred tax assets of $1.2 million. 0000008146 2022-02-01 2023-01-31 0000008146 2022-01-31 0000008146 2023-01-31 0000008146 2020-02-01 2021-01-31 0000008146 2021-02-01 2022-01-31 0000008146 2022-08-04 0000008146 2021-01-31 0000008146 2022-08-04 2022-08-04 0000008146 2022-07-30 0000008146 2023-04-12 0000008146 2021-10-30 0000008146 2022-03-22 0000008146 2020-01-31 0000008146 alot:OthersCountriesMember 2022-02-01 2023-01-31 0000008146 alot:CentralAndSouthAmericaMember 2022-02-01 2023-01-31 0000008146 srt:AsiaMember 2022-02-01 2023-01-31 0000008146 country:CA 2022-02-01 2023-01-31 0000008146 srt:EuropeMember 2022-02-01 2023-01-31 0000008146 country:US 2022-02-01 2023-01-31 0000008146 alot:ServiceAndOtherMember 2022-02-01 2023-01-31 0000008146 alot:SuppliesMember 2022-02-01 2023-01-31 0000008146 alot:HardwareProductsMember 2022-02-01 2023-01-31 0000008146 alot:RangeThreeMember 2022-02-01 2023-01-31 0000008146 alot:RangeFourMember 2022-02-01 2023-01-31 0000008146 alot:RangeFiveMember 2022-02-01 2023-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2022-02-01 2023-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2022-02-01 2023-01-31 0000008146 alot:OtherCountriesMember 2022-02-01 2023-01-31 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2022-02-01 2023-01-31 0000008146 alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2022-02-01 2023-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2022-02-01 2023-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2022-02-01 2023-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2022-02-01 2023-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2022-02-01 2023-01-31 0000008146 us-gaap:LandImprovementsMember srt:MaximumMember 2022-02-01 2023-01-31 0000008146 alot:BuildingAndLeaseholdImprovementsMember srt:MaximumMember 2022-02-01 2023-01-31 0000008146 srt:MinimumMember us-gaap:LandImprovementsMember 2022-02-01 2023-01-31 0000008146 srt:MinimumMember alot:BuildingAndLeaseholdImprovementsMember 2022-02-01 2023-01-31 0000008146 srt:MaximumMember us-gaap:MachineryAndEquipmentMember 2022-02-01 2023-01-31 0000008146 alot:ComputerEquipmentAndSoftwareMember srt:MaximumMember 2022-02-01 2023-01-31 0000008146 srt:MinimumMember us-gaap:MachineryAndEquipmentMember 2022-02-01 2023-01-31 0000008146 srt:MinimumMember alot:ComputerEquipmentAndSoftwareMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2022-02-01 2023-01-31 0000008146 us-gaap:OperatingSegmentsMember 2022-02-01 2023-01-31 0000008146 us-gaap:CommonStockMember 2022-02-01 2023-01-31 0000008146 srt:MinimumMember alot:AirborneProductMember 2022-02-01 2023-01-31 0000008146 srt:MaximumMember alot:AirborneProductMember 2022-02-01 2023-01-31 0000008146 us-gaap:TreasuryStockMember 2022-02-01 2023-01-31 0000008146 us-gaap:ForeignExchangeMember 2022-02-01 2023-01-31 0000008146 us-gaap:RetainedEarningsMember 2022-02-01 2023-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2022-02-01 2023-01-31 0000008146 alot:EmployeeStockPurchasePlanMember 2022-02-01 2023-01-31 0000008146 country:CN 2022-02-01 2023-01-31 0000008146 alot:TwoThousandAndTwentyTwoEmployeeStockPurchasePlanMember 2022-02-01 2023-01-31 0000008146 alot:PriorEmployeeStockPurchasePlanMember 2022-02-01 2023-01-31 0000008146 alot:RestrictedStockAwardMember 2022-02-01 2023-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2022-02-01 2023-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2022-02-01 2023-01-31 0000008146 alot:CashFlowHedgeMember us-gaap:CrossCurrencyInterestRateContractMember 2022-02-01 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:OtherExpenseMember alot:BankOfAmericaMember 2022-02-01 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember 2022-02-01 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MaximumMember 2022-02-01 2023-01-31 0000008146 alot:PaycheckProtectionProgramLoanMember alot:GreenwoodCreditUnionMember 2022-02-01 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember srt:MinimumMember 2022-02-01 2023-01-31 0000008146 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember 2022-02-01 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:FederalFundsEffectiveSwapRateMember 2022-02-01 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember 2022-02-01 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember 2022-02-01 2023-01-31 0000008146 alot:PromissoryNoteMember alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2022-02-01 2023-01-31 0000008146 us-gaap:IntangibleAssetsAmortizationPeriodMember us-gaap:CustomerContractsMember 2022-02-01 2023-01-31 0000008146 us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember 2022-02-01 2023-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember us-gaap:CustomerContractsMember 2022-02-01 2023-01-31 0000008146 us-gaap:IntangibleAssetsAmortizationPeriodMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember us-gaap:CustomerContractsMember 2022-02-01 2023-01-31 0000008146 alot:RuggedInformationTechnologyEquipmentCorporationMember us-gaap:CustomerContractsMember 2022-02-01 2023-01-31 0000008146 us-gaap:IntangibleAssetsAmortizationPeriodMember alot:RuggedInformationTechnologyEquipmentCorporationMember us-gaap:CustomerContractsMember 2022-02-01 2023-01-31 0000008146 us-gaap:SellingAndMarketingExpenseMember 2022-02-01 2023-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2022-02-01 2023-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-02-01 2023-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-02-01 2023-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember alot:SecondAmendmentCreditAgreementMember 2022-02-01 2023-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember 2022-02-01 2023-01-31 0000008146 us-gaap:DomesticCountryMember 2022-02-01 2023-01-31 0000008146 alot:AerospaceCustomerMember 2022-02-01 2023-01-31 0000008146 us-gaap:CustomerRelatedIntangibleAssetsMember 2022-02-01 2023-01-31 0000008146 us-gaap:CustomerContractsMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2022-01-31 0000008146 alot:DistributorRelationsMember alot:TrojanlabelApSMember 2022-01-31 0000008146 alot:ExistingTechnologyMember alot:TrojanlabelApSMember 2022-01-31 0000008146 us-gaap:CustomerContractsMember alot:RuggedInformationTechnologyEquipmentCorporationMember 2022-01-31 0000008146 alot:MiltopeCorporationMember us-gaap:CustomerContractsMember 2022-01-31 0000008146 alot:TermLoanDueSeptemberThirtyTwoThousandAndTwentyFiveMember 2022-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2022-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2022-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2022-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2022-01-31 0000008146 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2022-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2022-01-31 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2022-01-31 0000008146 country:US 2022-01-31 0000008146 srt:EuropeMember 2022-01-31 0000008146 country:CA 2022-01-31 0000008146 srt:AsiaMember 2022-01-31 0000008146 alot:TestAndMeasurementMember 2022-01-31 0000008146 alot:ProductIdentificationMember 2022-01-31 0000008146 srt:MaximumMember us-gaap:CustomerConcentrationRiskMember us-gaap:SalesRevenueNetMember 2022-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember alot:BeforeAmendmentToTheCreditAgreementMember 2022-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember us-gaap:CustomerContractsMember 2023-01-31 0000008146 us-gaap:TrademarksMember alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2023-01-31 0000008146 us-gaap:CustomerContractsMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2023-01-31 0000008146 alot:TrojanlabelApSMember alot:DistributorRelationsMember 2023-01-31 0000008146 alot:ExistingTechnologyMember alot:TrojanlabelApSMember 2023-01-31 0000008146 us-gaap:CustomerContractsMember alot:RuggedInformationTechnologyEquipmentCorporationMember 2023-01-31 0000008146 us-gaap:CustomerContractsMember alot:MiltopeCorporationMember 2023-01-31 0000008146 alot:TermLoanDueSeptemberThirtyTwoThousandAndTwentyFiveMember 2023-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2023-01-31 0000008146 alot:BankOfAmericaMember alot:TermLoanMember alot:BeforeAmendmentToTheCreditAgreementMember 2023-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember 2023-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2023-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2023-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2023-01-31 0000008146 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2023-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2023-01-31 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2023-01-31 0000008146 alot:TwoThousandSevenEquityIncentivePlanMember 2023-01-31 0000008146 alot:TwoThousandFifteenEquityIncentivePlanMember us-gaap:RestrictedStockMember 2023-01-31 0000008146 alot:TermLoanMember 2023-01-31 0000008146 country:US 2023-01-31 0000008146 srt:EuropeMember 2023-01-31 0000008146 country:CA 2023-01-31 0000008146 srt:AsiaMember 2023-01-31 0000008146 alot:RangeThreeMember 2023-01-31 0000008146 alot:RangeFourMember 2023-01-31 0000008146 alot:RangeFiveMember 2023-01-31 0000008146 alot:ProductIdentificationMember 2023-01-31 0000008146 alot:TestAndMeasurementMember 2023-01-31 0000008146 srt:MaximumMember us-gaap:CustomerConcentrationRiskMember us-gaap:SalesRevenueNetMember 2023-01-31 0000008146 country:CN 2023-01-31 0000008146 stpr:DE 2023-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember alot:TwoThousandEighteenEquityIncentivePlanMember 2023-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember us-gaap:PerformanceSharesMember 2023-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember us-gaap:RestrictedStockMember 2023-01-31 0000008146 us-gaap:EmployeeStockOptionMember 2023-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2023-01-31 0000008146 alot:TaxCreditsCarryForwardsMember 2023-01-31 0000008146 alot:TwoThousandAndTwentyTwoEmployeeStockPurchasePlanMember 2023-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2023-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2023-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember alot:SecondAmendmentCreditAgreementMember 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2023-01-31 0000008146 us-gaap:DomesticCountryMember 2023-01-31 0000008146 alot:AdditionalForeignTaxCreditMember 2023-01-31 0000008146 alot:MeasurementInputRoyaltyRateMember 2023-01-31 0000008146 alot:MeasurementInputCustomerAttritionRateMember 2023-01-31 0000008146 us-gaap:MeasurementInputDiscountRateMember 2023-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2023-01-31 0000008146 us-gaap:CustomerRelatedIntangibleAssetsMember 2023-01-31 0000008146 alot:NonCurrentLiabilityMember 2023-01-31 0000008146 alot:RoyaltyPaymentsDueInNextTwelveMonthsMember 2023-01-31 0000008146 alot:RoyaltyPaymentsDueYearTwoMember 2023-01-31 0000008146 alot:RoyaltyPaymentsDueYearThreeMember 2023-01-31 0000008146 alot:RoyaltyPaymentsDueYearFiveMember 2023-01-31 0000008146 alot:RoyaltyPaymentsDueYearFourMember 2023-01-31 0000008146 alot:OthersCountriesMember 2020-02-01 2021-01-31 0000008146 alot:CentralAndSouthAmericaMember 2020-02-01 2021-01-31 0000008146 srt:AsiaMember 2020-02-01 2021-01-31 0000008146 country:CA 2020-02-01 2021-01-31 0000008146 srt:EuropeMember 2020-02-01 2021-01-31 0000008146 country:US 2020-02-01 2021-01-31 0000008146 alot:ServiceAndOtherMember 2020-02-01 2021-01-31 0000008146 alot:SuppliesMember 2020-02-01 2021-01-31 0000008146 alot:HardwareProductsMember 2020-02-01 2021-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2020-02-01 2021-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2020-02-01 2021-01-31 0000008146 alot:OtherCountriesMember 2020-02-01 2021-01-31 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2020-02-01 2021-01-31 0000008146 alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2020-02-01 2021-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2020-02-01 2021-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-02-01 2021-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-02-01 2021-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2020-02-01 2021-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2020-02-01 2021-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2020-02-01 2021-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2020-02-01 2021-01-31 0000008146 us-gaap:OperatingSegmentsMember 2020-02-01 2021-01-31 0000008146 us-gaap:TreasuryStockMember 2020-02-01 2021-01-31 0000008146 us-gaap:CommonStockMember 2020-02-01 2021-01-31 0000008146 us-gaap:ForeignExchangeMember 2020-02-01 2021-01-31 0000008146 us-gaap:RetainedEarningsMember 2020-02-01 2021-01-31 0000008146 alot:OthersCountriesMember 2021-02-01 2022-01-31 0000008146 alot:CentralAndSouthAmericaMember 2021-02-01 2022-01-31 0000008146 srt:AsiaMember 2021-02-01 2022-01-31 0000008146 country:CA 2021-02-01 2022-01-31 0000008146 srt:EuropeMember 2021-02-01 2022-01-31 0000008146 country:US 2021-02-01 2022-01-31 0000008146 alot:ServiceAndOtherMember 2021-02-01 2022-01-31 0000008146 alot:SuppliesMember 2021-02-01 2022-01-31 0000008146 alot:HardwareProductsMember 2021-02-01 2022-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2021-02-01 2022-01-31 0000008146 alot:TestAndMeasurementMember us-gaap:OperatingSegmentsMember 2021-02-01 2022-01-31 0000008146 alot:OtherCountriesMember 2021-02-01 2022-01-31 0000008146 us-gaap:SupplierConcentrationRiskMember alot:CustomerMember us-gaap:CostOfGoodsTotalMember 2021-02-01 2022-01-31 0000008146 alot:TradeAccountsPayablesMember alot:CustomerMember us-gaap:SupplierConcentrationRiskMember 2021-02-01 2022-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2021-02-01 2022-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-02-01 2022-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2021-02-01 2022-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2021-02-01 2022-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2021-02-01 2022-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2021-02-01 2022-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2021-02-01 2022-01-31 0000008146 us-gaap:OperatingSegmentsMember 2021-02-01 2022-01-31 0000008146 us-gaap:CommonStockMember 2021-02-01 2022-01-31 0000008146 us-gaap:TreasuryStockMember 2021-02-01 2022-01-31 0000008146 us-gaap:ForeignExchangeMember 2021-02-01 2022-01-31 0000008146 us-gaap:RetainedEarningsMember 2021-02-01 2022-01-31 0000008146 alot:PriorEmployeeStockPurchasePlanMember 2021-02-01 2022-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2021-02-01 2022-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2021-02-01 2022-01-31 0000008146 alot:CashFlowHedgeMember us-gaap:CrossCurrencyInterestRateContractMember 2021-02-01 2022-01-31 0000008146 alot:BankOfAmericaMember us-gaap:OtherExpenseMember us-gaap:RevolvingCreditFacilityMember 2021-02-01 2022-01-31 0000008146 us-gaap:NonoperatingIncomeExpenseMember 2021-02-01 2022-01-31 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember 2021-02-01 2022-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2020-05-06 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2020-05-06 0000008146 alot:PaycheckProtectionProgramLoanMember alot:GreenwoodCreditUnionMember 2021-06-15 2021-06-15 0000008146 alot:PaycheckProtectionProgramLoanMember alot:GreenwoodCreditUnionMember 2021-06-15 2021-06-15 0000008146 us-gaap:CustomerRelationshipsMember 2022-08-04 2022-08-04 0000008146 us-gaap:TrademarksAndTradeNamesMember 2022-08-04 2022-08-04 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-08-04 2022-08-04 0000008146 alot:BankOfAmericaMember us-gaap:RevolvingCreditFacilityMember alot:SecondAmendmentCreditAgreementMember 2022-08-04 2022-08-04 0000008146 alot:SecondAmendmentCreditAgreementMember alot:AdditionalTermLoanAvailedMember alot:TermLoanMember alot:BankOfAmericaMember 2022-08-04 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-08-04 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-08-04 2023-01-31 0000008146 alot:BankOfAmericaMember alot:TermLoanMember 2022-10-31 2023-07-31 0000008146 alot:BankOfAmericaMember alot:TermLoanMember 2023-10-31 2027-04-30 0000008146 alot:PaycheckProtectionProgramLoanMember alot:GreenwoodCreditUnionMember 2021-05-02 2021-07-31 0000008146 us-gaap:CrossCurrencyInterestRateContractMember us-gaap:CashFlowHedgingMember 2021-08-01 2021-10-30 0000008146 us-gaap:CashFlowHedgingMember 2021-08-01 2021-10-30 0000008146 us-gaap:CrossCurrencyInterestRateContractMember 2020-07-30 2020-07-30 0000008146 alot:CaresActMember 2021-01-01 2021-06-30 0000008146 alot:CaresActMember 2021-07-01 2021-07-31 0000008146 us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember alot:CaresActMember 2022-03-22 2022-03-22 0000008146 us-gaap:CostOfSalesMember 2021-10-30 2021-10-30 0000008146 us-gaap:ResearchAndDevelopmentExpenseMember 2021-10-30 2021-10-30 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2018-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2018-01-31 2018-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2021-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2021-01-31 0000008146 alot:AerospaceCustomerMember 2022-12-31 0000008146 us-gaap:ChangeInAccountingMethodAccountedForAsChangeInEstimateMember 2021-05-01 2021-07-31 0000008146 us-gaap:AllowanceForCreditLossMember 2022-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2023-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2023-01-31 0000008146 us-gaap:CommonStockMember 2023-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2023-01-31 0000008146 us-gaap:RetainedEarningsMember 2023-01-31 0000008146 us-gaap:TreasuryStockMember 2023-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2023-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2023-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-31 0000008146 us-gaap:TreasuryStockMember 2020-01-31 0000008146 us-gaap:RetainedEarningsMember 2020-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2020-01-31 0000008146 us-gaap:CommonStockMember 2020-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2020-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2020-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2020-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2021-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2021-01-31 0000008146 us-gaap:CommonStockMember 2021-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2021-01-31 0000008146 us-gaap:RetainedEarningsMember 2021-01-31 0000008146 us-gaap:TreasuryStockMember 2021-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2021-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2021-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2022-01-31 0000008146 us-gaap:CommonStockMember 2022-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2022-01-31 0000008146 us-gaap:RetainedEarningsMember 2022-01-31 0000008146 us-gaap:TreasuryStockMember 2022-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2022-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2022-01-31 iso4217:USD xbrli:shares xbrli:pure utr:Year utr:sqft iso4217:USD xbrli:shares alot:Segment +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM +10-K +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31 , 2023 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +Commission file number +0-13200 +AstroNova, Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue , +West Warwick , Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: +( 401 ) 828-4000 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading +Symbol +Name of each exchange +on which registered +Common Stock , $.05 Par Value +ALOT +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of +Regulation S-T +(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a +non-accelerated +filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule +12b-2 +of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☒ +Non-accelerated filer +Smaller reporting company +☒ +Emerging growth company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to +§240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule +12b-2 +of the Act). ☐ Yes ☒ No +The aggregate market value of the registrant’s voting common equity held by +non-affiliates +at July 30, 2022, was approximately $ 84,333,000 based on the closing price on the Nasdaq Global Market on that date. The registrant has no +non-voting +common shares. +As of April 12, 2023, there were 7,400,560 +shares of Common Stock (par value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2023 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form +10-K +where indicated. +Auditor Firm Id: +PCAOB ID No. 392 +Auditor +Name: +Wolf & Company, P.C. +Auditor Location: +Boston, MA +ASTRONOVA, INC. +FORM 10-K +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +1 +Item 1A. +Risk Factors +8 +Item 1B. +Unresolved Staff Comments +22 +Item 2. +Properties +22 +Item 3. +Legal Proceedings +23 +Item 4. +Mine Safety Disclosures +23 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +24 +Item 6. +Reserved +24 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +24 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +37 +Item 8. +Financial Statements and Supplementary Data +38 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +38 +Item 9A. +Controls and Procedures +38 +Item 9B. +Other Information +39 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +39 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +40 +Item 11. +Executive Compensation +40 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +40 +Item 13. +Certain Relationships, Related Transactions and Director Independence +40 +Item 14. +Principal Accountant Fees and Services +40 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +41 +Item 16. +Form 10-K Summary +41 +ASTRONOVA, INC. +Forward-Looking Statements +The information included in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” “may,” “will,” and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in this Annual Report on Form 10-K under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K. +PART I +Item 1 . Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +We design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation. +Our products are distributed worldwide through our own sales force, authorized dealers, and independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel ® , TrojanLabel ® and GetLabels ™ brand names. The T&M segment includes our line of aerospace printers, ethernet networking products and test and measurement data acquisition systems sold under the AstroNova ® brand name. Refer to Note 18, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers and related accessories, tabbers, conveyors, and envelope feeders. Astro Machine is reported as a part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisition,” in our audited consolidated financial statements included elsewhere in this report. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 24 through 37 of this Annual Report on Form 10-K. +1 +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets globally. +PI products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers and light commercial label printers, direct-to-package printers, high-volume presses, and specialty original equipment manufacturer (“OEM”) printing systems, as well as a wide range of label, tag and flexible packaging material substrates and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. PI products sold under the Astro Machine brand acquired on August 4, 2022, also include a variety of label printers, envelope and packaging printing, and related processing and handling equipment. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed, stored and presented in various visual output formats. +Product Identification +Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. Additionally, PI includes the recently acquired Astro Machine brand that is sold directly to end users though our channel partners and to OEM customers, who generally rebrand these products for sales to their customers. The segment provides a wide array of digital end-to-end product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Our customers typically label or mark products on a short- to mid-size run basis and benefit from the efficiency, flexibility, and cost-savings of digitally printing labels or packaging in their facility, on-demand, with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready digital color label printers, and specialty OEM printing systems for either standalone output or inline integration with existing pre-processing and finishing systems. Customers use our digital printing products in a wide variety of industries, including chemicals, cosmetics, food and beverage, medical products, nutraceuticals, pharmaceuticals, and many others. TrojanLabel expands our customer market by providing a range of higher volume digital color printers, OEM printing systems, and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners, and thermal transfer ribbons designed for optimal performance with our printing hardware, and are also compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models include a selection of professional tabletop digital color label printers. We recently introduced the QL-E100, an entry-level, compact, full-color tabletop label printer. It delivers professional-quality output at a lower price point, which we believe is ideal for targeting smaller businesses entering the on-demand label market, and larger enterprises that require multiple on-demand label printers at distributed locations throughout their facilities. The high-speed QL-120X was built on our pioneering and successful Kiaro! platform. To expand the product line further, the QL-120Xe, a sister product to the dye ink QL-120X, was introduced in 2021 as a lower price point option for low-volume applications and price-sensitive customers. In 2020, we introduced the QL-120D, which features high-performance pigment inks that can produce durable BS5609-certified labels and labels that can withstand a wide range of demanding environmental conditions from sterilization to cryogenic freezing. Introduced early in 2019, the high-performance QL-300 was the first 5-color toner-based electrophotographic tabletop production label printer in the market. In addition, our +2 +QuickLabel line of printers includes the QL-850, our next-generation wide-format inkjet color label printer, the QL-30 and QL-60 series, a family of high-end monochrome printers, and the QLS-4100 XE, a unique solution with the ability to digitally print full-color labels and tags using thermal transfer ribbon technology. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to large-scale all-in-one inline specialty printing systems for both brand owners, OEMs, and commercial printers. The T2-C, a compact, digital mini-press designed for 24/7 label production, includes numerous differentiating features for several end-use market applications. The T2-L is a narrow-format digital press designed specifically for flexible packaging substrates. Beyond label printing, the T3-OPX, the first of its kind direct-to-package printer, which was introduced in late 2020, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many other items using pigment inks that are resistant to both water and UV exposure. A professional high-volume label press and finishing system, the T4, enables print, die-cut, and lamination in an all-in-one machine with a much smaller footprint than others in the market. +GetLabels provides a broad range of high-quality supplies for both our printers and third-party printers, including label and tag materials, inks, toner, and thermal transfer material, all specifically designed and constructed for a wide variety of labeling applications. Label material and substrates are carefully qualified and tested on-site in our Rhode Island Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +Astro Machine sells a variety of label printers, envelope and package printers and related envelope tabbers, conveyors and feeders to OEM customers who re-label the products with their own brand. +The PI segment provides worldwide training and support as well as develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems. +Test & Measurement +Products sold under our T&M segment are designed and manufactured for airborne printing and networking solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace-grade thermal paper. Our data acquisition systems are used in research and development, flight testing, missile/rocket telemetry production monitoring, power and maintenance applications. These products are sold to customers in various industries, including aerospace & defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Our airborne printers, which include our flagship ToughWriter ® series, are used in the flight decks and cabins of military, commercial, and business aircraft to print hard copies of data to enhance flight safety and reduce pilot workload by providing ready access to many types of critical flight-specific information required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, notice to air missions or NOTAMS, performance data, passenger data, and air traffic control data. ToughSwitch ® Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight-worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter printers for various aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream, and others. In addition to the ToughWriter products, we furnish other acquired flight deck printer products, including the TP/NP series, the RTP80 series and the PTA-45B series of airborne printers. The PTA-45B is subject to the Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which in 2017 we acquired an exclusive perpetual worldwide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Over time we expect customers to replace the +3 +PTA-45B and other acquired printer product lines with the AstroNova designed ToughWriter products because of the numerous technical features, functional advantages and significant weight savings. Currently, approximately one-third of the airborne printers sold are ToughWriter branded, and we expect the percentage of ToughWriter products to continue to grow over the next several years, and notably in fiscal 2025. +Other T&M products include the TMX ® all-in-one high-speed data acquisition system for applications requiring high channel counts and acquisition rates; the Daxus ® DXS-100 distributed data acquisition platform; the SmartCorder ® DDX-100, a portable all-in-one data acquisition system for R&D facility and field testing; and the Everest ® EV-5000 digital strip chart recording system used mainly in aerospace and defense applications. The Daxus DXS-100 can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying or printing the data on hard copy, visual displays or electronic storage media, and (4) analyzing the data. To support our data visualization technology, we maintain technological core competencies and trade secret know-how concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling, and airworthiness design. +Patents and Copyrights +We hold several product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions to protect our technology and brand names. We consider our intellectual property to be critical to the operation of our business. In particular, we believe that the loss of the trademarks QuickLabel, TrojanLabel, ToughWriter, or ToughSwitch or the loss of the license provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. Because of the OEM nature of the Astro Machine business model (and the similarity of that brand name to the AstroNova name), its trademark and brand name, while important, are less critical. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many sub-assemblies and parts in-house, including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts are not manufactured in-house are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We also purchase certain components, assembled products, and supplies used to manufacture or sell with our products, from single-or limited- source suppliers. Although we believe the majority of these sole or limited source components, assembled products, and supplies could be sourced elsewhere with appropriate changes in the design of our products, the required design changes might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past, we have made such advanced purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our existing network of manufacturing, sales and support facilities, we have sold our products to customers in over 150 countries. +4 +We believe we are a market leader in tabletop digital color label printing technology in the specialty on-demand printing field, the market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose, portable, high-speed data acquisition systems. +Management believes that we have a market leadership position in many of the markets we serve. We retain our leadership position by virtue of our proprietary technology, product reputation, delivery, our channels to market, technical assistance and service to customers. The number of competitors varies by product line. Key competitive factors vary among our product lines but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our PI products are sold by direct field salespersons as well as independent dealers and representatives, while our T & M products are sold predominantly through direct sales and manufacturers’ representatives. In the United States, we have factory-trained direct-field salespeople located throughout the country specializing in PI products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize over 100 independent dealers and representatives selling and marketing our products in over 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our order backlog is predominantly but not exclusively for products that will be delivered within twelve months, and backlog scheduled for beyond twelve months is predominantly within the T&M segment. However, backlog varies regularly and is not a highly reliable predictive indicator of near-term future sales trends, primarily due to the frequent longer-term original equipment and supplies orders within the T&M segment. In the PI segment, we have multi-period (but typically not multi-year) blanket order arrangements with many customers for labels and other supplies. Printer hardware in the PI segment is typically shipped within a short period of time after orders are booked. Manufacturing production is designed to meet forecasted demands and built-to-order customer requirements. Backlog at January 31, 2023 and 2022 was $35.8 million and $27.8 million, respectively. +Government Regulation +We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our business, particularly with respect to our aircraft cockpit printer business which sells in a highly regulated industry. For example, material modifications to an airborne printer cannot be made without having progressed through an extensive series of product qualification and certification steps that are technically complicated, expensive to execute, typically slow the pace of product development in that industry and can constrain our ability to quickly respond to pricing fluctuations or disruptions to our supply chain for products. +Other applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, accounting and U.S. Securities and Exchange Commission (“SEC”) reporting, privacy, data protection, pricing, content, distribution, energy consumption, environmental regulation, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. +Our business outside of the U.S. exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. +5 +Environmental Matters +We believe that we are in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment or otherwise relating to the protection of the environment. We have not experienced any material costs in connection with environmental compliance and do not believe that such compliance will have any material effect on our financial position, results of operations, cash flows, or competitive position. +Employees +As of January 31, 2023 we employed 394 full-time employees, including 40 employees added as a result of the Astro Machine acquisition in August 2022. Of our full-time employees, 295 were in the United States, 77 in Europe, 10 in Canada, 10 in Asia and two in Mexico. +None of our employees are represented by a labor union or covered by a collective bargaining agreement; except for our employees in France, where local regulations generally require collective bargaining agreements. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments in the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other actions to improve overall engagement with our key employees. +Culture +We are deeply committed to and invest substantial resources in maintaining and improving a strong and definable company culture that shapes how we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business to achieve continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure our business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand our customers’ changing needs and expectations. +Our objective is for these core values to guide our employees’ behavior and direct how we conduct our business. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities and are also demonstrated through teamwork, leadership, and everyday interactions. +Diversity and Inclusion +We believe that our culture and core values are strengthened through diversity and inclusion. Our diversity initiatives include—but are not limited to—our practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions; transfers; social and recreational programs; layoffs; terminations; and the ongoing development of a work environment built on the premise of gender and diversity equity. These initiatives include targeted recruitment of women in technical, engineering and sales +6 +roles, leadership development programs for women, periodic evaluation of our workforce demographics as compared to the demographics in the workforce market, and an affirmative effort to attract, recruit, retain and train a diverse workforce that is representative of the populations in the regions in which we do business. Metrics that track performance against these goals are regularly reported to and monitored by the Compensation Committee of our Board of Directors. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the variable size of certain individual customer revenue transactions, which can cause fluctuations in revenue from quarter to quarter and which may be inconsistent with the underlying business or general economic trends. For example, in our T&M segment, government procurement and contracting practices can result in material fluctuations in our backlog and revenues. +Information about our Executive Officers +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of the Board of Directors. +Name +Age +Position +Gregory A. Woods +64 +President, Chief Executive Officer and Director +David S. Smith +66 +Vice President, Chief Financial Officer and Treasurer +Stephen M. Petrarca +60 +Vice President—Operations +Michael J. Natalizia +59 +Vice President Technology & Strategic Alliances, Chief Technology Officer +Tom Carll +56 +Vice President and General Manager—Aerospace +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to 2010, Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts. +Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. Mr. Smith has also held a variety of senior finance positions at semiconductor and manufacturing companies, including Senior Vice President and Chief Financial Officer of Standard Microsystems Corporation, a global semiconductor company, from 2005 to 2008 and Vice President, Finance and Chief Financial Officer of both Dover Corporation, a diversified global manufacturing company, from 2000 to 2002 and Crane Company, a diversified manufacturing company from 1994 to 2000. +Mr. Petrarca was appointed Vice President—Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +7 +Mr. Carll joined the Company in 1989 and has held the position of Vice President and General Manager—Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product group and from its formation in 2004, the AstroNova Aerospace business group. +Code of Ethics +We have adopted a Code of Conduct which applies to all of our directors, officers and employees of the Company, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on our website, (www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” We intend to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, principal accounting officer, or persons performing similar functions by posting such information on our website. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These filings are also accessible on the SEC’s website at http://www.sec.gov. +Item 1A. Risk Factors +The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +Business and Industry Risks: +The structural impacts on the economy as a result of the COVID-19 pandemic and its aftermath have adversely affected and will likely continue to adversely affect our revenues, results of operations and financial condition. +All of our global operations were materially adversely affected by the worldwide COVID-19 pandemic and the related supply-chain disruptions. The aftermath of the immediate severe impacts of COVID-19 on our operations and financial performance, the changes in our customers’ purchasing behavior, the post-pandemic impact of inflation from macroeconomic factors, and the continued and lingering structural impacts on our global supply chain, particularly with respect to the availability and costs of electronic components, have made planning for customer demand and manufacturing production more difficult. Also, it has led to a rise in the cost of a number of classes of acquired goods for both the T&M and PI segments. We will continue to evaluate the impact of COVID-19 and its aftermath effects on our business, results of operations and cash flows throughout fiscal 2024, including the potential impacts on various estimates and assumptions inherent in the preparation of our condensed consolidated financial statements. +Since the COVID-19 pandemic began we have experienced difficulties in obtaining raw materials and components for our products. Some of the structural dislocations in the global economy that were triggered by the pandemic are prolonging these difficulties. Particularly with respect to certain electronic components for legacy products in our T&M segment, availability has been curtailed and may not recover, and in certain cases we have had to accelerate product redesign efforts and quickly transition customers to products with more viable +8 +long-term product configurations. We expect to incur substantial costs in doing so but we are unable to accurately estimate the financial impact due to the rapidly changing environment. We also have had to incur additional costs, such as higher shipping fees (i.e., air rather than ocean freight) and though these have abated to a degree, they have not returned to pre-pandemic levels. These factors negatively impacted our efficiency, delayed shipments in each of the fiscal quarters of 2023, and caused what we believe are product shortages. We are addressing these issues through long-range planning and procuring higher inventory levels for affected items to help mitigate potential shortages whenever practicable. For our T&M segment, we are also monitoring and reacting to extended lead times on electronic components, and utilizing a variety of strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have taken actions to increase regular contact with our essential vendors and increased our forecasting horizon for our products to help us better manage our supply chain. In some cases, we are working with our vendors to help them procure components. Similarly, in our PI segment, we are increasing our inventory levels to ensure the adequacy of the supplies we sell to customers who use our printers. Our strategies to counteract these supply chain dislocations have significantly increased the amount of inventory we maintain to support our product sales. We have also experienced several situations where component shortages and scarcity have required us to pay significantly higher costs to obtain those components, particularly electronic components and circuit board assemblies in the T&M segment and inks and printer machine parts in the PI segment. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our business and results of operations. +Our PI business was impacted by the COVID-19 pandemic as it limited our ability to meet with customers to demonstrate our products at trade shows and on-site in their facilities was curtailed. We partially countered this through a variety of virtual, on-line selling and digital marketing strategies, a number of which we continue to emphasize today. The degree to which post-pandemic selling practices will revert to those that were dominant previously, and the ultimate mix of customer engagement methods of face-to-face selling versus digital selling methods remains uncertain. For example, throughout fiscal 2023 we have attended numerous trade shows, but demand generation through those selling methods have not fully recovered to pre-pandemic levels. We believe that digital marketing has become a more permanent element of our go-to-market strategy. This has required us to shift resources to those technologies. Further, in the PI segment, the timely and reliable delivery of acceptable quality printer components from certain of our suppliers has declined post-pandemic, causing us to incur additional direct procurement costs, to carry higher inventories to assure adequate supplies to satisfy customers, to incur additional warranty and technical service costs to offset those impacts and to accelerate alternative technology development. +The aerospace industry, which we serve through our aerospace product line, was significantly disrupted by the COVID-19 pandemic, both inside and outside of the United States because of the severe decline in the demand for air travel, demand for aircraft, and a general curtailment of aircraft production rates. This had a material adverse impact on our financial results. Now that air travel demand and aircraft production demand have substantially improved, the direct and secondary impacts of the demand decline have abated, but demand for our products has not yet fully recovered to pre-pandemic levels. Our current belief is that it may take two or more years before we reach full revenue recovery, and lingering impacts of the COVID-19 pandemic on the economic structure of the airline industry, and general economic conditions could still become a negative factor for demand for aircraft, which could stall or reverse current favorable trends. If this were to happen individually or in combination, these factors would be difficult for us to respond to quickly, which could have a material adverse impact on our business operations and financial results. +9 +Our operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated. +Any decline in our customers’ markets or their general economic conditions would likely result in a reduction in demand for our products. For example, the 2020 grounding, suspension and subsequent slow restart of production of the Boeing 737 MAX, coupled with the negative impact of the COVID-19 pandemic on the demand for new aircraft and travel, reduced the demand for our airborne printers, as well as for the related repairs and supplies which has negatively affected our results of operations. While these effects have been abating, demand remains lower than it was pre-pandemic, and currently the outlook is uncertain. While demand for air travel has recently increased, the impact of another viral pandemic or other widespread health emergency could negatively impact this trend in the future. Also, we believe that the pandemic has negatively impacted our customers’ financial capacity materially enough to alter their strategies and industry dynamics so as to make changes in their demand more volatile. These factors may in particular cause demand for aircraft to grow slowly or decline, which would reduce demand for our products, and in turn harm our results of operations, financial position and cash flows. +Our future revenue growth depends on our ability to develop and introduce new products and services on a timely basis and achieve market acceptance of these new products and services. +The markets for our products are characterized by evolving technologies which in turn effect our product introduction cycles. Our future success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate our competitors’ development of new products, and maintain high levels of product quality and reliability. We spend a significant amount of time and effort on the development of our airborne and color printer products as well as our data acquisition and recorder products. Failure to meet our customers’ changing business needs or to further develop any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results. +As we introduce new or enhanced products, we must also successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. Additionally, when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or our plans for future support of existing products may cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +Operational and Business Strategy Risks: +We are dependent upon contract manufacturers for some of our products. If these manufacturers do not meet our requirements, either in volume or quality, then we could be materially harmed. +We subcontract the manufacturing and assembly of certain of our products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Disruptions in the global supply chain; +• +Limited control over the manufacturing process; +10 +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; +• +Reduced control over delivery schedules, manufacturing yields, quality and costs and +• +Exposure to rapid unplanned cost increases that cannot be adequately recovered by customer price increases due to market competition or contractual constraints. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture or provide these products in required volumes, fails to meet our quality standards, or imposes rapid price increases that we cannot recover in the market, we will have to identify alternate qualified subcontractors, take over the manufacturing ourselves, or redesign our products to use components from other suppliers. Additional qualified subcontractors may not be available or may not be available on a timely or cost-competitive basis. Any interruption in the supply, increase in the cost of the products manufactured by a third-party subcontractor or failure of a subcontractor to meet quality standards could have a material adverse effect on our business, operating results and financial condition. +For certain components, assembled products and supplies, we are dependent upon single or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and supplies used in the manufacture of our products from a single source or limited supplier sources. If the supply of a key component, assembled products or certain supplies were to be delayed or curtailed or, in the event a key manufacturing or sole supplier delays shipment of such components or assembled products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. For example, as a result of the global COVID-19 pandemic, there was a disruption to our supply chain due to the delays of component shipments from our vendors in China and other jurisdictions in which normal business operations were disrupted. Our business, results of operations and financial position could also be adversely affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source. +Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply components, assembled products or supplies in required volumes or at acceptable prices, we will have to identify and qualify acceptable replacements or redesign our products with different components. Alternative sources may not be available, or product redesign may not be feasible on a timely basis. For example, in fiscal 2023, we experienced increased difficulty in obtaining certain technology-based parts, components and supplies from the largest single supplier of our PI segment at stable or predictable prices. Additionally, we experienced repeated significant quality problems with that supplier. We have responded to these issues by increasing our inventories of those products to mitigate supply risk, negotiating quality related cost reimbursements, and in some cases, accelerating our development of PI products that rely on alternative suppliers. Any interruption in the supply of or increase in the cost of the components, assembled products and supplies provided by single or limited source suppliers could have a material adverse effect on our business, operating results, and financial condition. +We face significant competition, and our failure to compete successfully could adversely affect our results of operations and financial condition. +We operate in an environment of significant competition, especially in the markets in which we sell our PI printers and T&M data acquisition products. This competition is driven by rapid technological advances, evolving industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete based +11 +on technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products or services with features that could adversely affect the competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, our customers could seek alternative solutions from our competitors and we could lose market share, which could materially and adversely affect our business, results of operations and financial position. +Our profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure . +Our success depends on our ability to obtain adequate pricing for our products and services. For a variety of complex reasons, many of which were triggered by the COVID-19 pandemic, the general economy has been significantly impacted by supply chain disruptions. Examples of some of these impacts on us include reduced availability of certain electronic components and the need to pay premium prices to obtain them, and noticeably higher costs for a wide array of other parts and raw material components in both of our product segments. This has been exacerbated by increases in the cost of transportation to expedite incoming components and supplies. In many cases, we have had to expedite delivery of critical materials through significantly higher cost airfreight methods. Our ability to offset these effects through pricing actions for our products and services may not prove sufficient to offset these or further cost increases. Attempts to increase prices may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially adversely affected. +We are also continually reviewing our operations with a view towards reducing our cost structure, including but not limited to reducing our labor cost-to-revenue ratio, improving process and system efficiencies and outsourcing certain internal functions. From time to time, we also engage in restructuring actions to reduce our cost structure. However, if these efforts to constrain the cost of our operations are inadequate to offset higher product and employee wage costs, our results of operations and financial position could be materially adversely affected. +Our inability to adequately enforce and protect our intellectual property defend against assertions of infringement or the loss of certain licenses could prevent or restrict our ability to compete. +We rely on patents, trademarks, licenses, and proprietary knowledge and technology, both internally developed and acquired, in order to maintain a competitive advantage. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design technologies around the intellectual property protections or licenses that we currently own. The loss of the trademarks QuickLabel, TrojanLabel, ToughWriter and ToughSwitch or the loss of the licenses provided under the Honeywell Agreement could have a material adverse impact on our business. Operating outside the United States also exposes us to additional intellectual property risk. The laws and enforcement practices of certain jurisdictions in which we operate do not protect our intellectual property rights to the same extent as in the United States. Any diminution in our ability to defend against the unauthorized use of these rights and assets could have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement, which could result in significant costs and divert our management’s focus away from operations. +We have significant inventories on hand. +We maintain a significant amount of inventory, and as a result of recent supply chain disruptions and announced or anticipated price increases from suppliers, we have further increased the amount of inventory we maintain on hand to ensure we are able to meet market demand for our products at a reasonable price. These +12 +increases have been concentrated in label printing machines and supplies sold by our PI business, as well as in electronic components and assemblies in our T&M business. We maintain allowances for slow-moving and obsolete inventory that we believe are adequate, but any significant unanticipated changes in future product demand or market conditions, could have an impact on the value of inventory and adversely affect our business, operating results and financial condition. +We could incur liabilities as a result of installed product failures due to design or manufacturing defects. +We have incurred and could in the future incur additional liabilities because of product failures due to design or manufacturing defects. Our products may have defects despite our internal testing or testing by customers. These defects could result in, among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance or damage to our reputation. We could be subject to material claims by customers and may incur substantial expenses to correct any product defects. While in the past, we have successfully obtained partial compensation from suppliers for their contribution to product quality issues, we may not be successful in such a recovery in the future, and these recoveries have not in the past and are not in the future likely to fully offset the full financial impact on us. For example, in fiscal 2023, the quality of products obtained from one of the key suppliers to our PI segment declined and we were unable to detect latent defects in their products in a timely manner, which resulted in our incurring increased technical service and warranty expenses. We obtained partial compensation from that supplier, but this was insufficient to fully cover all of our costs related to this issue. We also believe we have experienced demand declines as a result of customers’ perceptions of the quality defects related to this supplier. +In addition, through our acquisitions, we have assumed, and may in the future assume, liabilities related to products previously developed by an acquired company that may not have been subjected to adequate product development, testing and quality control processes, and may have unknown or undetected defects. Some types of defects may not be detected until the product is installed in a user environment. This may cause us to incur significant warranty, repair or re-engineering costs. As such, it could also divert the attention of engineering personnel from product development efforts, which may result in increased costs and lower profitability. +We could experience a significant disruption in or security breach of our information technology system which could harm our business and adversely affect our results of operations. +We rely on on-premise and cloud-based information technology systems, some of which are managed by or licensed from third parties, to support many critical aspects of our business, as well as to process, transmit and store our own electronic proprietary or confidential information, and confidential information of customers, employees, suppliers and others, including personally identifiable information, credit card data, and other proprietary confidential information. These systems are vulnerable to damage, disruptions and/or shutdowns due to attacks by cyber-criminals, data breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events or other unforeseen events. These vulnerabilities could interfere with our operations, compromise our data processing capacity and the security of our information and that of our customers and suppliers, and expose us to liability which could adversely impact our business and reputation. We actively manage these risks through a variety of hardware and software-based techniques that we own, license or otherwise procure from third parties under contract to safeguard our systems, and we own or procure from third parties system data storage redundancy and disaster recovery capability. In particular, we have increased our investment in tools, techniques and training that we believe will reduce our vulnerability to attacks from cyber-criminals. However, due to the complexity of our systems, and especially due to the ever-increasing sophistication of cyber-criminals, there is no assurance that our efforts will be sufficient to prevent cyber-attacks, security breaches, or the other potential exploitation of vulnerabilities or systems failures. In any such circumstance, our system redundancy and other disaster recovery planning may be ineffective or inadequate. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of them to date has had a material impact. However, in the future, such events could result in legal claims or proceedings, liability or +13 +penalties under privacy laws, disruption in operations, and damage to our brand and reputation, all of which could adversely affect our business, operating results and financial condition. +We maintain insurance for a variety of cybersecurity risks to mitigate their possible impact, but because of the prevalence of claims in the market for cybersecurity insurance, the cost for that insurance has increased and the underwriting criteria to obtain such insurance has become far more demanding. There is no assurance that we will be able to obtain such insurance in the future, despite our substantial investments in cybersecurity, and if we are able to do so, it may be at substantially higher costs. In addition, in response to these higher costs, we may choose to reduce the amount of insurance we maintain because we believe our improvements in our cybersecurity profile have reduced our risk exposure relative to the increased cost of insurance. If our risk assessments prove incorrect and we were to have a loss not fully covered by insurance, our financial condition and results of operations could be materially negatively impacted. +We depend on our key employees and other highly qualified personnel and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees, as well as challenges with respect to the management of human capital resources, could compromise our future success and our business could be harmed. +Our future success depends upon our ability to attract and retain, through competitive compensation and benefits programs, professional and executive employees, including sales, operating, marketing, and financial management personnel as well as our ability to manage human capital resources. There is substantial competition for skilled personnel, and the failure to attract, develop, retain and motivate adequately qualified personnel could negatively impact our business, financial condition, results of operations and prospects. In order to hire new personnel or retain or replace our key personnel, we must maintain competitive compensation and benefits, and we may also be required to increase compensation, which would decrease net income. Additionally, several key employees have special knowledge of customers, supplier relationships, business processes, manufacturing operations, regulatory and customer quality compliance management, and financial management issues. The loss of any of these employees as the result of competitive compensation pressures or ineffective management of human capital resources could harm our ability to perform efficiently and effectively until their knowledge and skills are replaced, which might be difficult to do quickly, and as a result could have a material adverse effect on our business, financial condition, and results of operations. Failure to retain or attract key personnel could impede our ability to grow and could result in our inability to operate our business profitably. +Although we have not experienced any material disruptions due to labor shortages to date, we have observed an overall tightening and increasingly competitive labor market, and the demand for qualified individuals is expected to remain strong for the foreseeable future. Any sustained labor shortage or increased turnover rates within our employee base, could lead to increased costs and lost profitability and could otherwise compromise our ability to efficiently operate our business. +We may record future impairment charges, which could materially adversely impact our results of operations. +We test our goodwill balances annually, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit level and monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Declines in the future performance and cash flows of a reporting unit or asset group, changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses, or changes in other key assumptions, may result in the recognition of significant asset impairment charges, which could have a material adverse impact on our results of operations. +We also review our long-lived assets including property, plant and equipment, and other intangibles assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. +14 +Factors we consider include significant under-performance relative to expected historical or projected future operating results, significant negative industry or economic trends and our market capitalization relative to net book value. We may be required in the future to record a significant charge to earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such charges could have a significant adverse impact on our results of operations and our financial condition. +Financial and Economic Risks: +We face risks related to recession, inflation, stagflation and other economic conditions . +Customer demand for our products may be impacted by weak economic conditions, inflation, stagflation, recession, rising interest rates, equity market volatility or other negative economic factors in the U.S. or other nations. For example, under these conditions or the expectation of such conditions, our customers may cancel orders, delay purchasing decisions or reduce their use of our services. In addition, these economic conditions could result in higher inventory levels and the possibility of additional charges if we request changes in delivery schedules or if suppliers incur additional costs that they pass on to us. Further, in the event of a recession or threat of a recession, our suppliers, distributors, and other third-party partners may suffer their own financial and economic challenges and, as a result, they may demand pricing accommodations, delay payment, or become insolvent, which could harm our ability to meet our customers’ demands or collect revenue or could otherwise harm our business. Similarly, disruptions in financial or credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors and might cause us to not be able to continue to access preferred sources of liquidity when we would like if at all, and our borrowing costs could increase. Thus, if general macroeconomic conditions continue to deteriorate, our business and financial results could adversely affect our business, operating results and financial condition. +In addition, we are subject to risks from inflation and increasing market prices of certain components, supplies, and raw materials, which are incorporated into our end products or used by our suppliers to manufacture our end products. These components, supplies and other raw materials have from time to time become restricted. General market factors and conditions have in the past and may in the future affect pricing of such components, supplies and commodities. +Economic, political and other risks associated with international sales and operations could adversely affect our results of operations and financial position. +Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect sales to customers outside the U.S., accounted for approximately 35% of our total revenue for fiscal 2023, and we anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, contractors and facilities located outside the U.S. Accordingly, our business, operating results and financial condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +15 +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Failure to comply with complex and rapidly changing government economic sanctions against other countries, especially arising from responses to armed conflict; +• +Unexpected changes in regulatory requirements; +• +Uncertainty surrounding the implementation and effects of the United Kingdom’s withdrawal from the EU, commonly known as “Brexit”; and +• +Geopolitical turmoil, including terrorism, war and public health disruptions, such as that caused by the COVID-19 pandemic or Russia’s invasion of Ukraine. +To date, the impact of the Russian invasion of Ukraine and the resulting governmental sanctions and our decision to halt all activities in the affected areas has had an immaterial direct impact on our revenues. We believe, however, that the impact on the economies of Western Europe, especially Germany, which is the largest non-North American market for our products, has had a negative impact on demand for our products. +Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods . +As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is based on the tax rates in effect where we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each jurisdiction. Our effective tax rate may vary as a result of numerous factors, including changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, whether we secure or sustain acceptable arrangements with tax authorities, adjustments to the value of our uncertain tax positions, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations. +Changes to tax laws and regulations or changes to the interpretation thereof, the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, could have a material impact on our estimates of our effective tax rate and our deferred tax assets and liabilities. The impact of these factors may be substantially different from period-to-period. In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our financial statements. +We may have exposure to additional tax liabilities, which could negatively impact our income tax expense, net income and cash flow. +We are subject to income and other taxes in both the U.S. and the foreign jurisdictions in which we operate. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit by both domestic and foreign tax authorities and to the prospective and retrospective effects of changing tax regulations and legislation. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the amounts recorded in our consolidated financial statements and may materially affect our income tax benefit or expense, net loss or income, and cash flows in the period in which such determination is made. +16 +Deferred tax assets are recognized for the expected future tax consequences of temporary differences between the carrying amount for financial reporting purposes and the tax bases of assets and liabilities, and for net operating losses and tax credit carry forwards. In some cases, we may record a valuation allowance to reduce our deferred tax assets to estimated realizable value. We review our deferred tax assets and valuation allowance requirements quarterly. If we are unable to demonstrate that it is more likely than not that we will not be able to generate sufficient future taxable income to realize the net carrying value of deferred tax assets, we will record a valuation allowance to reduce the deferred tax assets to estimated realizable value, which could result in a material income tax charge. As part of our review, we consider positive and negative evidence, including cumulative results of recent years. +If we are unable to successfully comply with our credit agreement with Bank of America or secure alternative financing, our business and financial condition could be materially adversely affected. +Our credit agreement with Bank of America requires us, among other things, to satisfy certain financial ratios on an ongoing basis, consisting of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and an asset coverage ratio. We are also required to comply with other covenants and conditions, set forth in the credit agreement, including, among others, limitations on our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the credit agreement. If we were to violate the terms of the credit agreement and we were unable to renegotiate its terms at that time or secure alternative financing, it could have a material adverse impact on us. +The agreements governing our indebtedness subject us to various restrictions that limit our ability to pursue business opportunities. +The credit agreement governing our credit facility with Bank of America, N.A., as amended, contains, and any future debt agreements may include, several restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to: +• +Incur future indebtedness; +• +Place liens on assets; +• +Pay dividends or distributions on our and our subsidiaries’ capital stock; +• +Repurchase or acquire our capital stock; +• +Conduct mergers or acquisitions; +• +Sell assets; and/or +• +Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness. +We may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may negatively impact our overall business. +We have made strategic investments in other companies, products and technologies, including our August 2022 acquisition of Astro Machine LLC and 2017 acquisition of TrojanLabel. We will continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that we will be able to identify suitable acquisition opportunities. In any acquisition that we complete, we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +17 +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative impact on operating results or other aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental impact on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse impact on our reputation; and +• +Respective operations, management and personnel will be compatible. +For example, in the recently acquired Astro Machine business, revenues are concentrated in a relatively small number of customers. Failure to satisfy the delivery requirements of those customers or to adequately respond to their evolving product requirements could cause us to lose one or more customers which would have a material adverse impact on our financial condition and results of operation due to lower revenue and could result in intangible asset impairment. +In certain instances, as permitted by applicable law and NASDAQ rules, acquisitions, such as the Astro Machine acquisition, may be consummated without seeking and obtaining shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in an acquisition, there can be no assurance that we will properly ascertain or assess such risks. +We may also divest certain businesses from time to time. Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If we are not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize the expected benefits of our acquisitions, divestitures or strategic partnerships, our business, results of operations and financial condition could be adversely affected. +Changes in our business strategy or restructuring of our businesses may increase our costs or otherwise affect the profitability of our businesses. +We continually review our operations with a view toward reducing our cost structure, including but not limited to reducing our labor cost-to-revenue ratio, improving process and system efficiencies and increasing our revenues and operating margins. As changes in our business environment occur, we may need to adjust our business strategies to meet these changes, or we may otherwise find it necessary to restructure our operations or particular businesses or assets. When these changes or events occur, we may incur costs to change our business strategy and may need to write down the value of assets or sell certain assets. In any of these events our costs may increase, and we may have significant charges or losses associated with the write-down or divestiture of assets. +18 +Adverse conditions in the global banking industry and credit markets could impair our liquidity or interrupt our access to capital markets, borrowings or financial transactions to hedge certain risks. +At the end of fiscal 2023, we had approximately $3.9 million of cash and cash equivalents. Our cash and cash equivalents are held in bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our financial position. +To date, we have been able to access financing that has allowed us to make investments in growth opportunities and fund working capital requirements as needed. In addition, we occasionally enter into financial transactions to hedge certain foreign exchange and interest rate risks. Our continued access to capital markets, the stability of our lenders and their willingness to support our needs, and the stability of the counterparties to our financial transactions that hedge risks are essential for us to meet our current and long-term obligations, fund operations, and fund our future strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could materially and adversely affect our business and financial condition. +Inadequate self-insurance accruals or insurance coverage for employee healthcare benefits could have an adverse effect on our business, financial results or financial condition. +In the U.S., we maintain an employee health insurance coverage plan on a self-insured basis backed by stop-loss coverage which sets a limit on our liability for both individual and aggregate claim costs. We record expenses based on actual claims incurred and estimates of the costs of expected claims, administrative costs, and stop-loss insurance premiums. +We record a liability for our estimated cost of U.S. claims incurred and unpaid as of each balance sheet date. Our estimated liability is recorded on an undiscounted basis and is based on historical trends and data provided by our insurance broker. Our history of claims activity is closely monitored, and liabilities are adjusted as warranted based on changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of losses. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, which could cause us to record additional expenses, which could adversely impact our business, financial condition, results of operations and cash flow. +Legal and Regulatory Risks: +Certain of our products require certifications by customers, regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business. +In certain industries and for certain products, such as those used in aircraft, we must obtain certifications for our products by customers, regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +We are subject to laws and regulations; failure to address or comply with these laws and regulations could harm our business and adversely affect our results of operations. +Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our products. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +19 +We are subject to regulatory constraints and compliance requirements due to our status as a publicly held company. Public company compliance costs are increasing due to the increase in SEC regulations and enforcement actions, and the heightened scrutiny that we and the public accounting industry face from the Public Companies Accounting Oversight Board. Additionally, certain new and proposed regulations in the State of Rhode Island, where we are headquartered, are likely to increase compliance costs. In some instances, the regulations may mandate action on our part for which, to our knowledge, no current technical means to comply exist. If enacted, the costs to comply with these regulations could have a material adverse impact on our business. +Our business outside of the United States exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, employee rights and protection, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. For example, the increased use of sanctions in U.S. international relations recently has increased our cost of compliance with the regulations intended to enforce them. +Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on the effectiveness of their internal control over financial reporting and any inability to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting, could adversely affect our results of operations, our stock price and investor confidence in our company. +We have identified a material weakness in our internal control over financial reporting and that weakness has led to a conclusion that our internal control over financial reporting and disclosure controls and procedures were not effective as of January 31, 2023. The material weakness related to our inability to maintain effective controls to properly identify and assess significant non-routine transactions. Management is taking action to remediate the deficiencies in its internal controls over financial reporting by augmenting resources in our financial organization. +If action to remediate this material weakness is not completed on a timely basis, or if other remediation efforts are not successful, we may, in the future, identify additional internal control deficiencies that could rise to the level of a material weakness or uncover other errors in financial reporting. +Failure to have effective internal control over financial reporting and disclosure controls and procedures could impair our ability to produce accurate financial statements on a timely basis, or provide reliable financial statements needed for business decision processes, and our business and results of operations could be harmed. Additionally, investors could lose confidence in our reported financial information and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. Also, failure to maintain effective internal control over financial reporting could result in sanctions by regulatory authorities. +Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our business. +Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. As such, our business is subject to and may be materially and adversely affected by compliance obligations and other liabilities under those environmental, health and safety laws and regulations. Certain of our products contain, and some of manufacturing operations use various substances which have been or may be deemed to be hazardous or dangerous. Thus, we have and will continue to generate a generally limited amounts of hazardous waste in our operations. We manage our compliance with laws and regulations and the proper mitigation of risks internally and through the input of external consultants and outside service providers and we believe we are in material compliance with all applicable environmental laws and regulations. We desire to reduce and ultimately eliminate any adverse environmental impact of our +20 +business and to comply with relevant laws and regulations. We expect this effort to affect our ongoing operations and require additional capital and operating expenditures. If we were to fail to manage our environmental compliance effectively, we could suffer economic or reputational harm. +Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, and any determination that we or any of our subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies. +Unauthorized access to personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights and compliance with laws designed to prevent unauthorized access of personal data could be costly. +We collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Security breaches or other unauthorized access to, or the use or transmission of, personal user information could result in a variety of claims against us, including privacy-related claims. There are numerous federal, state, local, and international laws and regulations regarding privacy and the storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are changing, inconsistent and conflicting and subject to differing interpretations. +We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. For example, in 2016 the European Commission adopted the General Data Protection Regulation (GDPR), a comprehensive privacy and data protection reform that became effective in May 2018. The GDPR, which is applicable to all companies processing data of European Union residents, imposes significant fines and sanctions for violations. These requirements are complicated and compliance is technically complex to maintain. We contract with outside experts to advise us, conduct internal and external compliance training, and believe we are currently in compliance, however, maintaining compliance has increased costs and diverted resources. Similarly, the California Consumer Privacy Act of 2018, which was enacted in June 2018 and came into effect on January 1, 2020, provides a new private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. +Additionally, other jurisdictions have enacted or are enacting data localization laws that require data generated in or relating to the residents of those jurisdictions to be physically stored within those jurisdictions. In many cases, these laws and regulations apply not only to transfers between unrelated third parties but also to transfers between us and our subsidiaries. All these evolving compliance and operational requirements impose significant costs that are likely to increase over time. +While we continue to assess these requirements and the ways they may impact the conduct of our business, we believe that we materially comply with applicable laws and industry codes of conduct relating to privacy and data protection. There is no assurance that we will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event we are found not to be in compliance with such laws or codes of conduct. +21 +Any failure or perceived failure by us (or any third parties with whom we have contracted to store such information) to comply with applicable privacy and security laws, policies or related contractual obligations or any compromise of security that results in unauthorized access to personal information may result in governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. In the case of such an event, our reputation may be harmed, we could lose current and potential users and the competitive positions of our various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations. +Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition. +Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, income taxes, and warranties, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition. +Item 1B. Unresolved Staff Comments +None. +Item 2. Properties +The following table sets forth information regarding our principal owned properties. The West Warwick property is subject to a security agreement and a mortgage in favor of the lender under our credit facility. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, United States +135,500 +Corporate headquarters, research and development, manufacturing, sales and service +Elk Grove Village, Illinois +34,460 +Astro Machine principal place of business +We also lease facilities in various other locations. The following information pertains to each location: +Location +Approximate +Square +Footage +Principal Use +Dietzenbach, Germany +18,630 +Manufacturing, sales and service +Copenhagen, Denmark +4,800 +R&D, sales and service +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service +Elancourt, France +4,150 +Sales and service +Irvine, California, United States +3,100 +Sales +Shah Alam, Selangor, Malaysia +2,067 +Sales +Guangzhou, China +1,253 +Sales and service +Maidenhead, England +1,021 +Sales and service +Shanghai, China +425 +Sales +Mexico City, Mexico +97 +Sales +The West Warwick facility is used by both of our business segments, but the Elk Grove facility and leased locations are primarily used by the PI segment. We believe our facilities are well maintained, in good operating condition and generally adequate to meet our needs for the foreseeable future. +22 +Item 3. Legal Proceedings +We are party to various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or cash flows. Additionally, because of the nature of our business, we may be subject in the future to lawsuits or other claims, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters and an unfavorable resolution of any of these matters could materially affect our future results of operations, cash flows or financial position. +Item 4. Mine Safety Disclosures +Not applicable . +23 +PART II +Item 5. +Market for the Registrant ’ s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock trades on the NASDAQ Global Market under the symbol “ALOT.” +We had approximately 390 shareholders of record as of April 10, 2023, which does not reflect shareholders with beneficial ownership in shares held in nominee name. +Stock Repurchases +During the fourth quarter of fiscal 2023, we made the following repurchases of our common stock: +Total Number +of Shares +Repurchased +Average +Price paid +Per Share ($) +Total Number of +Shares Purchased as +Part of Publicly +Announced Plans +or Programs +Maximum Number +of Shares That +May Be Purchased +Under the Plans +or Programs +November 1 – November 30 +— +— +— +— +December 1 – December 31 +678 +(a)(b) +11.70 +(a)(b) +— +— +January 1 – January 31 +— +— +— +— +(a) +An executive of the company delivered 442 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $11.67 per share and are included with treasury stock in the consolidated balance sheet. +(b) +An executive of the company delivered 236 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $11.75 per share and are included with treasury stock in the consolidated balance sheet. +Item 6. [Reserved] +Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis are meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts of cash flows from operations and outside resources, liquidity and certain other factors that may affect future results so as to allow investors to better view our company from management’s perspective. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and other financial information included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. Carefully review the “Forward-Looking Statements” and “Risk Factors” sections of this annual report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. +Overview +We are a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. We organize our structure around a core set of competencies, including research and +24 +development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following two segments: +• +Product Identification (“PI”) – offers color and monochromatic digital label printers, over-printers and custom OEM printers. PI also provides software to design, manage and print labeling and packaging images locally and across networked printing systems, as well as all related printing supplies such as pressure-sensitive labels, tags, inks, toners and thermal transfer ribbons used by digital printers. PI also provides on-site and remote service, spare parts and various service contracts. +• +Test and Measurement (“T&M”) – offers a suite of products and services that acquire data from local and networked data streams and sensors as well as wired and wireless networks. The T&M segment includes a line of aerospace printers used to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, clearances, arrival and departure procedures, NOTAMS, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. Aerospace products also include aircraft networking systems for high-speed onboard data transfer. T&M also provides repairs, service and spare parts. +On August 4, 2022, we completed the acquisition of Astro Machine, an Illinois-based manufacturer of printing equipment, including label printers, tabbers, conveyors, and envelope feeders, for aggregate consideration of $17.1 million. Astro Machine is reported as part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisition,” in our consolidated financial statements included elsewhere in this report for further details. +We market and sell our products and services globally through a diverse distribution structure of direct sales personnel, manufacturers’ representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. In fiscal 2023, 2022, and 2021, revenue from customers in various geographic areas outside the United States, primarily in Western Europe, Canada and Asia, amounted to $50.6 million, $49.3 million, and $45.1 million, respectively. +We maintain an active program of product research and development. We spent approximately $6.8 million in both fiscal 2023 and 2022, and $6.2 million in fiscal 2021 on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2024 and beyond. +We also continue to invest in sales and marketing initiatives by expanding and improving the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability. +COVID-19 Update +All of our global operations were materially adversely affected by the worldwide COVID-19 pandemic and the related supply-chain disruptions. In the aftermath of the immediate severe impacts of COVID-19 on our operations and financial performance the changes in our customers’ purchasing behavior, the post-pandemic impact of inflation from macroeconomic factors, and the continued and lingering structural impacts on our global supply chain, particularly with respect to the availability and costs of electronic components, have made planning for customer demand and manufacturing production more difficult. Also, it has led to a rise in the cost of a number of classes of acquired goods for both the T&M and PI segments. We will continue to evaluate the impact of COVID-19 and its aftermath effects on our business, results of operations and cash flows throughout fiscal 2024, including the potential impacts on various estimates and assumptions inherent in the preparation of the consolidated financial statements. +Since the COVID-19 pandemic began we have experienced difficulties in obtaining raw materials and components for our products. Some of the structural dislocations in the global economy that were triggered by the pandemic are prolonging these difficulties. Particularly with respect to certain electronic components for legacy +25 +products in our T&M segment, availability has been curtailed and may not recover, and as a result we have had to accelerate product redesign and as quickly transition customers to products with more viable long-term product configurations. We expect to incur substantial costs in doing so but are unable to accurately estimate the financial impact due to the rapidly changing environment. We also have had to incur additional costs, such as higher shipping fees (i.e., air rather than ocean freight) and though these have abated to a degree, they have not returned to pre-pandemic levels. These factors have negatively impacted our efficiency, have delayed shipments for each of the fiscal quarters of fiscal 2023, and have caused what we believe are product shortages. We are addressing these issues through long-range planning and procuring higher inventory levels for the affected items to help mitigate potential shortages whenever practicable. For our T&M segment, we are also monitoring and reacting to extended lead times on electronic components, and utilizing a variety of strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have taken actions to increase regular contact with our essential vendors and increased our forecasting horizon for our products to help us better manage our supply chain. In some cases, we are working with our vendors to help them procure components. Similarly, in our PI segment, we are increasing our inventory levels to ensure the adequacy of the supplies we sell to customers who use the printers we have sold to them. Our strategies to counteract these supply chain dislocations have significantly increased the amount of inventory we maintain to support our product sales. We have also experienced several situations where component shortages and scarcity have required us to pay significantly higher costs to obtain those components, particularly electronic components and circuit board assemblies in the T&M segment and inks and printer machine parts in the PI segment. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our business and results of operations. +Product Identification Update +The COVID-19 pandemic impacted our PI business by limiting our ability to meet with customers to demonstrate our products at trade shows and on-site in their facilities was curtailed. We partially countered this through a variety of virtual, on-line selling and digital marketing strategies, a number of which we continue to emphasize today. The degree to which post-pandemic selling practices will revert to traditional practices, and the ultimate mix of customer engagement methods of face-to-face selling versus digital selling methods are just starting to recover. For example, throughout fiscal 2023 we attended numerous trade shows, but demand generation through those selling methods has not fully recovered and digital marketing has, we believe, become a more permanent element of our go-to-market strategy. This has required us to shift resources to those technologies. Further, the reliability of timely delivery of acceptable quality printer components from one of our suppliers has deteriorated post-pandemic causing us to incur additional direct procurement costs to carry higher inventories to assure adequate supplies to satisfy customers, as well as causing us to incur additional warranty and technical service costs to offset those impacts and to invest considerable time and resources with that supplier to improve their performance. +Test & Measurement Update +The aerospace industry, which we serve through our aerospace product line, was significantly disrupted by the COVID-19 pandemic, because of the severe decline in the demand for air travel, demand for aircraft, and a general curtailment of aircraft production rates. This had a material adverse impact on our financial results. Although air travel demand and aircraft production demand have improved, the direct and secondary impacts of the demand decline have somewhat abated, they have not recovered completely. As a result, demand for our products has not fully recovered to pre-pandemic levels. We believe that it will be at least another two or more years before we reach full revenue recovery due to the lingering impacts of the pandemic era on the economic structure of the airline industry. General economic conditions could also still become a negative factor impacting demand for new aircraft, which could potentially stall or reverse current favorable trends. If this were to happen individually or in combination, these factors would be difficult to respond to, which could have a material adverse impact on our business operations and financial results. +26 +Results of Operations +Fiscal 2023 compared to Fiscal 2022 +The following table presents the revenue of each of our segments, as well as the percentage of total revenue and change from the prior year. +($ in thousands) +2023 +2022 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +P I +$ +103,089 +72.3 +% +13.4 +% +$ +90,915 +77.4 +% +T&M +39,438 +27.7 +% +48.5 +% +26,565 +22.6 +% +Total +$ +142,527 +100.0 +% +21.3 +% +$ +117,480 +100.0 +% +Net revenue in fiscal 2023 was $142.5 million, a 21.3% increase compared to net revenue of $117.5 million for fiscal 2022. Current year revenue through domestic channels was $91.8 million, an increase of 34.8% from prior year domestic revenue of $68.2 million. International revenue of $50.6 million for fiscal 2023 increased 2.7% compared to prior year international revenue of $49.3 million. Fiscal 2023 international revenue reflects an unfavorable foreign exchange rate impact of $3.5 million, compared to a favorable foreign exchange rate impact of $1.1 million in fiscal 2022. +Hardware revenue in fiscal 2023 was $42.4 million, an $11.0 million or 34.8% increase compared to fiscal 2022 hardware revenue of $31.5 million due to increased hardware sales in both the T&M and PI segments. T&M hardware sales increased 44.2% or $7.5 million compared to the prior year primarily due to increased sales in our aerospace printer product line. Current year hardware sales in the PI segment increased 23.9% or $3.5 million compared to the prior year, predominately as a result of the August 2022 acquisition of Astro Machine. The increase in PI hardware sales for the current year was slightly offset by a decline in sales of our TrojanLabel product line printers. +Revenue from supplies in fiscal 2023 was $82.1 million, a 12.1% or $8.8 million increase compared to fiscal 2022 supplies revenue of $73.2 million. Supplies revenue increased in both the PI and T&M segment in the current year, with the increase primarily due to the contribution of $6.7 million of supply sales from the newly acquired Astro Machine in the PI segment. Also contributing to the increase in current year supply revenue was the increase in paper supply revenue for the aerospace printers in the T&M segment and the increased sales of supplies in our TrojanLabel product line in the PI segment. +Service and other revenue in fiscal 2023 was $18.0 million, a 41.3% increase compared to fiscal 2022 service and other revenue of $12.7 million. The increase is due primarily to significantly increased repair and parts revenue for aerospace printer products in the T&M segment due to the impact of increased flight hour usage and pricing increases. Also contributing to the current year increase was Astro Machine parts revenues included since the acquisition, offset by modest declines in aftermarket parts sales for Quick Label related products in the PI segment. +Gross profit was $48.2 million for fiscal 2023, reflecting a 10.1% increase compared to fiscal 2022 gross profit of $43.7 million. Our gross profit margin of 33.8% in fiscal 2023 reflects a 3.4 percentage point decrease compared to fiscal 2022 gross profit margin of 37.2%. The lower gross profit margin for the current year compared to the prior year is primarily attributable to the inclusion of Astro Machine for the six months since its acquisition, because of the impact of its lower gross margin business model, plus the impact of the employment retention tax credit (“ERC”) in the prior year, which reduced manufacturing payroll taxes, a component of cost of revenue, in the amount of $1.7 million in the second quarter of the prior year. Lastly, excess royalties (above the minimum guaranteed royalty amount), which are payable in connection with our license from Honeywell to produce aircraft cockpit printers for two narrow-body aircraft programs increased due to higher volumes of sales. +27 +Operating expenses for the current year were $42.7 million, representing an 8.2% increase from the prior year’s operating expenses of $39.5 million. Specifically, selling and marketing expenses of $24.5 million in fiscal 2023 increased 5.5% from the prior year amount of $23.2 million. The increase in selling and marketing expenses for the current year is primarily due to a decrease in payroll taxes in the second quarter of the prior year related to the ERC, which reduced payroll taxes in the amount of $0.8 million, as well as the current year increase in employee wages and travel and entertainment expenses. The current year increase in selling and marketing expenses was partially offset by a decrease in commissions and advertising and trade show expenses. General and administrative expenses increased 19.7% to $11.4 million in the current year compared to $9.6 million in the prior year, primarily due to an increase in outside service fees and employee wages, and the impact of the ERC, which reduced manufacturing payroll taxes in the amount of $0.3 million in the third quarter of the prior year, partially offset by a decrease in bonus and advertising and trade show expenses. Research & development (“R&D”) costs in fiscal 2023 of $6.8 million remained relatively unchanged from fiscal 2022, as increases in wages and benefits were substantially offset by decreases in bonus and supplies and repair expenses. The R&D spending level for fiscal 2023 represents 4.8% of net revenue, compared to the prior year level of 5.7%. +Other expense in fiscal 2023 was $2.0 million compared to other income of $2.8 million in fiscal 2022. Current year expense includes $1.7 million of interest expense on our debt and revolving line of credit and $0.4 million of net foreign exchange loss, offset by net other income of $0.1 million. Prior year other income includes $4.5 million related to the forgiveness of the loan we received under the Paycheck Protection Program (the “PPP”), partially offset by $0.7 million related to the write-off of our Oracle EnterpriseOne ERP system and related prepaid service and maintenance contracts as a result of the full implementation of a new ERP system in our US-based operations in the fourth quarter of fiscal 2022, interest expense on debt of $0.7 million, and net foreign exchange loss of $0.3 million. +We recognized $0.7 million of income tax expense for the current fiscal year, resulting in an effective tax rate of 22.0% compared to 8.6% in fiscal 2022. The increase in the effective tax rate in fiscal 2023 from fiscal 2022 is primarily related to the absence of the impact of the PPP loan forgiveness, which is tax-exempt income that was a one-time item that reduced the rate in fiscal 2022. Specific items increasing the effective tax rate in fiscal 2023 include the change in reserves related to uncertain tax positions under ASC 740 and an increase in the valuation allowance recorded on our China net operating losses. This increase was offset by state taxes, return to provision adjustments, share-based compensation, R&D tax credits, and foreign derived intangible income (“FDII”) deduction. During fiscal 2022, we recognized $0.6 million of income tax expense for the prior fiscal year, resulting in an effective tax rate of 8.6%. Specific items decreasing the effective tax rate include PPP loan forgiveness tax-exempt income, R&D tax credits, foreign derived intangible income (“FDII”) deductions, and a change in reserves related to ASC 740 liabilities. This decrease was offset by state taxes, return to provision adjustments, and taxes on foreign earnings. The PPP loan forgiveness is excluded from taxable income. +Net income for fiscal 2023 was $2.7 million, or $0.36 per diluted share. Net income for fiscal 2022 was $6.4 million, or $0.88 per diluted share. The results for the current year were impacted by expenses of $0.7 million ($0.5 million net of tax, or $0.07 per diluted share) related to transaction costs of the Astro Machine acquisition. The results for the prior period were impacted by income of $4.5 million ($4.4 million net of tax, or $0.60 per diluted share) related to the forgiveness of our PPP loan, income of $2.1 million ($1.6 million net of tax, or $0.22 per diluted share) related to the net ERC and expense of $0.7 million ($0.5 million net of tax, or $0.07 per diluted share) related to the write-off of our Oracle EnterpriseOne ERP system and related prepaid service and maintenance contracts. +Fiscal 2022 compared to Fiscal 2021 +For a comparison of our results of operations for the fiscal years ended January 31, 2022, and January 31, 2021, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended January 31, 2022, filed with the SEC on April 18, 2022. +28 +Segment Analysis +We report two segments consistent with our product revenue groups: PI and T&M. Segment performance is evaluated based on the operating segment’s profit (loss) before corporate and financial administration expenses. The following table summarizes selected financial information by segment. +($ in thousands) +Revenue +Segment Operating Profit +(Loss) +Segment Operating Profit (Loss) +as a % of Revenue +2023 +2022 +2021 +2023 +2022 +2021 +2023 +2022 +2021 +P I +$ +103,089 +$ +90,915 +$ +90,268 +$ +7,889 +$ +10,411 +$ +12,885 +7.7 +% +11.5 +% +14.3 +% +T&M +39,438 +26,565 +25,765 +8,989 +3,398 +(1,032 +) +22.8 +% +12.8 +% +(4.0 +)% +Total +$ +142,527 +$ +117,480 +$ +116,033 +16,878 +13,809 +11,853 +11.8 +% +11.8 +% +10.2 +% +Corporate Expenses +11,435 +9,553 +9,420 +Operating Income +5,443 +4,256 +2,433 +Other Income (Expense), Net +(2,033 +) +2,778 +(254 +) +Income Before Income Taxes +3,410 +7,034 +2,179 +Income Tax Provision +749 +605 +895 +Net Income +$ +2,661 +$ +6,429 +$ +1,284 +Product Identification +Revenue from the PI segment increased 13.4% in fiscal 2023, with revenue of $103.1 million compared to revenue of $90.9 million in the prior year. The current year increase is attributable to the contribution of the newly acquired Astro Machine, which provided revenue of $12.5 million for the current year. Trojan Label related product supply revenue also grew in fiscal 2023 compared to the prior year due to the larger installed base of these printers. The current year increase in PI revenue was slightly offset by declines in the sales of Trojan label hardware products resulting from the market reaction to quality problems caused by quality and reliability issues we faced from one supplier. Quick Label revenues were essentially flat as compared to the prior year. At the current time, we expect PI revenue to increase in fiscal 2024 due to the impact of a full year of Astro Machine revenue and recovery in both hardware and supplies in the other product lines, partly as the result of new product introductions. PI current year segment operating profit was $7.9 million with a profit margin of 7.7%, compared to the prior year segment operating profit of $10.4 million and related profit margin of 11.5%. Despite the inclusion of $1.6 million in operating profit contribution from Astro Machine, the primary reason for the decline in operating profit and margin was the inclusion in fiscal 2022 of $1.4 million of net benefit from the ERC, which reduced payroll taxes in the segment. The decrease in current year segment operating profit and margin, was also due to the result of a higher relative mix of lower gross profit product sales, higher travel and trade show expense, and increased warranty expenses. +Test & Measurement +Revenue from the T&M product group was $39.4 million for fiscal 2023, a 48.5% increase compared to revenue of $26.6 million in the prior year. The current year increase in T&M revenue is primarily due to a 44.2% or $7.5 million increase in hardware sales resulting primarily from increased aerospace printer product unit volume. Demand for printers, especially for narrow body aircraft, has increased due to the post-pandemic recovery in air travel demand and new orders of airplanes and the corresponding increase in production rates. The sales of printers for wide-body aircraft have increased but at much slower rates compared with narrow body demand. Sales of ToughSwitch ethernet products also recovered to levels consistent with the fiscal 2019 through +29 +fiscal 2021 period after a large decline in fiscal 2022, and we currently expect comparable revenue from those products in fiscal 2024. Our current expectation is that printers narrow-body aircraft will continue to recover to pre-pandemic levels over the next two years, although at a slower rate than the recovery in fiscal 2023. We believe any recovery in shipments for larger wide-body aircraft will take longer. The increase in fiscal 2023 hardware revenue in the T&M segment was also impacted by $1.1 million in revenue recognized in the fourth as the result of successful claims for component cost increases for printer shipments to one customer throughout most of fiscal 2023 as described in Note 3, “Revenue Recognition,” in our consolidated financial statements included elsewhere in this report. In the fourth quarter, we recognized revenue of $0.8 million in connection with a new Asset Purchase and License Agreement with Honeywell Inc. (“New HW Agreement”) as described in Note 12, “Royalty Obligation,” in our consolidated financial statements included elsewhere in this report. +The current year increase in T&M revenue was additionally favorably impacted by increased repair, parts and paper supply revenue related to aerospace printers, as flight hours and product utilization increased. At this time, we believe the outlook for T&M supplies, service and other revenue is favorable as the expected higher flight hours in commercial aviation should correlate favorably to higher aerospace printer supplies, parts and repair revenue. T&M current year segment operating profit was $9.0 million resulting in a 22.8% profit margin compared to the prior year segment operating profit of $3.4 million and related operating margin of 12.8%. The increased profit and margins were primarily attributable to the robust turnaround in revenue, particularly in repair, parts and supplies revenues at high margins, and were offset by the impact of higher components costs, as well as the fact that prior year’s operating profit included the impact of $0.8 million in net employee retention tax credits that reduced manufacturing and operating costs. Also contributing to the increase was the favorable impact in the fourth quarter of the receipt of improved pricing on certain contracts that related to the entire year and the impact of the New HW Agreement. Selling, marketing and administrative expense grew in total by $0.6 million in support of the revenue growth, which was a significantly lower rate than revenue growth, demonstrating favorable operating leverage. +Liquidity and Capital Resources +Overview +Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. In fiscal 2023, we used our credit facilities, as further described below, to acquire Astro Machine. We also used our credit facilities and operating cash flow to fund increases in inventories. Substantial increases in inventories were the result of the need to support higher levels of shipments in the aerospace product lines within our T&M segment, and the buildup of inventory buffers to respond to supply chain risks. In the fourth quarter of fiscal 2023, we were able to reduce our outstanding line of credit balance by $4.0 million. Capital spending was very low in fiscal 2023 compared to our historical levels of spending. +We believe that in the coming year, cash flow generation from operations and available unused credit capacity under our credit facility will support our anticipated needs. In fiscal 2024 (after required debt amortization and payment of minimum guaranteed royalty payments to Honeywell), we will be focused on inventory reduction and reduction of debt outstanding under our revolving credit facility, to the degree possible as constrained by supply chain management challenges. We also anticipate that we will have the capacity to spend $1.5 million to $2.0 million in capital to upgrade production machinery to support planned revenue growth and cost reduction objectives. Finally, if further acquisition opportunities develop that would require additional cash above our current available capacity, based on regular communication with our lender, we believe that our current operating performance and the reduction in leverage ratios as measured by the covenants within our credit facilities since the acquisition of Astro Machine would permit us to obtain sufficient additional debt financing, barring any unforeseen changes in the credit and capital markets. +. +30 +In connection with our purchase of Astro Machine on August 4, 2022, we entered into a Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment”) with Bank of America, N.A., as lender (the “Lender”). The Second Amendment amended the Amended and Restated Credit Agreement dated as of July 30, 2020, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of March 24, 2021, and the LIBOR Transition Amendment, dated as of December 24, 2021 (the “Existing Credit Agreement,” and the Existing Credit Agreement as amended by the Second Amendment, the “Amended Credit Agreement”), between the Company and the Lender. +The Amended Credit Agreement provides for (i) a new term loan in the principal amount of $6.0 million, which term loan was in addition to the existing term loan outstanding under the Existing Credit Agreement in the principal amount of $9.0 million as of the effective date of the Second Amendment, and (ii) an increase in the aggregate principal amount of the revolving credit facility available thereunder from $22.5 million to $25.0 million. Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. +While we expected that as a result of the impact of the COVID-19 pandemic, some of our customers would experience liquidity pressure and be unable to pay us for products on a timely basis, in general, our recent receivables collection experience has been consistent with our historical experience and a significant deterioration in receivables collection has not occurred. +In response to the COVID-19 pandemic and related economic dislocation, we have implemented and will continue to implement a variety of expense reduction and cash preservation initiatives. On April 27, 2020, our board of directors suspended our quarterly cash dividend beginning with the second quarter of our fiscal year 2021. +At January 31, 2023, our cash and cash equivalents were $3.9 million. During fiscal 2023, we borrowed a net of $15.9 million on our revolving line of credit, and at January 31, 2023, we had $9.1 million available for borrowing under that facility. +Indebtedness +Term Loan +The Amended Credit Agreement requires that the term loan be paid in quarterly installments on the last day of each of our fiscal quarters over the term of the Amended Credit Agreement on the following repayment schedule: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2022 through July 31, 2023 is $375,000; and the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2023 through April 30, 2027 is $675,000. The entire remaining principal balance of the term loan is required to be paid on August 4, 2027. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than August 4, 2027, and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate, on such date. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. +The loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. +31 +Amounts repaid under the revolving credit facility may be reborrowed, subject to our continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. +The interest rates under the Amended Credit Agreement are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the Amended Credit Agreement (or, in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60% to 2.50% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate, (iii) the BSBY Rate plus 1.00%, or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.50% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.35% based on our consolidated leverage ratio. +We must comply with various customary financial and non-financial covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and a minimum consolidated asset coverage ratio. The primary non-financial covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on our or our subsidiaries’ capital stock, to repurchase or acquire our or our subsidiaries’ capital stock, to conduct mergers or acquisitions, to sell assets, to alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of our or our subsidiaries’ business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Second Amendment. As of January 31, 2023, we believe we are in compliance with all of the covenants in the Credit Agreement. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests we hold in ANI ApS, AstroNova GmbH and AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island, and are guaranteed by, and secured by substantially all of the personal property assets of Astro Machine. +PPP Loan +On May 6, 2020, we entered into a Loan Agreement with and executed a promissory note in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed $4.4 million (the “PPP Loan”) from Greenwood pursuant to the Paycheck Protection Program (the “PPP”) administered by the United States Small Business Administration (the “SBA”) and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020. The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020 (the “PPP Flexibility Act”), which was enacted on June 5, 2020. +The PPP Loan, which would have matured on May 6, 2022, was unsecured and bore interest at a rate of 1.0% per annum, accruing from the loan date. +32 +On June 15, 2021, Greenwood notified us that the SBA approved our application for forgiveness of the entire $4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, we recorded a $4.5 million gain on the extinguishment of debt in Other Income (Expense) in our condensed consolidated income statement for the year ended January 31, 2022. +Cash Flow +The statements of cash flows for the years ended January 31, 2023, 2022, and 2021 are included on page F-9 of this Form 10-K. Net cash used by operating activities was $2.9 million in fiscal 2023 compared to net cash provided by operating activities of $1.4 million in the previous year. The increase in net cash used by operations for the current year is primarily due to an $11.5 million increase in cash used for working capital. The changes in accounts receivable, inventory, income taxes, accounts payable and accrued expenses for the current year decreased cash by $14.3 million in fiscal 2023 compared to $2.8 million in the prior year. The increase in cash used for operations for fiscal 2023 was partially offset by the $3.1 million of ERC receivable received in the first quarter of the current year. Cash from operations for fiscal 2022 was also impacted by the $3.1 million ERC receivable and the $4.5 million gain on the forgiveness of the PPP Loan. +The accounts receivable balance increased to $21.6 million at January 31, 2023, compared to $17.1 million at January 31, 2022. The increase in the accounts receivable balance is related to sales product mix in fiscal 2023 compared to the prior year, as well as the addition of Astro Machine. The days sales outstanding increased to 49 days at year end compared to 45 days at the end of fiscal 2022 contributing to the higher receivables balance at January 31, 2023. The days sales outstanding increase in the current year is due to customer mix, as aerospace receivables typically take longer to collect. +The year-end inventory balance increased to $51.3 million at January 31, 2023 versus $34.6 million at January 31, 2022, a $16.7 million increase from the prior year end. The increase in our inventory balance is primarily due to difficulty in the supply chain environment, including increased pricing and long lead times to obtain components and supplies, which has required us to increase our component and supply buffer stock to support the demands of our customers in our PI segment. We have also experienced increased inventory levels related to our T&M products to maintain our targeted inventory levels as a result of increased sales in that segment and parts shortage issues. In addition, the acquisition of Astro Machine resulted in increased levels of inventory to support their operations. Inventory days on hand increased to 176 days at the end of the current quarter from 156 days at the prior year end. This increase in working capital has been funded in part by borrowings under our credit facilities and has increased our interest expense. +Net cash used by investing activities for fiscal 2023 was $17.2 million, which includes $17.0 million related to the acquisition of Astro Machine and $0.2 million for capital expenditures. +Net cash provided by financing activities for fiscal 2023 was $18.8 million. Cash provided from financing activities for fiscal 2023 includes $15.9 million for borrowings under the revolving line of credit and $6.0 million of proceeds from long term borrowings. Cash outflows for financing activities for fiscal 2022 include principal payments on long-term debt and the guaranteed royalty obligation of $1.0 million and $2.0 million, respectively. +Fiscal 2022 compared to Fiscal 2021 +For a comparison of our cash flow for the fiscal years ended January 31, 2022 and January 31, 2021, see “Part II, Item 7. Management’s Discussion and Analysis of Liquidity and Capital Resources” in our annual report on Form 10-K for the fiscal year ended January 31, 2022, filed with the SEC on April 18, 2022. +Contractual Obligations, Commitments and Contingencies +As of January 31, 2023, we had contractual obligations related to lease arrangements, debt and royalty obligation arrangements and purchase commitments. +33 +The lease arrangements are for certain of our facilities at various locations worldwide. As of January 31, 2023, we had fixed lease payment obligations of $0.8 million, with $0.3 million due within 12 months. Refer to Note 13, “Leases,” in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details. +Debt arrangements under our Amended Credit Agreement with Bank of America, N.A., consist of the balance due of $14.3 million at January 31, 2023, with $2.1 million due within 12 months. For additional details regarding our long-term debt obligations, see Note 8, “Debt,” in our audited consolidated financial statements included in this Annual Report on Form 10-K. +We are subject to a guaranteed minimum royalty payment obligation over the next five years pursuant to the Honeywell Agreements, which, at January 31, 2023 included a balance due of $5.1 million, with $1.7 million due within 12 months. Refer to Note 2 “Acquisitions” and Note 12, “Royalty Obligation,” in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details. +In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. At January 31, 2023 our purchase commitments totaled $25.8 million, with $22.8 million due within 12 months, some of which are non-cancelable. +We are also subject to contingencies, including legal proceedings and claims arising out of our business that cover a wide range of matters, such as: contract and employment claims; workers’ compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided, or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that our results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +Critical Accounting Policies and Estimates +Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on our historical experience, current trends and information available from other sources, as appropriate. We do not believe there is a great likelihood that materially different amounts would be reported using different assumptions pertaining to the accounting policies described below, however, if actual conditions differ from the assumptions used in our judgments, our financial results could be materially different from our estimates. +We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements: +Revenue Recognition : We recognize revenue in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.” Under ASC 606, based on the nature of our contracts, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied. +Our accounting policies relating to the recognition of revenue under ASC 606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which +34 +include (i) the existence of a contract with the customer, (ii) the identification of the performance obligations in the contract, (iii) the value of any variable consideration in the contract, (iv) the standalone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the contract, and (v) determining when a performance obligation has been met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery for those services, could result in inappropriate recognition of revenue, or incorrect timing of revenue recognition, which could have a material effect on our financial condition and results of operations. +We recognize revenue for non-recurring engineering (NRE) fees, as necessary, for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. +Infrequently, we receive requests from customers to hold product being purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements in accordance with the guidance provided by ASC 606, which requires the transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) we do not have the ability to use the product or direct it to another customer. +Allowance for Doubtful Accounts: Accounts receivable consists primarily of receivables from our customers arising from the sale of our products. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts. +We estimate the collectability of our receivables and establish allowances for accounts receivable that we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our accounts receivable are outstanding and the financial condition of individual customers. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. We believe that our procedure for estimating such amounts is reasonable and historically has not resulted in material adjustments in subsequent periods. Bad debt expense was less than 1% of net sales in each of fiscal 2023 and 2022. +Warranty Claims: We offer warranties on some of our products. We establish a reserve for estimated costs of warranties at the time the product revenue is recognized. This reserve requires us to make estimates regarding the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect estimated warranty cost. If actual warranty costs differ from our estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of revenue, and the reserve balance recorded as an accrued expense. While we maintain product quality programs and processes, our warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, we revise our estimated warranty liability accordingly. +Inventories: Inventories are stated at the lower of average and standard cost or net realizable value. The process for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on hand and estimating the net realizable value of the inventory based on historical experience, current business conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income Taxes: A valuation allowance is established when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be +35 +considered, including our performance, the market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2023, we had provided valuation allowances for future tax benefits resulting from certain domestic R&D tax credits, foreign tax credit carryforwards, and China net operating losses, all of which are expected to expire unused. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted. +Business Combinations: We account for business acquisitions under the acquisition method of accounting in accordance with ASC 805, ‘‘Business Combinations,’’ where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates that, if known, would have affected the measurement of the amounts recognized as of the acquisition date. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ from these estimates. During the measurement period, we may record adjustments to acquired assets and assumed liabilities, with corresponding offsets to goodwill. Upon the conclusion of a measurement period, any subsequent adjustments are recorded to earnings. +Goodwill and Intangible Assets: We recognize goodwill in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). Goodwill is the excess of cost of an acquired entity over the fair value amounts assigned to assets acquired and liabilities assumed in a business combination and is not amortized. +Goodwill is tested for impairment at the reporting unit. A reporting unit is an operating segment or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. If a quantitative assessment is required, we estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to publicly traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach +36 +requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. No goodwill impairment was identified for the years ended January 31, 2023 or January 31, 2022. +We recognize intangibles assets in accordance with ASC 350. Acquired intangible assets subject to amortization are stated at fair value and are amortized using the straight-line method over the estimated useful lives of the assets. Intangible assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows. No impairment of intangible assets was identified for the years ended January 31, 2023 or January 31, 2022. +Share-Based Compensation: Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units. The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. +Recent Accounting Pronouncements +Reference is made to Note 1 of our audited consolidated financial statements included elsewhere in this report. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +Our primary financial market risks consist of foreign currency exchange rates risk and the impact of changes in interest rates that fluctuate with the market on our variable rate credit borrowings under our existing credit agreement. +Financial Exchange Risk +The functional currencies of our foreign subsidiaries and branches are the local currencies—the British Pound in the U.K., the Canadian Dollar in Canada, the Danish Kroner in Denmark, the Chinese Yuan in China, and the Euro in France and Germany. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign subsidiaries are translated to U.S. dollars. The assets and liabilities of our foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at an average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The reported results of our foreign +37 +subsidiaries will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency translation exposure is related to our subsidiaries that have functional currencies denominated in Danish Kroner and the Euro. A hypothetical 10% change in the rates used to translate the results of our foreign subsidiaries would result in an increase or decrease in our consolidated net income of approximately $0.2 million for the year ended January 31, 2023. +Transactional exposure arises where transactions occur in currencies other than the functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the balance sheet date and the resulting gains and losses are reported as foreign exchange gain (loss) in the consolidated statements of income. Foreign exchange losses resulting from transactional exposure were $0.5 million for the year ended January 31, 2023. +Interest Rate Risk +At January 31, 2023, our total indebtedness included $14.25 million of term loan variable-rate debt and $15.9 million outstanding balance on our revolving line of credit. At January 31, 2023, under the LIBOR Transition Amendment to the Amended Credit Agreement, the term loan bears interest at a BSBY (Bloomberg Short-Term Bank Yield) rate plus a margin that varies between 1.60% and 2.30% based on our consolidated leverage ratio. During fiscal 2023, the weighted average interest rate on our variable rate debt was 4.77% and the weighted average interest rate on our revolving line of credit was 6.71% The impact on our results of operations of a 100 basis point change in the interest rates on the outstanding balance of our variable-rate debt and revolving line of credit would be approximately $0.2 million annually. +Item 8. Financial Statements and Supplementary Data +The consolidated financial statements required under this item are submitted as a separate section of this report on the pages indicated at Item 15(a)(1). +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were not effective at January 31, 2023 because of the material weaknesses in our internal control over financial reporting described below. +38 +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2023. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The scope of management’s assessment of the effectiveness of its disclosure controls and procedures did not include the internal controls over financial reporting at Astro Machine, which was acquired effective August 4, 2022. Our consolidated total assets as of January 31, 2023 include $20.2 million from Astro Machine and our consolidated revenue for the year ended January 31, 2023 includes $12.5 million from Astro Machine. This exclusion is consistent with the SEC Staff’s guidance that an assessment of a recently acquired business may be omitted from the scope of management’s assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the year of acquisition. Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2023, our internal control over financial reporting was not effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We did not maintain effective controls to properly identify and assess significant non-routine transactions and management concluded that this material weakness continued to exist as of January 31, 2023. +Management is taking action to remediate this deficiency in its internal controls over financial reporting by augmenting personnel and resources in its finance and accounting organization. We anticipate that these actions and resulting improvements in controls will strengthen our internal control over financial reporting and will address the related material weakness. +The effectiveness of our internal control over financial reporting as of January 31, 2023 has been audited by Wolf & Company, P.C., an independent registered public accounting firm, as stated in their report, which is included herein. +Changes in Internal Controls over Financial Reporting +There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +39 +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed for our 2023 Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year (our “Proxy Statement”). Certain other information relating to our executive officers appears in Part I of this Annual Report on Form 10-K under the heading “Information about our Executive Officers.” +Item 11. Executive Compensation +The information required by this item is incorporated herein by reference to our Proxy Statement. +The information set forth under the heading “Compensation Committee Report” in our Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item is incorporated herein by reference to our Proxy Statement. +Item 13. Certain Relationships, Related Transactions and Director Independence +The information required by this item is incorporated herein by reference to our Proxy Statement. +Item 14. Principal Accountant Fees and Services +The information required by this item is incorporated herein by reference to our Proxy Statement. +40 +PART IV +Item 15. Exhibits and Financial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part of this Annual Report filed on Form 10-K: +Page +Reports of Independent Registered Public Accounting Firm +F-1 +Consolidated Balance Sheets as of January 31, 2023 and 2022 +F-5 +Consolidated Statements of Income—Years Ended January 31, 2023, 2022, and 2021 +F-6 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2023, 2022, and 2021 +F-7 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January 31, 2023, 2022, and 2021 +F-8 +Consolidated Statements of Cash Flows—Years Ended January 31, 2023, 2022, and 2021 +F-9 +Notes to Consolidated Financial Statements +F-10 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January 31, 2023, 2022, and 2021 +F-38 +All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +Item 16. Form 10-K Summary +Not Applicable. +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Share Purchase Agreement, dated January 7, 2017, as amended, by and among ANI ApS, Trojan Holding ApS, as a Seller and as the Sellers’ Representative, and Li Wei Chong filed as Exhibit 2.1 to our Annual Report on Form 10-K for the year ended January 31, 2017 and incorporated by reference herein* +(3A) +Restated Articles of Incorporation of the Company and all amendments thereto filed as Exhibit 3A to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(3B) +By-laws of the Company as amended to date filed as Exhibit 3B to our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. 000-13200) and incorporated by reference herein. +(4.1) +Specimen form of common stock certificate of the Company filed as Exhibit 4 to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(4.2) +Description of securities registered pursuant to Section 12 of the Exchange Act filed as Exhibit 4.2 to our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (File No. 000-13200) and incorporated by reference herein. +(10.1) +Astro-Med, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 annual shareholders meeting and incorporated by reference herein.** +41 +Exhibit +Number +(10.2) +Change in Control Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended January 31, 2015 and incorporated by reference herein.** +(10.3) +AstroNova Inc. 2015 Equity Incentive Plan filed as Exhibit A to the Definitive Proxy Statement filed on April 21, 2015 (File No. 000-13200) for the 2015 annual shareholders meeting and incorporated by reference herein.** +(10.4) +Form of Indemnification Agreement for directors and officers filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended October 31, 2015 and incorporated by reference herein.** +(10.5) +Form of Restricted Stock Agreement granted under the Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.6) +Form of Incentive Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.7) +Form of Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.8) +Form of Non-Employee Director Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.9) +Form of Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.10) +Form of Non-Employee Director Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.11) +Form of Time-Based Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.12) +Form of Performance Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.13) +Asset Purchase and License Agreement, dated September 28, 2017, by and between AstroNova, Inc. and Honeywell International, Inc. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date September 28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.14) +Form of Performance-based Restricted Stock Unit Award Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.15) +Form of Restricted Stock Unit Agreement (time-based vesting) filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.16) +Form of Incentive Stock Option filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +42 +Exhibit +Number +(10.17) +Form of Non-statutory Stock Option filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.18) +Form of Non-statutory Stock Option (Non-employee Director) filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.19) +Form of Restricted Stock Agreement filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.20) +Form of Non-employee Director Restricted Stock Agreement filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K , event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.21) +AstroNova, Inc. Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date January 31, 2019, filed with the SEC on February 4, 2019 and incorporated by reference herein.** +(10.22) +AstroNova, Inc. 2018 Equity Incentive Plan Non-Employee Director Restricted Stock Agreement filed as Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019 and incorporated by reference herein.* +(10.23) +AstroNova, Inc. 2018 Equity Incentive Plan, as amended, filed as Appendix A to the Company’s Definitive Proxy Statement filed with the SEC on May 25, 2019 on Schedule 14A and incorporated by reference herein.* +(10.24) +Amended and Restated Credit Agreement dated as of July 30, 2020 among AstroNova, Inc., ANI ApS, TrojanLabel ApS, and Bank of America, N.A. filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020 and incorporated by reference herein. +(10.25) +Amended and Restated Security and Pledge Agreement dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date July 30, 2020, filed with the SEC on August 5, 2020 and incorporated by reference herein. +(10.26) +Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date July 30, 2020, filed with the SEC on August 5, 2020 and incorporated by reference herein. +(10.27) +Change in Control Agreement dated September 8, 2020 by and between AstroNova, Inc. and David S. Smith filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020 and incorporated by reference herein.** +(10.28) +First Amendment to Credit Agreement dated as of March 24, 2021 among AstroNova, Inc. ANI ApS, TrojanLabel ApS and Bank of America, N.A., filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2021, and incorporated by reference herein. +(10.29) +First Amendment to Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of March 24, 2021 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2021, and incorporated by reference herein. +43 +Exhibit +Number +(10.30) +Form of Indemnification Agreement for directors and officers, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2021, and incorporated by reference herein.** +(10.31) +LIBOR Transition Amendment dated as of December 14, 2021 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2022, and incorporated by reference herein. +(10.32) +AstroNova, Inc. 2022 Employee Stock Purchase Plan, filed as Annex A to the AstroNova, Inc. Definitive Proxy Statement on Schedule 14A filed with the SEC on April 29, 2022 and incorporated by reference herein.** +(10.33) +Equity Interest Purchase Agreement, dated as of August 4, 2022, by and among AstroNova, Inc., Astro Machine LLC and GSND Holding Corporation, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date August 4, 2022, filed with the SEC on August 9, 2022 and incorporated by reference herein. +(10.34) +Purchase and Sale Agreement, dated as of August 4, 2022, between Astro Machine LLC and Selak Real Estate Limited Partnership, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date August 4, 2022, filed with the SEC on August 9, 2022 and incorporated by reference herein. +(10.35) +Second Amendment to Amended and Restated Credit Agreement, dated as of August 4, 2022, by and among AstroNova, Inc. and Bank of America, N.A. , filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date August 4, 2022, filed with the SEC on August 9, 2022 and incorporated by reference herein. +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(101.INS) +XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document +(101.SCH) +Inline XBRL Taxonomy Extension Schema Document +(101.CAL) +Inline XBRL Taxonomy Extension Calculation Linkbase Document +(101.DEF) +Inline XBRL Taxonomy Extension Definition Linkbase Document +(101.LAB) +Inline XBRL Taxonomy Extension Label Linkbase Document +(101.PRE) +Inline XBRL Taxonomy Extension Presentation Linkbase Document +(104) +Cover Page Interactive Data File (embedded within the Inline XBRL document). +* +Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request. +** +Management contract or compensatory plan or arrangement. +44 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +ASTRONOVA, INC. +(Registrant) +Date: April 17, 2023 +By: +/S/ G REGORY A. W OODS +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/ S / G REGORY A. W OODS +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 17, 2023 +/ S / D AVID S. S MITH +David S. Smith +Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) +April 17, 2023 +/s/ Alex P. Michas +Alexis P. Michas +Director +April 17, 2023 +/ S / M ITCHELL I. Q UAIN +Mitchell I. Quain +Director +April 17, 2023 +/ S / Y VONNE E. S CHLAEPPI +Yvonne E. Schlaeppi +Director +April 17, 2023 +/ S / R ICHARD S. W ARZALA +Richard S. Warzala +Director +April 17, 2023 +http://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrent +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Shareholders and Board of Directors of +AstroNova, Inc. +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of AstroNova, Inc. (the “Company”) as of January 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended January 31, 2023, and the related notes and the financial statement schedule listed in Item 15(a)(2) (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2023, in conformity with accounting principles generally accepted in the United States of America. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 31, 2023, based on criteria established in +Internal Control—Integrated Framework +issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated April 17, 2023 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of January 31, 2023, based on criteria established in +Internal Control—Integrated Framework +issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matters +The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +F-1 +Table of Contents +Valuation of Intangible Assets in the Astro Machine Acquisition +As described in Note 2 to the consolidated financial statements, the Company completed an acquisition of Astro Machine for consideration of $17.1 million in the year ended January 31, 2023. The Company accounted for this acquisition as a business combination. +Auditing the accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of identified assets, including the customer relationship intangible asset of $3.06 million. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about future performance of the acquired business and due to the limited historical data on which to base these assumptions. The significant assumptions used to form the basis of the forecasted results included customer attrition rates and forecasted revenues and expenditures. These significant assumptions were forward-looking and could be affected by future economic and market conditions. +Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others (i) obtaining an understanding of management’s process for accounting for the transaction; (ii) evaluating the qualifications of the third-party expert engaged by management; (iii) testing management’s, and the third-party expert’s, process for developing the valuation models, and (iv) evaluating the significant assumptions used in developing the valuation models. In evaluating management’s assumptions used in the development of the valuation models we considered (i) whether these assumptions were consistent with evidence obtained in other areas of the audit and (ii) the sensitivity to change of the assumptions used. +/s/ Wolf & Company, P.C. +We have served as the Company’s auditor since 2013. +Boston, Massachusetts +April 17, 2023 +F-2 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Shareholders and Board of Directors of +AstroNova, Inc. +Opinion on the Internal Control Over +Financial Reporting +We have audited AstroNova, Inc.’s (the Company) internal control over financial reporting as of January 31, 2023, based on criteria established in +Internal Control—Integrated Framework +issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 31, 2023, based on criteria established in +Internal Control—Integrated Framework +issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and our report dated April 17, 2023 expressed an unqualified opinion. +As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded Astro Machine from its assessment of internal control over financial reporting as of January 31, 2023, because it was acquired by the Company in a purchase business combination in the third quarter of fiscal 2023. We have also excluded Astro Machine from our audit of internal control over financial reporting. Astro Machine is a wholly owned subsidiary whose total assets and revenues represent approximately 15% and 9%, respectively, of the related consolidated financial statement amounts as of and for the year ended January 31, 2023. +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. +The Company’s controls over the accounting for significant +non-routine +transactions include management’s review of the transaction to ensure the appropriate accounting treatment in accordance with accounting principles generally accepted in the United States of America. During the year ended January 31, 2023, for certain significant +non-routine +transactions, this control did not operate effectively. +This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2023 financial statements, and this report does not affect our report dated April 17, 2023 on those financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial +F-3 +Table of Contents +reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Wolf & Company, P.C. +We have served as the Company’s auditor since 2013. +Boston, Massachusetts +April 17, 2023 +F-4 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2023 +2022 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +3,946 +$ +5,276 +Accounts Receivable, net of reserves of $ +731 +in 2023 +and $ +826 +in 2022 +21,598 +17,124 +Inventories +51,324 +34,609 +Employee Retention Credit Receivable +— +3,135 +Prepaid Expenses and Other Current Assets +2,894 +3,634 +Total Current Assets +79,762 +63,778 +Property, Plant and Equipment, net +14,288 +11,441 +Identifiable Intangibles, net +21,232 +19,200 +Goodwill +14,658 +12,156 +Deferred Tax Assets, net +6,907 +5,591 +Right of Use Asset +794 +1,094 +Other Assets +1,566 +1,695 +TOTAL ASSETS +$ +139,207 +$ +114,955 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +8,618 +$ +8,590 +Accrued Compensation +2,750 +3,512 +Other Accrued Expenses +3,308 +4,113 +Revolving Line of Credit +15,900 +— +Current Portion of Long-Term Debt +2,100 +1,000 +Current Liability—Royalty Obligation +1,725 +2,000 +Current Liability—Excess Royalty Payment Due +423 +235 +Income Taxes Payable +786 +323 +Deferred Revenue +1,888 +262 +Total Current Liabilities +37,498 +20,035 +NON-CURRENT +LIABILITIES +Long-Term Debt, net of current portion +12,040 +8,154 +Royalty Obligation, net of current portion +3,415 +4,361 +Lease Liabilities, net of current portion +555 +808 +Income Taxes Payable +491 +399 +Deferred Revenue +674 +— +Deferred Tax Liabilities +167 +186 +TOTAL LIABILITIES +54,840 +33,943 +Commitments and Contingencies (See Note 22) +SHAREHOLDERS’ EQUITY +Preferred Stock, $ +10 +Par Value, Authorized +100,000 +shares, +None +Issued +— +— +Common Stock, $ +0.05 +Par Value, Authorized +13,000,000 +shares; Issued +10,676,851 +shares in 2023 +and +10,566,404 +shares in 2022 +534 +528 +Additional +Paid-in +Capital +61,131 +59,692 +Retained Earnings +59,175 +56,514 +Treasury Stock, at Cost, +3,342,032 +shares in 2023 +and +3,324,280 +shares in 2022 +( 34,235 +) +( 33,974 +) +Accumulated Other Comprehensive Loss, net of tax +( 2,238 +) +( 1,748 +) +TOTAL SHAREHOLDERS’ EQUITY +84,367 +81,012 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +139,207 +$ +114,955 +See Notes to the Consolidated Financial Statements. +F-5 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share Data) +2023 +2022 +2021 +Revenue +$ +142,527 +$ +117,480 +$ +116,033 +Cost of Revenue +94,371 +73,741 +74,673 +Gross Profit +48,156 +43,739 +41,360 +Costs and Expenses: +Selling and Marketing +24,456 +23,177 +23,301 +Research and Development +6,822 +6,753 +6,206 +General and Administrative +11,435 +9,553 +9,420 +Operating Expenses +42,713 +39,483 +38,927 +Operating Income +5,443 +4,256 +2,433 +Other Income (Expense): +Interest Expense +( 1,678 +) +( 677 +) +( 955 +) +Gain (Loss) on Foreign Currency Transactions +( 474 +) +( 288 +) +590 +Gain on Extinguishment of Debt – PPP Loan +— +4,466 +— +Loss on Disposal of Assets +— +( 696 +) +— +Other, net +119 +( 27 +) +111 +( 2,033 +) +2,778 +( 254 +) +Income before Income Taxes +3,410 +7,034 +2,179 +Income Tax Provision +749 +605 +895 +Net Income +$ +2,661 +$ +6,429 +$ +1,284 +Net Income Per Common Share—Basic +$ +0.36 +$ +0.89 +$ +0.18 +Net Income Per Common Share—Diluted +$ +0.36 +$ +0.88 +$ +0.18 +Weighted Average Number of Common Shares Outstanding—Basic +7,307 +7,207 +7,104 +Dilutive Effect of Common Stock Equivalents +67 +132 +62 +Weighted Average Number of Common Shares Outstanding—Diluted +7,374 +7,339 +7,166 +See Notes to the Consolidated Financial Statements. +F-6 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2023 +2022 +2021 +Net Income +$ +2,661 +$ +6,429 +$ +1,284 +Other Comprehensive Income (Loss), net of taxes and reclassification adjustments: +Foreign Currency Translation Adjustments +( 537 +) +( 1,426 +) +710 +Change in Value of Derivatives Designated as Cash Flow Hedge +— +— +( 239 +) +(Gains) Losses from Cash Flow Hedges Reclassified to Income Statement +47 +62 +193 +Cross-Currency Interest Rate Swap Terminations +— +— +45 +Other Comprehensive Income (Loss) +( 490 +) +( 1,364 +) +709 +Comprehensive Income +$ +2,171 +$ +5,065 +$ +1,993 +See Notes to the Consolidated Financial Statements. +F-7 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Treasury +Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Shares +Amount +Balance January 31, 2020 +10,343,610 +$ +517 +$ +56,130 +$ +49,298 +$ +( 33,477 +) +$ +( 1,093 +) +$ +71,375 +Share-Based Compensation +— +— +1,819 +— +— +— +1,819 +Employee Option Exercises +16,487 +1 +103 +— +— +— +104 +Restricted Stock Awards Vested, net +64,997 +3 +( 3 +) +— +( 111 +) +— +( 111 +) +Common Stock—Cash Dividend—$ +0.07 +per share +— +— +— +( 497 +) +— +— +( 497 +) +Net Income +— +— +— +1,284 +— +— +1,284 +Other Comprehensive Income +— +— +— +— +— +709 +709 +Balance January 31, 2021 +10,425,094 +$ +521 +$ +58,049 +$ +50,085 +$ +( 33,588 +) +$ +( 384 +) +$ +74,683 +Share-Based Compensation +— +— +1,493 +— +— +— +1,493 +Employee Option Exercises +14,371 +1 +156 +— +— +— +157 +Restricted Stock Awards Vested, net +126,939 +6 +( 6 +) +— +( 386 +) +— +( 386 +) +Net Income +— +— +— +6,429 +— +— +6,429 +Other Comprehensive Loss +— +— +— +— +— +( 1,364 +) +( 1,364 +) +Balance January 31, 2022 +10,566,404 +$ +528 +$ +59,692 +$ +56,514 +$ +( 33,974 +) +$ +( 1,748 +) +$ +81,012 +Share-Based Compensation +— +— +1,290 +— +— +— +1,290 +Employee Option Exercises +25,123 +2 +153 +— +— +— +155 +Restricted Stock Awards Vested, net +85,324 +4 +( 4 +) +— +( 261 +) +— +( 261 +) +Net Income +— +— +— +2,661 +— +— +2,661 +Other Comprehensive Loss +— +— +— +— +— +( 490 +) +( 490 +) +Balance January 31, 2023 +10,676,851 +$ +534 +$ +61,131 +$ +59,175 +$ +( 34,235 +) +$ +( 2,238 +) +$ +84,367 +See Notes to the Consolidated Financial Statements. +F-8 +Table of Contents +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2023 +2022 +2021 +Cash Flows from Operating Activities: +Net Income +$ +2,661 +$ +6,429 +$ +1,284 +Adjustments to Reconcile Net Income to Net Cash (Used) Provided By Operating Activities: +Depreciation and Amortization +3,916 +3,994 +5,983 +Amortization of Debt Issuance Costs +25 +44 +75 +Share-Based Compensation +1,290 +1,493 +1,819 +Loss on Disposal of Assets +— +696 +— +Gain on Extinguishment of Debt +— +( 4,466 +) +— +Deferred Income Tax Provision (Benefit) +( 1,336 +) +210 +( 1,021 +) +Changes in Assets and Liabilities, net of impact of acquisition: +Accounts Receivable +( 1,234 +) +77 +2,702 +Other Receivable – Employee Retention Credit Receivable +3,135 +( 3,135 +) +— +Inventories +( 11,581 +) +( 4,883 +) +4,247 +Accounts Payable and Accrued Expenses +( 3,236 +) +4,052 +( 57 +) +Income Taxes Payable +1,710 +( 2,043 +) +1,482 +Other +1,714 +( 1,074 +) +( 970 +) +Net Cash Provided (Used) by Operating Activities +( 2,936 +) +1,394 +15,544 +Cash Flows from Investing Activities: +Cash Paid for Astro Machine Acquisition, net of cash acquired +( 17,034 +) +— +— +Additions to Property, Plant and Equipment +( 229 +) +( 1,796 +) +( 2,587 +) +Net Cash Used by Investing Activities +( 17,263 +) +( 1,796 +) +( 2,587 +) +Cash Flows from Financing Activities: +Net Cash Proceeds from Employee Stock Option Plans +85 +60 +9 +Net Cash Proceeds from Share Purchases under Employee Stock Purchase Plan +70 +96 +95 +Net Cash Used for Payment of Taxes Related to Vested Restricted Stock +( 261 +) +( 386 +) +( 111 +) +Net (Repayments)/Borrowings under Revolving Credit Facility +15,900 +— +( 6,500 +) +Payment of Minimum Guarantee Royalty Obligation +( 2,000 +) +( 2,000 +) +( 2,000 +) +Proceeds from Long-Term Debt – PPP Loan +— +— +4,422 +Proceeds from Long-Term Debt Borrowings +6,000 +10,000 +15,232 +Payoff of Long-Term Debt +— +( 12,576 +) +( 11,732 +) +Principal Payments on Long-Term Debt +( 1,000 +) +( 750 +) +( 3,958 +) +Payments of Debt Issuance Costs +( 39 +) +— +( 100 +) +Dividends Paid +— +— +( 497 +) +Net Cash Provided (Used) by Financing Activities +18,755 +( 5,556 +) +( 5,140 +) +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +114 +( 205 +) +( 627 +) +Net Increase (Decrease) in Cash and Cash Equivalents +( 1,330 +) +( 6,163 +) +7,190 +Cash and Cash Equivalents, Beginning of Year +5,276 +11,439 +4,249 +Cash and Cash Equivalents, End of Year +$ +3,946 +$ +5,276 +$ +11,439 +Supplemental Information: +Cash Paid During the Period for: +Interest +$ +791 +$ +342 +$ +677 +Income Taxes, Net of Refunds +$ +311 +$ +2,414 +$ +446 +Non-Cash Transactions: +Reclassifcation of Inventories to Property, Plant and Equipment +$ +348 +$ +— +$ +— +Recognize intangible asset and royalty payable related to Honeywell Asset Purchase and License Agreement +$ +530 +$ +— +$ +— +See Notes to the Consolidated Financial Statements. +F-9 +Table of Contents +ASTRONOVA, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +January 31, 2023, 2022, and 2021 +Note 1—Summary of Significant Accounting Policies +Basis of Presentation: +The accompanying financial statements and accompanying notes have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and are presented in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year. +Principles of Consolidation: +The consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: +Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation. +Use of Estimates: +The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes using information that is reasonably available to us at this time. Some of the more significant estimates relate to revenue recognition; the allowances for doubtful accounts; inventory valuation; income taxes; valuation of long-lived assets, intangible assets and goodwill; share-based compensation; and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters, including our expectations at the time +regarding +the ongoing impact from the +COVID-19 +pandemic. Consequently, actual results could differ from those estimates. +Cash and Cash Equivalents: +Highly liquid investments with an original maturity of 90 days or less are considered to be cash equivalents. At +January +31, 2023 and 2022, $ 3.2 million and $ 3.7 million, respectively, was held in foreign bank accounts. +Inventories: +Inventories are stated at the lower of standard and average cost or net realizable value and include material, labor and manufacturing overhead. +Property, Plant and Equipment: +Property +, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements— 10 to 20 years; buildings and leasehold improvements— 10 to 45 years; machinery and equipment— 3 to 10 years and +computer +equipment and software— 3 to 10 years). +Revenue Recognition: +We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers (“ASC 606”).” The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to recognize revenue and requires judgment and estimates within the revenue recognition process, including identifying contracts with customers, identifying performance obligations in the contract, determining and estimating the amount of any variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation and recognizing revenue when the entity satisfies each performance obligation. +The vast majority of our revenue is generated from the sale of distinct products. Revenue is measured as the amount of consideration we expect to receive in exchange for such products, which is generally at the contractually stated prices, and is recognized when we satisfy a performance obligation by transferring control of +F-10 +Table of Contents +a product to a customer. The transfer of control generally occurs at one point in time, upon shipment, when title and risk of loss pass to the customer. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Sales taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue. +Many of the contracts entered into with customers are commonly comprised of a combination of equipment, supplies, installation and/or training services. We determine performance obligations by assessing whether the products or services are distinct from other elements of the contract. In order to be distinct, the product must perform either on its own or with readily available resources and must be separate within the context of the contract. +Most of our hardware products contain embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole, as it is not sold or marketed separately, and its production costs are minor compared to those of the hardware system. Hardware and software elements are typically delivered at the same time and are accounted for as a single performance obligation for which revenue is recognized at the point in time when ownership is transferred to the customer. +Installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. The delivery of installation and training services are not assessed to determine whether they are separate performance obligations, as the amounts are not material to the contract. +Shipping and handling activities that occur after control over a product has transferred to a customer are accounted for as fulfillment activities rather than performance obligations, as allowed under a practical expedient provided by ASC 606. The shipping and handling fees charged to customers are recognized as revenue and the related costs are included in cost of revenue at the point in time when ownership of the product is transferred to the customer. +We may perform services at the request of the customer, generally for the repair and maintenance of products previously sold. These services are short in duration and total approximately 5.0 % and 4.4 % of revenue for the years ended January 31, 2023 and 2022, respectively. Revenue is recognized as services are rendered and accepted by the customer. We also provide service agreements on certain of our Product Identification equipment. Service agreements are purchased separately from the equipment and provide for the right to obtain service and maintenance on the equipment for a period of typically one to two years. Accordingly, revenue on these agreements is recognized over the term of the agreements. The portion of service agreement contracts that are uncompleted at the end of any reporting period are included in deferred revenue. +We generally provide warranties for our products. The standard warranty period is typically 12 months for most hardware products except for airborne printers, which typically have warranties that extend for +3 - 5 +years, consistent with industry practice. Such assurance-type warranties are not deemed to be separate performance obligations from the hardware product and costs associated with providing the warranties are accrued in accordance with ASC 450, “Contingencies,” as we have the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability. Our estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions. To the extent that our experience in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the estimated warranty liability are recorded at that time, with an offsetting adjustment to cost of revenue. On occasion, customers request a warranty period longer than our standard warranty. In those instances, in which extended warranty services are separately quoted to the customer, an additional performance obligation is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue. +F-11 +Table of Contents +We recognize and subsequently amortize an asset for the incremental direct costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year (Refer to Note 3, “Revenue Recognition” included in our notes to the consolidated financial statement). We apply the practical expedient to expense costs incurred for costs to obtain a contract when the amortization period would have been less than a year. These costs include sales commissions paid to the internal direct sales team as well as to third-party representatives and distributors. Contractual agreements with each of these parties outline commission structures and rates to be paid. Generally speaking, the contracts are all individual procurement decisions by the customers and do not include renewal provisions and, as such, the majority of the contracts have an economic life of significantly less than a year. +Accounts Receivables and Allowance for Doubtful Accounts: +Standard payment terms are typically 30 days after shipment but vary by type and geographic location of our customer. Credit is extended based upon an evaluation of the customer’s financial condition. In circumstances where we are aware of a customer’s inability to meet its financial obligations, an allowance is established. The remainder of the allowance established is based on a variety of factors, including the age of amounts outstanding relative to their contractual due date, historical +write-off +experience and current market assessments. Accounts receivable are stated at their estimated net realizable value. +Business Combinations: +We account for business acquisitions under the acquisition method of accounting in accordance with ASC 805, ‘‘Business Combinations,’’ where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ from these estimates. During the measurement period, we may record adjustments to acquired assets and assumed liabilities, with corresponding offsets to goodwill. Upon the conclusion of a measurement period, any subsequent adjustments are recorded to earnings. +At the acquisition date, the Company measures the fair values of all assets acquired and liabilities assumed that arise from contractual contingencies. The Company also measures the fair values of all +non-contractual +contingencies if, as of the acquisitions date, it is more likely than not that the contingencies will give rise to assets or liabilities. +Acquisition related costs not considered part of the considerations are expensed as incurred and recorded in Acquisition costs within the consolidated statement of operations. +Research +and Development Costs: +We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. The following costs are included in research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies. +Foreign Currency Translation: +The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at +year-end +exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the average monthly exchange rates in effect during the related period. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our subsidiaries in Germany, Denmark and China since +F-12 +Table of Contents +their undistributed earnings are considered to be permanently invested. Included in our consolidated statements of income was a net transaction foreign exchange loss of $ 0.5 million and $ 0.3 million in fiscal 2022 and 2023, respectively, and a net transaction foreign exchange gain of $ 0.6 million in fiscal 2021. +Advertising: +We expense advertising costs as incurred. Advertising costs including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $ 1.6 million, $ 1.3 million, and $ 0.9 million in fiscal years 2023, 2022, and 2021, respectively. +Long-Lived Assets: +Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. There were no impairment charges for our long-lived assets in fiscal years 2023, 2022, or 2021. +Intangible Assets: +Intangible assets include the value of customer and distributor relationships, trademarks and existing technology acquired in connection with business and asset acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. There were no impairment charges for our intangible assets in fiscal years 2023, 2022, or 2021. +Goodwill: +Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate indicate that the carrying value of an asset might be impaired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. We determined that each of our operating segments (Product Identification (“PI”) and Test & Measurement (“T&M”) represents a reporting unit for purposes of goodwill impairment testing. +The accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this qualitative assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. The quantitative assessment compares the fair value of the reporting unit with its carrying value. If the quantitative assessment is performed, we estimate the fair value of our reporting units using a blended income and market approach. The income approach is based on a discounted cash flow model and provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. The market approach compares the reporting unit to publicly traded companies and transactions involving similar business, and requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and +F-13 +Table of Contents +income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. We performed a qualitative assessment for our fiscal 2023 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying values of the reporting units exceed their fair values. Accordingly, no quantitative assessment was performed. There were no impairment charges for our goodwill in fiscal years 2023, 2022, or 2021. +Leases: +We account for our leases in accordance with ASC 842, “Leases” (“ASC 842”). ASC 842 requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (“ROU”) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using a discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate for the expected lease term is used. Our incremental borrowing rate approximates the rate we would have to pay to borrow on a collateralized basis over a similar term at lease inception. The value of the ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received. Several of our lease contracts include options to extend the lease term and we include the renewal options for these leases in the determination of the ROU asset and lease liability when the likelihood of renewal is determined to be reasonably certain. +We enter into lease contracts for certain of our facilities at various locations worldwide. At inception of a contract, we determine whether the contract is or contains a lease. If we have a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. +There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. We have made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. All of our leases are classified as operating leases. Operating lease expense is recognized on a straight-line basis over the lease term and included in general and administrative expense on the consolidated statement of income. ROU assets are classified as such on the consolidated balance sheet, short-term lease liabilities are classified in accrued expenses, and long-term lease liabilities are classified as such in the consolidated balance sheet. In the statement of cash flow, payments for operating leases are classified as operating activities. +In addition, several of our lease agreements include +non-lease +components for items such as common area maintenance and utilities which are accounted for separately from the lease component. +Income Taxes: +We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. Our deferred taxes are presented as +non-current +in the accompanying consolidated balance sheet. An allowance against deferred tax assets is recognized when it is +more-likely-than-not +that some portion or all of the deferred tax assets will not be realized. At January 31, 2023, a valuation allowance was provided for deferred tax assets attributable to certain domestic R&D, foreign tax credit carryforwards and China net operating losses, all of which are expected to expire unused. At January 31, 2022, a valuation allowance was provided for deferred tax assets attributed to certain domestic R&D and foreign tax credit carryforwards. +We account for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax +F-14 +Table of Contents +benefits that satisfy a +more-likely-than-not +threshold. ASC 740 also provides guidance on +de-recognition, +classification, interest and penalties, accounting in interim periods and disclosure. +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The legislation had sweeping effects including various types of economic relief for impacted businesses and industries. One such relief provision was the Paycheck Protection Program, which provided short-term cash flow assistance to finance employee payroll and qualified expenses. On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed +$ 4.4 +million (the “PPP Loan”). On December 27, 2020, the Consolidated Appropriations Act, 2021, H.R. 133 was signed into law. The legislation permits the deductibility of expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan (covered loan) guaranteed under the Paycheck Protection Program. We have fully utilized the PPP Loan proceeds for qualifying expenses and applied for forgiveness +of the PPP Loan. Consistent with the legislation, we deducted the full +$ 4.4 million of qualified expenses on our 2020 federal tax return. On June 15, 2021, Greenwood notified us that the United States Small Business Administration (the “SBA”) approved our application for forgiveness of the entire $ 4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, in the second quarter of fiscal 2022, we recorded a +$ 4.5 million gain on extinguishment of debt. The PPP loan forgiveness is excluded from taxable income under Section 1106(i) of the CARES Act. +Net Income Per Common Share: +Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2023, 2022, and 2021, there were 685,667 ; 345,085 ; and 642,623 , respectively, common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive. +Fair Value Measurement: +We measure our assets and liabilities at fair value on a recurring and +non-recurring +basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances. +The fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities +Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, other accrued expenses and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short-term nature of these instruments. +F-15 +Table of Contents +Self-Insurance: +We are self-insured for U.S. medical and dental benefits for qualifying employees and maintain stop-loss coverage from a third party which limits our exposure to large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In estimating this accrual, we utilize an independent third-party broker to estimate a range of expected losses, which are based on analyses of historical data. Assumptions are closely monitored and adjusted when warranted by changing circumstances. Our liability for self-insured claims is included within accrued compensation in our consolidated balance sheets and was +$ 0.3 million and $ 0.2 million at January 31, 2023 and 2022, respectively. +Share-Based Compensation: +Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units. The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. +Share-based compensation becomes deductible for determining income taxes when the related award vests, is exercised, or is forfeited depending on the type of share-based award and subject to relevant tax law. +Derivative Financial Instruments: +We occasionally use derivative instruments as part of our overall strategy to manage exposure to market risks primarily associated with fluctuations in foreign currency exchange rates and interest rates. Derivative instruments are recognized as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of income during the current period. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. +For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income/(loss) and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the hedged transaction affects earnings (e.g., in “Interest Expense” when the hedged transactions are interest cash flows associated with floating-rate debt, or “Other, Net” for portions reclassified relating to the remeasurement of the debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, are recognized in the statement of income during the current period. +Recent Accounting Pronouncements +There were no new accounting pronouncements, issued or effective during fiscal 2023, that have had or are expected to have a material impact on our consolidated financial statements. +F-16 +Table of Contents +Note 2 – Acquisitions +Astro Machine +On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers, tabbers, conveyors, and envelope feeders, for aggregate consideration of $ 17.1 million. +The acquisition was accomplished pursuant to an Equity Interest Purchase Agreement dated as of August 4, 2022 (the “Purchase Agreement”) by and among us, GSND Holding Corporation (“GSND”), the parent company of Astro Machine, and Astro Machine. Pursuant to the Purchase Agreement, we purchased 100 % of the issued and outstanding equity interests of Astro Machine from GSND for a purchase price of $ 15.6 million. The acquisition was funded using borrowings under our credit facility. We obtained a representation and warranty insurance policy and placed $ 300,000 of the purchase price into an escrow account, which pursuant to the terms and conditions of the Purchase Agreement, are our sole recourse for breaches of representations and warranties by GSND. Upon the closing of the transaction, Astro Machine became a wholly owned subsidiary of AstroNova, Inc. +Concurrently with the signing of the Purchase Agreement, our newly acquired subsidiary, Astro Machine, entered into a Purchase and Sale Agreement with Selak Real Estate Limited Partnership (“SRE”), pursuant to which Astro Machine purchased certain real property assets of SRE for a purchase price, paid in cash, of $ 1.5 million. These real estate assets are comprised of a 34,460 square foot industrial manufacturing building (including offices) on 1.26 acres of land, which is Astro Machine’s principal place of business. +This transaction is a business combination and was accounted for using the acquisition method of accounting prescribed by ASC 805, “Business Combinations” (“ASC 805”), whereby the results of operations, including the revenues and earnings of Astro Machine, are included in our financial statements from the date of acquisition. The purchase price of Astro Machine was allocated to the tangible and intangible assets acquired and liabilities assumed and recognized at their fair value based on widely accepted valuation techniques in accordance with ASC 820, “Fair Value Measurement,” as of the acquisition date. The process for estimating fair values requires the use of significant estimates, assumptions and judgments, including determining the timing and estimates of future cash flows and developing appropriate discount rates. The excess of the purchase price over the fair value of the net identified assets acquired and liabilities assumed was recorded as goodwill. ASC 805 establishes a measurement period to provide companies with a reasonable amount of time to obtain the information necessary to identify and measure various items in a business combination and cannot extend beyond one year from the acquisition date. +We completed our final fair value determination of the assets acquired and liabilities assumed during the fourth quarter of fiscal 2023. Since the initial preliminary estimates reported in the third quarter of fiscal 2023, we have adjusted certain amounts for the fair value of the assets acquired and liabilities assumed as a result of obtaining additional information that allowed us to determine the final purchase price allocation, as summarized in the table below. Measurement period adjustments were recognized in the reporting period in which the adjustments were determined and calculated as if the accounting had been completed at the acquisition date. +Total acquisition-related costs of $ 0.7 million are included in the general and administrative expenses in our consolidated statement of income for the year ended January 31, 2023. +F-17 +Table of Contents +The following table sets forth the final purchase price allocation of the Astro Machine acquisition for the estimated fair value of the net asset acquired and liabilities assumed as of the date of acquisition: +(In thousands) +Cash +$ +91 +Accounts Receivable +3,393 +Inventory +5,715 +Property, Plant and Equipment +4,200 +Identifiable Intangible Assets +3,480 +Goodwill +2,730 +Accounts Payable and Other Current Liabilities +( 2,484 +) +Total Purchase Price +$ +17,125 +The fair value of the intangible assets acquired was estimated by applying the income approach. This fair value measurement is based on significant inputs that are not observable in the market and therefore represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement.” Key assumptions in estimating the fair value of the intangibles include (1) remaining useful life of the tradename/trademarks and customer relations (2) the royalty rate of 0.75 %, (3) customer attrition rate of 18.0 %, (4) discount rate of 19.0 % and (5) a range of revenue and net income projections for the fiscal years 2023-2026. +The following table sets forth the fair value of the acquired identifiable intangible assets and related estimated useful lives: +(In thousands) +Fair +Value +Useful Life +( +y +ears) +Customer Relations +$ +3,060 +5 +Trademarks/Tradenames +420 +5 +Total +$ +3,480 +The Customer Relations intangible asset represents the relationships that will be maintained with certain historical customers of Astro Machine. The trademark/tradename intangible assets reflect the industry reputation of the Astro Machine name recognition and the registered trademarks for the use of several marks and logos held by Astro Machine. +Goodwill of $ 2.73 million, which is not deductible for tax purposes, represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired and liabilities assumed from Astro Machine. The goodwill recognized under ASC 805 is attributable to synergies which are expected to enhance and expand our overall product portfolio, opportunities in new and existing markets, future technologies that have yet to be determined and Astro Machine’s assembled work force. The carrying amount of the goodwill was allocated to the Product Identification (“PI”) segment. +The amounts of revenue and earnings before taxes included in our consolidated statement of income from the period August 4, 2022 (acquisition date) through January 31, 2023 are as follows: +(In thousands) +2023 +Revenue +$ +12,515 +Earnings before Taxes +1,571 +Astro Machine results are reported as part of the PI segment. Proforma results are not provided, as disclosure of such amounts was impractical to determine as the acquired business had insufficient financial records and no audit +history prior to the transaction. +F-18 +Table of Contents +Honeywell Asset Purchase and License Agreement +On June 30, 2022, AstroNova Inc. entered into an Asset Purchase and License Agreement with Honeywell Inc. (“New HW Agreement”) to acquire an exclusive, perpetual, world-wide license to manufacture Honeywell’s flight deck printers for the Boeing 787 aircraft. The New HW Agreement provides for royalty payments to Honeywell based on gross revenues from the sales of the printers, paper and repair services of the licensed products in perpetuity. The royalty rates vary based on the year in which they are paid or earned and as products are sold or as services provided and range from single-digit to +mid-double-digit +percentages of gross revenue. The New HW Agreement included a provision for guaranteed minimum royalty payments to be paid in the event that the royalties earned by Honeywell do not meet the minimum for the preceding calendar year as follows: $ 100,000 in 2024, $ 200,000 in 2025, $ 233,000 in 2026 and 2027, and $ 234,000 in 2028. +This transaction was evaluated under ASC 805, “Business Combinations,” and was accounted for as an asset acquisition. +The purchase price was allocated to the customer relationship intangible, which was the only asset acquired as a result of this transaction. This asset will be amortized over the useful life of the intangible. The minimum royalty payment obligation and related customer relation intangible were recorded at the present value of the minimum royalty payments. +The acquired identifiable intangible asset is as follows: +(In thousands) +Fair +Value +Useful Life +(Years) +Customer Contract Relationships +$ +530 +20 +The minimum royalty payment due was discounted based on the payment schedule and applicable discount rate, resulting in an outstanding royalty obligation of $ 0.5 million as of January 31, 2023, including $ 0.1 million recorded as a current liability. +Additional royalties based on sales activity will be recorded in the period that the associated revenue is earned. During the fourth quarter of 2023, we incurred $ 0.1 million +in e +xcess royalty expense, which is included in cost of revenue in our consolidated statement of income for the year ended January 31, 2023. +Note 3—Revenue Recognition +We derive revenue from the sale of (i) hardware including, digital color la +be +l printers and specialty OEM printing systems, portable data acquisition systems and airborne printers used in the flight deck and interior of commercial, business and military aircraft, (ii) related consumable supplies including paper, labels, tags, inks, toners and ribbons, (iii) repairs and maintenance of equipment and (iv) service agreements +. +Revenues disaggregated by primary geographic markets and major product types are as follows: +Primary geographical markets: +(In thousands) +2023 +2022 +2021 +United States +$ +91,917 +$ +68,185 +$ +70,911 +Europe +31,021 +31,922 +29,029 +Canada +8,393 +6,519 +5,574 +Asia +5,345 +5,926 +5,105 +Central and South America +4,589 +3,271 +3,950 +Other +1,262 +1,657 +1,464 +Total Revenue +$ +142,527 +$ +117,480 +$ +116,033 +F-19 +Table of Contents +Major product types: +(In thousands) +2023 +2022 +2021 +Hardware +$ +42,445 +$ +31,492 +$ +34,111 +Supplies +82,072 +73,244 +71,772 +Service and Other +18,010 +12,744 +10,150 +Total Revenue +$ +142,527 +$ +117,480 +$ +116,033 +In December 2022, we entered into an amended contract with one of our T&M customers that provided for a total payment of $ 3.25 +million to be received as a result of our claims allowable under French law relating to additional component costs we have incurred and will continue to incur in order to supply aerospace printers under the contract for the period beginning in April 2022 and continuing through 2025. As of January 31, 2023, $ +1.1 million was recognized as revenue in the consolidated income statement for the period ended January 31, 2023, in proportion to the total estimated shipments through the end of the contract period. The balance is recorded within deferred revenue, both current and +non-current, +and will be recognized into revenue based on shipments made of the printers during fiscal years 2024 and 2025. +Contract Assets and Liabilities +We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. +Our contract liabilities, which represent billings in excess of revenue recognized, are related to advanced billings for purchased service agreements and extended warranties. Contract liabilities were $ 412,000 and $ 262,000 at January 31, 2023 and January 31, 2022, respectively, and are recorded as current deferred revenue in the accompanying consolidated balance sheet. The decrease in the deferred revenue balance during the year ended January 31, 2023 is primarily due to $ 248,000 of revenue recognized during the period that was included in the deferred revenue balance at January 31, 2023 offset by cash payments received in advance of satisfying performance obligations. +Contract Costs +We have determined that certain costs related to obtaining sales contracts for our aerospace printer products meet the requirement to be capitalized. In the second quarter of fiscal 2022, we extended the remaining useful life of these deferred costs from 6 years to 20 years and changed the amortization method from units sold to the straight-line method. We believe these changes, based on +the life of the aircraft under the applicable sales contracts, appropriately reflects a more systematic and rational approach. This change was treated as a change in +accounting estimate that is affected by a change in accounting principle. The impact on net income was immaterial for the period ended January +31 +, +2022 +. The balance of these contract assets at +January 31, 2022 +, was $ +1.3 +million, and in the first quarter of fiscal +2023 +we incurred an additional $ +0.1 +million in contract costs that will be amortized over +19 +years. For the years ended January +31 +, +2023 +, +2022 +and +2021 +, we amortized contract costs of $ +75,000 +, $ +60,000 +and $ +27,000 +, respectively. The balance of deferred incremental direct costs net of accumulated amortization at January +31 +, +2023 +, was $ +1.4 +million, of which $ +0.1 +million is reported in other current assets and $ +1.3 +million is reported in ot +her as +sets in the accompanying consolidated balance sheet. +F-20 +Table of Contents +Note 4—Intangibl +e +Assets +Intangible assets are as follows: +January 31, 2023 +January 31, 2022 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Miltope: +Customer Contract Relationships +$ +3,100 +$ +( 2,777 +) +$ +— +$ +323 +$ +3,100 +$ +( 2,515 +) +$ +— +$ +585 +RITEC: +Customer Contract Relationships +2,830 +( 1,623 +) +— +1,207 +2,830 +( 1,557 +) +— +1,273 +TrojanLabel: +Existing Technology +2,327 +( 2,087 +) +94 +334 +2,327 +( 1,767 +) +127 +687 +Distributor Relations +937 +( 588 +) +27 +376 +937 +( 498 +) +46 +485 +Honeywell: +Customer Contract Relationships +27,773 +( 11,913 +) +— +15,860 +27,243 +( 11,073 +) +— +16,170 +Astro Machine: +Customer Contract Relationships +3,060 +( 306 +) +— +2,754 +— +— +— +— +Trademarks +420 +( 42 +) +— +378 +— +— +— +— +Intangible Assets, net +$ +40,447 +$ +( 19,336 +) +$ +121 +$ +21,232 +$ +36,437 +$ +( 17,410 +) +$ +173 +$ +19,200 +In the second quarter of 2022, we extended the remaining useful life of the pre-existing customer contract relationship intangibles for Honeywell International, Inc. (“Honeywell”) from +6 years to 20 years and for the RITEC intangibles we changed the amortization method which was based on revenue with a remaining life of 4 years to the straight-line method with a +20 -year +remaining life. We believe these changes, based on the life of the aircraft related to these intangibles, appropriately reflects a more systematic and rational approach to distributing the cost of these intangibles over their useful lives. The change in the amortization of the Honeywell customer contract relationship intangibles is being treated as a change in accounting estimate in 2022 and the change in the amortization of the RITEC customer contract relationship intangibles is being treated as a change in accounting estimate in 2022 that is effected by a change in accounting principle. The changes in amortization resulted in a $ 1.8 million decrease in amortization expense and a $ 1.8 million increase to net income for the period ended January 31, 2022. +There were no impairments to intangible assets during the periods ended January 31, 2023 and 2022. Amortization expense of $ 1.9 million, $ 2.2 million, and $ 4.1 million with regard to acquired intangibles has been included in the consolidated statements of income for the years ended January 31, 2023, 2022 and 2021, respectively. +Estimated amortization expense for the next +five +fiscal years is as follows: +(In thousands) +2024 +2025 +2026 +2027 +2028 +Estimated amortization expense +$ +2,378 +$ +1,719 +$ +1,718 +$ +1,7192 +$ +1,281 +F-21 +Table of Contents +Note 5—Inventories +The components of invento +ries +are as follows: +January 31, +2023 +2022 +(In thousands) +Materials and Supplies +$ +38,387 +$ +22,709 +Work-in-Progress +1,146 +1,489 +Finished Goods +23,221 +19,718 +62,754 +43,916 +Inventory Reserve +( 11,430 +) +( 9,307 +) +$ +51,324 +$ +34,609 +Finished goods inventory includes $ 2.3 million and $ 3.4 million of demonstration equipment at January 31, 2023 and 2022, respectively. +Note 6—Property, Plant and Equipment +Property, plant and equipment consist of the following: +January 31, +2023 +2022 +(In thousands) +Land and Land Improvements +$ +2,304 +$ +1,004 +Buildings and Leasehold Improvements +14,158 +12,666 +Machinery and Equipment +24,960 +23,238 +Computer Equipment and Software +13,972 +13,913 +Gross Property, Plant and Equipment +55,394 +50,821 +Accumulated Depreciation +( 41,106 +) +( 39,380 +) +Net Property Plant and Equipment +$ +14,288 +$ +11,441 +Depreciation expense on property, plant and equipment was $ 2.0 million for the year ended January 31, 2023 and $ 1.7 million and $ 1.9 million for the years ended January 31, 2022 and 2021, respectively. +During fiscal 2022, we +wrote-off +our Oracle EnterpriseOne enterprise resource planning (“ERP”) system due to the full implementation of a new ERP system in our US operations. The book value and related accumulated depreciation of the Oracle EnterpriseOne ERP system along with the balance of the related prepaid service and maintenance contracts were removed from the accompanying consolidated balance sheet at January 31, 2022, and we have recorded a net loss on the disposal of $ 696,000 , which is included in other income (expense) in the accompanying consolidated income statement for the year ended January 31, 2022. +F-22 +Table of Contents +Note 7—Accrued Expenses +Accrued expenses consist of the following: +January 31, +(In thousands) +2023 +2022 +Warranty +$ +1,072 +$ +834 +Professional Fees +311 +411 +Freight +— +347 +Lease Liability +275 +327 +Accrued Property & Sales Tax +187 +316 +Stockholder Relation Fees +86 +102 +Dealer Commissions +78 +139 +Other Accrued Expenses +1,299 +1,637 +$ +3,308 +$ +4,113 +Note 8—Credit Agreement and Long-Term Debt +Credit Agreement +In connection with the purchase of Astro Machine, on August 4, 2022, we entered into a Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment”) with Bank of America, N.A., as lender (the “Lender”). The Second Amendment amended the Amended and Restated Credit Agreement dated as of July 30, 2020, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of March 24, 2021, and the LIBOR Transition Amendment, dated as of December 24, 2021 (the “Existing Credit Agreement,” and the Existing Credit Agreement as amended by the Second Amendment, the “Amended Credit Agreement”), between the Company and the Lender. +The Amended Credit Agreement provides for (i) a new term loan in the principal amount of $ 6.0 million, which term loan was in addition to the existing term loan outstanding under the Existing Credit Agreement in the principal amount of $ 9.0 million as of the effective date of the Second Amendment, and (ii) an increase in the aggregate principal amount of the revolving credit facility available thereunder from $ 22.5 million to $ 25.0 million. At the closing of the Second Amendment, we borrowed the entire $ 6.0 million term loan and $ 12.4 million under the revolving credit facility, and the proceeds of such borrowings were used in part to pay the purchase price payable under the Purchase Agreement and certain related transaction costs. The revolving credit facility may otherwise be used for corporate purposes. +The Amended Credit Agreement requires that the term loan be paid in quarterly installments on the last day of each of our fiscal quarters over the term of the Amended Credit Agreement on the following repayment schedule: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2022 through July 31, 2023 is $ 375,000 ; and the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2023 through April 30, 2027 is $ 675,000 . The entire remaining principal balance of the term loan is required to be paid on August 4, 2027. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than August 4, 2027, and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate, on such date. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. +The interest rates under the Amended Credit Agreement are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the +F-23 +Table of Contents +Amended Credit Agreement (or, in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60 % to 2.50 % based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50 %, (ii) Bank of America’s publicly announced prime rate, (iii) the BSBY Rate plus 1.00 %, or (iv) 0.50 %, plus a margin that varies within a range of 0.60 % to 1.50 % based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15 % and 0.35 % based on our consolidated leverage ratio. The loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. +Amounts repaid under the revolving credit facility may be reborrowed, subject to our continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. +We must comply with various customary financial and +non-financial +covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and a minimum consolidated asset coverage ratio. The primary +non-financial +covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on our or our subsidiaries’ capital stock, to repurchase or acquire our or our subsidiaries’ capital stock, to conduct mergers or acquisitions, to sell assets, to alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of our or our subsidiaries’ business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Second Amendment. As of January 31, 2023, we believe we are in compliance with all of the covenants in the Credit Agreement. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests we hold in ANI ApS, AstroNova GmbH and AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island, and are guaranteed by, and secured by substantially all of the personal property assets of Astro Machine. +Summary of Outstanding Debt +Revolving Credit Facility +During fiscal 2023 we borrowed a net of $ 15.9 million on our revolving line of credit. The balance outstanding under the revolving line of credit bore interest at a weighted average rate of 6.71 % and 4.10 % for the years ended January 31, 2023 and January 31, 2022, respectively, and we incurred $ 752,000 and $ 4,000 for interest on this obligation during the years ended January 31, 2023 and January 31, 2022, respectively. Commitment fees on the undrawn portion of our revolving credit facility of $ 30,000 and $ 50,000 were incurred for the yea +rs ended January 31 +, 2023 +and January 31 +, 2022 +, respectively. Both the interest expense and commitment fees are included as interest expense in the accompanying consolidated income statement for all periods presented. At January 31 +, 2023 +, $ +9.1 +million remains available for borrowing under our revolving line of credit. +F-24 +Table of Contents +Long-Term Debt +Long-term debt in the accompanying condensed consolidated balance sheets under the Amended Credit Agreement is as follows: +January 31, +(In thousands) +2023 +2022 +USD Term Loan (6.78% as of January 31, 2023); maturity date of August 4, 2027 +$ +14,250 +$ +— +USD Term Loan (2.35% as of January 31, 2022); maturity date of September 30, 2025 +— +$ +9,250 +14,250 +9,250 +Debt Issuance Costs, net of accumulated amortization +( 110 +) +( 96 +) +Current Portion of Term Loan +( 2,100 +) +( 1,000 +) +Long-Term Debt +$ +12,040 +$ +8,154 +During the years ended January 31, 2023, 2022 and 2021, we recognized $ 0.6 million, $ 0.3 million and $ 0.5 million of interest expense on our long-term debt, respectively, which was included in interest expense in the accompanying consolidated income statement for all periods presented. +The schedule of required principal payments remaining on our long-term debt outstanding as of January 31, 2023 is as follows: +(In thousands) +Fiscal 2024 +$ +2,100 +Fiscal 2025 +2,700 +Fiscal 2026 +2,700 +Fiscal 2027 +2,700 +Fiscal 2028 +4,050 +$ +14,250 +Note 9—Paycheck Protection Program Loan +On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood pursuant to which we borrowed $ 4.4 million (the “PPP Loan”) from Greenwood under the Paycheck Protection Program (“PPP”) administered by the SBA and authorized by the CARES Act. +The PPP Loan, originally scheduled to mature on May 6, 2022 , was unsecured and bore interest at a rate of 1.0 % per annum, accruing from the loan date. +On June 15, 2021, Greenwood notified us that the SBA approved our application for forgiveness of the entire $ 4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, in the second quarter of fiscal 2022, we recorded a $ 4.5 million gain on extinguishment of debt, which is included in the accompanying consolidated income statement for the period ended January 31, +2022. +Note 10—Derivative Financial Instruments and Risk Management +In 2017, we entered into a cross-currency interest rate swap and an interest rate swap to manage the interest rate risk. +F-25 +Table of Contents +On July 30, 2020, we terminated these two swaps. The terms of the Amended and Restated Credit Agreement dated as of July 30, 2020, caused those swaps to cease to be effective hedges of the underlying exposures. The termination of the swaps was contracted immediately prior to the end of the second quarter of fiscal 2021 at a cash cost of approximately $ 0.7 million which was settled in the third quarter of fiscal 2021. Upon termination, the remaining balance of $ 58,000 in accumulated other comprehensive loss related to the cross-currency interest rate swap was reclassified into earnings as the forecasted foreign currency interest payments will not occur. +The $ 0.2 million remaining balance in accumulated other comprehensive loss related to the interest rate swap was amortized into earnings through the original term of the hedge relationship as the underlying floating interest rate debt still exists. +At January 31, 2023, we have fully reclassified all of the net losses on the frozen other comprehensive income balance from accumulated other comprehensive loss to earnings associated with the terminated interest rate swap due to the payment of variable interest associated with the floating interest rate debt. +The following tables present the impact of the derivative instruments in our consolidated financial statements for the years ended January 31, 2023 and 2022: +Years Ended +Cash Flow Hedge +(In thousands) +Amount of Gain(Loss) +Recognized in OCI +on +Derivative +Location of Gain (Loss) +Reclassified from +Accumulated OCI into +Income +Amount of Gain (Loss) +Reclassified from +Accumulated OCI into +Income +January 31, +2023 +January 31, +2022 +January 31, +2023 +January 31, +2022 +Swap contracts +$ +— +$ +— +Other Income +$ +( 59 +) +$ +( 79 +) +Note 11—Employee Retention Credit +The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes. On December 27, 2020, Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which amended and extended ERC availability under Section 2301 of the CARES Act. Before the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we were ineligible for the ERC because we received the PPP Loan. Following enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we and other businesses that received loans under that program became retroactively eligible for the ERC. +As a result of the foregoing legislation, we were eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to seventy percent ( 70 %) of the qualified wages that we paid to our employees between December 31, 2020 and June 30, 2021. Qualified wages are limited to $ 10,000 per employee per calendar quarter in 2021 for a maximum ERC per employee of $ 7,000 per calendar quarter in 2021. +We evaluated our eligibility for the ERC in the second quarter of calendar year 2021 +. In order to qualify for the ERC, we needed to experience a +20 +% reduction in gross receipts from either (1) +the same quarter in calendar year 2019 +or (2) +the immediately preceding quarter to the corresponding calendar quarter in 2019 +. We determined that we qualified for the employee retention credit under the first scenario for wages paid in calendar year 2020 +and the first calendar quarter of 2021 +. In the second quarter of the current year, we amended certain payroll tax filings and applied for a refund of $ +3.1 +million. Since there is no US GAAP guidance for +for-profit +business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, we determined the appropriate accounting treatment by analogy to other guidance. We accounted for the employee retention credit by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, of +F-26 +Table of Contents +International Financial Reporting Standards (IFRS). Under an IAS 20 analogy, a business entity would recognize the credit on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (i.e., tax credit) is intended to compensate when there is reasonable assurance (i.e., it is probable) that the entity will comply with any conditions attached to the grant and the grant (i.e., tax credit) will be received. +We recorded a $ +3.1 +million receivable in the second quarter of fiscal 2022 +for the ERC receivable, which was outstanding as of January 31 +, 2022 +and is included as such in the accompanying consolidated balance sheet. The $ +3.1 +mil +lion of ERCs was recognized as a reduction in employer payroll taxes and allocated to the financial statement captions from which the employee’s taxes were originally incurred. As a result, we recorded a reduction in expenses of $ 1.7 million in cost of revenue, $ 0.8 million in selling and marketing, $ 0.3 million in research and development and $ 0.3 million in general and administrative which is reflected in the accompanying consolidated income statement for the year ended January 31, 2022. On March 22, 2022, we received the $ 3.1 million for the ERC. +Note 12—Royalty Obligation +In fiscal 2018, AstroNova, Inc. entered into an Asset Purchase and License Agreement with Honeywell International, Inc. to acquire an exclusive, perpetual, world-wide license to manufacture Honeywell’s narrow-format flight deck printers for two aircraft families along with certain inventory used in the manufacturing of the licensed printers. The purchase price included a guaranteed minimum royalty payment of $ 15.0 million, to be paid in quarterly installments over a +ten-year +period. Royalty payments are based on gross revenues from the sales of the printers, paper and repair services of the licensed products. The royalty rates vary based on the year in which they are paid or earned and product sold or service provided, and range from single-digit to mid double-digit percentages of gross revenue. +The guaranteed minimum royalty payment obligation was recorded at the present value of the minimum annual royalty payments. As of January 31, 2023, we had paid an aggregate of $ +9.5 million of the guaranteed minimum royalty obligation. At January 31, 2023, the current portion of the outstanding guaranteed minimum royalty obligation of $ 1.6 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $ 3.0 million is reported as a long-term liability on our consolidated balance sheet. In addition to the guaranteed minimum royalty payments, for the periods ended January 31, 2023 and January 31, 2022, we also incurred excess royalty expense of $ 1.3 million and $ 0.5 million, respectively, which is included in cost of revenue in our consolidated statements of income. A total of $ 0.4 million of excess royalty is payable and reported as a current liability on our consolidated balance sheet at January 31, 2023. +In fiscal 2023, AstroNova, Inc. entered into a second Asset Purchase and License Agreement with Honeywell International, Inc. as further discussed in Note 2. +Note 13—Leases +We enter into lease contracts for certain of our facilities at various locations worldwide. Our leases have remaining lease terms of one to six years, some of which include options to extend the lease term for periods of up to five years when it is reasonably certain that we will exercise such options. +Balance sheet and other information related to our leases is as follows: +Operating Leases +(In thousands) +Balance Sheet Classification +January 31, +2023 +January 31, +2022 +Lease Assets +Right of Use Assets +$ +794 +$ +1,094 +Lease Liabilities—Current +Other Accrued Expenses +$ +275 +$ +327 +Lease Liabilities—Long Term +Lease Liabilities +$ +555 +$ +808 +F-27 +Table of Contents +Lease cost information is as follows: +Operating Leases +(In thousands) +Statement of Income Classification +2023 +2022 +Operating Lease Costs +General and Administrative Expense +$ +460 +$ +510 +At January 31, 2023, maturities of operating lease liabilities +are +as follows: +(In thousands) +2024 +$ +302 +2025 +199 +2026 +154 +2027 +149 +2028 +92 +Thereafter +— +Total Lease Payments +896 +Less: Imputed Interest +( 66 +) +Total Lease Liabilities +$ +830 +As of January 31, 2023, the weighted-average remaining lease term and weighted-average discount rate for our operating leases are 3.8 years and 3.87 %, respectively. We calculated the weighted-average discount rate using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term. +Supplemental cash flow information related to leases is as follows: +(In thousands) +2023 +2022 +Cash paid for operating lease liabilities +$ +314 +$ +372 +Note 14—Accumulat +ed O +ther Comprehensive Loss +The changes in the balance of accumulated other comprehensive loss by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Net +Unrealized +Gain (Losses) +on Cash Flow +Hedges +Total +Balance at January 31, 2020 +$ +( 985 +) +$ +( 108 +) +$ +( 1,093 +) +Other Comprehensive Income (Loss) before reclassification +710 +( 239 +) +471 +Amounts Reclassified from AOCI to Earnings +— +193 +193 +Cross-Currency Interest Rate Swap Termination +— +45 +45 +Other Comprehensive Income (Loss) +710 +( 1 +) +709 +Balance at January 31, 2021 +$ +( 275 +) +$ +( 109 +) +$ +( 384 +) +Other Comprehensive Loss before reclassification +( 1,426 +) +— +( 1,426 +) +Amounts Reclassified from AOCI to Earnings +— +62 +62 +Other Comprehensive Income (Loss) +( 1,426 +) +62 +( 1,364 +) +Balance at January 31, 2022 +$ +( 1,701 +) +$ +( 47 +) +$ +( 1,748 +) +Other Comprehensive Income (Loss) before reclassification +( 537 +) +— +( 537 +) +Amounts reclassified from AOCI to Earnings +— +47 +47 +Other Comprehensive Income (Loss) +( 537 +) +47 +( 490 +) +Balance at January 31, 2023 +$ +( 2,238 +) +$ +— +$ +( 2,238 +) +F-28 +Table of Contents +The amounts presented above in other comprehensive income (loss) are net of taxes except for translation adjustments associated with our German, Danish and Shanghai subsidiaries. +Note 15—Shareholders’ Equity +During fiscal years 2023 and 2022, certain of our employees delivered a total of 17,752 and 27,222 shares, respectively, of our common stock to satisfy the exercise price and related taxes for stock options exercised and restricted stock vesting. The shares delivered were valued at a total of $ 0.3 million and $ 0.4 millio +n, resp +ectively, and are included in treasury stock in the accompanying consolidated balance sheets +a +t January 31, 2023 and 2022. These transactions did not impact the number of shares authorized for repurchase under our current repurchase program. +Note 16—Share-Based Compensation +The Company maintains the following share-based compensation plans: +Stock Plans: +We have one equity incentive plan from which we are authorized to grant equity awards, the AstroNova, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for, among other things, the issuance of awards, including incentive stock options, +non-qualified +stock options, stock appreciation rights, time-based restricted stock units (“RSUs”), or performance-based restricted stock units (“PSUs”) and restricted stock awards (RSAs). The 2018 Plan authorizes the issuance of up to 950,000 shares of common stock, plus an additional number of shares equal to the number of shares subject to awards granted under the previous equity incentive plans that are forfeited, cancelled, satisfied without the issuance of stock, otherwise terminated (other than by exercise), or, for shares of stock issued pursuant to any unvested award, that are reacquired by us at not more than the grantee’s purchase price (other than by exercise). Under the 2018 Plan, all awards to employees generally have a minimum vesting period of one year. Options granted under the 2018 Plan must be issued at an exercise price of not less than the fair market value of our common stock on the date of grant and expire after ten years. Under the 2018 Plan, there were 124,962 unvested RSUs; 128,793 unvested PSUs; 21,172 unvested RSAs and options to purchase an aggregate of 135,500 shares outstanding as of January 31, 2023. +In addition to the 2018 Plan, we previously granted equity awards under our 2015 Equity Incentive Plan (the “2015 Plan”) and our 2007 Equity Incentive Plan (the “2007 Plan”). No new awards may be issued under either the 2007 or 2015 Plans, but outstanding awards will continue to be governed by those plans. As of January 31, 2023, options to purchase an aggregate of 276,574 shares were outstanding under the 2007 Plan and options to purchase an aggregate of 135,125 shares were outstanding under the 2015 Plan. +We also have a +Non-Employee +Director Annual Compensation Program (the “Program”), under which each of our +non-employee +directors automatically receives a grant of restricted stock on the date of their +re-election +to our board of directors. The number of whole shares granted is equal to the number calculated by dividing the stock component of the director compensation amount determined by the compensation committee for that year by the fair market value of our stock on that day. The value of the restricted stock award for fiscal 2023 was $ 65,000 . Shares of restricted stock granted under the Program become vested on the first anniversary of the date of grant, conditi +one +d upon the recipient’s continued service on our board of directors through that date. +F-29 +Table of Contents +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +Years Ended January 31 +2023 +2022 +2021 +(In thousands) +Stock Options +$ +7 +$ +210 +$ +517 +Restricted Stock Awards and Restricted Stock Units +1,271 +1,266 +1,285 +Employee Stock Purchase Plan +12 +17 +17 +Total +$ +1,290 +$ +1,493 +$ +1,819 +Stock Options: +Aggregated information regarding stock options granted under the plans is summarized below: +Number +of Shares +Weighted- +Average +Exercise +Price Per +Share +Options Outstanding, January 31, 2020 +679,044 +$ +14.46 +Options Granted +— +— +Options Exercised +( 1,200 +) +7.60 +Options Forfeited +( 54,361 +) +12.89 +Options Cancelled +( 1,400 +) +7.36 +Options Outstanding, January 31, 2021 +622,083 +$ +14.63 +Options Granted +— +— +Options Exercised +( 6,425 +) +9.34 +Options Forfeited +( 17,615 +) +15.09 +Options Cancelled +— +— +Options Outstanding, January 31, 2022 +598,043 +$ +14.67 +Options Granted +— +— +Options Exercised +( 42,944 +) +8.74 +Options Forfeited +( 5,500 +) +15.42 +Options Cancelled +( 2,400 +) +8.09 +Options Outstanding, January 31, 2023 +547,199 +$ +15.16 +Set forth below is a summary of options outstanding at January 31, 2023: +Outstanding +Exercisable +Range of +Exercise prices +Number of +Shares +Weighted- +Average +Exercise Price +Weighted- +Average +Remaining +Contractual Life +Number of +Shares +Weighted- +Average +Exercise Price +Weighted +Average +Remaining +Contractual +Life +$ 5.00 - 10.00 +— +$ +— +— +— +$ +— +— +$ 10.01 - 15.00 +332,849 +13.68 +2.9 +332,849 +13.68 +2.9 +$ 15.01 - 20.00 +214,350 +17.45 +4.8 +214,350 +17.45 +4.8 +547,199 +$ +15.16 +3.7 +547,199 +$ +15.16 +3.7 +No options were granted during fiscal 2023 or fiscal 2022. As of January 31, 2023, there was no unrecognized compensation expense related to the unvested stock options granted under the plans +. +F-30 +Table of Contents +As of January 31, 2023, the aggregate intrinsic value (the aggregate difference between the closing stock price of our common stock on January 31, 2023, and the exercise price of the outstanding options) that would have been received by the option holders if all options had been exercised was $ 50,000 for all exercisable options and all options outstanding. The total aggregate intrinsic value of options exercised during fiscal 2023, 2022 and 2021 was $ 200,000 , $ 26,000 , and $ 4,000 , +respectively. +Restricted Stock Units, Performance-Based Restricted Stock Units and Restricted Stock Awards : +Aggregated information regarding RSUs, PSUs and RSAs granted under the Plan is summarized below: +RSUs, PSUs & +RSAs +Weighted-Average +Grant Date Fair Value +Outstanding at January 31, 2020 +134,634 +$ +16.79 +Granted +245,131 +7.61 +Vested +( 64,997 +) +17.28 +Forfeited +( 117,355 +) +8.83 +Outstanding at January 31, 2021 +197,413 +$ +9.96 +Granted +151,406 +14.51 +Vested +( 126,939 +) +10.43 +Forfeited +( 900 +) +14.26 +Outstanding at January 31, 2022 +220,980 +$ +13.23 +Granted +141,371 +12.70 +Vested +( 85,324 +) +13.45 +Forfeited +( 2,100 +) +13.25 +Outstanding at January 31, 2023 +274,927 +$ +12.82 +As of January 31, 2023, there was $ 2.0 million of unrecognized compensation expense related to unvested RSUs, PSUs and RSAs. This expense is expected to be recognized over a weighted average period of 1.3 years. +Employee Stock Purchase Plan (ESPP): +On June 7, 2022, we adopted the AstroNova Inc. 2022 Employee Stock Purchase Plan (“2022 ESPP”) to replace our previous Employee Stock Purchase Plan (the “Prior ESPP”). The 2022 ESPP allows eligible employees to purchase shares of common stock at a 15 % discount from fair value on the first or last day of an offering period, whichever is less. A total of 40,000 shares were reserved for issuance under this plan and 5,045 shares were purchased under the 2022 ESSP during the year ended January 31, 2023. During the periods ended January 31, 2023 and January 31, 2022, there were 1,550 and 8,092 shares, respectively, purchased under the Prior ESPP, and no additional purchases may be made under the Prior ESPP. As of January 31, 2023, 34,955 shares remain available for purchase under the 2022 ESPP. +Note 17—Income Taxes +The components of income (loss) before income taxes are as follows: +2023 +2022 +2021 +(In thousands) +Domestic +$ +1,773 +$ +5,046 +$ +( 1,193 +) +Foreign +1,637 +1,988 +3,372 +$ +3,410 +$ +7,034 +$ +2,179 +F-31 +Table of Contents +The components of the provision for income taxes are as follows: +2023 +2022 +2021 +(In thousands) +Current: +Federal +$ +902 +$ +( 183 +) +$ +1,272 +State +313 +76 +224 +Foreign +870 +501 +420 +2,085 +394 +1,916 +Deferred: +Federal +$ +( 1,053 +) +$ +180 +$ +( 910 +) +State +( 315 +) +177 +( 189 +) +Foreign +32 +( 146 +) +78 +( 1,336 +) +211 +( 1,021 +) +$ +749 +$ +605 +$ +895 +Total income tax provision differs from the expected tax provision as a result of the following: +2023 +2022 +2021 +(In thousands) +Income Tax Provision at Statutory Rate +$ +716 +$ +1,477 +$ +458 +Change in Valuation Allowance +182 +57 +( 81 +) +Foreign Rate Differential +157 +61 +197 +Change in Reserves Related to ASC 740 Liability +93 +( 245 +) +( 10 +) +Denmark Statutory Audit +— +— +341 +Meals and Entertainment +— +9 +11 +Canada Withholding Taxes +— +— +62 +Global Intangible Low Taxed Income +— +— +14 +Foreign Derived Intangible Income +( 180 +) +( 55 +) +( 150 +) +R&D Credits +( 160 +) +( 180 +) +( 157 +) +Share Based Compensation +( 52 +) +( 95 +) +171 +Return to Provision Adjustment +( 22 +) +368 +( 2 +) +State Taxes, Net of Federal Tax Effect +( 2 +) +143 +28 +PPP Loan Forgiveness +— +( 937 +) +— +Other +17 +2 +13 +$ +749 +$ +605 +$ +895 +Our effective tax rate for fiscal 2023 was 22.0 % compared to 8.6 % in fiscal 2022 and 41.1 % in fiscal 2021. The increase in the effective tax rate in fiscal 2023 from fiscal 2022 is primarily related to the absence of the PPP loan forgiveness which is +tax-exempt +income that was a +one-time +item that reduced the rate in fiscal 2022. Specific items increasing the effective tax rate in fiscal 2023 include the change in reserves related to ASC 740 liability and the increase in the valuation allowance recorded on China net operating losses. This increase was offset by state taxes, return to provision adjustments, share-based compensation, R&D tax credits, and foreign derived intangible income (“FDII”) deduction. +The decrease in the effective tax rate in fiscal 2022 from fiscal 2021 is primarily related to the +one-time +impact of the PPP loan forgiveness +tax-exempt +income. Specific items decreasing the effective tax rate include PPP loan forgiveness +tax-exempt +income, R&D tax credits, foreign derived intangible income (“FDII”) deduction and change in reserves related to ASC 740 liabilities. This decrease was offset by state taxes, return to provision adjustments, and taxes on foreign earnings. +F-32 +Table of Contents +The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31, +(In thousands) +2023 +2022 +Deferred Tax Assets: +Inventory +$ +2,710 +$ +2,159 +Honeywell Royalty Liability +3,008 +2,655 +State R&D Credits +1,851 +1,925 +Share-Based Compensation +620 +593 +Bad Debt +180 +213 +Warranty Reserve +258 +198 +Compensation Accrual +248 +322 +Net Operating Loss +135 +152 +ASU 842 Adjustment – Lease Liability +53 +93 +Unrecognized State Tax Benefits +58 +64 +Foreign Tax Credit +154 +154 +Deferred Service Contract Revenue +90 +61 +Section 174 Capitalization* +1,175 +— +Other +281 +224 +10,821 +8,813 +Deferred Tax Liabilities: +Accumulated Tax Depreciation in Excess of Book Depreciation +1,037 +455 +Intangibles +694 +767 +ASU 842 Adjustment – Lease Liability +50 +90 +Other +180 +318 +1,961 +1,630 +Subtotal +8,860 +7,183 +Valuation Allowance +( 2,120 +) +( 1,778 +) +Net Deferred Tax Assets +$ +6,740 +$ +5,405 +* +Beginning in fiscal 2023, changes to Section 174 of the Internal Revenue Code made by the Tax Cuts and Jobs Act of 2017 no longer permit an immediate deduction for research and development expenditures in the tax year that such costs are incurred. These costs are capitalized resulting in an increase in deferred tax assets of $ 1.2 million. +Deferred taxes are reflected in the consolidated balance sheet as follows: +January 31, +2023 +2022 +Deferred Tax Assets +6,907 +5,591 +Deferred Tax Liabilities +( 167 +) +( 186 +) +Total Net Deferred Tax Assets +$ +6,740 +$ +5,405 +The valuation allowances of $ 2.1 million at January 31, 2023 and $ 1.8 million at January 31, 2022, relate to Rhode Island research and development tax credit carryforwards, foreign tax credit carryforwards, and China’s net operating losses that are expected to expire unutilized. +F-33 +Table of Contents +At January 31, 2023, we had net operating loss carryforwards of $ 0.1 million in China, which expire in 2024 through 2028 . We have net operating loss carryforwards of less than $ 0.1 million in France, which can be carried forward indefinitely. We expect to utilize the net operating loss carryforwards in France before in future tax periods. +At January 31, 2023, we had state research credit carryforwards of approximately $ 1.9 million which expire in 2023 through 2030 . Additionally, we had $ 0.2 million of foreign tax credits. We maintain a full valuation allowance against these credits as we expect these credits to expire unused. +We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows: +2023 +2022 +2021 +(In thousands) +Balance, beginning of the year +$ +303 +$ +384 +$ +362 +Increases in prior period tax positions +24 +63 +59 +Increases in current period tax positions +136 +67 +5 +Reductions related to lapse of statutes of limitations +( 49 +) +( 211 +) +( 42 +) +Balance, end of the year +$ +414 +$ +303 +$ +384 +During fiscal 2023 and 2022, we released $ 49,000 and $ 211,000 , respectively, of uncertain tax positions including accrued interest and penalties relating to a change in various unrecognized tax positions. The Company has accrued potential interest and penalties of $ 77,000 included in income taxes payable in the accompanying consolidated balance sheet at the end of January 31, 2023. +The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. In fiscal 2023, we released $ 27,000 related to a federal tax exposure for the fiscal 2019 tax year and $ 22,000 of state nexus positions as a result of the expiration of the statute of limitations. +U.S. income taxes have not been provided on $ 8.5 million of undistributed earnings of our foreign subsidiaries since it is our intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, the Company would not be subject to U.S. tax as a result of the Tax Act but could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical. +Note 18—Nature of Operations, Segment Reporting and Geographical Information +Our operations consist of the design, development, manufacture and sale of specialty printers and data acquisition and analysis systems, including both hardware and software and related consumable supplies. We organize and manage our business as a portfolio of products and services designed around a common theme of data acquisition and information output. We have two reporting segments consistent with our revenue product groups: Product Identification (“PI”) and Test & Measurement (“T&M”). +Our PI segment produces an array of high-technology digital color and monochrome label printers and mini presses, labeling software and supplies for a variety of commercial industries worldwide and includes our newly acquired Astro Machine. AstroNova’s T&M segment produces data acquisition systems used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing. The T&M segment also includes our line of aerospace flight deck and cabin printers. +F-34 +Table of Contents +Business is conducted in the United States and through foreign branch offices and subsidiaries in Canada, Europe, China, Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United States are conducted through wholly owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction. +The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies herein. We evaluate segment performance based on the segment profit before corporate and financial administration expenses. +Summarized below are the revenue and segment operating profit (loss) (both in dollars and as a percentage of revenue) for each reporting segment: +($ in thousands) +Revenue +Segment Operating Profit +(Loss) +Segment Operating Profit (Loss) +as a % of Revenue +2023 +2022 +2021 +2023 +2022 +2021 +2023 +2022 +2021 +Product Identification +$ +103,089 +$ +90,915 +$ +90,268 +$ +7,889 +$ +10,411 +$ +12,885 +7.7 +% +11.5 +% +14.3 +% +T&M +39,438 +26,565 +25,765 +8,989 +3,398 +( 1,032 +) +22.8 +% +12.8 +% +( 4.0 +)% +Total +$ +142,527 +$ +117,480 +$ +116,033 +16,878 +13,809 +11,853 +11.8 +% +11.8 +% +10.2 +% +Corporate Expenses +11,435 +9,553 +9,420 +Operating Income +5,443 +4,256 +2,433 +Other Income (Expense), Net +( 2,033 +) +2,778 +( 254 +) +Income Before Income Taxes +3,410 +7,034 +2,179 +Income Tax Provision +749 +605 +895 +Net Income +$ +2,661 +$ +6,429 +$ +1,284 +No customer accounted for greater than 10 % of net revenue in fiscal 2023, 2022 or 2021. +Other information by segment is presented below: +(In thousands) +Assets +January 31, +2023 +2022 +Product Identification +$ +69,607 +$ +51,732 +T&M +60,730 +50,374 +Corporate* +8,870 +12,849 +Total +$ +139,207 +$ +114,955 +* +Corporate assets consist principally of cash, cash equivalents, deferred tax assets and refunds, and certain prepaid corporate assets. +(In thousands) +Depreciation and +Amortization +Capital Expenditures +2023 +2022 +2021 +2023 +2022 +2021 +Product Identification +$ +2,219 +$ +1,157 +$ +1,835 +$ +121 +$ +847 +$ +1,563 +T&M +1,697 +2,837 +4,148 +108 +949 +1,024 +Total +$ +3,916 +$ +3,994 +$ +5,983 +$ +229 +$ +1,796 +$ +2,587 +F-35 +Table of Contents +Geographical Data +Presented below is selected financial information by geogr +ap +hic area: +Long-Lived Assets* +(In thousands) +Revenue +January 31, +2023 +2022 +2021 +2023 +2022 +United States +$ +91,917 +$ +68,185 +$ +70,911 +$ +34,277 +$ +29,131 +Europe +31,021 +31,922 +29,029 +1,230 +1,486 +Canada +8,393 +6,519 +5,574 +4 +9 +Asia +5,345 +5,926 +5,105 +9 +15 +Central and South America +4,589 +3,271 +3,950 +— +— +Other +1,262 +1,657 +1,464 +— +— +Total +$ +142,527 +$ +117,480 +$ +116,033 +$ +35,520 +$ +30,641 +* +Long-lived assets exclude goodwill assigned to the T&M segment of $ 4.5 million at both January 31, 2023 and 2022 and $ 10.1 million and $ 7.6 million assigned to the PI segment at January 31, 2023 and 2022, respectively. +Note 19—Employee Benefit Plans +We sponsor a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code. +All contributions are deposited into trust funds. It is our policy to fund any contributions accrued. Our annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $ 0.5 million in fiscal 2023, $ 0.5 million in fiscal 2022 and $ 0.4 million in fiscal 2021. +Note 20—Product Warranty Liability +We offer a manufacturer’s warranty for the majority of our hardware products. The specific terms and conditions of warranty vary depending upon the products sold and the country in which we do business. We estimate the warranty costs based on historical claims experience and record a liability in the amount of such estimates at the time product revenue is recognized. We regularly assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows: +( +In thousands) +2023 +2022 +2021 +Balance, beginning of the year +$ +834 +$ +730 +$ +850 +Provision for Warranty Expense +2,077 +2,174 +855 +Cost of Warranty Repairs +( 1,839 +) +( 2,070 +) +( 975 +) +Balance, end of the year +$ +1,072 +$ +834 +$ +730 +During fiscal 2022, we incurred incremental costs because of a product quality issue with one of our vendors. As the result of discussions with the vendor, which was responsible for the product quality issue, we entered into an agreement wh +ere +by the vendor paid us $ 975,000 as partial reimbursement of the costs we incurred in supporting our customers with respect to the product quality issue. For the period ended January 31, 2022, we recorded this payment to offset cost of goods in our PI segment for the product lines effected to partially reverse the accounting impact when the original costs of the quality issues were +incurred. +F-36 +Table of Contents +Note 21—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts, which constitute our customer base. We periodically perform +on-going +credit evaluations of our customers. We have not historically experienced significant credit losses on collection of our accounts receivable. +During the years ended January 31, 2023, 2022 and 2021, one vendor accounted for 18.7 %, 23.3 % and 23.2 % of purchases, respectively, and 16.2 %, 15.4 % and 28.3 % of accounts payable, respectively, as of January 31, 2023, 2022 and 2021. +Note 22—Commitments and Contingencies +In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. At January 31, 2023, our purchase commitments totaled $ 25.8 million, with $ 22.8 million due within 12 months, some of which are +non-cancelable. +We are also subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +Note 23—Fair Value Measurements +Assets and Liabilities Not Recorded at Fair Value on the Cons +olid +ated Balance Sheet +Our long-term debt, including the current portion of long-term debt not reflected in the financial statements at fair value, is reflected in the table below: +Fair Value Measurement at +January 31, 2023 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +14,310 +$ +14,310 +$ +14,250 +Fair Value Measurement at +January 31, 2022 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +9,255 +$ +9,255 +$ +9,250 +The fair value of our long-term debt, including the current portion, is estimated by discounting the future cash flows using current interest rates at which similar borrowings with the same maturities would be made to borrowers with similar credit ratings and is classified as Level 3. +F-3 +7 +Table of Contents +ASTRONOVA, INC. +SCHEDULE II—VA +LUA +TION AND Q +U +AL +IFY +ING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision/ +(Benefit) +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts (1): +(In thousands) +Year Ended January 31, +2023 +$ +826 +$ +100 +$ +( 195 +) +$ +731 +2022 +$ +1,054 +$ +50 +$ +( 278 +) +$ +826 +2021 +$ +856 +$ +194 +$ +4 +$ +1,054 +(1) +The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet dates. +(2) +Uncollectible accounts written off, net of recoveries. +F-3 +8 \ No newline at end of file diff --git a/raw/filings/0000008146/2022/0001193125-23-103662/filing_metadata.csv b/raw/filings/0000008146/2022/0001193125-23-103662/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..8e55ad6cec9b8e72fae3694ca7cbecc5f5312026 --- /dev/null +++ b/raw/filings/0000008146/2022/0001193125-23-103662/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2023-04-17,2023-01-31,2023-04-17T20:18:43.000Z,0001193125-23-103662,d415415d10k.htm,10-K,10820560,1,1,https://www.sec.gov/Archives/edgar/data/8146/000119312523103662/d415415d10k.htm,https://www.sec.gov/Archives/edgar/data/8146/000119312523103662/,2022,2022,1 diff --git a/raw/filings/0000008146/2022/0001193125-23-103662/item1.txt b/raw/filings/0000008146/2022/0001193125-23-103662/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..9fb5c6193c967b5be46c0bad1b58dabd4200cb1d --- /dev/null +++ b/raw/filings/0000008146/2022/0001193125-23-103662/item1.txt @@ -0,0 +1,101 @@ +Item 1 . Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +We design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation. +Our products are distributed worldwide through our own sales force, authorized dealers, and independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel ® , TrojanLabel ® and GetLabels ™ brand names. The T&M segment includes our line of aerospace printers, ethernet networking products and test and measurement data acquisition systems sold under the AstroNova ® brand name. Refer to Note 18, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers and related accessories, tabbers, conveyors, and envelope feeders. Astro Machine is reported as a part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisition,” in our audited consolidated financial statements included elsewhere in this report. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 24 through 37 of this Annual Report on Form 10-K. +1 +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets globally. +PI products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers and light commercial label printers, direct-to-package printers, high-volume presses, and specialty original equipment manufacturer (“OEM”) printing systems, as well as a wide range of label, tag and flexible packaging material substrates and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. PI products sold under the Astro Machine brand acquired on August 4, 2022, also include a variety of label printers, envelope and packaging printing, and related processing and handling equipment. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed, stored and presented in various visual output formats. +Product Identification +Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. Additionally, PI includes the recently acquired Astro Machine brand that is sold directly to end users though our channel partners and to OEM customers, who generally rebrand these products for sales to their customers. The segment provides a wide array of digital end-to-end product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Our customers typically label or mark products on a short- to mid-size run basis and benefit from the efficiency, flexibility, and cost-savings of digitally printing labels or packaging in their facility, on-demand, with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready digital color label printers, and specialty OEM printing systems for either standalone output or inline integration with existing pre-processing and finishing systems. Customers use our digital printing products in a wide variety of industries, including chemicals, cosmetics, food and beverage, medical products, nutraceuticals, pharmaceuticals, and many others. TrojanLabel expands our customer market by providing a range of higher volume digital color printers, OEM printing systems, and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners, and thermal transfer ribbons designed for optimal performance with our printing hardware, and are also compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models include a selection of professional tabletop digital color label printers. We recently introduced the QL-E100, an entry-level, compact, full-color tabletop label printer. It delivers professional-quality output at a lower price point, which we believe is ideal for targeting smaller businesses entering the on-demand label market, and larger enterprises that require multiple on-demand label printers at distributed locations throughout their facilities. The high-speed QL-120X was built on our pioneering and successful Kiaro! platform. To expand the product line further, the QL-120Xe, a sister product to the dye ink QL-120X, was introduced in 2021 as a lower price point option for low-volume applications and price-sensitive customers. In 2020, we introduced the QL-120D, which features high-performance pigment inks that can produce durable BS5609-certified labels and labels that can withstand a wide range of demanding environmental conditions from sterilization to cryogenic freezing. Introduced early in 2019, the high-performance QL-300 was the first 5-color toner-based electrophotographic tabletop production label printer in the market. In addition, our +2 +QuickLabel line of printers includes the QL-850, our next-generation wide-format inkjet color label printer, the QL-30 and QL-60 series, a family of high-end monochrome printers, and the QLS-4100 XE, a unique solution with the ability to digitally print full-color labels and tags using thermal transfer ribbon technology. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to large-scale all-in-one inline specialty printing systems for both brand owners, OEMs, and commercial printers. The T2-C, a compact, digital mini-press designed for 24/7 label production, includes numerous differentiating features for several end-use market applications. The T2-L is a narrow-format digital press designed specifically for flexible packaging substrates. Beyond label printing, the T3-OPX, the first of its kind direct-to-package printer, which was introduced in late 2020, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many other items using pigment inks that are resistant to both water and UV exposure. A professional high-volume label press and finishing system, the T4, enables print, die-cut, and lamination in an all-in-one machine with a much smaller footprint than others in the market. +GetLabels provides a broad range of high-quality supplies for both our printers and third-party printers, including label and tag materials, inks, toner, and thermal transfer material, all specifically designed and constructed for a wide variety of labeling applications. Label material and substrates are carefully qualified and tested on-site in our Rhode Island Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +Astro Machine sells a variety of label printers, envelope and package printers and related envelope tabbers, conveyors and feeders to OEM customers who re-label the products with their own brand. +The PI segment provides worldwide training and support as well as develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems. +Test & Measurement +Products sold under our T&M segment are designed and manufactured for airborne printing and networking solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace-grade thermal paper. Our data acquisition systems are used in research and development, flight testing, missile/rocket telemetry production monitoring, power and maintenance applications. These products are sold to customers in various industries, including aerospace & defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Our airborne printers, which include our flagship ToughWriter ® series, are used in the flight decks and cabins of military, commercial, and business aircraft to print hard copies of data to enhance flight safety and reduce pilot workload by providing ready access to many types of critical flight-specific information required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, notice to air missions or NOTAMS, performance data, passenger data, and air traffic control data. ToughSwitch ® Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight-worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter printers for various aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream, and others. In addition to the ToughWriter products, we furnish other acquired flight deck printer products, including the TP/NP series, the RTP80 series and the PTA-45B series of airborne printers. The PTA-45B is subject to the Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which in 2017 we acquired an exclusive perpetual worldwide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Over time we expect customers to replace the +3 +PTA-45B and other acquired printer product lines with the AstroNova designed ToughWriter products because of the numerous technical features, functional advantages and significant weight savings. Currently, approximately one-third of the airborne printers sold are ToughWriter branded, and we expect the percentage of ToughWriter products to continue to grow over the next several years, and notably in fiscal 2025. +Other T&M products include the TMX ® all-in-one high-speed data acquisition system for applications requiring high channel counts and acquisition rates; the Daxus ® DXS-100 distributed data acquisition platform; the SmartCorder ® DDX-100, a portable all-in-one data acquisition system for R&D facility and field testing; and the Everest ® EV-5000 digital strip chart recording system used mainly in aerospace and defense applications. The Daxus DXS-100 can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying or printing the data on hard copy, visual displays or electronic storage media, and (4) analyzing the data. To support our data visualization technology, we maintain technological core competencies and trade secret know-how concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling, and airworthiness design. +Patents and Copyrights +We hold several product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions to protect our technology and brand names. We consider our intellectual property to be critical to the operation of our business. In particular, we believe that the loss of the trademarks QuickLabel, TrojanLabel, ToughWriter, or ToughSwitch or the loss of the license provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. Because of the OEM nature of the Astro Machine business model (and the similarity of that brand name to the AstroNova name), its trademark and brand name, while important, are less critical. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many sub-assemblies and parts in-house, including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts are not manufactured in-house are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We also purchase certain components, assembled products, and supplies used to manufacture or sell with our products, from single-or limited- source suppliers. Although we believe the majority of these sole or limited source components, assembled products, and supplies could be sourced elsewhere with appropriate changes in the design of our products, the required design changes might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past, we have made such advanced purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our existing network of manufacturing, sales and support facilities, we have sold our products to customers in over 150 countries. +4 +We believe we are a market leader in tabletop digital color label printing technology in the specialty on-demand printing field, the market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose, portable, high-speed data acquisition systems. +Management believes that we have a market leadership position in many of the markets we serve. We retain our leadership position by virtue of our proprietary technology, product reputation, delivery, our channels to market, technical assistance and service to customers. The number of competitors varies by product line. Key competitive factors vary among our product lines but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our PI products are sold by direct field salespersons as well as independent dealers and representatives, while our T & M products are sold predominantly through direct sales and manufacturers’ representatives. In the United States, we have factory-trained direct-field salespeople located throughout the country specializing in PI products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize over 100 independent dealers and representatives selling and marketing our products in over 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our order backlog is predominantly but not exclusively for products that will be delivered within twelve months, and backlog scheduled for beyond twelve months is predominantly within the T&M segment. However, backlog varies regularly and is not a highly reliable predictive indicator of near-term future sales trends, primarily due to the frequent longer-term original equipment and supplies orders within the T&M segment. In the PI segment, we have multi-period (but typically not multi-year) blanket order arrangements with many customers for labels and other supplies. Printer hardware in the PI segment is typically shipped within a short period of time after orders are booked. Manufacturing production is designed to meet forecasted demands and built-to-order customer requirements. Backlog at January 31, 2023 and 2022 was $35.8 million and $27.8 million, respectively. +Government Regulation +We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our business, particularly with respect to our aircraft cockpit printer business which sells in a highly regulated industry. For example, material modifications to an airborne printer cannot be made without having progressed through an extensive series of product qualification and certification steps that are technically complicated, expensive to execute, typically slow the pace of product development in that industry and can constrain our ability to quickly respond to pricing fluctuations or disruptions to our supply chain for products. +Other applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, accounting and U.S. Securities and Exchange Commission (“SEC”) reporting, privacy, data protection, pricing, content, distribution, energy consumption, environmental regulation, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. +Our business outside of the U.S. exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. +5 +Environmental Matters +We believe that we are in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment or otherwise relating to the protection of the environment. We have not experienced any material costs in connection with environmental compliance and do not believe that such compliance will have any material effect on our financial position, results of operations, cash flows, or competitive position. +Employees +As of January 31, 2023 we employed 394 full-time employees, including 40 employees added as a result of the Astro Machine acquisition in August 2022. Of our full-time employees, 295 were in the United States, 77 in Europe, 10 in Canada, 10 in Asia and two in Mexico. +None of our employees are represented by a labor union or covered by a collective bargaining agreement; except for our employees in France, where local regulations generally require collective bargaining agreements. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments in the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other actions to improve overall engagement with our key employees. +Culture +We are deeply committed to and invest substantial resources in maintaining and improving a strong and definable company culture that shapes how we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business to achieve continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure our business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand our customers’ changing needs and expectations. +Our objective is for these core values to guide our employees’ behavior and direct how we conduct our business. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities and are also demonstrated through teamwork, leadership, and everyday interactions. +Diversity and Inclusion +We believe that our culture and core values are strengthened through diversity and inclusion. Our diversity initiatives include—but are not limited to—our practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions; transfers; social and recreational programs; layoffs; terminations; and the ongoing development of a work environment built on the premise of gender and diversity equity. These initiatives include targeted recruitment of women in technical, engineering and sales +6 +roles, leadership development programs for women, periodic evaluation of our workforce demographics as compared to the demographics in the workforce market, and an affirmative effort to attract, recruit, retain and train a diverse workforce that is representative of the populations in the regions in which we do business. Metrics that track performance against these goals are regularly reported to and monitored by the Compensation Committee of our Board of Directors. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the variable size of certain individual customer revenue transactions, which can cause fluctuations in revenue from quarter to quarter and which may be inconsistent with the underlying business or general economic trends. For example, in our T&M segment, government procurement and contracting practices can result in material fluctuations in our backlog and revenues. +Information about our Executive Officers +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of the Board of Directors. +Name +Age +Position +Gregory A. Woods +64 +President, Chief Executive Officer and Director +David S. Smith +66 +Vice President, Chief Financial Officer and Treasurer +Stephen M. Petrarca +60 +Vice President—Operations +Michael J. Natalizia +59 +Vice President Technology & Strategic Alliances, Chief Technology Officer +Tom Carll +56 +Vice President and General Manager—Aerospace +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to 2010, Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts. +Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. Mr. Smith has also held a variety of senior finance positions at semiconductor and manufacturing companies, including Senior Vice President and Chief Financial Officer of Standard Microsystems Corporation, a global semiconductor company, from 2005 to 2008 and Vice President, Finance and Chief Financial Officer of both Dover Corporation, a diversified global manufacturing company, from 2000 to 2002 and Crane Company, a diversified manufacturing company from 1994 to 2000. +Mr. Petrarca was appointed Vice President—Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005. +7 +Mr. Carll joined the Company in 1989 and has held the position of Vice President and General Manager—Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product group and from its formation in 2004, the AstroNova Aerospace business group. +Code of Ethics +We have adopted a Code of Conduct which applies to all of our directors, officers and employees of the Company, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on our website, (www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” We intend to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, principal accounting officer, or persons performing similar functions by posting such information on our website. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These filings are also accessible on the SEC’s website at http://www.sec.gov. \ No newline at end of file diff --git a/raw/filings/0000008146/2022/0001193125-23-103662/item13.txt b/raw/filings/0000008146/2022/0001193125-23-103662/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..9b7f98a0df3b0bfeec2d499a39c6494904c475ab --- /dev/null +++ b/raw/filings/0000008146/2022/0001193125-23-103662/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships, Related Transactions and Director Independence +The information required by this item is incorporated herein by reference to our Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0000008146/2022/0001193125-23-103662/item9a.txt b/raw/filings/0000008146/2022/0001193125-23-103662/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..c7f90a6a490df037365861dfe663ce7bada5e49c --- /dev/null +++ b/raw/filings/0000008146/2022/0001193125-23-103662/item9a.txt @@ -0,0 +1,13 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were not effective at January 31, 2023 because of the material weaknesses in our internal control over financial reporting described below. +38 +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2023. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The scope of management’s assessment of the effectiveness of its disclosure controls and procedures did not include the internal controls over financial reporting at Astro Machine, which was acquired effective August 4, 2022. Our consolidated total assets as of January 31, 2023 include $20.2 million from Astro Machine and our consolidated revenue for the year ended January 31, 2023 includes $12.5 million from Astro Machine. This exclusion is consistent with the SEC Staff’s guidance that an assessment of a recently acquired business may be omitted from the scope of management’s assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the year of acquisition. Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2023, our internal control over financial reporting was not effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.” +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We did not maintain effective controls to properly identify and assess significant non-routine transactions and management concluded that this material weakness continued to exist as of January 31, 2023. +Management is taking action to remediate this deficiency in its internal controls over financial reporting by augmenting personnel and resources in its finance and accounting organization. We anticipate that these actions and resulting improvements in controls will strengthen our internal control over financial reporting and will address the related material weakness. +The effectiveness of our internal control over financial reporting as of January 31, 2023 has been audited by Wolf & Company, P.C., an independent registered public accounting firm, as stated in their report, which is included herein. +Changes in Internal Controls over Financial Reporting +There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2022/0001193125-23-103662/rp_note.txt b/raw/filings/0000008146/2022/0001193125-23-103662/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2022/0001193125-23-103662/rpt_disclosure.txt b/raw/filings/0000008146/2022/0001193125-23-103662/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b2cf0302ec8fb5062d914980e52ff7f3aba7fec7 --- /dev/null +++ b/raw/filings/0000008146/2022/0001193125-23-103662/rpt_disclosure.txt @@ -0,0 +1,4 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. In reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +No officer, director or nominee for director of the Company or any associate of any of the foregoing had during the period beginning on February 1, 2023 through the date of this proxy statement any material interest, direct or indirect, in any material transaction or any material proposed transaction in which the amount exceeds $120,000 and to which the Company was or is to be a party. +None of our non-employee directors have any substantial interest in any matter to be acted upon except with respect to the directors so nominated. None of our executive officers have any substantial interest in any matter to be acted upon other than Proposals 1 and 2. \ No newline at end of file diff --git a/raw/filings/0000008146/2023/0000950170-24-043875/filing.txt b/raw/filings/0000008146/2023/0000950170-24-043875/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..852cfbb2281ae754f50cb83543e5a32a7e0ed852 --- /dev/null +++ b/raw/filings/0000008146/2023/0000950170-24-043875/filing.txt @@ -0,0 +1,3456 @@ +10-K +0000008146 FY false http://fasb.org/us-gaap/2023#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2023#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2023#CostOfRevenue 0000008146 2022-10-30 2023-01-31 0000008146 srt:EuropeMember 2022-02-01 2023-01-31 0000008146 alot:EquipmentLoanDueJanuaryTwentyThirdTwoThousandTwentyNineMember 2024-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2021-02-01 2022-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2022-01-31 0000008146 alot:ExistingTechnologyMember alot:TrojanlabelApSMember 2024-01-31 0000008146 alot:RangeFiveMember 2023-02-01 2024-01-31 0000008146 srt:MaximumMember alot:AirborneProductMember 2023-02-01 2024-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2021-02-01 2022-01-31 0000008146 alot:RoyaltyPaymentsDueYearFourMember 2024-01-31 0000008146 alot:TermLoanMember alot:SecondAmendmentCreditAgreementMember alot:BankOfAmericaMember 2022-08-04 2022-08-04 0000008146 us-gaap:RevolvingCreditFacilityMember 2023-02-01 2024-01-31 0000008146 alot:TestAndMeasurementMember 2023-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2023-02-01 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2024-01-31 0000008146 alot:AerospaceCustomerMember 2022-02-01 2023-01-31 0000008146 alot:OthersCountriesMember 2023-02-01 2024-01-31 0000008146 alot:TermLoanMember alot:BankOfAmericaMember 2022-10-31 2023-07-31 0000008146 us-gaap:TrademarksMember alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2023-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember 2023-02-01 2024-01-31 0000008146 us-gaap:CustomerContractsMember alot:MiltopeCorporationMember 2024-01-31 0000008146 2023-02-01 2024-01-31 0000008146 srt:AsiaMember 2022-02-01 2023-01-31 0000008146 alot:OtherCountriesMember 2022-02-01 2023-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2024-01-31 0000008146 srt:AsiaMember 2021-02-01 2022-01-31 0000008146 alot:FacilityExitAndOtherRestructuringCostsMember 2023-02-01 2024-01-31 0000008146 alot:ProductRetrofitProgramMember 2023-04-30 2023-07-29 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2024-01-31 0000008146 alot:AerospaceCustomerMember 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2023-02-01 2024-01-31 0000008146 alot:RuggedInformationTechnologyEquipmentCorporationMember us-gaap:CustomerContractsMember 2024-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2023-01-31 0000008146 alot:HardwareProductsMember 2022-02-01 2023-01-31 0000008146 srt:MaximumMember alot:BuildingAndLeaseholdImprovementsMember 2024-01-31 0000008146 alot:RoyaltyPaymentsDueYearTwoMember 2024-01-31 0000008146 2023-10-29 2024-01-31 0000008146 alot:BancOfAmericaLeasingCapitalLlcMember alot:EquipmentLoanAgreementMember 2023-02-01 2024-01-31 0000008146 country:US 2023-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2022-01-31 0000008146 us-gaap:MachineryAndEquipmentMember srt:MinimumMember 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:SecondAmendmentCreditAgreementMember alot:BankOfAmericaMember 2022-08-04 0000008146 alot:LondonInterbankOfferedRateLIBOR1Member us-gaap:RevolvingCreditFacilityMember 2023-02-01 2024-01-31 0000008146 alot:ComputerEquipmentAndSoftwareMember srt:MinimumMember 2024-01-31 0000008146 us-gaap:CustomerConcentrationRiskMember srt:MaximumMember us-gaap:SalesRevenueNetMember 2024-01-31 0000008146 us-gaap:ForeignExchangeMember 2021-02-01 2022-01-31 0000008146 alot:CentralAndSouthAmericaMember 2022-02-01 2023-01-31 0000008146 us-gaap:SellingAndMarketingExpenseMember 2023-02-01 2024-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2024-01-31 0000008146 us-gaap:RetainedEarningsMember 2022-02-01 2023-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2024-01-31 0000008146 country:CN 2023-02-01 2024-01-31 0000008146 alot:TermLoanMember alot:AdditionalTermLoanAvailedMember alot:SecondAmendmentCreditAgreementMember alot:BankOfAmericaMember 2022-08-04 0000008146 alot:ProductRetrofitProgramMember 2024-01-31 0000008146 us-gaap:CommonStockMember 2021-01-31 0000008146 alot:ServiceAndOtherMember 2022-02-01 2023-01-31 0000008146 alot:MeasurementInputCustomerAttritionRateMember 2022-08-04 0000008146 us-gaap:CommonStockMember 2022-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2024-01-31 0000008146 alot:PriorEmployeeStockPurchasePlanMember 2022-02-01 2023-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2021-06-15 2021-06-15 0000008146 us-gaap:PublicUtilitiesInventorySuppliesMember 2021-02-01 2022-01-31 0000008146 2021-01-31 0000008146 alot:OtherCountriesMember 2021-02-01 2022-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember alot:TwoThousandEighteenEquityIncentivePlanMember 2024-01-31 0000008146 us-gaap:SupplierConcentrationRiskMember alot:TradeAccountsPayablesMember alot:CustomerMember 2021-02-01 2022-01-31 0000008146 srt:MaximumMember us-gaap:LandImprovementsMember 2024-01-31 0000008146 country:US 2021-02-01 2022-01-31 0000008146 us-gaap:SupplierConcentrationRiskMember alot:TradeAccountsPayablesMember alot:CustomerMember 2023-02-01 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2023-02-01 2024-01-31 0000008146 us-gaap:RetainedEarningsMember 2021-01-31 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2022-02-01 2023-01-31 0000008146 srt:MaximumMember alot:ComputerEquipmentAndSoftwareMember 2024-01-31 0000008146 country:CA 2023-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2023-02-01 2024-01-31 0000008146 country:CA 2023-02-01 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember 2023-02-01 2024-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2021-01-31 0000008146 2022-02-01 2023-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2021-02-01 2022-01-31 0000008146 2022-08-04 2022-08-04 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2023-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2022-01-31 0000008146 alot:RangeFiveMember 2024-01-31 0000008146 srt:AsiaMember 2023-02-01 2024-01-31 0000008146 alot:TwoThousandAndTwentyTwoEmployeeStockPurchasePlanMember 2023-02-01 2024-01-31 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember 2021-02-01 2022-01-31 0000008146 alot:RoyaltyPaymentsDueInCurrentFiscalYearMember 2024-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2023-01-31 0000008146 us-gaap:CustomerRelatedIntangibleAssetsMember 2024-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2023-01-31 0000008146 us-gaap:CommonStockMember 2021-02-01 2022-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2024-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2023-02-01 2024-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2018-01-31 2018-01-31 0000008146 alot:ServiceAndOtherMember 2021-02-01 2022-01-31 0000008146 srt:EuropeMember 2021-02-01 2022-01-31 0000008146 country:US 2023-02-01 2024-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2022-01-31 2022-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2024-01-31 0000008146 us-gaap:CommonStockMember 2022-02-01 2023-01-31 0000008146 us-gaap:SupplierConcentrationRiskMember alot:TradeAccountsPayablesMember alot:CustomerMember 2022-02-01 2023-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2021-02-01 2022-01-31 0000008146 2022-08-04 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2022-01-31 0000008146 alot:OthersCountriesMember 2022-02-01 2023-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2021-02-01 2022-01-31 0000008146 country:CA 2024-01-31 0000008146 us-gaap:RetainedEarningsMember 2021-02-01 2022-01-31 0000008146 us-gaap:CommonStockMember 2023-02-01 2024-01-31 0000008146 us-gaap:CommonStockMember 2024-01-31 0000008146 us-gaap:CustomerContractsMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2024-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2021-01-31 0000008146 country:CA 2021-02-01 2022-01-31 0000008146 alot:TwoThousandAndTwentyTwoEmployeeStockPurchasePlanMember 2024-01-31 0000008146 srt:EuropeMember 2023-01-31 0000008146 us-gaap:EmployeeSeveranceMember 2023-02-01 2024-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-01-31 0000008146 alot:TaxCreditsCarryForwardsMember 2023-02-01 2024-01-31 0000008146 alot:ProductIdentificationMember 2023-01-31 0000008146 2023-01-31 0000008146 2024-04-05 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-08-04 2022-08-04 0000008146 us-gaap:AllowanceForCreditLossMember 2023-02-01 2024-01-31 0000008146 us-gaap:PublicUtilitiesInventorySuppliesMember 2022-02-01 2023-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2022-01-31 0000008146 us-gaap:LandImprovementsMember srt:MinimumMember 2024-01-31 0000008146 us-gaap:CostOfSalesMember 2023-02-01 2024-01-31 0000008146 country:CA 2022-02-01 2023-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2022-01-31 0000008146 alot:RoyaltyPaymentsDueInNextTwelveMonthsMember 2024-01-31 0000008146 us-gaap:CustomerContractsMember alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2023-01-31 0000008146 us-gaap:MeasurementInputDiscountRateMember 2022-08-04 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2023-02-01 2024-01-31 0000008146 alot:ServiceAndOtherMember 2023-02-01 2024-01-31 0000008146 alot:ProductRetrofitProgramMember 2023-02-01 2024-01-31 0000008146 alot:TermLoanMember 2024-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2022-02-01 2023-01-31 0000008146 us-gaap:ForeignExchangeMember 2022-02-01 2023-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2022-02-01 2023-01-31 0000008146 srt:AsiaMember 2023-01-31 0000008146 alot:TestAndMeasurementMember 2024-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2021-02-01 2022-01-31 0000008146 alot:OthersCountriesMember 2021-02-01 2022-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MaximumMember 2023-02-01 2024-01-31 0000008146 us-gaap:TrademarksAndTradeNamesMember 2022-08-04 2022-08-04 0000008146 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember alot:CustomerMember alot:TwoVendorsMember 2023-02-01 2024-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2021-02-01 2022-01-31 0000008146 alot:TwoThousandAndTwentyTwoEmployeeStockPurchasePlanMember 2022-02-01 2023-01-31 0000008146 us-gaap:CustomerContractsMember alot:RuggedInformationTechnologyEquipmentCorporationMember 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BeforeAmendmentToTheCreditAgreementMember alot:BankOfAmericaMember 2022-08-03 0000008146 alot:AerospaceCustomerMember 2023-02-01 2024-01-31 0000008146 alot:DistributorRelationsMember alot:TrojanlabelApSMember 2023-01-31 0000008146 srt:MaximumMember us-gaap:MachineryAndEquipmentMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember 2022-02-01 2023-01-31 0000008146 alot:HardwareProductsMember 2021-02-01 2022-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2023-02-01 2024-01-31 0000008146 srt:EuropeMember 2023-02-01 2024-01-31 0000008146 alot:HardwareProductsMember 2023-02-01 2024-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:FairValueInputsLevel3Member 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2023-02-01 2024-01-31 0000008146 us-gaap:NonoperatingIncomeExpenseMember 2021-02-01 2022-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2023-01-31 0000008146 us-gaap:CommonStockMember 2023-01-31 0000008146 us-gaap:RetainedEarningsMember 2023-01-31 0000008146 alot:BancOfAmericaLeasingCapitalLlcMember alot:EquipmentLoanAgreementMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2023-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2018-01-31 0000008146 srt:EuropeMember 2024-01-31 0000008146 us-gaap:CustomerContractsMember alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2022-02-01 2023-01-31 0000008146 alot:CentralAndSouthAmericaMember 2023-02-01 2024-01-31 0000008146 us-gaap:DomesticCountryMember 2024-01-31 0000008146 country:US 2022-02-01 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:OtherExpenseMember alot:BankOfAmericaMember 2023-02-01 2024-01-31 0000008146 2021-02-01 2022-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2022-01-31 0000008146 alot:ProductRetrofitProgramMember 2023-10-29 2024-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2023-02-01 2024-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2021-02-01 2022-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2022-02-01 2023-01-31 0000008146 alot:ExistingTechnologyMember alot:TrojanlabelApSMember 2023-01-31 0000008146 us-gaap:CustomerContractsMember alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2023-01-31 0000008146 us-gaap:CustomerContractsMember alot:MiltopeCorporationMember 2023-01-31 0000008146 alot:EquipmentLoanDueJanuaryTwentyThirdTwoThousandTwentyNineMember 2023-02-01 2024-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2022-02-01 2023-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember us-gaap:PerformanceSharesMember 2024-01-31 0000008146 us-gaap:CustomerRelationshipsMember 2022-08-04 2022-08-04 0000008146 alot:AerospaceCustomerMember 2023-01-31 0000008146 alot:OtherCountriesMember 2023-02-01 2024-01-31 0000008146 2023-07-28 0000008146 2022-01-31 0000008146 country:CN 2024-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2023-02-01 2024-01-31 0000008146 alot:ProductIdentificationSegmentRestructuringPlanMember 2023-04-30 2023-07-29 0000008146 alot:AerospaceCustomerMember 2022-12-31 0000008146 srt:AsiaMember 2024-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2023-02-01 2024-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2023-02-01 2024-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2021-01-31 0000008146 2024-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2022-02-01 2023-01-31 0000008146 alot:TaxCreditsCarryForwardsMember 2024-01-31 0000008146 us-gaap:PublicUtilitiesInventorySuppliesMember 2023-02-01 2024-01-31 0000008146 alot:TwoThousandSevenEquityIncentivePlanMember 2024-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2023-02-01 2024-01-31 0000008146 alot:MeasurementInputRoyaltyRateMember 2022-08-04 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-02-01 2022-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2022-02-01 2023-01-31 0000008146 us-gaap:RetainedEarningsMember 2024-01-31 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2023-01-31 0000008146 us-gaap:ResearchAndDevelopmentExpenseMember 2023-02-01 2024-01-31 0000008146 alot:ProductRetrofitProgramMember us-gaap:CostOfSalesMember 2023-07-30 2024-01-31 0000008146 us-gaap:RetainedEarningsMember 2023-02-01 2024-01-31 0000008146 alot:TermLoanMember alot:BeforeAmendmentToTheCreditAgreementMember alot:BankOfAmericaMember 2022-08-04 0000008146 alot:CentralAndSouthAmericaMember 2021-02-01 2022-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2021-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2024-01-31 0000008146 alot:AirborneProductMember srt:MinimumMember 2023-02-01 2024-01-31 0000008146 us-gaap:ForeignExchangeMember 2023-02-01 2024-01-31 0000008146 alot:RangeFourMember 2023-02-01 2024-01-31 0000008146 us-gaap:TrademarksMember alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2024-01-31 0000008146 alot:EmployeeStockPurchasePlanMember 2023-02-01 2024-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2021-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2021-02-01 2022-01-31 0000008146 alot:BuildingAndLeaseholdImprovementsMember srt:MinimumMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember 2021-02-01 2022-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:FederalFundsEffectiveSwapRateMember 2023-02-01 2024-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2022-02-01 2023-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-08-04 0000008146 us-gaap:TreasuryStockCommonMember 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:LondonInterbankOfferedRateLIBOR1Member srt:MaximumMember 2023-02-01 2024-01-31 0000008146 country:US 2024-01-31 0000008146 us-gaap:RetainedEarningsMember 2022-01-31 0000008146 alot:RestrictedStockAwardMember 2023-02-01 2024-01-31 0000008146 us-gaap:RestrictedStockMember alot:TwoThousandFifteenEquityIncentivePlanMember 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:SecondAmendmentCreditAgreementMember alot:BankOfAmericaMember 2022-08-04 2022-08-04 0000008146 us-gaap:CorporateNonSegmentMember 2024-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2023-02-01 2024-01-31 0000008146 alot:RestrictedStockAwardMember 2023-06-05 2023-06-05 0000008146 us-gaap:RevolvingCreditFacilityMember alot:LondonInterbankOfferedRateLIBOR1Member srt:MinimumMember 2023-02-01 2024-01-31 0000008146 alot:ProductRetrofitProgramMember us-gaap:CostOfSalesMember 2023-07-29 0000008146 alot:AdditionalForeignTaxCreditMember 2024-01-31 0000008146 alot:ProductIdentificationMember 2024-01-31 0000008146 us-gaap:DomesticCountryMember 2023-02-01 2024-01-31 0000008146 alot:DistributorRelationsMember alot:TrojanlabelApSMember 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2022-02-01 2023-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2022-05-01 2022-07-30 0000008146 alot:TermLoanMember alot:BankOfAmericaMember 2023-10-31 2027-04-30 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:FairValueInputsLevel3Member 2023-01-31 0000008146 us-gaap:EmployeeStockOptionMember 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:OtherExpenseMember alot:BankOfAmericaMember 2022-02-01 2023-01-31 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2024-01-31 0000008146 alot:GreenwoodCreditUnionMember alot:PaycheckProtectionProgramLoanMember 2020-05-06 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2022-01-31 0000008146 alot:RoyaltyPaymentsDueYearThreeMember 2024-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2022-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2021-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2023-01-31 0000008146 alot:InventoryWriteOffMember 2023-02-01 2024-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2023-02-01 2024-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2023-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember 2024-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2022-02-01 2023-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2024-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2023-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2021-02-01 2022-01-31 0000008146 alot:RangeFourMember 2024-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2022-02-01 2023-01-31 xbrli:pure iso4217:USD xbrli:shares utr:sqft xbrli:shares alot:Printer alot:Segment iso4217:USD alot:Customer +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31 , 2024 +OR +☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from ____________ to ____________ +Commission file number 0-13200 +AstroNova, Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue , +West Warwick , Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: ( 401 ) 828-4000 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading +Symbol +Name of each exchange +on which registered +Common Stock , $.05 Par Value +ALOT +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☒ +Non-accelerated filer +☐ +S Smaller Reporting Company +☒ +Emerging growth company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No +The aggregate market value of the registrant’s voting common equity held by non-affiliates at July 28, 2023, was approximately $ 102,820,000 based on the closing price on the Nasdaq Global Market on that date. The registrant has no non-voting common shares. +As of April 5, 2024, there were 7,743,140 shares of Common Stock (par value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2024 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. +Auditor Firm Id: +PCAOB ID No. 392 +Auditor Name: +Wolf & Company, P.C. +Auditor Location: +Boston, MA +ASTRONOVA, INC. +FORM 10-K +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +2 +Item 1A. +Risk Factors +7 +Item 1B. +Unresolved Staff Comments +17 +Item 1C. +Cybersecurity +17 +Item 2. +Properties +18 +Item 3. +Legal Proceedings +19 +Item 4. +Mine Safety Disclosures +19 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity +Securities +20 +Item 6. +Reserved +20 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +21 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +29 +Item 8. +Financial Statements and Supplementary Data +30 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +30 +Item 9A. +Controls and Procedures +30 +Item 9B. +Other Information +31 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +31 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +32 +Item 11. +Executive Compensation +32 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +32 +Item 13. +Certain Relationships, Related Transactions and Director Independence +32 +Item 14. +Principal Accountant Fees and Services +32 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +33 +Item 16. +Form 10-K Summary +33 +ASTRONOVA, INC. +Forward-Looking Statements +The information included in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” “may,” “will,” and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties, and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in this Annual Report on Form 10-K under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K. +1 +PART I +Item 1 . Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +We design, develop, manufacture, and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging, and transportation. +Our products are distributed worldwide through our own sales force, authorized dealers, and independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel ® , TrojanLabel ® , and GetLabels ™ brand names. The T&M segment includes our line of aerospace printers, ethernet networking products and test and measurement data acquisition systems sold under the AstroNova ® brand name. Refer to Note 16, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers and related accessories, tabbers, conveyors, and envelope feeders. Astro Machine is reported as a part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisitions,” in our audited consolidated financial statements included elsewhere in this report. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included elsewhere in this Annual Report on Form 10-K. +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets globally. +PI products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers and light commercial label printers, direct-to-package printers, high-volume presses, and specialty original equipment manufacturer (“OEM”) printing systems, as well as a wide range of label, tag and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. PI products sold under the Astro Machine brand acquired on August 4, 2022, also include a variety of label printers, envelope and packaging printing, and related processing and handling equipment. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed, stored and presented in various visual output formats. +Product Identification +Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. Additionally, PI also includes the Astro Machine brand that is sold directly to end users though our channel partners and to OEM customers, which generally rebrand these products for sales to their customers. The segment provides a wide array of digital end-to-end product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Our customers typically label or mark products on a short- to mid-size run basis and benefit from the efficiency, flexibility, and cost-savings of digitally printing +2 +labels or packaging in their facility, on-demand, with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready digital color label printers, and specialty OEM printing systems for either standalone output or inline integration with existing pre-processing and finishing systems. Customers use our digital printing products in a wide variety of industries, including chemicals, cosmetics, food and beverage, medical products, nutraceuticals, pharmaceuticals, and many others. TrojanLabel expands our customer market by providing a range of higher volume digital color printers, OEM printing systems, and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners, and thermal transfer ribbons designed for optimal performance with our printing hardware, and are also compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models include a selection of professional tabletop digital color label printers. We recently introduced the QL-E100, an entry-level, compact, full-color tabletop label printer. It delivers professional-quality output at a lower price point, which we believe is ideal for targeting smaller businesses entering the on-demand label market, and larger enterprises that require multiple on-demand label printers at distributed locations throughout their facilities. The high-speed QL-120X was built on our pioneering and successful Kiaro! ® platform. To expand the product line further, the QL-120Xe, a sister product to the dye ink QL-120X, was introduced in 2021 as a lower price point option for price-sensitive customers. In 2020, we introduced the QL-120D, which features high-performance pigment inks that can produce durable BS5609-certified labels and labels that can withstand a wide range of demanding environmental conditions from sterilization to cryogenic freezing. Introduced early in 2019, the high-performance QL-300 was the first 5-color toner-based electrophotographic tabletop production label printer in the market. The QL-30 and QL-60 are high-end monochrome printers which print a variety of labels and tags using direct thermal or thermal transfer technology. In fiscal 2024, we introduced the QL-900, a wider format inkjet color label printer. Also in fiscal 2024, we obsoleted the QL-850 and QLS-4100 Xe to rationalize our product lines and manufacturing system, creating a leaner and more efficient business. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to large-scale all-in-one inline specialty printing systems for brand owners, OEMs, and commercial printers. The T2-C, a compact, digital mini-press designed for 24/7 label production, includes numerous differentiating features for several end-use market applications. Beyond label printing, the T3-OPX, the first of its kind direct-to-package printer, which was introduced in late 2020, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many other items using pigment inks that are resistant to both water and UV exposure. In fiscal 2024, we launched two new products: the T2-PRO and the T3-PRO, both of which have wide-format print capabilities. +GetLabels provides a broad range of high-quality supplies for both our printers and third-party printers, including label and tag materials, inks, toner, and thermal transfer material, all specifically designed and constructed for a wide variety of labeling applications. Label material and substrates are carefully qualified and tested on-site in our Rhode Island Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +Astro Machine is a U.S.-based manufacturer and engineering development company providing inkjet printers, conveyors, tabbers, software, and various components to the mail and addressing markets, as well as the label and packaging markets. Astro Machine serves OEMs and value-added resellers. +The PI segment provides worldwide training and support as well as develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems. +Test & Measurement +Products sold under our T&M segment are designed and manufactured for airborne printing and networking solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace-grade thermal paper. Our data acquisition systems are used in research and development; flight testing; missile/rocket telemetry; and production monitoring and power and maintenance applications. These products are sold to customers in various industries, including aerospace and defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Our airborne printers, which include our flagship ToughWriter ® series, are used in the flight decks and cabins of military, commercial, and business aircraft to print hard copies of data to enhance flight safety and reduce pilot workload by providing ready access to many types of critical flight-specific information required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, notice to air missions ("NOTAMs"), +3 +performance data, passenger data, and air traffic control data. ToughSwitch ® Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. Our ToughWriter airborne printers and ToughSwitch ethernet switches are ruggedized to comply with rigorous military and commercial flight-worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter printers for various aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream, and others. In addition to our ToughWriter products, we furnish other acquired flight deck printer products, including the TP/NP series, the RTP80 series and the PTA-45B series of airborne printers. The PTA-45B is subject to an Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which we acquired an exclusive perpetual worldwide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing B737 and Airbus A320 aircraft. Over time we expect customers to replace the PTA-45B and other acquired printer product lines with the AstroNova designed ToughWriter products because of its numerous technical features, functional advantages and significant weight savings. Currently, approximately one-third of the airborne printers we sell are ToughWriter branded, and we expect the percentage of ToughWriter products to continue to grow over the next several years, and notably in fiscal 2026. +Other T&M products include the TMX ® all-in-one high-speed data acquisition system for applications requiring high channel counts and acquisition rates; the Daxus ® DXS-100 distributed data acquisition platform; the SmartCorder ® DDX-100, a portable all-in-one data acquisition system for R&D facility and field testing; and the Everest ® EV-5000 digital strip chart recording system used mainly in aerospace and defense applications. The Daxus DXS-100 can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data; (2) conditioning the data; (3) displaying or printing the data on hard copy, visual displays or electronic storage media; and (4) analyzing the data. To support our data visualization technology, we maintain technological core competencies and trade secret know-how concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling, and airworthiness design. +Intellectual Property +We rely on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions to protect our technology and brand names. While we consider our intellectual property to be important to the operation of our business, other than our Honeywell license agreement, we do not believe that any existing patent, trademark, or other intellectual property right is of such significance that its loss or termination would have a material adverse effect on our business taken as a whole +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many sub-assemblies and parts in-house, including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts that are not manufactured in-house are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We also purchase certain components, assembled products, and supplies used to manufacture or to be sold with our products, from single-or limited- source suppliers. Although we believe the majority of these sole or limited source components, assembled products, and supplies could be sourced elsewhere with appropriate changes in the design of our products, the required design changes might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past, we have made such advanced purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our existing network of manufacturing, sales and support facilities, during fiscal 2024, we sold our products to customers in approximately 100 countries. +4 +We believe we are a market leader in tabletop digital color label printing technology in the specialty on-demand printing field, the market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose, portable, high-speed data acquisition systems. +We retain our leadership position in the markets we serve by virtue of our proprietary technology, product reputation, delivery, our channels to market, technical assistance, and service to customers. The number of competitors we face in any given market varies by product line. Key competitive factors vary among our product lines but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our PI products are sold by direct field salespersons, OEMs, and independent dealers and representatives, while our T & M products are sold predominantly through direct sales and independent representatives. In the United States, we have factory-trained direct-field salespeople located throughout the country specializing in PI products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize over 100 independent dealers and representatives selling and marketing our products in over 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our order backlog is predominantly but not exclusively for products that will be delivered within twelve months, and backlog scheduled for beyond twelve months is predominantly within the T&M segment. However, backlog varies regularly and is not a highly reliable predictive indicator of near-term future sales trends, primarily due to the frequent longer-term original equipment and supplies orders within the T&M segment. In the PI segment, we have multi-period (but typically not multi-year) blanket order arrangements with many customers for labels and other supplies. Printer hardware in the PI segment is typically shipped within a short period of time after orders are booked. Manufacturing production is designed to meet forecasted demands and built-to-order customer requirements. Backlog at January 31, 2024 and 2023 was $31.4 million and $35.8 million, respectively. +Government Regulation +We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our business, particularly with respect to our aircraft cockpit printer business which sells in a highly regulated industry. For example, material modifications to an airborne printer cannot be made without having progressed through an extensive series of product qualification and certification steps that are technically complicated, expensive to execute, typically slow the pace of product development in that industry and can constrain our ability to quickly respond to pricing fluctuations or disruptions to our supply chain for products. +Other applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, accounting and U.S. Securities and Exchange Commission (“SEC”) reporting, privacy, data protection, pricing, content, distribution, energy consumption, environmental regulation, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. +Our business outside of the U.S. exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. +Environmental Matters +We believe that we are in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment or otherwise relating to the protection of the environment. We have not experienced any material costs in connection with environmental compliance and do not believe that such compliance will have any material effect on our financial position, results of operations, cash flows, or competitive position. +5 +Employees +As of January 31, 2024 we employed 365 full-time employees. Of our full-time employees, 276 were in the United States, 69 were in Europe, 11 were in Canada, seven were in Asia, and two were in Mexico. +None of our employees are represented by a labor union or covered by a collective bargaining agreement, except for employees in France, where local regulations generally require collective bargaining agreements. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments of the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other initiatives to improve overall engagement with our key employees. +Culture +We are deeply committed to and invest substantial resources in maintaining and improving a strong and definable company culture that shapes how we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business in pursuit of continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure our business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand our customers’ changing needs and expectations. +Our objective is for these core values to guide our employees’ behavior and direct how we conduct our business. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities and are also demonstrated through teamwork, leadership, and everyday interactions. +Diversity and Inclusion +We believe that our culture and core values are strengthened through diversity and inclusion. Our diversity initiatives include—but are not limited to—our practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions; transfers; social and recreational programs; layoffs; terminations; and the ongoing development of a work environment built on the premise of gender and diversity equity. These initiatives include targeted recruitment of women in technical, engineering and sales roles, leadership development programs for women, periodic evaluation of our workforce demographics as compared to the demographics in the workforce market, and an affirmative effort to attract, recruit, retain and train a diverse workforce that is representative of the populations in the regions in which we do business. Metrics that track performance against these goals are regularly reported to and monitored by the Human Capital and Compensation Committee of our Board of Directors. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the variable size of certain individual customer revenue transactions, which can cause fluctuations in revenue from quarter to quarter and which may be inconsistent with the underlying business or general economic trends. For example, in our T&M segment, government procurement and contracting practices can result in material fluctuations in our backlog and revenues. +Information about Our Executive Officers +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of the Board of Directors. +6 +Name +Age +Position +Gregory A. Woods +65 +President, Chief Executive Officer and Director +David S. Smith +67 +Vice President, Chief Financial Officer and Treasurer +Stephen M. Petrarca +61 +Vice President—Operations +Michael J. Natalizia +60 +Vice President Technology & Strategic Alliances, Chief Technology Officer +Tom W. Carll +57 +Vice President and General Manager—Aerospace +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. +Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. +Mr. Petrarca was appointed Vice President—Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia had held the position of Director of Product Development of the Company since 2005. +Mr. Carll joined the Company in 1989 and has held the position of Vice President and General Manager—Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product group and, from its formation in 2004, the AstroNova Aerospace business group. +Code of Ethics +We have adopted a Code of Conduct which applies to all of our directors, officers and employees of the Company, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on our website, (www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” We intend to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, principal accounting officer, or persons performing similar functions by posting such information on our website. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These filings are also accessible on the SEC’s website at http://www.sec.gov. +Item 1A. R isk Factors +The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +Business and Industry Risks: +Our operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated. +Any decline in our customers’ markets or their general economic conditions would likely result in a reduction in demand for our products. For example, the 2020 grounding, suspension and subsequent slow restart of the Boeing B737 MAX, coupled with the +7 +impact of the COVID-19 pandemic reduced the demand for our airborne printers, as well as for the related repairs and supplies, which negatively affected our business. Although we have experienced a significant recovery in the demand for our airborne printers following the negative impact of the COVID-19 pandemic on the demand for new aircraft and travel, demand remains lower than it was pre-pandemic, and currently the outlook is uncertain. While demand for air travel has recently increased, the impact of air-safety incidents or of another viral pandemic or other widespread health emergency could negatively impact this trend in the future. Also, we believe that the pandemic negatively impacted our customers’ financial capacity materially enough to alter their strategies and industry dynamics, but the increase in travel demand has caused the industry profitability to rebound. Production or supply chain issues experienced by any aircraft manufacturer may cause aircraft deliveries to grow more slowly or decline, which would reduce demand for our products, and in turn harm our results of operations, financial position and cash flows. +Our future revenue growth depends on our ability to develop and introduce new products and services on a timely basis and achieve market acceptance of these new products and services. +The markets for our products are characterized by evolving technologies which in turn affect our product introduction cycles. Our future success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate our competitors’ development of new products, and maintain high levels of product quality and reliability. We spend a significant amount of time and effort on the development of our airborne and color printer products as well as our data acquisition and recorder products. Failure to meet our customers’ changing business needs or to further develop any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results. +As we introduce new or enhanced products, we must also successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. Additionally, when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or our plans for future support of existing products may cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +Operational and Business Strategy Risks: +We are dependent upon contract manufacturers for some of our products. If these manufacturers do not meet our requirements, either in volume or quality, then we could be materially harmed. +We subcontract the manufacturing and assembly of certain of our products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Disruptions in the global supply chain; +• +Limited control over the manufacturing process; +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; +• +Reduced control over delivery schedules, manufacturing yields, quality and costs; and +• +Exposure to rapid unplanned cost increases that cannot be adequately recovered by customer price increases due to market competition or contractual constraints. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture or provide these products in required volumes, fails to meet our quality standards, or imposes rapid price increases that we cannot recover in the market, we will have to identify alternate qualified subcontractors, take over the manufacturing ourselves, or redesign our products to use components from other suppliers. Additional qualified subcontractors may not be available or may not be available on a timely or cost-competitive +8 +basis. Any interruption in the supply, increase in the cost of the products manufactured by a third-party subcontractor, or failure of a subcontractor to meet quality standards could have a material adverse effect on our business, operating results and financial condition. +For certain components, assembled products and supplies, we are dependent upon single or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and supplies used in the manufacture of our products from a single source or limited supplier sources. If the supply of a key component, assembled products, or certain supplies were to be delayed or curtailed or, in the event a key manufacturing or sole supplier delays shipment of such components or assembled products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. For example, as a result of the global COVID-19 pandemic, there was a disruption to our supply chain due to the delays of component shipments from our vendors in China and other jurisdictions in which normal business operations were disrupted. The supply chain disruption continues to affect our business as it has become difficult to ramp up production as quickly as needed to respond to the post-COVID increase in customer demand. Our business, results of operations and financial position could also be adversely affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source as well as incurring higher costs to obtain needed components. +Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply components, assembled products, or supplies in required volumes or at acceptable prices, we will have to identify and qualify acceptable replacements or redesign our products with different components. Alternative sources may not be available, or product redesign may not be feasible on a timely basis. For example, in fiscal 2023, we experienced increased difficulty in obtaining certain technology-based parts, components and supplies from the largest single supplier of our PI segment at stable or predictable prices. Additionally, we experienced repeated significant quality problems with that supplier. We have responded to these issues by increasing our inventories of those products to mitigate supply risk, negotiating quality related cost reimbursements, and in some cases, accelerating our development of PI products that rely on alternative suppliers. In fiscal 2024, we incurred $0.6 million of incremental expense relating to warranty services and implementation of corrective retrofits resulting from these issues. Any interruption in the supply of or increase in the cost of the components, assembled products and supplies provided by single or limited source suppliers could have a material adverse effect on our business, operating results, and financial condition. +We face significant competition, and our failure to compete successfully could adversely affect our results of operations and financial condition. +We operate in an environment of significant competition, especially in the markets in which we sell our PI printers and T&M data acquisition products. This competition is driven by rapid technological advances, evolving industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete based on technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products or services with features that could adversely affect the competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, our customers could seek alternative solutions from our competitors and we could lose market share, which could materially and adversely affect our business, results of operations and financial position. +Our profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure . +Our success depends on our ability to obtain adequate pricing for our products and services. For a variety of complex reasons, many of which were triggered by the COVID-19 pandemic, the general economy has been significantly impacted by supply chain disruptions. Examples of some of these impacts on us include reduced availability of certain electronic components and the need to pay premium prices to obtain them, and noticeably higher costs for a wide array of other parts and raw material components in both of our product segments. Additionally, due to supply chain disruptions, it has become more difficult to obtain the needed components for our legacy T&M products, and as a result we have incurred higher costs to obtain these components. The supply chain disruptions have been exacerbated by increases in the cost of transportation to expedite incoming components and supplies. In many cases, we have had to expedite delivery of critical materials through significantly higher cost airfreight methods. Our ability to offset these effects through pricing actions for our products and services may not prove sufficient to offset these or further cost increases. Attempts to increase prices may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially adversely affected. +We are also continually reviewing our operations with a view towards reducing our cost structure, including but not limited to reducing our labor cost-to-revenue ratio, improving process and system efficiencies and outsourcing certain internal functions. In fiscal 2024, we engaged in restructuring actions to reduce our cost structure in our PI segment. However, if these efforts to constrain the cost of our operations are inadequate to offset higher product and employee wage costs, our results of operations and financial position could be materially adversely affected. +9 +Our inability to adequately enforce and protect our intellectual property defend against assertions of infringement or the loss of certain licenses could prevent or restrict our ability to compete. +We rely on patents, trademarks, licenses, and proprietary knowledge and technology, both internally developed and acquired, in order to maintain a competitive advantage. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design technologies around the intellectual property protections or licenses that we currently own. The loss of our Honeywell license agreement could have a material adverse impact on our business. Operating outside the United States also exposes us to additional intellectual property risk. The laws and enforcement practices of certain jurisdictions in which we operate do not protect our intellectual property rights to the same extent as in the United States. Any diminution in our ability to defend against the unauthorized use of these rights and assets could have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement, which could result in significant costs and divert our management’s focus away from operations. +We have significant inventories on hand. +We maintain a significant amount of inventory, and as a result of recent supply chain disruptions and announced or anticipated price increases from suppliers, we have further increased the amount of inventory we maintain on hand to ensure we are able to meet market demand for our products at a reasonable price. These increases have been concentrated in label printing machines and supplies sold by our PI business, as well as in electronic components and assemblies in our T&M business. We maintain allowances for slow-moving and obsolete inventory that we believe are adequate, but any significant unanticipated changes in future product demand or market conditions, could have an impact on the value of inventory and adversely affect our business, operating results and financial condition. +We could incur liabilities as a result of installed product failures due to design or manufacturing defects. +We have incurred and could in the future incur additional liabilities because of product failures due to design or manufacturing defects. Our products may have defects despite our internal testing or testing by customers. These defects could result in, among other things, increased warranty provisions, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance, or damage to our reputation. We could be subject to material claims by customers and may incur substantial expenses to correct any product defects. While in the past, we have successfully obtained partial compensation from suppliers for their contribution to product quality issues, we may not be successful in such a recovery in the future, and these recoveries have not in the past and are not in the future likely to fully offset the full financial impact on us. For example, in fiscal 2023, the quality of products obtained from one of the key suppliers to our PI segment declined and we were unable to detect latent defects in their products in a timely manner, which resulted in our incurring increased technical service and warranty expenses. We obtained partial compensation from that supplier, but this was insufficient to fully cover all of our costs related to this issue. We also believe we have experienced demand declines as a result of customers’ perceptions of the quality defects related to this supplier. In fiscal 2024, we continued to have quality and reliability issues in certain models of our PI printers as a result of faulty ink provided by one of our larger suppliers. During the second quarter of fiscal 2024, we initiated a program to retrofit all of the printers sold to our customers that were affected by the faulty ink at a total cost of $0.6 million. If we continue to experience product failures due to design or manufacturing defects, our business, results of operations and financial position could be materially and adversely affected. +In addition, through our acquisitions, we have assumed, and may in the future, assume liabilities related to products previously developed by an acquired company that may not have been subjected to adequate product development, testing and quality control processes, and may have unknown or undetected defects. Some types of defects may not be detected until the product is installed in a user environment. This may cause us to incur significant warranty, repair, or re-engineering costs. As such, it could also divert the attention of engineering personnel from product development efforts, which may result in increased costs and lower profitability. +We could experience a significant disruption in or security breach of our information technology system, which could harm our business and adversely affect our results of operations. +We rely on on-premise and cloud-based information technology systems, some of which are managed by or licensed from third parties, to support many critical aspects of our business, as well as to process, transmit and store our own electronic proprietary or confidential information, and confidential information of customers, employees, suppliers and others, including personally identifiable information, credit card data, and other proprietary confidential information. These systems are vulnerable to damage, disruptions and/or shutdowns due to attacks by cyber-criminals, data breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events, or other unforeseen events. These vulnerabilities could interfere with our operations, compromise our data processing capacity and the security of our information and that of our customers and suppliers, and expose us to liability which could adversely impact our business and reputation. We actively manage these risks through a variety of hardware and software-based techniques that we own, license, or otherwise procure from third parties under contract to safeguard our systems, and we own or procure from third parties system data storage redundancy and disaster recovery capability. In particular, we have increased our investment in tools, techniques and training that we believe will reduce our vulnerability to attacks from cyber-criminals. However, due to the complexity of our systems, and especially due to the ever-increasing sophistication of cyber-criminals, there is no assurance that our efforts will be sufficient to prevent cyber-attacks, security +10 +breaches, or the other potential exploitation of vulnerabilities or systems failures. In any such circumstance, our system redundancy and other disaster recovery planning may be ineffective or inadequate. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of them to date has had a material impact. However, in the future, such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our brand and reputation, all of which could adversely affect our business, operating results and financial condition. +We maintain insurance for a variety of cybersecurity risks to mitigate their possible impact, but because of the prevalence of claims in the market for cybersecurity insurance, the cost for that insurance has increased and the underwriting criteria to obtain such insurance has become far more demanding. There is no assurance that we will be able to obtain such insurance in the future, despite our substantial investments in cybersecurity, and if we are able to do so, it may be at substantially higher costs. In addition, in response to these higher costs, we may choose to reduce the amount of insurance we maintain because we believe our improvements in our cybersecurity profile have reduced our risk exposure relative to the increased cost of insurance. If our risk assessments prove incorrect and we were to have a loss not fully covered by insurance, our financial condition and results of operations could be materially negatively impacted. +We depend on our key employees and other highly qualified personnel and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees, as well as challenges with respect to the management of human capital resources, could compromise our future success and our business could be harmed. +Our future success depends upon our ability to attract and retain, through competitive compensation and benefits programs, professional and executive employees, including sales, operating, marketing, and financial management personnel as well as our ability to manage human capital resources. There is substantial competition for skilled personnel, and the failure to attract, develop, retain and motivate adequately qualified personnel could negatively impact our business, financial condition, results of operations and prospects. In order to hire new personnel or retain or replace our key personnel, we must maintain competitive compensation and benefits, and we may also be required to increase compensation, which would decrease net income. Additionally, several key employees have special knowledge of customers, supplier relationships, business processes, manufacturing operations, regulatory and customer quality compliance management, and financial management issues. The loss of any of these employees as the result of competitive compensation pressures or ineffective management of human capital resources could harm our ability to perform efficiently and effectively until their knowledge and skills are replaced, which might be difficult to do quickly, and as a result could have a material adverse effect on our business, financial condition, and results of operations. Failure to retain or attract key personnel could impede our ability to grow and could result in our inability to operate our business profitably. +Although we have not experienced any material disruptions due to labor shortages to date, we have observed an overall tightening and increasingly competitive labor market, and the demand for qualified individuals is expected to remain strong for the foreseeable future. Any sustained labor shortage or increased turnover rates within our employee base, could lead to increased costs and lost profitability and could otherwise compromise our ability to efficiently operate our business. +We may record future impairment charges, which could materially adversely impact our results of operations. +We test our goodwill balances annually, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit level and monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Declines in the future performance and cash flows of a reporting unit or asset group, changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses, or changes in other key assumptions, may result in the recognition of significant asset impairment charges, which could have a material adverse impact on our results of operations. +We also review our long-lived assets including property, plant and equipment, and other intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. +Factors we consider include significant under-performance relative to expected historical or projected future operating results, significant negative industry or economic trends and our market capitalization relative to net book value. We may be required in the future to record a significant charge to earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such charges could have a significant adverse impact on our results of operations and our financial condition. +Financial and Economic Risks: +We face risks related to recession, inflation, stagflation and other economic conditions . +Customer demand for our products may be impacted by weak economic conditions, inflation, stagflation, recession, rising interest rates, equity market volatility or other negative economic factors in the U.S. or other nations. For example, under these conditions or the expectation of such conditions, our customers may cancel orders, delay purchasing decisions, or reduce their use of +11 +our services. In addition, these economic conditions could result in higher inventory levels and the possibility of additional charges if we request changes in delivery schedules or if suppliers incur additional costs that they pass on to us. Further, in the event of a recession or threat of a recession, our suppliers, distributors, and other third-party partners may suffer their own financial and economic challenges and, as a result, they may demand pricing accommodations, delay payment, or become insolvent, which could harm our ability to meet our customers’ demands or collect revenue or could otherwise harm our business. Similarly, disruptions in financial or credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors and might cause us to not be able to continue to access preferred sources of liquidity when we would like if at all, and our borrowing costs could increase. Thus, if general macroeconomic conditions continue to deteriorate, our business and financial results could adversely affect our business, operating results and financial condition. +In addition, we are subject to risks from inflation and increasing market prices of certain components, supplies, and raw materials, which are incorporated into our end products or used by our suppliers to manufacture our end products. These components, supplies and other raw materials have from time to time become restricted. General market factors and conditions have in the past and may in the future affect pricing of such components, supplies, and commodities. +Economic, political and other risks associated with international sales and operations could adversely affect our results of operations and financial position. +Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect sales to customers outside the U.S., accounted for approximately 43% of our total revenue for fiscal 2024, and we anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, contractors and facilities located outside the U.S. Accordingly, our business, operating results and financial condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory, or other conditions; +• +Trade protection measures and import or export licensing requirements; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Failure to comply with complex and rapidly changing government economic sanctions against other countries, especially arising from responses to armed conflict; +• +Unexpected changes in regulatory requirements; and +• +Geopolitical turmoil, including terrorism, war and public health disruptions, such as that caused by the COVID-19 pandemic or Russia’s invasion of Ukraine. +To date, the impact of the Russian invasion of Ukraine and the resulting governmental sanctions and our decision to halt all activities in the affected areas has had an immaterial direct impact on our revenues. We believe, however, that the impact on the economies of Western Europe, especially Germany, which is the largest non-North American market for our products, has had a negative impact on demand for our products. +Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods . +As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is based on the tax rates in effect where we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each jurisdiction. Our effective tax rate may vary as a result of numerous factors, including changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, whether we secure or sustain acceptable arrangements with tax authorities, adjustments to the value of our uncertain tax positions, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations. +12 +Changes to tax laws and regulations or changes to the interpretation thereof, the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, uncertainties regarding the geographic mix of earnings in any particular period, and other factors could have a material impact on our estimates of our effective tax rate and our deferred tax assets and liabilities. The impact of these factors may be substantially different from period to period. In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state, and local tax authorities. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our financial statements. +We may have exposure to additional tax liabilities, which could negatively impact our income tax expense, net income and cash flow. +We are subject to income and other taxes in both the U.S. and the foreign jurisdictions in which we operate. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit by both domestic and foreign tax authorities and to the prospective and retrospective effects of changing tax regulations and legislation. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the amounts recorded in our consolidated financial statements and may materially affect our income tax benefit or expense, net loss or income, and cash flows in the period in which such determination is made. +Deferred tax assets are recognized for the expected future tax consequences of temporary differences between the carrying amount for financial reporting purposes and the tax bases of assets and liabilities, and for net operating losses and tax credit carry forwards. In some cases, we may record a valuation allowance to reduce our deferred tax assets to estimated realizable value. We review our deferred tax assets and valuation allowance requirements quarterly. If we are unable to demonstrate that it is more likely than not that we will not be able to generate sufficient future taxable income to realize the net carrying value of deferred tax assets, we will record a valuation allowance to reduce the deferred tax assets to estimated realizable value, which could result in a material income tax charge. As part of our review, we consider positive and negative evidence, including cumulative results of recent years. +If we are unable to successfully comply with our credit agreement with Bank of America or secure alternative financing, our business and financial condition could be materially adversely affected. +Our credit agreement with Bank of America, N.A. requires us, among other things, to satisfy certain financial ratios on an ongoing basis, consisting of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and an asset coverage ratio. We are also required to comply with other covenants and conditions, set forth in the credit agreement, including, among others, limitations on our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the credit agreement. If we were to violate the terms of the credit agreement and we were unable to renegotiate its terms at that time or secure alternative financing, it could have a material adverse impact on us. +The agreements governing our indebtedness subject us to various restrictions that limit our ability to pursue business opportunities. +The credit agreement governing our credit facility with Bank of America, N.A. contains, and any future debt agreements may include several restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to: +• +Incur future indebtedness; +• +Place liens on assets; +• +Pay dividends or distributions on our and our subsidiaries’ capital stock; +• +Repurchase or acquire our capital stock; +• +Conduct mergers or acquisitions; +• +Sell assets; and/or +• +Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness. +13 +We may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may negatively impact our overall business. +We have made strategic investments in other companies, products and technologies, including our August 2022 acquisition of Astro Machine LLC. We will continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that we will be able to identify suitable acquisition opportunities. In any acquisition that we complete, we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative impact on operating results or other aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental impact on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse impact on our reputation; +• +We will successfully implement effective disclosure controls and internal controls over financial reporting at the acquired business in a timely fashion; and +• +Respective operations, management and personnel will be compatible. +For example, in the recently acquired Astro Machine business, revenues are concentrated in a relatively small number of customers. Failure to satisfy the delivery requirements of those customers or to adequately respond to their evolving product requirements could cause us to lose one or more customers which would have a material adverse impact on our financial condition and results of operation due to lower revenue and could result in intangible asset impairment. +In certain instances, as permitted by applicable law and NASDAQ rules, acquisitions, such as the Astro Machine acquisition, may be consummated without seeking and obtaining shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in an acquisition, there can be no assurance that we will properly ascertain or assess such risks. +We may also divest certain businesses from time to time. Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If we are not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize the expected benefits of our acquisitions, divestitures or strategic partnerships, our business, results of operations and financial condition could be adversely affected. +Changes in our business strategy or restructuring of our businesses may increase our costs or otherwise affect the profitability of our businesses. +We continually review our operations with a view toward reducing our cost structure, including but not limited to reducing our labor cost-to-revenue ratio, improving process and system efficiencies and increasing our revenues and operating margins. For example, in fiscal 2024 we implemented a restructuring plan in our PI segment to reduce operating costs within that segment. As changes in our business environment occur, we may need to adjust our business strategies to meet these changes, or we may otherwise find it necessary to restructure our operations or particular businesses or assets. When these changes or events occur, we may incur costs to change our business strategy and may need to write down the value of assets or sell certain assets. In any of these events our costs may increase, and we may have significant charges or losses associated with the write-down or divestiture of assets. +14 +Adverse conditions in the global banking industry and credit markets could impair our liquidity or interrupt our access to capital markets, borrowings or financial transactions to hedge certain risks. +At the end of fiscal 2024, we had approximately $4.5 million of cash and cash equivalents. Our cash and cash equivalents are held in bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our financial position. +To date, we have been able to access financing that has allowed us to make investments in growth opportunities and fund working capital requirements as needed. In addition, we occasionally enter into financial transactions to hedge certain foreign exchange and interest rate risks. Our continued access to capital markets, the stability of our lenders and their willingness to support our needs, and the stability of the counterparties to our financial transactions that hedge risks are essential for us to meet our current and long-term obligations, fund operations, and fund our future strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could materially and adversely affect our business and financial condition. +Inadequate self-insurance accruals or insurance coverage for employee healthcare benefits could have an adverse effect on our business, financial results or financial condition. +In the U.S., we maintain an employee health insurance coverage plan on a self-insured basis backed by stop-loss coverage which sets a limit on our liability for both individual and aggregate claim costs. We record expenses based on actual claims incurred and estimates of the costs of expected claims, administrative costs, and stop-loss insurance premiums. +We record a liability for our estimated cost of U.S. claims incurred and unpaid as of each balance sheet date. Our estimated liability is recorded on an undiscounted basis and is based on historical trends and data provided by our insurance broker. Our history of claims activity is closely monitored, and liabilities are adjusted as warranted based on changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of losses. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, which could cause us to record additional expenses, which could adversely impact our business, financial condition, results of operations and cash flow. +Legal and Regulatory Risks: +Certain of our products require certifications by customers, regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business. +In certain industries and for certain products, such as those used in aircraft, we must obtain certifications for our products by customers, regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +We are subject to laws and regulations; failure to address or comply with these laws and regulations could harm our business and adversely affect our results of operations. +Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our products. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +We are subject to regulatory constraints and compliance requirements due to our status as a publicly held company. Public company compliance costs are increasing due to the increase in SEC regulations and enforcement actions, and the heightened scrutiny that we and the public accounting industry face from the Public Companies Accounting Oversight Board. Additionally, certain new and proposed regulations in the State of Rhode Island, where we are headquartered, are likely to increase compliance costs. In some instances, the regulations may mandate action on our part for which, to our knowledge, no current technical means to comply exist. If enacted, the costs of complying with these regulations could have a material adverse impact on our business. +Our business outside of the United States exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, employee rights and protection, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to +15 +government officials and other third parties. For example, the increased use of sanctions in U.S. international relations recently has increased our cost of compliance with the regulations intended to enforce them. +Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on the effectiveness of their internal control over financial reporting and any inability to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting, could adversely affect our results of operations, our stock price and investor confidence in our company. +We have identified a material weakness in our internal control over financial reporting and that weakness has led to a conclusion that our internal control over financial reporting and disclosure controls and procedures were not effective as of January 31, 2024. The material weakness related to our failure to design and maintain an effective control environment at our Astro Machine subsidiary, which was acquired in August of 2022. Management is taking action to remediate this material weakness in its internal controls over financial reporting by designing an effective control environment and expanding our existing enterprise resource planning system to include the Astro Machine subsidiary. +If action to remediate this material weakness is not completed on a timely basis, or if other remediation efforts are not successful, we may, in the future, identify additional internal control deficiencies that could rise to the level of a material weakness or uncover other errors in financial reporting. +Failure to have effective internal control over financial reporting and disclosure controls and procedures could impair our ability to produce accurate financial statements on a timely basis, or provide reliable financial statements needed for business decision processes, and our business and results of operations could be harmed. Additionally, investors could lose confidence in our reported financial information and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. Also, failure to maintain effective internal control over financial reporting could result in sanctions by regulatory authorities. +Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our business. +Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. As such, our business is subject to and may be materially and adversely affected by compliance obligations and other liabilities under those environmental, health and safety laws and regulations. Certain of our products contain, and some of manufacturing operations use various substances which have been or may be deemed to be hazardous or dangerous. Thus, we have and will continue to generate a generally limited amounts of hazardous waste in our operations. We manage our compliance with laws and regulations and the proper mitigation of risks internally and through the input of external consultants and outside service providers and we believe we are in material compliance with all applicable environmental laws and regulations. We desire to reduce and ultimately eliminate any adverse environmental impact of our business and to comply with relevant laws and regulations. We expect this effort to affect our ongoing operations and require additional capital and operating expenditures. If we were to fail to manage our environmental compliance effectively, we could suffer economic or reputational harm. +Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, and any determination that we or any of our subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies. +Unauthorized access to personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights and compliance with laws designed to prevent unauthorized access of personal data could be costly. +We collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Security breaches or other unauthorized access to, or the use or transmission of, personal user information could result in a variety of claims against us, including privacy-related claims. There are numerous federal, state, local, and international laws and regulations regarding privacy and the +16 +storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are changing, inconsistent and conflicting and subject to differing interpretations. +We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. For example, in 2016 the European Commission adopted the General Data Protection Regulation (GDPR), a comprehensive privacy and data protection reform that became effective in May 2018. The GDPR, which is applicable to all companies processing data of European Union residents, imposes significant fines and sanctions for violations. These requirements are complicated, and compliance is technically complex to maintain. We contract with outside experts to advise us, conduct internal and external compliance training, and believe we are currently in compliance, however, maintaining compliance has increased costs and diverted resources. Similarly, the California Consumer Privacy Act of 2018, which was enacted in June 2018 and came into effect on January 1, 2020, provides a new private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. +Additionally, other jurisdictions have enacted or are enacting data localization laws that require data generated in or relating to the residents of those jurisdictions to be physically stored within those jurisdictions. In many cases, these laws and regulations apply not only to transfers between unrelated third parties but also to transfers between us and our subsidiaries. All these evolving compliance and operational requirements impose significant costs that are likely to increase over time. +While we continue to assess these requirements and the ways they may impact the conduct of our business, we believe that we materially comply with applicable laws and industry codes of conduct relating to privacy and data protection. There is no assurance that we will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event we are found not to be in compliance with such laws or codes of conduct. +Any failure or perceived failure by us (or any third parties with whom we have contracted to store such information) to comply with applicable privacy and security laws, policies or related contractual obligations or any compromise of security that results in unauthorized access to personal information may result in governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. In the case of such an event, our reputation may be harmed, we could lose current and potential users and the competitive positions of our various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations. +Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition. +Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, income taxes, and warranties, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition. +Item 1B. Unreso lved Staff Comments +None. +Item 1C. Cybersec urity +Cybersecurity Risk Management and Strategy +We have made substantial investments in cybersecurity risk management, and it is an integral part of our overall enterprise risk management program. We have implemented a variety of tools and a process designed to identify, monitor, evaluate and respond to cybersecurity threats and incidents, including those associated with our use of third-party vendors and service providers. Our process consists of steps for identifying the source of a cybersecurity threat or incident, including whether such cybersecurity threat or incident is associated with a third-party vendor or service provider; implementing cybersecurity countermeasures and mitigation strategies, and informing management and our board of directors of potentially material cybersecurity threats and incidents or other significant changes in the evolving cybersecurity threat landscape. We intend to continue to make substantial investments in cybersecurity risk management to improve our tools and processes because the cybersecurity threat continues to evolve. While we continue to invest in our infrastructure environment and monitoring capability, and in due diligence with respect to the third parties with whom we interact, there can be no assurance that we can prevent, mitigate, or remediate the risk of any compromise or failure in the cybersecurity infrastructure owned or controlled by us or any third-party vendor or service providers that we use. +17 +Our Information Technology team reports to senior management and is responsible for assessing and maintaining our cybersecurity risk management program. In addition, they collaborate with third-party security specialists as necessary, aiming for thorough risk assessments and system improvements. Together with our third-party security service providers, the Information Technology team oversees our processes for the prevention, detection, mitigation, and resolution of cybersecurity incidents. Throughout the year, we regularly train our employees on cybersecurity awareness and confidential information protection. We review or update our cybersecurity policies and the effectiveness of our programs to manage cybersecurity risk on a continuing basis, to account for changes in the evolving cybersecurity threat landscape, as well as for any related legal and regulatory developments that may occur. +Cybersecurity threats have the potential to materially affect our company, including our business strategy, results of operations, and financial condition. While we have not experienced material adverse effects from cybersecurity threats to date, we recognize the evolving nature of these risks and remain vigilant in our efforts to mitigate potential impacts. Refer to “Item 1A. - Risk Factors” in this annual report on Form 10-K, including, “We could experience a significant disruption in or security breach of our information technology system which could harm our business and adversely affect our results of operations,” for additional discussion on our cybersecurity related risks. +Cybersecurity Governance +Our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), and Information Technology team are responsible for identifying and assessing cybersecurity risks on an ongoing basis, establishing processes designed to provide reasonable assurance that such potential cybersecurity risk exposures are monitored, instituting appropriate mitigation and remediation measures, and maintaining cybersecurity programs. Additionally, since we do not have a full time Chief Information Security Officer, we obtain additional domain expertise from third party outside resources. Our cybersecurity programs are managed under the direction of our CFO, who receives reports from our Information Technology team and third-party resources to monitor the prevention, detection, mitigation, and remediation of cybersecurity risks. +Our board of directors has oversight responsibility for our overall enterprise risk management and directly oversees our cybersecurity risk management. As part of its enterprise risk management efforts, our board of directors regularly receives reports from management on our cybersecurity programs with regard to any risks that may arise from specific cybersecurity threats and incidents. The board of directors oversees management’s programs, policies and processes in place that identify, monitor, assess, and respond to cybersecurity, data privacy, and other information technology risks to which we are exposed. +Item 2. P roperties +The following table sets forth information regarding our principal owned properties. The West Warwick property is subject to a security agreement and a mortgage in favor of the lender under our credit facility. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, United States +135,500 +Corporate headquarters, research and development, +manufacturing, sales and service +Elk Grove Village, Illinois +34,460 +Astro Machine principal place of business +The West Warwick facility is used by both of our business segments, while the Elk Grove Village facility is exclusively used by the PI segment. +We also lease facilities in various other locations. The following information pertains to each location: +Location +Approximate +Square +Footage +Principal Use +Dietzenbach, Germany +18,630 +Manufacturing, sales and service (PI segment) +Copenhagen, Denmark +4,800 +R&D, sales and service (PI segment) +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service (PI segment) +Elancourt, France +4,150 +Sales and service (PI segment) +Shah Alam, Selangor, Malaysia +2,067 +Sales (PI segment) +Singapore +2,400 +Sales (T&M segment) +Shanghai, China +425 +Sales (PI segment) +Mexico City, Mexico +97 +Sales (PI segment) +We believe all our facilities are well maintained in good operating condition and generally adequate to meet our needs for the foreseeable future. +18 +Item 3. Leg al Proceedings +We are party to various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or cash flows. Additionally, because of the nature of our business, we may be subject in the future to lawsuits or other claims, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters and an unfavorable resolution of any of these matters could materially affect our future results of operations, cash flows or financial position. +Item 4. Mine Sa fety Disclosures +Not applicable. +19 +PART II +Item 5. Market for the Registrant’s Common Stock, R elated Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock trades on the NASDAQ Global Market under the symbol “ALOT.” +As of April 5, 2024, we had approximately 370 shareholders, which does not reflect shareholders with beneficial ownership in shares held in nominee name. +Stock Repurchases +During the fourth quarter of fiscal 2024, we made the following repurchases of our common stock: +Total Number +of Shares +Repurchased +Average +Price paid +Per Share ($) +Total Number of +Shares Purchased as +Part of Publicly +Announced Plans +or Programs +Maximum Number +of Shares That +May Be Purchased +Under the Plans +or Programs +November 1 – November 30 +— +— +— +— +December 1 – December 31 +309(a) +15.16(a) +— +— +January 1 – January 31 +— +— +— +— +(a) +An executive of the company delivered 309 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $15.16 per share and are included with treasury stock in the consolidated balance sheet. +Item 6. [Reserved] +20 +Item 7. Management’s Discu ssion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis are meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts of cash flows from operations and outside resources, liquidity and certain other factors that may affect future results so as to allow investors to better view our company from management’s perspective. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and other financial information included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. Carefully review the “Forward-Looking Statements” and “Risk Factors” sections of this annual report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. +Overview +We are a multi-national enterprise that leverages our proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. We organize our structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following two segments: +• +Product Identification (“PI”) – offers color and monochromatic digital label printers, over-printers and custom OEM printers. PI also provides software to design, manage and print labeling and packaging images locally and across networked printing systems, as well as all related printing supplies such as pressure-sensitive labels, tags, inks, toners and thermal transfer ribbons used by digital printers. PI also provides on-site and remote service, spare parts and various service contracts. +• +Test and Measurement (“T&M”) – offers a suite of products and services that acquire data from local and networked data streams and sensors as well as wired and wireless networks. The T&M segment includes a line of aerospace printers used to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, clearances, arrival and departure procedures, NOTAMs, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. Aerospace products also include aircraft networking systems for high-speed onboard data transfer. T&M also provides repairs, service and spare parts. +On August 4, 2022, we completed the acquisition of Astro Machine, an Illinois-based manufacturer of printing equipment, including label printers, tabbers, conveyors, and envelope feeders, for aggregate consideration of $17.1 million. Astro Machine is reported as part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisition,” in our consolidated financial statements included elsewhere in this report for further details. +On July 26, 2023, we adopted a restructuring plan (the “2024 Restructuring Plan”) for our PI segment that transitioned a portion of the printer manufacturing within that segment from our facility in Rhode Island to our Astro Machine facility located in Illinois. Additionally, we ceased selling certain of our older, lower-margin or low-volume PI segment products and made targeted reductions to our workforce. As part of the 2024 Restructuring Plan, we also consolidated certain of our international PI sales and distribution facilities and streamlined our channel partner network. The total cost of this plan was $2.5 million, comprised primarily of non-cash charges related to inventory write-offs and facility exit costs, and cash charges related to severance-related costs. As of January 31, 2024, we have completed the 2024 Restructuring Plan. Refer to Note 19, “Restructuring,” in our consolidated financial statements included elsewhere in this report for further details. +In connection with our 2024 Restructuring Plan, we identified the need to address quality and reliability issues in certain models of our PI printers as a result of faulty ink provided by one of our larger suppliers. We identified approximately 150 printers sold to our customers that were affected by the faulty ink. In order to remedy these issues and maintain solid customer relationships, during the second quarter of fiscal 2024, we initiated a program to retrofit all of the affected printers sold to our customers (the “2024 Product Retrofit Program”). The costs associated with this program, which included the cost of parts, labor and travel, were $0.6 million and were included in cost of revenue in our consolidated income statement for the year ended January 31, 2024. During fiscal 2024, we worked with our customers to either repair or replace the affected printers and at the end of the fourth quarter of fiscal 2024, the 2024 Product Retrofit Program was concluded. Refer to Note 19, “Restructuring,” in our consolidated financial statements included elsewhere in this report for further details. +We market and sell our products and services globally through a diverse distribution structure of direct sales personnel, manufacturers’ representatives, OEMs, and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. In fiscal 2024, 2023, and 2022, revenue from customers in various geographic areas outside the United States, primarily in Western Europe, Canada and Asia, amounted to $63.3 million, $59.0 million, and $49.3 million, respectively. +21 +We maintain an active program of product research and development. We spent approximately $6.9 million in fiscal 2024 and $6.8 million in both fiscal 2023 and 2022, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2025 and beyond. +We also continue to invest in sales and marketing initiatives by expanding and improving the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability. +Impact of COVID-19 +The lingering impact of the COVID-19 pandemic continues to affect our business, most notably in our T&M segment. While sales demand in this segment has largely recovered in the current year due to the increase in demand for air travel and new aircraft, it has not yet reached pre-COVID-19 levels. Additionally, the lingering disruptions in the supply chain from the COVID-19 pandemic continue to impact our business, as it has become difficult to ramp up production as quickly as needed to respond to the increase in customer demand. Furthermore, due to supply chain disruptions, it has become increasingly difficult to obtain the needed components for our legacy T&M products and as a result we have incurred higher costs to obtain these components. +Results of Operations +Fiscal 2024 compared to Fiscal 2023 +The following table presents the revenue of each of our segments, as well as the percentage of total revenue and change from the prior year. +($ in thousands) +2024 +2023 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +PI +$ +104,041 +70.3 +% +0.9 +% +$ +103,089 +72.3 +% +T&M +44,045 +29.7 +% +11.7 +% +39,438 +27.7 +% +Total +$ +148,086 +100.0 +% +3.9 +% +$ +142,527 +100.0 +% +Net revenue in fiscal 2024 was $148.1 million, a 3.9% increase compared to net revenue of $142.5 million for fiscal 2023. Current year revenue through domestic channels was $84.8 million, an increase of 1.4% from prior year domestic revenue of $83.6 million. International revenue of $63.3 million for fiscal 2024 increased 7.4% compared to prior year international revenue of $59.0 million. Fiscal 2024 international revenue reflects a favorable foreign exchange rate impact of $0.4 million, compared to an unfavorable foreign exchange rate impact of $3.5 million in fiscal 2023. +Hardware revenue in fiscal 2024 was $49.4 million, a $7.0 million or 16.5% increase compared to fiscal 2023 hardware revenue of $42.4 million due to increased hardware sales in both the T&M and PI segments. T&M hardware sales increased 15.8% or $3.8 million compared to the prior year primarily due to increased sales in our aerospace printer product line. Current year hardware sales in the PI segment increased 17.4% or $3.1 million compared to the prior year, predominately as a result of the August 2022 acquisition of Astro Machine which contributed a full year of revenue for fiscal 2024, compared to six months in fiscal 2023. The increase in PI hardware sales for the current year was slightly offset by a decline in sales of our QuickLabel and TrojanLabel product line printers. +Revenue from supplies in fiscal 2024 was $79.3 million, a 3.4% or $2.8 million decrease compared to fiscal 2023 supplies revenue of $82.1 million. The current year decrease in supplies revenue was primarily due to lower sales of ink jet supply products in the PI segment, which declined $3.3 million or 5.2% from the prior year. Also contributing to the decrease in current year supply revenue was the decline in thermal film supplies in the PI segment. The overall decline in supplies sales in the current year was partially offset by increased sales of toner and media supplies in our PI segment and an increase in paper supply revenue for the aerospace printers in our T&M segment. +Service and other revenue in fiscal 2024 was $19.4 million, a 7.7% or $1.4 million increase compared to fiscal 2023 service and other revenue of $18.0 million. The increase is primarily due to the inclusion of a full year of Astro Machine parts revenue in the PI segment for the current year, compared to six months in fiscal 2023. Also contributing to the current year increase is the increased repair and parts revenue for aerospace printer products in the T&M segment due to the impact of increased flight hour usage and pricing increases. +Gross profit was $51.6 million for fiscal 2024, reflecting a 7.2% increase compared to fiscal 2023 gross profit of $48.2 million. Our gross profit margin of 34.9% in fiscal 2024 reflects a 1.1 percentage point increase compared to fiscal 2023 gross profit margin of 33.8%. The increased gross profit and related profit margin for the current year compared to the prior year is primarily attributable to higher margins on a favorable product mix. +22 +Operating expenses for the current year were $42.8 million, representing a 0.3% increase from the prior year’s operating expenses of $42.7 million. Specifically, selling and marketing expenses of $24.4 million in fiscal 2024 decreased 0.1% from the prior year amount of $24.5 million. The slight decrease in selling and marketing expenses for the current year is primarily due to a decrease in wages and benefits as well as a decrease in maintenance contract fees. Current year selling and marketing expense was also impacted by $0.4 million in restructuring costs related to the 2024 Restructuring Plan. The current year decrease in selling and marketing expenses was partially offset by an increase in amortization expense related to the customer relationship and trademark intangibles acquired as part of the Astro Machine acquisition. General and administrative expenses increased 0.5% to $11.5 million in the current year compared to $11.4 million in the prior year, as increases in professional fees, wages, and bonuses were largely offset by decreases in outside service and employee fees. Current year general and administrative expense was also impacted by $0.1 million of restructuring costs related to the 2024 Restructuring Plan. Research & development (“R&D”) costs in fiscal 2024 of $6.9 million increased 1.2% from fiscal 2023, as increases in outside consulting and service expenses were substantially offset by decreases in employee wage and bonus expenses. The R&D spending level for fiscal 2024 represents 4.7% of net revenue, compared to the prior year level of 4.8%. +Other expense in fiscal 2024 was $2.7 million compared to $2.0 million in fiscal 2023. Current year other expense includes $2.7 million of interest expense on our debt and revolving credit facility and $0.1 million of net foreign exchange loss, offset by net other income of $0.1 million. Prior year other expense included interest expense on debt and revolving credit facility of $1.7 million, and net foreign exchange loss of $0.5 million, offset by other income of $0.1 million. +We recognized $1.4 million of income tax expense for the current fiscal year, resulting in an effective tax rate of 22.7% compared to 22.0% in fiscal 2023. The increase in the effective tax rate in fiscal 2024 from fiscal 2023 is primarily related to the impact of the valuation allowance recorded on China net operating losses, the increase in the current provision for state and local taxes, and the change in the foreign rate differential. This increase was partially offset by other factors decreasing the effective tax rate such as foreign derived intangible income deduction, share based compensation, and the R&D tax credit. +Net income for fiscal 2024 was $4.7 million, or $0.63 per diluted share. The results for this period were impacted by expense of $2.6 million ($2.0 million net of tax or $0.27 per diluted share) related to the 2024 Restructuring Plan and expense of $0.6 million ($0.5 million net of tax or $0.07 per diluted share) related to the 2024 Product Retrofit Program. Net income for fiscal 2023 was $2.7 million, or $0.36 per diluted share. The results for the fiscal 2023 year were impacted by expenses of $0.7 million ($0.5 million net of tax, or $0.07 per diluted share) related to transaction costs of the Astro Machine acquisition. +Fiscal 2023 compared to Fiscal 2022 +For a comparison of our results of operations for the fiscal years ended January 31, 2023, and January 31, 2022, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended January 31, 2023, filed with the SEC on April 17, 2023. +Segment Analysis +We report two segments consistent with our product revenue groups: PI and T&M. Segment performance is evaluated based on the operating segment’s profit before corporate and financial administration expenses. The following table summarizes selected financial information by segment. +($ in thousands) +Revenue +Segment Operating Profit +Segment Operating Profit +as a % of Revenue +2024 +2023 +2022 +2024 +2023 +2022 +2024 +2023 +2022 +P I +$ +104,041 +$ +103,089 +$ +90,915 +$ +10,087 +$ +7,889 +$ +10,411 +9.7 +% +7.7 +% +11.5 +% +T&M +44,045 +39,438 +26,565 +10,200 +8,989 +3,398 +23.2 +% +22.8 +% +12.8 +% +Total +$ +148,086 +$ +142,527 +$ +117,480 +20,287 +16,878 +13,809 +13.7 +% +11.8 +% +11.8 +% +Corporate Expenses +11,491 +11,435 +9,553 +Operating Income +8,796 +5,443 +4,256 +Other Income (Expense), Net +(2,723 +) +(2,033 +) +2,778 +Income Before Income Taxes +6,073 +3,410 +7,034 +Income Tax Provision +1,379 +749 +605 +Net Income +$ +4,694 +$ +2,661 +$ +6,429 +Product Identification +Revenue from the PI segment increased 0.9% in fiscal 2024, with revenue of $104.0 million compared to revenue of $103.1 million in the prior year. The current year increase is primarily attributable to the contribution of a full year of revenue from the fiscal 2023 acquisition of Astro Machine, compared to six months in the prior year. Trojan Label related product supplies and part revenues also grew in fiscal 2024 compared to the prior year due to the larger installed base of these printers. The current year increase in PI +23 +revenue was largely offset by declines in the revenue from inkjet supplies and certain tabletop label hardware sales, particularly in North America resulting primarily from the continued adverse market reaction to the deterioration of certain label printers due to the ink quality issues related to one of our larger suppliers. PI current year segment operating profit was $10.1 million with a profit margin of 9.7%, compared to the prior year segment operating profit of $7.9 million and related profit margin of 7.7%. The increase in the current year PI segment operating profit and margin is primarily due to the inclusion of Astro Machine for the full twelve months of fiscal 2024, lower manufacturing and operating expenses and a favorable product mix, partially offset by the impact of $2.5 million of costs related to the 2024 Restructuring Plan and $0.6 million of costs recognized in the current year relating to the 2024 Product Retrofit Program. At this time, we believe the outlook for PI business is favorable due to the strategic realignment accomplished by the 2024 Restructuring Plan which will allow us to concentrate on higher-margin PI products as well as consolidate our PI sales and distribution facility and streamline our channel partner network. +Test & Measurement +Revenue from the T&M product group was $44.0 million for fiscal 2024, an 11.7% increase compared to revenue of $39.4 million in the prior year. The increase in revenue for the current year was primarily attributable to strong hardware sales in our aerospace product lines as a result of increased aerospace printer product unit volume. Demand for printers has increased due to the post-pandemic recovery in air travel demand, which has driven new orders for airplanes and a corresponding increase in production rates. Also contributing to the current year increase in revenue were increased sales of ToughSwitch ethernet products, which continue to recover to levels consistent with the fiscal 2019 through 2021 period after a large decline in fiscal 2022, and we currently expect comparable revenue from those products in fiscal 2025. T&M revenue in fiscal 2024 and 2023 was also impacted by $1.3 million and $1.1 million, respectively, of revenue recognized as the result of successful claims for component cost increases for printer shipments to one customer as described in Note 3, “Revenue Recognition,” in our consolidated financial statements included elsewhere in this report. The current year increase in T&M revenue was additionally favorably impacted by increased repair, parts and paper supply revenue related to aerospace printers, as flight hours and product utilization increased. The current year T&M segment revenue increase was partially offset by a decline in T&M hardware sales in the data recorder product line. At this time, we believe the outlook for T&M supplies, service and other revenue is favorable as the expected higher flight hours in commercial aviation should correlate favorably to higher aerospace printer supplies, parts and repair revenue. T&M current year segment operating profit was $10.2 million resulting in a 23.2% profit margin compared to the prior year segment operating profit of $9.0 million and related operating margin of 22.8%. The increased profit and margins were primarily attributable to higher revenue from high-margin product lines. +Liquidity and Capital Resources +Overview +Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. These sources have also historically funded the majority of our capital expenditures and contractual contingent consideration obligations. In fiscal 2024, we financed, under our secured equipment loan facility agreement, $0.8 million of capital investments to upgrade production machinery to support planned revenue growth and cost reduction objectives. In fiscal 2023, we funded the acquisition of Astro Machine in part by borrowing under our credit facilities, as further described below. +We believe that in the coming year and in the longer term, cash flow generation from operations and available unused credit capacity under our credit facility will support our anticipated needs. In fiscal 2025 (after required debt amortization and payment of minimum guaranteed royalty payments to Honeywell), we will be focused on inventory reduction and reduction of debt outstanding under our revolving credit facility, to the degree possible as constrained by supply chain management challenges. Furthermore, if acquisition opportunities develop that would require additional cash above our current available capacity, based on regular communication with our lender, we believe that our current operating performance and the reduction in leverage ratios as measured by the covenants within our credit facilities since the acquisition of Astro Machine would permit us to obtain sufficient additional short and long term debt financing, barring any unforeseen changes in the credit and capital markets. +In connection with our purchase of Astro Machine on August 4, 2022, we entered into a Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment”) with Bank of America, N.A., as lender (the “Lender”). The Second Amendment amended the Amended and Restated Credit Agreement dated as of July 30, 2020, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of March 24, 2021, and the LIBOR Transition Amendment, dated as of December 24, 2021 (the “Existing Credit Agreement,” and the Existing Credit Agreement as amended by the Second Amendment, the “Amended Credit Agreement”), between the Company and the Lender. +The Amended Credit Agreement provides for (i) a new term loan in the principal amount of $6.0 million, which term loan was in addition to the existing term loan outstanding under the Existing Credit Agreement in the principal amount of $9.0 million as of the effective date of the Second Amendment, and (ii) an increase in the aggregate principal amount of the revolving credit facility available thereunder from $22.5 million to $25.0 million. Under the Amended Credit Agreement, revolving credit loans may continue +24 +to be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. +At January 31, 2024, our cash and cash equivalents were $4.5 million and we had an outstanding balance of $8.9 million drawn and outstanding under our revolving credit facility. At January 31, 2024, we had $16.1 million available for borrowing under that facility. +Indebtedness +Term Loan +The Amended Credit Agreement requires that the term loan be paid in quarterly installments on the last day of each of our fiscal quarters over the term of the Amended Credit Agreement on the following repayment schedule: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2022 through July 31, 2023 is $375,000; and the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2023 through April 30, 2027 is $675,000. The entire remaining principal balance of the term loan is required to be paid on August 4, 2027. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than August 4, 2027, and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate on such date. We may reduce or terminate the revolving credit facility at any time, subject to certain thresholds and conditions, without premium or penalty. +The loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. +Amounts repaid under the revolving credit facility may be reborrowed, subject to our continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. +The interest rates under the Amended Credit Agreement are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the Amended Credit Agreement (or, in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60% to 2.50% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate, (iii) the BSBY Rate plus 1.00%, or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.50% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.35% based on our consolidated leverage ratio. +We must comply with various customary financial and non-financial covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and a minimum consolidated asset coverage ratio. The primary non-financial covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on our or our subsidiaries’ capital stock, to repurchase or acquire our or our subsidiaries’ capital stock, to conduct mergers or acquisitions, to sell assets, to alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of our or our subsidiaries’ business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Second Amendment. As of January 31, 2024, we believe we are in compliance with all of the covenants in the Credit Agreement. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests we hold in AstroNova Scandinavia ApS, AstroNova GmbH and AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island, and are guaranteed and secured by substantially all of the personal property assets of Astro Machine. +25 +Equipment Loan +In January 2024, we entered into a secured equipment loan facility agreement with Banc of America Leasing & Capital, LLC and borrowed the principal amount of $0.8 million thereunder for the financing of our purchase of production equipment. The loan matures on January 23, 2029, and bears interest at a fixed rate of 7.06%. +Cash Flow +The statements of cash flows for the years ended January 31, 2024, 2023, and 2022 are included on page F-7 of this Form 10-K. Net cash provided by operating activities was $12.4 million in fiscal 2024 compared to net cash used by operating activities of $2.9 million in the previous year. The increase in net cash provided by operations for the current year is primarily due to the impact of changes in working capital items. Specifically, the changes in accounts receivable, inventory, income taxes, accounts payable and accrued expenses for the current year increased cash by $1.0 million in fiscal 2024 compared to a decrease in cash of $14.3 million in the prior year. +Our accounts receivable balance increased to $23.1 million at January 31, 2024, compared to $21.6 million at January 31, 2023. The increase in the accounts receivable balance is related to sales product mix in fiscal 2024 compared to the prior year, as well as the addition of Astro Machine for a full year in fiscal 2024. The days sales outstanding increased to 52 days at year end compared to 49 days at the end of fiscal 2023 contributing to the higher receivables balance at January 31, 2024. The days sales outstanding increase in the current year is due to customer mix, as aerospace receivables typically take longer to collect. +The year-end inventory balance decreased to $46.4 million at January 31, 2024 versus $51.3 million at January 31, 2023, a $5.0 million decrease from the prior year end. The decrease in our inventory balance is primarily due to the write-down of inventory of $2.0 million related to the 2024 Restructuring Plan. Also contributing to the current year reduction in inventory is usage of safety stock we had accumulated in prior years as a result of supply chain issues we were experiencing at that time. Inventory days on hand decreased to 168 days at the end of the current year from 176 days at the prior year end. +Net cash used by investing activities for fiscal 2024 was $0.9 million for capital expenditures, compared to fiscal 2023 cash used of $17.2 million, which includes $17.0 million related to the acquisition of Astro Machine and $0.2 million for capital expenditures. +Net cash used by financing activities for fiscal 2024 was $11.0 million. Cash used by financing activities for fiscal 2024 includes $7.0 million of net repayment activity under the revolving credit facility, $2.1 million of principal payments on our long term debt and guaranteed royalty obligation payments of $1.7 million. Cash provided from financing activities for fiscal 2023 includes $15.9 million for borrowings under the revolving credit facility and $6.0 million of proceeds from long term borrowings, which were partially offset by $2.0 million in guaranteed royalty obligation payments and $1.0 million of principle payments on long term debt . +Fiscal 2023 compared to Fiscal 2022 +For a comparison of our cash flow for the fiscal years ended January 31, 2023, and January 31, 2022, see “Part II, Item 7. Management’s Discussion and Analysis of Liquidity and Capital Resources” in our annual report on Form 10-K for the fiscal year ended January 31, 2023, filed with the SEC on April 17, 2023. +Contractual Obligations, Commitments and Contingencies +As of January 31, 2024, we had contractual obligations related to lease arrangements, debt and royalty obligation arrangements and purchase commitments. +The lease arrangements are for certain of our facilities at various locations worldwide. As of January 31, 2024, we had fixed lease payment obligations of $0.6 million, with $0.2 million due within 12 months. Refer to Note 11, “Leases,” in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details. +Debt arrangements under our Amended Credit Agreement with Bank of America, N.A., consist of a term loan with an outstanding principal balance of $12.2 million at January 31, 2024, of which $2.7 million is due within the 12 months after that date. Additionally, in January 2024, we entered into a secured equipment loan facility agreement and borrowed the principal amount of $0.8 million thereunder to finance our purchase of production equipment, of which $0.1 million is due within the 12 months after such date. For additional details regarding our long-term debt obligations, see Note 8, “Credit Agreement and Long Term Debt,” in our audited consolidated financial statements included in this Annual Report on Form 10-K. +We are subject to a guaranteed minimum royalty payment obligation over the next five years pursuant to the Honeywell Agreements, which, at January 31, 2024 included a balance due of $4.7 million, with $2.6 million due within 12 months. Refer to Note 2 “Acquisitions” and Note 10, “Royalty Obligation,” in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details. +26 +In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. At January 31, 2024, our purchase commitments totaled $25.8 million, with $23.1 million due within 12 months, some of which are non-cancelable. +We are also subject to contingencies, including legal proceedings and claims arising out of our business that cover a wide range of matters, such as: contract and employment claims; workers’ compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided, or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that our results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +Critical Accounting Policies and Estimates +Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on our historical experience, current trends and information available from other sources, as appropriate. We do not believe there is a great likelihood that materially different amounts would be reported using different assumptions pertaining to the accounting policies described below, however, if actual conditions differ from the assumptions used in our judgments, our financial results could be materially different from our estimates. +We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements: +Revenue Recognition : We recognize revenue in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.” Under ASC 606, based on the nature of our contracts, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied. +Our accounting policies relating to the recognition of revenue under ASC 606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which include (i) the existence of a contract with the customer, (ii) the identification of the performance obligations in the contract, (iii) the value of any variable consideration in the contract, (iv) the standalone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the contract, and (v) determining when a performance obligation has been met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery for those services, could result in inappropriate recognition of revenue, or incorrect timing of revenue recognition, which could have a material effect on our financial condition and results of operations. +We recognize revenue for non-recurring engineering (NRE) fees, as necessary, for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. +Infrequently, we receive requests from customers to hold products purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements in accordance with the guidance provided by ASC 606, which requires the transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) we do not have the ability to use the product or direct it to another customer. +Allowance for Doubtful Accounts: Accounts receivable consists primarily of receivables from our customers arising from the sale of our products. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts. +We estimate the collectability of our receivables and establish allowances for accounts receivable that we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our accounts receivable are outstanding and the financial condition of individual customers. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. We believe that our procedure for estimating such amounts is reasonable and historically has not resulted in material adjustments in subsequent periods. Bad debt expense was less than 1% of net sales in each of fiscal 2024 and 2023. +27 +Warranty Claims: We offer warranties on some of our products. We establish a reserve for estimated costs of warranties at the time the product revenue is recognized. This reserve requires us to make estimates regarding the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect estimated warranty cost. If actual warranty costs differ from our estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of revenue, and the reserve balance recorded as an accrued expense. While we maintain product quality programs and processes, our warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, we revise our estimated warranty liability accordingly. +Inventories: Inventories are stated at the lower of average and standard cost or net realizable value. The process for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on hand and estimating the net realizable value of the inventory based on historical experience, current business conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income Taxes: A valuation allowance is established when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, including our performance, the market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2024, we had provided valuation allowances for future tax benefits resulting from certain domestic R&D tax credits, foreign tax credit carryforwards, and China net operating losses, all of which are expected to expire unused. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted. +Business Combinations: We account for business acquisitions under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates that, if known, would have affected the measurement of the amounts recognized as of the acquisition date. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ from these estimates. During the measurement period, we may record adjustments to acquired assets and assumed liabilities, with corresponding offsets to goodwill. Upon the conclusion of a measurement period, any subsequent adjustments are recorded to earnings. +Goodwill and Intangible Assets: We recognize goodwill in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). Goodwill is the excess of cost of an acquired entity over the fair value amounts assigned to assets acquired and liabilities assumed in a business combination and is not amortized. +Goodwill is tested for impairment at the reporting unit. A reporting unit is an operating segment or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. If a quantitative assessment is required, we estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, we use the market approach, which compares the +28 +reporting unit to publicly traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. No goodwill impairment was identified for the years ended January 31, 2024 or January 31, 2023. +We recognize intangibles assets in accordance with ASC 350. Acquired intangible assets subject to amortization are stated at fair value and are amortized using the straight-line method over the estimated useful lives of the assets. Intangible assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows. No impairment of intangible assets was identified for the years ended January 31, 2024 or January 31, 2023. +Share-Based Compensation: Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units. The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. +Recent Accounting Pronouncements +Reference is made to Note 1, “Summary of Significant Accounting Policies,” in our audited consolidated financial statements included elsewhere in this report. +Item 7A. Quantitative and Qualit ative Disclosures about Market Risk +Our primary financial market risks consist of foreign currency exchange rates risk and the impact of changes in interest rates that fluctuate with the market on our variable rate credit borrowings under our existing credit agreement. +Foreign Currency Exchange Risk +The functional currencies of our foreign subsidiaries and branches are the local currencies—the British Pound in the U.K., the Canadian Dollar in Canada, the Danish Kroner in Denmark, the Chinese Yuan in China, and the Euro in France and Germany. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign subsidiaries are translated to U.S. dollars. The assets and liabilities of our foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at an average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The reported results of our foreign subsidiaries will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency translation exposure is related to our subsidiaries that have functional currencies denominated in Danish Kroner and the Euro. A hypothetical 10% change in the rates used to translate the results of our foreign subsidiaries would result in an increase or decrease in our consolidated net income of less than $0.1 million for the year ended January 31, 2024. +Transactional exposure arises where transactions occur in currencies other than the functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the balance sheet date and the resulting gains and losses are reported as foreign exchange gain (loss) in the consolidated statements of income. Foreign exchange losses resulting from transactional exposure were $0.1 million for the year ended January 31, 2024. +Interest Rate Risk +At January 31, 2024, our total indebtedness included an outstanding principal amount of $12.2 million of term loan variable-rate debt and an outstanding principal balance of $8.9 million under our revolving credit facility. At January 31, 2024, the term loan bears interest at a BSBY (Bloomberg Short-Term Bank Yield) rate plus a margin that varies between 1.60% and 2.30% based on our +29 +consolidated leverage ratio. During fiscal 2024, the weighted average interest rate on our variable rate debt was 7.54% and the weighted average interest rate on our revolving credit facility was 7.70%. The impact on our results of operations of a 100 basis point change in the interest rates on the outstanding balance of our variable-rate debt and revolving credit facility would be approximately $0.3 million annually. +Item 8. Financial Stateme nts and Supplementary Data +The consolidated financial statements required under this item are submitted as a separate section of this report on the pages indicated at Item 15(a)(1). +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls a nd Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of January 31, 2024, because of the material weakness in our internal control over financial reporting described below. +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2024. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, our Principal Executive Officer and Principal Financial Officer believe that as of January 31, 2024, our internal control over financial reporting was not effective based on criteria set forth by COSO in “Internal Control-Integrated Framework” because of the material weakness in our internal control over financial reporting as described below. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As of January 31, 2024, we did not design or maintain an effective control environment to ensure the accurate and timely reporting of transactions related to our Astro Machine subsidiary, which was acquired August 4, 2022. +Management is taking action to remediate this deficiency in its internal controls over financial reporting by designing an effective control environment and expanding our existing enterprise resource planning system to include the Astro Machine subsidiary. We anticipate that these actions and resulting improvements in controls will strengthen our internal control over financial reporting and will address the related material weakness. +30 +The effectiveness of our internal control over financial reporting as of January 31, 2024 has been audited by Wolf & Company, P.C., an independent registered public accounting firm, as stated in their attestation report, which is included herein. +Changes in Internal Controls over Financial Reporting +There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Oth er Information +None. +Item 9C. Disclosure Regarding Fore ign Jurisdictions that Prevent Inspections +Not applicable. +31 +PART III +Item 10. Directors, Executive Offic ers and Corporate Governance +The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed for our 2024 Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year (our “Proxy Statement”). Certain other information relating to our executive officers appears in Part I of this Annual Report on Form 10-K under the heading “Information about our Executive Officers.” +Item 11. Executive Compe nsation +The information required by this item is incorporated herein by reference to our Proxy Statement. +The information set forth under the heading “Compensation Committee Report” in our Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item is incorporated herein by reference to our Proxy Statement. +Item 13. Certain Relationships, Related T ransactions and Director Independence +The information required by this item is incorporated herein by reference to our Proxy Statement. +Item 14. Principal Accounta nt Fees and Services +The information required by this item is incorporated herein by reference to our Proxy Statement. +32 +PART IV +Item 15. Exhibits and Fi nancial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part of this Annual Report filed on Form 10-K: +Page +Reports of Independent Registered Public Accounting Firm +F- 1 +Consolidated Balance Sheets as of January 31, 2024 and 2023 +F- 3 +Consolidated Statements of Income—Years Ended January 31, 2024, 2023, and 2022 +F- 4 +Consolidated Statements of Comprehensive Income—Years Ended January 31, 2024, 2023, and 2022 +F- 5 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January 31, 2024, 2023, and 2022 +F- 6 +Consolidated Statements of Cash Flows—Years Ended January 31, 2024, 2023, and 2022 +F- 7 +Notes to Consolidated Financial Statements +F- 8 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January 31, 2024, 2023, and 2022 +F- 32 +All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +Item 16. Form 1 0-K Summary +Not Applicable. +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Share Purchase Agreement, dated January 7, 2017, as amended, by and among ANI ApS, Trojan Holding ApS, as a Seller and as the Sellers’ Representative, and Li Wei Chong filed as Exhibit 2.1 to our Annual Report on Form 10-K for the year ended January 31, 2017 and incorporated by reference herein* +(3A) +Restated Articles of Incorporation of the Company and all amendments thereto filed as Exhibit 3A to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(3B) +By-laws of the Company as amended to date filed as Exhibit 3B to our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. 000-13200) and incorporated by reference herein. +(4.1) +Specimen form of common stock certificate of the Company filed as Exhibit 4 to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(4.2) +Description of securities registered pursuant to Section 12 of the Exchange Act filed as Exhibit 4.2 to our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (File No. 000-13200) and incorporated by reference herein. +(10.1) +Astro-Med, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 annual shareholders meeting and incorporated by reference herein.** +33 +Exhibit +Number +(10.2) +Change in Control Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended January 31, 2015 and incorporated by reference herein.** +(10.3) +AstroNova Inc. 2015 Equity Incentive Plan filed as Exhibit A to the Definitive Proxy Statement filed on April 21, 2015 (File No. 000-13200) for the 2015 annual shareholders meeting and incorporated by reference herein.** +(10.4) +Form of Incentive Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.5) +Form of Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.6) +Form of Non-Employee Director Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.7) +Form of Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.8) +Form of Non-Employee Director Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.9) +Form of Time-Based Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.10) +Form of Performance Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.11) +Asset Purchase and License Agreement, dated September 28, 2017, by and between AstroNova, Inc. and Honeywell International, Inc. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date September 28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.12) +Form of Performance-based Restricted Stock Unit Award Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.13) +Form of Restricted Stock Unit Agreement (time-based vesting) filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.14) +Form of Incentive Stock Option filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +34 +Exhibit +Number +(10.15) +Form of Non-statutory Stock Option filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.16) +Form of Non-statutory Stock Option (Non-employee Director) filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.17) +Form of Restricted Stock Agreement filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.18) +Form of Non-employee Director Restricted Stock Agreement filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.19) +AstroNova, Inc. Amended and Restated Non-Employee Director Annual Compensation Program filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date January 31, 2019, filed with the SEC on February 4, 2019 and incorporated by reference herein.** +(10.20) +AstroNova, Inc. 2018 Equity Incentive Plan Non-Employee Director Restricted Stock Agreement filed as Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019 and incorporated by reference herein.* +(10.21) +AstroNova, Inc. 2018 Equity Incentive Plan, as amended, filed as Appendix A to the Company’s Definitive Proxy Statement filed with the SEC on May 25, 2019 on Schedule 14A and incorporated by reference herein.* +(10.22) +Amended and Restated Credit Agreement dated as of July 30, 2020 among AstroNova, Inc., ANI ApS, TrojanLabel ApS, and Bank of America, N.A. filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020 and incorporated by reference herein. +(10.23) +Amended and Restated Security and Pledge Agreement dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date July 30, 2020, filed with the SEC on August 5, 2020 and incorporated by reference herein. +(10.24) +Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date July 30, 2020, filed with the SEC on August 5, 2020 and incorporated by reference herein. +(10.25) +Change in Control Agreement dated September 8, 2020 by and between AstroNova, Inc. and David S. Smith filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020 and incorporated by reference herein.** +(10.26) +First Amendment to Credit Agreement dated as of March 24, 2021 among AstroNova, Inc. ANI ApS, TrojanLabel ApS and Bank of America, N.A., filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2021, and incorporated by reference herein. +(10.27) +First Amendment to Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of March 24, 2021 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2021, and incorporated by reference herein. +35 +Exhibit +Number +(10.28) +Form of Indemnification Agreement for directors and officers, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2021, and incorporated by reference herein.** +(10.29) +LIBOR Transition Amendment dated as of December 14, 2021 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2022, and incorporated by reference herein. +(10.30) +AstroNova, Inc. 2022 Employee Stock Purchase Plan, filed as Annex A to the AstroNova, Inc. Definitive Proxy Statement on Schedule 14A filed with the SEC on April 29, 2022 and incorporated by reference herein.** +(10.31) +Equity Interest Purchase Agreement, dated as of August 4, 2022, by and among AstroNova, Inc., Astro Machine LLC and GSND Holding Corporation, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date August 4, 2022, filed with the SEC on August 9, 2022 and incorporated by reference herein. +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(97) +AstroNova, Inc. Compensation Recovery Policy +(101.INS) +XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document +(101.SCH) +Inline XBRL Taxonomy Extension Schema Document +(104) +Cover Page Interactive Data File (embedded within the Inline XBRL document). +* Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request. +** Management contract or compensatory plan or arrangement. +36 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +ASTRONOVA, INC. +(Registrant) +/s/ Gregory A. Woods +Date: April 12, 2024 +By: +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/s/ Gregory A. Woods +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 12, 2024 +/s/ David S. Smith +David S. Smith +Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) +April 12, 2024 +/s/ Alexis P. Michas +Alexis P. Michas +Director +April 12, 2024 +/s/ Mitchell I. Quain +Mitchell I. Quain +Director +April 12, 2024 +/s/ Yvonne E. Schlaeppi +Yvonne E. Schlaeppi +Director +April 12, 2024 +/s/ Richard S. Warzala +Richard S. Warzala +Director +April 12, 2024 +REPORT OF INDEPENDENT REGIS TERED PUBLIC ACCOUNTING FIRM +The Shareholders and Board of Directors of +AstroNova, Inc. +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of AstroNova, Inc. (the “Company”) as of January 31, 2024 and 2023, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended January 31, 2024, and the related notes to the consolidated financial statements and the financial statement schedule listed in Item 15(a)(2) (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2024, in conformity with accounting principles generally accepted in the United States of America. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated April 12, 2024 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of January 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matters +Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. We determined that there are no critical audit matters. +/s/ Wolf & Company, P.C. +We have served as the Company’s auditor since 2013. +Boston, Massachusetts +April 12, 2024 +F- 1 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Shareholders and Board of Directors of +AstroNova, Inc. +Opinion on the Internal Control Over Financial Reporting +We have audited AstroNova, Inc.’s (the Company) internal control over financial reporting as of January 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and our report dated April 12, 2024 expressed an unqualified opinion. +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment. +As of January 31, 2024, management did not design or maintain an effective control environment to ensure the accurate and timely reporting of transactions related to the Company’s Astro Machine subsidiary. +This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2024 financial statements, and this report does not affect our report dated April 12, 2024 on those financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Wolf & Company, P.C. +We have served as the Company’s auditor since 2013. +Boston, Massachusetts +April 12, 2024 +F- 2 +ASTRONOVA, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2024 +2023 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +4,527 +$ +3,946 +Accounts Receivable, net of reserves of $ 618 in 2024 and $ 731 in 2023 +23,056 +21,598 +Inventories +46,371 +51,324 +Prepaid Expenses and Other Current Assets +2,720 +2,894 +Total Current Assets +76,674 +79,762 +Property, Plant and Equipment, net +14,185 +14,288 +Identifiable Intangibles, net +18,836 +21,232 +Goodwill +14,633 +14,658 +Deferred Tax Assets, net +6,882 +6,907 +Right of Use Asset +603 +794 +Other Assets +1,438 +1,566 +TOTAL ASSETS +$ +133,251 +$ +139,207 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +8,068 +$ +8,479 +Accrued Compensation +2,923 +2,750 +Other Accrued Expenses +2,706 +3,308 +Revolving Credit Facility +8,900 +15,900 +Current Portion of Long-Term Debt +2,842 +2,100 +Current Liability—Royalty Obligation +1,700 +1,725 +Current Liability—Excess Royalty Payment Due +935 +562 +Income Taxes Payable +349 +786 +Deferred Revenue +1,338 +1,888 +Total Current Liabilities +29,761 +37,498 +NON-CURRENT LIABILITIES +Long-Term Debt, net of current portion +10,050 +12,040 +Royalty Obligation, net of current portion +2,093 +3,415 +Lease Liabilities, net of current portion +415 +555 +Income Taxes Payable +551 +491 +Deferred Revenue +— +674 +Deferred Tax Liabilities +99 +167 +TOTAL LIABILITIES +42,969 +54,840 +Commitments and Contingencies (See Note 21) +SHAREHOLDERS’ EQUITY +Preferred Stock, $ 10 Par Value, Authorized 100,000 shares, No ne Issued +— +— +Common Stock, $ 0.05 Par Value, Authorized 13,000,000 shares; Issued 10,812,137 +shares in 2024 and 10,676,851 shares in 2023 +541 +534 +Additional Paid-in Capital +62,684 +61,131 +Retained Earnings +63,869 +59,175 +Treasury Stock, at Cost, 3,368,763 shares in 2024 and 3,342,032 shares in 2023 +( 34,593 +) +( 34,235 +) +Accumulated Other Comprehensive Loss, net of tax +( 2,219 +) +( 2,238 +) +TOTAL SHAREHOLDERS’ EQUITY +90,282 +84,367 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +133,251 +$ +139,207 +See Notes to the Consolidated Financial Statements. +F- 3 +ASTRONOVA, INC. +CONSOLIDATED STATE MENTS OF INCOME +For the years ended January 31 +(In Thousands, Except Per Share Data) +2024 +2023 +2022 +Revenue +$ +148,086 +$ +142,527 +$ +117,480 +Cost of Revenue +96,465 +94,371 +73,741 +Gross Profit +51,621 +48,156 +43,739 +Costs and Expenses: +Selling and Marketing +24,428 +24,456 +23,177 +Research and Development +6,906 +6,822 +6,753 +General and Administrative +11,491 +11,435 +9,553 +Operating Expenses +42,825 +42,713 +39,483 +Operating Income +8,796 +5,443 +4,256 +Other Income (Expense): +Interest Expense +( 2,697 +) +( 1,678 +) +( 677 +) +Loss on Foreign Currency Transactions +( 83 +) +( 474 +) +( 288 +) +Gain on Extinguishment of Debt – PPP Loan +— +— +4,466 +Loss on Disposal of Assets +— +— +( 696 +) +Other, net +57 +119 +( 27 +) +Total Other Income (Expense) +( 2,723 +) +( 2,033 +) +2,778 +Income before Income Taxes +6,073 +3,410 +7,034 +Income Tax Provision +1,379 +749 +605 +Net Income +$ +4,694 +$ +2,661 +$ +6,429 +Net Income Per Common Share—Basic +$ +0.63 +$ +0.36 +$ +0.89 +Net Income Per Common Share—Diluted +$ +0.63 +$ +0.36 +$ +0.88 +Weighted Average Number of Common Shares Outstanding—Basic +7,415 +7,307 +7,207 +Dilutive Effect of Common Stock Equivalents +81 +67 +132 +Weighted Average Number of Common Shares Outstanding—Diluted +7,496 +7,374 +7,339 +See Notes to the Consolidated Financial Statements. +F- 4 +ASTRONOVA, INC. +CONSOLIDATED STATEMENT S OF COMPREHENSIVE INCOME +For the years ended January 31 +(In Thousands) +2024 +2023 +2022 +Net Income +$ +4,694 +$ +2,661 +$ +6,429 +Other Comprehensive Income (Loss), net of taxes and reclassification +adjustments: +Foreign Currency Translation Adjustments +19 +( 537 +) +( 1,426 +) +Loss from Cash Flow Hedges Reclassified to Income Statement +— +47 +62 +Other Comprehensive Income (Loss) +19 +( 490 +) +( 1,364 +) +Comprehensive Income +$ +4,713 +$ +2,171 +$ +5,065 +See Notes to the Consolidated Financial Statements. +F- 5 +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CH ANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Retained +Treasury +Accumulated +Other +Comprehensive +Total +Shareholders’ +Shares +Amount +Capital +Earnings +Stock +Income (Loss) +Equity +Balance January 31, 2021 +10,425,094 +$ +521 +$ +58,049 +$ +50,085 +$ +( 33,588 +) +$ +( 384 +) +$ +74,683 +Share-Based Compensation +— +— +1,493 +— +— +— +1,493 +Employee Option Exercises +14,371 +1 +156 +— +— +— +157 +Restricted Stock Awards Vested, net +126,939 +6 +( 6 +) +— +( 386 +) +— +( 386 +) +Net Income +— +— +— +6,429 +— +— +6,429 +Other Comprehensive Loss +— +— +— +— +— +( 1,364 +) +( 1,364 +) +Balance January 31, 2022 +10,566,404 +$ +528 +$ +59,692 +$ +56,514 +$ +( 33,974 +) +$ +( 1,748 +) +$ +81,012 +Share-Based Compensation +— +— +1,290 +— +— +— +1,290 +Employee Option Exercises +25,123 +2 +153 +— +— +— +155 +Restricted Stock Awards Vested, net +85,324 +4 +( 4 +) +— +( 261 +) +— +( 261 +) +Net Income +— +— +— +2,661 +— +— +2,661 +Other Comprehensive Loss +— +— +— +— +— +( 490 +) +( 490 +) +Balance January 31, 2023 +10,676,851 +$ +534 +$ +61,131 +$ +59,175 +$ +( 34,235 +) +$ +( 2,238 +) +$ +84,367 +Share-Based Compensation +— +— +1,347 +— +— +— +1,347 +Employee Option Exercises +18,998 +1 +212 +— +— +— +213 +Restricted Stock Awards Vested, net +116,288 +6 +( 6 +) +— +( 358 +) +— +( 358 +) +Net Income +— +— +— +4,694 +— +— +4,694 +Other Comprehensive Income +— +— +— +— +— +19 +19 +Balance January 31, 2024 +10,812,137 +$ +541 +$ +62,684 +$ +63,869 +$ +( 34,593 +) +$ +( 2,219 +) +$ +90,282 +See Notes to the Consolidated Financial Statements. +F- 6 +ASTRONOVA, INC. +CONSOLIDATED STAT EMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2024 +2023 +2022 +Cash Flows from Operating Activities: +Net Income +$ +4,694 +$ +2,661 +$ +6,429 +Adjustments to Reconcile Net Income to Net Cash Provided (Used) By +Operating Activities: +Depreciation and Amortization +4,266 +3,916 +3,994 +Amortization of Debt Issuance Costs +23 +25 +44 +Restructuring Cost +2,040 +— +— +Share-Based Compensation +1,347 +1,290 +1,493 +Loss on Disposal of Assets +— +— +696 +Gain on Extinguishment of Debt +— +— +( 4,466 +) +Deferred Income Tax Provision (Benefit) +( 78 +) +( 1,336 +) +210 +Changes in Assets and Liabilities, net of impact of acquisition: +Accounts Receivable +( 1,486 +) +( 1,234 +) +77 +Other Receivable – Employee Retention Credit Receivable +— +3,135 +( 3,135 +) +Inventories +2,910 +( 11,581 +) +( 4,883 +) +Accounts Payable and Accrued Expenses +( 46 +) +( 3,236 +) +4,052 +Income Taxes Payable +( 343 +) +1,710 +( 2,043 +) +Other +( 973 +) +1,714 +( 1,074 +) +Net Cash Provided (Used) by Operating Activities +12,354 +( 2,936 +) +1,394 +Cash Flows from Investing Activities: +Cash Paid for Astro Machine Acquisition, net of cash acquired +— +( 17,034 +) +— +Additions to Property, Plant and Equipment +( 875 +) +( 229 +) +( 1,796 +) +Net Cash Used by Investing Activities +( 875 +) +( 17,263 +) +( 1,796 +) +Cash Flows from Financing Activities: +Net Cash Proceeds from Employee Stock Option Plans +105 +85 +60 +Net Cash Proceeds from Share Purchases under Employee Stock +Purchase Plan +107 +70 +96 +Net Cash Used for Payment of Taxes Related to Vested Restricted Stock +( 358 +) +( 261 +) +( 386 +) +Net (Repayments)/Borrowings under Revolving Credit Facility +( 7,000 +) +15,900 +— +Payment of Minimum Guarantee Royalty Obligation +( 1,725 +) +( 2,000 +) +( 2,000 +) +Proceeds from Long-Term Debt Borrowings +— +6,000 +10,000 +Payoff of Long-Term Debt +— +— +( 12,576 +) +Principal Payments on Long-Term Debt +( 2,100 +) +( 1,000 +) +( 750 +) +Payments of Debt Issuance Costs +— +( 39 +) +— +Net Cash Provided (Used) by Financing Activities +( 10,971 +) +18,755 +( 5,556 +) +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +73 +114 +( 205 +) +Net Increase (Decrease) in Cash and Cash Equivalents +581 +( 1,330 +) +( 6,163 +) +Cash and Cash Equivalents, beginning of year +3,946 +5,276 +11,439 +Cash and Cash Equivalents, end of year +$ +4,527 +$ +3,946 +$ +5,276 +Supplemental Information: +Cash Paid During the Period for: +Interest +$ +2,343 +$ +791 +$ +342 +Income Taxes, net of refunds +$ +1,694 +$ +311 +$ +2,414 +Non-Cash Transactions: +Financed Equipment Purchase +$ +822 +$ +— +$ +— +Reclassification of Inventories to Property, Plant and Equipment +$ +— +$ +348 +$ +— +Recognize intangible asset and royalty payable related to Honeywell +Asset Purchase and License Agreement +$ +— +$ +530 +$ +— +See Notes to the Consolidated Financial Statements. +F- 7 +ASTRONOVA, INC. +NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS +January 31, 2024, 2023, and 2022 +Note 1—Summary of Significant Accounting Policies +Basis of Presentation: The accompanying financial statements and accompanying notes have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and are presented in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year. +Principles of Consolidation: The consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation. +Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes using information that is reasonably available to us at this time. Some of the more significant estimates relate to revenue recognition; allowances for doubtful accounts; inventory valuation; income taxes; valuation of long-lived assets, intangible assets and goodwill; share-based compensation; and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates. +Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are considered to be cash equivalents. At January 31, 2024 and 2023, $ 2.3 million and $ 3.2 million, respectively, was held in foreign bank accounts. +Inventories: Inventories are stated at the lower of standard and average cost or net realizable value and include material, labor and manufacturing overhead. +Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements— 10 to 20 years; buildings and leasehold improvements— 10 to 45 years; machinery and equipment— 3 to 10 years; and computer equipment and software— 3 to 10 years). +Revenue Recognition: We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers (“ASC 606”).” The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to recognize revenue and requires judgment and estimates within the revenue recognition process, including identifying contracts with customers, identifying performance obligations in the contract, determining and estimating the amount of any variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation and recognizing revenue when the entity satisfies each performance obligation. +The vast majority of our revenue is generated from the sale of distinct products. Revenue is measured as the amount of consideration we expect to receive in exchange for such products, which is generally at the contractually stated prices, and is recognized when we satisfy a performance obligation by transferring control of a product to a customer. The transfer of control generally occurs at one point in time, upon shipment, when title and risk of loss pass to the customer. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Sales taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue. +Many of the contracts entered into with customers are commonly comprised of a combination of equipment, supplies, installation and/or training services. We determine performance obligations by assessing whether the products or services are distinct from other elements of the contract. In order to be distinct, the product must perform either on its own or with readily available resources and must be separate within the context of the contract. +F- 8 +Most of our hardware products contain embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole, as it is not sold or marketed separately, and its production costs are minor compared to those of the hardware system. Hardware and software elements are typically delivered at the same time and are accounted for as a single performance obligation for which revenue is recognized at the point in time when ownership is transferred to the customer. +Installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. The delivery of installation and training services are not assessed to determine whether they are separate performance obligations, as the amounts are not material to the contract. +Shipping and handling activities that occur after control over a product has transferred to a customer are accounted for as fulfillment activities rather than performance obligations, as allowed under a practical expedient provided by ASC 606. The shipping and handling fees charged to customers are recognized as revenue and the related costs are included in cost of revenue at the point in time when ownership of the product is transferred to the customer. +We may perform services at the request of the customer, generally for the repair and maintenance of products previously sold. These services are short in duration and total approximately 5.0 % of revenue for each of the years ended January 31, 2024 and 2023. Revenue is recognized as services are rendered and accepted by the customer. We also provide service agreements on certain of our Product Identification equipment. Service agreements are purchased separately from the equipment and provide for the right to obtain service and maintenance on the equipment for a period of typically one to two years. Accordingly, revenue on these agreements is recognized over the term of the agreements. The portion of service agreement contracts that are uncompleted at the end of any reporting period is included in deferred revenue. +We generally provide warranties for our products. The standard warranty period is typically 12 months for most hardware products except for airborne printers, which typically have warranties that extend for 3 - 5 years, consistent with industry practice. Such assurance-type warranties are not deemed to be separate performance obligations from the hardware product and costs associated with providing the warranties are accrued in accordance with ASC 450, “Contingencies,” as we have the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability. Our estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions. To the extent that our experience in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the estimated warranty liability are recorded at that time, with an offsetting adjustment to cost of revenue. On occasion, customers request a warranty period longer than our standard warranty. In those instances, in which extended warranty services are separately quoted to the customer, an additional performance obligation is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue. +We recognize and subsequently amortize an asset for the incremental direct costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year (Refer to Note 3, “Revenue Recognition” included in our notes to the consolidated financial statements). We apply the practical expedient to expense costs incurred for costs to obtain a contract when the amortization period would have been less than a year. These costs include sales commissions paid to the internal direct sales team as well as to third-party representatives and distributors. Contractual agreements with each of these parties outline commission structures and rates to be paid. In general, such contracts are all individual procurement decisions by the customers and do not include renewal provisions and, as such, the majority of the contracts have an economic life of significantly less than a year. +Accounts Receivables and Allowance for Doubtful Accounts: Standard payment terms are typically 30 days after shipment but vary by type and geographic location of our customer. Credit is extended based upon an evaluation of the customer’s financial condition. Our allowance for doubtful accounts represents our estimate of expected credit losses related to our trade receivables. We pool our trade receivables based on similar risk characteristics, such as the age of receivables. To estimate our allowance for doubtful accounts, we leverage information on historical losses, asset-specific risk characteristics, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when we deem the amount is uncollectible. Accounts receivable are stated at their estimated net realizable value. +Business Combinations: We account for business acquisitions under the acquisition method of accounting in accordance with ASC 805, ‘‘Business Combinations,’’ where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and +F- 9 +unpredictable. As a result, actual results may differ from these estimates. During the measurement period, we may record adjustments to acquired assets and assumed liabilities, with corresponding offsets to goodwill. Upon the conclusion of a measurement period, any subsequent adjustments are recorded to earnings. +At the acquisition date, the Company measures the fair values of all assets acquired and liabilities assumed that arise from contractual contingencies. The Company also measures the fair values of all non-contractual contingencies if, as of the acquisition date, it is more likely than not that the contingencies will give rise to assets or liabilities. +Acquisition-related costs not considered part of the considerations are expensed as incurred and recorded in acquisition costs within the consolidated statement of operations. +Research and Development Costs: We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. The following costs are included in research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies. +Foreign Currency Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the average monthly exchange rates in effect during the related period. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our subsidiaries in Germany, Denmark and China since their undistributed earnings are considered to be permanently invested. Included in our consolidated statements of income was a net transaction foreign exchange losses of $ 0.1 million, $ 0.5 million and $ 0.3 million in fiscal 2024, 2023 and 2022, respectively. +Advertising: We expense advertising costs as incurred. Advertising costs including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $ 1.8 million, $ 1.6 million, and $ 1.3 million in fiscal years 2024, 2023, and 2022, respectively. +Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. There were no impairment charges for our long-lived assets in fiscal years 2024, 2023, or 2022. +Intangible Assets: Intangible assets include the value of customer and distributor relationships, trademarks and existing technology acquired in connection with business and asset acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. There were no impairment charges for our intangible assets in fiscal years 2024, 2023, or 2022. +Goodwill: Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate indicate that the carrying value of an asset might be impaired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. We determined that each of our operating segments Product Identification (“PI”) and Test & Measurement (“T&M”) represents a reporting unit for purposes of goodwill impairment testing. +F- 10 +The accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this qualitative assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. The quantitative assessment compares the fair value of the reporting unit with its carrying value. If the quantitative assessment is performed, we estimate the fair value of our reporting units using a blended income and market approach. The income approach is based on a discounted cash flow model and provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. The market approach compares the reporting unit to publicly traded companies and transactions involving similar business, and requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. We performed a qualitative assessment for our fiscal 2024 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying values of the reporting units exceed their fair values. Accordingly, no quantitative assessment was performed. There were no impairment charges for our goodwill in fiscal years 2024, 2023, or 2022. +Leases: We account for our leases in accordance with ASC 842, “Leases” (“ASC 842”). ASC 842 requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (“ROU”) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using a discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate for the expected lease term is used. Our incremental borrowing rate approximates the rate we would have to pay to borrow on a collateralized basis over a similar term at lease inception. The value of the ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received. Several of our lease contracts include options to extend the lease term and we include the renewal options for these leases in the determination of the ROU asset and lease liability when the likelihood of renewal is determined to be reasonably certain. +We enter into lease contracts for certain of our facilities at various locations worldwide. At inception of a contract, we determine whether the contract is or contains a lease. If we have a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. +There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. We have made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. All of our leases are classified as operating leases. Operating lease expense is recognized on a straight-line basis over the lease term and included in general and administrative expense on the consolidated statement of income. ROU assets are classified as such on the consolidated balance sheets, short-term lease liabilities are classified in accrued expenses, and long-term lease liabilities are classified as such in the consolidated balance sheets. In the statements of cash flow, payments for operating leases are classified as operating activities. +In addition, several of our facility lease agreements include non-lease components for items such as common area maintenance and utilities which are accounted for separately from the lease component. +Income Taxes: We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. Our deferred taxes are presented as non-current in the accompanying consolidated balance sheet. An allowance against deferred tax assets is recognized when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At both January 31, 2024 and January 31, 2023, a valuation allowance was provided for deferred tax assets attributable to certain domestic R&D, foreign tax credit carryforwards and China net operating losses, all of which are expected to expire unused. +We account for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. +Net Income Per Common Share: Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common +F- 11 +equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2024, 2023, and 2022, there were 295,370 ; 685,667 ; and 345,085 , respectively, common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive. +Fair Value Measurement: We measure our assets and liabilities at fair value on a recurring and non-recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances. +The fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. +Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, other accrued expenses and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short-term nature of these instruments. +Self-Insurance: We are self-insured for U.S. medical and dental benefits for qualifying employees and maintain stop-loss coverage from a third party which limits our exposure to large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In estimating this accrual, we utilize an independent third-party broker to estimate a range of expected losses, which are based on analyses of historical data. Assumptions are closely monitored and adjusted when warranted by changing circumstances. Our liability for self-insured claims is included within accrued compensation in our consolidated balance sheets and was $ 0.3 million at both January 31, 2024 and 2023. +Share-Based Compensation: Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units. The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. +Share-based compensation becomes deductible for determining income taxes when the related award vests, is exercised, or is forfeited depending on the type of share-based award and subject to relevant tax law. +Derivative Financial Instruments: We occasionally use derivative instruments as part of our overall strategy to manage exposure to market risks primarily associated with fluctuations in foreign currency exchange rates and interest rates. Derivative instruments are recognized as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of income during the current period. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. +For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income/(loss) and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the hedged transaction affects earnings (e.g., in “Interest +F- 12 +Expense” when the hedged transactions are interest cash flows associated with floating-rate debt, or “Other, Net” for portions reclassified relating to the remeasurement of the debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, are recognized in the statement of income during the current period. +Recent Accounting Pronouncements +In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”) to enhance the transparency and decision usefulness of income tax disclosures primarily related to the rate reconciliation and income taxes paid information. ASU 2023-09 modifies the requirement for income tax disclosures to include (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. We will adopt this standard beginning with our fiscal year ending January 31, 2025. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures. +In November 2023, the FASB issued Accounting Standards Update No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker (CODM), as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. ASU 2023-07 also requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss. Public entities will be required to provide all annual disclosures currently required by ASU 2023-07 in interim periods. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. We will adopt this standard beginning with our fiscal year ending January 31, 2025, and for interim periods beginning with our first quarter of fiscal 2026. We are currently evaluating the new disclosure requirements of ASU 2023-07 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements or disclosures. +In October 2023, the FASB issued Accounting Standard Update 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Updated and Simplification Initiative” (“ASU 2023-06”), which amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification. ASU 2023-06 was issued in response to the U.S. Securities and Exchange Commission’s (the “SEC”) August 2018 final rule that updated and simplified disclosure requirements and is intended to align U.S. GAAP requirements with those of the SEC and to facilitate the application of U.S. GAAP for all entities. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. We are currently assessing potential impacts of ASU 2023-06 and do not expect the adoption of this guidance to have a material impact on our condensed consolidated financial statements and disclosures. +There were no other new accounting pronouncements, issued or effective during fiscal 2024, that have had or are expected to have a material impact on our consolidated financial statements. +Note 2—Acquisitions +Astro Machine +On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers, tabbers, conveyors, and envelope feeders, for aggregate consideration of $ 17.1 million. +The acquisition was accomplished pursuant to an Equity Interest Purchase Agreement dated as of August 4, 2022 (the “Purchase Agreement”) by and among us, GSND Holding Corporation (“GSND”), the parent company of Astro Machine, and Astro Machine. Pursuant to the Purchase Agreement, we purchased 100 % of the issued and outstanding equity interests of Astro Machine from GSND for a purchase price of $ 15.6 million. The acquisition was funded using borrowings under our credit facility. We obtained a representation and warranty insurance policy and placed $ 300,000 of the purchase price into an escrow account, which pursuant to the terms and conditions of the Purchase Agreement, are our sole recourse for breaches of representations and warranties by GSND. Upon the closing of the transaction, Astro Machine became a wholly owned subsidiary of AstroNova, Inc. +F- 13 +Concurrently with the signing of the Purchase Agreement, our newly acquired subsidiary, Astro Machine, entered into a Purchase and Sale Agreement with Selak Real Estate Limited Partnership (“SRE”), pursuant to which Astro Machine purchased certain real property assets of SRE for a purchase price, paid in cash, of $ 1.5 million. These real estate assets are comprised of a 34,460 square foot industrial manufacturing building (including offices) on 1.26 acres of land, which is Astro Machine’s principal place of business. +This transaction is a business combination and was accounted for using the acquisition method of accounting prescribed by ASC 805, “Business Combinations” (“ASC 805”), whereby the results of operations, including the revenues and earnings of Astro Machine, are included in our financial statements from the date of acquisition. The purchase price of Astro Machine was allocated to the tangible and intangible assets acquired and liabilities assumed and recognized at their fair value based on widely accepted valuation techniques in accordance with ASC 820, “Fair Value Measurement,” as of the acquisition date. The process for estimating fair values requires the use of significant estimates, assumptions and judgments, including determining the timing and estimates of future cash flows and developing appropriate discount rates. The excess of the purchase price over the fair value of the net identified assets acquired and liabilities assumed was recorded as goodwill. ASC 805 establishes a measurement period to provide companies with a reasonable amount of time to obtain the information necessary to identify and measure various items in a business combination and cannot extend beyond one year from the acquisition date. +The following table sets forth the final purchase price allocation of the Astro Machine acquisition for the estimated fair value of the net asset acquired and liabilities assumed as of the date of acquisition: +(In thousands) +Cash +$ +91 +Accounts Receivable +3,393 +Inventory +5,715 +Property, Plant and Equipment +4,200 +Identifiable Intangible Assets +3,480 +Goodwill +2,730 +Accounts Payable and Other Current Liabilities +( 2,484 +) +Total Purchase Price +$ +17,125 +The fair value of the intangible assets acquired was estimated by applying the income approach. This fair value measurement is based on significant inputs that are not observable in the market and therefore represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement.” Key assumptions in estimating the fair value of the intangibles include (1) remaining useful life of the tradename/trademarks and customer relations (2) the royalty rate of 0.75 %, (3) customer attrition rate of 18.0 %, (4) discount rate of 19.0 % and (5) a range of revenue and net income projections for the fiscal years 2023 through 2026. +The following table sets forth the fair value of the acquired identifiable intangible assets and related estimated useful lives: +(In thousands) +Fair +Value +Useful Life +(years) +Customer Relations +$ +3,060 +5 +Trademarks/Tradenames +420 +5 +Total +$ +3,480 +The Customer Relations intangible asset represents the relationships that will be maintained with certain historical customers of Astro Machine. The trademark/tradename intangible assets reflect the industry reputation of the Astro Machine name recognition and the registered trademarks for the use of several marks and logos held by Astro Machine. +Goodwill of $ 2.7 million, which is not deductible for tax purposes, represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired and liabilities assumed from Astro Machine. The goodwill recognized under ASC 805 is attributable to synergies which are expected to enhance and expand our overall product portfolio, opportunities in new and existing markets, future technologies that have yet to be determined and Astro Machine’s assembled work force. The carrying amount of the goodwill was allocated to the PI segment. +Total acquisition-related costs of $ 0.7 million are included in general and administrative expenses in our consolidated statement of income for the year ended January 31, 2023. +F- 14 +The amounts of revenue and earnings before taxes attributable to Astro Machine and included in our consolidated statement of income were as follows: +(In thousands) +2024 +2023 +Revenue +$ +18,147 +$ +12,515 +Earnings before Taxes +$ +2,616 +$ +1,571 +Astro Machine results are reported as part of the PI segment. Proforma results are not provided, as disclosure of such amounts was impractical to determine as the acquired business had insufficient financial records and no audit history prior to the transaction. +Honeywell Asset Purchase and License Agreement +On June 30, 2022, we entered into an Asset Purchase and License Agreement with Honeywell Inc. (“New HW Agreement”) to acquire an exclusive, perpetual, world-wide license to manufacture Honeywell’s flight deck printers for the Boeing 787 aircraft. The New HW Agreement provides for royalty payments to Honeywell based on gross revenues from the sales of the printers, paper and repair services of the licensed products in perpetuity. The royalty rates vary based on the year in which they are paid or earned and as products are sold or as services provided and range from single-digit to mid-double-digit percentages of gross revenue. The New HW Agreement included a provision for guaranteed minimum royalty payments to be paid in the event that the royalties earned by Honeywell do not meet the minimum for the preceding calendar year as follows: $ 100,000 in 2024, $ 200,000 in 2025, $ 233,000 in 2026 and 2027, and $ 234,000 in 2028. +This transaction was evaluated under ASC 805, “Business Combinations,” and was accounted for as an asset acquisition. +The purchase price was allocated to the customer relationship intangible, which was the only asset acquired as a result of this transaction. This asset will be amortized over the useful life of the intangible. The minimum royalty payment obligation and related customer relation intangible were recorded at the present value of the minimum royalty payments. +The acquired identifiable intangible asset is as follows: +(In thousands) +Fair +Value +Useful Life +(Years) +Customer Contract Relationships +$ +530 +20 +The minimum royalty payment due was discounted based on the payment schedule and applicable discount rate, resulting in an outstanding royalty obligation of $ 0.5 million as of January 31, 2023, including $ 0.1 million recorded as a current liability. Additional royalties based on sales activity will be recorded in the period that the associated revenue is earned. During the fourth quarter of fiscal 2023, we incurred $ 0.1 million in excess royalty expense, which was paid in the first quarter of the current fiscal year. As of the end of fiscal 2024, we incurred $ 0.2 million in additional royalties payable to Honeywell. As of January 31, 2024, the outstanding royalty obligation is $ 0.6 million, including $ 0.2 million recorded as a current liability in the accompanying consolidated balance sheet. +Note 3—Revenue Recognition +We derive revenue from the sale of (i) hardware, including digital color label printers and specialty OEM printing systems, portable data acquisition systems and airborne printers used in the flight deck and interior of commercial, business and military aircraft, (ii) related consumable supplies including paper, labels, tags, inks, toners and ribbons, (iii) repairs and maintenance of equipment and (iv) service agreements. +Revenues disaggregated by primary geographic markets and major product types are as follows: +Primary geographical markets: +(In thousands) +2024 +2023* +2022 +United States +$ +84,757 +$ +83,559 +$ +68,185 +Europe +41,761 +38,859 +31,922 +Canada +8,742 +8,690 +6,519 +Asia +7,216 +5,547 +5,926 +Central and South America +4,221 +4,589 +3,271 +Other +1,389 +1,283 +1,657 +Total Revenue +$ +148,086 +$ +142,527 +$ +117,480 +*Certain amounts have been reclassified to conform to the current year's presentation. +F- 15 +Major product types: +(In thousands) +2024 +2023 +2022 +Hardware +$ +49,440 +$ +42,445 +$ +31,492 +Supplies +79,252 +82,072 +73,244 +Service and Other +19,394 +18,010 +12,744 +Total Revenue +$ +148,086 +$ +142,527 +$ +117,480 +In December 2022, we entered into an amended contract with one of our T&M customers that provided for a total payment of $ 3.25 million to be received as a result of our claims allowable under French law relating to additional component costs we have incurred and will continue to incur in order to supply aerospace printers under the contract for the period beginning in April 2022 and continuing through 2025. As of January 31, 2023, we recognized $ 1.1 million in revenue as a result of this arrangement and the $ 2.15 million balance was recorded as deferred revenue in the accompanying consolidated balance sheet. During fiscal 2024, we recognized an additional $ 1.3 million which is included in revenue in the consolidated statement of income for the period ended January 31, 2024, and at January 31, 2024, the remaining balance to be received of $ 0.8 million is included in deferred revenue in the accompanying consolidated balance sheet. The remaining revenue to be recognized will be based on our shipments of the printers during fiscal 2025. +Contract Assets and Liabilities +We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. +Our contract liabilities, which represent billings in excess of revenue recognized, are related to advanced billings for purchased service agreements and extended warranties. Contract liabilities were $ 530,000 and $ 412,000 at January 31, 2024 and January 31, 2023, respectively, and are recorded as current deferred revenue in the accompanying consolidated balance sheet. The increase in the deferred revenue balance for the year ended January 31, 2024 is primarily due to cash payments received in advance of satisfying performance obligations, offset by $ 704,000 of revenue recognized during the period that was included in the deferred revenue balance at January 31, 2023. +Contract Costs +We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain costs related to obtaining sales contracts for our aerospace printer products meet the requirement to be capitalized. These costs are deferred and amortized over the remaining useful life of these contracts, which we currently estimate to be approximately 17 years as of January 31, 2024. Amortized contract costs for each of the years ended January 31, 2024 and 2023, were $ 75,000 and were $ 60,000 for the year ended January 31, 2022. The balance of deferred incremental direct costs net of accumulated amortization at January 31, 2024, was $ 1.3 million, of which $ 0.1 million is reported in other current assets and $ 1.2 million is reported in other assets in the accompanying consolidated balance sheet. +Note 4—Intangible Assets +Intangible assets are as follows: +January 31, 2024 +January 31, 2023 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Miltope: +Customer Contract Relationships +$ +3,100 +$ +( 3,100 +) +$ +— +$ +— +$ +3,100 +$ +( 2,777 +) +$ +— +$ +323 +RITEC: +Customer Contract Relationships +2,830 +( 1,689 +) +— +1,141 +2,830 +( 1,623 +) +— +1,207 +TrojanLabel: +Existing Technology +2,327 +( 2,420 +) +93 +— +2,327 +( 2,087 +) +94 +334 +Distributor Relations +937 +( 686 +) +30 +281 +937 +( 588 +) +27 +376 +Honeywell: +Customer Contract Relationships +27,773 +( 12,795 +) +— +14,978 +27,773 +( 11,913 +) +— +15,860 +Astro Machine: +Customer Contract Relationships +3,060 +( 918 +) +— +2,142 +3,060 +( 306 +) +— +2,754 +Trademarks +420 +( 126 +) +— +294 +420 +( 42 +) +— +378 +Intangible Assets, net +$ +40,447 +$ +( 21,734 +) +$ +123 +$ +18,836 +$ +40,447 +$ +( 19,336 +) +$ +121 +$ +21,232 +F- 16 +There were no impairments to intangible assets during the periods ended January 31, 2024 and 2023. Amortization expense of $ 2.4 million, $ 1.9 million, and $ 2.2 million with regard to acquired intangibles has been included in the consolidated statements of income for the years ended January 31, 2024, 2023 and 2022, respectively. +Estimated amortization expense for the next five fiscal years is as follows: +(In thousands) +2025 +2026 +2027 +2028 +2029 +Estimated amortization expense +$ +1,723 +$ +1,723 +$ +1,723 +$ +1,723 +$ +1,281 +Note 5—Inventories +The components of inventories are as follows: +January 31, +2024 +2023 +(In thousands) +Materials and Supplies +$ +39,078 +$ +38,387 +Work-in-Progress +1,054 +1,146 +Finished Goods +15,645 +23,221 +55,777 +62,754 +Inventory Reserve +( 9,406 +) +( 11,430 +) +$ +46,371 +$ +51,324 +Note 6—Property, Plant and Equipment +Property, plant and equipment consist of the following: +January 31, +2024 +2023 +(In thousands) +Land and Land Improvements +$ +2,304 +$ +2,304 +Buildings and Leasehold Improvements +14,381 +14,158 +Machinery and Equipment +26,123 +24,960 +Computer Equipment and Software +14,238 +13,972 +Gross Property, Plant and Equipment +57,046 +55,394 +Accumulated Depreciation +( 42,861 +) +( 41,106 +) +Net Property Plant and Equipment +$ +14,185 +$ +14,288 +Depreciation expense on property, plant and equipment was $ 1.8 million, $ 2.0 million and $ 1.7 million for the years ended January 31, 2024, 2023 and 2022, respectively. +During fiscal 2022, we wrote-off our Oracle EnterpriseOne enterprise resource planning (“ERP”) system due to the full implementation of a new ERP system in our US operations. The book value and related accumulated depreciation of the ERP system along with the balance of the related prepaid service and maintenance contracts were removed from the accompanying consolidated balance sheet at January 31, 2022, and we recorded a net loss on the disposal of $ 0.7 million, which is included in other income (expense) in the accompanying consolidated income statement for the year ended January 31, 2022. +F- 17 +Note 7—Accrued Expenses +Accrued expenses consist of the following: +January 31, +(In thousands) +2024 +2023 +Warranty +$ +711 +$ +1,072 +Professional Fees +375 +311 +Current portion of Lease Liability +233 +275 +Accrued Property & Sales Tax +209 +187 +Stockholder Relation Fees +94 +86 +Dealer Commissions +64 +78 +Other Accrued Expenses +1,020 +1,299 +$ +2,706 +$ +3,308 +Note 8—Credit Agreement and Long-Term Debt +Credit Agreement +In connection with the purchase of Astro Machine, on August 4, 2022, we entered into a Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment”) with Bank of America, N.A., as lender (the “Lender”). The Second Amendment amended the Amended and Restated Credit Agreement dated as of July 30, 2020, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of March 24, 2021, and the LIBOR Transition Amendment, dated as of December 24, 2021 (the “Existing Credit Agreement,” and the Existing Credit Agreement as amended by the Second Amendment, the “Amended Credit Agreement”), between the Company and the Lender. +The Amended Credit Agreement provides for (i) a new term loan in the principal amount of $ 6.0 million, which term loan was in addition to the existing term loan outstanding under the Existing Credit Agreement in the principal amount of $ 9.0 million as of the effective date of the Second Amendment, and (ii) an increase in the aggregate principal amount of the revolving credit facility available thereunder from $ 22.5 million to $ 25.0 million. At the closing of the Second Amendment, we borrowed the entire $ 6.0 million term loan and $ 12.4 million under the revolving credit facility, and the proceeds of such borrowings were used in part to pay the purchase price payable under the Purchase Agreement and certain related transaction costs. The revolving credit facility may otherwise be used for corporate purposes. +The Amended Credit Agreement requires that the term loan be paid in quarterly installments on the last day of each of our fiscal quarters over the term of the Amended Credit Agreement on the following repayment schedule: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2022 through July 31, 2023 is $ 375,000 ; and the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2023 through April 30, 2027 is $ 675,000 . The entire remaining principal balance of the term loan is required to be paid on August 4, 2027. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than August 4, 2027, and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate on such date. We may reduce or terminate the revolving credit facility at any time, subject to certain thresholds and conditions, without premium or penalty. +The interest rates under the Amended Credit Agreement are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the Amended Credit Agreement (or, in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60 % to 2.50 % based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50 %, (ii) Bank of America’s publicly announced prime rate, (iii) the BSBY Rate plus 1.00 %, or (iv) 0.50 %, plus a margin that varies within a range of 0.60 % to 1.50 % based on our consolidated leverage ratio. During fiscal 2024, the weighted average interest rate on our variable rate debt was 7.54 %. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15 % and 0.35 % based on our consolidated leverage ratio. The loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. +Amounts repaid under the revolving credit facility may be reborrowed, subject to our continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. +F- 18 +We must comply with various customary financial and non-financial covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and a minimum consolidated asset coverage ratio. The primary non-financial covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on our or our subsidiaries’ capital stock, to repurchase or acquire our or our subsidiaries’ capital stock, to conduct mergers or acquisitions, to sell assets, to alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of our or our subsidiaries’ business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Second Amendment. As of January 31, 2024, we believe we are in compliance with all of the covenants in the Credit Agreement. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests we hold in AstroNova Scandinavia ApS, AstroNova GmbH and AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island, and are guaranteed by, and secured by substantially all of the personal property assets of Astro Machine. +Equipment Financing +In January 2024, we entered into a secured equipment loan facility agreement with Banc of America Leasing & Capital, LLC and borrowed a principal amount of $ 0.8 million thereunder for the purpose of financing our purchase of production equipment. This loan matures on January 23, 2029 , and bears interest at a fixed rate of 7.06 %. Under this loan agreement, equal monthly payments including principal and interest of $ 16,296 will commence on February 23, 2024 , and will continue through the maturity of the equipment loan facility on January 23, 2029 . +Summary of Outstanding Debt +Revolving Credit Facility +At January 31, 2024, we had a principal balance of $ 8.9 million outstanding on our revolving credit facility. The balance outstanding under the revolving credit facility bore interest at a weighted average rate of 7.70 % and 6.35 % for the years ended January 31, 2024 and January 31, 2023, respectively, and we incurred $ 1.2 million and $ 0.8 million for interest on this obligation during the years ended January 31, 2024 and January 31, 2023, respectively. Commitment fees on the undrawn portion of our revolving credit facility of $ 30,000 were incurred for each of the years ended January 31, 2024 and January 31, 2023, respectively. Both the interest expense and commitment fees are included as interest expense in the accompanying consolidated income statement for all periods presented. At January 31, 2024, $ 16.1 million remained available for borrowing under our revolving credit facility. +Long-Term Debt +Long-term debt in the accompanying consolidated balance sheets is as follows: +January 31, +(In thousands) +2024 +2023 +Term Loan ( 7.56 % as of January 31, 2024 and 6.78 % as of January 31, +2023); maturity date of August 4, 2027 +$ +12,150 +$ +14,250 +Equipment Loan - 7.06 % Fixed Rate; maturity date of January 23, +2029 +822 +— +Total Long Term Debt +$ +12,972 +$ +14,250 +Less: Debt Issuance Costs, net of accumulated amortization +80 +110 +Current Portion of Long Term Debt +2,842 +2,100 +Long-Term Debt, net of current portion +$ +10,050 +$ +12,040 +During the years ended January 31, 2024, 2023 and 2022, we recognized $ 1.0 million, $ 0.6 million and $ 0.3 million of interest expense on our long-term debt, respectively, which was included in interest expense in the accompanying consolidated income statement for all periods presented. +F- 19 +The schedule of required principal payments remaining on our long-term debt outstanding as of January 31, 2024 is as follows: +(In thousands) +Fiscal 2025 +$ +2,842 +Fiscal 2026 +2,852 +Fiscal 2027 +2,864 +Fiscal 2028 +4,226 +Fiscal 2029 +188 +$ +12,972 +Note 9—Paycheck Protection Program Loan +On May 6, 2020, we entered into a loan agreement in which we borrowed $ 4.4 million (the “PPP Loan”) from Greenwood Credit Union under the Paycheck Protection Program administered by the SBA and authorized by the CARES Act. +The PPP Loan, originally scheduled to mature on May 6, 2022 , was unsecured and bore interest at a rate of 1.0 % per annum, accruing from the loan date. +On June 15, 2021, Greenwood notified us that the SBA approved our application for forgiveness of the entire $ 4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, in the second quarter of fiscal 2022, we recorded a $ 4.5 million gain on extinguishment of debt, which is included in the accompanying consolidated income statement for the period ended January 31, 2022. +Note 10—Royalty Obligation +In fiscal 2018, we entered into an Asset Purchase and License Agreement with Honeywell International, Inc. to acquire an exclusive, perpetual, world-wide license to manufacture Honeywell’s narrow-format flight deck printers for two aircraft families along with certain inventory used in the manufacturing of the licensed printers. The purchase price included a guaranteed minimum royalty payment of $ 15.0 million, to be paid in quarterly installments over a ten-year period. This ten-year period ends on September 30, 2028 . Royalty payments are based on gross revenues from the sales of the printers, paper and repair services of the licensed products. The royalty rates vary based on the year in which they are paid or earned and product sold or service provided, and range from single-digit to mid double-digit percentages of gross revenue. +The guaranteed minimum royalty payment obligation was recorded at the present value of the minimum annual royalty payments. As of January 31, 2024, we had paid an aggregate of $ 11.5 million of the guaranteed minimum royalty obligation. At January 31, 2024, the current portion of the outstanding guaranteed minimum royalty obligation of $ 1.5 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $ 1.7 million is reported as a long-term liability on our consolidated balance sheet. In addition to the guaranteed minimum royalty payments, for the periods ended January 31, 2024, 2023 and 2022, we also incurred excess royalty expense of $ 2.3 million, $ 1.3 million and $ 0.5 million, respectively, which is included in cost of revenue in our consolidated statements of income for those periods. A total of $ 0.9 million of excess royalty is payable and reported as a current liability on our consolidated balance sheet at January 31, 2024. +In fiscal 2023, we entered into a second Asset Purchase and License Agreement with Honeywell International, Inc. as further discussed in Note 2. +Note 11—Leases +We enter into lease contracts for certain of our facilities at various locations worldwide. Our leases have remaining lease terms of one to six years, some of which include options to extend the lease term for periods of up to five years when it is reasonably certain that we will exercise such options. +Balance sheet and other information related to our leases is as follows: +Operating Leases +(In thousands) +Balance Sheet Classification +January 31, +2024 +January 31, +2023 +Lease Assets +Right of Use Assets +$ +603 +$ +794 +Lease Liabilities—Current +Other Accrued Expenses +$ +233 +$ +275 +Lease Liabilities—Long Term +Lease Liabilities +$ +415 +$ +555 +F- 20 +Lease cost information is as follows: +Operating Leases +(In thousands) +Statement of Income Classification +2024 +2023 +Operating Lease Costs +General and Administrative Expense +$ +470 +$ +460 +At January 31, 2024, maturities of operating lease liabilities are as follows: +(In thousands) +2025 +$ +256 +2026 +197 +2027 +148 +2028 +92 +2029 +— +Thereafter +— +Total Lease Payments +693 +Less: Imputed Interest +( 45 +) +Total Lease Liabilities +$ +648 +As of January 31, 2024, the weighted-average remaining lease term and weighted-average discount rate for our operating leases are 3.1 years and 4.38 %, respectively. We calculated the weighted-average discount rate using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term. +Supplemental cash flow information related to leases is as follows: +(In thousands) +2024 +2023 +Cash paid for operating lease liabilities +$ +350 +$ +314 +Note 12—Accumulated Other Comprehensive Loss +The changes in the balance of accumulated other comprehensive loss by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Net +Unrealized +Gain (Losses) +on Cash Flow +Hedges +Total +Balance at January 31, 2021 +$ +( 275 +) +$ +( 109 +) +$ +( 384 +) +Other Comprehensive Loss before reclassification +( 1,426 +) +— +( 1,426 +) +Amounts Reclassified from AOCI to Earnings +— +62 +62 +Other Comprehensive Income (Loss) +( 1,426 +) +62 +( 1,364 +) +Balance at January 31, 2022 +$ +( 1,701 +) +$ +( 47 +) +$ +( 1,748 +) +Other Comprehensive Income (Loss) before reclassification +( 537 +) +— +( 537 +) +Amounts reclassified from AOCI to Earnings +— +47 +47 +Other Comprehensive Income (Loss) +( 537 +) +47 +( 490 +) +Balance at January 31, 2023 +$ +( 2,238 +) +$ +— +$ +( 2,238 +) +Other Comprehensive Income (Loss) before reclassification +19 +— +19 +Amounts reclassified from AOCI to Earnings +— +— +— +Other Comprehensive Income (Loss) +19 +— +19 +Balance at January 31, 2024 +$ +( 2,219 +) +$ +— +$ +( 2,219 +) +The amounts presented above in other comprehensive income (loss) are net of taxes except for translation adjustments associated with our German, Danish and Shanghai subsidiaries. +F- 21 +Note 13—Shareholders’ Equity +During fiscal years 2024 and 2023, certain of our employees delivered a total of 26,731 and 17,752 shares, respectively, of our common stock to satisfy the exercise price and related taxes for stock options exercised and restricted stock vesting. The shares delivered were valued at a total of $ 0.4 million and $ 0.3 million, respectively, and are included in treasury stock in the accompanying consolidated balance sheets at January 31, 2024 and 2023. These transactions did not impact the number of shares authorized for repurchase under our current repurchase program. +Note 14—Share-Based Compensation +The Company maintains the following share-based compensation plans: +Stock Plans: +We have one equity incentive plan from which we are authorized to grant equity awards, the AstroNova, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for, among other things, the issuance of awards, including incentive stock options, non-qualified stock options, stock appreciation rights, time-based restricted stock units (“RSUs”), or performance-based restricted stock units (“PSUs”) and restricted stock awards (“RSAs”). The 2018 Plan authorizes the issuance of up to 950,000 shares of common stock, plus an additional number of shares equal to the number of shares subject to awards granted under the previous equity incentive plans that are forfeited, cancelled, satisfied without the issuance of stock, otherwise terminated (other than by exercise), or, for shares of stock issued pursuant to any unvested award, that are reacquired by us at not more than the grantee’s purchase price (other than by exercise). Under the 2018 Plan, all awards to employees generally have a minimum vesting period of one year. Options granted under the 2018 Plan must be issued at an exercise price of not less than the fair market value of our common stock on the date of grant and expire after ten years. Under the 2018 Plan, there were 115,970 unvested RSUs; 184,735 unvested PSUs; and options to purchase an aggregate of 135,500 shares outstanding as of January 31, 2024. +In addition to the 2018 Plan, we previously granted equity awards under our 2015 Equity Incentive Plan (the “2015 Plan”) and our 2007 Equity Incentive Plan (the “2007 Plan”). No new awards may be issued under either the 2007 or 2015 Plans, but outstanding awards will continue to be governed by those plans. As of January 31, 2024, options to purchase an aggregate of 260,249 shares were outstanding under the 2007 Plan and options to purchase an aggregate of 127,600 shares were outstanding under the 2015 Plan. +We also have a Non-Employee Director Annual Compensation Program (the “Program”) under which each non-employee director receives an automatic grant of RSAs on the date of the regular full meeting of the Board of Directors held each fiscal quarter. Under the Program, the number of whole shares to be granted each quarter is equal to 25 % of the number calculated by dividing the director’s annual compensation amount by the fair market value of the Company’s stock on such day. On June 5, 2023, each director’s annual compensation amount was adjusted to be $ 70,000 . All RSAs granted under this Program vest immediately. +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +Years Ended January 31 +2024 +2023 +2022 +(In thousands) +Stock Options +$ +— +$ +7 +$ +210 +Restricted Stock Awards and Restricted Stock Units +1,322 +1,271 +1,266 +Employee Stock Purchase Plan +25 +12 +17 +Total +$ +1,347 +$ +1,290 +$ +1,493 +F- 22 +Stock Options: +Aggregated information regarding stock options granted under the plans is summarized below: +Number +of Shares +Weighted- +Average +Exercise +Price Per +Share +Options Outstanding, January 31, 2021 +622,083 +$ +14.63 +Options Granted +— +— +Options Exercised +( 6,425 +) +9.34 +Options Forfeited +( 17,615 +) +15.09 +Options Cancelled +— +— +Options Outstanding, January 31, 2022 +598,043 +$ +14.67 +Options Granted +— +— +Options Exercised +( 42,944 +) +8.74 +Options Forfeited +( 5,500 +) +15.42 +Options Cancelled +( 2,400 +) +8.09 +Options Outstanding, January 31, 2023 +547,199 +$ +15.16 +Options Granted +— +— +Options Exercised +( 9,100 +) +11.54 +Options Forfeited +( 10,525 +) +15.20 +Options Cancelled +( 4,225 +) +10.50 +Options Outstanding, January 31, 2024 +523,349 +$ +15.26 +Set forth below is a summary of options outstanding at January 31, 2024: +Outstanding +Exercisable +Range of +Exercise prices +Number of +Shares +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Life +Number of +Shares +Weighted- +Average +Exercise +Price +Weighted +Average +Remaining +Contractual +Life +$ 10.01 - 15.00 +311,874 +$ +13.78 +2.0 +311,874 +$ +13.78 +2.0 +$ 15.01 - 20.00 +211,475 +17.44 +3.8 +211,475 +17.44 +3.8 +523,349 +$ +15.26 +2.7 +523,349 +$ +15.26 +2.7 +No options were granted during fiscal 2024 or fiscal 2023. As of January 31, 2024, there was no unrecognized compensation expense related to the unvested stock options granted under the plans. +As of January 31, 2024, the aggregate intrinsic value (the aggregate difference between the closing stock price of our common stock on January 31, 2024, and the exercise price of the outstanding options) that would have been received by the option holders if all options had been exercised was $ 1.3 million for all exercisable options and all options outstanding. The total aggregate intrinsic value of options exercised during fiscal 2024, 2023 and 2022 was $ 32,000 , $ 200,000 , and $ 26,000 , respectively. +F- 23 +Restricted Stock Units, Performance-Based Restricted Stock Units and Restricted Stock Awards: +Aggregated information regarding RSUs, PSUs and RSAs granted under the Plan is summarized below: +RSUs, PSUs & +RSAs +Weighted-Average +Grant Date +Fair Value +Outstanding at January 31, 2021 +197,413 +$ +9.96 +Granted +151,406 +14.51 +Vested +( 126,939 +) +10.43 +Forfeited +( 900 +) +14.26 +Outstanding at January 31, 2022 +220,980 +$ +13.23 +Granted +141,371 +12.70 +Vested +( 85,324 +) +13.45 +Forfeited +( 2,100 +) +13.25 +Outstanding at January 31, 2023 +274,927 +$ +12.82 +Granted +157,643 +12.64 +Vested +( 116,288 +) +12.29 +Forfeited +( 15,577 +) +13.37 +Outstanding at January 31, 2024 +300,705 +$ +12.90 +As of January 31, 2024, there was $ 2.1 million of unrecognized compensation expense related to unvested RSUs, PSUs and RSAs. This expense is expected to be recognized over a weighted average period of 1.5 years. +Employee Stock Purchase Plan (ESPP): +On June 7, 2022, we adopted the AstroNova Inc. 2022 Employee Stock Purchase Plan (“2022 ESPP”) to replace our previous Employee Stock Purchase Plan (the “Prior ESPP”). The 2022 ESPP allows eligible employees to purchase shares of common stock at a 15 % discount from fair value on the first or last day of an offering period, whichever is less. A total of 40,000 shares were reserved for issuance under this plan and 9,897 and 5,045 shares were purchased under the 2022 ESSP during the years ended January 31, 2024 and 2023, respectively. During the period ended January 31, 2023, there were 1,550 shares purchased under the Prior ESPP, and no additional purchases may be made under the Prior ESPP. As of January 31, 2024, 25,058 shares remain available for purchase under the 2022 ESPP. +Note 15—Income Taxes +The components of income before income taxes are as follows: +2024 +2023 +2022 +(In thousands) +Domestic +$ +5,448 +$ +1,773 +$ +5,046 +Foreign +625 +1,637 +1,988 +$ +6,073 +$ +3,410 +$ +7,034 +The components of the provision for income taxes are as follows: +2024 +2023 +2022 +(In thousands) +Current: +Federal +$ +966 +$ +902 +$ +( 183 +) +State +71 +313 +76 +Foreign +420 +870 +501 +1,457 +2,085 +394 +Deferred: +Federal +$ +( 32 +) +$ +( 1,053 +) +$ +180 +State +2 +( 315 +) +177 +Foreign +( 48 +) +32 +( 146 +) +( 78 +) +( 1,336 +) +211 +$ +1,379 +$ +749 +$ +605 +F- 24 +Total income tax provision differs from the expected tax provision as a result of the following: +2024 +2023 +2022 +(In thousands) +Income Tax Provision at Statutory Rate +$ +1,275 +$ +716 +$ +1,477 +Foreign Rate Differential +197 +157 +61 +Change in Valuation Allowance +73 +182 +57 +Change in Reserves Related to ASC 740 Liability +60 +93 +( 245 +) +State Taxes, Net of Federal Tax Effect +56 +( 2 +) +143 +Meals and Entertainment +14 +— +9 +Return to Provision Adjustment +12 +( 22 +) +368 +R&D Credits +( 160 +) +( 160 +) +( 180 +) +Foreign Derived Intangible Income +( 98 +) +( 180 +) +( 55 +) +Share Based Compensation +( 43 +) +( 52 +) +( 95 +) +PPP Loan Forgiveness +— +— +( 937 +) +Other +( 7 +) +17 +2 +$ +1,379 +$ +749 +$ +605 +Our effective tax rate for fiscal 2024 was 22.7 % compared to 22.0 % in fiscal 2023 and 8.6 % in fiscal 2022. The increase in the effective tax rate in fiscal 2024 from fiscal 2023 is primarily related to the impact of the valuation allowance recorded on China net operating losses, the increase in the current provision for state and local taxes, and the change in the foreign rate differential. This increase was partially offset by other factors decreasing the effective tax rate such as foreign derived intangible income (“FDII”) deduction, share based compensation, and the R&D tax credit. +The increase in the effective tax rate in fiscal 2023 from fiscal 2022 is primarily related to the absence of the PPP loan forgiveness which is tax-exempt income that was a one-time item that reduced the rate in fiscal 2022. Specific items increasing the effective tax rate in fiscal 2023 include the change in reserves related to ASC 740 liability and the increase in the valuation allowance recorded on China net operating losses. This increase was partially offset by state taxes, return to provision adjustments, share-based compensation, R&D tax credits, and foreign derived intangible income FDII deduction. +F- 25 +The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31, +(In thousands) +2024 +2023 +Deferred Tax Assets: +Inventory +$ +2,242 +$ +2,710 +Honeywell Royalty Liability +3,561 +3,008 +State R&D Credits +2,160 +1,851 +Share-Based Compensation +590 +620 +Bad Debt +134 +180 +Warranty Reserve +171 +258 +Compensation Accrual +276 +248 +Net Operating Loss +199 +135 +ASC 842 Adjustment – Lease Liability +38 +53 +Unrecognized State Tax Benefits +49 +58 +Foreign Tax Credit +154 +154 +Deferred Service Contract Revenue +100 +90 +Section 174 Capitalization* +1,981 +1,175 +Other +381 +281 +12,036 +10,821 +Deferred Tax Liabilities: +Accumulated Tax Depreciation in Excess of Book Depreciation +1,491 +1,037 +Intangibles +989 +694 +ASC 842 Adjustment – Lease Liability +33 +50 +Other +206 +180 +2,719 +1,961 +Subtotal +9,317 +8,860 +Valuation Allowance +( 2,534 +) +( 2,120 +) +Net Deferred Tax Assets +$ +6,783 +$ +6,740 +* Beginning in fiscal 2023, changes to Section 174 of the Internal Revenue Code made by the Tax Cuts and Jobs Act of 2017 (“TCJA”) no longer permit an immediate deduction for research and development expenditures in the tax year that such costs are incurred. These costs are capitalized resulting in an increase in deferred tax assets of $ 0.8 million from fiscal 2023 to fiscal 2024. +Deferred taxes are reflected in the consolidated balance sheet as follows: +January 31, +(In thousands) +2024 +2023 +Deferred Tax Assets +6,882 +6,907 +Deferred Tax Liabilities +( 99 +) +( 167 +) +Total Net Deferred Tax Assets +$ +6,783 +$ +6,740 +The valuation allowances of $ 2.5 million at January 31, 2024 and $ 2.1 million at January 31, 2023, relate to Rhode Island research and development tax credit carryforwards, foreign tax credit carryforwards, and China’s net operating losses that are expected to expire unutilized. +At January 31, 2024, we had net operating loss carryforwards of $ 0.2 million in China, which expire in 2024 through 2028 . +At January 31, 2024, we had state research credit carryforwards of approximately $ 2.2 million which expire in 2025 through 2031 . Additionally, we had $ 0.2 million of foreign tax credits. We maintain a full valuation allowance against these credits as we expect these credits to expire unused. +F- 26 +We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows: +2024 +2023 +2022 +(In thousands) +Balance, beginning of the year +$ +414 +$ +303 +$ +384 +Increases in prior period tax positions +— +24 +63 +Increases in current period tax positions +162 +136 +67 +Reductions related to lapse of statutes of limitations +( 71 +) +( 49 +) +( 211 +) +Balance, end of the year +$ +505 +$ +414 +$ +303 +During fiscal 2024 and 2023, we released $ 71,000 and $ 49,000 , respectively, of uncertain tax positions including accrued interest and penalties relating to a change in various unrecognized tax positions. We have accrued potential interest and penalties of $ 46,000 included in income taxes payable in the accompanying consolidated balance sheet at January 31, 2024. +The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. In fiscal 2024, we released $ 33,000 related to a federal tax exposure for the fiscal 2020 tax year and $ 39,000 of state nexus positions as a result of the expiration of the statute of limitations. +U.S. income taxes have not been provided on $ 10.0 million of undistributed earnings of our foreign subsidiaries since it is our intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, we would not be subject to U.S. tax as a result of the TCJA but, could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical. +Note 16—Nature of Operations, Segment Reporting and Geographical Information +Our operations consist of the design, development, manufacture and sale of specialty printers and data acquisition and analysis systems, including both hardware and software and related consumable supplies. We organize and manage our business as a portfolio of products and services designed around a common theme of data acquisition and information output. We have two reporting segments consistent with our revenue product groups: Product Identification (“PI”) and Test & Measurement (“T&M”). +Our PI segment produces an array of high-technology digital color and monochrome label printers and mini presses, labeling software and supplies for a variety of commercial industries worldwide and includes our fiscal 2023 acquisition of Astro Machine. Our T&M segment produces data acquisition systems used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing. The T&M segment also includes our line of aerospace flight deck and cabin printers. +Business is conducted in the United States and through foreign branch offices and subsidiaries in Canada, Europe, China, Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United States are conducted through wholly owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction. +The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies herein. We evaluate segment performance based on the segment profit before corporate and financial administration expenses. +Summarized below are the revenue and segment operating profit (both in dollars and as a percentage of revenue) for each reporting segment: +Revenue +Segment Operating Profit +Segment Operating Profit +as a % of Revenue +($ in thousands) +2024 +2023 +2022 +2024 +2023 +2022 +2024 +2023 +2022 +Product Identification +$ +104,041 +$ +103,089 +$ +90,915 +$ +10,087 +$ +7,889 +$ +10,411 +9.7 +% +7.7 +% +11.5 +% +T&M +44,045 +39,438 +26,565 +10,200 +8,989 +3,398 +23.2 +% +22.8 +% +12.8 +% +Total +$ +148,086 +$ +142,527 +$ +117,480 +20,287 +16,878 +13,809 +13.7 +% +11.8 +% +11.8 +% +Corporate Expenses +11,491 +11,435 +9,553 +Operating Income +8,796 +5,443 +4,256 +Other Income (Expense), Net +( 2,723 +) +( 2,033 +) +2,778 +Income Before Income Taxes +6,073 +3,410 +7,034 +Income Tax Provision +1,379 +749 +605 +Net Income +$ +4,694 +$ +2,661 +$ +6,429 +No customer accounted for greater than 10% of net revenue in fiscal 2024, 2023 or 2022. +F- 27 +Other information by segment is presented below: +Assets +January 31, +(In thousands) +2024 +2023 +Product Identification +$ +64,686 +$ +69,607 +T&M +61,125 +60,730 +Corporate* +7,440 +8,870 +Total +$ +133,251 +$ +139,207 +* Corporate assets consist principally of cash, cash equivalents, deferred tax assets and refunds, and certain prepaid corporate assets. +Depreciation and Amortization +Capital Expenditures +(In thousands) +2024 +2023 +2022 +2024 +2023 +2022 +Product Identification +$ +2,572 +$ +2,219 +$ +1,157 +$ +1,686 +$ +121 +$ +847 +T&M +1,694 +1,697 +2,837 +10 +108 +949 +Total +$ +4,266 +$ +3,916 +$ +3,994 +$ +1,696 +$ +229 +$ +1,796 +Geographical Data +Presented below is selected financial information by geographic area: +Long-Lived Assets (2) +Revenue (1) +January 31, +(In thousands) +2024 +2023 +2022 +2024 +2023 +United States +$ +84,757 +$ +83,559 +$ +68,185 +$ +32,090 +$ +34,277 +Europe +41,761 +38,859 +31,922 +754 +1,230 +Canada +8,742 +8,690 +6,519 +171 +4 +Asia +7,216 +5,547 +5,926 +6 +9 +Central and South America +4,221 +4,589 +3,271 +— +— +Other +1,389 +1,283 +1,657 +— +— +Total +$ +148,086 +$ +142,527 +$ +117,480 +$ +33,021 +$ +35,520 +(1) Certain amounts have been reclassified to conform to the current year's presentation. +(2) Long-lived assets exclude goodwill assigned to the T&M segment of $ 4.5 million at both January 31, 2024 and 2023 and $ 10.1 million assigned to the PI segment at both January 31, 2024 and 2023. +Note 17—Employee Benefit Plans +We sponsor a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code. +All contributions are deposited into trust funds. It is our policy to fund any contributions accrued. Our annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $ 0.5 million in each of fiscal 2024, fiscal 2023 and fiscal 2022. +Note 18—Product Warranty Liability +We offer a manufacturer’s warranty for the majority of our hardware products. The specific terms and conditions of warranty vary depending upon the products sold and the country in which we do business. We estimate the warranty costs based on historical claims experience and record a liability in the amount of such estimates at the time product revenue is recognized. We regularly assess +F- 28 +the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows: +(In thousands) +2024 +2023 +2022 +Balance, beginning of the year +$ +1,072 +$ +834 +$ +730 +Provision for Warranty Expense +1,181 +2,077 +2,174 +Cost of Warranty Repairs +( 1,542 +) +( 1,839 +) +( 2,070 +) +Balance, end of the year +$ +711 +$ +1,072 +$ +834 +During fiscal 2022, we incurred incremental costs because of a product quality issue with one of our vendors. As the result of discussions with the vendor, which was responsible for the product quality issue, we entered into an agreement whereby the vendor paid us $ 975,000 as partial reimbursement of the costs we incurred in supporting our customers with respect to the product quality issue. For the period ended January 31, 2022, we recorded this payment to offset cost of revenue in our PI segment for the product lines effected to partially reverse the accounting impact when the original costs of the quality issues were incurred. +Note 19—Restructuring +On July 26, 2023, we adopted a restructuring plan for our PI segment that transitioned a portion of the printer manufacturing within that segment from our facility in Rhode Island to our Astro Machine facility located in Illinois. Additionally, we ceased selling certain of our older, lower-margin or low-volume PI segment products and made targeted reductions to our workforce. As part of the restructuring plan, we also consolidated certain of our international PI sales and distribution facilities and streamlined our channel partner network. As of January 31, 2024, we have completed this plan. +As a result of the adoption and implementation of our PI segment restructuring plan, in the second quarter of fiscal 2024 we recognized a pre-tax restructuring charge of $ 2.7 million, comprised primarily of non-cash charges related to inventory write-offs associated with product curtailment and discontinuation and facility exit related costs, and cash charges related to severance-related costs. The following table is a summary of the restructuring costs by type for the year ended January 31, 2024: +(In thousands) +Inventory Write-Off +Severance and Employee Related Costs +Facility Exit and Other Restructuring Costs +Total +Restructuring Charges +$ +1,991 +$ +611 +$ +49 +$ +2,651 +Change in Estimates (1) +— +( 75 +) +— +( 75 +) +Total +$ +1,991 +$ +536 +$ +49 +$ +2,576 +(1) During the fourth quarter of fiscal 2024, we recorded a $ 75,000 net reversal to our restructuring charge, which was attributed to lower than anticipated severance charges due to retaining and re-assigning certain employees. +F- 29 +The following table summarizes restructuring costs included in the accompanying consolidated statement of income as of January 31, 2024: +(In thousands) +Cost of Revenue +$ +2,064 +Operating Expenses: +Selling & Marketing +400 +Research & Development +29 +General & Administrative +83 +Total +$ +2,576 +The following table presents the details of liability for Severance and Employee Related Cost: +(In thousands) +Balance January 31, 2023 +$ +— +Restructuring Charges +611 +Cash Paid +( 524 +) +Effects of Foreign Exchange +( 12 +) +Change in Estimates +( 75 +) +Balance January 31, 2024 +$ +— +Product Retrofit Program +In connection with our restructuring plan, we identified the need to address quality and reliability issues in certain models of our PI printers as a result of faulty ink provided by one of our larger suppliers. We identified approximately 150 printers sold to our customers that were affected by the faulty ink. In order to remedy these issues and maintain solid customer relationships, during the second quarter of fiscal 2024, we initiated a program to retrofit all of the printers sold to our customers that were affected by the faulty ink. +The initial estimated costs associated with this program were $ 0.9 million, which included the cost of parts, labor and travel. During fiscal 2024, we worked with our customers to either repair or replace the affected printers. At the end of the fourth quarter of fiscal 2024, we adjusted our estimate of costs for this program as we determined not all customers wanted to retrofit their printers and consequently the program was concluded. As a result, at the end of the fourth quarter of fiscal 2024, we reversed $ 0.2 million of charges for this program. Total costs of this program as of January 31, 2024, as summarized below, were $ 0.6 million and are included in cost of revenue in the accompanying consolidated statement of income for the year ended January 31, 2024. +(In thousands) +Provision for Product Retrofit Program +$ +852 +Cost of Repairs and Replacements incurred through January 31, 2024 +( 642 +) +Changes in Estimate (1) +( 210 +) +Balance at January 31, 2024 +$ +— +(1) During the fourth quarter of fiscal 2024, we recorded a $ 210,000 net reversal to our retrofit program, which was attributed to lower than anticipated participation by customers in this program and ultimate conclusion of the program as of January 31, 2024. +There is no balance in the related liability for this program at January 31, 2024. +Note 20—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts, which constitute our customer base. We periodically perform on-going credit evaluations of our customers. We have not historically experienced significant credit losses on collection of our accounts receivable. +During the year ended January 31, 2024, we had two vendors that accounted for 23.5 % of purchases, and for the years ended January 31, 2023 and 2022, we had one vendor that accounted for 18.7 % and 23.3 % of purchases, respectively. We had one vendor that accounted for 46.9 %, 16.2 % and 15.4 %, respectively, of accounts payable as of January 31, 2024, 2023 and 2022. +F- 30 +Note 21—Commitments and Contingencies +In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. At January 31, 2024, our purchase commitments totaled $ 25.8 million, with $ 23.1 million due within 12 months, some of which are non-cancelable. +We are also subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +Note 22—Fair Value Measurements +Assets and Liabilities Not Recorded at Fair Value on the Consolidated Balance Sheet +Our long-term debt, including the current portion, not reflected in the financial statements at fair value, is reflected in the table below: +Fair Value Measurement at +January 31, 2024 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +13,026 +$ +13,026 +$ +12,972 +Fair Value Measurement at +January 31, 2023 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +14,310 +$ +14,310 +$ +14,250 +The fair value of our long-term debt, including the current portion, is estimated by discounting the future cash flows using current interest rates at which similar borrowings with the same maturities would be made to borrowers with similar credit ratings and is classified as Level 3. +F- 31 +ASTRONOVA, INC. +SCHEDULE II—VALUATION AND QUALI FYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision/ +(Benefit) +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts (1): +(In thousands) +Year Ended January 31, +2024 +$ +731 +$ +( 113 +) +$ +— +$ +618 +2023 +$ +826 +$ +100 +$ +( 195 +) +$ +731 +2022 +$ +1,054 +$ +50 +$ +( 278 +) +$ +826 +(1) +The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet dates. +(2) +Uncollectible accounts written off, net of recoveries. +F- 32 \ No newline at end of file diff --git a/raw/filings/0000008146/2023/0000950170-24-043875/filing_metadata.csv b/raw/filings/0000008146/2023/0000950170-24-043875/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..420c8b1e574b3c4896519ae886abd206f6b03e87 --- /dev/null +++ b/raw/filings/0000008146/2023/0000950170-24-043875/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2024-04-12,2024-01-31,2024-04-12T12:30:40.000Z,0000950170-24-043875,alot-20240131.htm,10-K,14695241,1,1,https://www.sec.gov/Archives/edgar/data/8146/000095017024043875/alot-20240131.htm,https://www.sec.gov/Archives/edgar/data/8146/000095017024043875/,2023,2023,1 diff --git a/raw/filings/0000008146/2023/0000950170-24-043875/item1.txt b/raw/filings/0000008146/2023/0000950170-24-043875/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..61d8f3c7900a5d98f52e2e0dde6dd6ffd638eb43 --- /dev/null +++ b/raw/filings/0000008146/2023/0000950170-24-043875/item1.txt @@ -0,0 +1,98 @@ +Item 1 . Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +We design, develop, manufacture, and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging, and transportation. +Our products are distributed worldwide through our own sales force, authorized dealers, and independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel ® , TrojanLabel ® , and GetLabels ™ brand names. The T&M segment includes our line of aerospace printers, ethernet networking products and test and measurement data acquisition systems sold under the AstroNova ® brand name. Refer to Note 16, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers and related accessories, tabbers, conveyors, and envelope feeders. Astro Machine is reported as a part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisitions,” in our audited consolidated financial statements included elsewhere in this report. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included elsewhere in this Annual Report on Form 10-K. +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets globally. +PI products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers and light commercial label printers, direct-to-package printers, high-volume presses, and specialty original equipment manufacturer (“OEM”) printing systems, as well as a wide range of label, tag and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. PI products sold under the Astro Machine brand acquired on August 4, 2022, also include a variety of label printers, envelope and packaging printing, and related processing and handling equipment. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed, stored and presented in various visual output formats. +Product Identification +Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. Additionally, PI also includes the Astro Machine brand that is sold directly to end users though our channel partners and to OEM customers, which generally rebrand these products for sales to their customers. The segment provides a wide array of digital end-to-end product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Our customers typically label or mark products on a short- to mid-size run basis and benefit from the efficiency, flexibility, and cost-savings of digitally printing +2 +labels or packaging in their facility, on-demand, with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready digital color label printers, and specialty OEM printing systems for either standalone output or inline integration with existing pre-processing and finishing systems. Customers use our digital printing products in a wide variety of industries, including chemicals, cosmetics, food and beverage, medical products, nutraceuticals, pharmaceuticals, and many others. TrojanLabel expands our customer market by providing a range of higher volume digital color printers, OEM printing systems, and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners, and thermal transfer ribbons designed for optimal performance with our printing hardware, and are also compatible with a wide variety of competitive and third-party printing hardware. +Current QuickLabel models include a selection of professional tabletop digital color label printers. We recently introduced the QL-E100, an entry-level, compact, full-color tabletop label printer. It delivers professional-quality output at a lower price point, which we believe is ideal for targeting smaller businesses entering the on-demand label market, and larger enterprises that require multiple on-demand label printers at distributed locations throughout their facilities. The high-speed QL-120X was built on our pioneering and successful Kiaro! ® platform. To expand the product line further, the QL-120Xe, a sister product to the dye ink QL-120X, was introduced in 2021 as a lower price point option for price-sensitive customers. In 2020, we introduced the QL-120D, which features high-performance pigment inks that can produce durable BS5609-certified labels and labels that can withstand a wide range of demanding environmental conditions from sterilization to cryogenic freezing. Introduced early in 2019, the high-performance QL-300 was the first 5-color toner-based electrophotographic tabletop production label printer in the market. The QL-30 and QL-60 are high-end monochrome printers which print a variety of labels and tags using direct thermal or thermal transfer technology. In fiscal 2024, we introduced the QL-900, a wider format inkjet color label printer. Also in fiscal 2024, we obsoleted the QL-850 and QLS-4100 Xe to rationalize our product lines and manufacturing system, creating a leaner and more efficient business. +Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to large-scale all-in-one inline specialty printing systems for brand owners, OEMs, and commercial printers. The T2-C, a compact, digital mini-press designed for 24/7 label production, includes numerous differentiating features for several end-use market applications. Beyond label printing, the T3-OPX, the first of its kind direct-to-package printer, which was introduced in late 2020, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many other items using pigment inks that are resistant to both water and UV exposure. In fiscal 2024, we launched two new products: the T2-PRO and the T3-PRO, both of which have wide-format print capabilities. +GetLabels provides a broad range of high-quality supplies for both our printers and third-party printers, including label and tag materials, inks, toner, and thermal transfer material, all specifically designed and constructed for a wide variety of labeling applications. Label material and substrates are carefully qualified and tested on-site in our Rhode Island Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers. +Astro Machine is a U.S.-based manufacturer and engineering development company providing inkjet printers, conveyors, tabbers, software, and various components to the mail and addressing markets, as well as the label and packaging markets. Astro Machine serves OEMs and value-added resellers. +The PI segment provides worldwide training and support as well as develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems. +Test & Measurement +Products sold under our T&M segment are designed and manufactured for airborne printing and networking solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace-grade thermal paper. Our data acquisition systems are used in research and development; flight testing; missile/rocket telemetry; and production monitoring and power and maintenance applications. These products are sold to customers in various industries, including aerospace and defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Our airborne printers, which include our flagship ToughWriter ® series, are used in the flight decks and cabins of military, commercial, and business aircraft to print hard copies of data to enhance flight safety and reduce pilot workload by providing ready access to many types of critical flight-specific information required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, notice to air missions ("NOTAMs"), +3 +performance data, passenger data, and air traffic control data. ToughSwitch ® Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. Our ToughWriter airborne printers and ToughSwitch ethernet switches are ruggedized to comply with rigorous military and commercial flight-worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter printers for various aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream, and others. In addition to our ToughWriter products, we furnish other acquired flight deck printer products, including the TP/NP series, the RTP80 series and the PTA-45B series of airborne printers. The PTA-45B is subject to an Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which we acquired an exclusive perpetual worldwide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing B737 and Airbus A320 aircraft. Over time we expect customers to replace the PTA-45B and other acquired printer product lines with the AstroNova designed ToughWriter products because of its numerous technical features, functional advantages and significant weight savings. Currently, approximately one-third of the airborne printers we sell are ToughWriter branded, and we expect the percentage of ToughWriter products to continue to grow over the next several years, and notably in fiscal 2026. +Other T&M products include the TMX ® all-in-one high-speed data acquisition system for applications requiring high channel counts and acquisition rates; the Daxus ® DXS-100 distributed data acquisition platform; the SmartCorder ® DDX-100, a portable all-in-one data acquisition system for R&D facility and field testing; and the Everest ® EV-5000 digital strip chart recording system used mainly in aerospace and defense applications. The Daxus DXS-100 can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data; (2) conditioning the data; (3) displaying or printing the data on hard copy, visual displays or electronic storage media; and (4) analyzing the data. To support our data visualization technology, we maintain technological core competencies and trade secret know-how concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling, and airworthiness design. +Intellectual Property +We rely on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions to protect our technology and brand names. While we consider our intellectual property to be important to the operation of our business, other than our Honeywell license agreement, we do not believe that any existing patent, trademark, or other intellectual property right is of such significance that its loss or termination would have a material adverse effect on our business taken as a whole +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many sub-assemblies and parts in-house, including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts that are not manufactured in-house are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We also purchase certain components, assembled products, and supplies used to manufacture or to be sold with our products, from single-or limited- source suppliers. Although we believe the majority of these sole or limited source components, assembled products, and supplies could be sourced elsewhere with appropriate changes in the design of our products, the required design changes might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past, we have made such advanced purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our existing network of manufacturing, sales and support facilities, during fiscal 2024, we sold our products to customers in approximately 100 countries. +4 +We believe we are a market leader in tabletop digital color label printing technology in the specialty on-demand printing field, the market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose, portable, high-speed data acquisition systems. +We retain our leadership position in the markets we serve by virtue of our proprietary technology, product reputation, delivery, our channels to market, technical assistance, and service to customers. The number of competitors we face in any given market varies by product line. Key competitive factors vary among our product lines but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our PI products are sold by direct field salespersons, OEMs, and independent dealers and representatives, while our T & M products are sold predominantly through direct sales and independent representatives. In the United States, we have factory-trained direct-field salespeople located throughout the country specializing in PI products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize over 100 independent dealers and representatives selling and marketing our products in over 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +Order Backlog +Our order backlog is predominantly but not exclusively for products that will be delivered within twelve months, and backlog scheduled for beyond twelve months is predominantly within the T&M segment. However, backlog varies regularly and is not a highly reliable predictive indicator of near-term future sales trends, primarily due to the frequent longer-term original equipment and supplies orders within the T&M segment. In the PI segment, we have multi-period (but typically not multi-year) blanket order arrangements with many customers for labels and other supplies. Printer hardware in the PI segment is typically shipped within a short period of time after orders are booked. Manufacturing production is designed to meet forecasted demands and built-to-order customer requirements. Backlog at January 31, 2024 and 2023 was $31.4 million and $35.8 million, respectively. +Government Regulation +We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our business, particularly with respect to our aircraft cockpit printer business which sells in a highly regulated industry. For example, material modifications to an airborne printer cannot be made without having progressed through an extensive series of product qualification and certification steps that are technically complicated, expensive to execute, typically slow the pace of product development in that industry and can constrain our ability to quickly respond to pricing fluctuations or disruptions to our supply chain for products. +Other applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, accounting and U.S. Securities and Exchange Commission (“SEC”) reporting, privacy, data protection, pricing, content, distribution, energy consumption, environmental regulation, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. +Our business outside of the U.S. exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. +Environmental Matters +We believe that we are in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment or otherwise relating to the protection of the environment. We have not experienced any material costs in connection with environmental compliance and do not believe that such compliance will have any material effect on our financial position, results of operations, cash flows, or competitive position. +5 +Employees +As of January 31, 2024 we employed 365 full-time employees. Of our full-time employees, 276 were in the United States, 69 were in Europe, 11 were in Canada, seven were in Asia, and two were in Mexico. +None of our employees are represented by a labor union or covered by a collective bargaining agreement, except for employees in France, where local regulations generally require collective bargaining agreements. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments of the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other initiatives to improve overall engagement with our key employees. +Culture +We are deeply committed to and invest substantial resources in maintaining and improving a strong and definable company culture that shapes how we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business in pursuit of continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure our business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand our customers’ changing needs and expectations. +Our objective is for these core values to guide our employees’ behavior and direct how we conduct our business. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities and are also demonstrated through teamwork, leadership, and everyday interactions. +Diversity and Inclusion +We believe that our culture and core values are strengthened through diversity and inclusion. Our diversity initiatives include—but are not limited to—our practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions; transfers; social and recreational programs; layoffs; terminations; and the ongoing development of a work environment built on the premise of gender and diversity equity. These initiatives include targeted recruitment of women in technical, engineering and sales roles, leadership development programs for women, periodic evaluation of our workforce demographics as compared to the demographics in the workforce market, and an affirmative effort to attract, recruit, retain and train a diverse workforce that is representative of the populations in the regions in which we do business. Metrics that track performance against these goals are regularly reported to and monitored by the Human Capital and Compensation Committee of our Board of Directors. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the variable size of certain individual customer revenue transactions, which can cause fluctuations in revenue from quarter to quarter and which may be inconsistent with the underlying business or general economic trends. For example, in our T&M segment, government procurement and contracting practices can result in material fluctuations in our backlog and revenues. +Information about Our Executive Officers +The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of the Board of Directors. +6 +Name +Age +Position +Gregory A. Woods +65 +President, Chief Executive Officer and Director +David S. Smith +67 +Vice President, Chief Financial Officer and Treasurer +Stephen M. Petrarca +61 +Vice President—Operations +Michael J. Natalizia +60 +Vice President Technology & Strategic Alliances, Chief Technology Officer +Tom W. Carll +57 +Vice President and General Manager—Aerospace +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. +Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. +Mr. Petrarca was appointed Vice President—Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia had held the position of Director of Product Development of the Company since 2005. +Mr. Carll joined the Company in 1989 and has held the position of Vice President and General Manager—Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product group and, from its formation in 2004, the AstroNova Aerospace business group. +Code of Ethics +We have adopted a Code of Conduct which applies to all of our directors, officers and employees of the Company, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on our website, (www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” We intend to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, principal accounting officer, or persons performing similar functions by posting such information on our website. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These filings are also accessible on the SEC’s website at http://www.sec.gov. \ No newline at end of file diff --git a/raw/filings/0000008146/2023/0000950170-24-043875/item13.txt b/raw/filings/0000008146/2023/0000950170-24-043875/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..1679a1cd65d04326e47c9cd2f089dab3a713719e --- /dev/null +++ b/raw/filings/0000008146/2023/0000950170-24-043875/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships, Related T ransactions and Director Independence +The information required by this item is incorporated herein by reference to our Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0000008146/2023/0000950170-24-043875/item9a.txt b/raw/filings/0000008146/2023/0000950170-24-043875/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..5de8343811a1d1a790adbae23c3eb92c304ab24f --- /dev/null +++ b/raw/filings/0000008146/2023/0000950170-24-043875/item9a.txt @@ -0,0 +1,13 @@ +Item 9A. Controls a nd Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of January 31, 2024, because of the material weakness in our internal control over financial reporting described below. +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2024. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, our Principal Executive Officer and Principal Financial Officer believe that as of January 31, 2024, our internal control over financial reporting was not effective based on criteria set forth by COSO in “Internal Control-Integrated Framework” because of the material weakness in our internal control over financial reporting as described below. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As of January 31, 2024, we did not design or maintain an effective control environment to ensure the accurate and timely reporting of transactions related to our Astro Machine subsidiary, which was acquired August 4, 2022. +Management is taking action to remediate this deficiency in its internal controls over financial reporting by designing an effective control environment and expanding our existing enterprise resource planning system to include the Astro Machine subsidiary. We anticipate that these actions and resulting improvements in controls will strengthen our internal control over financial reporting and will address the related material weakness. +30 +The effectiveness of our internal control over financial reporting as of January 31, 2024 has been audited by Wolf & Company, P.C., an independent registered public accounting firm, as stated in their attestation report, which is included herein. +Changes in Internal Controls over Financial Reporting +There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2023/0000950170-24-043875/rp_note.txt b/raw/filings/0000008146/2023/0000950170-24-043875/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2023/0000950170-24-043875/rpt_disclosure.txt b/raw/filings/0000008146/2023/0000950170-24-043875/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b2cf0302ec8fb5062d914980e52ff7f3aba7fec7 --- /dev/null +++ b/raw/filings/0000008146/2023/0000950170-24-043875/rpt_disclosure.txt @@ -0,0 +1,4 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. In reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +No officer, director or nominee for director of the Company or any associate of any of the foregoing had during the period beginning on February 1, 2023 through the date of this proxy statement any material interest, direct or indirect, in any material transaction or any material proposed transaction in which the amount exceeds $120,000 and to which the Company was or is to be a party. +None of our non-employee directors have any substantial interest in any matter to be acted upon except with respect to the directors so nominated. None of our executive officers have any substantial interest in any matter to be acted upon other than Proposals 1 and 2. \ No newline at end of file diff --git a/raw/filings/0000008146/2024/0000950170-25-054163/filing.txt b/raw/filings/0000008146/2024/0000950170-25-054163/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..c97d68043f368aa71d01fd74c7da854dda31e18f --- /dev/null +++ b/raw/filings/0000008146/2024/0000950170-25-054163/filing.txt @@ -0,0 +1,3879 @@ +10-K +0000008146 FY false http://fasb.org/us-gaap/2024#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2024#AccruedLiabilitiesCurrent 2027-01-31 2027-01-31 http://fasb.org/us-gaap/2024#OtherComprehensiveIncomeLossForeignCurrencyTransactionAndTranslationAdjustmentNetOfTax http://www.astronova.com/20250131#PresidentAndChiefExecutiveOfficerMember http://fasb.org/us-gaap/2024#CostOfRevenue 0000008146 us-gaap:RevolvingCreditFacilityMember alot:ThirdAmendmentCreditAgreementMember alot:BankOfAmericaMember us-gaap:SubsequentEventMember 2025-02-01 0000008146 alot:RevisedEstimateMember alot:MtexNewSolutionsSAMember 2024-05-06 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember us-gaap:PublicUtilitiesInventorySuppliesMember 2024-02-01 2025-01-31 0000008146 alot:CustomerMember alot:TwoVendorsMember us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember 2024-02-01 2025-01-31 0000008146 us-gaap:PublicUtilitiesInventorySuppliesMember 2024-02-01 2025-01-31 0000008146 us-gaap:RetainedEarningsMember 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MaximumMember us-gaap:EurodollarMember 2024-02-01 2025-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2022-02-01 2023-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2022-02-01 2023-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2025-01-31 0000008146 alot:MtexNewSolutionsSAMember 2024-05-06 0000008146 2024-02-01 2025-01-31 0000008146 alot:MtexNewSolutionsSAMember srt:MaximumMember 2024-05-06 2024-05-06 0000008146 alot:ProductIdentificationMember alot:MtexNewSolutionsSAMember 2024-11-03 2025-01-31 0000008146 alot:TermA2LoanDueAugustFourthTwoThousandAndTwentySevenMember currency:EUR 2024-02-01 2025-01-31 0000008146 alot:HardwareProductsMember us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2024-02-01 2025-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2025-01-31 0000008146 us-gaap:CommonStockMember 2023-02-01 2024-01-31 0000008146 alot:EquipmentLoanDueJanuaryTwentyThirdTwoThousandTwentyNineMember 2023-02-01 2024-01-31 0000008146 2023-02-01 2024-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember us-gaap:SecuredOvernightFinancingRateSofrMember 2024-02-01 2025-01-31 0000008146 us-gaap:CommonStockMember 2022-02-01 2023-01-31 0000008146 alot:OthersCountriesMember 2023-02-01 2024-01-31 0000008146 alot:MtexEuroTermLoanDueDecemberTwentyOneTwothousandAndThirtyThreeMember 2025-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2018-01-31 0000008146 country:CA 2022-02-01 2023-01-31 0000008146 alot:FacilityExitAndOtherRestructuringCostsMember 2023-02-01 2024-01-31 0000008146 alot:RuggedInformationTechnologyEquipmentCorporationMember us-gaap:CustomerContractsMember 2024-01-31 0000008146 alot:PreliminaryEstimateMember alot:MtexNewSolutionsSAMember 2024-05-06 2024-05-06 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember 2025-01-31 0000008146 alot:TaxCreditsCarryForwardsMember 2025-01-31 0000008146 alot:HardwareProductsMember us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2023-02-01 2024-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember alot:RoyaltyPaymentsDueYearFourMember 2025-01-31 0000008146 alot:TermATwoLoanMember 2024-05-06 2024-05-06 0000008146 srt:AsiaMember 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:ThirdAmendmentCreditAgreementMember alot:BankOfAmericaMember 2025-01-31 0000008146 us-gaap:EmployeeSeveranceMember us-gaap:ResearchAndDevelopmentExpenseMember 2023-02-01 2024-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2022-02-01 2023-01-31 0000008146 us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember srt:MaximumMember 2025-01-31 0000008146 alot:FacilityExitAndOtherRestructuringCostsMember us-gaap:SellingAndMarketingExpenseMember 2023-02-01 2024-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember us-gaap:CustomerContractsMember 2024-01-31 0000008146 alot:TrojanlabelApSMember alot:DistributorRelationsMember 2025-01-31 0000008146 us-gaap:RetainedEarningsMember 2024-02-01 2025-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2025-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2023-02-01 2024-01-31 0000008146 srt:ScenarioForecastMember alot:BankOfAmericaMember alot:TermLoanMember 2024-11-03 2027-04-30 0000008146 alot:OtherCountriesMember 2024-02-01 2025-01-31 0000008146 us-gaap:SoftwareDevelopmentMember alot:MtexNewSolutionsSAMember 2025-01-31 0000008146 alot:MtexEuroTermLoanDueDecemberTwentyOneTwothousandAndThirtyThreeMember 2024-02-01 2025-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MaximumMember 2024-02-01 2025-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember us-gaap:PublicUtilitiesInventorySuppliesMember 2022-02-01 2023-01-31 0000008146 alot:MtexNewSolutionsSAMember 2024-05-04 2024-05-04 0000008146 us-gaap:ForeignExchangeMember 2022-02-01 2023-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2023-02-01 2024-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2022-01-31 0000008146 alot:TermLoanMember 2025-01-31 0000008146 alot:HardwareProductsMember us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2024-02-01 2025-01-31 0000008146 2023-01-31 0000008146 alot:TwoThousandAndTwentyTwoEmployeeStockPurchasePlanMember 2024-02-01 2025-01-31 0000008146 2025-04-09 0000008146 srt:EuropeMember 2025-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2018-01-31 2018-01-31 0000008146 us-gaap:SellingAndMarketingExpenseMember 2023-02-01 2024-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2022-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:ThirdAmendmentCreditAgreementMember alot:BankOfAmericaMember 2024-05-06 2024-05-06 0000008146 us-gaap:ComputerSoftwareIntangibleAssetMember alot:MtexNewSolutionsSAMember 2024-05-06 2024-05-06 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2025-01-31 0000008146 alot:ThirdAmendmentCreditAgreementMember alot:TermATwoLoanMember alot:BankOfAmericaMember 2024-11-02 2024-11-02 0000008146 us-gaap:AllowanceForCreditLossMember 2024-01-31 0000008146 alot:RangeFourMember 2025-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2024-01-31 0000008146 alot:ProductIdentificationMember 2023-02-01 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2023-02-01 2024-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2024-02-01 2025-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2024-02-01 2025-01-31 0000008146 srt:EuropeMember 2022-02-01 2023-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2024-01-31 0000008146 alot:CustomerMember alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember 2023-02-01 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember us-gaap:CustomerRelationshipsMember 2022-08-04 2022-08-04 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2024-02-01 2025-01-31 0000008146 alot:MtexNewSolutionsSAMember alot:MeasurementPeriodAdjustmentMember 2024-05-06 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2024-01-31 0000008146 alot:AerospaceCustomerMember 2023-02-01 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember srt:MaximumMember us-gaap:EurodollarMember 2025-03-20 2025-03-20 0000008146 alot:ProductRetrofitProgramMember 2023-02-01 2024-01-31 0000008146 alot:BancOfAmericaLeasingCapitalLlcMember alot:EquipmentLoanAgreementMember 2024-01-01 2024-01-31 0000008146 alot:ServiceAndOtherMember 2022-02-01 2023-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember alot:MtexNewSolutionsSAMember 2024-02-01 2025-01-31 0000008146 alot:ProductIdentificationMember alot:MtexNewSolutionsSAMember 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2024-02-01 2025-01-31 0000008146 alot:OthersCountriesMember 2024-02-01 2025-01-31 0000008146 2025-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember alot:RoyaltyPaymentsDueYearFiveMember 2025-01-31 0000008146 alot:MtexEuroGovernmentGrantTermLoanDueJanuaryTwoThousandAndTwentySevenMember 2025-01-31 0000008146 us-gaap:AccountingStandardsUpdate202307Member 2025-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2025-01-31 0000008146 us-gaap:ProductAndServiceOtherMember us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember 2023-02-01 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember us-gaap:MeasurementInputDiscountRateMember 2022-08-04 0000008146 srt:AsiaMember 2024-02-01 2025-01-31 0000008146 alot:EquipmentLoanDueJanuaryTwentyThirdTwoThousandTwentyNineMember 2024-02-01 2025-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-01-31 0000008146 us-gaap:DomesticCountryMember 2023-02-01 2024-01-31 0000008146 us-gaap:RetainedEarningsMember 2023-02-01 2024-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2023-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:HardwareProductsMember alot:TestAndMeasurementMember 2022-02-01 2023-01-31 0000008146 alot:AerospaceCustomerMember 2022-02-01 2023-01-31 0000008146 country:CA 2025-01-31 0000008146 alot:TermA2LoanDueAugustFourthTwoThousandAndTwentySevenMember currency:EUR 2025-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2023-01-31 0000008146 alot:AerospaceCustomerMember 2022-12-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2022-01-31 0000008146 alot:MTEXTermLoanMember alot:CaixaCentralDeCreditoAgricolaMutuoMember 2024-05-06 2024-05-06 0000008146 alot:MtexEuroTermLoanDueDecemberTwentyOneTwothousandAndThirtyThreeMember 2023-02-01 2024-01-31 0000008146 us-gaap:ProductAndServiceOtherMember us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2023-02-01 2024-01-31 0000008146 alot:MtexNewSolutionsSAMember alot:MeasurementInputRoyaltyRateMember 2024-05-06 0000008146 us-gaap:MeasurementInputDiscountRateMember alot:MtexNewSolutionsSAMember 2024-05-06 0000008146 us-gaap:CommonStockMember 2022-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember us-gaap:ProductAndServiceOtherMember 2024-02-01 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2023-02-01 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember srt:MaximumMember us-gaap:SecuredOvernightFinancingRateSofrMember 2025-03-20 2025-03-20 0000008146 alot:RangeFiveMember 2024-02-01 2025-01-31 0000008146 us-gaap:MachineryAndEquipmentMember srt:MaximumMember 2025-01-31 0000008146 alot:RFAIMember 2024-02-01 2025-01-31 0000008146 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2025-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2024-01-31 0000008146 alot:ServiceAndOtherMember 2024-02-01 2025-01-31 0000008146 us-gaap:PublicUtilitiesInventorySuppliesMember 2023-02-01 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember us-gaap:TrademarksMember 2025-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2022-01-31 0000008146 alot:ProductIdentificationMember 2024-02-01 2025-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember srt:MaximumMember 2023-06-06 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember us-gaap:EmployeeSeveranceMember 2023-02-01 2024-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2024-02-01 2025-01-31 0000008146 alot:TestAndMeasurementMember 2024-02-01 2025-01-31 0000008146 us-gaap:ProductAndServiceOtherMember us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2022-02-01 2023-01-31 0000008146 srt:EuropeMember 2024-01-31 0000008146 us-gaap:EmployeeSeveranceMember us-gaap:CostOfSalesMember 2023-02-01 2024-01-31 0000008146 us-gaap:MeasurementInputDiscountRateMember alot:MtexNewSolutionsSAMember 2025-01-31 0000008146 alot:RestrictedStockAwardMember 2024-06-11 2024-06-11 0000008146 alot:RangeFiveMember 2025-01-31 0000008146 2024-08-03 0000008146 alot:BancOfAmericaLeasingCapitalLlcMember alot:EquipmentLoanAgreementMember 2024-01-31 0000008146 alot:ProductIdentificationMember 2025-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2024-02-01 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember 2025-01-31 0000008146 alot:BancOfAmericaLeasingCapitalLlcMember alot:EquipmentLoanAgreementMember 2024-02-01 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember 2024-02-01 2025-01-31 0000008146 us-gaap:CommonStockMember 2024-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2023-02-01 2024-01-31 0000008146 alot:ProductIdentificationSegmentRestructuringPlanMember 2023-02-01 2024-01-31 0000008146 alot:MTEXGovernmentGrantsTermLoanMember 2025-01-31 0000008146 alot:TestAndMeasurementMember 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember us-gaap:TrademarksMember 2024-01-31 0000008146 alot:MTEXRestructuringPlanMember alot:ProductIdentificationMember 2024-02-01 2025-01-31 0000008146 us-gaap:ResearchAndDevelopmentExpenseMember 2023-02-01 2024-01-31 0000008146 alot:InventoryWriteOffMember 2023-02-01 2024-01-31 0000008146 us-gaap:PerformanceSharesMember alot:TwoThousandEighteenEquityIncentivePlanMember 2025-01-31 0000008146 us-gaap:SubsequentEventMember 2025-04-14 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember srt:MinimumMember 2023-06-06 0000008146 alot:RevisedEstimateMember alot:MtexNewSolutionsSAMember 2024-05-06 2024-05-06 0000008146 alot:TermATwoLoanMember srt:ScenarioForecastMember alot:BankOfAmericaMember 2024-11-03 2027-04-30 0000008146 us-gaap:PublicUtilitiesInventorySuppliesMember 2022-02-01 2023-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2025-01-31 0000008146 country:US 2025-01-31 0000008146 us-gaap:SubsequentEventMember 2025-03-21 2025-04-14 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember alot:MeasurementInputRoyaltyRateMember 2022-08-04 0000008146 us-gaap:RestrictedStockUnitsRSUMember 2024-02-01 2025-01-31 0000008146 us-gaap:MachineryAndEquipmentMember srt:MinimumMember 2025-01-31 0000008146 alot:BuildingAndLeaseholdImprovementsMember srt:MinimumMember 2025-01-31 0000008146 alot:BeforeAmendmentToTheCreditAgreementMember alot:BankOfAmericaMember 2024-05-06 0000008146 alot:ComputerEquipmentAndSoftwareMember srt:MinimumMember 2025-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2023-01-31 0000008146 alot:MtexNewSolutionsSAMember 2025-01-31 0000008146 alot:ProductIdentificationMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2025-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2024-01-31 0000008146 us-gaap:EmployeeStockOptionMember 2025-01-31 0000008146 alot:TwoThousandAndTwentyTwoEmployeeStockPurchasePlanMember 2023-02-01 2024-01-31 0000008146 country:CA 2024-02-01 2025-01-31 0000008146 alot:HardwareProductsMember 2024-02-01 2025-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2023-02-01 2024-01-31 0000008146 alot:RestrictedStockAwardMember 2024-02-01 2025-01-31 0000008146 srt:MinimumMember alot:AirborneProductMember 2024-02-01 2025-01-31 0000008146 alot:TrojanlabelApSMember alot:DistributorRelationsMember 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember srt:MaximumMember 2025-03-20 2025-03-20 0000008146 us-gaap:AdditionalPaidInCapitalMember 2024-01-31 0000008146 alot:ProductRetrofitProgramMember 2023-10-29 2024-01-31 0000008146 alot:TwoThousandSevenEquityIncentivePlanMember 2025-01-31 0000008146 srt:EuropeMember 2023-02-01 2024-01-31 0000008146 alot:MtexNewSolutionsSAMember alot:MeasurementPeriodAdjustmentMember 2024-05-06 2024-05-06 0000008146 us-gaap:ForeignExchangeMember 2023-02-01 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember alot:HardwareProductsMember 2023-02-01 2024-01-31 0000008146 alot:ProductRetrofitProgramMember 2024-01-31 0000008146 us-gaap:CostOfSalesMember alot:InventoryWriteOffMember 2023-02-01 2024-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember 2024-02-01 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MaximumMember us-gaap:SecuredOvernightFinancingRateSofrMember 2024-02-01 2025-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember us-gaap:PublicUtilitiesInventorySuppliesMember 2024-02-01 2025-01-31 0000008146 us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember srt:MaximumMember 2024-01-31 0000008146 country:CA 2023-02-01 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember us-gaap:CustomerContractsMember 2025-01-31 0000008146 alot:CentralAndSouthAmericaMember 2024-02-01 2025-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2024-02-01 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BeforeAmendmentToTheCreditAgreementMember alot:BankOfAmericaMember 2024-05-06 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2024-02-01 2025-01-31 0000008146 us-gaap:EmployeeSeveranceMember 2023-02-01 2024-01-31 0000008146 us-gaap:TrademarksAndTradeNamesMember alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-08-04 2022-08-04 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:FederalFundsEffectiveSwapRateMember 2024-02-01 2025-01-31 0000008146 alot:EquipmentLoanDueJanuaryTwentyThirdTwoThousandTwentyNineMember 2024-01-31 0000008146 alot:FiscalYearTwoThousandTwentySevenMember alot:MtexNewSolutionsSAMember 2024-05-06 0000008146 us-gaap:RetainedEarningsMember 2022-01-31 0000008146 alot:AirborneProductMember srt:MaximumMember 2024-02-01 2025-01-31 0000008146 us-gaap:DesignatedAsHedgingInstrumentMember us-gaap:NetInvestmentHedgingMember alot:EuroDenominatedDebtMember 2024-02-01 2025-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2024-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember 2025-01-31 0000008146 country:US 2024-02-01 2025-01-31 0000008146 us-gaap:AdditionalPaidInCapitalMember 2022-02-01 2023-01-31 0000008146 us-gaap:CommonStockMember 2025-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2025-01-31 0000008146 us-gaap:SubsequentEventMember 2025-03-20 0000008146 alot:EmployeeStockPurchasePlanMember 2024-02-01 2025-01-31 0000008146 alot:EquipmentLoanDueJanuaryTwentyThirdTwoThousandTwentyNineMember 2025-01-31 0000008146 alot:TermLoanMember 2024-05-06 2024-05-06 0000008146 alot:SIFIDEMember 2024-02-01 2025-01-31 0000008146 alot:MtexNewSolutionsSAMember alot:FiscalYearTwoThousandTwentySixMember 2024-05-06 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2024-01-31 0000008146 2022-08-04 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember 2025-03-20 2025-03-20 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember us-gaap:ProductAndServiceOtherMember 2022-02-01 2023-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember alot:RoyaltyPaymentsDueYearTwoMember 2025-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember us-gaap:PublicUtilitiesInventorySuppliesMember 2022-02-01 2023-01-31 0000008146 alot:RangeFourMember 2024-02-01 2025-01-31 0000008146 alot:RuggedInformationTechnologyEquipmentCorporationMember us-gaap:CustomerContractsMember 2025-01-31 0000008146 srt:MinimumMember us-gaap:LandImprovementsMember 2025-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2022-02-01 2023-01-31 0000008146 alot:TestAndMeasurementMember 2022-02-01 2023-01-31 0000008146 alot:CustomerMember alot:TwoVendorsMember us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember 2023-02-01 2024-01-31 0000008146 us-gaap:TrademarksMember alot:MtexNewSolutionsSAMember 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember 2025-03-20 0000008146 us-gaap:EmployeeSeveranceMember us-gaap:SellingAndMarketingExpenseMember 2023-02-01 2024-01-31 0000008146 2024-01-31 0000008146 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember us-gaap:EurodollarMember 2024-02-01 2025-01-31 0000008146 alot:CentralAndSouthAmericaMember 2023-02-01 2024-01-31 0000008146 alot:TestAndMeasurementMember 2025-01-31 0000008146 2024-11-03 2025-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2023-02-01 2024-01-31 0000008146 alot:OthersCountriesMember 2022-02-01 2023-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2023-01-31 0000008146 alot:CustomerMember us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember 2022-02-01 2023-01-31 0000008146 us-gaap:OperatingSegmentsMember 2023-02-01 2024-01-31 0000008146 srt:EuropeMember 2024-02-01 2025-01-31 0000008146 us-gaap:RetainedEarningsMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2022-02-01 2023-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2022-02-01 2023-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2023-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2022-01-31 0000008146 alot:AerospaceCustomerMember 2025-01-31 0000008146 alot:ProductIdentificationMember us-gaap:OperatingSegmentsMember 2023-02-01 2024-01-31 0000008146 alot:ProductRetrofitProgramMember 2023-04-30 2023-07-29 0000008146 alot:TaxCreditsCarryForwardsMember 2024-02-01 2025-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2023-02-01 2024-01-31 0000008146 alot:TermLoanDueAugustFourthTwoThousandAndTwentySevenMember 2024-02-01 2025-01-31 0000008146 us-gaap:RestrictedStockMember alot:TwoThousandFifteenEquityIncentivePlanMember 2025-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2023-02-01 2024-01-31 0000008146 srt:AsiaMember 2022-02-01 2023-01-31 0000008146 alot:TermA2LoanDueAugustFourthTwoThousandAndTwentySevenMember currency:EUR 2023-02-01 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2024-02-01 2025-01-31 0000008146 alot:CentralAndSouthAmericaMember 2022-02-01 2023-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember us-gaap:SubsequentEventMember 2025-03-20 2025-03-20 0000008146 alot:MtexEuroGovernmentGrantTermLoanDueJanuaryTwoThousandAndTwentySevenMember 2024-02-01 2025-01-31 0000008146 alot:MtexNewSolutionsSAMember srt:MaximumMember 2024-05-06 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:SecuredOvernightFinancingRateSofrMember 2024-02-01 2025-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember us-gaap:CustomerContractsMember 2025-01-31 0000008146 us-gaap:CommonStockMember 2024-02-01 2025-01-31 0000008146 alot:MtexNewSolutionsSAMember us-gaap:CustomerRelationshipsMember 2024-05-06 2024-05-06 0000008146 srt:AsiaMember 2023-02-01 2024-01-31 0000008146 alot:ServiceAndOtherMember 2023-02-01 2024-01-31 0000008146 alot:FiscalYearTwoThousandTwentyFiveMember alot:MtexNewSolutionsSAMember 2024-05-06 0000008146 alot:BankOfAmericaMember alot:AdditionalTermLoanAvailedMember 2024-05-06 0000008146 us-gaap:AdditionalPaidInCapitalMember 2024-02-01 2025-01-31 0000008146 us-gaap:CorporateNonSegmentMember 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember us-gaap:SubsequentEventMember us-gaap:EurodollarMember 2025-03-20 2025-03-20 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember alot:MeasurementInputCustomerAttritionRateMember 2022-08-04 0000008146 country:US 2023-02-01 2024-01-31 0000008146 us-gaap:OtherExpenseMember us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2024-02-01 2025-01-31 0000008146 us-gaap:RestrictedStockUnitsRSUMember alot:TwoThousandEighteenEquityIncentivePlanMember 2025-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2023-02-01 2024-01-31 0000008146 alot:ComputerEquipmentAndSoftwareMember srt:MaximumMember 2025-01-31 0000008146 alot:NewHoneywellAssetPurchaseAndLicenseAgreementMember 2024-02-01 2025-01-31 0000008146 us-gaap:CostOfSalesMember 2023-02-01 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-08-04 0000008146 us-gaap:AllowanceForCreditLossMember 2023-02-01 2024-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2022-02-01 2023-01-31 0000008146 country:CA 2024-01-31 0000008146 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2024-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-08-04 2022-08-04 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2024-02-01 2025-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-02-01 2023-01-31 0000008146 alot:TestAndMeasurementMember 2023-02-01 2024-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2025-01-31 0000008146 us-gaap:RetainedEarningsMember 2023-01-31 0000008146 alot:RestrictedStockAwardPreferredStockUnitAndRestrictedStockUnitMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember 2022-02-01 2023-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember alot:RoyaltyPaymentsDueInNextTwelveMonthsMember 2025-01-31 0000008146 alot:AerospaceCustomerMember 2024-02-01 2025-01-31 0000008146 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2022-01-31 0000008146 us-gaap:GeneralAndAdministrativeExpenseMember 2023-02-01 2024-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2023-01-31 0000008146 us-gaap:RetainedEarningsMember 2024-01-31 0000008146 alot:MTEXTermLoanMember alot:CaixaCentralDeCreditoAgricolaMutuoMember 2024-05-06 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2025-01-31 0000008146 us-gaap:OtherExpenseMember us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2023-02-01 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember 2024-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:TestAndMeasurementMember us-gaap:PublicUtilitiesInventorySuppliesMember 2023-02-01 2024-01-31 0000008146 2022-02-01 2023-01-31 0000008146 alot:OtherCountriesMember 2022-02-01 2023-01-31 0000008146 us-gaap:CommonStockMember 2023-01-31 0000008146 alot:ProductIdentificationMember alot:HardwareProductsMember us-gaap:OperatingSegmentsMember 2022-02-01 2023-01-31 0000008146 alot:ProductIdentificationMember 2022-02-01 2023-01-31 0000008146 alot:MTEXTermLoanMember 2025-01-31 0000008146 alot:HoneywellAssetPurchaseAndLicenseAgreementMember alot:RoyaltyPaymentsDueYearThreeMember 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember alot:BankOfAmericaMember 2025-01-31 0000008146 alot:MTEXTermLoanMember alot:CaixaCentralDeCreditoAgricolaMutuoMember 2024-01-31 0000008146 alot:TwoThousandEighteenEquityIncentivePlanMember 2023-06-06 0000008146 alot:PreliminaryEstimateMember alot:MtexNewSolutionsSAMember 2024-05-06 0000008146 country:US 2022-02-01 2023-01-31 0000008146 us-gaap:LandImprovementsMember srt:MaximumMember 2025-01-31 0000008146 alot:MtexNewSolutionsSAMember us-gaap:CustomerContractsMember 2025-01-31 0000008146 alot:CustomerMember alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedTranslationAdjustmentMember 2023-02-01 2024-01-31 0000008146 alot:MtexNewSolutionsSAMember 2024-05-06 2024-05-06 0000008146 us-gaap:TrademarksAndTradeNamesMember alot:MtexNewSolutionsSAMember 2024-05-06 2024-05-06 0000008146 alot:BuildingAndLeaseholdImprovementsMember srt:MaximumMember 2025-01-31 0000008146 us-gaap:ForeignExchangeMember 2024-02-01 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember us-gaap:SecuredOvernightFinancingRateSofrMember 2025-03-20 2025-03-20 0000008146 us-gaap:OperatingSegmentsMember 2024-02-01 2025-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember 2022-02-01 2023-01-31 0000008146 alot:CustomerMember alot:TradeAccountsPayablesMember us-gaap:SupplierConcentrationRiskMember 2024-02-01 2025-01-31 0000008146 alot:AgreementWithAstroMachineForAssetAcquisitionsMember us-gaap:CustomerContractsMember 2024-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2025-01-31 0000008146 us-gaap:TreasuryStockCommonMember 2022-02-01 2023-01-31 0000008146 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2024-02-01 2025-01-31 0000008146 alot:HardwareProductsMember 2022-02-01 2023-01-31 0000008146 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2024-01-31 0000008146 2022-01-31 0000008146 alot:TwoThousandAndTwentyTwoEmployeeStockPurchasePlanMember 2025-01-31 0000008146 us-gaap:OperatingSegmentsMember alot:ProductIdentificationMember us-gaap:PublicUtilitiesInventorySuppliesMember 2023-02-01 2024-01-31 0000008146 alot:AdditionalForeignTaxCreditMember 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember us-gaap:SubsequentEventMember us-gaap:SecuredOvernightFinancingRateSofrMember 2025-03-20 2025-03-20 0000008146 alot:MtexNewSolutionsSAMember 2024-02-01 2025-01-31 0000008146 us-gaap:OperatingSegmentsMember us-gaap:ProductAndServiceOtherMember alot:TestAndMeasurementMember 2024-02-01 2025-01-31 0000008146 us-gaap:AllowanceForCreditLossMember 2024-02-01 2025-01-31 0000008146 us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember us-gaap:FederalFundsEffectiveSwapRateMember 2025-03-20 2025-03-20 0000008146 alot:HardwareProductsMember 2023-02-01 2024-01-31 0000008146 country:US 2024-01-31 0000008146 alot:OtherCountriesMember 2023-02-01 2024-01-31 utr:acre alot:ReportingUnit iso4217:EUR iso4217:USD xbrli:shares xbrli:pure utr:sqft xbrli:shares alot:Printer alot:Segment iso4217:USD alot:Customer +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 31 , 2025 +OR +☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from ____________ to ____________ +Commission file number 0-13200 +AstroNova, Inc. +(Exact name of registrant as specified in its charter) +Rhode Island +05-0318215 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer Identification No.) +600 East Greenwich Avenue , +West Warwick , Rhode Island +02893 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: ( 401 ) 828-4000 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading +Symbol +Name of each exchange +on which registered +Common Stock , $.05 Par Value +ALOT +NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☒ +Non-accelerated filer +☐ +S Smaller Reporting Company +☒ +Emerging growth company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No +The aggregate market value of the registrant’s voting common equity held by non-affiliates at August 3, 2024, was approximately $ 105,528,000 based on the closing price on the Nasdaq Global Market on that date. The registrant has no non-voting common shares. +As of April 9, 2025, there were 7,574,834 shares of Common Stock (par value $0.05 per share) of the registrant outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for the 2025 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. +Auditor Firm Id: +PCAOB ID No. 392 +Auditor Name: +Wolf & Company, P.C. +Auditor Location: +Boston, MA +ASTRONOVA, INC. +FORM 10-K +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +2 +Item 1A. +Risk Factors +7 +Item 1B. +Unresolved Staff Comments +18 +Item 1C. +Cybersecurity +18 +Item 2. +Properties +Item 3. +Legal Proceedings +19 +Item 4. +Mine Safety Disclosures +19 +PART II +Item 5. +Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity +Securities +20 +Item 6. +Reserved +20 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +21 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +31 +Item 8. +Financial Statements and Supplementary Data +32 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +32 +Item 9A. +Controls and Procedures +32 +Item 9B. +Other Information +33 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +33 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +34 +Item 11. +Executive Compensation +34 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +34 +Item 13. +Certain Relationships, Related Transactions and Director Independence +34 +Item 14. +Principal Accountant Fees and Services +34 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +35 +Item 16. +Form 10-K Summary +35 +ASTRONOVA, INC. +Forward-Looking Statements +The information included in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact but rather reflect our current expectations concerning future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “continues,” “may,” “will,” and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties, and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in this Annual Report on Form 10-K under “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K. +1 +PART I +Item 1 . Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +• +We design, develop, manufacture, and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, aviation, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging, and transportation. +Our products are distributed worldwide through our own sales force, authorized dealers, and independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel ® , TrojanLabel ® , and GetLabels ™ brand names. The T&M segment includes our line of aerospace printers, Ethernet networking products and test and measurement data acquisition systems sold under the AstroNova ® brand name. Refer to Note 17, “Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +On May 4, 2024, we entered into an agreement to acquire MTEX New Solution, S.A. (“MTEX”), a Portugal-based manufacturer of digital printing equipment that addresses a wide variety of markets and applications including textiles, packaging, labeling, apparel, footwear and more. We reported MTEX as a part of our PI segment as of May 6, 2024, the closing date of this acquisition. On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers and related accessories, tabbers, conveyors, and envelope feeders. Astro Machine is reported as a part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisitions,” in our audited consolidated financial statements included elsewhere in this report for further details on these acquisitions. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included elsewhere in this Annual Report on Form 10-K. +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets globally. +PI products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers and light commercial label printers, direct-to-package printers, high-volume presses, and specialty original equipment manufacturer (“OEM”) printing systems. The PI segment also offers a wide range of label, tag and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. PI products sold under our May 2024 MTEX acquisition are mid-to-high volume direct-to-package printers and label printers primarily targeting the industrial and commercial printing segments. PI products sold under Astro Machine which was acquired on August 4, 2022, also include a variety of label printers, envelope and packaging printing, and related processing and handling equipment. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed, stored and presented in various visual formats. +Product Identification +Our PI segment includes QuickLabel, TrojanLabel, GetLabels, Astro Machine and MTEX and offers digital product marking and identification solutions for brand owners, small print shops and OEMs with products sold through channel partners or directly to end users. +2 +The MTEX acquisition enhances our offerings in the commercial printing segment with hardware, software, and supplies that support efficient, flexible, and cost-saving digital printing primarily targeting mid-to-high volume markets. Customers benefit from on-demand label or packaging printing at an efficient cost, accommodating the needs of customers requiring high volumes of medium production runs. +In the brand-owner segment, our one-stop shop strategy aims to provide brand-owners and print shops with label printers, application specific label media and matched inks, as well as label management software, which is optimized for excellent print quality when combined with GetLabels branded tags and label supplies. Our wide range of printers from small tabletop printers to large industrial printers allows us to address a broad range of applications in this segment. +Astro Machine is a U.S.-based manufacturing and technology company providing inkjet printers, conveyors, tabbers, software, and various components to the mail and addressing markets, as well as the label and packaging markets. Astro Machine serves OEM and value-added resellers that have a deep understanding of these markets and loyal customer bases. +Our recently acquired MTEX product portfolio enabled us to further expand into the mid-market segment by providing label and package printing solutions for higher volume brand owners and commercial printers. Additionally, we were able to enter the high-volume market with certain MTEX product offerings. This segment invests in heavier duty printing equipment with a focus on reliability and optimization of operating costs to maximize profitability. We believe that the next generation print engine technology that we acquired from MTEX will enhance MTEX and other PI offerings. Additionally, the TRAX Machine Monitoring software integrated into all of our MTEX products improves the customer experience by maximizing machine uptime and ensures usage of only authentic AstroNova approved consumables. +The PI segment also provides worldwide training and support as well as develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly or over networked systems. +Test & Measurement +Products sold under our T&M segment are designed and manufactured for airborne printing and networking solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace-grade thermal paper. Our data acquisition systems are used in research and development; flight testing; missile/rocket telemetry; production monitoring; and power and maintenance applications. These products are sold to customers in various industries, including aerospace and defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Our airborne printers, which include our flagship ToughWriter ® series, are used in the flight decks of military transport, commercial transport, and business aircraft to print hard copies of data. This enhances flight safety and reduces pilot workload by providing ready access to many types of critical flight-specific information required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, notice to airmen ("NOTAMs"), performance data, passenger data, and air traffic control communications. ToughSwitch ® Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. Our ToughWriter airborne printers and ToughSwitch Ethernet switches are ruggedized to comply with rigorous military and commercial flight-worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter printers for various aircraft made by Airbus, Boeing, Embraer, Lockheed, Gulfstream, and others. In addition to our ToughWriter products, we furnish other acquired flight deck printer products, including the TP/NP series, the RTP80 series and the PTA-45B series of airborne printers. The PTA-45B is subject to an Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which we acquired an exclusive perpetual worldwide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing B737 and Airbus A320 aircraft. Over time we expect customers to replace the PTA-45B and other acquired printer product lines with the AstroNova-designed ToughWriter products because of its numerous technical features, functional advantages and significant weight savings. Currently, almost half of the airborne printers we sell are ToughWriter branded, and we expect the percentage of ToughWriter products to continue to grow over the next several years, and notably in fiscal 2026. +Other T&M products include the TMX ® and TMX-200 all-in-one high-speed data acquisition systems for applications requiring high channel counts and acquisition rates; the Daxus ® DXS-100 distributed data acquisition platform; the SmartCorder ® DDX-100, a portable all-in-one data acquisition system for R&D facility and field testing; and the Everest ® EV-5000 and RC-300 digital strip chart recording systems used mainly in aerospace and defense applications. The Daxus DXS-100 can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +3 +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data; (2) conditioning the data; (3) displaying or printing the data on hard copy, visual displays or electronic storage media; and (4) analyzing the data. To support our data visualization technology, we maintain technological core competencies and trade secret know-how concerning the subject matter particular to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling, and airworthiness design. +Intellectual Property +We rely on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions to protect our technology and brand names. While we consider our intellectual property to be important to the operation of our business, other than our Honeywell license agreement, we do not believe that any existing patent, trademark, or other intellectual property right is of such significance that its loss or termination would have a material adverse effect on our business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many sub-assemblies and parts in-house, including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts that are not manufactured in-house are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We also purchase certain components, assembled products, and supplies used to manufacture or to be sold with our products, from single- or limited- source suppliers. Although we believe the majority of these sole or limited source components, assembled products, and supplies could be sourced elsewhere with appropriate changes in the design of our products, the required design changes might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past, we have made such advanced purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our existing network of manufacturing, sales and support facilities, during fiscal 2025, we sold our products to customers in approximately 100 countries. +We believe we are a market leader in tabletop digital color label printing technology in the specialty on-demand printing field, the market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose, portable, high-speed data acquisition systems. +We retain our leadership position in the markets we serve by virtue of our proprietary technology, product reputation, delivery, channels to market, technical assistance, and service to customers. The number of competitors we face in any given market varies by product line. Key competitive factors vary among our product lines but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our PI products are sold by direct field salespersons and independent dealers and representatives, while our T&M products are sold predominantly through independent representatives. In the United States, we have factory-trained direct-field salespeople located throughout the country specializing in PI products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Portugal, Singapore, and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize over 125 independent dealers and representatives selling and marketing our products in approximately 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +4 +Order Backlog +Our order backlog is predominantly but not exclusively for products that will be delivered within twelve months, and backlog scheduled for beyond twelve months is predominantly within the T&M segment. However, backlog varies regularly and is not a highly reliable predictive indicator of near-term future sales trends, primarily due to the frequent longer-term original equipment and supplies orders within the T&M segment. In the PI segment, we have multi-period (but typically not multi-year) blanket order arrangements with many customers for labels and other supplies. Printer hardware in the PI segment is typically shipped within a short period of time after orders are booked. Manufacturing production is designed to meet forecasted demand and built-to-order customer requirements. Backlog at January 31, 2025 and 2024 was $28.3 million and $31.4 million, respectively. +Government Regulation +We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our business, particularly with respect to our aircraft cockpit printer business which sells in a highly regulated industry. For example, material modifications to an airborne printer cannot be made without having progressed through an extensive series of product qualification and certification steps that are technically complicated, expensive to execute, typically slow the pace of product development in that industry and can constrain our ability to quickly respond to pricing fluctuations or disruptions to our supply chain for products. +Other applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, accounting and U.S. Securities and Exchange Commission (“SEC”) reporting, privacy, data protection, pricing, content, distribution, energy consumption, environmental regulation, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. +Our business outside of the U.S. exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. +Environmental Matters +We believe that we are in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment or otherwise relating to the protection of the environment. We have not experienced any material costs in connection with environmental compliance and do not believe that such compliance will have any material effect on our financial position, results of operations, cash flows, or competitive position. +Employees +As of January 31, 2025, we employed 441 full-time employees, including 72 employees from our MTEX acquisition. Of our full-time employees, 280 were in the United States, 143 were in Europe, 11 were in Canada, five were in Asia, and two were in Mexico. +Our employees are not represented by a labor union or covered by a collective bargaining agreement, except for employees in France, where local regulations generally require collective bargaining agreements. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments of the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other initiatives to improve overall engagement with our key employees. +Culture +We are deeply committed to, and invest substantial resources in, maintaining and improving a strong and definable company culture that shapes how we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +5 +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business in pursuit of continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure our business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand our customers’ changing needs and expectations. +Our objective is for these core values to guide our employees’ behavior and direct how we conduct our business. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities and are also demonstrated through teamwork, leadership, and everyday interactions. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the variable size of certain individual customer revenue transactions, which can cause fluctuations in revenue from quarter to quarter and which may be inconsistent with the underlying business or general economic trends. For example, in our T&M segment, government procurement and contracting practices can result in material fluctuations in our backlog and revenues. +Information about Our Executive Officers +The following sets forth certain information with respect to all executive officers of the Company as of April 15, 2025. All officers serve at the pleasure of the Board of Directors. +Name +Age +Position +Gregory A. Woods +66 +President, Chief Executive Officer and Director +Thomas D. DeByle +65 +Vice President, Chief Financial Officer and Treasurer +Stephen M. Petrarca +62 +Vice President - Operations +Michael J. Natalizia +61 +Vice President - Technology & Strategic Alliances, Chief Technology Officer +Tom W. Carll +58 +Vice President and General Manager - Aerospace +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. +Mr. DeByle was appointed Vice President, Chief Financial Officer, and Treasurer of the Company effective June 17, 2024. Prior to joining the Company, Mr. DeByle served as Chief Financial Officer for Plastic Industries, a manufacturer of blow molded, high-density polyethylene bottles for food, specialty beverage, dairy, health, wellness, household and industrial product markets, from October 2021 through the sale of the business to Altium Packaging in August 2022. Mr. DeByle also held the position of Sr. Vice President and Chief Financial Officer of NN, Inc., a global precision component manufacturer with extensive experience in machining, stamping, and precious metal plating from September 2019 to June 2021, and Vice President, Chief Financial Officer and Treasurer of Standex International Corporation, a global multi-industry manufacturer in five broad business segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions from March 2008 through September 2019. Additionally, Mr. DeByle currently serves on the Board of Directors of Chase Corporation and Good Foods Group, LLC. +Mr. Petrarca was appointed Vice President - Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Natalizia was appointed Vice President - Technology & Strategic Alliances and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia had held the position of Director of Product Development of the Company since 2005. +Mr. Carll joined the Company in 1989 and has held the position of Vice President and General Manager - Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product group and, from its formation in 2004, the AstroNova Aerospace business group. +6 +Code of Ethics +We have adopted a Code of Conduct which applies to all of our directors, officers and employees of the Company, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on our website, (www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” We intend to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, principal accounting officer, or persons performing similar functions by posting such information on our website. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission ("SEC"). These filings are also accessible on the SEC’s website at http://www.sec.gov. +Item 1A. R isk Factors +The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business operations. +Business and Industry Risks: +Our operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated. +Any decline in our customers’ markets or their general economic conditions would likely result in a reduction in demand for our products. For example, the late 2024 strike at Boeing has negatively affected our volume of airborne printer deliveries. In addition, the impact of air-safety incidents or of another viral pandemic or other widespread health emergencies could negatively impact our business in the future. Production or supply chain issues experienced by any aircraft manufacturer may cause aircraft deliveries to grow more slowly or decline, which would reduce demand for our products, and in turn harm our results of operations, financial position and cash flows. +Our future revenue growth depends on our ability to develop and introduce new products and services on a timely basis and achieve market acceptance of these new products and services. +The markets for our products are characterized by evolving technologies which in turn affect our product introduction cycles. Our future success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate our competitors’ development of new products, and maintain high levels of product quality and reliability. We spend a significant amount of time and effort on the development of our airborne and color printer products as well as our data acquisition and recorder products. Failure to meet our customers’ changing business needs or to further develop any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results. +As we introduce new or enhanced products, we must also successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. Additionally, when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or our plans +7 +for future support of existing products may cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results. +Operational and Business Strategy Risks: +We are dependent upon contract manufacturers for some of our products. If these manufacturers do not meet our requirements, either in volume or quality, then we could be materially harmed. +We subcontract the manufacturing and assembly of certain of our products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including: +• +Disruptions in the global supply chain; +• +Limited control over the manufacturing process; +• +Potential absence of adequate production capacity; +• +Potential delays in production lead times; +• +Unavailability of certain process technologies; +• +Reduced control over delivery schedules, manufacturing yields, quality and costs; and +• +Exposure to rapid unplanned cost increases that cannot be adequately recovered by customer price increases due to market competition or contractual constraints. +If one of our significant subcontractors becomes unable or unwilling to continue to manufacture or provide these products in required volumes, fails to meet our quality standards, or imposes rapid price increases that we cannot recover in the market, we will have to identify alternate qualified subcontractors, take over the manufacturing ourselves, or redesign our products to use components from other suppliers. Additional qualified subcontractors may not be available or may not be available on a timely or cost-competitive basis. Any interruption in the supply, increase in the cost of the products manufactured by a third-party subcontractor, or failure of a subcontractor to meet quality standards could have a material adverse effect on our business, operating results and financial condition. +For certain components, assembled products and supplies, we are dependent upon single or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed. +Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and supplies used in the manufacture of our products from a single source or limited supplier sources. If the supply of a key component, assembled products, or certain supplies were to be delayed or curtailed or, in the event a key manufacturing or sole supplier delays shipment of such components or assembled products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. Our business, results of operations and financial position could also be adversely affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source as well as incurring higher costs to obtain needed components. +Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply components, assembled products, or supplies in required volumes or at acceptable prices, we will have to identify and qualify acceptable replacements or redesign our products with different components. Alternative sources may not be available, or product redesign may not be feasible on a timely basis. For example, in fiscal 2023, we experienced increased difficulty in obtaining certain technology-based parts, components and supplies from the largest single supplier of our PI segment at stable or predictable prices. Additionally, we experienced repeated significant quality problems with that supplier. We have responded to these issues by increasing our inventories of those products to mitigate supply risk, negotiating quality related cost reimbursements, and in some cases, accelerating our development of PI products that rely on alternative suppliers. In fiscal 2024, we incurred $0.6 million of incremental expense relating to warranty services and implementation of corrective retrofits resulting from these issues. Any interruption in the supply of or increase in the cost of the components, assembled products and supplies provided by single or limited source suppliers could have a material adverse effect on our business, operating results, and financial condition. +We face significant competition, and our failure to compete successfully could adversely affect our results of operations and financial condition. +We operate in an environment of significant competition, especially in the markets in which we sell our PI printers and T&M data acquisition products. This competition is driven by rapid technological advances, evolving industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete based on technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the +8 +markets we currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products or services with features that could adversely affect the competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, our customers could seek alternative solutions from our competitors and we could lose market share, which could materially and adversely affect our business, results of operations and financial position. +Our profitability is dependent upon our ability to control our cost structure . +Our profitability is directly impacted by our levels of fixed and variable costs. We are continually reviewing our operations with a view towards reducing our cost structure, including but not limited to reducing our labor cost-to-revenue ratio, improving process and system efficiencies and outsourcing certain internal functions. In fiscal 2024, we engaged in restructuring actions to reduce our cost structure in our PI segment and we recently announced that we will implement another restructuring action focused on the PI segment in fiscal 2026. However, if these efforts to constrain the cost of our operations are inadequate to offset higher product and employee wage costs, our results of operations and financial position could be materially adversely affected. +Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement or the loss of certain licenses could prevent or restrict our ability to compete. +We rely on patents, trademarks, licenses, and proprietary knowledge and technology, both internally developed and acquired, in order to maintain a competitive advantage. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design technologies around the intellectual property protections or licenses that we currently own. The loss of our Honeywell license agreement could have a material adverse impact on our business. Operating outside the United States also exposes us to additional intellectual property risk. The laws and enforcement practices of certain jurisdictions in which we operate do not protect our intellectual property rights to the same extent as in the United States. Any diminution in our ability to defend against the unauthorized use of these rights and assets could have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement, which could result in significant costs and divert our management’s focus away from operations. +We have significant inventories on hand. +We maintain a significant amount of inventory, and as a result of recent supply chain disruptions and announced or anticipated price increases from suppliers and possibly from tariffs, we have further increased the amount of inventory we maintain on hand to ensure we are able to meet market demand for our products at a reasonable price. These increases have been concentrated in label printing machines and supplies sold by our PI business, as well as in electronic components and assemblies in our T&M business. We maintain allowances for slow-moving and obsolete inventory that we believe are adequate, but any significant unanticipated changes in future product demand or market conditions could have an impact on the value of inventory and adversely affect our business, operating results and financial condition. +We could incur liabilities as a result of installed product failures due to design or manufacturing defects. +We have incurred and could in the future incur additional liabilities because of product failures due to design or manufacturing defects. Our products may have defects despite our internal testing or testing by customers. These defects could result in, among other things, increased warranty provisions, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance, or damage to our reputation. We could be subject to material claims by customers and may incur substantial expenses to correct any product defects. While in the past, we have successfully obtained partial compensation from suppliers for their contribution to product quality issues, we may not be successful in such a recovery in the future, and these recoveries have not in the past and are not in the future likely to fully offset all of the financial impact on us. For example, in fiscal 2023, the quality of products obtained from one of the key suppliers to our PI segment declined and we were unable to detect latent defects in their products in a timely manner, which resulted in our incurring increased technical service and warranty expenses. We obtained partial compensation from that supplier, but this was insufficient to fully cover all of our costs related to this issue. We also believe we have experienced demand declines as a result of customers’ perceptions of the quality defects related to this supplier. In fiscal 2024, we continued to have quality and reliability issues in certain models of our PI printers as a result of faulty ink provided by one of our larger suppliers. During the second quarter of fiscal 2024, we initiated a program to retrofit all of the printers sold to our customers that were affected by the faulty ink at a total cost of $0.6 million. If we continue to experience product failures due to design or manufacturing defects, our business, results of operations and financial position could be materially and adversely affected. +In addition, through our acquisitions of Astro Machine and MTEX, we have assumed, and may in the future, assume liabilities related to products previously developed by an acquired company that may not have been subjected to adequate product development, testing and quality control processes, and may have unknown or undetected defects. Some types of defects may not be detected until the product is installed in a user environment. This may cause us to incur significant warranty, repair, or re-engineering costs. As such, it could also divert the attention of engineering personnel from product development efforts, which may result in increased costs and lower profitability. +9 +We could experience a significant disruption in, or a security breach of, our information technology system, which could harm our business and adversely affect our results of operations. +We rely on on-premise and cloud-based information technology systems, some of which are managed by or licensed from third parties, to support many critical aspects of our business, as well as to process, transmit, and store our own electronic proprietary or confidential information, and confidential information of customers, employees, suppliers, and others, including personally identifiable information, credit card data, and other proprietary, confidential information. These systems are vulnerable to damage, disruptions, and/or shutdowns due to attacks by cyber-criminals, data breaches, employee errors, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events, or other unforeseen events. These vulnerabilities could interfere with our operations, compromise our data processing capacity and the security of our information and that of our customers and suppliers, and expose us to liability, which could adversely impact our business and reputation. We actively manage these risks through various hardware and software-based techniques that we own, license, or otherwise procure from third parties under contract to safeguard our systems. We also own or procure data storage redundancy and disaster recovery capability from third parties. We have increased our investment in tools, techniques, and training that we believe will reduce our vulnerability to attacks by cybercriminals. However, due to the complexity of our systems, and especially the ever-increasing sophistication of cyber-criminals, there is no assurance that our efforts will be sufficient to prevent cyber-attacks, security breaches, or other potential exploitation of vulnerabilities or systems failures. In any such circumstance, our system redundancy and other disaster recovery planning may be ineffective or inadequate. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of them to date has led to an event that has had a material impact. However, in the future, such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our brand and reputation, all of which could adversely affect our business, operating results, and financial condition. +We maintain insurance for various cybersecurity risks to mitigate their possible impact. Due to the prevalence of claims in the market for cybersecurity insurance, the cost for that insurance has increased, and the underwriting criteria to obtain such insurance have become far more demanding. There is no assurance that we will be able to obtain such insurance in the future despite our substantial investments in cybersecurity. If we can do so, it may be at substantially higher costs. In addition, in response to these higher costs, we may choose to reduce the amount of insurance we maintain because our improvements in our cybersecurity profile have reduced our risk exposure relative to the increased cost of insurance. If our risk assessments prove incorrect and we have a loss that is not fully covered by insurance, our financial condition and results of operations could be materially negatively impacted. +We depend on our key employees and other highly qualified personnel and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees, as well as challenges with respect to the management of human capital resources, could compromise our future success and our business could be harmed. +Our future success depends upon our ability to attract and retain, through competitive compensation and benefits programs, professional and executive employees, including sales, operating, marketing, and financial management personnel as well as our ability to manage human capital resources. There is substantial competition for skilled personnel, and the failure to attract, develop, retain and motivate adequately qualified personnel could negatively impact our business, financial condition, results of operations and prospects. In order to hire new personnel or retain or replace our key personnel, we must maintain competitive compensation and benefits, and we may also be required to increase compensation, which would decrease net income. Additionally, several key employees have special knowledge of customers, supplier relationships, business processes, manufacturing operations, regulatory and customer quality compliance management, and financial management issues. The loss of any of these employees as the result of competitive compensation pressures or ineffective management of human capital resources could harm our ability to perform efficiently and effectively until their knowledge and skills are replaced, which might be difficult to do quickly, and as a result could have a material adverse effect on our business, financial condition, and results of operations. Failure to retain or attract key personnel could impede our ability to grow and could result in our inability to operate our business profitably. +Although we have not experienced any material disruptions due to labor shortages to date, we have observed an overall tightening and increasingly competitive labor market, and the demand for qualified individuals is expected to remain strong for the foreseeable future. Any sustained labor shortage or increased turnover rates within our employee base could lead to increased costs and lost profitability and could otherwise compromise our ability to efficiently operate our business. +We have recorded significant goodwill impairment charges and may be required to record additional charges to future earnings if our goodwill or intangible assets become further impaired, which could materially adversely impact our results of operations. +We test our goodwill balances annually, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit level and monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Declines in the future performance and cash flows of a reporting unit or asset group, changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses, or changes in other key assumptions, may result in the recognition of significant asset impairment charges, which could have a material adverse impact on our results of operations. +10 +We also review our long-lived assets including property, plant and equipment, and other intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. +Factors we consider include significant under-performance relative to expected historical or projected future operating results, significant negative industry or economic trends and our market capitalization relative to net book value. In fiscal 2025, we recorded a goodwill impairment charge of $13.4 million related to our MTEX acquisition, due in part to MTEX’s post-acquisition performance and changes to our management’s expectations with regard to MTEX’s performance in future periods. We may be required in the future to record additional significant charges to earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such charges could have a significant adverse impact on our results of operations and our financial condition. +Financial and Economic Risks: +Changes to United States tariff and import/export regulations and potential countermeasures could increase our costs and disrupt our global supply chain, which could negatively impact the results of our operations. +The United States has recently instituted or proposed changes in trade policies that include the renegotiation or termination of trade agreements, the imposition of higher tariffs on imports into the United States, economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the United States and other countries. There continues to exist significant uncertainty about the future relationship between the U.S. and other countries with respect to tariffs and other trade matters. In response to these actions, other countries have announced retaliatory tariffs and other trade measures against the United States. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States, which could impact the way in which we do business and could increase the cost of our products. Additionally, such tariffs and any countermeasures could increase the cost of raw materials and components necessary for our operations, increase volatility in the markets in which we operate, disrupt our global supply chain and create additional operational challenges, all of which could have a material adverse effect on our financial condition, results of operations and cash flows. +We face risks related to recession, inflation, stagflation and other economic conditions. +Customer demand for our products may be impacted by weak economic conditions, inflation, stagflation, recession, rising interest rates, equity market volatility or other negative economic factors in the U.S. or other nations. For example, under these conditions or the expectation of such conditions, our customers may cancel orders, delay purchasing decisions, or reduce their use of our services. In addition, these economic conditions could result in higher inventory levels and the possibility of additional charges if we request changes in delivery schedules or if suppliers incur additional costs that they pass on to us. Further, in the event of a recession or threat of a recession, our suppliers, distributors, and other third-party partners may suffer their own financial and economic challenges and, as a result, they may demand pricing accommodations, delay payment, or become insolvent, which could harm our ability to meet our customers’ demands or collect revenue or could otherwise harm our business. Similarly, disruptions in financial or credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors and might cause us to not be able to continue to access preferred sources of liquidity when we would like, if at all, and our borrowing costs could increase. Thus, if general macroeconomic conditions continue to deteriorate, our business and financial results could adversely affect our business, operating results and financial condition. +In addition, we are subject to risks from inflation and increasing market prices of certain components, supplies, and raw materials, which are incorporated into our end products or used by our suppliers to manufacture our end products. These components, supplies and other raw materials have from time to time become restricted. General market factors and conditions have in the past and may in the future affect pricing of such components, supplies, and commodities. +Economic, political and other risks associated with international sales and operations could adversely affect our results of operations and financial position. +Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect sales to customers outside the U.S., accounted for approximately 41% of our total revenue for fiscal 2025, and we anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, contractors and facilities located outside the U.S. Accordingly, our business, operating results and financial condition could be harmed by a variety of factors, including: +• +Interruption to transportation flows for delivery of parts to us and finished goods to our customers; +• +Customer and vendor financial stability; +• +Fluctuations in foreign currency exchange rates; +11 +• +Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory, or other conditions; +• +Trade protection measures and import or export licensing requirements, including the imposition of additional sanctions, tariffs or other trade restrictions or embargoes; +• +Negative consequences from changes in tax laws; +• +Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters; +• +Difficulty in obtaining and maintaining adequate staffing; +• +Differing labor regulations; +• +Failure to comply with complex and rapidly changing government economic sanctions against other countries, especially arising from responses to armed conflict; +• +Unexpected changes in regulatory requirements; and +• +Geopolitical turmoil, including terrorism, war, market dislocations, and public health disruptions, such as that caused by the COVID-19 pandemic, the Russia-Ukraine war or the impact of recently announced tariffs and other trade protection measures. +To date, the impact of the Russia-Ukraine war and the resulting governmental sanctions followed by our decision to halt all activities in the affected areas, has had an immaterial direct impact on our revenues. We believe, however, that the impact on the economies of Western Europe, especially Germany, which is the largest non-North American market for our products, has had a negative impact on demand for our products. +Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods . +As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is based on the tax rates in effect where we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each jurisdiction. Our effective tax rate may vary as a result of numerous factors, including changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, whether we secure or sustain acceptable arrangements with tax authorities, adjustments to the value of our uncertain tax positions, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations. +Changes to tax laws and regulations or changes to the interpretation thereof, the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, uncertainties regarding the geographic mix of earnings in any particular period, and other factors could have a material impact on our estimates of our effective tax rate and our deferred tax assets and liabilities. The impact of these factors may be substantially different from period to period. In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state, and local tax authorities. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our financial statements. +We may have exposure to additional tax liabilities, which could negatively impact our income tax expense, net income and cash flow. +We are subject to income and other taxes in both the U.S. and the foreign jurisdictions in which we operate. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit by both domestic and foreign tax authorities and to the prospective and retrospective effects of changing tax regulations and legislation. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the amounts recorded in our consolidated financial statements and may materially affect our income tax benefit or expense, net loss or income, and cash flows in the period in which such determination is made. +Deferred tax assets are recognized for the expected future tax consequences of temporary differences between the carrying amount for financial reporting purposes and the tax bases of assets and liabilities, and for net operating losses and tax credit carry forwards. In some cases, we may record a valuation allowance to reduce our deferred tax assets to estimated realizable value. We review our deferred tax assets and valuation allowance requirements quarterly. If we are unable to demonstrate that it is more likely than not that we will not be able to generate sufficient future taxable income to realize the net carrying value of deferred tax assets, we +12 +will record a valuation allowance to reduce the deferred tax assets to estimated realizable value, which could result in a material income tax charge. As part of our review, we consider positive and negative evidence, including cumulative results of recent years. +If we are unable to comply with our credit agreement with Bank of America or secure alternative financing, our business and financial condition could be materially adversely affected. +Our credit agreement with Bank of America, N.A. requires us, among other things, to satisfy certain financial ratios on an ongoing basis, consisting of a maximum consolidated leverage ratio and certain minimum consolidated fixed charge coverage ratios. We are also required to comply with other covenants and conditions, set forth in our Amended Credit Agreement, including, among others, limitations on our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the credit agreement. At January 31, 2025, we were not in compliance with our credit agreement with Bank of America, which governs our outstanding term loans and revolving line of credit, due to our failure to comply with the maximum consolidated leverage ratio and the minimum consolidated fixed charge coverage ratio in effect for the fiscal measurement period ended on such date. While we were subsequently able to obtain waivers of the associated events of default from Bank of America and amend our credit agreement, there can be no assurance that we would be able to renegotiate the terms of our credit agreement in the event of further covenant violations under our credit agreement. If, in the future, we were to violate the terms of our credit agreement and we were unable to renegotiate its terms at that time or secure alternative financing, it could have a material adverse impact on us. +Our business has substantial indebtedness. The level of our outstanding indebtedness may limit the cash flow available for our operations and exposes us to risks that could adversely affect our business, results of operations, and financial condition. +We currently have, and will likely continue to have, a substantial amount of indebtedness. Our indebtedness could, among other things, make it more difficult for us to satisfy our debt obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions, place us at a competitive disadvantage and increase our exposure to the impact of interest rate fluctuations. As of January 31, 2025, we had total outstanding debt of $46.7 million, which included (i) $42.7 million in aggregate principal amount of indebtedness outstanding under our credit agreement with Bank of America, consisting of $20.5 million in aggregate outstanding principal under our revolving credit facility, a “Term Loan” in the aggregate outstanding principal amount of $9.5 million, and a Euro-denominated “Term A-2 Loan” in the aggregate outstanding principal amount of $12.7 million, (ii) $0.6 million of outstanding principal indebtedness under a secured equipment facility agreement and (iii) $3.4 million of outstanding debt assumed as part of the MTEX acquisition. The term loans and revolving credit loans under our credit agreement with Bank of America have a final maturity date of August 4, 2027, but we may prepay the term loans or borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable). The secured equipment facility has a maturity date of January 23, 2029, and the assumed MTEX debt has varying maturity dates through 2033. +We expect to obtain the money to pay our expenses and pay the principal and interest on our indebtedness from cash flow from our operations and potentially from other debt or equity offerings. Accordingly, our ability to meet our obligations depends on our future performance and capital-raising activities, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If our cash flow and capital resources prove inadequate to allow us to pay the principal and interest on our debt and meet our other obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations, restructure or refinance our debt, which we may be unable to do on acceptable terms, and forego attractive business opportunities. +The agreements governing our indebtedness subject us to various restrictions that limit our ability to pursue business opportunities. +The credit agreement governing our credit facility with Bank of America, N.A. contains, and any future debt agreements may include, several restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to: +• +Incur future indebtedness; +• +Place liens on assets; +• +Pay dividends or distributions on our and our subsidiaries’ capital stock; +• +Repurchase or acquire our capital stock; +• +Conduct mergers or acquisitions; +13 +• +Sell assets; and/or +• +Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness. +We may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may negatively impact our overall business. +We have made strategic investments in other companies, products and technologies, including our August 2022 acquisition of Astro Machine LLC and our May 2024 acquisition of MTEX. In the future we may identify and pursue acquisitions of additional complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that we will be able to identify suitable acquisition opportunities. In any acquisition that we complete, we cannot be certain that: +• +We will successfully integrate the operations of the acquired business with our own; +• +All the benefits expected from such integration will be realized; +• +Management’s attention will not be diverted or divided, to the detriment of current operations; +• +Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative impact on operating results or other aspects of our business; +• +Delays or unexpected costs related to the acquisition will not have a detrimental impact on our business, operating results and financial condition; +• +Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse impact on our reputation; +• +Our acquisitions will achieve the planned objectives, return on investment or future earnings expectations; +• +We will successfully implement effective disclosure controls and internal controls over financial reporting at the acquired business in a timely fashion; and +• +Respective operations, management and personnel will be compatible. +For example, Astro Machine revenues are concentrated in a relatively small number of customers. Failure to satisfy the delivery requirements of those customers or to adequately respond to their evolving product requirements could cause us to lose one or more customers which would have a material adverse impact on our financial condition and results of operation due to lower revenue and could result in intangible asset impairment. We have also faced challenges in our efforts to integrate the MTEX and Astro Machine acquisitions into our operations, such as the material weakness we identified relating to our failure to design and maintain an effective control environment to ensure the accurate and timely reporting of transactions of our Astro Machine business in fiscal 2024. We may also incur impairment charges for acquired intangible assets or goodwill relating to our acquisitions, which could result in a significant charge to our earnings in the affected period, such as the goodwill impairment charge of $13.4 million recorded in fiscal 2025 related to the MTEX acquisition. +In certain instances, as permitted by applicable law and NASDAQ rules, acquisitions, such as the MTEX and Astro Machine acquisition, may be consummated without seeking and obtaining shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in an acquisition, there can be no assurance that we will properly ascertain or assess such risks. +We may also divest certain businesses from time to time. Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture depends on various factors, including our ability to: +• +Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser; +• +Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and +• +Reduce fixed costs previously associated with the divested assets or business. +All of these efforts require varying levels of management resources, which may divert our attention from other business operations. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. +If we are not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or if we are not able to realize the expected benefits of our acquisitions, divestitures or strategic partnerships, our business, results of operations and financial condition could be adversely affected. +14 +If we are unable to realize the benefits of our acquisition of MTEX, our business could be harmed. +On May 6, 2024, we acquired all of the outstanding share capital of Portugal-based MTEX, for closing consideration of EUR 17.3 million (approximately $18.7 million). Since that time, we have discovered facts regarding MTEX’s financial condition, operations and relationships with its customers that we believe are inconsistent with the representations made to us in connection with the acquisition. As a result of these matters and as discussed elsewhere in this Annual Report on Form 10-K, we have recorded a goodwill impairment charge for substantially all of our goodwill related to MTEX. We believe that we have largely addressed the matters regarding MTEX’s financial issues, operations and relationships with its customers, and we continue to believe that MTEX’s technology will prove valuable to us and our customers over the long-term. In addition, we and the MTEX seller have initiated arbitration in Portugal against one another, with the seller preliminarily alleging, among other things, breaches by us of the MTEX acquisition agreement. While we believe that we have meritorious defenses against the MTEX seller’s claims, if we are unsuccessful in our arbitration proceedings against the MTEX seller or we are unable to successfully realize the benefits of MTEX’s technology and business, we could lose our investment in MTEX, and our business and financial condition could be adversely impacted. +Changes in our business strategy or restructuring of our businesses may increase our costs or otherwise affect the profitability of our businesses. +We continually review our operations with a view toward reducing our cost structure, including but not limited to reducing our labor cost-to-revenue ratio, improving process and system efficiencies and increasing our revenues and operating margins. For example, in fiscal 2024 we implemented a restructuring plan in our PI segment to reduce operating costs within that segment and we recently announced that we will implement another restructuring action focused on the PI segment in fiscal 2026. As changes in our business environment occur, we may need to adjust our business strategies to meet these changes, or we may otherwise find it necessary to restructure our operations or particular businesses or assets. When these changes or events occur, we may incur costs to change our business strategy and may need to write down the value of assets or sell certain assets. In any of these events our costs may increase, and we may have significant charges or losses associated with the write-down or divestiture of assets. +Adverse conditions in the global banking industry and credit markets could impair our liquidity or interrupt our access to capital markets, borrowings or financial transactions to hedge certain risks. +At the end of fiscal 2025, we had $5.1 million of cash and cash equivalents. Our cash and cash equivalents are held in bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our financial position. +To date, we have been able to access financing that has allowed us to make investments in growth opportunities and fund working capital requirements as needed. In addition, we occasionally enter into financial transactions to hedge certain foreign exchange and interest rate risks. Our continued access to capital markets, the stability of our lenders and their willingness to support our needs, and the stability of the counterparties to our financial transactions that hedge risks are essential for us to meet our current and long-term obligations, fund operations, and fund our future strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could materially and adversely affect our business and financial condition. +Inadequate self-insurance accruals or insurance coverage for employee healthcare benefits could have an adverse effect on our business, financial results or financial condition. +In the U.S., we maintain an employee health insurance coverage plan on a self-insured basis backed by stop-loss coverage which sets a limit on our liability for both individual and aggregate claim costs. We record expenses based on actual claims incurred and estimates of the costs of expected claims, administrative costs, and stop-loss insurance premiums. +We record a liability for our estimated cost of U.S. claims incurred and unpaid as of each balance sheet date. Our estimated liability is recorded on an undiscounted basis and is based on historical trends and data provided by our insurance broker. Our history of claims activity is closely monitored, and liabilities are adjusted as warranted based on changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of losses. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, which could cause us to record additional expenses, which could adversely impact our business, financial condition, results of operations and cash flow. +15 +Legal and Regulatory Risks: +Certain of our products require certifications by customers, regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business. +In certain industries and for certain products, such as those used in aircraft, we must obtain certifications for our products by customers, regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +We are subject to laws and regulations; failure to address or comply with these laws and regulations could harm our business and adversely affect our results of operations. +Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our products. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. +We are subject to regulatory constraints and compliance requirements due to our status as a publicly held company. Public company compliance costs are increasing due to the increase in SEC regulations and enforcement actions, and the heightened scrutiny that we and the public accounting industry face from the Public Companies Accounting Oversight Board. +Our business outside of the United States exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, employee rights and protection, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. For example, the increased use of sanctions in U.S. international relations recently has increased our cost of compliance with the regulations intended to enforce them. +Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on the effectiveness of their internal control over financial reporting and any inability to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting, could adversely affect our results of operations, our stock price and investor confidence in our company. +In fiscal 2024, we identified a material weakness in our internal control over financial reporting and that weakness has led to a conclusion that our internal control over financial reporting and disclosure controls and procedures were not effective as of January 31, 2024. The material weakness related to our failure to design and maintain an effective control environment at our Astro Machine subsidiary, which was acquired in August of 2022. As of January 31, 2025, management successfully remediated this material weakness in its internal controls over financial reporting by designing an effective control environment and expanding our existing enterprise resource planning system to include the Astro Machine subsidiary. +We may, in the future, identify additional internal control deficiencies that could rise to the level of a material weakness or uncover other errors in our financial reporting. +Failure to have effective internal control over financial reporting and disclosure controls and procedures could impair our ability to produce accurate financial statements on a timely basis, or provide reliable financial statements needed for business decision processes, and our business and results of operations could be harmed. Additionally, investors could lose confidence in our reported financial information and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. Also, failure to maintain effective internal control over financial reporting could result in sanctions by regulatory authorities. +Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our business. +Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. As such, our business is subject to and may be materially and adversely affected by compliance obligations and other liabilities under those environmental, health and safety laws and regulations. Certain of our products contain, and some of manufacturing operations use various substances which have been or may be deemed to be hazardous or dangerous. Thus, we have and will continue to generate a generally limited amounts of hazardous waste in our operations. We manage our compliance with laws and regulations and the proper mitigation of risks internally and through the input of external consultants and outside service providers, and we believe we are +16 +in material compliance with all applicable environmental laws and regulations. We desire to reduce and ultimately eliminate any adverse environmental impact of our business and to comply with relevant laws and regulations. We expect this effort to affect our ongoing operations and require additional capital and operating expenditures. If we were to fail to manage our environmental compliance effectively, we could suffer economic or reputational harm. +Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, and any determination that we or any of our subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. +The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies. +Unauthorized access to personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights and compliance with laws designed to prevent unauthorized access of personal data could be costly. +We collect and store specific data, including proprietary business information, and may have access to confidential or personal information subject to privacy and security laws, regulations, and customer-imposed controls. Security breaches or other unauthorized access to, or the use or transmission of, personal user information could result in various claims against us, including privacy-related claims. There are numerous federal, state, local, and international laws and regulations regarding privacy and the storage, sharing, use, processing, disclosure, and protection of this kind of information, the scope of which is changing, inconsistent, conflicting, and subject to differing interpretations. +We also expect that new laws, regulations, and industry standards will continue to be proposed and enacted in various jurisdictions concerning privacy, data protection, and information security proposed and passed in multiple jurisdictions. For example, in 2016, the European Commission adopted the General Data Protection Regulation (GDPR), a comprehensive privacy and data protection reform effective May 2018. The GDPR, which applies to all companies processing data of European Union residents, imposes significant fines and sanctions for violations. These requirements are complicated, and compliance is technically complex to maintain. We contract with outside experts to advise and conduct internal and external compliance training. +Additionally, other jurisdictions have enacted or are enacting data localization laws that require data generated in or relating to the residents of those jurisdictions to be physically stored within those jurisdictions. In many cases, these laws and regulations apply to transfers between unrelated third parties and transfers between us and our subsidiaries. All these evolving compliance and operational requirements impose significant costs that will likely increase over time. +While we continue to assess these requirements and how they may impact our business's conduct, we believe that we materially comply with applicable laws and industry codes of conduct relating to privacy and data protection. There is no assurance that we will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to defend against such claims successfully, or that we will not be subject to significant fines and penalties in the event we are found not in compliance with such laws or codes of conduct. +Any failure or perceived failure by us (or any third parties with whom we have contracted to store such information) to comply with applicable privacy and security laws, policies, or related contractual obligations or any compromise of security that results in unauthorized access to personal information may result in governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. In the case of such an event, our reputation may be harmed, we could lose current and potential users, and the competitive positions of our various brands could be diminished, any or all of which could adversely affect our business, financial condition, and results of operations. +Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition. +Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, income taxes, and warranties, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition. +17 +Item 1B. Unreso lved Staff Comments +None. +Item 1C. Cybersec urity +Cybersecurity Risk Management and Strategy +We continue to invest substantially in cybersecurity risk management, which is a core part of our overall enterprise risk management program. Our security program is based on ISO27001, NIST 800-53, and GDPR frameworks to support our global business. We utilize various tools and processes to identify, monitor, evaluate, and address cybersecurity threats and incidents, including those involving third-party vendors and service providers. Our process includes identifying the source of a threat or incident, implementing countermeasures and mitigation strategies, and informing management and our board of directors about significant threats and changes in the cybersecurity landscape. We remain committed to investing in risk management tools and processes as cybersecurity threats evolve. Despite our efforts, we cannot guarantee that we can prevent, mitigate, or remediate risks in our own or third-party cybersecurity infrastructure. +Our Information Technology team which reports to senior management, is responsible for maintaining our cybersecurity risk management program. They collaborate with third-party security specialists as they believe necessary to conduct thorough risk assessments and system improvements. Together with our third-party security service providers, the Information Technology team oversees cybersecurity incidents, prevention, detection, mitigation, and resolution. We regularly train our employees on cybersecurity awareness and confidential information protection and continuously review and update our policies to adapt to the evolving threat landscape and legal developments. +Cybersecurity threats have the potential to materially affect our company, including our business strategy, results of operations, and financial condition. While we have not experienced material adverse effects from cybersecurity threats to date, we recognize the dynamic nature of these risks and remain vigilant in our efforts to mitigate potential impacts. Refer to “Item 1A. - Risk Factors” in this Annual Report on Form 10-K, including, “We could experience a significant disruption in or security breach of our information technology system which could harm our business and adversely affect our results of operations,” for additional discussion on our cybersecurity related risks. +Cybersecurity Governance +Our management, including our Chief Executive Officer, Chief Financial Officer , Chief Technology Officer (“CTO”), and Information Technology team, is responsible for identifying and assessing cybersecurity risks, establishing monitoring processes and implementing mitigation and remediation measures. In fiscal 2025, we hired a full-time Director of Information Technology, who is a Certified Information Security Professional. Our cybersecurity programs are managed under the direction of our CTO and the Director of Information Technology, with support from internal and external third-party resources. +Our IT Steering Committee, which consists of our CEO. CFO, and other senior leadership employees, is responsible for coordinating our day-to-day management of cybersecurity risk. Each quarter, the IT Steering Committee receives reports from the CTO and Director of Information Technology on our cybersecurity program performance and emerging threats and incidents. The IT Steering Committee makes recommendations intended to ensure that hawse have adequate resources to address information technology risks. +Our board of directors has ultimate oversight responsibility for our overall enterprise risk management and, with input from our senior management, oversees our cybersecurity risk management. As part of its enterprise risk management efforts, our board of directors regularly receives reports from management on our cybersecurity programs with regard to any risks that may arise from specific cybersecurity threats and incidents. The board of directors oversees management’s programs, policies and processes in place that identify, monitor, assess, and respond to cybersecurity, data privacy, and other information technology risks to which we are exposed. +18 +Item 2. Properties +The following table sets forth information regarding our principal owned properties. The West Warwick property is subject to a security agreement and a mortgage in favor of the lender under our credit facility. +Location +Approximate +Square +Footage +Principal Use +West Warwick, Rhode Island, United States +135,500 +Corporate headquarters, research and development, +manufacturing, sales and service +Elk Grove Village, Illinois +34,460 +Astro Machine principal place of business +The West Warwick facility is used by both of our business segments, while the Elk Grove Village facility is exclusively used by the PI segment. +We also lease facilities in various other locations. The following information pertains to each location: +Location +Approximate +Square +Footage +Principal Use +Porto, Portugal +80,822 +* +Manufacturing, sales and service (PI segment) +Dietzenbach, Germany +18,630 +Manufacturing, sales and service (PI segment) +Copenhagen, Denmark +4,800 +R&D, sales and service (PI segment) +Brossard, Quebec, Canada +4,500 +Manufacturing, sales and service (PI segment) +Elancourt, France +4,150 +Sales and service (PI segment) +Shah Alam, Selangor, Malaysia +2,067 +Sales (PI segment) +Singapore +2,400 +Warehouse (T&M segment) +Shanghai, China +425 +Sales (PI segment) +Sherman Oaks, California USA +160 +Sales (PI segment) +Mexico City, Mexico +97 +Sales (PI segment) +*This consists of five separate leased properties located in Porto, Portugal we assumed in connection with the acquisition of MTEX. +We believe all our facilities are well maintained in good operating condition and generally adequate to meet our needs for the foreseeable future. +Item 3. Leg al Proceedings +On March 11, 2025, Effort Premier Solutions LDA (“Effort”) and Elói Serafim Alves Ferreira initiated arbitration proceedings against us and our subsidiary AstroNova Portugal, Unipessoal, Lda. (“AstroNova Portugal”) in the Arbitration Center located in Oporto, Portugal (Centro de Arbitragem do Instituto de Arbitragem Comercial), alleging, among other things, breaches of the MTEX acquisition agreement and damage to Mr. Ferreira’s professional reputation. On March 31, 2025, we made a preliminary reply rejecting Effort and Mr. Ferreira’s claims and formally notified the Arbitration Center of our intention to file counterclaims against Effort and Mr. Ferreira, on the grounds of, among other things, breaches of the MTEX acquisition agreement. As of April 11, 2025, neither party has formally presented their formal allegations or demands for relief to the Court of Arbitration. The parties’ arbitrators are currently in the process of choosing the third arbitrator which is a required step before the Arbitration Court is installed and the arbitration can be initiated. If a third arbitrator cannot be chosen by agreement the President of the Centro de Arbitragem will designate one. +We are party to other various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or cash flows. Additionally, because of the nature of our business, we may be subject in the future to lawsuits or other claims, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters and an unfavorable resolution of any of these matters could materially affect our future results of operations, cash flows or financial position. +Item 4. Mine Sa fety Disclosures +Not applicable. +19 +PART II +Item 5. Market for the Registrant’s Common Stock, R elated Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock trades on the NASDAQ Global Market under the symbol “ALOT.” +As of April 11, 2025, we had approximately 238 shareholders, which does not reflect shareholders with beneficial ownership in shares held in nominee name. +Stock Repurchases +During the fourth quarter of fiscal 2025, we made the following repurchases of our common stock: +Total Number +of Shares +Repurchased +Average +Price paid +Per Share ($) +Total Number of +Shares Purchased as +Part of Publicly +Announced Plans +or Programs +Maximum Number +of Shares That +May Be Purchased +Under the Plans +or Programs +November 1 – November 30 +— +— +— +— +December 1 – December 31 +300 +(a) +15.91 +(a) +— +— +January 1 – January 31 +1,200 +(b) +11.36 +(b) +— +— +(a) +An employee of the Company delivered 300 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $15.91 per share and are included with treasury stock in our consolidated balance sheet as of January 31, 2025 included elsewhere in this Annual Report on Form 10-K. +(b) +A former executive of the Company delivered 1,200 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $11.36 per share and are included with treasury stock in our consolidated balance sheet as of January 31, 2025 included elsewhere in this Annual Report on Form 10-K. +Item 6. [Reserved] +20 +Item 7. Management’s Discu ssion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis are meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts of cash flows from operations and outside resources, liquidity and certain other factors that may affect future results so as to allow investors to better view our company from management’s perspective. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. Carefully review the “Forward-Looking Statements” and “Risk Factors” sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. +Overview +We are a multi-national enterprise that leverages our proprietary data visualization technologies to design, develop, manufacture, distribute, and service a broad range of products that acquire, store, analyze, and present data in multiple formats. We organize our structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following two segments: +• +Product Identification (“PI”) – offers color and monochromatic digital label printers, direct-to-package printers, industrial wide-format printers for both flexible and rigid materials and custom OEM printers. PI also provides proprietary software to design, manage, and store print images as well as fully control the workflow of its printers. The software enables both local and network control of the printers. As a full solution supplier, PI offers a wide variety of carefully application-matched printing supplies such as pressure-sensitive labels, tags, inks, toners, and thermal transfer ribbons used by digital printers. PI also provides on-site and remote service, spare parts, and various service contracts. +• +Test and Measurement (“T&M”) – offers a suite of products and services that acquire data from local and networked data streams and sensors as well as wired and wireless networks. The T&M segment is the leading supplier of aerospace printers for commercial, military transport, business, and regional aircraft. The printers are used to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, clearances, arrival and departure procedures, NOTAMs, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. Aerospace products also include aircraft networking systems for high-speed onboard data transfer. T&M also provides repairs, service and spare parts. +On May 4, 2024, we entered into an agreement to acquire MTEX, a Portugal-based manufacturer of digital mid-market printing equipment and supplies that addresses a wide variety of markets primarily targeting color printing of rigid and flexible packaging, labeling, apparel, footwear and more. We have reported MTEX as a part of our PI segment since the May 6, 2024 closing date of that transaction. On August 4, 2022, we completed the acquisition of Astro Machine, an Illinois-based manufacturer of printing equipment, including label printers, over printers, tabbers, conveyors, and envelope feeders. Astro Machine is reported as part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisitions,” in our consolidated financial statements included elsewhere in this report for further details on both of these acquisitions. +On July 26, 2023, we adopted a restructuring plan (the “2024 Restructuring Plan”) for our PI segment that transitioned a portion of the printer manufacturing within that segment from our facility in Rhode Island to our Astro Machine facility located in Illinois, ceased the sale of certain of our older, lower-margin or low-volume PI segment products and made targeted reductions to our workforce. As part of the 2024 Restructuring Plan, we also consolidated certain of our international PI sales and distribution facilities and streamlined our channel partner network. The total cost of this plan was $2.5 million, comprised primarily of non-cash charges related to inventory write-offs and facility exit costs, and cash charges related to severance-related costs. Additionally, in connection with our 2024 Restructuring Plan, we identified the need to address quality and reliability issues in certain models of our PI printers as a result of faulty ink provided by one of our larger suppliers. We identified approximately 150 printers sold to our customers that were affected by the faulty ink and in order to remedy these issues and maintain solid customer relationships, during the second quarter of fiscal 2024, we initiated a program to retrofit all of the affected printers sold to our customers (the “2024 Product Retrofit Program”). The costs associated with this program were $0.6 million, which included the cost of parts, labor and travel, and were included in cost of revenue in our consolidated income statement for the year ended January 31, 2024. As of January 31, 2024, both the 2024 Restructuring Plan and the 2024 Product Retrofit Program were completed and concluded. Refer to Note 20, “Restructuring,” in our consolidated financial statements included elsewhere in this report for further details. +We market and sell our products and services globally through a diverse distribution structure of direct sales personnel, manufacturers’ representatives, OEMs, and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. In fiscal +21 +2025, 2024, and 2023, revenue from customers in various geographic areas outside the United States, primarily in Western Europe, Canada and Asia, amounted to $61.8 million, $63.3 million, and $59.0 million, respectively. +We maintain an active program of product research and development. We spent approximately $6.6 million in fiscal 2025, $6.9 million in fiscal 2024 and $6.8 million in fiscal 2023, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2026 and beyond. +We also continue to invest in sales and marketing initiatives by expanding and improving the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability. +Results of Operations +Fiscal 2025 compared to Fiscal 2024 +The following table presents the revenue of each of our segments, as well as the percentage of total revenue and change from the prior year. +($ in thousands) +2025 +2024 +Revenue +As a % of +Total Revenue +% Change +Over Prior Year +Revenue +As a % of +Total Revenue +PI +$ +102,345 +67.7 +% +(1.6 +)% +$ +104,041 +70.3 +% +T&M +48,938 +32.3 +% +11.1 +% +44,045 +29.7 +% +Total +$ +151,283 +100.0 +% +2.2 +% +$ +148,086 +100.0 +% +Net revenue in fiscal 2025 was $151.3 million, a 2.2% increase compared to net revenue of $148.1 million for fiscal 2024. Current year revenue through domestic channels was $89.5 million, an increase of 5.6% from prior year domestic revenue of $84.8 million. International revenue of $61.8 million for fiscal 2025 decreased 2.4% compared to prior year international revenue of $63.3 million. Fiscal 2025 international revenue reflects an unfavorable foreign exchange rate impact of $0.3 million, compared to a favorable foreign exchange rate impact of $0.4 million in fiscal 2024. Our 2024 acquisition of MTEX contributed $4.2 million in international revenue in fiscal 2025. +Hardware revenue in fiscal 2025 was $44.6 million, a $4.8 million or 9.7% decrease compared to fiscal 2024 hardware revenue of $49.4 million due to decreased hardware sales in both the T&M and PI segments. Compared to fiscal 2024 and excluding $2.2 million of hardware sales from our newly acquired MTEX business, current year hardware sales in the PI segment decreased $7.0 million or 14.1%. The decrease in PI hardware sales was in both Astro Machine and Trojan Label. Astro Machine’s key customer, a distributor, announced a new design for their “Mail and Envelope” printer that was faster, included a wider format and used water-based pigments versus water-based dyes for superior quality. The newly designed printer was pre-released to the marketplace by the distributor before its specifications were finalized and was intended to replace the distributor’s previous design that was also manufactured by Astro Machine. The distributor’s pre-release announcement caused their customers to delay purchases of existing printers as they awaited the new enhanced printer. Unfortunately, the distributor also made a series of changes to the new printer that delayed the selling of the new printers until January 2025. The combination of the delay in customer purchases of the existing printers as they waited for the release of the new printers, and the delays in the release of the new printer driven by design modifications caused hardware sales to decrease by $1.7 million as compared to fiscal 2024. In addition, Astro Machine’s black and white printer sales decreased by $1.4 million due to a supply disruption of specialized motors. Astro Machine’s suppliers were able to deliver the motors late in fiscal 2025, allowing the black and white printer deliveries to resume at normal levels. Sales of TrojanLabel’s large-format over-printers decreased year-over-year by $1.5 million due to a competitor introducing a new model that impacted our market share in Europe. We are addressing this challenge with new superior technology in our MTEX product line scheduled for release in the first half of fiscal 2026. T&M hardware sales decreased 6.5% or $1.8 million compared to the prior year. The decline was in the Aerospace printer and networking products was due to a delayed defense order of approximately $2.2 million and delays in commercial aircraft printer orders of $0.7 million due to a strike a major airplane manufacturer. These declines were partially offset by volume increases in overall aircraft printer orders. In the T&M product line, data recorder sales were down year over year by $1.1 million, as the products are typically used for defense and other niche applications and do not follow a regular replacement cycle. +Revenue from supplies in fiscal 2025 was $81.4 million, a 2.7% or $2.2 million increase compared to fiscal 2024 supplies revenue of $79.3 million, as supplies revenue increased in both the PI and T&M segments in the current year, but primarily due to an increase in sales of our Trojan Label brand inks and printheads of $3.1 million or 23.8%, Astro Machine’s $0.8 million or 12.1% increase relating to increased sales of both printheads and inks and the contribution of supplies sales from MTEX of $1.4 million, all in the PI segment. Also contributing to the increase in the current year’s supplies revenue was an increase in paper revenue for the aerospace printer product line in the T&M segment of $0.8 million. Partially offsetting the growth in supplies revenue was a decline in +22 +QuickLabel supplies sales in the PI segment of $3.9 million, as sales of these supplies were impacted by obsolete and end of life products along with lower ink sales on certain ink-jet printers. +Service and other revenue in fiscal 2025 was $25.2 million, a $5.8 million or 30.1% increase compared to fiscal 2024 service and other revenue of $19.4 million. The increase is primarily due to a $6.0 million or 51.9% increase in parts and repairs revenue in the aerospace printer product line in the T&M segment. This was due to a large backlog of replacement parts that were shipped during the current year and an increased use of the printers due to the higher number of commercial flights. +Gross profit was $52.7 million for fiscal 2025, reflecting a $1.1 million or 2.2% increase compared to fiscal 2024 gross profit of $51.6 million. Our gross profit margin of 34.9% in fiscal 2025 remained consistent with our fiscal 2024 gross profit margin. The increase in gross profit dollars in the current year compared to the prior year was due to the MTEX gross profit contribution of $0.5 million and the $2.2 million increase in the T&M segment gross profit, offset by a decrease in PI segment gross profit, excluding the MTEX impact, of $1.8 million related to sales volume. Note that the fiscal 2024 gross profit margin included $2.1 million of restructuring costs and $0.7 million of product retrofit costs that did not repeat in the current year. +Operating expenses for the current year were $61.4 million, representing a 43.3% increase from the prior year’s operating expenses of $42.8 million. Current year operating expenses included a $13.4 million goodwill impairment charge related to the under performance of the MTEX acquisition. Originally, we expected MTEX to achieve $8.0 million to $10.0 million in revenues for the period of May 2024 through January 2025, however, during this period, MTEX generated only $4.2 million of revenue. Due to the actual and expected underperformance of MTEX relative to our original expectations, we performed a strategic review of the MTEX operation, which ultimately led to the conclusion that the goodwill in our PI segment was impaired. Refer to Note 4, “Intangible Assets and Goodwill,” in our consolidated financial statements included elsewhere in this report for further details. Included in operating expenses are selling and marketing expenses of $25.6 million in fiscal 2025, an increase of 4.6% from the prior year amount of $24.4 million. The increase in selling and marketing expenses for the current year is primarily due to an increase in wages, travel and entertainment, and advertising and trade show expenses, partially offset by the impact of restructuring costs that were unique to the prior year. General and administrative expenses increased 37.6% to $15.8 million in the current year compared to $11.5 million in the prior year primarily due to an increase in outside services fees, which includes MTEX acquisition costs of $1.2 million. Also contributing to the increase in general and administrative expenses were CFO transition costs of $0.4 million and increases in employee wages and benefits, and advertising and trade show expenses. Research & development (“R&D”) costs in fiscal 2025 of $6.6 million decreased 4.3% from fiscal 2024, as decreases in employee wages and bonuses were partially offset by increases in outside consulting and service expenses. The R&D spending level for fiscal 2025 represents 4.4% of net revenue, compared to the prior year level of 4.7%. +Other expense in fiscal 2025 was $3.6 million compared to $2.7 million in fiscal 2024. Current year other expense includes $3.2 million of interest expense on our debt and revolving credit facilities and net other expense of $0.8 million, partially offset by a net foreign exchange gain of $0.3 million. Prior year other expense included interest expense on debt and revolving credit facility of $2.7 million and net foreign exchange loss of $0.1 million, partially offset by other income of $0.1 million. +We recognized $2.2 million of income tax expense for the current fiscal year, resulting in an effective tax rate of (17.9)% compared to 22.7% in fiscal 2024. The decrease in the effective tax rate in fiscal 2025 from fiscal 2024 is primarily related to the decrease in pre-tax book income and federal income tax provision associated with the goodwill impairment and MTEX losses, the decrease in return to provision adjustments, and the decrease in the valuation allowance associated with China losses. This decrease was partially offset by other factors increasing the effective tax rate, such as the valuation allowance recorded on Portuguese tax credits, goodwill impairment recorded on MTEX for the PI reporting segment, and transaction costs associated with the MTEX acquisition. +Net loss for fiscal 2025 was $14.5 million, or $1.93 per diluted share. The results for this period were impacted by an inventory step up cost of $0.2 million ($0.2 million net of tax or $ 0.02 per diluted share) and transaction costs of $1.2 million ($0.9 million net of tax or $0.12 per diluted share), both related to the MTEX acquisition and CFO transition charges of $0.4 million ($0.3 million net of tax or $0.04 per diluted share). Net income for fiscal 2024 was $4.7 million, or $0.63 per diluted share. The results for fiscal 2024 were impacted by expense of $2.6 million ($2.0 million net of tax or $0.27 per diluted share) related to the 2024 Restructuring Plan and expense of $0.6 million ($0.5 million net of tax or $0.07 per diluted share) related to the 2024 Product Retrofit Program. +Fiscal 2024 compared to Fiscal 2023 +For a comparison of our results of operations for the fiscal years ended January 31, 2024, and January 31, 2023, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 31, 2024, filed with the SEC on April 12, 2024. +23 +Segment Analysis +We report two segments consistent with our product revenue groups: PI and T&M. Segment performance is evaluated based on the operating segment’s profit before corporate and financial administration expenses. The following table summarizes selected financial information by segment. +($ in thousands) +Revenue +Segment Operating Profit (Loss) +Segment Operating Profit (Loss) +as a % of Revenue +2025 +2024 +2023 +2025 +2024 +2023 +2025 +2024 +2023 +PI +$ +102,345 +$ +104,041 +$ +103,089 +$ +(3,967 +) +$ +10,087 +$ +7,889 +(3.9 +)% +9.7 +% +7.7 +% +T&M +48,938 +44,045 +39,438 +11,143 +10,200 +8,989 +22.8 +% +23.2 +% +22.8 +% +Total +$ +151,283 +$ +148,086 +$ +142,527 +7,176 +20,287 +16,878 +4.7 +% +13.7 +% +11.8 +% +Corporate Expenses +15,816 +11,491 +11,435 +Operating Income (Loss) +(8,640 +) +8,796 +5,443 +Other Income (Expense), Net +(3,647 +) +(2,723 +) +(2,033 +) +Income (Loss) Before Income Taxes +(12,287 +) +6,073 +3,410 +Income Tax Provision +2,202 +1,379 +749 +Net Income (Loss) +$ +(14,489 +) +$ +4,694 +$ +2,661 +Product Identification +During the second quarter of the current year we acquired MTEX, a Portugal-based manufacturer of digital printing equipment. Since the closing of that transaction on May 6, 2024, MTEX has been reported as a part of our PI segment. Although we remain excited about the opportunities created by MTEX’s complementary product portfolio and anticipate improved overall business and enhanced customer service as we integrate MTEX’s advanced technology across other areas of our product portfolio, the integration of MTEX has been more time-consuming and resource-intensive than we originally anticipated. Additionally, in the course of integrating MTEX into our operations, we have discovered certain facts that we believe may constitute breaches of the representations and warranties included in the definitive agreements governing our acquisition of MTEX. We are continuing to investigate these matters and are seeking remedies from the seller under those agreements. In the current year, MTEX had an operating loss of $16.9 million on revenue of $4.2 million. MTEX’s operating loss includes a $13.4 million charge related to goodwill impairment. Corporate expense for the current year includes $1.2 million of general and administrative expenses that are not allocated to any segment, related to the acquisition of MTEX. +Subsequent to year end, on March 20, 2025, we announced our restructuring actions for fiscal 2026, which include the reduction of approximately 10% of the Company’s global workforce, primarily in the PI segment, and the realignment of our underperforming MTEX operation in Portugal. As part of this initiative, we have cut approximately 70% of the MTEX product portfolio, phasing out low-volume, low-profit and developmental models in the nascent fabric printing market to focus more resources on much higher-margin products that capitalize on our supplies business. In addition, all MTEX sales, marketing and customer support functions have been integrated into our global teams. We anticipate our restructuring actions to generate $3.0 million in annualized savings. Refer to Note 24, “Subsequent Events,” in our consolidated financial statements included elsewhere in this report for further details. +Revenue from the PI segment decreased 1.6% in fiscal 2025, with revenue of $102.3 million compared to revenue of $104.0 million in the prior year. The current year decrease in revenue is primarily attributable to the delayed release of an OEM printer within our Astro Machine product line. These printers were initially slated for release in the third quarter of fiscal 2025, but due to post order customer changes more development and development time were incurred and shipments did not begin until the fourth quarter of fiscal 2025. Also contributing to the decline in current year sales was the decrease in legacy hardware sales and QuickLabel supply revenue. The decline in current quarter revenue was partially offset by an increase in supplies sales in the Trojan Label product line and the contribution of $4.2 million from MTEX hardware, supply and parts revenues. PI current year segment operating loss was $4.0 million, which includes a $13.4 million charge for goodwill impairment and a $0.2 million inventory step-up, both related to the MTEX business and reflects a profit margin of (3.9)%. Prior year segment operating profit was $10.1 million which includes $3.1 million in costs related to the 2024 Restructuring Plan and the 2024 Product Retrofit Program, with a related profit margin of 9.7%. The decrease in the current year PI segment operating profit and margin is primarily due to higher costs in the fiscal 2025 period, in part associated with the MTEX acquisition, product mix, lower sales volume in Europe and the delayed Astro Machine product release. +Test & Measurement +Revenue from the T&M segment was $48.9 million for fiscal 2025, an 11.1% increase compared to revenue of $44.0 million in the prior year. The increase in revenue for the current year was primarily attributable to increased parts and repairs revenue in our aerospace product lines, including a large backlog of replacement parts that were shipped during the current year. Also contributing to the current year increase was an increase in sales of aerospace supplies. T&M revenue in fiscal 2025 and 2024 was also impacted by $0.8 million and $1.3 million, respectively, of revenue recognized as the result of successful claims for component cost increases for +24 +printer shipments to one customer as described in Note 3, “Revenue Recognition,” in our consolidated financial statements included elsewhere in this report. The current year T&M segment revenue increase was partially offset by a decline in hardware sales in both the aerospace printer and data recorder product lines. T&M current year segment operating profit was $11.1 million resulting in a 22.8% profit margin compared, to the prior year segment operating profit of $10.2 million and related operating profit margin of 23.2%. The increased profit and decrease in margins were primarily attributable to higher revenue from high-margin product lines, partially offset by increased manufacturing, period costs and operating expenses in fiscal 2025. +Liquidity and Capital Resources +Overview +Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. These sources have also typically funded the majority of our capital expenditures. We have funded acquisitions by borrowing under bank credit facilities. +We believe cash flow generation from operations and available unused credit capacity under our revolving credit facility will support our anticipated needs. Additionally, as discussed below, we amended the terms of our credit agreement with Bank of America to finance our acquisition of MTEX. In fiscal 2026 (after required debt amortization and payment of minimum guaranteed royalty payments to Honeywell), we plan to focus on reduction of debt outstanding under our credit agreement. +In connection with our acquisition of MTEX, on May 6, 2024, we entered into a Third Amendment to Amended and Restated Credit Agreement (the “Third Amendment”) with Bank of America, N.A., as lender (the “Lender”). The Third Amendment amended the Amended and Restated Credit Agreement dated as of July 30, 2020, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of March 24, 2021, the LIBOR Transition Amendment, dated as of December 14, 2021, the Second Amendment to Amended and Restated Credit Agreement dated as of August 4, 2022, and the Joinder Agreement relating to Astro Machine dated as of August 26, 2022 (as so amended, the “Existing Credit Agreement”; the Existing Credit Agreement as amended by the Third Amendment, the “Amended Credit Agreement”), between AstroNova, Inc. as the borrower, Astro Machine as a guarantor, and the Lender. +At January 31, 2025 our cash and cash equivalents were $5.1 million. As of January 31, 2025, $20.5 million was borrowed and outstanding under our revolving credit facility with Bank of America and $4.5 million was available for borrowing under that revolving credit facility. Additionally, MTEX has a EUR 0.5 million ($0.5 million) available line of credit with Caixa Central de Crédito Agricola Mutuo. This credit line was established in December 2023 and is renewable every six months. There was EUR 0.4 million ($0.4 million) borrowed and outstanding on this line of credit as of January 31, 2025. +Indebtedness +Term Loans and Revolving Credit Facility +The Amended Credit Agreement requires that the Term A-2 Loan be paid in quarterly installments on the last day of each of our fiscal quarters through April 30, 2027 in the principal amount of EUR 583,333 each, and the entire then-remaining principal balance of the Term A-2 Loan is required to be paid on August 4, 2027. The Amended Credit Agreement requires that the remaining balance of the Term Loan be paid in quarterly installments on the last day of each of our fiscal quarters through April 30, 2027 in the principal amount of $675,000 each, and the entire then remaining principal balance of the Term Loan is required to be paid on August 4, 2027. We may voluntarily prepay the Term A-2 Term Loan or the Term Loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than August 4, 2027, and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate, on such date. We may reduce or terminate the revolving credit facility at any time, subject to certain thresholds and conditions, without premium or penalty. +The loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from net cash proceeds from certain dispositions of property, certain issuances of equity, certain issuances of additional debt and certain extraordinary receipts. +Amounts repaid under the revolving credit facility may be reborrowed, subject to our continued compliance with the Amended Credit Agreement. No amount of the Term A-2 Loan or the Term Loan that is repaid may be reborrowed. +The Term A-2 Loan bears interest at a rate per annum equal to the EURIBOR rate as defined in the Amended Credit Agreement, plus a margin that varies within a range of 1.60% to 2.50% based on our consolidated leverage ratio. The Term Loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the Term SOFR rate as defined in the Amended Credit Agreement (or, in the case of revolving credit loans denominated in Euros or another currency other than U.S. Dollars, the applicable +25 +quoted rate), plus a margin that varies within a range of 1.60% to 2.50% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate, (iii) the Term SOFR rate plus 1.00%, or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.50% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.35% based on our consolidated leverage ratio. +We must comply with various customary financial and non-financial covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio, certain of the provisions of which were modified by the Third Amendment; the minimum consolidated asset coverage ratio under the Existing Credit Agreement was eliminated by the Third Amendment. The primary non-financial covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on our or our subsidiaries’ capital stock, to repurchase or acquire our or our subsidiaries’ capital stock, to conduct mergers or acquisitions, to sell assets, to alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of our or our subsidiaries’ business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Third Amendment. As of January 31, 2025, we were not in compliance with the Amended Credit Agreement as a result of our failure to comply with the maximum consolidated leverage ratio and the minimum consolidated fixed charge coverage ratio in effect for our fiscal measurement period ended January 31, 2025. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests we hold in ANI Scandinavia ApS, AstroNova GmbH, AstroNova SAS and the Purchaser), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island, and are guaranteed by, and secured by substantially all of the personal property assets of, Astro Machine. +Equipment Loan +In January 2024, we entered into a secured equipment loan facility agreement with Banc of America Leasing & Capital, LLC and borrowed the principal amount of $0.8 million thereunder for the financing of our purchase of production equipment. The loan matures on January 23, 2029 and bears interest at a fixed rate of 7.06%. Under this loan agreement, equal monthly payments including principal and interest of $16,296 will be paid through the maturity of the loan on January 23, 2029. +Assumed Financing Obligations of MTEX +In connection with the purchase of MTEX, we assumed certain existing financing obligations of MTEX that remain outstanding as of January 31, 2025. The long-term debt obligations of MTEX that remain outstanding include a term loan (the “MTEX Term Loan”) pursuant to the agreement dated December 22, 2023 (the “MTEX Term Loan Agreement”) between MTEX and Caixa Central de Crédito Agricola Mutuo. The MTEX Term Loan provides for a term loan in the principal amount of EUR 1.5 million ($1.6 million) requiring monthly principal and interest payments totaling EUR 17,402 ($18,795) commencing in October 2024 and continuing through maturity on December 21, 2033, and bears interest at a fixed rate of 6.022% per annum. +MTEX has also received government assistance in the form of interest-free loans from government agencies located in Portugal (the “MTEX Government Grant Term Loans”). The MTEX Government Grant Term Loans are to be repaid to the applicable government agencies and are classified as long-term debt. The balance of the MTEX Government Grants Term Loans as of January 31, 2025 is $0.9 million. The MTEX Government Grant Term Loans provide interest-free financing so long as monthly principal payments are made. In the event that MTEX and the applicable government agency renegotiate the payment dates, interest will be calculated according to a rate determined by the government agency as of the date of renegotiation and added to the outstanding +26 +principal payments. The MTEX Government Grants Term Loans outstanding as of January 31, 2025 mature at different dates through January 2027. +Additionally, we assumed short-term financing obligations of MTEX, of which $0.6 million remain outstanding as of January 31, 2025, including letters of credit, maturing term loans, and financing arrangements for working capital classified as debt. +Subsequent Event – Credit Agreement Amendment and Waiver +On March 20, 2025, we entered into a Fourth Amendment to Amended and Restated Credit Agreement (the “Fourth Amendment”) with Bank of America, which further amended the Amended Credit Agreement (as so amended, the “Further Amended Credit Agreement"). +The Further Amended Credit Agreement modified the remaining quarterly installments in which the outstanding balance of the existing Term Loan must be paid; the outstanding principal balance of the Term Loan as of the effective date of the Fourth Amendment was $9,450,000. Under the Further Amended Credit Agreement, such remaining quarterly installments must be paid on the last day of each of our fiscal quarters through April 30, 2027 in the principal amount of (i) in the case of the installments for the fiscal quarters ending April 30, 2025 through January 31, 2026, $325,000 each, (ii) in the case of the installments for the fiscal quarters ending April 30, 2026 through January 31, 2027, $725,000 each, and (iii) in the case of the installment for the fiscal quarter ending April 30, 2027, $950,000; the entire then outstanding principal balance of the Term Loan is required to be paid on August 4, 2027. We continue to have the right to voluntarily prepay the Term Loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). +The remaining repayment installments of the existing Term A-2 Loan were not modified by the Fourth Amendment; the outstanding principal balance of the Term A-2 Loan as of the effective date of the Fourth Amendment was EUR 12,250,000 . The amount and availability and repayment terms of the existing $25.0 million revolving credit facility available to us under the Further Amended Credit Agreement were not modified by the Fourth Amendment; the outstanding principal balance under the revolving credit facility as of the effective date of the Fourth Amendment was $21.7 million. +The Further Amended Credit Agreement modified the applicable interest rate margins payable with respect to the Term Loan, the Term A-2 Loan and the revolving credit facility loans and modified the commitment fee payable with respect to the undrawn portion of the revolving credit facility. Under the Further Amended Credit Agreement, the Term Loan and revolving credit facility loans bear interest at a rate per annum equal to, at our option, either (a) the Term SOFR rate as defined in the Further Amended Credit Agreement (or, in the case of revolving credit loans denominated in Euros or another currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60% to 2.85% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate (iii) the Term SOFR Rate plus 1.00%, or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.85% based on our consolidated leverage ratio. Under the Further Amended Credit Agreement, the Term A-2 Loan bears interest at a rate per annum equal to the EURIBOR rate as defined in the Further Amended Credit Agreement, plus a margin that varies within a range of 1.60% to 2.85% based on our consolidated leverage ratio. Under the Further Amended Credit Agreement, the commitment fee that we are required to pay on the undrawn portion of the revolving credit facility under the Further Amended Credit Agreement varies within a range of 0.15% and 0.40% based on our consolidated leverage ratio. +We must comply with various customary financial and non-financial covenants under the Further Amended Credit Agreement, certain provisions of which covenants were modified by the Fourth Amendment. The financial covenants under the Further Amended Credit Agreement consist of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio that is tested commencing with the measurement period ending with the fiscal quarter ending January 31, 2026, and an interim minimum consolidated fixed charge coverage ratio that is tested for certain measurement periods ending April 30, 2025, July 31, 2025 and October 31, 2025; the interim minimum consolidated fixed charge coverage ratio was added by the Fourth Amendment, and certain provisions of the existing financial covenants were modified by the Fourth Amendment. +Pursuant to the Fourth Amendment, the Lender waived the events of default that had occurred under the Amended Credit Agreement as a result of our failure to comply with the maximum consolidated leverage ratio and the minimum consolidated fixed charge coverage ratio in effect thereunder for our fiscal measurement period ended January 31, 2025. +Cash Flow +The statements of cash flows for the years ended January 31, 2025, 2024, and 2023, are included on page F-8 of this Annual Report on Form 10-K. Net cash provided by operating activities was $4.8 million in fiscal 2025 compared to net cash provided by operating activities of $12.4 million in the previous year. The decrease in net cash provided by operations for the current year is primarily due to lower net income and a decrease in cash provided by working capital, as the changes in accounts receivable, inventory, income taxes, deferred revenue and accounts payable and accrued expenses for the current year decreased cash by $0.3 million in fiscal 2025 compared to an increase in cash of $0.7 million in the prior year. Cash provided by operating activities for fiscal 2024 was impacted by $2.0 million of non-cash restructuring costs. +27 +Our accounts receivable balance decreased to $21.2 million at January 31, 2025, compared to $23.1 million at January 31, 2024. Excluding the impact of the MTEX acquisition, accounts receivable decreased $2.9 million from prior year end. The days sales outstanding decreased to 51 days at year end compared to 52 days at the end of fiscal 2024. +The year-end inventory balance increased to $47.9 million at January 31, 2025 versus $46.4 million at January 31, 2024. Excluding the impact of the MTEX acquisition, inventories decreased $1.6 million from the prior year end. Inventory days on hand increased to 175 days at the end of the current year from 168 days at the prior year end. +Net cash used by investing activities for fiscal 2025 was $20.3 million, which includes $19.1 million related to the acquisition of MTEX and $1.2 million for capital expenditures. This compares to fiscal 2024 cash used by investing activities of $0.9 million for capital expenditures. +Net cash provided by financing activities for fiscal 2025 was $15.4 million. Cash provided by financing activities for fiscal 2025 primarily includes $15.1 million of proceeds from our debt borrowings and $11.5 million of borrowing under the revolving credit facility, offset by $9.0 million of principal payments on our long term debt and guaranteed royalty obligation payments of $1.9 million. Cash used by financing activities for fiscal 2024 includes $7.0 million of net repayment activity under the revolving credit facility, $2.1 million of principal payments on our long term debt and guaranteed royalty obligation payments of $1.7 million. +Fiscal 2024 compared to Fiscal 2023 +For a comparison of our cash flow for the fiscal years ended January 31, 2024, and January 31, 2023, see “Part II, Item 7. Management’s Discussion and Analysis of Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024, filed with the SEC on April 12, 2024. +Contractual Obligations, Commitments and Contingencies +As of January 31, 2025, we had contractual obligations related to lease arrangements, debt and royalty obligation arrangements and purchase commitments. +The lease arrangements are for certain of our facilities at various locations worldwide. As of January 31, 2025, we had fixed lease payment obligations of $2.3 million, with $0.4 million due within 12 months. Refer to Note 11, “Leases,” in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details. +Debt arrangements under our Amended Credit Agreement with Bank of America, N.A., consist of a Term Loan with an outstanding principal balance of $9.5 million at January 31, 2025, of which $2.7 million is due within the 12 months after that date; a Euro-denominated A-2 Term Loan with an outstanding principal balance of $12.7 million at January 31, 2025, of which $2.4 million is due within the 12 months after that date, and a revolving credit facility with an outstanding principal loan balance of $20.5 million at January 31, 2025. We also have an outstanding amount of $0.7 million for our secured equipment loan facility, of which $0.2 million is due within the 12 months after such date. Additionally, we have $3.4 million of debt outstanding at January 31, 2025 related to debt we assumed as part of the May 2024 MTEX acquisition, of which $1.4 million is due within 12 months. For additional details regarding our long-term debt obligations, see Note 8, “Credit Agreement and Long Term Debt,” in our audited consolidated financial statements included in this Annual Report on Form 10-K. +We are subject to a guaranteed minimum royalty payment obligation over the next five years pursuant to the Honeywell Agreements, which, at January 31, 2025 included a balance due of $2.5 million, with $1.4 million due within 12 months. Refer to Note 10, “Royalty Obligations,” in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details. +In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. At January 31, 2025, our purchase commitments totaled $29.0 million, with $27.4 million due within 12 months, some of which are non-cancelable. Subsequent to year end we entered into a three-year purchase commitment agreement with one of our vendors for a total of $5.2 million, of which $1.7 million is due within the next 12 months. +We are also subject to contingencies, including legal proceedings and claims arising out of our business that cover a wide range of matters, such as: contract and employment claims; workers’ compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of the amounts provided, or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that our results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +28 +Critical Accounting Policies and Estimates +Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on our historical experience, current trends and information available from other sources, as appropriate. We do not believe there is a great likelihood that materially different amounts would be reported using different assumptions pertaining to the accounting policies described below, however, if actual conditions differ from the assumptions used in our judgments, our financial results could be materially different from our estimates. +We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements: +Revenue Recognition : We recognize revenue in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.” Under ASC 606, based on the nature of our contracts, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied. +Our accounting policies relating to the recognition of revenue under ASC 606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which include (i) the existence of a contract with the customer, (ii) the identification of the performance obligations in the contract, (iii) the value of any variable consideration in the contract, (iv) the standalone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the contract, and (v) determining when a performance obligation has been met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery for those services, could result in inappropriate recognition of revenue, or incorrect timing of revenue recognition, which could have a material effect on our financial condition and results of operations. +We recognize revenue for non-recurring engineering (NRE) fees, as necessary, for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. +Infrequently, we receive requests from customers to hold products purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements in accordance with the guidance provided by ASC 606, which requires the transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) we do not have the ability to use the product or direct it to another customer. +Allowance for Doubtful Accounts: Accounts receivable consists primarily of receivables from our customers arising from the sale of our products. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts. +We estimate the collectability of our receivables and establish allowances for accounts receivable that we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our accounts receivable are outstanding and the financial condition of individual customers. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. We believe that our procedure for estimating such amounts is reasonable and historically has not resulted in material adjustments in subsequent periods. Bad debt expense was less than 1% of net sales in each of fiscal 2025 and 2024. +Warranty Claims: We offer warranties on some of our products. We establish a reserve for estimated costs of warranties at the time the product revenue is recognized. This reserve requires us to make estimates regarding the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect estimated warranty cost. If actual warranty costs differ from our estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of revenue, and the reserve balance recorded as an accrued expense. While we maintain product quality programs and processes, our warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, we revise our estimated warranty liability accordingly. +Inventories: Inventories are stated at the lower of average and standard cost or net realizable value. Cost is determined using an average cost method that approximates the first-in, first-out (FIFO) method. The process for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on hand and estimating the net realizable value of the inventory +29 +based on historical experience, current business conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. +Income Taxes: A valuation allowance is established when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, including our performance, the market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2025, we had provided valuation allowances for future tax benefits resulting from certain domestic and foreign R&D tax credits, foreign tax credit carryforwards, and China net operating losses, all of which are expected to expire unused. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted. +Business Combinations: We account for business acquisitions under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates that, if known, would have affected the measurement of the amounts recognized as of the acquisition date. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ from these estimates. During the measurement period, we may record adjustments to acquired assets and assumed liabilities, with corresponding offsets to goodwill. Upon the conclusion of a measurement period, any subsequent adjustments are recorded to earnings. +Goodwill and Intangible Assets: We recognize goodwill in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). Goodwill is the excess of cost of an acquired entity over the fair value amounts assigned to assets acquired and liabilities assumed in a business combination and is not amortized. +Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. Components within an operating segment can be aggregated as a single reporting unit if they have similar economic characteristics. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first quantitatively assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. +The quantitative assessment compares the fair value of the reporting unit with its carrying value. If a quantitative assessment is required, we estimate the fair value of our reporting units using a combination of both an income approach based upon a discounted cash flow model and a market approach. The income approach provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. In addition, we use the market approach, which compares the reporting unit to publicly traded companies and transactions involving similar business, to support the conclusions based upon the income approach. Based on the results of the quantitative assessment, if the fair value of the reporting unit exceeds the carrying value of the net assets, including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets, including goodwill, exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. We have recognized a goodwill impairment of $13.4 million for our PI segment for the fiscal year ended January 31, 2025. Refer to Note 4, “ Intangible Assets and Goodwill” in our consolidated financial statements included elsewhere in this report for further details. +We recognize intangibles assets in accordance with ASC 350. Acquired intangible assets subject to amortization are stated at fair value and are amortized using the straight-line method over the estimated useful lives of the assets. Intangible assets that are +30 +subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows. No impairment of intangible assets was identified for the years ended January 31, 2025 or January 31, 2024. +Share-Based Compensation: Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units. The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. +Recent Accounting Pronouncements +Reference is made to Note 1, “Summary of Significant Accounting Policies,” in our audited consolidated financial statements included elsewhere in this report. +Item 7A. Quantitative and Qualit ative Disclosures about Market Risk +Our primary financial market risks consist of foreign currency exchange rates risk and the impact of changes in interest rates that fluctuate with the market on our variable rate credit borrowings under our existing credit agreement. +Foreign Currency Exchange Risk +The functional currencies of our foreign subsidiaries and branches are the local currencies—the British Pound in the U.K., the Canadian Dollar in Canada, the Danish Kroner in Denmark, the Chinese Yuan in China, and the Euro in France, Germany and Portugal. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign subsidiaries are translated to U.S. dollars. The assets and liabilities of our foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at an average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity. The reported results of our foreign subsidiaries will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency translation exposure is related to our subsidiaries that have functional currencies denominated in Danish Kroner and the Euro. A hypothetical 10% change in the rates used to translate the results of our foreign subsidiaries would result in an increase or decrease in our consolidated net income of $1.9 million for the year ended January 31, 2025. +Transactional exposure arises where transactions occur in currencies other than the functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the balance sheet date and the resulting gains and losses are reported as foreign exchange gain (loss) in the consolidated statements of income. Foreign exchange losses resulting from transactional exposure were $0.5 million for the year ended January 31, 2025. +Interest Rate Risk +At January 31, 2025, our total indebtedness primarily consists of an outstanding principal amount of $9.5 million of USD term loan variable-rate debt, $12.7 million of Euro term loan variable-rate debt, and an outstanding principal balance of $20.5 million under our revolving credit facility, which bears interest at a variable rate. At January 31, 2025, the USD term loan and our revolving credit facility debt bears interest at the SOFR rate as defined in the Amended Credit Agreement plus a margin that varies between 1.60% and 2.50% based on our consolidated leverage ratio and the Euro term loan bears interest at a rate per annum equal to the EURIBOR rate as defined in the Amended Credit Agreement, plus a margin that varies within a range of 1.60% to 2.50% based on our consolidated leverage ratio. During fiscal 2025, the weighted average interest rate on our variable rate debt was 6.71%, and the weighted average interest rate on our revolving credit facility debt was 7.28%. The impact on our results of operations of a 100 basis point change in the interest rates on the outstanding balance of our variable-rate term debt and revolving credit facility debt would be approximately $0.4 million annually. +31 +Item 8. Financial Stateme nts and Supplementary Data +The consolidated financial statements required under this item are submitted as a separate section of this report on the pages indicated at Item 15(a)(1). +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls a nd Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +Based on that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of January 31, 2025. +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2025. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The scope of management’s assessment of the effectiveness of its disclosure controls and procedures did not include the internal controls over financial reporting at MTEX, which was acquired effective May 6, 2024. Our consolidated total assets as of January 31, 2025 include $20.9 million from MTEX and our consolidated revenue for the year ended January 31, 2025 includes $4.2 million from MTEX. This exclusion is consistent with the SEC staff’s guidance that an assessment of a recently acquired business may be omitted from the scope of management’s assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the year of acquisition. Based on this assessment, our Principal Executive Officer and Principal Financial Officer believe that as of January 31, 2025, our internal control over financial reporting was effective. +Remediation of Previously Identified Material Weakness +As reported in Item 9A of our Annual Report on Form 10-K for the year ended January 31, 2024, our management concluded that our internal control over financial reporting was ineffective as of January 31, 2024 due to a material weakness as a result of not designing or maintaining an effective control environment to ensure the accurate and timely reporting of transactions related to our Astro Machine subsidiary, which was acquired August 4, 2022. +Management has taken actions to remediate the deficiencies in our internal controls over financial reporting and implemented additional processes and controls designed to address the underlying causes associated with the above-mentioned material weakness. Management’s internal control remediation efforts included the following: +32 +• +During the third quarter of fiscal 2025, we completed the implementation of our NetSuite ERP system at our Astro Machine subsidiary. We have implemented additional controls to mitigate existing risks of proper segregation and change configurations related to this implementation. +• +An outside firm continued to assist management with performing control design and operating effectiveness testing throughout the year. +• +We regularly reported the results of control testing to the key stakeholders across our organization, including our Audit Committee, on testing progress and defined corrective actions, and we monitored and reported on the results of control remediation. We have strengthened our internal policies, processes, and reviews through these actions. +• +We have continued working on documenting and structuring our processes to meet Sarbanes-Oxley (SOX) 404(a) requirements. +Based on the successful implementation and testing of these new and enhanced control processes, we have concluded that the material weakness described above has been remediated as of January 31, 2025. +The effectiveness of our internal control over financial reporting as of January 31, 2025 has been audited by Wolf & Company, P.C., an independent registered public accounting firm, as stated in their attestation report, which is included herein. +Changes in Internal Controls over Financial Reporting +Except as noted above, there have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Oth er Information +None of our directors or officers, as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, adopted or terminated a Rule 10b5-1 trading plan or arrangement or a non-Rule 10b5-1 trading plan or arrangement, as defined in Item 408(c) of Regulation S-K, during the fiscal quarter covered by this report. +Item 9C. Disclosure Regarding Fore ign Jurisdictions that Prevent Inspections +Not applicable. +33 +PART III +Item 10. Directors, Executive Offic ers and Corporate Governance +The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed for our 2025 Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year (our “Proxy Statement”). Certain other information relating to our executive officers appears in Part I of this Annual Report on Form 10-K under the heading “Information about our Executive Officers.” +Item 11. Executive Compe nsation +The information required by this item is incorporated herein by reference to our Proxy Statement. +The information set forth under the heading “Compensation Committee Report” in our Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item is incorporated herein by reference to our Proxy Statement. +Item 13. Certain Relationships, Related T ransactions and Director Independence +The information required by this item is incorporated herein by reference to our Proxy Statement. +Item 14. Principal Accounta nt Fees and Services +The information required by this item is incorporated herein by reference to our Proxy Statement. +34 +PART IV +Item 15. Exhibits and Fi nancial Statement Schedule +(a)(1) Financial Statements: +The following documents are included as part of this Annual Report filed on Form 10-K: +Page +Reports of Independent Registered Public Accounting Firm +F- 1 +Consolidated Balance Sheets as of January 31, 2025 and 2024 +F- 4 +Consolidated Statements of Income (Loss)—Years Ended January 31, 2025, 2024, and 2023 +F- 5 +Consolidated Statements of Comprehensive Income (Loss)—Years Ended January 31, 2025, 2024, and 2023 +F- 6 +Consolidated Statements of Changes in Shareholders’ Equity—Years Ended January 31, 2025, 2024, and 2023 +F- 7 +Consolidated Statements of Cash Flows—Years Ended January 31, 2025, 2024, and 2023 +F- 8 +Notes to Consolidated Financial Statements +F- 9 +(a)(2) Financial Statement Schedule: +Schedule II—Valuation and Qualifying Accounts and Reserves—Years Ended January 31, 2025, 2024, and 2023 +F- 38 +All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. +Item 16. Form 1 0-K Summary +Not Applicable. +(a)(3) Exhibits: +Exhibit +Number +(2.1) +Share Purchase Agreement, dated January 7, 2017, as amended, by and among ANI ApS, Trojan Holding ApS, as a Seller and as the Sellers’ Representative, and Li Wei Chong filed as Exhibit 2.1 to our Annual Report on Form 10-K for the year ended January 31, 2017 and incorporated by reference herein* +(2.2) +Share Purchase Agreement, dated May 4, 2024, by and among AstroNova Portugal, Unipessoal, Lda., as Purchaser, AstroNova, Inc., as First Guarantor, Effort Premier Solutions Lda., as Seller, and Elói Serafim Alves Ferreira, as Guarantor filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, event date May 4, 2024, filed with the SEC on May 9, 2024 and incorporated by reference herein* +(3.1) +Restated Articles of Incorporation of the Company and all amendments thereto filed as Exhibit 3A to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(3.2) +By-laws of the Company as amended to date filed as Exhibit 3B to our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (File No. 000-13200) and incorporated by reference herein. +(4.1) +Specimen form of common stock certificate of the Company filed as Exhibit 4 to our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and incorporated by reference herein. +(4.2) +Description of securities registered pursuant to Section 12 of the Exchange Act filed as Exhibit 4.2 to our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (File No. 000-13200) and incorporated by reference herein. +(10.1) +Astro-Med, Inc. 2007 Equity Incentive Plan as filed as Appendix A to the Definitive Proxy Statement filed on April 25, 2007 on Schedule 14A (File No. 000-13200) for the 2007 annual shareholders meeting and incorporated by reference herein.** +35 +Exhibit +Number +(10.2) +Change in Control Agreement dated as of November 24, 2014 by and between the Company and Gregory A. Woods filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended January 31, 2015 and incorporated by reference herein.** +(10.3) +AstroNova Inc. 2015 Equity Incentive Plan filed as Exhibit A to the Definitive Proxy Statement filed on April 21, 2015 (File No. 000-13200) for the 2015 annual shareholders meeting and incorporated by reference herein.** +(10.4) +Form of Incentive Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.5) +Form of Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.6) +Form of Non-Employee Director Non-Statutory Stock Option Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.7) +Form of Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.8) +Form of Non-Employee Director Restricted Stock Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.9) +Form of Time-Based Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.10) +Form of Performance Restricted Stock Unit Agreement granted under the 2015 Equity Incentive Plan filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2016 and incorporated by reference herein.** +(10.11) +Asset Purchase and License Agreement, dated September 28, 2017, by and between AstroNova, Inc. and Honeywell International, Inc. filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date September 28, 2017, filed with the SEC on October 4, 2017 and incorporated by reference herein. +(10.12) +Form of Performance-based Restricted Stock Unit Award Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.13) +Form of Restricted Stock Unit Agreement (time-based vesting) filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.14) +Form of Incentive Stock Option filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +36 +Exhibit +Number +(10.15) +Form of Non-statutory Stock Option filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.16) +Form of Non-statutory Stock Option (Non-employee Director) filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.17) +Form of Restricted Stock Agreement filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.18) +Form of Non-employee Director Restricted Stock Agreement filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K, event date June 4, 2018, filed with the SEC on June 4, 2018 and incorporated by reference herein.** +(10.19) +AstroNova, Inc. Amended and Restated Non-Employee Director Annual Compensation Program.** +(10.20) +AstroNova, Inc. 2018 Equity Incentive Plan Non-Employee Director Restricted Stock Agreement filed as Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019 and incorporated by reference herein.* +(10.21) +AstroNova, Inc. 2018 Equity Incentive Plan, as amended, filed as Appendix A to the Company’s Definitive Proxy Statement filed with the SEC on May 25, 2019 on Schedule 14A and incorporated by reference herein.* +(10.22) +Amended and Restated Credit Agreement dated as of July 30, 2020 among AstroNova, Inc., ANI ApS, TrojanLabel ApS, and Bank of America, N.A. filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020 and incorporated by reference herein. +(10.23) +Amended and Restated Security and Pledge Agreement dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date July 30, 2020, filed with the SEC on August 5, 2020 and incorporated by reference herein. +(10.24) +Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 30, 2020 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date July 30, 2020, filed with the SEC on August 5, 2020 and incorporated by reference herein. +(10.25) +First Amendment to Credit Agreement dated as of March 24, 2021 among AstroNova, Inc. ANI ApS, TrojanLabel ApS and Bank of America, N.A., filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2021, and incorporated by reference herein. +(10.26) +First Amendment to Open-End Mortgage Deed to Secure Present and Future Loans under Chapter 25 of Title 34 of the Rhode Island General Laws, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of March 24, 2021 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2021, and incorporated by reference herein. +37 +Exhibit +Number +(10.27) +Form of Indemnification Agreement for directors and officers, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2021, and incorporated by reference herein.** +(10.28) +LIBOR Transition Amendment dated as of December 14, 2021 among AstroNova, Inc. and Bank of America, N.A., filed as Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2022, and incorporated by reference herein. +(10.29) +AstroNova, Inc. 2022 Employee Stock Purchase Plan, filed as Annex A to the AstroNova, Inc. Definitive Proxy Statement on Schedule 14A filed with the SEC on April 29, 2022 and incorporated by reference herein.** +(10.30) +Transitional Management Agreement dated May 4, 2024, by and between AstroNova Portugal, Unipessoal, Lda., Effort Premier Solutions Lda., Elói Serafim Alves Ferreira, and MTEX New Solutions, S.A., filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date May 4, 2024, filed with the SEC on May 9, 2024 and incorporated by reference herein * +(10.31) +Third Amendment to Amended and Restated Credit Agreement dated as of May 6, 2024 among AstroNova, Inc., Astro Machine Corporation and Bank of America, N.A., filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date May 4, 2024, filed with the SEC on May 9, 2024 and incorporated by reference herein* +(10.32) +Offer Letter dated May 31, 2024 between the Company and Thomas DeByle, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date June 17, 2024, filed with the SEC on June 20, 2024 and incorporated by reference herein .** +(10.33) +Separation Agreement dated June 25, 2024 between the Company and David S. Smith, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date June 25, 2024, filed with the SEC on June 27, 2024 and incorporated by reference herein .** +(10.34) +Amendment dated August 5, 2024 to Separation Agreement between the Company and David S. Smith, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event dated August 5, 2024, filed with the SEC on August 8, 2024 and incorporated by reference herein. ** +(10.35) +Fourth Amendment to Amended and Restated Credit Agreement dated as of March 20, 2025 among AstroNova, Inc., Astro Machine Corporation and Bank of America, N.A., filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date March 20, 2025, filed with the SEC on March 21, 2025 and incorporated by reference herein. +(19) +Statement of Policy Regarding Transaction in Securities of AstroNova, Inc. +(21) +List of Subsidiaries of the Company. +(23.1) +Consent of Wolf & Company, P.C. +(31.1) +Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(31.2) +Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +(32.1) +Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(32.2) +Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +(97) +AstroNova, Inc. Compensation Recovery Policy filed as Exhibit 97 to the Company’s Annual Report on Form 10-K for the period ended January 31, 2024, and incorporated by reference herein . +(101.INS) +XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document +(101.SCH) +Inline XBRL Taxonomy Extension Schema Document +(104) +Cover Page Interactive Data File (embedded within the Inline XBRL document). +* Schedules to this Exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request. +** Management contract or compensatory plan or arrangement. +38 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +ASTRONOVA, INC. +(Registrant) +/s/ Gregory A. Woods +Date: April 15, 2025 +By: +(Gregory A. Woods, Chief Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. +Name +Title +Date +/s/ Gregory A. Woods +Gregory A. Woods +President, Chief Executive Officer and Director (Principal Executive Officer) +April 15, 2025 +/s/ Thomas D. DeByle +Thomas D. DeByle +Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) +April 15, 2025 +/s/ Alexis P. Michas +Alexis P. Michas +Director +April 14, 2025 +/s/ Mitchell I. Quain +Mitchell I. Quain +Director +April 15, 2025 +/s/ Yvonne E. Schlaeppi +Yvonne E. Schlaeppi +Director +April 15, 2025 +/s/ Richard S. Warzala +Richard S. Warzala +Director +April 15, 2025 +/s/ Darius G. Nevin +Darius G. Nevin +Director +April 15, 2025 +REPORT OF INDEPENDENT REGIS TERED PUBLIC ACCOUNTING FIRM +The Shareholders and Board of Directors of +AstroNova, Inc. +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of AstroNova, Inc. (the “Company”) as of January 31, 2025 and 2024, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended January 31, 2025, and the related notes to the consolidated financial statements and the financial statement schedule listed in Item 15(a)(2) (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2025 and 2024, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2025, in conformity with accounting principles generally accepted in the United States of America. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 31, 2025, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated April 15, 2025 expressed an opinion that the Company maintained effective internal control over financial reporting as of January 31, 2025, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matters +Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +Goodwill Impairment Assessment +As described in Notes 1 and 4 to the financial statements, the Company’s consolidated goodwill balance was $14.5 million as of January 31, 2025. Management tests goodwill for impairment annually or more frequently if an event or change in circumstances indicate the asset may be impaired. Management performed the annual goodwill impairment test as of January 31, 2025. Impairment testing for goodwill is done at the reporting unit level. The fair value of the reporting unit is determined utilizing a combination of both an income approach and a market approach. The income approach utilizes a discounted cash flow analysis based upon the forecasted future business results of the reporting unit. The market approach utilizes the guideline public company method. If the fair value of a reporting unit is less than its carrying amount, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This evaluation resulted in an impairment of the Product Identification reporting unit's goodwill, totaling $13.4 million. As disclosed by management, the most significant assumptions used in the goodwill impairment assessment relate to revenue growth rates, the discount rate and the gross margin rates. +The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments for the Product Identification reporting unit is a critical audit matter are (i) the significant judgment by management when determining the fair value of the reporting unit; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, the discount rate and gross margin rates. +F- 1 +Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s goodwill impairment assessments, including controls over the determination of the fair value of the reporting unit. These procedures also included, among others (i) testing management’s process for determining the fair value of the reporting unit; (ii) evaluating the appropriateness of the discounted cash flow analysis; (iii) testing the completeness and accuracy of underlying data used in the discounted cash flow analysis; and (iv) evaluating the reasonableness of the significant assumptions used by management related to revenue growth rates, gross margin rates and the discount rate. Evaluating management’s significant assumptions related to revenue growth rates and the gross margin rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit and (ii) whether the assumptions were consistent with evidence obtained in other areas of the audit. +Valuation of Intangible Assets in the MTEX Acquisition +As described in Note 2 to the financial statements, the Company completed an acquisition of MTEX for consideration of $18.7 million in the year ended January 31, 2025. The Company accounted for this acquisition as a business combination. +Auditing the accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of identified intangible assets of $7.54 million, including the customer relationship intangible asset and internally developed technology assets. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business and due to the limited historical data on which to base these assumptions. The significant assumptions used to form the basis of the forecasted results included customer attrition rates and forecasted revenues and expenditures. These significant assumptions were forward-looking and could be affected by future economic and market conditions. +Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others (i) obtaining an understanding of management’s process for accounting for the transaction; (ii) evaluating the qualifications of the third-party expert engaged by management; (iii) testing management’s and the third-party expert’s, process for developing the valuation models, and (iv) evaluating the significant assumptions used in developing the valuation models. In evaluating management’s assumptions used in the development of the valuation models we considered (i) whether these assumptions were consistent with evidence obtained in other areas of the audit and (ii) the sensitivity to change of the assumptions used. +/s/ Wolf & Company, P.C. +We have served as the Company’s auditor since 2013. +Boston, Massachusetts +April 15, 2025 +F- 2 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Shareholders and Board of Directors of +AstroNova, Inc. +Opinion on the Internal Control Over Financial Reporting +We have audited AstroNova, Inc.’s (the Company) internal control over financial reporting as of January 31, 2025, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained effective internal control over financial reporting as of January 31, 2025, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and our report dated April 15, 2025 expressed an unqualified opinion. +As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded MTEX from its assessment of internal control over financial reporting as of January 31, 2025, because it was acquired by the Company in a purchase business combination in the second quarter of fiscal 2025. We have also excluded MTEX from our audit of internal control over financial reporting. MTEX is a wholly owned subsidiary whose total assets and revenues represent approximately 14% and 3%, respectively, of the related consolidated financial statement amounts as of and for the year ended January 31, 2025. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Wolf & Company, P.C. +We have served as the Company’s auditor since 2013. +Boston, Massachusetts +April 15, 2025 +F- 3 +ASTRONOVA, INC. +CONSOLIDATED BALANCE SHEETS +As of January 31 +(In Thousands, Except Share Data) +2025 +2024 +ASSETS +CURRENT ASSETS +Cash and Cash Equivalents +$ +5,050 +$ +4,527 +Accounts Receivable, net of reserves of $ 3,104 in 2025 and $ 618 in 2024 +21,218 +23,056 +Inventories +47,894 +46,371 +Prepaid Expenses and Other Current Assets +3,855 +2,720 +Total Current Assets +78,017 +76,674 +Property, Plant and Equipment, net +17,639 +14,185 +Identifiable Intangibles, net +23,519 +18,836 +Goodwill +14,515 +14,633 +Deferred Tax Assets, net +8,431 +6,882 +Right of Use Asset +1,781 +603 +Other Assets +1,693 +1,438 +TOTAL ASSETS +$ +145,595 +$ +133,251 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES +Accounts Payable +$ +7,928 +$ +8,068 +Accrued Compensation +3,745 +2,923 +Other Accrued Expenses +4,461 +2,706 +Revolving Credit Facility +20,929 +8,900 +Current Portion of Long-Term Debt +6,110 +2,842 +Short-Term Debt +581 +— +Current Liability—Royalty Obligation +1,358 +1,700 +Current Liability—Excess Royalty Payment Due +691 +935 +Income Taxes Payable +— +349 +Deferred Revenue +543 +1,338 +Total Current Liabilities +46,346 +29,761 +NON-CURRENT LIABILITIES +Long-Term Debt, net of current portion +19,044 +10,050 +Royalty Obligation, net of current portion +1,106 +2,093 +Lease Liabilities, net of current portion +1,535 +415 +Grant Deferred Revenue +1,090 +— +Income Taxes Payable +684 +551 +Deferred Tax Liabilities +40 +99 +TOTAL LIABILITIES +69,845 +42,969 +Commitments and Contingencies (See Note 22) +SHAREHOLDERS’ EQUITY +Preferred Stock, $ 10 Par Value, Authorized 100,000 shares, No ne Issued +— +— +Common Stock, $ 0.05 Par Value, Authorized 13,000,000 shares; Issued 10,936,220 +shares in 2025 and 10,812,137 shares in 2024 +547 +541 +Additional Paid-in Capital +64,215 +62,684 +Retained Earnings +49,380 +63,869 +Treasury Stock, at Cost, 3,394,942 shares in 2025 and 3,368,763 shares in 2024 +( 35,043 +) +( 34,593 +) +Accumulated Other Comprehensive Loss, net of tax +( 3,349 +) +( 2,219 +) +TOTAL SHAREHOLDERS’ EQUITY +75,750 +90,282 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +145,595 +$ +133,251 +See Notes to the Consolidated Financial Statements. +F- 4 +ASTRONOVA, INC. +CONSOLIDATED STATE MENTS OF INCOME (LOSS) +For the years ended January 31 +(In Thousands, Except Per Share Data) +2025 +2024 +2023 +Revenue +$ +151,283 +$ +148,086 +$ +142,527 +Cost of Revenue +98,534 +96,465 +94,371 +Gross Profit +52,749 +51,621 +48,156 +Costs and Expenses: +Selling and Marketing +25,560 +24,428 +24,456 +Research and Development +6,610 +6,906 +6,822 +General and Administrative +15,816 +11,491 +11,435 +Goodwill Impairment +13,403 +— +— +Operating Expenses +61,389 +42,825 +42,713 +Operating Income (Loss) +( 8,640 +) +8,796 +5,443 +Other Income (Expense): +Interest Expense +( 3,210 +) +( 2,697 +) +( 1,678 +) +Gain (Loss) on Foreign Currency Transactions +335 +( 83 +) +( 474 +) +Other, net +( 772 +) +57 +119 +Total Other Income (Expense) +( 3,647 +) +( 2,723 +) +( 2,033 +) +Income (Loss) before Income Taxes +( 12,287 +) +6,073 +3,410 +Income Tax Provision +2,202 +1,379 +749 +Net Income (Loss) +$ +( 14,489 +) +$ +4,694 +$ +2,661 +Net Income (Loss) Per Common Share—Basic +$ +( 1.93 +) +$ +0.63 +$ +0.36 +Net Income (Loss) Per Common Share—Diluted +$ +( 1.93 +) +$ +0.63 +$ +0.36 +Weighted Average Number of Common Shares Outstanding—Basic +7,509 +7,415 +7,307 +Dilutive Effect of Common Stock Equivalents +— +(1) +81 +67 +Weighted Average Number of Common Shares Outstanding—Diluted +7,509 +7,496 +7,374 +(1) For the year ended January 31, 2025, we had weighted average common stock equivalent shares outstanding of 45,908 that could potentially dilute earnings per share in future periods. These shares were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive given the net loss during the period. +See Notes to the Consolidated Financial Statements. +F- 5 +ASTRONOVA, INC. +CONSOLIDATED STATEMENT S OF COMPREHENSIVE INCOME (LOSS) +For the years ended January 31 +(In Thousands) +2025 +2024 +2023 +Net Income (Loss) +$ +( 14,489 +) +$ +4,694 +$ +2,661 +Other Comprehensive Income (Loss), net of taxes and reclassification +adjustments: +Foreign Currency Translation Adjustments +( 1,130 +) +19 +( 537 +) +Loss from Cash Flow Hedges Reclassified to Income Statement +— +— +47 +Other Comprehensive Income (Loss) +( 1,130 +) +19 +( 490 +) +Comprehensive Income (Loss) +$ +( 15,619 +) +$ +4,713 +$ +2,171 +See Notes to the Consolidated Financial Statements. +F- 6 +ASTRONOVA, INC. +CONSOLIDATED STATEMENTS OF CH ANGES IN SHAREHOLDERS’ EQUITY +($ In Thousands) +Common Stock +Additional +Paid-in +Retained +Treasury +Accumulated +Other +Comprehensive +Total +Shareholders’ +Shares +Amount +Capital +Earnings +Stock +Income (Loss) +Equity +Balance January 31, 2022 +10,566,404 +$ +528 +$ +59,692 +$ +56,514 +$ +( 33,974 +) +$ +( 1,748 +) +$ +81,012 +Share-Based Compensation +— +— +1,290 +— +— +— +1,290 +Employee Option Exercises +25,123 +2 +153 +— +— +— +155 +Restricted Stock Awards Vested, net +85,324 +4 +( 4 +) +— +( 261 +) +— +( 261 +) +Net Income +— +— +— +2,661 +— +— +2,661 +Other Comprehensive Loss +— +— +— +— +— +( 490 +) +( 490 +) +Balance January 31, 2023 +10,676,851 +$ +534 +$ +61,131 +$ +59,175 +$ +( 34,235 +) +$ +( 2,238 +) +$ +84,367 +Share-Based Compensation +— +— +1,347 +— +— +— +1,347 +Employee Option Exercises +18,998 +1 +212 +— +— +— +213 +Restricted Stock Awards Vested, net +116,288 +6 +( 6 +) +— +( 358 +) +— +( 358 +) +Net Income +— +— +— +4,694 +— +— +4,694 +Other Comprehensive Income +— +— +— +— +— +19 +19 +Balance January 31, 2024 +10,812,137 +$ +541 +$ +62,684 +$ +63,869 +$ +( 34,593 +) +$ +( 2,219 +) +$ +90,282 +Share-Based Compensation +— +— +1,378 +— +— +— +1,378 +Employee Option Exercises +27,096 +1 +158 +— +— +— +159 +Restricted Stock Awards Vested, net +96,987 +5 +( 5 +) +— +( 450 +) +— +( 450 +) +Net Loss +— +— +— +( 14,489 +) +— +— +( 14,489 +) +Other Comprehensive Loss +— +— +— +— +— +( 1,130 +) +( 1,130 +) +Balance January 31, 2025 +10,936,220 +$ +547 +$ +64,215 +$ +49,380 +$ +( 35,043 +) +$ +( 3,349 +) +$ +75,750 +See Notes to the Consolidated Financial Statements. +F- 7 +ASTRONOVA, INC. +CONSOLIDATED STAT EMENTS OF CASH FLOWS +For the years ended January 31 +(In Thousands) +2025 +2024 +2023 +Cash Flows from Operating Activities: +Net Income (Loss) +$ +( 14,489 +) +$ +4,694 +$ +2,661 +Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) By +Operating Activities: +Depreciation and Amortization +4,780 +4,266 +3,916 +Grant Income charged to Depreciation +159 +— +— +Goodwill Impairment +13,403 +— +— +Amortization of Debt Issuance Costs +30 +23 +25 +Restructuring Cost +— +2,040 +— +Share-Based Compensation +1,378 +1,347 +1,290 +Deferred Income Tax Provision (Benefit) +9 +( 78 +) +( 1,336 +) +Changes in Assets and Liabilities, net of impact of acquisition: +Accounts Receivable +2,859 +( 1,486 +) +( 1,234 +) +Other Receivable – Employee Retention Credit Receivable +— +— +3,135 +Inventories +1,616 +2,910 +( 11,581 +) +Accounts Payable and Accrued Expenses +( 2,379 +) +( 46 +) +( 3,236 +) +Deferred Revenue +( 1,520 +) +— +— +Income Taxes Payable +( 904 +) +( 343 +) +1,710 +Other +( 94 +) +( 973 +) +1,714 +Net Cash Provided (Used) by Operating Activities +4,848 +12,354 +( 2,936 +) +Cash Flows from Investing Activities: +Cash Paid for Acquisitions, net of cash acquired +( 19,109 +) +— +( 17,034 +) +Additions to Property, Plant and Equipment +( 1,165 +) +( 875 +) +( 229 +) +Net Cash Used by Investing Activities +( 20,274 +) +( 875 +) +( 17,263 +) +Cash Flows from Financing Activities: +Net Cash Proceeds from Employee Stock Option Plans +13 +105 +85 +Net Cash Proceeds from Share Purchases under Employee Stock +Purchase Plan +146 +107 +70 +Net Cash Used for Payment of Taxes Related to Vested Restricted Stock +( 450 +) +( 358 +) +( 261 +) +Net (Repayments)/Borrowings under Revolving Credit Facility +11,508 +( 7,000 +) +15,900 +Payment of Minimum Guarantee Royalty Obligation +( 1,902 +) +( 1,725 +) +( 2,000 +) +Proceeds from Long-Term Debt Borrowings +15,078 +— +6,000 +Principal Payments on Long-Term Debt +( 8,980 +) +( 2,100 +) +( 1,000 +) +Payments of Debt Issuance Costs +( 35 +) +— +( 39 +) +Net Cash Provided (Used) by Financing Activities +15,378 +( 10,971 +) +18,755 +Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents +571 +73 +114 +Net Increase in Cash and Cash Equivalents +523 +581 +( 1,330 +) +Cash and Cash Equivalents, beginning of year +4,527 +3,946 +5,276 +Cash and Cash Equivalents, end of year +$ +5,050 +$ +4,527 +$ +3,946 +Supplemental Information: +Cash Paid During the Period for: +Interest +$ +2,701 +$ +2,343 +$ +791 +Income Taxes, net of refunds +$ +2,210 +$ +1,694 +$ +311 +Non-Cash Transactions: +Operating Lease Obtained in Exchange for Operating Lease Liabilities +$ +1,581 +$ +— +$ +— +Financed Equipment Purchase +$ +— +$ +822 +$ +— +Reclassification of Inventories to Property, Plant and Equipment +$ +— +$ +— +$ +348 +Recognize Intangible Asset and Royalty Payable Related to Honeywell Asset Purchase and License Agreement +$ +— +$ +— +$ +530 +See Notes to the Consolidated Financial Statements. +F- 8 +ASTRONOVA, INC. +NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS +January 31, 2025, 2024, and 2023 +Note 1—Summary of Significant Accounting Policies +Basis of Presentation: The accompanying financial statements and accompanying notes have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and are presented in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year. +Principles of Consolidation: The consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. +Reclassification: Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation. +Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes using information that is reasonably available to us at this time. Some of the more significant estimates relate to revenue recognition; allowances for doubtful accounts; inventory valuation; income taxes; valuation of long-lived assets, intangible assets and goodwill; share-based compensation; and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates. +Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are considered to be cash equivalents. At January 31, 2025 and 2024, $ 2.7 million and $ 2.3 million, respectively, was held in foreign bank accounts. +Inventories: Inventories are stated at the lower of standard and average cost or net realizable value and include material, labor and manufacturing overhead. Cost is determined using an average cost method that approximates the first-in, first-out (FIFO) method. +Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements— 10 to 20 years; buildings and leasehold improvements— 10 to 45 years; machinery and equipment— 3 to 10 years; and computer equipment and software— 3 to 10 years). +Revenue Recognition: We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers (“ASC 606”).” The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to recognize revenue and requires judgment and estimates within the revenue recognition process, including identifying contracts with customers, identifying performance obligations in the contract, determining and estimating the amount of any variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation and recognizing revenue when the entity satisfies each performance obligation. +The vast majority of our revenue is generated from the sale of distinct products. Revenue is measured as the amount of consideration we expect to receive in exchange for such products, which is generally at the contractually stated prices, and is recognized when we satisfy a performance obligation by transferring control of a product to a customer. The transfer of control generally occurs at one point in time, upon shipment, when title and risk of loss pass to the customer. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Sales taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue. +Many of the contracts entered into with customers are commonly comprised of a combination of equipment, supplies, installation and/or training services. We determine performance obligations by assessing whether the products or services are distinct from other elements of the contract. In order to be distinct, the product must perform either on its own or with readily available resources and must be separate within the context of the contract. +F- 9 +Most of our hardware products contain embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole, as it is not sold or marketed separately, and its production costs are minor compared to those of the hardware system. Hardware and software elements are typically delivered at the same time and are accounted for as a single performance obligation for which revenue is recognized at the point in time when ownership is transferred to the customer. +Installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. The delivery of installation and training services are not assessed to determine whether they are separate performance obligations, as the amounts are not material to the contract. +Shipping and handling activities that occur after control over a product has transferred to a customer are accounted for as fulfillment activities rather than performance obligations, as allowed under a practical expedient provided by ASC 606. The shipping and handling fees charged to customers are recognized as revenue and the related costs are included in cost of revenue at the point in time when ownership of the product is transferred to the customer. +We may perform services at the request of the customer, generally for the repair and maintenance of products previously sold. These services are short in duration and total approximately 5.0 % of revenue for each of the years ended January 31, 2025 and 2024. Revenue is recognized as services are rendered and accepted by the customer. We also provide service agreements on certain of our Product Identification equipment. Service agreements are purchased separately from the equipment and provide for the right to obtain service and maintenance on the equipment for a period of typically one to two years. Accordingly, revenue on these agreements is recognized over the term of the agreements. The portion of service agreement contracts that are uncompleted at the end of any reporting period is included in deferred revenue. +We generally provide warranties for our products. The standard warranty period is typically 12 months for most hardware products except for airborne printers, which typically have warranties that extend for 3 - 5 years, consistent with industry practice. Such assurance-type warranties are not deemed to be separate performance obligations from the hardware product and costs associated with providing the warranties are accrued in accordance with ASC 450, “Contingencies,” as we have the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability. Our estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions. To the extent that our experience in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the estimated warranty liability are recorded at that time, with an offsetting adjustment to cost of revenue. On occasion, customers request a warranty period longer than our standard warranty. In those instances, in which extended warranty services are separately quoted to the customer, an additional performance obligation is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue. +We recognize and subsequently amortize an asset for the incremental direct costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year (refer to Note 3, “Revenue Recognition” for a discussion of Contract Costs). We apply the practical expedient to expense costs incurred for costs to obtain a contract when the amortization period would have been less than a year. These costs include sales commissions paid to the internal direct sales team as well as to third-party representatives and distributors. Contractual agreements with each of these parties outline commission structures and rates to be paid. In general, such contracts are all individual procurement decisions by the customers and do not include renewal provisions and, as such, the majority of the contracts have an economic life of significantly less than a year. +Accounts Receivables and Allowance for Doubtful Accounts: Standard payment terms are typically 30 days after shipment but vary by type and geographic location of our customer. Credit is extended based upon an evaluation of the customer’s financial condition. Our allowance for doubtful accounts represents our estimate of expected credit losses related to our trade receivables. We pool our trade receivables based on similar risk characteristics, such as the age of receivables. To estimate our allowance for doubtful accounts, we leverage information on historical losses, asset-specific risk characteristics, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when we deem the amount is uncollectible. Accounts receivable are stated at their estimated net realizable value. +Business Combinations: We account for business acquisitions under the acquisition method of accounting in accordance with ASC 805, ‘‘Business Combinations,’’ ASC 805 requires the purchase price of the acquisition to be allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair value as of the acquisition date as determined by widely accepted valuation techniques in accordance with ASC 820, “Fair Value Measurement.” Any excess of the purchase price over the fair value of the net identified assets acquired and liabilities assumed will be recorded as goodwill. ASC 805 establishes a measurement period to provide companies with a reasonable amount of time to obtain the information necessary to identify and measure various items in a business combination and cannot extend beyond one year from the acquisition date. Accounting for business combinations requires us to make significant estimates and assumptions at the acquisition date relevant to the determination of the fair value of the tangible and intangible assets acquired and liabilities assumed. These estimates include, but are not limited to, expected future cash flows, discount +F- 10 +rates, royalty rates, and other assumptions. Such estimates are inherently uncertain and may be subject to refinement. If the initial accounting for the business combination has not been completed by the end of the reporting period in which the business combination occurs, provisional amounts are reported to present information about facts and circumstances that existed as of the acquisition date. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of the tangible and intangible assets acquired and liabilities assumed with the corresponding offset to goodwill, to the extent such information was not available to us at the acquisition date to determine such amounts. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income. +Acquisition-related costs not considered part of the considerations are expensed as incurred and recorded in acquisition costs within the consolidated statement of income (loss). Changes in the fair value of contingent consideration arrangements that are not measurement period adjustments are recognized in earnings in the period of the change. The results of operations of the acquired entity, including revenues and earnings, are included in our financial statements from the closing date of the acquisition. +Research and Development Costs: We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income (loss). The following costs are included in research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies. +Foreign Currency Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the average monthly exchange rates in effect during the related period. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our subsidiaries in Germany, Denmark and China since their undistributed earnings are considered to be permanently invested. Included in our consolidated statements of income (loss) was a net transaction foreign exchange losses of $ 0.5 million, $ 0.1 million, and $ 0.5 million in fiscal 2025, 2024, and 2023, respectively. +Advertising: We expense advertising costs as incurred. Advertising costs including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to $ 2.0 million, $ 1.8 million, and $ 1.6 million, in fiscal years 2025, 2024, and 2023, respectively. +Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. There were no impairment charges for our long-lived assets in fiscal years 2025, 2024, or 2023. +Intangible Assets: Intangible assets include the value of customer and distributor relationships, trademarks and existing technology acquired in connection with business and asset acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. There were no impairment charges for our intangible assets in fiscal years 2025, 2024, or 2023. +Goodwill: Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate indicate that the carrying value of an asset might be impaired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. We determined that each of our operating segments Product Identification (“PI”) and Test & Measurement (“T&M”) represents a reporting unit for purposes of goodwill impairment testing. +F- 11 +The accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this qualitative assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. +The quantitative assessment compares the fair value of the reporting unit with its carrying value. If the quantitative assessment is performed, we estimate the fair value of our reporting units using a combination of both the income approach and a market approach. The income approach is based on a discounted cash flow model and provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. The market approach compares the reporting unit to publicly traded companies and transactions involving similar business, and requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. +For our fiscal 2025 analysis of goodwill we elected to forgo the qualitative assessment and perform a quantitative assessment. Based on the quantitative assessment performed, a goodwill impairment charge of $ 13.4 million was recognized related to our PI reporting unit (refer to Note 4, “Intangible Assets and Goodwill” for a further discussion of this impairment). There was no impairment to our T&M segment’s goodwill in fiscal year 2025, no r any impairment charges for goodwill in either of our T&M or PI segments for either fiscal year 2024 or 2023. +Leases: We account for our leases in accordance with ASC 842, “Leases” (“ASC 842”). ASC 842 requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (“ROU”) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using a discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate for the expected lease term is used. Our incremental borrowing rate approximates the rate we would have to pay to borrow on a collateralized basis over a similar term at lease inception. The value of the ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received. Several of our lease contracts include options to extend the lease term and we include the renewal options for these leases in the determination of the ROU asset and lease liability when the likelihood of renewal is determined to be reasonably certain. +We enter into lease contracts for certain of our facilities at various locations worldwide. At inception of a contract, we determine whether the contract is or contains a lease. If we have a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. +There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. We have made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. All of our leases are classified as operating leases. Operating lease expense is recognized on a straight-line basis over the lease term and included in general and administrative expense on the consolidated statement of income. ROU assets are classified as such on the consolidated balance sheets, short-term lease liabilities are classified in accrued expenses, and long-term lease liabilities are classified as such in the consolidated balance sheets. In the statements of cash flow, payments for operating leases are included as operating activities. +In addition, several of our facility lease agreements include non-lease components for items such as common area maintenance and utilities which are accounted for separately from the lease component. +Income Taxes: We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. Our deferred taxes are presented as non-current in the accompanying consolidated balance sheets. An allowance against deferred tax assets is recognized when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At both January 31, 2025 and January 31, 2024, a valuation allowance was provided for deferred tax assets attributable to certain domestic R&D, foreign tax credit carryforwards and China net operating losses, all of which are expected to expire unused. +We account for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. +F- 12 +Net Income Per Common Share: Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2025, 2024, and 2023, there were 173,380 ; 295,370 ; and 685,667 , respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive. +Fair Value Measurement: We measure our assets and liabilities at fair value on a recurring and non-recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures,” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances. +The fair value hierarchy is summarized as follows: +• +Level 1—Quoted prices in active markets for identical assets or liabilities; +• +Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and +• +Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. +Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, other accrued expenses and income tax payable are reflected in the consolidated balance sheet at carrying value, which approximates fair value due to the short-term nature of these instruments. +Self-Insurance: We are self-insured for U.S. medical and dental benefits for qualifying employees and maintain stop-loss coverage from a third party which limits our exposure to large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In estimating this accrual, we utilize an independent third-party broker to estimate a range of expected losses, which are based on analyses of historical data. Assumptions are closely monitored and adjusted when warranted by changing circumstances. Our liability for self-insured claims is included within accrued compensation in our consolidated balance sheets and was $ 0.3 million at both January 31, 2025 and 2024. +Share-Based Compensation: Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units. The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. +Share-based compensation becomes deductible for determining income taxes when the related award vests, is exercised, or is forfeited depending on the type of share-based award and subject to relevant tax law. +Derivative Financial Instruments: We occasionally use derivative instruments as part of our overall strategy to manage exposure to market risks primarily associated with fluctuations in foreign currency exchange rates and interest rates. Derivative instruments are recognized as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of income during the current period. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. +F- 13 +Cash Flow Hedges +For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the hedged transaction affects earnings (e.g., in “Interest Expense” when the hedged transactions are interest cash flows associated with floating-rate debt, or “Other, Net” for portions reclassified relating to the remeasurement of the debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, are recognized in the statement of income during the current period. +Net Investment Hedges +We formally assess a net investment hedge, both at inception and on a quarterly basis thereafter, as to whether the designated derivative or nonderivative instrument is highly effective as an economic hedge of foreign exchange risk associated with the hedged net investment. The change in the fair value of a derivative instrument or the change in the carrying value of a nonderivative instrument that is designated and highly effective as a net investment hedge is recorded in the cumulative translation adjustment component of Accumulated Other Comprehensive Income (“AOCI”), offsetting the translation adjustment of the net investment being hedged. +If a net investment hedging relationship ceases to be highly effective, we discontinue hedge accounting, and any future change in the fair value of the derivative hedging instrument or future change in the carrying value of the nonderivative hedging instrument is recorded in the “other expenses” in the consolidated statement of income (loss), which is where the gain or loss on the sale or substantial liquidation of the underlying net investment would be recorded. However, any deferred gains or losses previously recorded in the cumulative translation adjustment component of AOCI will remain in AOCI until the hedged net investment is sold or substantially liquidated, at which time the cumulative deferred gains or losses are recorded in the “other expenses” line in the consolidated statement of income (loss). +Recent Accounting Pronouncements +Financial Standards Adopted During Fiscal 2025 +Effective January 31, 2025 , we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. ASU 2023-07 also requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss to assess segment performance and make decisions about allocating resources. The amendments in this update do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. ASU 2023-07 was applied retrospectively to all prior periods presented in the financial statements. The adoption of ASU 2023-07 has only impacted our segment disclosures with no impact to our consolidated financial statements. See Note 17 “Segment Reporting and Geographical Information,” for segment disclosures. +Financial Accounting Standards Not Yet Adopted +In November 2024, the FASB issued ASU 2024-03, “Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.” ASU 2024-03 enhances expense disclosures on both an annual and interim basis by requiring public entities to disclose additional information about specific expense categories in the notes to the consolidated financial statements. This ASU requires disclosure in tabular format of purchases of inventory, employee compensation, depreciation, intangible asset amortization and depletion, as applicable, for each income statement line item that contains those expenses. Specific expenses, gains and losses that are already disclosed under existing US GAAP are also required to be included in the disaggregated income statement expense line-item disclosures, and any remaining amounts will need to be described quantitatively. Additionally, ASU 2024-03 requires disclosure of the total amount of selling expenses and the entity’s definition of selling expenses. ASU 2024-03 is effective for the first annual disclosure period beginning after December 15, 2026 and for the interim periods subsequent to that, with early adoption permitted. The amendment should be applied prospectively; however, retrospective application is permitted. We are currently evaluating the new disclosure requirements of ASU 2024-04 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements or disclosures. +In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”) to enhance the transparency and decision usefulness of income tax disclosures primarily related to the rate reconciliation and income taxes paid information. ASU 2023-09 modifies the requirement for income tax disclosures to include (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit +F- 14 +(separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. We will adopt this standard beginning with our fiscal year ending January 31, 2026. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures. +There were no other new accounting pronouncements, issued or effective during fiscal 2025, that have had or are expected to have a material impact on our consolidated financial statements. +Note 2—Acquisitions +Fiscal 2025 +MTEX +Background +On May 4, 2024 , AstroNova, along with its wholly-owned Portuguese subsidiary, AstroNova Portugal, Unipessoal, Lda (the “Purchaser”) entered into a Share Purchase Agreement (the “Purchase Agreement”) with Effort Premier Solutions Lda., a private limited company incorporated under the laws of Portugal (the “Seller”) and Elói Serafim Alves Ferreira, as a guarantor (the “Guarantor”). +In accordance with the terms and subject to the conditions set forth in the Purchase Agreement, the Purchaser acquired from the Seller, 100 % of the issued and outstanding share capital of MTEX New Solution, S.A., a joint stock company with limited liability incorporated under the laws of Portugal (“MTEX”). The closing date for the acquisition was May 6, 2024 . This transaction is a business combination and accounted for using the acquisition method as prescribed by ASC 805. +The purchase price for this acquisition consisted of EUR 17,268,345 (approximately $ 18.7 million) paid by the Purchaser to the Seller on the closing date, and up to an additional EUR 731,655 (approximately $ 0.8 million) retained by the Purchaser to secure certain indemnification obligations of the Seller to be released by the Purchaser subject to resolution of such obligations. The Seller may be entitled to additional contingent consideration if specified revenue targets are achieved by MTEX as set forth in the Purchase Agreement for the three calendar year periods ending after the closing date. The contingent consideration consists of potential earn-out payments to the seller of EUR 1.0 million (approximately $ 1.1 million) if the specified revenue target is achieved in the full fiscal year of 2025, an additional EUR 1.5 million (approximately $ 1.6 million) if the specified revenue target is achieved in full fiscal year 2026, and an additional EUR 1.5 million (approximately $ 1.6 million) if the specified earnings targets are achieved in full fiscal year 2027, with a maximum of EUR 4.0 million (approximately $ 4.4 million) if all of the specified earnings targets are achieved over the three-year period. +Also on May 4, 2024, the Purchaser, the Seller, the Guarantor and MTEX entered into a Transitional Management Agreement (the “Transitional Management Agreement”) pursuant to which the Guarantor will serve as MTEX’s Chief Executive Officer for a term of three years following the closing date. Under the terms of the Transitional Management Agreement, the Guarantor will receive a salary and grant of restricted stock units and will be entitled to participate in our incentive compensation programs on the same terms as our executive officers. The Transitional Management Agreement includes customary non-competition and confidentiality provisions. Following fiscal 2025, the Guarantor ceased to be employed by MTEX. +Upon the closing of the transaction, MTEX became a wholly owned indirect subsidiary of AstroNova, Inc. +Purchase Price Allocation +A summary of the estimate of the fair value of the consideration transferred as of the acquisition closing date is presented in the table below: +(In thousands) +Preliminary Estimate +Measurement Period Adjustment +Revised Estimate +Cash Paid at Closing +$ +18,732 +$ +( 1 +) +$ +18,731 +Holdback Amount +742 +— +742 +Fair Value of the Earnout +1,619 +( 1,619 +) +— +Total Purchase Price +$ +21,093 +$ +( 1,620 +) +$ +19,473 +The approach to valuing the initial contingent consideration relating to the earn-out requires the use of unobservable factors such as projected revenues over the term of the earn-out periods, discounted for the period over which the initial contingent consideration is +F- 15 +measured, and relevant volatility rates. Based upon these assumptions, the earn-out contingent consideration was valued using an option pricing model, which resulted in the estimated fair value being reduced to zero as of the acquisition closing date. +The following table sets forth the preliminary purchase price allocation of the MTEX acquisition for the estimated fair value of the net assets acquired and liabilities assumed as of May 6, 2024: +(In thousands) +Preliminary Estimate +Measurement Period Adjustment +Revised Estimate +Cash +$ +364 +$ +— +$ +364 +Accounts Receivable +3,989 +( 2,748 +) +1,241 +Inventory +3,807 +( 200 +) +3,607 +Prepaid Expenses and Other Current Assets +301 +— +301 +Property, Plant and Equipment +4,802 +— +4,802 +Other Long-Term Assets +5,154 +1,054 +6,208 +Identifiable Intangible Assets +9,556 +( 2,017 +) +7,539 +Goodwill +10,629 +3,621 +14,250 +Accounts Payable and Other Current Liabilities +( 4,225 +) +( 1,870 +) +( 6,095 +) +Debt Assumed +( 7,918 +) +— +( 7,918 +) +Other Long-Term Liabilities +( 5,366 +) +540 +( 4,826 +) +Total Purchase Price +$ +21,093 +$ +( 1,620 +) +$ +19,473 +Although we have made a number of adjustments to the opening balance sheet through January 31, 2025, as we continue to finalize our due diligence and accounting for this acquisition, the amounts above remain provisional and are based on information that is currently available. Management believes the information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but is waiting to complete their financial due diligence necessary to finalize those fair values. Therefore, the provisional measurements of fair values reflected continue to be subject to changes that could be significant. Management anticipates there will be changes to the purchase price allocation as further information is collected and analyzed and pending the final completion of certain appraisals and valuation report. We expect to complete the final fair value determination of the assets acquired and liabilities assumed, resolutions of working capital, and any other purchase price adjustments identified as soon as practicable within the measurement period and, in any event, not later than one year from the acquisition closing date. +The following table reflects the preliminary fair value of the acquired identifiable intangible assets and related estimated useful lives: +(In thousands) +Preliminary Fair +Value +Measurement Period Adjustment +Revised Estimate +Useful Life +(years) +Customer Relations +$ +8,786 +$ +( 6,183 +) +$ +2,603 +10 +Internally Developed Technology +488 +4,231 +4,719 +6 +Trademarks/Tradenames +282 +( 65 +) +217 +3 +Total +$ +9,556 +$ +( 2,017 +) +$ +7,539 +The customer relations intangible asset represents relationships that will be maintained with certain historical customers of MTEX. The trademark/tradename intangible assets reflect the industry reputation of the MTEX name, and the registered trademarks held by MTEX for the use of several marks and logos. The internally developed technology intangible asset represents software used to collect a wide range of data on each piece of equipment and the ability to monitor customer ink usage and troubleshoot issues with customers. +The fair value of the customer relations intangible asset acquired was estimated by applying the income approach using the Multi-Period Excess Earning Method. This fair value measurement is based on significant inputs that are not observable in the market and therefore represents a Level 3 measurement as defined in ASC 820, “Fair Value Measurement”. The fair value determined under this approach is a function of (i) future revenues expected to be generated by these assets and the profitability of the assets, (ii) identification of the contribution of other tangible and intangible assets to the cash flows generated by these asset to apply an appropriate capital charge against the cash flow, and (iii) a discount rate of 15.5 % used to calculate the present value of the stream of anticipated cash flows. The fair value of the trademark intangible asset acquired was estimated by applying the income approach using the “relief-from-royalty” method. The value under the relief-from-royalty method is a function of (i) the concluded royalty rate of 0.75 %, (ii) projected revenues generated by product sales under the asset being valued, and (iii) a discount rate of 15.5 %. The fair value of the internally developed technology intangible asset acquired was estimated by applying the cost approach, which takes into consideration the internal development costs of the technology and a hypothetical developer’s profit margin to build the software, the +F- 16 +opportunity costs the buyer avoids by not having to reproduce this asset and any duplicative or unproductive efforts, as well as functional obsolescence of the technology. +Purchased goodwill of $ 14.3 million, which is not deductible for tax purposes, represented the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired and liabilities assumed from MTEX. The goodwill recognized under ASC 805 was attributable to the expected earnings potential of the business, synergies which are expected to enhance and expand our overall product portfolio, opportunities in new and existing markets, and MTEX's assembled workforce. The carrying amount of the goodwill was allocated to the PI segment. During the fourth quarter of the current year, based on the results our quantitative test of goodwill in the PI segment, a goodwill impairment of $ 13.4 million was recognized. Refer to Note 4, “Intangible Assets and Goodwill” for further details. +We incurred $ 1.2 million of acquisition-related costs for this transaction which are included in general and administrative expenses in our consolidated statements of income (loss) for year ended January 31, 2025. +The operating results and earnings before taxes attributable to MTEX included in our consolidated statements of income (loss) for the year ended January 31, 2025 were as follows: +(In thousands) +2025 +Revenue +$ +4,163 +Gross Profit +511 +Operating Expenses: +Selling Expenses +2,485 +Research and Development Expenses +309 +General and Administrative Expenses +1,194 +Goodwill Impairment +13,403 +Total Operating Expenses +$ +17,391 +Operating Income (Loss) +( 16,880 +) +Other Income (Expenses) +( 862 +) +Earnings (Loss) before Taxes +$ +( 17,742 +) +MTEX results are reported as part of the PI segment. Pro forma results as if the acquisition was closed on February 1, 2024 are not provided, as such amounts were impractical to determine. +Fiscal 2023 +Astro Machine +On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers, tabbers, conveyors, and envelope feeders, for aggregate consideration of $ 17.1 million. The purchase included 100 % of the issued and outstanding equity interests of Astro Machine for a purchase price of $ 15.6 million and certain real estate assets comprised of a 34,460 square foot industrial manufacturing and office building on 1.26 acres of land, which is Astro Machine’s principal place of business for a purchase price of $ 1.5 million. Upon the closing of the transaction, Astro Machine became a wholly owned subsidiary of AstroNova, Inc. +This transaction is a business combination and was accounted for using the acquisition method of accounting prescribed by ASC 805, “Business Combinations.” +The following table sets forth the final purchase price allocation of the Astro Machine acquisition for the estimated fair value of the net asset acquired and liabilities assumed as of the date of acquisition: +(In thousands) +Cash +$ +91 +Accounts Receivable +3,393 +Inventory +5,715 +Property, Plant and Equipment +4,200 +Identifiable Intangible Assets +3,480 +Goodwill +2,730 +Accounts Payable and Other Current Liabilities +( 2,484 +) +Total Purchase Price +$ +17,125 +F- 17 +The fair value of the intangible assets acquired was estimated by applying the income approach. This fair value measurement is based on significant inputs that are not observable in the market and therefore represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement.” Key assumptions in estimating the fair value of the intangibles include (1) remaining useful life of the tradename/trademarks and customer relations (2) the royalty rate of 0.75 %, (3) customer attrition rate of 18.0 %, (4) discount rate of 19.0 % and (5) a range of revenue and net income projections for the fiscal years 2023 through 2026. +The following table sets forth the fair value of the acquired identifiable intangible assets and related estimated useful lives: +(In thousands) +Fair +Value +Useful Life +(years) +Customer Relations +$ +3,060 +5 +Trademarks/Tradenames +420 +5 +Total +$ +3,480 +The Customer Relations intangible asset represents the relationships that will be maintained with certain historical customers of Astro Machine. The trademark/tradename intangible assets reflect the industry reputation of the Astro Machine name recognition and the registered trademarks for the use of several marks and logos held by Astro Machine. +Goodwill of $ 2.7 million, which is not deductible for tax purposes, represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired and liabilities assumed from Astro Machine and is attributable to synergies which are expected to enhance and expand our overall product portfolio, opportunities in new and existing markets, future technologies that have yet to be determined and Astro Machine’s assembled work force. The carrying amount of the goodwill was allocated to the PI segment. +Total acquisition-related costs for Astro Machine of $ 0.7 million are included in general and administrative expenses in our consolidated statement of income for the year ended January 31, 2023. +The amounts of revenue and earnings before taxes attributable to Astro Machine and included in our consolidated statement of income were as follows: +(In thousands) +2025 +2024 +2023 +Revenue +$ +18,497 +$ +18,147 +$ +12,515 +Earnings before Taxes +$ +1,476 +$ +2,616 +$ +1,571 +Astro Machine results are reported as part of the PI segment. Proforma results are not provided, as disclosure of such amounts was impractical to determine as the acquired business had insufficient financial records and no audit history prior to the transaction. +Note 3—Revenue Recognition +We derive revenue from the sale of (i) hardware, including digital color label printers and specialty OEM printing systems, portable data acquisition systems and airborne printers used in the flight deck and interior of commercial, business and military aircraft, (ii) related consumable supplies including paper, labels, tags, inks, toners and ribbons, (iii) repairs and maintenance of equipment and (iv) service agreements. +Revenues disaggregated by primary geographic markets and major product types are as follows: +Primary geographical markets: +(In thousands) +2025 +2024 +2023* +United States +$ +89,466 +$ +84,757 +$ +83,559 +Europe +39,121 +41,761 +38,859 +Canada +8,210 +8,742 +8,690 +Asia +8,018 +7,216 +5,547 +Central and South America +4,967 +4,221 +4,589 +Other +1,501 +1,389 +1,283 +Total Revenue +$ +151,283 +$ +148,086 +$ +142,527 +* Certain amounts have been reclassified to conform to the current year's presentation. +F- 18 +Major product types: +(In thousands) +2025 +2024 +2023 +Hardware +$ +44,632 +$ +49,440 +$ +42,445 +Supplies +81,423 +79,252 +82,072 +Service and Other +25,228 +19,394 +18,010 +Total Revenue +$ +151,283 +$ +148,086 +$ +142,527 +In December 2022, we entered into an amended contract with one of our T&M customers that provided for a total payment of $ 3.25 million to be received as a result of our claims allowable under French law relating to additional component costs we have incurred, and will continue to incur in order to supply aerospace printers under the contract for the period beginning in April 2022 and continuing through 2025. We have recognized $ 0.8 million, $ 1.3 million, and $ 1.1 million in revenue for the years ended January 31, 2025, 2024 and 2023, respectively as a result of this arrangement. As we have received the total payment amount per the amended contract, there is no balance in deferred revenue at January 31, 2025. +Contract Assets and Liabilities +We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. +Our contract liabilities, which represent billings in excess of revenue recognized, are related to advanced billings for purchased service agreements and extended warranties. Contract liabilities were $ 543,000 and $ 530,000 at January 31, 2025 and January 31, 2024, respectively, and are recorded as current deferred revenue in the accompanying consolidated balance sheets The increase in the deferred revenue balance for the year ended January 31, 2025 is due to cash payments received in advance of satisfying performance obligations, offset by revenue recognized during the period, including $ 265,000 of revenue recognized that was included in the deferred revenue balance at January 31, 2024. +Contract Costs +We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain costs related to obtaining sales contracts for our aerospace printer products meet the requirement to be capitalized. These costs are deferred and amortized over the remaining useful life of these contracts, which we currently estimate to be approximately 16 years as of January 31, 2025. Amortized contract costs for the year ended January 31, 2025 were $ 88,000 and $ 75,000 for each of the years ended January 31, 2024 and 2023. The balance of deferred incremental direct costs net of accumulated amortization at January 31, 2025, was $ 1.5 million, of which $ 0.1 million is reported in other current assets and $ 1.4 million is reported in other assets in the accompanying consolidated balance sheet. +Note 4—Intangible Assets and Goodwill +Intangible assets are as follows: +January 31, 2025 +January 31, 2024 +(In thousands) +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Currency +Translation +Adjustment +Net +Carrying +Amount +RITEC: +Customer Contract Relationships +2,830 +( 1,755 +) +— +1,075 +2,830 +( 1,689 +) +— +1,141 +TrojanLabel: +Distributor Relations +937 +( 774 +) +16 +179 +937 +( 686 +) +30 +281 +Honeywell: +Customer Contract Relationships +27,773 +( 13,661 +) +— +14,112 +27,773 +( 12,795 +) +— +14,978 +Astro Machine: +Customer Contract Relationships +3,060 +( 1,530 +) +— +1,530 +3,060 +( 918 +) +— +2,142 +Trademarks +420 +( 210 +) +— +210 +420 +( 126 +) +— +294 +MTEX: +Customer Contract Relationships +2,603 +( 194 +) +( 104 +) +2,305 +— +— +— +— +Internally Developed Technology +4,719 +( 586 +) +( 181 +) +3,952 +— +— +— +— +Trademarks +217 +( 54 +) +( 7 +) +156 +— +— +— +— +Intangible Assets, net +$ +42,559 +$ +( 18,764 +) +$ +( 276 +) +$ +23,519 +$ +35,020 +$ +( 16,214 +) +$ +30 +$ +18,836 +F- 19 +There were no impairments to intangible assets during the periods ended January 31, 2025 and 2024. Amortization expense of $ 2.6 million, $ 2.4 million, and $ 1.9 million, with regard to acquired intangibles has been included in the consolidated statements of income for the years ended January 31, 2025, 2024, and 2023, respectively. +Estimated amortization expense for the next five fiscal years is as follows: +(In thousands) +2026 +2027 +2028 +2029 +2030 +Estimated amortization expense +$ +2,832 +$ +2,832 +$ +2,338 +$ +1,972 +$ +1,972 +Goodwill is as follows: +(In thousands) +PI +T&M +Total +Balance at January 31, 2024 +$ +10,111 +$ +4,522 +$ +14,633 +Acquisition +14,250 +— +14,250 +Impairment +( 13,403 +) +— +( 13,403 +) +Foreign Currency Translation +( 965 +) +— +( 965 +) +Balance at January 31, 2025 +$ +9,993 +$ +4,522 +$ +14,515 +We assess recoverability of goodwill on an annual basis or when events or changes in circumstances indicate that the carrying value may not be recoverable, such as a deterioration in macroeconomic conditions and a sustained decrease in stock price. Due to the actual and expected future underperformance of a unit within our Product Identification segment, MTEX, relative to management’s original expectations, we performed a strategic review of the MTEX operation which resulted in a restructuring plan including cutting approximately 70 % of the MTEX product portfolio and integrating MTEX’s sales, marketing and customer support functions into our global teams. We then performed a quantitative test as of January 31, 2025 of the carrying value of the Product Identification segment which included $ 14.3 million of goodwill recognized as part of the May 2024 acquisition of MTEX by applying a combination of an income approach, which utilizes discounted cash flows for each reporting unit, and a market approach. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that are discounted using a weighted-average cost of capital that reflects current market conditions appropriate to the reporting unit. The discounted cash flow model uses management’s best estimates of economic and market conditions over the projected period using the best information available, including growth rates in revenues, costs and estimates of future expected changes in operating margins and cash expenditures. The market approach considers a benchmark of our market multiples and comparable transactions occurring within the last two years. Other estimates and assumptions include terminal value growth rates, weighted average cost of capital and changes in future working capital requirements. Determining fair value requires the exercise of significant assumptions and judgments, which are considered Level 3 inputs under the fair value hierarchy, including the amount and timing of expected future cash flows, long term growth rates, and the discount rates. +In connection with the valuation, we also performed a reconciliation of the aggregate fair value of the two reporting units to the Company’s market capitalization as of January 31, 2025. The reconciliation considered the Company’s publicly traded market capitalization, adjusted for a reasonable control premium, as well as other market-based factors such as observed premiums in comparable market transactions. Based on the results of the impairment test, we concluded that the carrying value of our PI reporting unit exceeded the fair value by $ 13.4 million and, accordingly, we recorded an impairment charge of that amount. The fair value of our T&M segment exceeded the carrying value therefore there was no goodwill impairment charge to this segment. +Note 5—Inventories +The components of inventories are as follows: +January 31, +2025 +2024 +(In thousands) +Materials and Supplies +$ +35,181 +$ +39,078 +Work-in-Progress +2,559 +1,054 +Finished Goods +19,879 +15,645 +57,619 +55,777 +Inventory Reserve +( 9,725 +) +( 9,406 +) +$ +47,894 +$ +46,371 +F- 20 +Note 6—Property, Plant and Equipment +Property, plant and equipment consist of the following: +January 31, +2025 +2024 +(In thousands) +Land and Land Improvements +$ +2,304 +$ +2,304 +Buildings and Leasehold Improvements +15,116 +14,381 +Machinery and Equipment +30,403 +26,123 +Computer Equipment and Software +14,538 +14,238 +Gross Property, Plant and Equipment +62,361 +57,046 +Accumulated Depreciation +( 44,722 +) +( 42,861 +) +Net Property Plant and Equipment +$ +17,639 +$ +14,185 +Depreciation expense on property, plant and equipment was $ 2.1 million, $ 1.8 million, and $ 2.0 million for the years ended January 31, 2025, 2024, and 2023, respectively. +Note 7—Accrued Expenses +Accrued expenses consist of the following: +January 31, +(In thousands) +2025 +2024 +Customer Deposits +$ +786 +$ +86 +Acquisition Escrow Holdback +710 +— +Warranty +548 +711 +Professional Fees +253 +375 +Grant Performance Obligation - Short Term +212 +— +Current Portion of Lease Liability +320 +233 +Accrued Property & Sales Tax +538 +209 +Stockholder Relation Fees +63 +94 +Other Accrued Expenses +1,031 +998 +$ +4,461 +$ +2,706 +Note 8—Credit Agreement and Long-Term Debt +Credit Agreement +In connection with our purchase of MTEX, on May 6, 2024, we entered a Third Amendment to Amended and Restated Credit Agreement (the “Third Amendment”) with Bank of America, N.A., as lender (the “Lender”). The Third Amendment amended the Amended and Restated Credit Agreement dated as of July 30, 2020, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of March 24, 2021, the LIBOR Transition Amendment, dated as of December 14, 2021, the Second Amendment to Amended and Restated Credit Agreement dated as of August 4, 2022, and the Joinder Agreement relating to our subsidiary Astro Machine Corporation (“Astro Machine”) dated as of August 26, 2022 (as so amended, the “Existing Credit Agreement”; the Existing Credit Agreement as amended by the Third Amendment, (the “Amended Credit Agreement”), between AstroNova, Inc. as the borrower, Astro Machine as a guarantor, and the Lender. +The Amended Credit Agreement provides for (i) a new term loan to AstroNova, Inc. in the principal amount of EUR 14.0 million (the “Term A-2 Loan”), which term loan is in addition to the existing term loan (the “Term Loan”) outstanding under the Existing Credit Agreement in the principal amount of approximately $ 12.3 million as of the effective date of the Third Amendment, and (ii) an increase in the aggregate principal amount of the revolving credit facility available to AstroNova, Inc. from $ 25.0 million to $ 30.0 million until January 31, 2025, upon and after which the aggregate principal amount of the revolving credit facility reduces to $ 25.0 million. At the closing of the Third Amendment, we borrowed the entire EUR 14.0 million Term A-2 Loan, EUR 3.0 million under the revolving credit facility and a US dollar amount under the revolving credit facility that was converted to Euros to satisfy the +F- 21 +entire purchase price payable on the closing date pursuant to the purchase agreement for our purchase of MTEX. The revolving credit facility may otherwise be used for general corporate purposes. +The Amended Credit Agreement requires that the Term A-2 Loan be paid in quarterly installments on the last day of each of our fiscal quarters through April 30, 2027 in the principal amount of EUR 583,333 each, and the entire then-remaining principal balance of the Term A-2 Loan is required to be paid on August 4, 2027 . The Amended Credit Agreement requires that the remaining balance of the Term Loan be paid in quarterly installments on the last day of each of our fiscal quarters through April 30, 2027 in the principal amount of $ 675,000 each, and the entire then remaining principal balance of the Term Loan is required to be paid on August 4, 2027 . We may voluntarily prepay the Term A-2 Term Loan or the Term Loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than August 4, 2027, and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate, on such date. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. +The Term A-2 Loan bears interest at a rate per annum equal to the EURIBOR rate as defined in the Amended Credit Agreement, plus a margin that varies within a range of 1.60 % to 2.50 % based on our consolidated leverage ratio. The Term Loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the Term SOFR rate as defined in the Amended Credit Agreement (or, in the case of revolving credit loans denominated in Euros or another currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60 % to 2.50 % based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50 %, (ii) Bank of America’s publicly announced prime rate, (iii) the Term SOFR rate plus 1.00 %, or (iv) 0.50 %, plus a margin that varies within a range of 0.60 % to 1.50 % based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15 % and 0.35 % based on our consolidated leverage ratio. +The loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from net cash proceeds from certain dispositions of property, certain issuances of equity, certain issuances of additional debt and certain extraordinary receipts. +Amounts repaid under the revolving credit facility may be reborrowed, subject to our continued compliance with the Amended Credit Agreement. No amount of the Term A-2 Loan or the Term Loan that is repaid may be reborrowed. +We must comply with various customary financial and non-financial covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio, certain of the provisions of which were modified by the Third Amendment; the minimum consolidated asset coverage ratio under the Existing Credit Agreement was eliminated by the Third Amendment. The primary non-financial covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on our or our subsidiaries’ capital stock, to repurchase or acquire our or our subsidiaries’ capital stock, to conduct mergers or acquisitions, to sell assets, to alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of our or our subsidiaries’ business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Third Amendment. As of January 31, 2025, we were not in compliance with the Amended Credit Agreement, as a result of our failure to comply with the maximum consolidated leverage ratio and the minimum consolidated fixed charge coverage ratio in effect for our fiscal measurement period ended January 31, 2025. +The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. +Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests we hold in ANI Scandinavia ApS, AstroNova GmbH, AstroNova SAS and the Purchaser), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island, and are guaranteed by, and secured by substantially all of the personal property assets of, Astro Machine. +Subsequent to the end of fiscal 2025, on March 20, 2025, we entered into a Fourth Amendment to Amended and Restated Credit Agreement with Bank of America (the “Fourth Amendment”), which further amended the Amended Credit Agreement. The Fourth Amendment also provided a waiver of the events of default that had occurred under the Amended Credit Agreement as a result of our failure to comply with the maximum consolidated leverage ratio and the minimum consolidated fixed charge coverage ratio in effect +F- 22 +thereunder for our fiscal measurement period ended January 31, 2025 as described above. See Note 24, “Subsequent Events” for further information regarding the Fourth Amendment. +Equipment Financing +In January 2024, we entered into a secured equipment loan facility agreement with Banc of America Leasing & Capital, LLC and borrowed a principal amount of $ 0.8 million thereunder for the purpose of financing our purchase of production equipment. This loan matures on January 23, 2029 , and bears interest at a fixed rate of 7.06 %. Under this loan agreement, equal monthly payments including principal and interest of $ 16,296 commenced on February 23, 2024 and will continue through the maturity of the equipment loan facility on January 23, 2029 . +Assumed Financing Obligations of MTEX +In connection with our acquisition of MTEX, on the May 6, 2024 closing date of this acquisition we assumed certain existing financing obligations of MTEX that remain outstanding as of November 2, 2024. The long-term debt obligations of MTEX that remain outstanding include a term loan (the “MTEX Term Loan”) pursuant to an agreement dated December 22, 2023 (the “MTEX Term Loan Agreement”) between MTEX and Caixa Central de Crédito Agricola Mutuo. The MTEX Term Loan, which provides for a term loan in the principal amount of EUR 1.5 million ($ 1.6 million) and bears interest at a fixed rate of 6.022 % per annum, requires monthly principal and interest payments totaling EUR 17,402 ($ 18,795 ) commencing in October 2024 and continuing through maturity on December 21, 2033 . +MTEX has also received government assistance in the form of interest-free loans from government agencies located in Portugal (the “MTEX Government Grant Term Loans”). The MTEX Government Grant Term Loans are to be repaid to the applicable government agencies and are classified as long-term debt. The current balance of the MTEX Government Grants Term Loans as of January 31, 2025 is $ 0.9 million. The MTEX Government Grant Term Loans provide interest-free financing so long as monthly principal payments are made. In the event that MTEX and the applicable government agency renegotiate the payment dates, interest will be calculated according to a rate determined by the government agency as of the date of renegotiation and added to the outstanding principal payments. The MTEX Government Grant Term Loans mature at different dates through January 2027. +Additionally, we assumed short-term financing obligations of MTEX, including letters of credit, maturing term loans, and financing arrangements for working capital classified as debt. As of January 31, 2025, $ 0.6 million of the short-term debt obligation assumed in the purchase of MTEX remains outstanding. +Revolving Credit Facilities +At January 31, 2025, we had a principal balance of $ 20.5 million outstanding under our revolving credit facility under the Amended Credit Agreement. The balance outstanding under the revolving credit facility bore interest at a weighted average rate of 7.28 % and 7.70 % for the years ended January 31, 2025 and January 31, 2024, respectively, and we incurred $ 1.0 million and $ 1.2 million for interest on these obligations during the years ended January 31, 2025 and January 31, 2024, respectively. Commitment fees on the undrawn portion of our revolving credit facility of $ 42,000 and $ 30,000 were incurred for the years ended January 31, 2025 and 2024, respectively. Both the interest expense and commitment fees are included as interest expense in the accompanying consolidated statements of income (loss) for all periods presented. At January 31, 2025, $ 4.5 million remained available for borrowing under our revolving credit facility. Additionally, MTEX has a EUR 0.5 million ($ 0.5 million) available line of credit with Caixa Central de Crédito Agricola Mutuo. This credit line was established in December 2023 and is renewable every six months. There was EUR 0.4 million ($ 0.4 million) outstanding on this line of credit as of January 31, 2025. +F- 23 +Long-Term Debt +Long-term debt in the accompanying consolidated balance sheets is as follows: +January 31, +(In thousands) +2025 +2024 +USD Term Loan 6.90 % as of January 31, 2025 and 7.56 % as +of January 31, 2024); maturity date of August 4, 2027 +$ +9,450 +$ +12,150 +Euro Term A-2 Loan ( 5.38 % as of January 31, 2025); +maturity date of August 4, 2027 +12,719 +— +MTEX Euro Term Loan ( 6.022 % Fixed Rate as of January 31, 2025); +maturity date of December 21, 2033 +1,514 +— +MTEX Euro Government Grant Term Loan ( 0 % as of January 31, 2025); +maturity dates through January 2027 +876 +— +Equipment Loan ( 7.06 % Fixed Rate); maturity date of January 23, 2029 +680 +822 +Total Debt +25,239 +12,972 +Less: Debt Issuance Costs, net of accumulated amortization +85 +80 +Current Portion of Debt +6,110 +2,842 +Long-Term Debt +$ +19,044 +$ +10,050 +During the years ended January 31, 2025, 2024 and 2023, we recognized $ 1.6 million, $ 1.0 million, and $ 0.6 million of interest expense on our long-term debt, respectively, which was included in interest expense in the accompanying consolidated statement of income (loss) for all periods presented. +The schedule of required principal payments remaining on our long-term debt outstanding as of January 31, 2025 is as follows: +(In thousands) +Fiscal 2026 +$ +6,110 +Fiscal 2027 +5,595 +Fiscal 2028 +12,258 +Fiscal 2029 +348 +Fiscal 2030 +928 +$ +25,239 +Note 9 – Financial Instruments and Risk Management +We use foreign currency-denominated debt to partially hedge our net investment in our operations in Portugal against adverse movements in exchange rates. On August 3, 2024, a portion of the Euro-denominated debt has been designated and was effective as an economic hedge of part of the net investment in our Portuguese operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the Euro-denominated debt are included in the foreign currency translation adjustments in the condensed consolidated statement of comprehensive income for the year ended January 31, 2025, and within the accumulated other comprehensive items in the shareholder’s equity section of the consolidated balance sheet as of January 31, 2025 as follows : +(In thousands) +Amount of Foreign Currency Translation Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivative +Financial Instruments Designated as Net Investment Hedge +January 31, +2025 +January 31, +2024 +Euro-Denominated Debt +$ +( 24 +) +$ +— +On January 31, 2025 we assessed the effectiveness of the net investment hedge and determined that it was no longer highly effective, accordingly, future change in the carrying value of this nonderivative hedging instrument would have to be recorded in the “other expenses” in the consolidated statements of income (loss). To address this situation, the Euro-denominated debt has been +F- 24 +designated as an economic hedge of part of our net investment in our German operation in place of part of our net investment in our Portugal operation effective January 31, 2025. +Note 10—Royalty Obligations +In fiscal 2018, we entered into an Asset Purchase and License Agreement with Honeywell International, Inc. ("Honeywell") to acquire an exclusive, perpetual, world-wide license to manufacture Honeywell’s narrow-format flight deck printers for two aircraft families along with certain inventory used in the manufacturing of the licensed printers. The purchase price included a guaranteed minimum royalty payment of $ 15.0 million, to be paid in quarterly installments over a ten-year period. This ten-year period ends on September 30, 2028 . Royalty payments are based on gross revenues from the sales of the printers, paper and repair services of the licensed products. The royalty rates vary based on the year in which they are paid or earned and product sold or service provided, and range from single-digit to mid double-digit percentages of gross revenue. +The guaranteed minimum royalty payment obligation was recorded at the present value of the minimum annual royalty payments. As of January 31, 2025, we had paid an aggregate of $ 13.0 million of the guaranteed minimum royalty obligation. At January 31, 2025, the current portion of the outstanding guaranteed minimum royalty obligation of $ 1.1 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $ 0.8 million is reported as a long-term liability on our consolidated balance sheet. In addition to the guaranteed minimum royalty payments, for the periods ended January 31, 2025, 2024, and 2023, we also incurred excess royalty expense of $ 2.5 million, $ 2.3 million, and $ 1.3 million, respectively, which is included in cost of revenue in our consolidated statements of income for those periods. A total of $ 0.6 million of excess royalty is payable and reported as a current liability on our consolidated balance sheet at January 31, 2025. +In fiscal 2023, we entered into an Asset Purchase and License Agreement with Honeywell (the “New HW Agreement”) to acquire an exclusive, perpetual, world-wide license to manufacture Honeywell’s flight deck printers for the Boeing 787 aircraft. The New HW Agreement provides for royalty payments to Honeywell based on gross revenues from the sales of the printers, paper and repair services of the licensed products in perpetuity. The royalty rates vary based on the year in which they are paid or earned and as products are sold or as services are provided and range from single-digit to mid-double-digit percentages of gross revenue. The New HW Agreement includes a provision for guaranteed minimum royalty payments to be paid in the event that the royalties earned by Honeywell do not meet the minimum for the preceding calendar year as follows: $ 100,000 in 2024, $ 200,000 in 2025, $ 233,000 in each of 2026 and 2027, and $ 234,000 in 2028. +As of January 31, 2024, the total outstanding royalty obligation under the New HW Agreement was $ 0.6 million, including $ 0.2 million recorded as a current liability in the accompanying consolidated balance sheet. During fiscal 2025, we incurred and paid $ 0.4 million in royalty expense. As of January 31, 2025, the total outstanding royalty obligation on the New HW Agreement is $ 0.5 million, including $ 0.3 million recorded as a current liability in the accompanying consolidated balance sheet. +Note 11—Leases +We enter into lease contracts for certain of our facilities at various locations worldwide. Our leases have remaining lease terms of one to ten years, some of which include options to extend the lease term for periods of up to five years when it is reasonably certain that we will exercise such options. +Balance sheet and other information related to our leases is as follows: +Operating Leases +(In thousands) +Balance Sheet Classification +January 31, +2025 +January 31, +2024 +Lease Assets +Right of Use Assets +$ +1,781 +$ +603 +Lease Liabilities—Current +Other Accrued Expenses +$ +320 +$ +233 +Lease Liabilities—Long Term +Lease Liabilities +$ +1,535 +$ +415 +Lease cost information is as follows: +Operating Leases +(In thousands) +Statement of Income Classification +2025 +2024 +Operating Lease Costs +General and Administrative Expense +$ +410 +$ +318 +F- 25 +At January 31, 2025, maturities of operating lease liabilities are as follows: +(In thousands) +2026 +$ +437 +2027 +393 +2028 +336 +2029 +244 +2030 +191 +Thereafter +691 +Total Lease Payments +2,292 +Less: Imputed Interest +( 437 +) +Total Lease Liabilities +$ +1,855 +As of January 31, 2025, the weighted-average remaining lease term and weighted-average discount rate for our operating leases are 7.0 years and 5.96 %, respectively. We calculated the weighted-average discount rate using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term. +Supplemental cash flow information related to leases is as follows: +(In thousands) +2025 +2024 +Cash paid for operating lease liabilities +$ +418 +$ +350 +Note 12 – Government Grants +Our recently acquired subsidiary, MTEX, receives grants from its local government in Portugal to support its operations and various capital projects. We account for these government grants by analogy to International Accounting Standards 20, “Accounting for Government Grants and Disclosure of Government Assistance,” which follows a grant accounting model. Under this accounting framework, government assistance is recognized when it is probable we will receive assistance and comply with the conditions attached to the assistance. Operational-related assistance is recorded on a systematic basis over the periods in which the related costs or expenditures have occurred and is presented as a reduction in the expense for which it is intended to defray. Capital-related assistance is recorded as long-term deferred revenue and is recognized in cost of revenue as an offset against depreciation expense over the applicable asset's useful life. +The grant programs have execution periods ending on various dates beginning in May 2025 and continuing through November 2026. The government agencies may verify compliance with the conditions established in the contracts during the investment phase and upon completion and are entitled to propose adjustments and require reimbursement if the contracts do not meet the specifications. Historically, no significant corrections or returns have occurred. As of January 31, 2025, there are no contingencies associated with the government grants. +The capital-related government contracts between the Portuguese government and MTEX are defined on a grant-by-grant basis, with partial reimbursement of the assets acquired in connection with these grants. We have $ 1.3 million of deferred revenue for capital related government grants which is included in the accompanying consolidated balance sheet as of January 31, 2025 of which $ 0.2 million is included in other accrued expenses, and we have recognized $ 0.2 million of grant revenue, included in cost of revenue as an offset to depreciation expense in the consolidated statement of income (loss) for the year ended January 31, 2025. +Under the operational-related assistance grants, MTEX commits to research and development projects that the Portuguese government partially reimburses. We have recognized $ 0.5 million of grant revenue for our operational related assistance grants which is offset against the expenditures recognized for those grants and is included in selling and marketing expense in the accompanying condensed consolidated statement of income (loss) for the year ended January 31, 2025. +F- 26 +Note 13—Accumulated Other Comprehensive Loss +The changes in the balance of accumulated other comprehensive loss by component are as follows: +(In thousands) +Foreign Currency +Translation +Adjustments +Net +Unrealized +Gain (Losses) +on Cash Flow +Hedges +Total +Balance at January 31, 2022 +$ +( 1,701 +) +$ +( 47 +) +$ +( 1,748 +) +Other Comprehensive Income (Loss) before reclassification +( 537 +) +— +( 537 +) +Amounts reclassified from AOCI to Earnings +— +47 +47 +Other Comprehensive Income (Loss) +( 537 +) +47 +( 490 +) +Balance at January 31, 2023 +$ +( 2,238 +) +$ +— +$ +( 2,238 +) +Other Comprehensive Income (Loss) before reclassification +19 +— +19 +Amounts reclassified from AOCI to Earnings +— +— +— +Other Comprehensive Income (Loss) +19 +— +19 +Balance at January 31, 2024 +$ +( 2,219 +) +$ +— +$ +( 2,219 +) +Other Comprehensive Income (Loss) before reclassification +( 1,130 +) +— +( 1,130 +) +Amounts reclassified from AOCI to Earnings +— +— +— +Other Comprehensive Income (Loss) +( 1,130 +) +— +( 1,130 +) +Balance at January 31, 2025 +$ +( 3,349 +) +$ +— +$ +( 3,349 +) +The amounts presented above in other comprehensive income (loss) are net of taxes except for translation adjustments associated with our German, Danish and Shanghai subsidiaries. The foreign cumulative translation adjustment includes translation adjustments and net investment hedges. See Note 9, "Financial Instruments and Risk Management" for additional disclosures about the net investment hedge. +Note 14—Shareholders’ Equity +During fiscal years 2025 and 2024, certain of our employees delivered a total of 26,179 and 26,731 shares, respectively, of our common stock to satisfy the exercise price and related taxes for stock options exercised and restricted stock vesting. The shares delivered were valued at a total of $ 0.5 million and $ 0.4 million, respectively, and are included in treasury stock in the accompanying consolidated balance sheets at January 31, 2025 and 2024. These transactions did not impact the number of shares authorized for repurchase under our current repurchase program. +Note 15—Share-Based Compensation +The Company maintains the following share-based compensation plans: +Stock Plans: +We have one equity incentive plan from which we are authorized to grant equity awards, the AstroNova, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for, among other things, the issuance of awards, including incentive stock options, non-qualified stock options, stock appreciation rights, time-based restricted stock units (“RSUs”), or performance-based restricted stock units (“PSUs”) and restricted stock awards (“RSAs”). At the June 6, 2023 annual meeting of shareholders, the 2018 Plan was amended to increase the number of shares of our common stock available for issuance by 600,000 , bringing the total number of shares available for issuance under the 2018 Plan from 950,000 to 1,550,000 . Under the 2018 Plan, we may also issue an additional number of shares equal to the number of shares subject to outstanding awards under our prior 2015 Equity Incentive Plan that are forfeited, canceled, satisfied without the issuance of stock, otherwise terminated (other than by exercise),or, for shares of stock issued pursuant to any unvested award, that are reacquired by us at not more than the grantee’s purchase price (other than by exercise). Under the 2018 Plan, all awards to employees generally have a minimum vesting period of one year. Options granted under the 2018 Plan must be issued at an exercise price of not less than the fair market value of our common stock on the date of grant and expire after ten years. Under the 2018 Plan, there were 132,196 unvested RSUs; 121,581 unvested PSUs; and options to purchase an aggregate of 130,500 shares outstanding as of January 31, 2025. +In addition to the 2018 Plan, we previously granted equity awards under our 2015 Equity Incentive Plan (the “2015 Plan”) and our 2007 Equity Incentive Plan (the “2007 Plan”). No new awards may be issued under either the 2007 or 2015 Plans, but outstanding awards will continue to be governed by those plans. As of January 31, 2025, options to purchase an aggregate of 178,599 shares were outstanding under the 2007 Plan and options to purchase an aggregate of 112,600 shares were outstanding under the 2015 Plan. +F- 27 +We also have a Non-Employee Director Annual Compensation Program (the “Program”) under which each non-employee director receives an automatic grant of RSAs on the date of the regular full meeting of the Board of Directors held each fiscal quarter. Under the Program, the number of whole shares to be granted each quarter is equal to 25 % of the number calculated by dividing the director’s annual compensation amount by the fair market value of the Company’s stock on such day. On June 11, 2024, each director’s annual compensation amount was adjusted to be $ 72,800 . All RSAs granted under this Program vest immediately. +Share-Based Compensation: +Share-based compensation expense has been recognized as follows: +Years Ended January 31, +2025 +2024 +2023 +(In thousands) +Stock Options +$ +— +$ +— +$ +7 +Restricted Stock Awards and Restricted Stock Units +1,338 +1,322 +1,271 +Employee Stock Purchase Plan +40 +25 +12 +Total +$ +1,378 +$ +1,347 +$ +1,290 +Stock Options: +Aggregated information regarding stock options granted under the plans is summarized below: +Number +of Shares +Weighted- +Average +Exercise +Price Per +Share +Options Outstanding, January 31, 2022 +598,043 +$ +14.67 +Options Granted +— +— +Options Exercised +( 42,944 +) +8.74 +Options Forfeited +( 5,500 +) +15.42 +Options Cancelled +( 2,400 +) +8.09 +Options Outstanding, January 31, 2023 +547,199 +$ +15.16 +Options Granted +— +— +Options Exercised +( 9,100 +) +11.54 +Options Forfeited +( 10,525 +) +15.20 +Options Cancelled +( 4,225 +) +10.50 +Options Outstanding, January 31, 2024 +523,349 +$ +15.26 +Options Granted +— +— +Options Exercised +( 65,900 +) +13.86 +Options Forfeited +— +— +Options Cancelled +( 35,750 +) +14.69 +Options Outstanding, January 31, 2025 +421,699 +$ +15.52 +Set forth below is a summary of options outstanding at January 31, 2025: +Outstanding +Exercisable +Range of +Exercise prices +Number of +Shares +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Life +Number of +Shares +Weighted- +Average +Exercise +Price +Weighted +Average +Remaining +Contractual +Life +$ 10.01 - 15.00 +215,224 +$ +13.70 +1.1 +215,224 +$ +13.70 +1.1 +$ 15.01 - 20.00 +206,475 +17.42 +2.6 +206,475 +17.42 +2.6 +421,699 +$ +15.52 +1.8 +421,699 +$ +15.52 +1.8 +No options were granted during fiscal 2025 or fiscal 2024. As of January 31, 2025, there was no unrecognized compensation expense related to the unvested stock options granted under the plans. +F- 28 +As of January 31, 2025, there was no aggregate intrinsic value (the aggregate difference between the closing stock price of our common stock on January 31, 2025, and the exercise price of the outstanding options) received by the option holders if all options had been exercised for all exercisable options and all options outstanding. The total aggregate intrinsic value of options exercised during fiscal 2025, 2024, and 2023 was $ 242,000 , $ 32,000 , and $ 200,000 , respectively. +Restricted Stock Units, Performance-Based Restricted Stock Units and Restricted Stock Awards: +Aggregated information regarding RSUs, PSUs and RSAs granted under the Plan is summarized below: +RSUs, PSUs & +RSAs +Weighted-Average +Grant Date +Fair Value +Outstanding at January 31, 2022 +220,980 +$ +13.23 +Granted +141,371 +12.70 +Vested +( 85,324 +) +13.45 +Forfeited +( 2,100 +) +13.25 +Outstanding at January 31, 2023 +274,927 +$ +12.82 +Granted +157,643 +12.64 +Vested +( 116,288 +) +12.29 +Forfeited +( 15,577 +) +13.37 +Outstanding at January 31, 2024 +300,705 +$ +12.90 +Granted +96,040 +16.93 +Vested +( 96,987 +) +13.95 +Forfeited +( 45,981 +) +12.64 +Outstanding at January 31, 2025 +253,777 +$ +14.07 +As of January 31, 2025, there was $ 1.4 million of unrecognized compensation expense related to unvested RSUs, PSUs and RSAs. This expense is expected to be recognized over a weighted average period of 1.9 years. +Employee Stock Purchase Plan (ESPP): +On June 7, 2022, we adopted the AstroNova Inc. 2022 Employee Stock Purchase Plan (“2022 ESPP”) to replace our previous Employee Stock Purchase Plan. The 2022 ESPP allows eligible employees to purchase shares of common stock at a 15 % discount from fair value on the first or last day of an offering period, whichever is less. A total of 40,000 shares were reserved for issuance under this plan and 12,550 and 9,897 shares were purchased under the 2022 ESSP during the years ended January 31, 2025 and 2024, respectively. As of January 31, 2025, 12,508 shares remain available for purchase under the 2022 ESPP. +Note 16—Income Taxes +The components of income (loss) before income taxes are as follows: +2025 +2024 +2023 +(In thousands) +Domestic +$ +5,605 +$ +5,448 +$ +1,773 +Foreign +( 17,892 +) +625 +1,637 +$ +( 12,287 +) +$ +6,073 +$ +3,410 +F- 29 +The components of the provision for income taxes are as follows: +2025 +2024 +2023 +(In thousands) +Current: +Federal +$ +1,125 +$ +966 +$ +902 +State +134 +71 +313 +Foreign +153 +420 +870 +1,412 +1,457 +2,085 +Deferred: +Federal +$ +( 621 +) +$ +( 32 +) +$ +( 1,053 +) +State +( 13 +) +2 +( 315 +) +Foreign +1,424 +( 48 +) +32 +790 +( 78 +) +( 1,336 +) +$ +2,202 +$ +1,379 +$ +749 +Total income tax provision differs from the expected tax provision as a result of the following: +2025 +2024 +2023 +(In thousands) +Income Tax Provision at Statutory Rate +$ +( 2,579 +) +$ +1,275 +$ +716 +Goodwill Impairment +2,814 +— +— +Portugal Tax Incentives - Valuation Allowance +2,373 +— +— +Foreign Rate Differential +163 +197 +157 +Change in Reserves Related to ASC 740 Liability +133 +60 +93 +Transaction Costs +121 +— +— +State Taxes, Net of Federal Tax Effect +96 +56 +( 2 +) +Meals and Entertainment +21 +14 +— +Change in Valuation Allowance +( 68 +) +73 +182 +Share Based Compensation +( 74 +) +( 43 +) +( 52 +) +Foreign Derived Intangible Income +( 151 +) +( 98 +) +( 180 +) +R&D Credits +( 205 +) +( 160 +) +( 160 +) +Return to Provision Adjustment +( 363 +) +12 +( 22 +) +Other +( 79 +) +( 7 +) +17 +$ +2,202 +$ +1,379 +$ +749 +Our effective tax rate for fiscal 2025 was ( 17.9 )% compared to 22.7 % in fiscal 2024 and 22.0 % in fiscal 2023. The decrease in the effective tax rate in fiscal 2025 from fiscal 2024 is primarily related to the decrease in pre-tax book income and the federal income tax provision associated with the goodwill impairment and MTEX losses, the decrease in return to provision adjustments, and the decrease in the valuation allowance associated with China losses. This decrease was partially offset by other factors increasing the effective tax rate such as the valuation allowance recorded on Portuguese tax credits, goodwill impairment recorded on MTEX for the PI reporting segment, and transaction costs associated with the MTEX acquisition. +The increase in the effective tax rate in fiscal 2024 from fiscal 2023 is primarily related to the impact of the valuation allowance recorded on China net operating losses, the increase in the current provision for state and local taxes, and the change in the foreign rate differential. This increase was partially offset by other factors decreasing the effective tax rate such as foreign derived intangible income (“FDII”) deduction, share based compensation, and the R&D tax credit. +F- 30 +The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows: +January 31, +(In thousands) +2025 +2024 +Deferred Tax Assets: +Honeywell Royalty Liability +$ +4,280 +$ +3,561 +Section 174 Capitalization +2,894 +1,981 +Portugal Tax Incentives +2,373 +— +Inventory +1,994 +2,242 +State R&D Credits +1,721 +2,160 +Net Operating Loss +886 +199 +Share-Based Compensation +575 +590 +Portugal Statutory Tax Adjustments +541 +— +Compensation Accrual +285 +276 +Foreign Tax Credit +154 +154 +Bad Debt +115 +134 +Warranty Reserve +120 +171 +ASC 842 Adjustment – Lease Liability +87 +38 +Deferred Service Contract Revenue +— +100 +Unrecognized State Tax Benefits +— +49 +Other +563 +381 +16,588 +12,036 +Deferred Tax Liabilities: +Accumulated Tax Depreciation in Excess of Book Depreciation +1,632 +1,491 +Intangibles +1,544 +989 +Purchase Price Accounting +270 +— +Portugal Statutory Tax Adjustments +110 +— +ASC 842 Adjustment – Lease Liability +87 +33 +Other +154 +206 +3,797 +2,719 +Subtotal +12,791 +9,317 +Valuation Allowance +( 4,400 +) +( 2,534 +) +Net Deferred Tax Assets +$ +8,391 +$ +6,783 +Deferred taxes are reflected in the consolidated balance sheet as follows: +January 31, +(In thousands) +2025 +2024 +Deferred Tax Assets +8,431 +6,882 +Deferred Tax Liabilities +( 40 +) +( 99 +) +Total Net Deferred Tax Assets +$ +8,391 +$ +6,783 +The valuation allowances of $ 4.4 million at January 31, 2025 and $ 2.5 million at January 31, 2024, relate to Rhode Island research and development tax credit carryforwards, foreign tax credit carryforwards, Portugal tax credits, and China’s net operating losses that are expected to expire unutilized. +At January 31, 2025, we had net operating loss carryforwards of $ 0.9 million, which expire in 2027 through 2045 and interest expense carryforwards of $ 11,700 , which carry forward indefinitely. +At January 31, 2025, we had state research credit carryforwards of approximately $ 1.7 (net of federal benefit) million which expire in 2026 through 2031 . Additionally, we had $ 0.2 million of foreign tax credits. We maintain a full valuation allowance against these credits as we expect these credits to expire unused. Due to the acquisition of MTEX that occurred during 2024, we acquired tax attributes of $ 2.3 million related to tax incentives associated with the System of Tax Incentives in Business Research and Development ("SIFIDE") and Investment Support Tax Regime ("RFAI"). The SIFIDE incentive is a research and development credit for Portuguese tax resident companies carrying out commercial, industrial, or agricultural activities, and non-resident companies with a permanent establishment in the Portuguese territory. The RFAI is a tax regime for investment promotion, in which an incentive is +F- 31 +given to companies that invest in certain regions (capped at 50 % of the corporate income tax due) of 30 % (for qualified investments lower than € 15 million) or 10 % (for the part of qualified investments exceeding that limit) of the qualified investment. The credits have carryforward periods of 10 years and 12 years for SIFIDE and RFAI, respectively. We maintain a full valuation allowance against these credits as we expect these credits to expire unused. +We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows: +2025 +2024 +2023 +(In thousands) +Balance, beginning of the year +$ +505 +$ +414 +$ +303 +Increases in prior period tax positions +10 +— +24 +Increases in current period tax positions +143 +162 +136 +Reductions related to lapse of statutes of limitations +( 19 +) +( 71 +) +( 49 +) +Balance, end of the year +$ +639 +$ +505 +$ +414 +During fiscal 2025 and 2024, we released $ 19,000 and $ 71,000 , respectively, of uncertain tax positions including accrued interest and penalties relating to a change in various unrecognized tax positions. We have accrued potential interest and penalties of $ 45,000 included in income taxes payable in the accompanying consolidated balance sheet at January 31, 2025. +We and our subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. In fiscal 2024, we released $ 6,000 of state nexus positions as a result of the expiration of the statute of limitations. +U.S. income taxes have not been provided on $ 8.2 million of undistributed earnings of our foreign subsidiaries since it is our intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, we would not be subject to U.S. tax as a result of the TCJA but, could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical. +Note 17—Segment Reporting and Geographical Information +Our operations consist of the design, development, manufacture and sale of specialty printers and data acquisition and analysis systems, including both hardware and software and related consumable supplies. We organize and manage our business as a portfolio of products and services designed around a common theme of data acquisition and information output. We have two reporting segments consistent with our revenue product groups: Product Identification (“PI”) and Test & Measurement (“T&M”). +Our PI segment produces an array of high-technology digital color and monochrome label printers and mini presses, labeling software and supplies for a variety of commercial industries worldwide and includes our fiscal 2025 MTEX acquisition and our fiscal 2023 acquisition of Astro Machine. Our T&M segment produces data acquisition systems used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing. The T&M segment also includes our line of aerospace flight deck and cabin printers. +Our chief operating decision maker (“CODM”) has been identified as the President and Chief Executive Officer . The CODM regularly receives and uses discrete financial information about each reporting segment which is used for performance assessments and resource allocation decisions. The CODM evaluates the performance of and allocates resources to the reporting segments based on segment profit or loss, which represents the segments’ income (loss) before income taxes and excludes corporate expenses . The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies herein. +Business is conducted in the United States and through foreign branch offices and subsidiaries in Canada, Europe, China, Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United States are conducted through wholly owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction. +F- 32 +Summarized below are the revenue and segment operating profit for each reporting segment: +($ in thousands) +2025 +2024 +2023 +Revenue: +PI : +$ +102,345 +$ +104,041 +$ +103,089 +T&M +48,938 +44,045 +39,438 +Total Revenue +$ +151,283 +$ +148,086 +$ +142,527 +Cost of Revenue: +PI +$ +68,420 +$ +69,064 +$ +70,079 +T&M +30,114 +27,401 +24,292 +Total Cost of Revenue +$ +98,534 +$ +96,465 +$ +94,371 +Operating Expenses: +PI (1) +$ +37,892 +$ +24,890 +$ +25,121 +T&M (1) +7,681 +6,444 +6,157 +Total Operating Expenses +$ +45,573 +$ +31,334 +$ +31,278 +Segment Operating Income (Loss): +PI +$ +( 3,967 +) +$ +10,087 +$ +7,889 +T&M +11,143 +10,200 +8,989 +Total Segment Operating Income (Loss) +$ +7,176 +$ +20,287 +$ +16,878 +Corporate Expense (2) +( 15,816 +) +( 11,491 +) +( 11,435 +) +Operating Income (Loss) +$ +( 8,640 +) +$ +8,796 +$ +5,443 +Other Income (Expense) (3) +( 3,647 +) +( 2,723 +) +( 2,033 +) +Income (Loss) Before Income Taxes +$ +( 12,287 +) +$ +6,073 +$ +3,410 +Income Tax Provision +2,202 +1,379 +749 +Net Income (Loss) +$ +( 14,489 +) +$ +4,694 +$ +2,661 +(1) PI and T&M segment operating expenses include Selling and Marketing, Research and Development, and Goodwill Impairment. +(2) The amounts included in Corporate Expenses consist of executive and finance compensation, acquisition and integration costs, restructuring costs, professional fees as well as certain other non-recurring costs not allocated to the reporting segments. +(3) Includes interest expense, gain/(loss) on foreign exchange and other miscellaneous income/(expense) not allocated to the reporting segments. +No customer accounted for greater than 10% of net revenue in fiscal 2025, 2024, or 2023. +Revenue by product type for each reporting segment: +($ in thousands) +2025 +2024 +2023 +PI : +Hardware +$ +18,294 +$ +21,270 +$ +18,123 +Supplies +76,797 +75,418 +78,392 +Other +7,254 +7,353 +6,574 +Total PI Revenue +102,345 +104,041 +103,089 +T&M: +Hardware +26,337 +28,170 +24,322 +Supplies +4,626 +3,834 +3,680 +Other +17,975 +12,041 +11,436 +Total T&M Revenue +48,938 +44,045 +39,438 +Total Revenue +$ +151,283 +$ +148,086 +$ +142,527 +F- 33 +Other information by segment is presented below: +Assets +January 31, +(In thousands) +2025 +2024 +PI +$ +82,531 +$ +70,028 +T&M +55,086 +55,783 +Corporate* +7,978 +7,440 +Total +$ +145,595 +$ +133,251 +* Corporate assets consist principally of cash, cash equivalents, deferred tax assets and refunds, and certain prepaid corporate assets. +Depreciation and Amortization +Capital Expenditures +(In thousands) +2025 +2024 +2023 +2025 +2024 +2023 +PI +$ +3,530 +$ +2,572 +$ +2,219 +$ +1,066 +$ +1,687 +$ +121 +T&M +1,250 +1,694 +1,697 +99 +10 +108 +Total +$ +4,780 +$ +4,266 +$ +3,916 +$ +1,165 +$ +1,697 +$ +229 +Geographical Data +Presented below is selected financial information by geographic area: +Long-Lived Assets (2) +Revenue (1) +January 31, +(In thousands) +2025 +2024 +2023 +2025 +2024 +United States +$ +89,466 +$ +84,757 +$ +83,559 +$ +29,868 +$ +32,090 +Europe +39,121 +41,761 +38,859 +11,149 +754 +Canada +8,210 +8,742 +8,690 +141 +171 +Asia +8,018 +7,216 +5,547 +— +6 +Central and South America +4,967 +4,221 +4,589 +— +— +Other +1,501 +1,389 +1,283 +— +— +Total +$ +151,283 +$ +148,086 +$ +142,527 +$ +41,158 +$ +33,021 +(1) Certain amounts have been reclassified to conform to the current year's presentation. +(2) Long-lived assets exclude goodwill assigned to the T&M segment of $ 4.5 million at both January 31, 2025 and 2024 and $ 10.0 and $ 10.1 million assigned to the PI segment at January 31, 2025 and 2024, respectively. +Note 18—Employee Benefit Plans +We sponsor a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code. +All contributions are deposited into trust funds. It is our policy to fund any contributions accrued. Our annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $ 0.6 million in fiscal 2025 and $ 0.5 million in each of fiscal 2024 and fiscal 2023. +Note 19—Product Warranty Liability +We offer a manufacturer’s warranty for the majority of our hardware products. The specific terms and conditions of warranty vary depending upon the products sold and the country in which we do business. We estimate the warranty costs based on historical claims experience and record a liability in the amount of such estimates at the time product revenue is recognized. We regularly assess +F- 34 +the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheets, is as follows: +(In thousands) +2025 +2024 +2023 +Balance, beginning of the year +$ +711 +$ +1,072 +$ +834 +Provision for Warranty Expense +709 +1,181 +2,077 +Cost of Warranty Repairs +( 872 +) +( 1,542 +) +( 1,839 +) +Balance, end of the year +$ +548 +$ +711 +$ +1,072 +Note 20—Restructuring +On July 26, 2023, we adopted a restructuring plan (the “2024 Restructuring Plan”) for our PI segment that transitioned a portion of the printer manufacturing within that segment from our facility in Rhode Island to our Astro Machine facility located in Illinois. Additionally, we ceased selling certain of our older, lower-margin or low-volume PI segment products and made targeted reductions to our workforce. As part of the 2024 Restructuring Plan, we also consolidated certain of our international PI sales and distribution facilities and streamlined our channel partner network. As of January 31, 2024, we have completed this plan. +As a result of the adoption and implementation of our 2024 Restructuring Plan, in fiscal 2024 we recognized a pre-tax restructuring charge of $ 2.6 million, comprised primarily of non-cash charges related to inventory write-offs associated with product curtailment and discontinuation and facility exit related costs, and cash charges related to severance-related costs. The following table is a summary of the restructuring costs by type included in the accompanying consolidated statement of income (loss) for the year ended January 31, 2024: +(In thousands) +Inventory Write-Off +Severance and Employee Related Costs +Facility Exit and Other Restructuring Costs +Total +Cost of Revenue +$ +1,991 +$ +73 +$ +— +$ +2,064 +Operating Expenses: +Selling & Marketing +— +351 +49 +400 +Research & Development +— +29 +— +29 +General & Administrative +— +83 +— +83 +Total +$ +1,991 +$ +536 +$ +49 +2,576 +Product Retrofit Program +In connection with our 2024 Restructuring Plan, we identified the need to address quality and reliability issues in certain models of our PI printers as a result of faulty ink provided by one of our larger suppliers. We identified approximately 150 printers sold to our customers that were affected by the faulty ink. In order to remedy these issues and maintain solid customer relationships, during the second quarter of fiscal 2024, we initiated a program to retrofit all of the printers sold to our customers that were affected by the faulty ink. +The initial estimated costs associated with this program were $ 0.8 million, which included the cost of parts, labor and travel. During fiscal 2024, we worked with our customers to either repair or replace the affected printers. At the end of fiscal 2024, we adjusted our estimate of costs for this program as we determined not all customers wanted to retrofit their printers and consequently the program was concluded. As a result, at the end of the fourth quarter of fiscal 2024, we reversed $ 0.2 million of charges for this program. Total costs of this program as of January 31, 2024, were $ 0.6 million and are included in cost of revenue in the accompanying consolidated statement of income (loss) for the year ended January 31, 2024. This program was concluded by the end of fiscal 2024 and there was no balance in the related liability for this program at January 31, 2025 and January 31, 2024. +Note 21—Concentration of Risk +Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts, which constitute our customer base. We periodically perform on-going credit evaluations of our customers. We have not historically experienced significant credit losses on collection of our accounts receivable. +F- 35 +During the years ended January 31, 2025 and 2024, we had two vendors that accounted for 27.3 % and 23.5 % of purchases, respectively, and for the year ended January 31, 2023, we had one vendor that accounted for 18.7 % of purchases. We had one vendor that accounted for 13.3 %, 46.9 %, and 16.2 %, respectively, of accounts payable as of January 31, 2025, 2024, and 2023. +Note 22—Commitments and Contingencies +In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. At January 31, 2025, our purchase commitments totaled $ 29.0 million, with $ 27.4 million due within 12 months, some of which are non-cancelable. +We are also subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold. +Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control. +Note 23—Fair Value Measurements +Assets and Liabilities Not Recorded at Fair Value on the Consolidated Balance Sheet +Our long-term debt, including the current portion, not reflected in the financial statements at fair value, is reflected in the table below: +Fair Value Measurement at +January 31, 2025 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +25,202 +$ +25,202 +$ +25,239 +Fair Value Measurement at +January 31, 2024 +(In thousands) +Level 1 +Level 2 +Level 3 +Total +Carrying +Value +Long-Term Debt and Related Current Maturities +$ +— +$ +— +$ +13,026 +$ +13,026 +$ +12,972 +The fair value of our long-term debt, including the current portion, is estimated by discounting the future cash flows using current interest rates at which similar borrowings with the same maturities would be made to borrowers with similar credit ratings and is classified as Level 3. +Note 24— Subsequent Events +Credit Agreement Amendment and Waiver +On March 20, 2025, we entered into a Fourth Amendment to Amended and Restated Credit Agreement (the “Fourth Amendment”) with Bank of America, which further amended the Amended Credit Agreement (as so amended, the “Further Amended Credit Agreement”). +The Further Amended Credit Agreement modified the remaining quarterly installments in which the outstanding balance of the existing Term Loan must be paid; the outstanding principal balance of the Term Loan as of the effective date of the Amendment was $ 9.5 million. Under the Further Amended Credit Agreement, such remaining quarterly installments must be paid on the last day of each of our fiscal quarters through April 30, 2027 in the principal amount of (i) in the case of the installments for the fiscal quarters ending April 30, 2025 through January 31, 2026, $ 325,000 each, (ii) in the case of the installments for the fiscal quarters ending April 30, 2026 through January 31, 2027, $ 725,000 each, and (iii) in the case of the installment for the fiscal quarter ending April 30, 2027, $ 950,000 ; the entire then-outstanding principal balance of the Term Loan is required to be paid on August 4, 2027. We continue to have the right to voluntarily prepay the Term Loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). +F- 36 +The remaining repayment installments of the existing Term A-2 Loan were not modified by the Fourth Amendment; the outstanding principal balance of the Term A-2 Loan as of the effective date of the Fourth Amendment was EUR 12,250,000 million. The amount and availability and repayment terms of the existing $ 25.0 million revolving credit facility available to the Company under the Further Amended Credit Agreement were not modified by the Fourth Amendment; the outstanding principal balance under the revolving credit facility as of the effective date of the Fourth Amendment was $ 21.7 million. +The Further Amended Credit Agreement modified the applicable interest rate margins payable with respect to the Term Loan, the Term A-2 Loan and the revolving credit facility loans and modified the commitment fee payable with respect to the undrawn portion of the revolving credit facility. Under the Further Amended Credit Agreement, the Term Loan and revolving credit facility loans bear interest at a rate per annum equal to, at the Company’s option, either (a) the Term SOFR rate as defined in the Further Amended Credit Agreement (or, in the case of revolving credit loans denominated in Euros or another currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60 % to 2.85 % based our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50 %, (ii) Bank of America’s publicly announced prime rate (iii) the Term SOFR Rate plus 1.00 %, or (iv) 0.50 %, plus a margin that varies within a range of 0.60 % to 1.85 % based our consolidated leverage ratio. Under the Further Amended Credit Agreement, the Term A-2 Loan bears interest at a rate per annum equal to the EURIBOR rate as defined in the Further Amended Credit Agreement, plus a margin that varies within a range of 1.60 % to 2.85 % based on the Company’s consolidated leverage ratio. Under the Further Amended Credit Agreement, the commitment fee that we are is required to pay on the undrawn portion of the revolving credit facility under the Further Amended Credit Agreement varies within a range of 0.15 % and 0.40 % based on our consolidated leverage ratio. +We must comply with various customary financial and non-financial covenants under the Further Amended Credit Agreement, certain provisions of which covenants were modified by the Fourth Amendment. The financial covenants under the Further Amended Credit Agreement consist of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio that is tested commencing with the measurement period ending with the fiscal quarter ending January 31, 2026, and a minimum interim consolidated fixed charge coverage ratio that is tested for certain measurement periods ending April 30, 2025, July 31, 2025 and October 31, 2025; the interim minimum consolidated fixed charge coverage ratio was added by the Fourth Amendment, and certain provisions of the existing financial covenants were modified by the Fourth Amendment. +Pursuant to the Further Amended Credit Agreement, the Lender waived the events of default that had occurred under the Amended Credit Agreement as a result of our failure to comply with the maximum consolidated leverage ratio and the minimum consolidated fixed charge coverage ratio in effect thereunder for our fiscal measurement period ended January 31, 2025. +Restructuring - Fiscal 2026 +Subsequent to year end, on March 20, 2025, we announced our restructuring actions for fiscal 2026 which include the reduction of approximately 10 % of the Company’s global workforce, primarily in the PI segment, and the realignment of its underperforming MTEX operation in Portugal. As part of this initiative, AstroNova has cut approximately 70 % of the MTEX product portfolio, phasing out low-volume, low-profit models and prioritizing higher-margin products that capitalize on the Company’s consumables business. In addition, all MTEX sales, marketing and customer support functions have been integrated into AstroNova’s global teams. The restructuring action is expected to achieve projected annualized cost savings of $ 3.0 million. +F- 37 +ASTRONOVA, INC. +SCHEDULE II—VALUATION AND QUALI FYING ACCOUNTS AND RESERVES +Description +Balance at +Beginning +of Year +Provision/ +(Benefit) +Charged to +Operations +Deductions(2) +Balance +at End +of Year +Allowance for Doubtful Accounts (1) : +(In thousands) +Year Ended January 31, +2025 +$ +618 +$ +2,486 +$ +— +$ +3,104 +2024 +$ +731 +$ +( 113 +) +$ +— +$ +618 +2023 +$ +826 +$ +100 +$ +( 195 +) +$ +731 +(1) +The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet dates. +(2) +Uncollectible accounts written off, net of recoveries. +F- 38 \ No newline at end of file diff --git a/raw/filings/0000008146/2024/0000950170-25-054163/filing_metadata.csv b/raw/filings/0000008146/2024/0000950170-25-054163/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..7da13f51e899b39e7bcde3ffc4098b134d118f60 --- /dev/null +++ b/raw/filings/0000008146/2024/0000950170-25-054163/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000008146,ALOT,"AstroNova, Inc.",10-K,2025-04-15,2025-01-31,2025-04-15T19:00:33.000Z,0000950170-25-054163,alot-20250131.htm,10-K,19480228,1,1,https://www.sec.gov/Archives/edgar/data/8146/000095017025054163/alot-20250131.htm,https://www.sec.gov/Archives/edgar/data/8146/000095017025054163/,2024,2024,1 diff --git a/raw/filings/0000008146/2024/0000950170-25-054163/item1.txt b/raw/filings/0000008146/2024/0000950170-25-054163/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..2f60e28009c154584d987b99c9e7a04895f89e37 --- /dev/null +++ b/raw/filings/0000008146/2024/0000950170-25-054163/item1.txt @@ -0,0 +1,95 @@ +Item 1 . Business +General +Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries. +• +We design, develop, manufacture, and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, aviation, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging, and transportation. +Our products are distributed worldwide through our own sales force, authorized dealers, and independent dealers and representatives. +Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel ® , TrojanLabel ® , and GetLabels ™ brand names. The T&M segment includes our line of aerospace printers, Ethernet networking products and test and measurement data acquisition systems sold under the AstroNova ® brand name. Refer to Note 17, “Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments. +On May 4, 2024, we entered into an agreement to acquire MTEX New Solution, S.A. (“MTEX”), a Portugal-based manufacturer of digital printing equipment that addresses a wide variety of markets and applications including textiles, packaging, labeling, apparel, footwear and more. We reported MTEX as a part of our PI segment as of May 6, 2024, the closing date of this acquisition. On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers and related accessories, tabbers, conveyors, and envelope feeders. Astro Machine is reported as a part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisitions,” in our audited consolidated financial statements included elsewhere in this report for further details on these acquisitions. +The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included elsewhere in this Annual Report on Form 10-K. +Description of Business +Product Overview +We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets globally. +PI products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers and light commercial label printers, direct-to-package printers, high-volume presses, and specialty original equipment manufacturer (“OEM”) printing systems. The PI segment also offers a wide range of label, tag and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. PI products sold under our May 2024 MTEX acquisition are mid-to-high volume direct-to-package printers and label printers primarily targeting the industrial and commercial printing segments. PI products sold under Astro Machine which was acquired on August 4, 2022, also include a variety of label printers, envelope and packaging printing, and related processing and handling equipment. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed, stored and presented in various visual formats. +Product Identification +Our PI segment includes QuickLabel, TrojanLabel, GetLabels, Astro Machine and MTEX and offers digital product marking and identification solutions for brand owners, small print shops and OEMs with products sold through channel partners or directly to end users. +2 +The MTEX acquisition enhances our offerings in the commercial printing segment with hardware, software, and supplies that support efficient, flexible, and cost-saving digital printing primarily targeting mid-to-high volume markets. Customers benefit from on-demand label or packaging printing at an efficient cost, accommodating the needs of customers requiring high volumes of medium production runs. +In the brand-owner segment, our one-stop shop strategy aims to provide brand-owners and print shops with label printers, application specific label media and matched inks, as well as label management software, which is optimized for excellent print quality when combined with GetLabels branded tags and label supplies. Our wide range of printers from small tabletop printers to large industrial printers allows us to address a broad range of applications in this segment. +Astro Machine is a U.S.-based manufacturing and technology company providing inkjet printers, conveyors, tabbers, software, and various components to the mail and addressing markets, as well as the label and packaging markets. Astro Machine serves OEM and value-added resellers that have a deep understanding of these markets and loyal customer bases. +Our recently acquired MTEX product portfolio enabled us to further expand into the mid-market segment by providing label and package printing solutions for higher volume brand owners and commercial printers. Additionally, we were able to enter the high-volume market with certain MTEX product offerings. This segment invests in heavier duty printing equipment with a focus on reliability and optimization of operating costs to maximize profitability. We believe that the next generation print engine technology that we acquired from MTEX will enhance MTEX and other PI offerings. Additionally, the TRAX Machine Monitoring software integrated into all of our MTEX products improves the customer experience by maximizing machine uptime and ensures usage of only authentic AstroNova approved consumables. +The PI segment also provides worldwide training and support as well as develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly or over networked systems. +Test & Measurement +Products sold under our T&M segment are designed and manufactured for airborne printing and networking solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace-grade thermal paper. Our data acquisition systems are used in research and development; flight testing; missile/rocket telemetry; production monitoring; and power and maintenance applications. These products are sold to customers in various industries, including aerospace and defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors. +Our airborne printers, which include our flagship ToughWriter ® series, are used in the flight decks of military transport, commercial transport, and business aircraft to print hard copies of data. This enhances flight safety and reduces pilot workload by providing ready access to many types of critical flight-specific information required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, notice to airmen ("NOTAMs"), performance data, passenger data, and air traffic control communications. ToughSwitch ® Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. Our ToughWriter airborne printers and ToughSwitch Ethernet switches are ruggedized to comply with rigorous military and commercial flight-worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter printers for various aircraft made by Airbus, Boeing, Embraer, Lockheed, Gulfstream, and others. In addition to our ToughWriter products, we furnish other acquired flight deck printer products, including the TP/NP series, the RTP80 series and the PTA-45B series of airborne printers. The PTA-45B is subject to an Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which we acquired an exclusive perpetual worldwide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing B737 and Airbus A320 aircraft. Over time we expect customers to replace the PTA-45B and other acquired printer product lines with the AstroNova-designed ToughWriter products because of its numerous technical features, functional advantages and significant weight savings. Currently, almost half of the airborne printers we sell are ToughWriter branded, and we expect the percentage of ToughWriter products to continue to grow over the next several years, and notably in fiscal 2026. +Other T&M products include the TMX ® and TMX-200 all-in-one high-speed data acquisition systems for applications requiring high channel counts and acquisition rates; the Daxus ® DXS-100 distributed data acquisition platform; the SmartCorder ® DDX-100, a portable all-in-one data acquisition system for R&D facility and field testing; and the Everest ® EV-5000 and RC-300 digital strip chart recording systems used mainly in aerospace and defense applications. The Daxus DXS-100 can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances. +3 +Technology +Our core technologies are data visualization technologies that relate to (1) acquiring data; (2) conditioning the data; (3) displaying or printing the data on hard copy, visual displays or electronic storage media; and (4) analyzing the data. To support our data visualization technology, we maintain technological core competencies and trade secret know-how concerning the subject matter particular to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling, and airworthiness design. +Intellectual Property +We rely on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions to protect our technology and brand names. While we consider our intellectual property to be important to the operation of our business, other than our Honeywell license agreement, we do not believe that any existing patent, trademark, or other intellectual property right is of such significance that its loss or termination would have a material adverse effect on our business taken as a whole. +Manufacturing and Supplies +We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many sub-assemblies and parts in-house, including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts that are not manufactured in-house are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We also purchase certain components, assembled products, and supplies used to manufacture or to be sold with our products, from single- or limited- source suppliers. Although we believe the majority of these sole or limited source components, assembled products, and supplies could be sourced elsewhere with appropriate changes in the design of our products, the required design changes might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past, we have made such advanced purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed. +Marketing and Competition +We compete worldwide in multiple markets. Through our existing network of manufacturing, sales and support facilities, during fiscal 2025, we sold our products to customers in approximately 100 countries. +We believe we are a market leader in tabletop digital color label printing technology in the specialty on-demand printing field, the market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose, portable, high-speed data acquisition systems. +We retain our leadership position in the markets we serve by virtue of our proprietary technology, product reputation, delivery, channels to market, technical assistance, and service to customers. The number of competitors we face in any given market varies by product line. Key competitive factors vary among our product lines but include technology, quality, service and support, distribution network and breadth of product and service offerings. +Our PI products are sold by direct field salespersons and independent dealers and representatives, while our T&M products are sold predominantly through independent representatives. In the United States, we have factory-trained direct-field salespeople located throughout the country specializing in PI products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Portugal, Singapore, and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize over 125 independent dealers and representatives selling and marketing our products in approximately 60 countries. +No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years. +4 +Order Backlog +Our order backlog is predominantly but not exclusively for products that will be delivered within twelve months, and backlog scheduled for beyond twelve months is predominantly within the T&M segment. However, backlog varies regularly and is not a highly reliable predictive indicator of near-term future sales trends, primarily due to the frequent longer-term original equipment and supplies orders within the T&M segment. In the PI segment, we have multi-period (but typically not multi-year) blanket order arrangements with many customers for labels and other supplies. Printer hardware in the PI segment is typically shipped within a short period of time after orders are booked. Manufacturing production is designed to meet forecasted demand and built-to-order customer requirements. Backlog at January 31, 2025 and 2024 was $28.3 million and $31.4 million, respectively. +Government Regulation +We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our business, particularly with respect to our aircraft cockpit printer business which sells in a highly regulated industry. For example, material modifications to an airborne printer cannot be made without having progressed through an extensive series of product qualification and certification steps that are technically complicated, expensive to execute, typically slow the pace of product development in that industry and can constrain our ability to quickly respond to pricing fluctuations or disruptions to our supply chain for products. +Other applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, accounting and U.S. Securities and Exchange Commission (“SEC”) reporting, privacy, data protection, pricing, content, distribution, energy consumption, environmental regulation, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. +Our business outside of the U.S. exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. +Environmental Matters +We believe that we are in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment or otherwise relating to the protection of the environment. We have not experienced any material costs in connection with environmental compliance and do not believe that such compliance will have any material effect on our financial position, results of operations, cash flows, or competitive position. +Employees +As of January 31, 2025, we employed 441 full-time employees, including 72 employees from our MTEX acquisition. Of our full-time employees, 280 were in the United States, 143 were in Europe, 11 were in Canada, five were in Asia, and two were in Mexico. +Our employees are not represented by a labor union or covered by a collective bargaining agreement, except for employees in France, where local regulations generally require collective bargaining agreements. +Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments of the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other initiatives to improve overall engagement with our key employees. +Culture +We are deeply committed to, and invest substantial resources in, maintaining and improving a strong and definable company culture that shapes how we operate and engage with stakeholders and employees. Our culture consists of four key components: +• +A powerful set of core values: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value. +5 +• +The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business in pursuit of continuous improvements in quality, delivery, cost, and growth. +• +A commitment to operating with integrity and compliance to ensure our business is conducted in an honest, legal, and environmentally responsible manner. +• +A passionate commitment to quality that drives our goal to achieve zero defects and understand our customers’ changing needs and expectations. +Our objective is for these core values to guide our employees’ behavior and direct how we conduct our business. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities and are also demonstrated through teamwork, leadership, and everyday interactions. +Other Information +Our business is not seasonal in nature. However, our revenue is impacted by the variable size of certain individual customer revenue transactions, which can cause fluctuations in revenue from quarter to quarter and which may be inconsistent with the underlying business or general economic trends. For example, in our T&M segment, government procurement and contracting practices can result in material fluctuations in our backlog and revenues. +Information about Our Executive Officers +The following sets forth certain information with respect to all executive officers of the Company as of April 15, 2025. All officers serve at the pleasure of the Board of Directors. +Name +Age +Position +Gregory A. Woods +66 +President, Chief Executive Officer and Director +Thomas D. DeByle +65 +Vice President, Chief Financial Officer and Treasurer +Stephen M. Petrarca +62 +Vice President - Operations +Michael J. Natalizia +61 +Vice President - Technology & Strategic Alliances, Chief Technology Officer +Tom W. Carll +58 +Vice President and General Manager - Aerospace +Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. +Mr. DeByle was appointed Vice President, Chief Financial Officer, and Treasurer of the Company effective June 17, 2024. Prior to joining the Company, Mr. DeByle served as Chief Financial Officer for Plastic Industries, a manufacturer of blow molded, high-density polyethylene bottles for food, specialty beverage, dairy, health, wellness, household and industrial product markets, from October 2021 through the sale of the business to Altium Packaging in August 2022. Mr. DeByle also held the position of Sr. Vice President and Chief Financial Officer of NN, Inc., a global precision component manufacturer with extensive experience in machining, stamping, and precious metal plating from September 2019 to June 2021, and Vice President, Chief Financial Officer and Treasurer of Standex International Corporation, a global multi-industry manufacturer in five broad business segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions from March 2008 through September 2019. Additionally, Mr. DeByle currently serves on the Board of Directors of Chase Corporation and Good Foods Group, LLC. +Mr. Petrarca was appointed Vice President - Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980. +Mr. Natalizia was appointed Vice President - Technology & Strategic Alliances and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia had held the position of Director of Product Development of the Company since 2005. +Mr. Carll joined the Company in 1989 and has held the position of Vice President and General Manager - Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product group and, from its formation in 2004, the AstroNova Aerospace business group. +6 +Code of Ethics +We have adopted a Code of Conduct which applies to all of our directors, officers and employees of the Company, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on our website, (www.astronovainc.com) , under the heading “Investors—Corporate Governance—Governance Documents.” We intend to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, principal accounting officer, or persons performing similar functions by posting such information on our website. +Available Information +We make available on our website (www.astronovainc.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission ("SEC"). These filings are also accessible on the SEC’s website at http://www.sec.gov. \ No newline at end of file diff --git a/raw/filings/0000008146/2024/0000950170-25-054163/item13.txt b/raw/filings/0000008146/2024/0000950170-25-054163/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..1679a1cd65d04326e47c9cd2f089dab3a713719e --- /dev/null +++ b/raw/filings/0000008146/2024/0000950170-25-054163/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships, Related T ransactions and Director Independence +The information required by this item is incorporated herein by reference to our Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0000008146/2024/0000950170-25-054163/item9a.txt b/raw/filings/0000008146/2024/0000950170-25-054163/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..1ff5ffc3e6c41da11dbe58143f1979d50e720b6c --- /dev/null +++ b/raw/filings/0000008146/2024/0000950170-25-054163/item9a.txt @@ -0,0 +1,24 @@ +Item 9A. Controls a nd Procedures +Evaluation of Disclosure Controls and Procedures +Our management has evaluated, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +Based on that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of January 31, 2025. +Management’s Annual Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate. +Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2025. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The scope of management’s assessment of the effectiveness of its disclosure controls and procedures did not include the internal controls over financial reporting at MTEX, which was acquired effective May 6, 2024. Our consolidated total assets as of January 31, 2025 include $20.9 million from MTEX and our consolidated revenue for the year ended January 31, 2025 includes $4.2 million from MTEX. This exclusion is consistent with the SEC staff’s guidance that an assessment of a recently acquired business may be omitted from the scope of management’s assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the year of acquisition. Based on this assessment, our Principal Executive Officer and Principal Financial Officer believe that as of January 31, 2025, our internal control over financial reporting was effective. +Remediation of Previously Identified Material Weakness +As reported in Item 9A of our Annual Report on Form 10-K for the year ended January 31, 2024, our management concluded that our internal control over financial reporting was ineffective as of January 31, 2024 due to a material weakness as a result of not designing or maintaining an effective control environment to ensure the accurate and timely reporting of transactions related to our Astro Machine subsidiary, which was acquired August 4, 2022. +Management has taken actions to remediate the deficiencies in our internal controls over financial reporting and implemented additional processes and controls designed to address the underlying causes associated with the above-mentioned material weakness. Management’s internal control remediation efforts included the following: +32 +• +During the third quarter of fiscal 2025, we completed the implementation of our NetSuite ERP system at our Astro Machine subsidiary. We have implemented additional controls to mitigate existing risks of proper segregation and change configurations related to this implementation. +• +An outside firm continued to assist management with performing control design and operating effectiveness testing throughout the year. +• +We regularly reported the results of control testing to the key stakeholders across our organization, including our Audit Committee, on testing progress and defined corrective actions, and we monitored and reported on the results of control remediation. We have strengthened our internal policies, processes, and reviews through these actions. +• +We have continued working on documenting and structuring our processes to meet Sarbanes-Oxley (SOX) 404(a) requirements. +Based on the successful implementation and testing of these new and enhanced control processes, we have concluded that the material weakness described above has been remediated as of January 31, 2025. +The effectiveness of our internal control over financial reporting as of January 31, 2025 has been audited by Wolf & Company, P.C., an independent registered public accounting firm, as stated in their attestation report, which is included herein. +Changes in Internal Controls over Financial Reporting +Except as noted above, there have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000008146/2024/0000950170-25-054163/rp_note.txt b/raw/filings/0000008146/2024/0000950170-25-054163/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000008146/2024/0000950170-25-054163/rpt_disclosure.txt b/raw/filings/0000008146/2024/0000950170-25-054163/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4e1b6b136cc8522fc767c993afc49b6b3e070bcb --- /dev/null +++ b/raw/filings/0000008146/2024/0000950170-25-054163/rpt_disclosure.txt @@ -0,0 +1,4 @@ +RELATED PARTY TRANSACTIONS +Potential conflicts of interest and related party transactions are referred by the Board to the Audit Committee for review and approval. In reviewing and evaluating potential conflicts of interest and related party transactions, the Audit Committee uses applicable NASDAQ listing standards and SEC rules as a guide. +No officer, director or nominee for director of the Company or any associate of any of the foregoing had during the period beginning on February 1, 2024 through the date of this proxy statement any material interest, direct or indirect, in any material transaction or any material proposed transaction in which the amount exceeds $120,000 and to which the Company was or is to be a party. +None of our non-employee directors have any substantial interest in any matter to be acted upon except with respect to the directors so nominated (Proposal 1). None of our executive officers, other than Mr. Ittmann, have any substantial interest in any matter to be acted upon other than with respect to approval of the compensation paid to our Named Executive Officers (Proposal 2). Mr. Ittmann does not have a substantial interest in any matter to be acted upon except with respect to Proposals 1 and 2. \ No newline at end of file diff --git a/raw/filings/0000874499/2019/0001628280-20-002453/item1.txt b/raw/filings/0000874499/2019/0001628280-20-002453/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..a93285bc27bd61e080c73dfa890d2a2de8e4ca8b --- /dev/null +++ b/raw/filings/0000874499/2019/0001628280-20-002453/item1.txt @@ -0,0 +1,885 @@ +ITEM 1. +BUSINESS +Our Business +A Delaware corporation formed in 1997, we are an independent natural gas-weighted exploration and production company focused on the exploration, development, acquisition and production of natural gas, crude oil and natural gas liquids ("NGL") in the United States with primary focus in the Appalachia and Mid-Continent basins. Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. We also seek to opportunistically expand our inventory of economic drilling locations in the basins in which we operate. Our principal properties are located in Eastern Ohio, where we target development in the Utica formation (the “Utica”) and Central Oklahoma where we target development in the SCOOP Woodford and Springer formations (the "SCOOP"). We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. In addition, among other interests, we hold an acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC ("Grizzly"), and an approximate 21.8% equity interest in Mammoth Energy Services, Inc. ("Mammoth Energy"), an energy services company listed on the Nasdaq Global Select Market (TUSK), both of which are non-core to our business strategy. +As of December 31, 2019 , we had 4.5 trillion cubic feet of natural gas equivalent ("Tcfe") of proved reserves with a standardized measure of discounted future net cash flows of approximately $1.7 billion and a present net value of estimated future net revenues, discounted at 10% ("PV-10"), of approximately $1.7 billion . See " Oil, Natural Gas and NGL Reserves " below for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Business Strategy +Gulfport aims to create shareholder value through the development of our significant resource plays. Our substantial inventory of hydrocarbon resources, including unproved acreage positions in each of our key basins, provides a strong foundation to create future value. Concentrated blocks of unproved acreage provide us the opportunity to apply best in class techniques including optimum well spacing, leading completion practices and lateral length optimization to maximize overall capital efficiency. We have improved our capital and operating efficiency metrics over the last several years and today have a low cost structure in both our Utica and SCOOP operating areas. We believe our low cost structure provides a significant competitive advantage in the current commodity price environment and it is our strategy to continue to seek capital and operating efficiencies to grow this advantage. +We continue to focus on reducing our leverage profile, increasing cash flow from operations, improving margins through financial discipline and operating efficiencies while at the same time maintaining strong environmental and safety performance. To accomplish these goals, we intend to allocate capital expenditures to projects we believe offer the highest rate of return, to deploy leading drilling and completion techniques and technologies in our development efforts, and to take advantage of merger, acquisition and divestiture opportunities to strengthen our cost structure, deepen our inventory and improve our asset portfolio. +We believe that our dedication to financial discipline, the flexibility and efficiency of our capital program, our low cost structure and our continued focus on safety and environmental stewardship provides opportunities for sustainable value creation. +2 +Table of Contents +Index to Financial Statements +Our 2020 capital expenditure program is expected to be $285 million to $310 million . We expect to fund these expenditures with our operating cash flow and borrowings under our revolving credit agreement. We expect this drilling program to result in 1,100 to 1,150 MMcfe per day of production in 2020. +We plan to run on average approximately one operated rig in our Utica area and 1.5 rigs in our SCOOP area in 2020. In the Utica, we intend to spud 16 gross operated horizontal wells ( 14.8 net), and commence sales on 18 gross and net horizontal wells in 2020 . In the SCOOP, we intend to spud 10 gross operated horizontal wells ( 7.8 net), and commence sales on four gross horizontal wells ( 3.8 net) in 2020 . +Operating Areas +We focus our development, production and acquisition efforts in the geographic operating areas described below. +Utica (primarily Eastern Ohio) - The Utica Shale is a hydrocarbon bearing rock formation located in the Appalachian Basin of the United States and Canada. We have approximately 205,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in Eastern Ohio where the Utica Shale ranges in thickness from 600 to over 750 feet. During the fourth quarter of 2019 we produced approximately 1,090 MMcfe per day net to our interests in this area. +SCOOP (Oklahoma) - The SCOOP, or South Central Oklahoma Oil Province, is a loosely defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 76,000 net reservoir acres (comprised of approximately 41,500 in the Woodford formation and approximately 34,500 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During the fourth quarter of 2019, we produced approximately 255 MMcfe per day net to our interests in this area. +Additional Properties - In addition to our core properties discussed above, we also own working interests and overriding royalty interest in various fields including the Bakken formation in North Dakota and Montana, the Niobrara formation in Colorado and other formations in Texas. We previously held interests located in the West Cote Blanche Bay ("WCBB") and Hackberry fields of Louisiana. However, we sold these non-core interests in July 2019. +Drilling Activity +The following table sets forth information with respect to operated wells completed during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +3 +Table of Contents +Index to Financial Statements +2019 +2018 +2017 +Gross +Net +Gross +Net +Gross +Net +Recompletions: +Productive +— +— +47 +47 +81 +81 +Dry +— +— +— +— +— +— +Total +— +— +47 +47 +81 +81 +Development: +Productive +25 +22.4 +34 +30 +124 +115.4 +Dry +— +— +— +— +2 +2 +Total +25 +22.4 +34 +30 +126 +117.4 +Exploratory: +Productive +1 +0.8 +2 +1.5 +— +— +Dry +— +— +— +— +— +— +Total +1 +0.8 +2 +1.5 +— +— +The following table presents activity by operating area for the year ended December 31, 2019 : +Operated +Non-Operated +Field +Drilled +Turned to Sales +Drilled +Turned to Sales +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Utica Shale (1) +16 +14.6 +47 +41.6 +5 +0.9 +14 +3.3 +SCOOP (2) +10 +8.6 +14 +12.6 +42 +1.6 +39 +1.2 +Niobrara Formation +— +— +— +— +— +— +— +— +Bakken Formation +— +— +— +— +— +— +— +— +Total +26 +23.2 +61 +54.2 +47 +2.5 +53 +4.5 +_____________________ +(1) +Of the 16 gross wells we drilled in 2019 , six were completed as producing wells and 10 were in various stages of completion as of December 31, 2019 . +(2) +Of the 10 gross wells we drilled in 2019 , five were completed as producing wells, four were in various stages of completion and one was being drilled as of December 31, 2019 . +Acreage +The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2019 . +4 +Table of Contents +Index to Financial Statements +Average NRI/WI (1) +Productive +Oil Wells +Productive +Gas Wells +Non-Productive +Oil Wells +Non-Productive +Gas Wells +Developed +Acreage +Undeveloped +Acreage +Field +Percentages +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Utica Shale +45.93/56.32 +126 +40.36 +503 +313.41 +— +— +2 +1.58 +107,076 +85,381 +130,734 +119,428 +SCOOP +26.21/32.64 +118 +24.28 +480 +153.16 +13 +3.69 +56 +36.58 +50,721 +35,602 +7,373 +5,999 +Niobrara Formation +24.41/29.18 +5 +1.46 +— +— +— +— +— +— +1,998 +999 +1,292 +646 +Bakken Formation +1.11/1.97 +18 +0.35 +— +— +— +— +— +— +386 +77 +3,505 +701 +Overrides/Royalty Non-operated +Various +401 +0.02 +5 +0.02 +2 +— +— +— +— +— +— +— +Total +668 +66.47 +988 +466.59 +15 +3.69 +58 +38.16 +160,181 +122,059 +142,904 +126,774 +_____________________ +(1) +Net Revenue Interest (NRI)/Working Interest (WI). +Most of our leases have a three- to five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations and drilling to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2019 +Undeveloped Acres +Gross Acres +Net Acres +Years Ending December 31: +2020 +16,572 +14,803 +2021 +13,773 +12,685 +2022 +17,960 +16,039 +After 2022 +20,088 +18,975 +Held by production or operations +74,511 +64,272 +Total +142,904 +126,774 +Oil, Natural Gas and NGL Reserves +The tables below set forth information as of December 31, 2019 , with respect to our estimated proved reserves, the associated estimated future net revenue, the PV-10 and the standardized measure of discounted future net cash flows (“standardized measure”). None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2019 +Oil +(MMbbl) +Natural +Gas +(Bcf) +NGL (MMbbl) +Total (Bcfe) +Proved developed +8 +1,757 +30 +1,984 +Proved undeveloped +10 +2,291 +32 +2,544 +Total proved (1) +18 +4,048 +62 +4,528 +5 +Table of Contents +Index to Financial Statements +Proved Developed +Proved Undeveloped +Total Proved +($ in millions) +Estimated future net revenue (2) +$ +2,086 +$ +1,461 +$ +3,547 +Present value of estimated future net revenue (PV-10) (2) +$ +1,383 +$ +320 +$ +1,704 +Standardized measure (2) +$ +1,704 +_____________________ +(1) +Utica and SCOOP accounted for approximately 71% and 29% , respectively, of our estimated proved reserves by volume as of December 31, 2019 . +(2) +Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2019 , and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2019 . The prices used in our PV-10 measure were $55.85 per barrel and $2.58 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2019 . The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense. There was no effect of estimated future income tax expense as of December 31, 2019 , primarily as a result of significant net operating loss carryforwards that can be used to offset income taxes on future taxable income. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +_____________________ +Grizzly had no proved reserves as of December 31, 2019. For further discussion of our interest in Grizzly, see “ Our Equity Investments ” below. +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year. +Changes in Proved Reserves during 2019 . +The following table summarizes the changes in our estimated proved reserves during 2019 (in Bcfe): +6 +Table of Contents +Index to Financial Statements +Proved Reserves, December 31, 2018 +4,743 +Sales of oil and natural gas reserves in place +(77 +) +Extensions and discoveries +1,097 +Revisions of prior reserve estimates +(734 +) +Current production +(502 +) +Proved Reserves, December 31, 2019 +4,528 +Sales of oil and natural gas reserves in place. These are revisions to proved reserves resulting from the divestiture of minerals in place during a period. During 2019 , we sold approximately 76.8 Bcfe of proved oil and natural gas reserves through various sales of our Southern Louisiana assets, non-operated interests in our Utica assets and overriding royalty interests in North Dakota. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 1.1 Tcfe of proved reserves were primarily attributable to the continued development of our Utica Shale and SCOOP acreage. We added 72 drilling locations in our Utica acreage for 793.5 Bcfe and 37 drilling locations in our SCOOP acreage for 302.9 Bcfe. This change reflects our ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total downward revisions of 733.8 Bcfe in estimated proved reserves, of which 347.2 Bcfe was a result of the exclusion of nine PUD locations in our Utica field and 22 PUD locations in our SCOOP field when changes in our schedule moved development of these PUD locations beyond five years of initial booking. The development plan change reflects our commitment to capital discipline and funding future activities within cash flow. +An additional 296.4 Bcfe in downward revisions was the result of commodity price changes. Commodity prices experienced volatility throughout 2019 and the 12-month average price for natural gas decreased from $3.10 per MMBtu for 2018 to $2.58 per MMBtu for 2019 , the 12-month average price for NGL decreased from $32.02 per barrel for 2018 to $21.25 per barrel for 2019 , and the 12-month average price for crude oil decreased from $65.56 per barrel for 2018 to $55.85 per barrel for 2019 . +We also experienced downward revisions of 90.2 Bcfe from a combination of working interest changes, optimization of our well design in the current commodity price environment and well performance. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2019 , 2018 and 2017 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities , or Supplemental Information , in Note 19 of the notes to our consolidated financial statements included in this report. +Proved Undeveloped Reserves (PUDs) +As of December 31, 2019 , our proved undeveloped reserves totaled 10 MMbbl of oil, 2,291 Bcf of natural gas and 32 MMbbl of NGL, for a total of 2,544 Bcfe. Approximately 70% and 30% of our PUD reserves at year-end 2019 were located in Utica and SCOOP, respectively. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +7 +Table of Contents +Index to Financial Statements +The following table summarizes the changes in our estimated proved undeveloped reserves during 2019 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2018 +2,628 +Sales of oil and natural gas reserves in place +(69 +) +Extensions and discoveries +1,078 +Conversion to proved developed reserves +(654 +) +Revisions of prior reserve estimates +(439 +) +Proved Undeveloped Reserves, December 31, 2019 +2,544 +Sales of oil and natural gas reserves in place. During 2019 , we sold approximately 68.8 Bcfe of proved undeveloped oil and natural gas reserves associated with various non-operated interests, the majority of which were in our Utica field. +Extensions and discoveries. Our extensions of approximately 1.1 Tcfe were primarily attributed to the addition of 72 PUD drilling locations in the Utica field and 37 PUD drilling locations in the SCOOP field as a result of our current development plan that refocused some activity within our existing fields. This change reflects our ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations. +Conversion to proved developed reserves. Our 2019 development activities resulted in the conversion of approximately 654.0 Bcfe into proved developed producing reserves, attributable to 49 PUD locations in the Utica field and 12 PUD locations in the SCOOP field. These 61 PUDs represent a conversion rate of 20% for 2019. +Revision of prior reserve estimates. We experienced proved undeveloped downward revisions of 347.2 Bcfe from the exclusion of 9 PUD locations in our Utica field and 22 PUD locations in our SCOOP field due to the SEC five-year development rule. The development plan change, as approved by our senior management and Board of Directors, reflects our commitment to capital discipline and funding future activities within cash flow. We also experienced 146.8 Bcfe of downward revisions as a result of commodity price changes. These downward revisions were partially offset by positive revisions of 54.8 Bcfe in estimated proved reserves from a combination of well performance, changes in ownership interest and development well design changes. +Costs incurred relating to the development of PUDs were approximately $353.1 million in 2019 . +All PUD drilling locations included in our 2019 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2019 , 1% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates at December 31, 2019 and December 31, 2018 were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. Reserve estimates at December 31, 2017 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio, the SCOOP Woodford and SCOOP Springer plays in Oklahoma and our WCBB and Hackberry fields. Our personnel prepared reserve estimates with respect to our Niobrara field as well as our overriding royalty and non-operated interests at December 31, 2017. +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves relating to our assets in the Utica Shale, SCOOP, WCBB and Hackberry fields. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, +8 +Table of Contents +Index to Financial Statements +commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 20 years of reservoir and operations experience. In addition, our geophysical staff has approximately 100 years combined industry experience and our reservoir staff has approximately 40 years combined experience. +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• +review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• +verification of property ownership by our land department; +• +preparation of reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• +direct reporting responsibilities by our reservoir engineering department to our Chief Operating Officer; +• +review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• +provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• +annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• +annual review and approval by our senior management and our board of directors of a multi-year development plan; +• +annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• +annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +PV-10 Sensitivities. +As noted above, our December 31, 2019 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2019 of $55.85 per barrel and $2.58 per MMBtu. Holding production and development costs constant, if SEC pricing were $61.44 per barrel and $2.84 per MMBtu, or a 10% increase, this would have resulted in an increase of 69.6 Bcfe of our total proved reserves and a $0.7 billion increase in PV-10 value at December 31, 2019 . Holding production and development costs constant, if SEC pricing were $50.27 per barrel and $2.32 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 106.5 Bcfe of our total proved reserves and a $0.7 billion decrease in PV-10 value at December 31, 2019 . +Production, Prices and Production Costs +The following table presents our production volumes in our core operating areas during the periods indicated: +9 +Table of Contents +Index to Financial Statements +Year Ended December 31, +Field +2019 +Net Production +Natural Gas (MMcf) +Oil and Condensate (Mbbls) +NGL (MGal) +Natural gas equivalents (MMcfe) +MMcfe per Day +Utica Shale +387,473 +247 +76,112 +399,828 +1,095 +SCOOP +70,669 +1,610 +136,948 +99,891 +274 +Niobrara Formation +— +14 +— +86 +— +Bakken Formation +35 +41 +67 +292 +1 +Louisiana and Other +1 +274 +2 +1,645 +5 +Total +458,178 +2,186 +213,129 +501,742 +1,375 +10 +Table of Contents +Index to Financial Statements +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2019 +2018 +2017 +($ In thousands) +Natural gas sales +Natural gas production volumes (MMcf) +458,178 +443,742 +350,061 +Total natural gas sales +$ +918,263 +$ +1,121,815 +$ +845,999 +Natural gas sales without the impact of derivatives ($/Mcf) +$ +2.00 +$ +2.53 +$ +2.42 +Impact from settled derivatives ($/Mcf) +$ +0.23 +$ +(0.04 +) +$ +0.07 +Average natural gas sales price, including settled derivatives +($/Mcf) +$ +2.23 +$ +2.49 +$ +2.49 +Oil and condensate sales +Oil and condensate production volumes (Mbbls) +2,186 +2,801 +2,579 +Total oil and condensate sales +$ +117,937 +$ +177,793 +$ +124,568 +Oil and condensate sales without the impact of derivatives ($/Bbl) +$ +53.95 +$ +63.48 +$ +48.29 +Impact from settled derivatives ($/Bbl) +$ +1.86 +$ +(9.51 +) +$ +1.59 +Average oil and condensate sales price, including settled derivatives ($/Bbl) +$ +55.81 +$ +53.97 +$ +49.88 +NGL sales +NGL production volumes (MGal) +213,129 +251,720 +224,038 +Total NGL sales +$ +101,448 +$ +178,915 +$ +136,057 +NGL sales without the impact of derivatives ($/Gal) +$ +0.48 +$ +0.71 +$ +0.61 +Impact from settled derivatives ($/Gal) +$ +0.06 +$ +(0.05 +) +$ +(0.03 +) +Average NGL sales price, including settled derivatives ($/Gal) +$ +0.54 +$ +0.66 +$ +0.58 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) +501,742 +496,505 +397,543 +Total natural gas, oil and condensate and NGL sales +$ +1,137,648 +$ +1,478,523 +$ +1,106,624 +Natural gas, oil and condensate and NGL sales without the impact of derivatives ($/Mcfe) +$ +2.27 +$ +2.98 +$ +2.78 +Impact from settled derivatives ($/Mcfe) +$ +0.24 +$ +(0.12 +) +$ +0.07 +Average natural gas, oil and condensate and NGL sales price, including settled derivatives ($/Mcfe) +$ +2.51 +$ +2.86 +$ +2.85 +Production Costs: +Average production costs ($/Mcfe) +$ +0.17 +$ +0.18 +$ +0.20 +Average production taxes ($/Mcfe) +$ +0.06 +$ +0.07 +$ +0.05 +Average midstream gathering and processing ($/Mcfe) +$ +0.58 +$ +0.58 +$ +0.63 +Total production costs, midstream costs and production taxes ($/Mcfe) +$ +0.81 +$ +0.83 +$ +0.88 +11 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2019 : +Year Ended December 31, +2019 +2018 +2017 +Utica Shale +Net Production +Natural gas (MMcf) +387,473 +379,417 +309,450 +Oil (Mbbls) +247 +299 +473 +NGL (Mgal) +76,112 +113,379 +139,634 +Total (MMcfe) +399,828 +397,406 +332,238 +Average Sales Price Without the Impact of Derivatives: +Natural gas ($/Mcf) +$ +1.99 +$ +2.50 +$ +2.38 +Oil ($/Bbl) +$ +51.11 +$ +60.22 +$ +44.26 +NGL ($/Gal) +$ +0.47 +$ +0.67 +$ +0.60 +Average Production Costs ($/Mcfe) +$ +0.14 +$ +0.14 +$ +0.15 +Year Ended December 31, +2019 +2018 +2017 (1) +SCOOP +Net Production +Natural gas (MMcf) +70,669 +64,258 +40,501 +Oil (Mbbls) +1,610 +1,710 +1,083 +NGL (Mgal) +136,948 +138,261 +84,283 +Total (MMcfe) +99,891 +94,268 +59,038 +Average Sales Price Without the Impact of Derivatives: +Natural gas ($/Mcf) +$ +2.08 +$ +2.67 +$ +2.68 +Oil ($/Bbl) +$ +53.32 +$ +62.36 +$ +48.70 +NGL ($/Gal) +$ +0.48 +$ +0.75 +$ +0.62 +Average Production Costs ($/Mcfe) +$ +0.18 +$ +0.20 +$ +0.19 +_____________________ +(1) +We acquired our SCOOP assets through an acquisition completed on February 17, 2017. See Note 2 in the notes to our consolidated financial statements for additional discussion of this acquisition. +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2019 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage ("SAGD") oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. In April 2015 , Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses future plans for the facility. Grizzly also owns the May River property comprising approximately 47,000 acres prospective for oil sands development. An initial 12,000 barrel per day development application covering the eastern portion of the May River lease has been deemed complete from the Alberta Energy Regulator and received final approval in December 2019. If pursued, this project could begin production as early as 2023. A 2-D seismic program covering approximately 83 kilometers has been completed to more fully define the resource over the remaining lease beyond the development application area. In 2017, Grizzly advanced plans for cold heavy oil sands production ("CHOPS") at its Cadotte property in Peace River. However, plans for development are dependent on stabilized commodity prices. Grizzly continues to advance rail marketing strategies to ensure consistent and flexible access to +12 +Table of Contents +Index to Financial Statements +premium markets for its future production. Grizzly is also advancing a project to utilize its Windell truck to rail terminal located near Conklin, Alberta, for movement of liquefied petroleum gas ("LPG") into the oil sands area for use in Thermal applications by SAGD producers. We elected to cease funding capital calls in 2019, and we have no obligation to fund any of the projects Grizzly is pursuing. Failure to fund capital calls may lead to dilution of our equity ownership interest. +Mammoth Energy . In connection with Mammoth Energy's initial public offering ("IPO") in October 2016, we received 9,150,000 shares of Mammoth Energy common stock in return for our contribution to Mammoth Energy of our 30.5% interest in Mammoth Energy Partners LLC. In June 2017, we received an additional 2,000,000 shares of Mammoth Energy common stock in connection with our contribution of all of our equity interests in three other entities to Mammoth Energy. We sold 76,250 shares of our Mammoth Energy common stock in the IPO and an additional 1,354,574 shares in a subsequent underwritten public offering in 2018. As of December 31, 2019 , we owned 9,829,548 shares, or approximately 21.8% , of Mammoth Energy’s outstanding common stock. +See Note 4 of the notes to our consolidated financial statements included elsewhere in this report for additional information regarding these and our other equity investments. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating of commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for Gulfport’s interest and other interest owners in Gulfport-operated wells. In addition, there are a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our pipeline delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. +Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority being shorter term in nature. We have entered into long-term gathering, processing and transportation contracts with various parties that require us to deliver fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. See Note 16 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of our commitments. +Major Customers +For the year ended December 31, 2019 , sales to Morgan Stanley Capital accounted for approximately 14% of our total natural gas, oil and NGL revenues, before the effects of hedging. For the year ended December 31, 2018 , sales to BP Energy Company ("BP") and ECO-Energy accounted for approximately 17% and 10% , respectively, of our total natural gas, oil and NGL revenues, before the effects of hedging. For the year ended December 31, 2017 , sales to BP accounted for approximately 40% of our total natural gas, oil and NGL revenues, before the effects of hedging. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +13 +Table of Contents +Index to Financial Statements +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• +reporting of workplace injuries and illnesses; +• +industrial hygiene monitoring; +• +worker protection and workplace safety; +• +approval or permits to drill and to conduct operations; +• +provision of financial assurances (such as bonds) covering drilling and well operations; +• +calculation and disbursement of royalty payments and production taxes; +• +seismic operations and data; +• +location, drilling, cementing and casing of wells; +• +well design and construction of pad and equipment; +• +construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• +method of completing wells; +• +hydraulic fracturing; +• +water withdrawal; +• +well production and operations, including processing and gathering systems; +• +emergency response, contingency plans and spill prevention plans; +• +air emissions and fluid discharges; +• +climate change; +• +use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• +surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• +plugging and abandoning of wells; and +• +transportation of production. +Failure to comply with these laws and regulations can lead to the imposition of remedial liabilities, fines, or criminal penalties or to injunctions limiting our operations in affected areas. Moreover, multiple environmental laws provide for citizen suits which allow environmental organizations to act in the place of the government and sue operators for alleged violations of environmental law. We consider the costs of environmental protection and of safety and health compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the forced pooling or integration of tracts to facilitate exploration. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural +14 +Table of Contents +Index to Financial Statements +gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. In addition, permitting activities on federal lands are subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a $25 million single well limit and a $35 million multiple wells limit that insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $101 million comprehensive general liability umbrella insurance policy. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during each of 2019 and 2018 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. We pay these companies a retainer plus additional amounts when they provide us with clean up services. +15 +Table of Contents +Index to Financial Statements +Employees +At December 31, 2019 , we had 298 employees. +Executive Officers +David M. Wood, Chief Executive Officer, President and Director +David M. Wood , 62, has served as the Chief Executive Officer and President of the Company, and as a member of our board of directors, since December 2018. Prior to joining the Company, Mr. Wood served as the Chief Executive Officer and Chairman of the Board of Directors of Arsenal Resources LLC, which we refer to as Arsenal, a West Virginia focused natural gas producer and portfolio company of First Reserve Corporation ("First Reserve"), an energy-focused private equity firm, where he most recently served as Chairman of its board of directors and previously held the role of the Chief Executive Officer. Prior to his tenure at Arsenal, Mr. Wood served as a Senior Advisor to First Reserve from 2013 to 2016, serving on several of its portfolio company boards. Prior to his position at First Reserve, Mr. Wood spent more than 17 years at Murphy Oil Corporation (NYSE: MUR) ("Murphy Oil"), a global oil and natural gas exploration and production company, where he served as Chief Executive Officer, President and a member of the board of directors from 2009 to 2012. From 1980 to 1994, Mr. Wood held various senior positions with Ashland Exploration and Production, an oil and natural gas exploration and production company. Mr. Wood began his career as a well-site geologist in Saudi Arabia. Mr. Wood has served on the board of directors of Lilis Energy, Inc. (NYSE: LLEX), an exploration and development company operating in the Delaware Basin since June 2018. Mr. Wood also served on the board of directors of the general partner of Crestwood Equity Partners LP (NYSE: CEQP) and its wholly-owned subsidiary, Crestwood Midstream Partners LP, an owner and operator of crude oil and natural gas midstream assets. Mr. Wood also served on the board of directors of several private oil and natural gas companies, including Deep Gulf Energy LP (prior to its acquisition by Kosmos Energy Ltd.) and Berkana Energy Corp. (when it was majority owned by Murphy Oil). Mr. Wood previously served on the board of directors and as an executive committee member of the American Petroleum Institute. He was also a member of the National Petroleum Council and is a member of the Society of Exploration Geophysicists. Mr. Wood holds a B.S. in Geology from the University of Nottingham in England and completed Harvard University’s Advanced Management Program. +Quentin R. Hicks, Executive Vice President and Chief Financial Officer +Quentin R. Hicks , 45, has served as the Executive Vice President and Chief Financial Officer of the Company since August 2019. Prior to joining the Company, Mr. Hicks served as the Executive Vice President and Chief Financial Officer of Halcón Resources Corporation (“Halcón”), a position he held since March 2019, having previously served as Executive Vice President, Finance, Capital Markets and Investor Relations of Halcón since January 2018. Prior to that, Mr. Hicks held various roles at Halcón focused primarily on finance and investor relations. Prior to Halcón, Mr. Hicks worked for GeoResources Inc., where he served as Director of Acquisitions and Financial Planning from 2011 to 2012. From 2004 to 2011, he worked in investment banking with Bear Stearns, Sanders Morris Harris and Madison Williams, where he was a Director in their energy investment banking practice. Prior to that, Mr. Hicks worked as Manager of Financial Reporting for Continental Airlines. Mr. Hicks began his career in 1998 working as an auditor for Ernst and Young LLP. Mr. Hicks graduated from Texas A&M University with a Bachelor of Business Administration and a Master of Science degree in Accounting. In addition, Mr. Hicks holds a Master of Business Administration degree in Finance from Vanderbilt University and also holds a Certified Public Accountant license from the State of Texas. +Donnie G. Moore, Executive Vice President and Chief Operating Officer +Donnie G. Moore , 55, has served as Executive Vice President and Chief Operating Officer of the Company since January 2018. He also served as Interim Chief Executive Officer of the Company from October 29, 2018, the date our former Chief Executive Officer and President left the Company, to December 18, 2018, the date of the appointment of Mr. Wood as our new Chief Executive Officer and President. From 2007 until December 2017, Mr. Moore worked at Noble Energy, Inc. ("Noble"), where he most recently served as Vice President of Noble’s Texas operations for its Eagle Ford and Delaware Basin assets. Prior to that, Mr. Moore held various leadership roles at Noble including Vice President of the Marcellus Business Unit, Manager for Operations of the Wattenberg/DJ Business Unit, Manager of Operations for the Gunflint discovery in the Deepwater Gulf of Mexico and Development Manager for Noble’s Mid-Continent and Gulf Coast positions. From 1989 until 2007, Mr. Moore served in a variety of roles with ARCO Oil and Gas Company, Vastar Resources, Inc. and BP America. Mr. Moore holds a Bachelor of Science degree in Petroleum Engineering from Louisiana Tech University. +16 +Table of Contents +Index to Financial Statements +Patrick K. Craine, Executive Vice President, General Counsel and Corporate Secretary +Patrick K. Craine , 47, has served as Executive Vice President, General Counsel and Corporate Secretary of the Company since May 2019. Mr. Craine has over 20 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. He joined Gulfport from Chesapeake Energy Corporation (NYSE: CHK) ("Chesapeake"), where he served as Deputy General Counsel – Chief Risk and Compliance Officer from 2013 until 2019. Prior to joining Chesapeake, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. +Michael J. Sluiter, Senior Vice President of Reservoir Engineering +Michael J. Sluiter , 47, has served as Senior Vice President of Reservoir Engineering of the Company since December 2018. Mr. Sluiter joined the Company from Noble Energy, Inc., where he held various engineering and leadership positions from March 2007 to November 2018, including, most recently, the Permian Basin Business Unit Manager. Prior to, Noble Mr. Sluiter worked for Santos Australia and Santos USA from February 2000 to March 2007, and started his career as a wireline field services engineer for Schlumberger in Thailand. He has over 18 years combined of experience in unconventional resource development, reservoir engineering, subsurface development, business development and acquisitions. Mr. Sluiter holds a Bachelor of Science degree in Chemical Engineering from the University of Sydney, Australia. \ No newline at end of file diff --git a/raw/filings/0000874499/2019/0001628280-20-002453/item13.txt b/raw/filings/0000874499/2019/0001628280-20-002453/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..3c9e360d2793446eed4691965d0b9312e272d6f4 --- /dev/null +++ b/raw/filings/0000874499/2019/0001628280-20-002453/item13.txt @@ -0,0 +1,3 @@ +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2020 Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0000874499/2019/0001628280-20-002453/item9a.txt b/raw/filings/0000874499/2019/0001628280-20-002453/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..69924a576bde36a3b0f7a508ac53126cce458747 --- /dev/null +++ b/raw/filings/0000874499/2019/0001628280-20-002453/item9a.txt @@ -0,0 +1,55 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2019 because of the material weakness in our internal control over financial reporting described in Management’s Report on Internal Control Over Financial Reporting disclosed below. +Our Chief Executive Officer and Chief Financial Officer also determined that the material weakness existed at September 30, 2019 and also concluded that we did not maintain effective disclosure controls and procedures as of that date. Our Chief Executive Officer and Chief Financial Officer have concluded that the unaudited condensed consolidated financial statements included in the Form 10-Q filing for the reporting period ended September 30, 2019 were materially misstated as a result of the material weakness. The Company filed an amended Form 10-QA for the period ended September 30, 2019 with the restated amounts. +Remediation Plan for the Material Weakness +Our management is actively engaged in the planning for, and implementation of, remediation efforts to address the material weakness identified. Specifically, our management is currently evaluating our policies and procedures related to its process of accounting for unevaluated oil and gas properties. We plan to design and implement additional controls to ensure that we are properly and timely identifying and transferring leasehold costs associated with acreage expirations, lease transfers and proved reserve additions from the unevaluated capitalized cost pool to the evaluated amortization base. We will do that through continued focus on (i) redesigning controls over the completeness and reconciliation of acreage movements; (ii) identifying new resources to execute and monitor the redesigned controls; (iii) process enhancements and (iv) additional technical training of our accounting staff. Our management believes that these actions will remediate the material weakness in internal control over financial reporting described above. The material weakness will not be considered remediated until the controls operate for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively. +Changes in Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting during the quarter ended December 31, 2019, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting, other than the material weakness described above. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +107 +Table of Contents +Index to Financial Statements +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. +Management determined it did not effectively design and maintain controls over the completeness and accuracy of the accounting of transfers of unevaluated capitalized costs into the amortization base for the three and nine month periods ended September 30, 2019 and the twelve month period ended December 31, 2019. Specifically, we did not have an adequate process for monitoring that our accounting policies for transferring unevaluated oil and gas properties were consistently being performed timely and reconciled with the general ledger. This material weakness resulted in a material error in the amount of impairment expense booked in relation to our oil and gas properties for the nine months ended September 30, 2019 and resulted in the Company restating its consolidated financial statements as of and for the three and nine months ended September 30, 2019. +As a result of the material weakness in internal control over financial reporting described above, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2019. +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2019 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2019, as stated in their accompanying report. +/s/ David M. Wood +/s/ Quentin Hicks +Name: +David M. Wood +Name: +Quentin Hicks +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +108 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment: +The Company did not have effective internal control in place over the completeness and accuracy of the information used in determining the accounting for transfers of unevaluated capitalized costs into the amortization base. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report dated February 27, 2020 which expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +109 +Table of Contents +Index to Financial Statements +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 27, 2020 +110 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2019/0001628280-20-002453/rp_note.txt b/raw/filings/0000874499/2019/0001628280-20-002453/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001503274/2017/0001047469-18-001842/filing.txt b/raw/filings/0001503274/2017/0001047469-18-001842/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..3443dc5d695778416d6653550f55de1169b42bbf --- /dev/null +++ b/raw/filings/0001503274/2017/0001047469-18-001842/filing.txt @@ -0,0 +1,7641 @@ +10-K +1 +a2234843z10-k.htm +10-K +Use these links to rapidly review the document +TABLE OF CONTENTS +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS QUANTERIX CORPORATION Years ended December 31, 2017, 2016 and 2015 +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2017 +OR +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period +from to +Commission file number: 001-38319 +QUANTERIX CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +20-8957988 +(I.R.S. Employer Identification No.) +113 Hartwell Avenue, Lexington, MA +(Address of principal executive offices) +02421 +(Zip Code) +Registrant's +telephone number, including area code: (617) 301-9400 +Securities +registered pursuant to Section 12(b) of the Exchange Act: +Title of each class +Name of each exchange on which registered +Common Stock, $0.001 par value per share +The Nasdaq Global Market +Securities +registered pursuant to Section 12(g) of the Exchange Act: None +Indicate +by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes o No ý +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange +Act. Yes o No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act +of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the +past 90 days. Yes ý No o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to +be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such +files). Yes ý No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, +to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this +Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an +emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. +(Check one): +Large accelerated filer o +Accelerated filer o +Non-accelerated filer ý +[Do not check if a +smaller reporting company] +Smaller reporting company o +Emerging growth company ý +If +an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting +standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange +Act). Yes o No ý +The registrant was not a public company as of the last business day of its most recently completed second fiscal quarter and, therefore, cannot calculate the +aggregate market value of its voting and non-voting common equity held by non-affiliates as of such date. +As +of March 1, 2018, the registrant had 21,937,510 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant's definitive proxy statement for its 2018 Annual Meeting of Stockholders, which the registrant intends to file with the Securities and +Exchange Commission pursuant to Regulation 14A within 120 days after the end of the registrant's fiscal year ended December 31, 2017, are incorporated by reference into +Part III of this Annual Report on Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +1 +Item 1A. +Risk Factors +36 +Item 1B. +Unresolved Staff Comments +68 +Item 2. +Properties +68 +Item 3. +Legal Proceedings +68 +Item 4. +Mine Safety Disclosures +68 +PART II +Item 5. +Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +69 +Item 6. +Selected Financial Data +71 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +72 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +90 +Item 8. +Financial Statements and Supplementary Data +90 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +90 +Item 9A. +Controls and Procedures +90 +Item 9B. +Other Information +91 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +91 +Item 11. +Executive Compensation +91 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +91 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +91 +Item 14. +Principal Accountant Fees and Services +91 +PART IV +Item 15. +Exhibits and Financial Statement Schedules +92 +Item 16. +Summary +96 +Signatures +97 +Consolidated Financial Statements +F-1 +i +Table of Contents +Special Note Regarding Forward-Looking Statements +This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. All statements other than +statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements by words such as +"anticipate," "believe," "contemplate," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "seek," "should," "target," "will," "would," or the +negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about: +• the implementation of our business model and strategic plans for our business, products and services; +• the size of the life science research, diagnostics, and health screening markets addressable by our Simoa technology; +• the size and market opportunity for our Simoa technology in the fields of neurology, oncology, cardiology, infectious disease and inflammation; +• the commercialization and adoption of our existing products and services and the success of our new product offerings, including Quanterix SR-X +and the detection of nucleic acids; +• our ability to develop additional assays, including multiplexed assays; +• the accuracy of our estimates regarding expenses, future revenues, capital requirements and our needs for additional financing; +• the ability of our Simoa technology's sensitivity to improve existing diagnostics and to enable the development of new diagnostic tests and +tools; +• the potential of our Simoa technology in the field of companion diagnostics and its adoption by healthcare professionals; +• the impact of our Simoa technology on proteomic research; +• the relevance of proteins versus nucleic acids in understanding the continuum between health and disease; +• the usefulness of the data generated by our Simoa technology in the life science research, diagnostic and precision health screening fields; +and +• our financial performance. +These +forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Part I, Item 1A, Risk Factors" and elsewhere +in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to +predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those +contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on +Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. +You +should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, +we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no +obligation to update +ii +Table of Contents +publicly +any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to new information, actual results or to changes in our +expectations, except as required by law. +You +should read this Annual Report on Form 10-K and the documents that we reference herein and have filed with the Securities and Exchange Commission, or SEC, as exhibits to this +Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect. +This +Annual Report on Form 10-K includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by +third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do +not guarantee the accuracy or completeness of such information. This Annual Report on Form 10-K also contains estimates and other statistical data from a custom market research report by an +independent third-party research firm, which was commissioned by us and was issued in June 2017, referred to herein as the Third-Party Research Report. Such data involves a number of assumptions and +limitations and contains projections and estimates of the future performance of the markets in which we operate and intend to operate that are subject to a high degree of uncertainty. We caution you +not to give undue weight to such projections, assumptions and estimates. +Unless +the context otherwise requires, the terms "Quanterix," the "Company," "we," "us" and "our" in this Annual Report on Form 10-K refer to Quanterix Corporation. "Quanterix," +"Simoa," "Simoa HD-1," "SR-X," "HD-1 Analyzer" and our logo are our trademarks. All other service marks, trademarks and trade names appearing in this Annual Report on Form 10-K are the property +of their respective owners. We do not intend our use or display of other companies' trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these +other companies. +iii +Table of Contents +PART I +Item 1. BUSINESS +Overview +We are a life sciences company that has developed a next generation, ultra-sensitive digital immunoassay platform that advances precision health +for life sciences research and diagnostics. Our platform enables customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, +are undetectable using conventional, analog immunoassay technologies. It also allows researchers to define and validate the function of novel protein biomarkers that are only present in very low +concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has +not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the +development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, +prevention. We are currently focusing our platform on protein detection, which we believe is an area of significant unmet need and where we have significant competitive advantages. In addition to +enabling new applications and insights in protein analysis, we are also developing our Simoa technology to detect nucleic acids in biological samples. +Our +platform is based on our proprietary digital si ngle mo lecule a rray, or Simoa, detection technology, which is +the most sensitive commercially available protein detection technology. Simoa significantly advances +ELISA technology, which has been the industry standard for protein detection for over forty years. Proteins are complex molecules that are required for the structure, function and regulation of the +body's tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It +is estimated that these 20,000 genes can produce over 100,000 different proteins, approximately 10,500 of which are known to be secreted in blood. Accordingly, while research on nucleic acids provides +valuable information about the role of genes in health and disease, proteins are more prevalent and, we believe, more relevant to a precise understanding of the nuanced continuum between health and +disease. Protein measurement goes beyond genetic predisposition, reflecting the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more +relevant insight into what is happening in a person's body in real time. +Researchers +and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable using +conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low +abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa's sensitivity offers a new way to monitor healthy individuals and detect +proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical +signs and symptoms have appeared. +Our +Simoa platform has achieved significant scientific validation and commercial adoption. Simoa has been cited by published research in more than 215 articles in peer-reviewed +publications covering over +165 biomarkers in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over +200 customers across our end markets, and includes 17 of the 20 largest biopharmaceutical companies. +On +January 30, 2018, we acquired Aushon BioSystems, Inc., or Aushon. We believe that this acquisition provides us technologies and expertise to help further expand our +instrument and biomarker menu. Additionally, we expect that Aushon's CLIA-certified laboratory will help accelerate our entry into pharmaceutical services. +Table of Contents +Our Market Opportunities +Our Simoa technology has applications across the life science research, diagnostics and precision health screening markets. Our initial target +market has been the life science research market. While we have received revenue from upfront and milestone payments related to collaborations with diagnostic companies, neither we nor any of our +diagnostic partners have sold Simoa products or services in the diagnostics or precision health screening markets. As our customers continue to gain experience with our proprietary Simoa technology, +we believe the opportunity to access markets beyond research will be significant. According to estimates in the Third-Party Research Report, we believe the future aggregate market opportunity for us +and others using our Simoa technology has the potential to expand to approximately $38 billion, approximately $30 billion of which would be addressable by Simoa upon receipt of the +necessary regulatory approvals to market our products in areas other than life science research, which we have not yet begun the process to obtain. +Life Science Research +Our initial target market is the large and growing life science research market. We believe Simoa is well-positioned to capture a significant +share of this market because of its superior sensitivity, automated workflow capabilities, multiplexing and its ability to work with a broader range of sample types. By substantially lowering the +limit of detection of protein biomarkers, we believe that Simoa is penetrating the existing market for protein analysis and holds potential to significantly grow the life science research market as +researchers expand their research into the diseases associated with the thousands of proteins that were previously undetectable. Simoa also enables earlier detection of the proteins that are currently +detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. As an indication of the market's acceptance of our Simoa platform, biopharmaceutical +researchers are also integrating our platform into drug development protocols to more efficiently and effectively develop drugs. In addition to enabling new applications and insights in protein +analysis, our Simoa technology can be used to detect nucleic acids, which expands our market opportunity. We believe that Simoa has the potential to ultimately provide the same sensitivity as +polymerase chain reaction, or PCR, which is the most commonly used technology for nucleic acid detection, without the distortion and bias issues associated with amplification used in PCR. +According +to estimates in the Third-Party Research Report, we believe that the total life science research market addressable by Simoa, including both proteomics and genomics research, +is $3 billion per year and has the potential to reach $8 billion per year. +Diagnostics +The diagnostic market represents a significant commercial opportunity for Simoa as well. We believe existing diagnostics can be improved by +Simoa's sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog +immunoassay technologies but are detectable using Simoa. We also believe that the ultra-sensitive protein detection provided by Simoa can enable the development of a new category of non-invasive +diagnostic tests and tools based on blood, serum, saliva and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, +diagnostic imaging and biopsy. In order to accelerate the use of our technology to develop applications in the diagnostic market, we have entered into a collaboration agreement with +bioMérieux, a leading diagnostic company. +Simoa +also has significant potential in the emerging field of companion diagnostics. Drug developers can use Simoa to stratify patients into categories, enabling selection of those +patients for whom a drug is expected to be most effective and safe. Not only can Simoa be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa's +sensitivity also +2 +Table of Contents +enables +the development of companion diagnostics based on protein biomarkers that can regularly monitor whether an approved drug is having the desired biological effect, enabling doctors to quickly +and efficiently adjust the course of treatment as appropriate. +Precision Health Screening +Simoa's ability to detect and quantify normal physiological levels of proteins in low abundance that are undetectable using conventional, analog +immunoassay technologies may enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of +the onset of disease. We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood +draw on a regular, ongoing basis as part of a patient's routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of +disease, prior to the appearance of symptoms. +According +to estimates in the Third-Party Research Report, we believe that the total diagnostic and precision health screening markets addressable by us and others using Simoa have the +potential to reach an aggregate of $30 billion per year, which would be addressable upon receipt of the necessary regulatory approvals to market our products in areas other than life science +research, which we have not yet begun the process to obtain. +Products +sold by us or collaborators in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including +requirements for regulatory clearance or approval of such products before they can be marketed. To date, neither we nor any of our diagnostic partners have received or applied for regulatory approvals +for Simoa products. See "Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement" and "—Government Regulation" for a more detailed discussion +regarding the regulatory approvals that may be required. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme-linked immunosorbent assay, or ELISA, technology, which has been the most widely +used method of detection of proteins for over 40 years. Given our target customers' familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. +Simoa differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional +ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to Simoa's unprecedented +sensitivity. +We +commercially launched our Simoa HD-1 Analyzer in January 2014. The HD-1 Analyzer is the most sensitive protein detection platform commercially available, and is currently capable of +analyzing up to six biomarkers per test, with anticipated expansion of biomarker capability per test in 2018. Assays run on the HD-1 Analyzer are also fully automated. We believe that the increased +multiplexing capability and the full automation of the HD-1 Analyzer provides us with an additional significant competitive advantage with biopharmaceutical customers. We have currently developed more +than 80 Simoa digital biomarker assays. The Simoa platform also allows ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called "homebrew" assays. We +intend to continue to increase the number of Simoa digital biomarker assays. +We +continually seek to expand our product offerings to meet the needs of our customers. To that end, we have developed a new instrument, the Quanterix SR-X, which we commercially +launched in December 2017. The Quanterix SR-X utilizes the same core Simoa technology and assay kits as the HD-1 Analyzer in a compact benchtop form with a lower price point, more flexible assay +preparation, +3 +Table of Contents +and +a wider range of applications, including direct detection of nucleic acids. The Quanterix SR-X supports detection capability of up to six biomarkers per test, with anticipated expansion of +biomarker capability per test in 2018. +We +also provide contract research services for customers through our Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa's technology, and supports +multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 350 projects for more than 150 customers from all +over the world using our Simoa platform. In addition to being an important source of revenue, we have also +found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as over 36 customers for whom we have provided contract research services have subsequently purchased +an instrument from us. In addition, with our acquisition of Aushon in January 2018, we acquired Aushon's CLIA-certified lab. We have integrated this lab into our Accelerator Laboratory, and intend to +move Simoa instruments into this CLIA-certified lab. We believe the ability to offer services from a CLIA-certified lab will help accelerate our entry into pharmaceutical services. +We +sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America +and Europe, and through distributors or sales agents in other select markets. We have an extensive base of customers in world class academic and governmental research institutions, as well as +pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Competitive Strengths +We believe that our competitive strengths include the following: +• Proprietary ultra-sensitive digital immunoassay Simoa technology platform, enabling +researchers and clinicians to obtain information from less invasive procedures in smaller sample sizes. Simoa is the most sensitive commercially +available protein detection technology, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows +researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and +facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our Simoa technology +allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. +• Technology platform that leverages and improves upon industry standard ELISA +technology. Simoa uses the basic principles of conventional bead-based ELISA. However, unlike ELISA, which runs the enzyme-substrate reactions on +all molecules in one well, Simoa reactions are run on individual molecules in tiny microwells that are 2.5 billion times smaller than traditional ELISA wells. Adding digital capability to this +industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers' familiarity with the core ELISA technology, Simoa is easily integrated with +existing customer workflows including data analysis. +• Leader in large and growing market for detecting proteins in low +abundance. Simoa is the most sensitive commercially available protein detection technology. We believe our growing market acceptance is +establishing Simoa as the reference platform for detecting proteins in low abundance across sample types in our end markets. +4 +Table of Contents +• Deep and expanding scientific +validation. Our Simoa technology has been cited in more than 215 articles in peer-reviewed publications, including JAMA Neurology and Nature , covering over 165 biomarkers, and is becoming a vital tool in cutting edge +life sciences research. Our company has established relationships with key opinion leaders, and our growing base of over 200 customers includes some of the world's leading academic and government +research institutions as well as 17 of the 20 largest pharmaceutical and biotechnology companies. +• Leading position in market solidified by robust customization capabilities, assay design +flexibility and automation of our HD-1 Analyzer. Our technical capabilities and expertise allow our customers to design high-quality, customized +assays utilizing our Simoa platform. The needs of our customers vary widely, and the flexibility of the Simoa detection technology allows us to provide innovative, low cost solutions for customers in +multiple markets across various applications. In addition, the Simoa HD-1 Analyzer provides fully automated analysis from sample introduction to analytical results. Furthermore, our proprietary array +approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater +throughput and lab efficiency. +• Highly attractive business model that leverages growing installed base of +instruments. As we continue to grow our installed base, optimize workflows and expand our assay menu, we expect to increase our revenues derived +from consumables. The integration of our technology in our customers' projects also provides ongoing sales of assays and consumables, resulting in a growing revenue stream. +• Our highly experienced senior management +team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop +novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into protein and nucleic acids to allow greater insight into their role in human health in ways that have not +been possible with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on +earlier detection, monitoring, prognosis and, ultimately, prevention. +Our +strategy to achieve this includes: +• Focus on the highly attractive, expanding market for protein detection and +analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on +human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to +a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including +environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person's body in real time. Our technology provides a unique bridge between understanding +the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and drug development. +• Continue to drive adoption of the Simoa platform in the life science research, +diagnostics and precision health screening markets. Simoa has the potential to significantly expand the life science research market because of +its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We believe Simoa +5 +Table of Contents +has +the capability to enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive +and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. In the precision health screening market, we believe that Simoa can be used to monitor protein biomarker +levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of disease. +• Leverage the Simoa "ecosystem" to grow our customer base and further penetrate our +existing customer base. In an effort to enhance the productivity of our instrument base, we have launched an extensive customer outreach program +that we call Catalyzing Customer Engagement, or CCE. Through CCE, we actively engage customers to optimize their workflow and better understand our instruments' and products' capabilities, resulting +in increased utilization of our installed instrument base. +• Utilize the flexibility of the Simoa platform to expand into complementary markets, +including nucleic acid detection. We plan to utilize the flexibility of the Simoa platform to expand our product offering to include other +testing capabilities, including detection of nucleic acids. We believe that our Simoa technology has the potential to provide the same sensitivity as PCR-based assays in detecting nucleic acids +without the issues associated with amplification. The ability to integrate nucleic acid and protein testing capabilities into a full service instrument would hold significant value to our customers. +• Leverage the data generated by Simoa to drive adoption of our +technology. Technology being employed in the healthcare industry has become increasingly sophisticated, creating the need to aggregate and +digitize the significant amount of data being created in order to better achieve the goals of higher quality and more efficient care. Simoa generates digitized data for highly relevant biomarkers that +can provide a nuanced view into the continuum of health and disease. We plan to use the data generated by the Simoa technology to improve and create additional assays, with the goal of enabling more +precise research today and contributing to precision health in the future. +• Grow into new markets organically with our customers and through strategic +collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers +continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of +some of the work that our customers are doing today in the research market. For example, Simoa's unprecedented sensitivity has the potential to uncover research insights that could identify novel +biomarkers, which could help stratify patients in clinical trials potentially leading to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. +This progression with our customers will help us move into new markets organically in a cost effective manner, while also retaining significant upside. Additionally, we currently have partnerships in +place with leading diagnostics companies and plan to continue evaluating strategic collaborations that could help us access these new markets. +• Grow through strategic +acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For +example, in January 2018, we acquired Aushon Biosystems. This will continue to be an important part of our strategy to increase scale. We intend to pursue acquisitions to expand product offerings, +strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +6 +Table of Contents +Industry Background +We intend to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. +Our initial commercial strategy targets the large and growing life science research market and we believe that the diagnostic market and the precision health screening market represents a significant +future commercial opportunities for Simoa. According to estimates in the Third-Party Research Report, we believe the aggregate market opportunity for us or others using Simoa has the potential to +expand to $38 billion as researchers and healthcare practitioners develop new applications for our products that span the continuum from research through diagnosis and precision health. +Proteins +are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and +regulation of the body's tissues and organs. For example, proteins provide immune protection, generate movement, +transmit nerve impulses and control cell growth and differentiation. Understanding an organism's proteome, the complete set of proteins and their expression levels, can provide a powerful and unique +window into its health, a window that other types of research, such as genomics, cannot provide. +The +human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, +the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, approximately 10,500 +of which are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of +much of the proteome has not been practical given the limited level of sensitivity of existing technologies. To date, we have developed assays that address approximately 80 of the proteins secreted in +blood. We estimate that the current sensitivity of our Simoa technology has the potential to detect and measure up to one-third of the approximately 9,200 proteins secreted in blood that are not +consistently detectable using conventional immunoassay technologies. +While +genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to +understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of +environmental factors and lifestyle, such as diet and exercise, or provide insight into what is happening in a patient's body in real time. For example, identical twins have the same genotype, but may +develop different diseases over the course of their lifetime, largely due to environmental factors. +Much +like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of +which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic +research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not +detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and +well-being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, +ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +7 +Table of Contents +Existing Technologies and Their Limitations +Protein Analysis +The enzyme-linked immunosorbent assay, or ELISA, has been the most widely used method of sensitive detection of proteins for over +40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either +directly, or indirectly through use of a conjugated +secondary or "capture" antibody (sandwich ELISA). A specific "detection" antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final +step, a substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the +graphic below: +Aside +from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, +Raman-enhanced signal detection, immune-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of what is +estimated to be approximately 10,500 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of +these approaches have limitations, including: +• dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +• narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules +and increasing sample volume requiring additional enzymes to reach detection limit; +• low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal +physiological levels; and +• limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers +aimed at more effectively detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and +then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated +during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become +8 +Table of Contents +detectable. +PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide +availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias +into the data, potentially compromising the reliability of results, particularly at low concentrations. +Due +to the complexity, susceptibility to contamination and significant costs related to PCR and other existing technologies, the genomic testing market generally remains limited to +reference laboratories, research facilities and laboratories associated with large hospitals. A typical molecular diagnostics laboratory in a hospital or research laboratory setting is a dedicated +facility that employs highly skilled technologists and is supervised by a technician with a Ph.D. or M.D./Ph.D. To guard against contamination, which is a common result of target amplification, a +typical laboratory will require at least three separate rooms, or isolation areas, to perform PCR-based assay methods for genomic testing. +Our Simoa Digital Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection +sensitivity. Simoa digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for +detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that +are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa digital technology +measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our +Simoa platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high +throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa technology detects proteins: +Simoa Analytic Process +Sample Preparation of ELISA Sandwich +Simoa uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white +star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the +graphic). +9 +Table of Contents +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 +microwells, each of which is large enough to accommodate only a single bead. +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is +introduced into the channel to displace the substrate solution and excess beads, and, most importantly, to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our +Simoa technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. The following chart shows examples +of the levels of detection, or LoD, of certain Simoa assays and commercially available ELISA assay compared to the median lower normal plasma or clinical ranges of various protein biomarkers. As shown +below, the LoD for most of the assays from a leading manufacturer of commercial ELISA assays is above the median lower normal plasma or clinical ranges, making these biomarkers undetectable at normal +physiological levels with these assays. +10 +Table of Contents +LoD Comparison +Each +of the increments in the horizontal axis in the table above represents a 10-fold increase in sensitivity. Using the protein IL-2 as an example from the graphic above, the LoD for +the leading commercially available IL-2 assay is approximately 9 pg/mL, whereas the LoD for our Simoa assay is approximately 0.01 pg/mL, representing a 900-fold increase in sensitivity. +Multiplexing Capability +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers +to maximize the biological information from a sample, and to develop more specific diagnostic tests. Importantly, Simoa multiplexing maintains single plex precision, while competitive platforms lose +sensitivity when multiplexing is used. Multiplexing is achieved with our Simoa technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the +assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. +We +have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the Simoa HD-1 Analyzer, which is a prerequisite to our ability to develop an +assay with the capacity to detect an equivalent number of proteins in a single sample. +In +2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of traumatic brain injury and other neurodegenerative conditions. Simoa is the +only +technology with the sensitivity to detect all four of these markers in blood, whereas other assay technologies require cerebrospinal fluid, or CSF, to detect all four of these markers due to +sensitivity limitations. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. +11 +Table of Contents +Nucleic Acid Testing +Our initial focus has been on the use of Simoa to detect protein biomarkers. However, we are also developing our Simoa technology to detect +nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, polymerase chain +reaction, or PCR, is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and +heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional +PCR-based assays with the following benefits: +• no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +• reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; +and +• the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water. +For +detection of nucleic acids with Simoa, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. +Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target +nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. This assay is pictured below: +Simoa +has been used to detect short sequences of RNA, known as microRNA, that are important in a number of biological systems, and are widely used in innovative therapeutic and gene +editing technologies. The assay was used to detect microRNA-122, or miR-122, a marker of liver toxicity, from +12 +Table of Contents +the +serum of patients who had overdosed with acetaminophen. As shown in the graph below, these patients had elevated miR-122 levels compared to healthy controls. +This +approach suggests potential for applications for measuring drug-induced liver injury for both safety testing of drugs in development and for monitoring of approved drugs. In March +2018, we began offering miR-122 testing for liver toxicity through our Accelerator Laboratory. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research, diagnostics and precision health +screening markets. +Life Science Research +Our initial target market is the large and growing life science research market, including both proteomics and genomics research. We believe +Simoa is well-positioned to capture a significant share of this market because of its superior sensitivity, automated workflow capabilities, multiplexing and its ability to work with a broader range +of sample types. +Proteomics, +the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how +to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa, and we believe +that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. While it is estimated that there are approximately 10,500 secreted proteins in +circulation in human blood, fewer than 1,300 of them can be detected in healthy individuals using conventional immunoassay technologies. In addition, many of the proteins which can be detected by +other technologies are only detectable after they have reached levels that reflect more advanced disease or injury. By substantially lowering the limit of detection of protein biomarkers, Simoa holds +significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently +detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa provides researchers the ability to see the nuanced continuum of health to +disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and +catalyzing a new era of medical and life science research, drug discovery and disease prevention. +As +an indication of the market's acceptance of our Simoa platform, researchers at pharmaceutical and biotechnology companies are integrating our platform into drug development protocols +to more efficiently and effectively develop drugs. Using Simoa's unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a +drug, drug +13 +Table of Contents +developers +can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. We estimate that our Simoa technology has been utilized in over 500 +clinical trials to date. +In +addition, researchers can also use Simoa to monitor a drug candidate's unwanted effect on "off-target" biomarkers and predict side effects, addressing the significant issue of drug +toxicity, which is the fourth leading cause of death in the United States. +According +to estimates in the Third-Party Research Report, we believe that the total life science research market addressable by Simoa, including both proteomics and genomics research, +is $3 billion per year and has the potential to reach $8 billion per year. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for Simoa as well. We believe existing biomarker diagnostics can be +improved by Simoa's sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, +analog immunoassay technologies but are detectable using Simoa. We also believe that the ultra-sensitive protein detection provided by Simoa can enable the development of a new category of +non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal +tap, diagnostic imaging and biopsy. +For +example, researchers have conducted studies using Simoa that indicate that neurological biomarkers, including tau and Nf-L, may someday be able to replace diagnostic imaging to +diagnose traumatic brain injury, or TBI. Our Simoa assays for tau and Nf-L are 3,500-fold and 840-fold more sensitive, respectively, than the leading assay platforms, and are the only assays that can +reliably detect these critical protein biomarkers in blood. Almost 90% of patients who visit U.S. hospital emergency rooms and receive a computerized tomography, or CT, scan show no structural brain +injury. In addition, CT scans have approximately 100 times more radiation than a chest x-ray, and are suspected of causing cancer in up to 29,000 people per year, underscoring the need for development +of a safe and accurate blood-based diagnostic test for TBI, which we believe may be enabled by our Simoa technology. +Simoa +also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a therapeutic drug +that can help predict +how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients to study for whom a drug is expected to be most effective and +safe. Companion diagnostics have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only can Simoa be used to develop companion diagnostics +to stratify patients in clinical trials and for treatment, but Simoa's sensitivity also enables the development of companion diagnostics based on protein biomarkers that can actively and regularly +monitor whether an approved drug is having the desired biological effect. This can quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing +dosages or even switching therapies. +There +has been significant interest from third parties to use our technology to develop applications for the diagnostic market, which has resulted in collaborations with leading +diagnostic companies, such as bioMérieux. In addition, we have had discussions with lab service companies that are interested in using our technology to develop laboratory developed +tests that may be more sensitive than currently available commercial tests. +14 +Table of Contents +Precision Health Screening +We believe that Simoa's ability to detect and quantify normal physiological levels of low abundance proteins that are undetectable using +conventional, analog immunoassay technologies will enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide +earlier detection of the onset of disease. This may facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, +prevention, enabling a "precision health" revolution. +We +believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on +a regular, ongoing basis as part of a patient's routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, +prior to the appearance of symptoms. +According +to estimates in the Third-Party Research Report, we believe that the total diagnostic and precision health screening markets addressable by us and others using Simoa have the +potential to +reach an aggregate of $30 billion per year upon receipt of the necessary regulatory approvals, which we have not yet begun the process to obtain. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have +significant shortcomings that our technology addresses. In particular, we have focused on the following areas: neurology, oncology, cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally +only been detectable in cerebrospinal fluid, or CSF, has the potential to rapidly advance neurology research and drug development, and transform the way brain injuries and diseases are diagnosed and +treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that +the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these +endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of +which are costly and highly invasive for the patient. The sensitivity of the Simoa platform has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse +through the blood-brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of these neural biomarkers in +the blood are so low that they are undetectable by conventional, analog immunoassay technologies. +As +one example, we have developed ultra-sensitive protein assays for the neural biomarkers A b 42 and tau that are approximately 2,000 to 3,500-fold +more sensitive, respectively, than benchmark commercial assays. Our protein assays are the only currently available assays on the market capable of precise measurement of these neural biomarkers in +blood in diseased and healthy individuals. +To +date, there have been over 100 scientific publications on approximately 52 neural biomarkers using our Simoa technology, and we believe that ultra-sensitive digital detection of +neural related biomarkers +in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including CTE, Alzheimer's disease, dementia, Parkinson's disease, +15 +Table of Contents +multiple +sclerosis and TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. +In +2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for ther +neurological biomarker Nf-L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer's disease as currently established CSF biomarkers. The study was a major study of almost 600 +patients from the Alzheimer's Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf-L measurements compared with traditional CSF biomarkers. The +diagnostic accuracy of the plasma Simoa Nf-L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +In +addition, Simoa plasma Nf-L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer's disease at baseline and during follow-up. High plasma Nf-L +correlated with poor cognition and Alzheimer's disease -related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf-L may have +clinical utility as a noninvasive biomarker in Alzheimer's disease. +Traumatic +brain injuries, or TBIs, lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive +diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa has demonstrated the sensitivity to identify relevant neurological biomarkers, +such as Nf-L, tau, GFAP and UCHL-1, to more adequately address diagnosis of TBIs and overall brain health. +Leading +researchers in neurology have used Simoa to study biomarkers in the blood of athletes after concussion in many high-impact sports. Our platform measures critical neural +biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic +Encephalopathy, or CTE, which currently can be diagnosed after death via a brain autopsy. A recent publication by an National Institute of Health researcher indicates that measuring tau in the blood +with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling +clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +16 +Table of Contents +In 2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of traumatic brain injury and other neurodegenerative +conditions. Whereas other assay technologies require cerebrospinal fluid, or CSF, to detect all four of these markers, due to its sensitivity, Simoa is the only assay that can detect all of these +biomarkers directly from blood samples. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. +In +2016, Fast Company named Quanterix one of the "World's Most Innovative Companies" for our work in concussion detection. We also were awarded two competitive grants from the NFL-GE +Head Health Challenge to advance this work in the detection and quantification of mild TBI. +We +estimate that the total addressable market for Simoa for neurology has the potential to reach $6 billion across research, diagnostic and precision health screening indications. +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease +development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the +disease has progressed and the patient has become symptomatic. Simoa's highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for +patients. Additionally, Simoa has shown early promise as an alternative to more invasive diagnostic procedures. To date, there have been 17 scientific publications on approximately 40 cancer +biomarkers using our Simoa technology. +Simoa +was used in a recent unpublished scientific study that we understand indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low +cost, non-invasive blood test. In this retrospective study, researchers found that Simoa resulted in significantly fewer false positives and false negatives than mammography. Inaccurate mammography +results in unnecessary stress, additional health care costs from follow up diagnostic mammograms, unnecessary biopsies and increased lifetime exposure to radiation. Researchers are also developing +ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa, potentially replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, +cost effective, accurate blood-based health screens, further enabling the liquid biopsy market, which is estimated to grow to almost $3 billion by 2026. +Cancer +immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are +not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Serum protein +biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and predict side effects. One technical +challenge to using these biomarkers has been the development of immunoassays with sufficient sensitivity to measure immune modulates directly in serum. We have developed a set of +38 ultrasensitive immune modulation assays (cytokines and chemokines) that can be used to directly monitor the immune response. In particular key immune regulatory cells (T-regs, dendritic +cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be detected in serum using conventional, analog immunoassay technology, however they +can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for PD-L1 which is one of the major immuno-oncology targeted antigens. Several studies have +shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We +also believe residual cancer cell detection post-surgery or treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a +greater risk of +17 +Table of Contents +reoccurrence +post-surgery due to residual cancer. We have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen, or PSA, that is over 1,000-fold more sensitive than benchmark +commercial PSA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we +and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate +cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of +traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our +Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant +radiation treatment to be targeted only to the men who actually would benefit. +We +estimate that the total addressable market for Simoa for oncology has the potential to reach $25 billion across research, diagnostic and precision health screening indications. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths +in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa's highly sensitive digital measurement capabilities have +the potential to be used to predict early cardiac disease. +To +date, there have been six scientific publications on approximately 11 cardiology biomarkers using our Simoa technology. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying +rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology can have a significant impact in reducing the spread of infectious diseases by making early stage +detection more specific and widely available. +18 +Table of Contents +Today, +early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious +disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables +the detection of extremely low levels of infectious disease specific antigens with sensitivity that rivals the use of nucleic acid testing in this application, without the potential biases inherent in +amplification technologies, such as PCR. +We +have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than benchmark commercial protein assays capable of detecting the HIV-specific antigen, p24. This +Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a +commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early +as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of +acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In +addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry +a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa can detect Clostridium difficile ( C. +diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism +does not always produce toxins, PCR methods that detect the C. diff organism suffer +from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential +to provide a higher level of sensitivity and specificity, greatly reducing false positives. +We +will continue to develop Simoa assays for pathogenic antigens that are competitive in sensitivity to PCR but more specific to the pathogenicity of the offending organism. We believe +that these Simoa +19 +Table of Contents +assays +could also be invaluable tools for the development of anti-infective drugs and treatment monitoring of anti-viral and anti-bacterial drugs. +To +date, there have been 27 scientific publications on approximately 13 infectious disease biomarkers using our Simoa technology. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory +molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology +measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn's disease, asthma, rheumatoid arthritis and +neuro-inflammation. We believe the sensitivity of Simoa can provide a clearer picture of the underlying state of the immune response and disease progression. +Our +Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to +monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn's disease undergoing +anti-TNF- a therapy with Remicade, Humira or +Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF- a levels of the patients before and after treatment. These levels were +all below the limit of detection, or LoD, of traditional immunoassays. +We +believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory +drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side +effects or increase efficacy. +To +date, there have been 25 scientific publications on approximately 47 inflammatory biomarkers using our Simoa technology. +20 +Table of Contents +Our Products and Services +Our Quanterix commercial portfolio includes instruments, assay kits and other consumables, and contract research services offered through our +Accelerator Laboratory, as follows: +Product +Key attributes +Simoa HD-1 Analyzer +• +commercially launched in +January 2014 +• +most sensitive immunoassay platform on market +• +fully automated, floor-standing instrument +• +wide dynamic range +• +multiplexing capability with small sample volume +• +up to 400 samples per eight-hour shift +• +homebrew capabilities +Quanterix SR-X +• +commercial launch in +December 2017 +• +reader only, benchtop instrument with lower price point +• +same sensitivity, dynamic range and homebrew capabilities as HD-1 +• +multiplexing capability: Quanterix SR-X currently has up to have 6-plex capability with anticipated expansion of biomarker capability per test in 2018 +• +sample prep and assay protocol flexibility +Assays and other consumables +• +over 85 assays developed +for neurology, oncology, cardiology, infectious diseases and inflammation research +• +homebrew kits containing beads and reagents required for customers to +custom build assays +• +proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells +21 +Table of Contents +Product +Key attributes +Services +• +contract research services +provided through our Accelerator Laboratory +• +over 350 projects completed to date +• +extended warranty and service contracts +• +CLIA-certified lab available +Instruments and Consumables +Simoa HD-1 Analyzer +We commercially launched the Simoa HD-1 Analyzer in January 2014. The HD-1 Analyzer is the most sensitive protein detection platform +commercially available, and is currently capable of analyzing up to six biomarkers per test, with anticipated expansion of biomarker capability per test in 2018. Assays for the HD-1 Analyzer are fully +automated (i.e. sample in to result out), and results for up to 66 samples are available in approximately one hour. We believe that this automation provides us an additional significant +competitive advantage with pharmaceutical and biotechnology customers. Samples can be input into the instrument via 96-well microtiter plates or sample tubes where the system can multiplex and +process tests in a variety of assay protocol configurations. Simoa digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for +capture onto the beads, and one for detection (antigen 'sandwich'). +Specialized +software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration +of multiple biological molecules. The Simoa HD-1 Analyzer software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis +software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals +to concentrations for the different biological molecules. +Quanterix SR-X +We commercially launched the Quanterix SR-X in the fourth quarter of 2017 and installed five instruments in December 2017. The Quanterix +SR-X utilizes the same core Simoa technology and assay kits as the HD-1 Analyzer in a compact benchtop form with a lower price point designed to address the needs of researchers who value the +ultra-sensitive detection capabilities enabled by Simoa. +In +contrast to the fully automated workflow of the HD-1 Analyzer, the assay incubation and washing steps for the Quanterix SR-X are performed outside of the instruments using +conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct +detection of nucleic acids. The Quanterix SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 +well plate is approximately 2.5 hours. +The +Quanterix SR-X system currently supports detection capability of up to six biomarkers per test with anticipated expansion of biomarker capability per test in 2018. +22 +Table of Contents +Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital +biomarker assays, with more than 85 assays developed to date. In addition to these assays we have developed, the Simoa platform allows ease and flexibility in assay design, enabling our customers to +develop their own proprietary in-house assays, called homebrew assays, using our Homebrew Assay Development Kit. Our kits include all components required to run tests, such as beads, capture and +detector reagents, enzyme reagents and enzyme substrate. Our consumables portfolio also includes our proprietary Simoa disks that are unique to our systems, as well as cuvettes, and disposable tips. +Our goal is to continue to add to our assay kits to extend our application base. +We +have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to +manufacturing +and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu +expansion goals. +Services +Our Accelerator Laboratory provides customers a contract research option. Researchers, academics and principal investigators can work with our +scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, +including: +• Sample testing. Utilizing commercially available Simoa kits, we have run +large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer's needs and even large studies can +be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +• Homebrew assay development. Utilizing proprietary or commercially available +reagents in combination with the Quanterix Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to ELISA. The Accelerator Laboratory can +also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +• Custom development. After identifying the optimal assay and conditions, the +Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa +platform. +To +date, we have completed over 350 projects for over 150 customers from all over the world using our Simoa platform. In addition to being an important source of revenue, we have also +found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as over 36 customers for whom we have provided contract research services have subsequently purchased +an instrument from us. +In +addition, with our acquisition of Aushon in January 2018, we acquired Aushon's CLIA-certified lab. We have integrated this lab into our Accelerator Laboratory, and intend to move +Simoa instruments into this CLIA-certified lab. We believe the ability offer services from a CLIA-certified lab will help accelerate our entry into pharmaceutical services. +23 +Table of Contents +We +also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This +evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We are particularly focused on expanding +our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, +customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and marketing team. We also intend to continue +to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our instruments and reagents via direct field sales and support organizations located in North America and Europe and through a +combination of our own sales force and third-party distributors in additional major markets such as Australia, China, India, Japan, South Korea, Lebanon, Singapore and Taiwan. Our domestic and +international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological advances in Simoa systems, workflows, and +notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on +delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As +of March 1, 2018, we had approximately 43 people employed in sales, sales support and marketing, including 19 technical field application scientists. This staff is primarily +located in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a +comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region +countries such as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with +Quanterix-employed sales and support personnel. +Our +sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and +governmental research institutions. +In +addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness +of our technology, demonstrate its benefits relative to existing technologies and accelerate its adoption. We also seek to increase awareness of our products through participation at trade shows, +academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +To +develop a thought leadership position in the precision health arena, we were a Platinum Sponsor of the inaugural Powering Precision Health Summit, or PPHS, in Cambridge, Massachusetts +in September 2016 and of the second annual PPHS in Cambridge in October 2017. At PPHS in 2016, there were 22 cutting edge scientific talks covering neurology, cardiology, oncology and inflammation. +There were over 200 registered attendees, including senior scientists, patient advocates, investors, and potential partners. At PPHS in 2017, there were 37 scientific talks and over 425 registered +attendees. +24 +Table of Contents +Our +systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and +demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the system including running experiments in the Accelerator Laboratory and +comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive +documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time +from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource instrument development and manufacturing with industry leaders, and to internally +develop and assay kits in our own facility. +Systems +HD-1/Quanterix SR-X +The Simoa HD-1 Analyzer is manufactured by STRATEC Biomedical AG, based in Birkenfeld, Germany, and is manufactured and shipped from their +Birkenfeld and Beringen, Switzerland facilities. See "—Key Agreements—Development Agreement and Supply Agreement with STRATEC" for a description of this agreement. Simoa HD-1 +Analyzers are shipped by STRATEC to our global customers' locations. Installation of, and training on, our products is provided by our employees in the markets where we conduct direct sales, and by +distributors in those markets where we operate with distributors. The Quanterix SR-X is manufactured by Paramit Corporation, based in Morgan Hill, California, and is shipped to global customers by +Paramit. +We +believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for either the Simoa +HD-1 Analyzer or the Quanterix SR-X, we would experience additional costs, delays and difficulties in doing so, and our business would be harmed. +Consumables +Simoa Consumables +We assemble our assay kits in our Lexington, Massachusetts facility. Our reagents are sourced from a limited number of suppliers, including +certain single-source suppliers. Reagents include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. +Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay +kits on a timely basis. +Simoa +disks are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. This agreement provides +for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our +cuvettes are single sourced through STRATEC Biomedical, and the disposable tips used in our assays are commercially available. +25 +Table of Contents +Key Agreements +License Agreement with bioMérieux SA +In November 2012, we entered into a Joint Development and License Agreement, or JDLA, with bioMérieux SA. Under the terms +of the JDLA, we granted bioMérieux an exclusive, royalty-bearing license to manufacture and sell instruments and assays using our Simoa technology for in vitro diagnostics used in +clinical lab applications, food quality control testing, in vitro diagnostics and pharmaceutical quality control testing, and a co-exclusive, royalty-bearing license in certain other fields. Under the +JDLA, bioMérieux was required to purchase instruments from us subject to certain minimum purchase requirements. We received a $10 million upfront payment and we were eligible to +receive developmental and regulatory milestone payments, royalties on the sale of assays by bioMérieux and payments for the manufacture and delivery of instruments based on a +contractual rate subject to future adjustments. +On +December 22, 2016, we entered into an Amended and Restated License Agreement with bioMérieux, or the BMX Agreement, which modified the JDLA resulting in the +termination of the ongoing joint development efforts between the parties and clarified and amended prospective rights and obligations of both parties. Under the BMX Agreement, +bioMérieux retains an exclusive license to our Simoa technology for in vitro diagnostics used in clinical lab applications, food quality control testing, and pharmaceutical quality +control testing, each as defined in the agreement, subject to a right we have retained to make and sell the current version of our HD-1 instrument for use in clinical lab applications, either directly +or through a partner (but not both), if an affiliate of ours is manufacturing and selling in vitro diagnostics tests, or solely through a partner (subject to restrictions as to the particular parties +with which we could elect to partner and the assays that can be developed) in the event we do not have an affiliate manufacturing and selling in vitro diagnostics tests. For sales by a partner, we +would be required to pay to bioMérieux a mid-double-digit percentage of royalties received based on sales of assays by the partner. bioMérieux also retains a co-exclusive +license to our Simoa technology for certain in vitro diagnostics, including point-of-care testing and laboratory developed testing. We retained rights to research use only applications and to nucleic +acid assay applications. We also granted bioMérieux a non-exclusive, royalty-free license to the source and object code of our Level 1 Data Reduction, or L1DR, software including +rights to updates and upgrades in the future. The L1DR software is our proprietary image processing algorithms that convert images of microscopic beads associated with biomarker molecules in +microwells. bioMérieux's minimum purchasing requirements were eliminated and it is permitted to independently develop and manufacture certain instruments. +bioMérieux +has a three-year option to acquire distribution rights to the HD-1 instrument in the exclusive and co-exclusive fields. If the option to acquire distribution +rights to the HD-1 is exercised, the BMX Agreement provides that we and bioMérieux shall negotiate, in good faith, a distribution agreement which will include a specified lump sum +payment. If bioMérieux does not exercise this right prior to December 22, 2019, all rights and licenses granted to bioMérieux with respect to the HD-1 instrument +(other than the license to the L1DR software) will terminate. +bioMérieux +also has a period of not more than three years from the date of the BMX Agreement to evaluate its interest in developing a new, smaller in vitro diagnostic +instrument using the Simoa +technology for use in clinical lab applications, food quality control testing, and pharmaceutical quality control testing. If bioMérieux does not elect to pursue development of a new +instrument within the three year period ending December 22, 2019, all rights and licenses granted to bioMérieux for instruments other than the HD-1 instrument will terminate. If +bioMérieux does elect to pursue development of a new instrument, they will have a set number of years to obtain a CE mark for such instrument and a set period of time thereafter to +obtain FDA approval. Subject to a cure period, if these regulatory milestones are not met, the BMX Agreement will terminate (subject to the continuing +26 +Table of Contents +right +of bioMérieux to distribute the HD-1 instrument if it had previously exercised its option and negotiated a distribution agreement). +We +have been advised by bioMérieux that its current objective is to identify and develop an assay menu supporting the commercial launch of a new, benchtop in-vitro +diagnostic instrument using the Simoa technology for use in clinical lab applications, food quality control testing, and pharmaceutical quality control testing. This will require identifying assays +that support the commercial launch of such an instrument and developing or adapting technology to facilitate a benchtop platform. Pursuant to the exclusive license to the Simoa technology granted in +the BMX Agreement, bioMérieux has the sole right to determine whether or not to develop such an instrument for use in clinical lab applications, food quality control testing, and +pharmaceutical quality control testing, and we can not assure you that bioMérieux will decide to do so. If they were to do so, we would be restricted from selling a benchtop instrument +for use in clinical lab applications, food quality control testing, and pharmaceutical quality control testing, but not for use in any other applications. +On +execution of the BMX Agreement, we received an upfront payment of $2 million. We are also eligible to receive royalties on net sales of assays sold by bioMérieux +in the mid to high single digits, and to receive low double digit royalties on sales of instruments by bioMérieux based on manufacturing cost. The future developmental and regulatory +milestone payments under the JDLA were not achieved as the parties agreed to no longer pursue joint development, subject to the right for bioMérieux to develop its own instrument using +the Simoa technology with a different form and size than our HD-1 instrument, prior to the achievement of these milestones. Accordingly, these milestones were no longer applicable and were removed in +the BMX Agreement and are no longer eligible to be earned. The BMX Agreement has an indefinite term, but can be terminated by bioMérieux for any reason with six months notice to us. In +addition, either party may terminate the agreement upon 60 days notice in the event of an uncured material breach by the other party. +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement, or the Development Agreement, with STRATEC +Biomedical Systems AG, pursuant to which STRATEC undertook the development of the Simoa HD-1 instrument for manufacture and sale to us or a partner whom we designate. Under the Development Agreement, +we were required to pay a fee and issue to STRATEC warrants to purchase 2,000,000 shares of our Series A-3 Preferred Stock at an exercise price of $0.001 per share, all of which have been +exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The Development Agreement was amended in November 2016. The Amendment reduced our +obligation to satisfy a minimum purchase commitment under the Supply and Manufacturing Agreement described below. Additionally, the parties agreed on additional development services for an additional +fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with the final milestone due under the terms of the Development +Agreement. The services are expected to be completed during the year ending December 31, 2018. +The +Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations +to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In +September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC, or the Supply Agreement, pursuant to which STRATEC agreed to supply HD-1 instruments to us, and +we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC's ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the +instruments. We agreed to purchase a certain number of instruments in the seven years following the +27 +Table of Contents +acceptance +of the first validation instrument. The Supply Agreement was amended in November 2016 to reduce the number of instruments we are committed to procure from STRATEC. The instrument price +stipulated in the Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The +Supply Agreement is terminable by either party on 12 months' notice to the other party, provided that neither party may terminate the Supply Agreement prior to the later of +the seven year anniversary +of the acceptance of the first prototype instrument and the purchase of the minimum number of instruments which we committed to procure. The Supply Agreement may also be terminated on the insolvency +of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us +for STRATEC's insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the +instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement, or the Paramit Agreement, with Paramit Corporation, or Paramit. Under the +terms of the Paramit Agreement, we engaged Paramit to produce and test our Quanterix SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to +manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines +will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess +pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in +cost. +The +Paramit Agreement has an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with nine months' written notice to the other +party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months' notice to Paramit upon the occurrence of (i) a failure +of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under +the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days' notice to us in the event of a material breach after written notice and a 60-day opportunity to +cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for protein +detection, nucleic acid detection and additional applications. For example, companies such as Bio-Techne, Luminex Corporation, MesoScale Diagnostics, Singulex, Gyros Corporation, Nanostring +Technologies, Inc., and others, have products for protein detection that compete in certain segments of the market in which we sell our products. As we or our partners expand the applications +for our products to include diagnostics and precision health +screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. In addition, a number of other companies and academic groups are +in the process of developing novel technologies for the life science research, diagnostic and precision health screening markets. Many of the companies with which we compete have substantially greater +resources than we have. +28 +Table of Contents +The life science instrumentation industry is highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research +and development. We believe the principal competitive factors in our target markets include: +• sensitivity; +• cost of instruments and consumables; +• assay menu; +• reputation among customers and key opinion leaders; +• innovation in product offerings; +• accuracy and reproducibility of results; and +• customer support infrastructure. +We +believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions +and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core technology, directed to general methods and devices for single molecule detection, originated at Tufts University, in the laboratory of +Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies +that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from +Tufts the relevant patent filings related to these technologies. (See "—License Agreement with Tufts University" below). In addition to licensed patents, we have developed our own +portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. We believe our proprietary platform is a core strength of our business +and our strategy includes the continued development of our patent portfolio. +Our +patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products +and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers +embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the +invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent +strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of March 1, 2018, we had exclusively licensed 17 patents and one patent application from Tufts. These patents and patent applications +include eight issued U.S. patents and one pending U.S patent application, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian +patent. +A +first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes five granted U.S. patents, one pending U.S. patent +application, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted +29 +Table of Contents +Australian +patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A +second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. +The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A +third patent family licensed from Tufts is directed to methods for analyzing analytes using a sensor system with cross-reactive elements. This patent family includes one granted U.S. +patent. The standard patent expiration date for the U.S. patent in this family is March 14, 2021. +A +fourth patent family licensed from Tufts is directed to electro-optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. +The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +As +of March 1, 2018, we owned ten issued U.S. patents and ten pending U.S. patent applications, three granted European patents and three pending European patent applications, five +granted Japanese patents and one pending Japanese patent applications, three granted Chinese patents and three pending Chinese patent applications, two granted Canadian patents and one pending +Canadian patent application, and two registered Hong Kong patent applications. +A +first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for analyte capture on beads, including multiplexing. This patent family includes three granted U.S. patents and one pending U.S. patent application, two granted European patent (nationalized in eight +countries) and one pending European application, two granted Japanese patents, one granted Chinese patent and one pending Chinese patent application, and one granted Canadian patent. The standard +patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A +second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in +particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes four granted U.S. patents and +one pending U.S. patent application, one granted European patent (nationalized in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The +standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A +third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is +September 28, 2028. +A +fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent +in this family is March 24, 2030. +A +fifth patent family owned by us is directed to instruments and consumables. This patent family includes one granted Japanese patent and one pending Japanese patent application, one +pending +Chinese patent application, two registered Hong Kong patent applications and one pending patent application in each of the United States, Europe, and Canada. The standard patent expiration date for +30 +Table of Contents +any +U.S. patents that may issue from this family is February 25, 2031, and for any non-U.S. patents is January 27, 2032. +A +sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent +application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A +seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The +standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An +eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending U.S. provisional patent +application. If we pursue protection by filing any non-provisional applications, the standard patent expiration date for any patents that may issue from this family will be in 2038. +We +own or co-own six patent families directed to the measurement of particular types of analytes, including prostate specific antigen (PSA), +b -amyloid peptide, tau protein, toxin B of C. difficile , and DNA or RNA molecules. Any patents that may issue from +these patent applications would have standard expiration dates between 2032 and 2038. +We +have licensed additional patents and patent applications from third parties. +In +addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and +intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +With +the acquisition of Aushon, we acquired their patent portfolio. As of March 1, 2018, the acquired patent portfolio includes at least seven issued U.S. patents and six pending +U.S. patent applications, one granted Australian patent, two granted Canadian patents and two pending Canadian patent application, five granted European patents and three pending European patent +applications, three granted Japanese patents and one pending Japanese patent application, one pending Korean patent application, and one registered Hong Kong patent application. +License Agreement with Tufts University +In June 2007, as amended in April 2013 and August 2017, we entered into a license agreement with Tufts University, or Tufts, pursuant to which +we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or +have sold products and services covered by patent rights to the Simoa technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of +use and are sublicensable for a fee. +Under +the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 +amendment, we issued Tufts shares of our Series C-1 Preferred Stock. We are required to pay Tufts low single-digit royalties on all net sales of products and services as well as a portion of +any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. +We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The +term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or +convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to +31 +Table of Contents +cure +such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within +60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five +separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly +or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within +60 days. We may terminate the agreement at any time upon at least 60 days' written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Our products are currently intended for research use only, or RUO, applications, although our customers may use our products to develop their +own products that are subject to regulation by the FDA. Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products fall under the FDA's +jurisdiction if they are used for clinical rather than research purposes. Consequently, our products are labeled "For Research Use Only." +On +November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on "Distribution of In Vitro Diagnostic Products Labeled for Research Use +Only or Investigational Use Only," or, the RUO/IUO Guidance. The purpose of an FDA guidance document is to provide the FDA's current thinking on when IVD products are properly labeled for RUO or for +IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory +requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. +Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA's 510(k) clearance, premarket approval, or other +requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may +include written or verbal marketing claims or links to articles regarding a product's performance in clinical applications, a manufacturer's provision of technical support for clinical validation or +clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance +is a statement of the FDA's thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and promotion of our products is +consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. When we develop products for clinical use, we will do so in accordance with FDA requirements +at that time. +When +our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, +apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, +mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising +and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The +FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as +determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated +with them, are subject to +32 +Table of Contents +general +controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk +associated with them, are subject to general controls and premarket approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a +premarket notification, or 510(k), and receive clearance from the FDA which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized +until a premarket approval application, or PMA, is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent, +or SE, to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA's receipt of the 510(k), but it often +takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time +consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the +FDA's satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of +the submitted information. By statute, +the FDA has 180 days to review the accepted application, although, review of the application generally can take between one and three years. During this review period, the FDA may request +additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the +application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance +with its quality system regulations, or QSRs. New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and +efficacy of the device. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to +present a "significant risk," the manufacturer may not begin a clinical trial until it submits an investigational device exemption application, or IDE, and obtains approval of the IDE from the FDA. +These clinical trials are also subject to the review, approval and oversight of an institutional review board, or IRB, at each clinical trial site. The clinical trials must be conducted in accordance +with the FDA's IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that +the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to +the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +33 +Table of Contents +After +a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +compliance +with QSRs, which require manufacturers to follow stringent design, testing, control, documentation, record maintenance, including maintenance of complaint and related +investigation files, and other quality assurance controls during the manufacturing process; +• reporting of device malfunctions, serious injuries or deaths; +• registration of the establishments where the devices are produced; +• labeling regulations, which prohibit the promotion of products for uncleared or unapproved uses; and +• medical device reporting obligations, which require that manufacturers investigate and report to the FDA adverse events, including deaths, or +serious injuries that may have been or were caused by a medical device and malfunctions in the device that would likely cause or contribute to a death or serious injury if it were to recur. +Failure +to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, +injunctions, and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new +devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. To ensure compliance with regulatory requirements, medical device manufacturers are subject to market +surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. +Clinical Laboratory Improvement Amendments of 1988 and State Regulation +In January 2018, we acquired Aushon Biosystems, Inc., which owns and operates a CLIA certified laboratory. The Clinical Laboratory +Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and +basic research). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health +assessment and for the diagnosis, prevention, or treatment of disease."). CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, +personnel, facilities administration, quality and proficiency testing +requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as +well as many private insurers, for laboratory testing services. +In +addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If +a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As +a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial +survey is conducted by the Centers for Medicare & Medicaid Services ("CMS"), a CMS agent (typically a state agency), or, a CMS-approved accreditation organization. +In +addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, +as applicable, from various states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of +these states, each of which requires out-of-state laboratories to obtain licensure. +34 +Table of Contents +If +a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, +limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory's CLIA certificate or state license may also result in +the inability to receive payments from state and federal health care programs as well as private third party payors. +If, +in the future, we utilize Aushon to perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as +well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries +prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be +easier or more difficult to satisfy and are subject to change. For example, the European Union, or EU, recently published new regulations that will result in greater regulation of medical devices and +IVDs. The IVD Regulation is significantly different from the IVD Directive that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member +states, include a risk-based classification system and increase the requirements for conformity assessment. The conformity assessment process results in the receipt of a CE designation which has been +sufficient to begin marketing many types of IVDs. That process will become more difficult and costly to complete. +Other Governmental Regulation +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, +transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration, or OSHA, has +established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect +workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory +supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United +States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may +use during our research. +Employees +As of December 31, 2017, we had 126 employees, of which 43 work in sales, sales support and marketing, 43 work in engineering and +research and development, 23 work in manufacturing and operations and 17 work in general and administrative. As of December 31, 2017, of our 126 employees, 116 were located in the United States +and 10 were employed outside the United +States. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name "Digital Genomics, Inc." In August 2007, we +changed our name to "Quanterix Corporation." Our principal executive offices are located at 113 Hartwell Avenue, Lexington, MA 02421, and our telephone number is (617) 301-9400. +35 +Table of Contents +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be +accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K +solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on +Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amdended, or the Exchange Act. We make these +reports available through the "Investors—Financial Information—SEC Filings" section of our website as soon as reasonably practicable after we electronically file such reports +with, or furnish such reports to, the Securities and Exchange Commission, or SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, +directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can find, +copy and inspect information we file at the SEC's public reference room, which is located at 100 F Street, N.E., Room 1580, Washington, DC 20549. +Please call the SEC at 1-800-SEC-0330 for more information about the operation of the SEC's public reference room. You can review our electronically filed reports and other information that we file +with the SEC on the SEC's website at http://www.sec.gov . +Item 1A. RISK FACTORS +The following risk factors and other information included in this Annual Report on Form 10-K should be carefully +considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also +impair our business operations. Please see page ii of this Annual Report on Form 10-K for a discussion of some of the forward-looking statements that are qualified by these risk factors. +If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. +Risks Related to Our Financial Condition and Need for Additional Capital +We have incurred losses since we were formed and expect to incur losses in the future. We cannot be certain +that we will achieve or sustain profitability. +We incurred net losses of $27.0 million, $23.2 million and $15.9 million for the years ended December 31, 2017, 2016 +and 2015, respectively. As of December 31, 2017, we had an accumulated deficit of $144.4 million. We cannot predict if we will achieve sustained profitability in the near future or at +all. We expect that our losses will continue at least through the next 24 months as we plan to invest significant additional funds toward expansion of our commercial organization and the development +of our technology and related assays. In addition, as a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. These increased +expenses will make it harder for us to achieve and sustain future profitability. We may incur significant losses in the future for a number of reasons, many of which are beyond our control, including +the other risks described in this Annual Report on Form 10-K, the market acceptance of our products, future product development and our market penetration and margins. +Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to +fluctuate, causing the value of our common stock to decline substantially. +Numerous factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual +operating results. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases +36 +Table of Contents +in +our available cash, which could negatively affect our business and prospects. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be +disproportionately higher or lower relative to the others. As a result, comparing our operating results on a period-to-period basis might not be meaningful. You should not rely on our past results as +indicative of our future performance. Moreover, our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating +results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. +Our +operating results have varied in the past. In addition to other risk factors listed in this section, some of the important factors that may cause fluctuations in our quarterly and +annual operating results include: +• adoption of our Simoa technology platform and products by customers; +• the timing of customer orders to purchase our Simoa instruments; +• the rate of utilization of consumables by our customers; +• receipt and timing of revenue for services provided in our Simoa Accelerator Laboratory; +• the timing of the introduction of new products, product enhancements and services; and +• the receipt and timing of revenue from collaborations. +In +addition, a significant portion of our operating expense is relatively fixed in nature, and planned expenditures are based in part on expectations regarding future revenue. +Accordingly, unexpected revenue shortfalls might decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. If this occurs, the trading price of +our common stock could fall substantially. +We are an early, commercial-stage company and have a limited commercial history, which may make it difficult +to evaluate our current business and predict our future performance. +We are an early, commercial-stage company and have a limited commercial history. Our revenues are derived from sales of our instruments, +consumables and services, which are all based on our Simoa technology, which we launched commercially in 2014. Our limited commercial history may make it difficult to evaluate our current business and +make predictions about our future success or viability subject to significant uncertainty. We will continue to encounter risks and difficulties frequently experienced by early, commercial-stage +companies, including scaling up our infrastructure and headcount. If we do not address these risks successfully, our business will suffer. +If we are unable to maintain adequate revenue growth or do not successfully manage such growth, our business +and growth prospects will be harmed. +We have experienced significant revenue growth in a short period of time. We may not achieve similar growth rates in future periods. Investors +should not rely on our operating results for any prior periods as an indication of our future operating performance. To effectively manage our anticipated future growth, we must continue to maintain +and enhance our financial, accounting, manufacturing, customer support and sales administration systems, processes and controls. Failure to effectively manage our anticipated growth could lead us to +over-invest or under-invest in development, operational, and administrative infrastructure; result in weaknesses in our infrastructure, systems, or controls; give rise to operational mistakes, losses, +loss of customers, productivity or business opportunities; and result in loss of employees and reduced productivity of remaining employees. +37 +Table of Contents +Our +continued growth could require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. As +additional products are commercialized, we may need to incorporate new equipment, implement new technology systems, or hire new personnel with different qualifications. Failure to manage this growth +or transition could result in turnaround time delays, higher product costs, declining product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any +one of these areas could make it difficult for us to meet market expectations for our products, and could damage our reputation and the prospects for our business. +If +our management is unable to effectively manage our anticipated growth, our expenses may increase more than expected, our revenue could decline or grow more slowly than expected and we +may be unable to implement our business strategy. The quality of our products and services may suffer, which could negatively affect our reputation and harm our ability to retain and attract +customers. +Our future capital needs are uncertain and we may need to raise additional funds in the future. +We believe that our existing cash and cash equivalents as of December 31, 2017, together with our cash generated from commercial sales, +excluding any future available borrowings under our debt facility, will enable us to fund our operating expenses and capital expenditure +requirements for at least the next 24 months. However, we may need to raise substantial additional capital to: +• expand our sales and marketing efforts to further commercialize our products; +• expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our +products are deemed by the United States Food and Drug Administration, or FDA, to be medical devices or otherwise subject to additional regulation by the FDA; +• seek premarket approval, or PMA, or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market +products for use in the prevention, diagnosis or treatment of a disease or other condition (see "Risk Factors—If the FDA determines that our products are medical devices or if we seek to +market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s), and may be required to cease or limit sales of our then +marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain +both in timing and in outcome." and "Business—Government regulation—501(k) clearance pathway;" "Business—Government regulation—Premarket approval +pathway" and "Business—Government regulation—Clinical trials" for further information about the FDA approvals that we may be required to seek and obtain in that circumstance); +• lease a larger facility or build out our existing facility as we continue to grow our employee headcount; +• hire additional personnel; +• enter into collaboration arrangements, if any, or in-license other products and technologies; +• add operational, financial and management information systems; and +• incur increased costs as a result of operating as a public company. +Our +future funding requirements will depend on many factors, including: +• market acceptance of our products, including the recently launched Quanterix SR-X instrument; +• the cost and timing of establishing additional sales, marketing and distribution capabilities; +38 +Table of Contents +• the cost of our research and development activities; +• the success of our existing collaborations and our ability to enter into additional collaborations in the future; and +• the effect of competing technological and market developments. +We +cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our +stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing may +contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some +rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or +commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could have a material +adverse effect on our financial condition, operating results and business. +Our ability to use net operating losses to offset future income may be subject to certain limitations. +As of December 31, 2017, we had federal net operating loss carry forwards, or NOLs, to offset future taxable income of approximately +$108.4 million, which expire at various dates through 2035, if not utilized. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under +Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its NOLs to +offset future taxable income. We have already experienced one or more ownership changes as defined under Section 382 of the Code. Depending on the timing of any future utilization of our NOLs, +we may be limited as to the amount that can be utilized each year as a result of such previous ownership changes. In addition, future changes in our stock ownership, including changes that may be +outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full +valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. +U.S. taxation of international business activities or the adoption of tax reform policies could materially +impact our future financial position and results of operations. +Limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings +outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of future foreign earnings. +Should the scale of our international business activities expand, any changes in the U.S. taxation of such activities could increase our worldwide effective tax rate and harm our future financial +position and results of operations. +Provisions of our secured term loan facility with Hercules Capital, Inc. may restrict our ability to +pursue our business strategies. In addition, repayment of our outstanding debt and other obligations under our secured term loan facility with Hercules is subject to acceleration upon the occurrence +of an event of default, which would have a material adverse effect on our business, financial condition and results of operations. +Our secured term loan facility with Hercules Capital, Inc., or Hercules, requires us, and any debt instruments we may enter into in the +future may require us, to comply with various covenants that limit our ability to take on new indebtedness, to permit new liens, to pay dividends, to dispose of our property (including to license in +certain situations), to engage in mergers or acquisitions and make +39 +Table of Contents +certain +other changes in our business. Debt instruments we may enter into in the future may also include financial covenants such as a requirement to maintain a specified minimum liquidity level or +achieve a minimum annual revenue level. These restrictions could inhibit our ability to pursue our business strategies, including our ability to raise additional capital and make certain dispositions +or investments without the consent of our lenders. +The +obligations under our secured term loan facility with Hercules are subject to acceleration upon the occurrence of specified events of default, including our failure to make payments +when due, our breach or default in the performance of our covenants and obligations under the facility following a cure period, bankruptcy and similar events, and the occurrence of a circumstance that +would reasonably be expected to have a material adverse effect on (i) our business, operations, properties, assets or financial condition, (ii) our ability to perform our obligations in +accordance with the facility documents, (iii) the lender's ability to enforce any of its rights or remedies with respect to our obligations, or (iv) the +collateral, the liens on the collateral or the first priority of the lender's liens. While we do not believe it is probable that the lender would accelerate the obligations under the facility, the +definition of a material adverse effect is inherently subjective in nature, and we cannot assure that a material adverse effect will not occur or be deemed to have occurred by the lender. +The recently passed comprehensive tax reform bill could adversely affect our business and financial +condition. +On December 22, 2017, President Trump signed into law the "Tax Cuts and Jobs Act," or TCJA, that significantly reforms the Internal +Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and +net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from a "worldwide" system of taxation to a territorial system. Our net deferred +tax assets and liabilities have been revalued at the newly enacted U.S. corporate rate, and there has been no impact due to the required full valuation allowance against our total deferred tax assets. +We continue to examine the impact this tax reform legislation may have on our business. The impact of this tax reform is uncertain and could be adverse. This report does not discuss any such tax +legislation or the manner in which it might affect our stockholders. We urge our stockholders to consult with their legal and tax advisors with respect to such legislation and the potential tax +consequences of investing in our common stock. +Risks Related to Our Business +If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely +affected. +Our success depends on our ability to develop and market products that are recognized and accepted as reliable, enabling and cost-effective. +Most of the potential customers for our products already use expensive research systems in their laboratories that they have used for many years and may be reluctant to replace those systems with +ours. Market acceptance of our Simoa technology will depend on many factors, including our ability to convince potential customers that our technology is an attractive alternative to existing +technologies. Compared to some competing technologies, our Simoa technology is new and complex, and many potential customers have limited knowledge of, or experience with, our products. Prior to +adopting our systems, some potential customers may need to devote time and effort to testing and validating our systems. Any failure of our systems to meet these customer benchmarks could result in +potential customers choosing to retain their +existing systems or to purchase systems other than ours. In addition, it is important that our Simoa technology be perceived as accurate and reliable by the scientific and medical research community +as a whole. Historically, a significant part of our sales and marketing efforts has been directed at demonstrating the advantages of our technology to industry leaders and encouraging such leaders to +publish or present the results of their evaluation of our system. If we are unable to continue to motivate leading researchers to use Simoa technology, or if such researchers are unable to achieve or +unwilling to publish or present +40 +Table of Contents +significant +experimental results using our systems, acceptance and adoption of our systems will be slowed and our ability to increase our revenue would be adversely affected. +Our future success is dependent upon our ability to further penetrate our existing customer base and attract +new customers. +Our current customer base is primarily composed of academic and governmental research institutions, as well as biopharmaceutical and contract +research companies. Our success will depend upon our ability to respond to the evolving needs of, and increase our market share among, existing customers and additional potential customers, marketing +new products as we develop them. Identifying, engaging and marketing to customers who are unfamiliar with our current products requires substantial time, expertise and expense and involves a number of +risks, including: +• our ability to attract, retain and manage the sales, marketing and service personnel necessary to expand market acceptance for our Simoa +technology; +• the time and cost of maintaining and growing a specialized sales, marketing and service force; and +• our sales, marketing and service force may be unable to execute successful commercial activities. +We +have utilized third parties to assist with sales, distribution and customer support in certain regions of the world. There is no guarantee, when we enter into such arrangements, that +we will be successful in attracting desirable sales and distribution partners. There is also no guarantee that we will be able to enter into such arrangements on favorable terms. Any failure of our +sales and marketing efforts, or those of any third-party sales and distribution partners, would adversely affect our business. +Some of the reagents used in our products are labeled for "research use only" and will have to undergo +additional testing before we could use them in a product intended for clinical use. +Some of the materials that are used in our consumable products, including certain reagents, are purchased from suppliers with a restriction that +they be used for research use only, or RUO. While we have focused initially on the life sciences research market, part of our business strategy is to expand our product line, either alone or in +collaboration with third parties, to encompass systems and products that can be used for clinical purposes. Whether or not we continue to use the same RUO materials that we currently use, or obtain +similar materials that are not labeled with the RUO restriction, we will be required to demonstrate that the use of our system and products as a clinical test complies with all applicable +requirements. In addition, if we were to change the supplier of any material or component used in a clinical test, we would be required to confirm through additional testing that the change does not +adversely affect the reliability of the test. Any such additional testing may be expensive and time-consuming and delay our introduction of new products and systems. +In the near term, our business will depend on levels of research and development spending by academic and +governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results. +In the near term, we expect that our revenue will be derived primarily from sales of our instruments and consumables to academic and +governmental research institutions, as well as biopharmaceutical and contract research companies worldwide for research applications. The demand for our products will depend in part upon the research +and development budgets of these customers, which are impacted by factors beyond our control, such as: +• changes in government programs that provide funding to research institutions and companies; +• macroeconomic conditions and the political climate; +41 +Table of Contents +• changes in the regulatory environment; +• differences in budgetary cycles; and +• market acceptance of relatively new technologies, such as ours. +For +example, in March 2017, the federal government announced the intent to cut federal biomedical research funding by as much as 18%. While there has been significant opposition to these +funding cuts, the uncertainty regarding the availability of research funding for potential customers may adversely affect our operating results. Our operating results may fluctuate substantially due +to reductions and delays in research and development expenditures by these customers. Any decrease in customers' budgets or expenditures, or in the size, scope or frequency of capital or operating +expenditures, could materially and adversely affect our business, operating results and financial condition. +The sales cycle for our Simoa instruments can be lengthy and variable, which makes it difficult for us to +forecast revenue and other operating results. +The sales process for our Simoa instruments generally involves numerous interactions with multiple individuals within an organization, and often +includes in-depth analysis by potential customers of our technology and products and a lengthy review process. Our customers' evaluation processes often involve a number of factors, many of which are +beyond our control. As a result of these factors, the capital investment required to purchase our systems and the budget cycles of our customers, the time from initial contact with a customer to our +receipt of a purchase order can vary significantly. Given the length and uncertainty of our sales cycle, we have in the past experienced, and expect to in the future experience, fluctuations in our +sales on a period-to-period basis. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems, use existing assays not requiring capital +equipment or purchase systems other than ours. +Our long-term results depend upon our ability to improve existing products and introduce and market new +products successfully. +Our business is dependent on the continued improvement of our existing Simoa products and our development of new products utilizing our Simoa or +other potential future technology. As we introduce new products or refine, improve or upgrade versions of existing products, we cannot predict the level of market acceptance or the amount of market +share these products will achieve, if any. We cannot assure you that we will not experience material delays in the introduction of new products in the future. In addition, introducing new products +could result in a decrease in revenues from our existing products. For example, introduction of the Quanterix SR-X may result in a decrease in revenue from our existing Simoa HD-1 Analyzer instrument. +Consistent with our strategy of offering new products and product refinements, we expect to continue to use a substantial amount of capital for product development and refinement. We may need +additional capital for product development and refinement than is available on terms favorable to us, if at all, which could adversely affect our business, financial condition or results of +operations. +We +generally sell our products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. If we do not +develop new products and product enhancements based on technological innovation on a timely basis, our products may become obsolete over time and our revenues, cash flow, profitability and competitive +position will suffer. Our success will depend on several factors, including our ability to: +• correctly identify customer needs and preferences and predict future needs and preferences; +• allocate our research and development funding to products with higher growth prospects; +42 +Table of Contents +• anticipate and respond to our competitors' development of new products and technological innovations; +• innovate and develop new technologies and applications, and acquire or obtain rights to third-party technologies that may have valuable +applications in the markets we serve; +• successfully commercialize new technologies in a timely manner, price them competitively and manufacture and deliver sufficient volumes of new +products of appropriate quality on time; and +• convince customers to adopt new technologies. +In +addition, if we fail to accurately predict future customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products +that do not lead to significant revenue. Even if we successfully innovate and develop new products and product enhancements, we may incur substantial costs in doing so, and our profitability may +suffer. +Our +ability to develop new products based on innovation can affect our competitive position and often requires the investment of significant resources. Difficulties or delays in +research, development or production of new products and services or failure to gain market acceptance of new products and technologies may reduce future revenues and adversely affect our competitive +position. +If we do not successfully develop and introduce new assays for our technology, we may not generate new +sources of revenue and may not be able to successfully implement our growth strategy. +Our business strategy includes the development of new assays for our Simoa instruments. New assays require significant research and development +and a commitment of significant resources prior to their commercialization. Our technology is complex, and we cannot be sure that any assays we may intend to develop will be developed successfully, be +proven to be effective, offer improvements over currently available tests, meet applicable standards, be produced in commercial quantities at acceptable costs or be successfully marketed. Moreover, +development of particular assays may require licenses or access to third party intellectual property which may not be available on commercially reasonable terms, or at all. In addition, we believe +that our future success will depend, in part, on our ability to develop and commercialize multiplex assays that can simultaneously measure multiple biomarkers. The most robust multiplex assay that we +have commercially launched to date is a 4-plex assay. If we do not successfully develop new assays for our Simoa instruments, including multiplex assays with the ability to detect an increased number +of biomarkers in a single sample, we could lose revenue opportunities with existing or future customers. +If we do not successfully manage the development and launch of new products, our financial results could be +adversely affected. +We commercially launched our Quanterix SR-X instrument in December 2017. We face risks associated with launching new products such as the +Quanterix SR-X. If we encounter development or manufacturing challenges or discover errors during our product development cycle, the product launch dates of new products may be delayed. The expenses +or losses associated with unsuccessful product development or launch activities or lack of market acceptance of our new products could adversely affect our business or financial condition. +Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our +products or expose us to product liability claims. +Our Simoa products may contain undetected errors or defects when first introduced or as new versions or new products are released. Disruptions +affecting the introduction or release of, or other performance problems with, our products may damage our customers' businesses and could harm their and our reputation. If that occurs, we may incur +significant costs, the attention of our key personnel +43 +Table of Contents +could +be diverted, or other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages related to errors or defects in our products. In +addition, if we do not meet industry or quality standards, if applicable, our products may be subject to recall. A material liability claim, recall or other occurrence that harms our reputation or +decreases market acceptance of our products could harm our business and operating results. +Although +we do not, and cannot currently, promote the use of our products, or services based on our products, for diagnostic purposes, if our customers develop or use them for diagnostic +purposes, someone could file a product liability claim alleging that one of our products contained a design or manufacturing defect that resulted in the failure to adequately perform, leading +to death or injury. A product liability claim could result in substantial damages and be costly and time consuming to defend, either of which could materially harm our business or financial condition. +We cannot assure investors that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim +brought against us, with or without +merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future. +We depend on strategic collaborations and licensing arrangements with third parties to develop in vitro +diagnostic products. We may not be successful in maintaining these collaborations and licensing arrangements and in establishing or maintaining additional collaborations or license agreements. +We have established strategic collaborations and licensing agreements with third parties to develop products based on our Simoa technology, such +as for certain in vitro diagnostic, or IVD, purposes. For example, we have entered into a license agreement with bioMérieux SA, pursuant to which we have granted them an +exclusive license to, among other things, develop and sell certain in vitro diagnostic products used in clinical lab applications based on our Simoa technology and a co-exclusive license for certain +other in vitro diagnostic products. If bioMérieux or any other partners do not prioritize and commit sufficient resources to develop and sell products based on our Simoa technology, our +ability to generate revenue from sales in respect of in vitro diagnostic products may be limited. +We +may seek to enter into additional such arrangements; however, there is no assurance that we will be successful in doing so. Moreover, given the exclusive nature of a portion of the +license rights granted to bioMérieux, our ability to collaborate with others in the areas of in vitro diagnostics used in clinical lab applications, food quality control testing, and +pharmaceutical quality control testing will be limited, in that we may not establish collaborations with others covering these areas while the exclusive license to bioMérieux remains in +effect, subject to our right to make and sell the current version of the Simoa HD-1 Analyzer for use in clinical lab applications, either directly or through a partner (but not both). Establishing +collaborations and licensing arrangements is difficult and time-consuming. Discussions may not lead to collaborations or licenses on favorable terms, if at all. Even if we establish new relationships, +they may never result in the successful development or commercialization of products based on our Simoa technology. +Our reliance on distributors for sales of our products outside of the United States could limit or prevent us +from selling our products and could impact our revenue. +We have established exclusive distribution agreements for our Simoa HD-1 Analyzer and related consumable products within Australia, China, +India, Japan, Lebanon, Singapore, South Korea, and Taiwan as well as other foreign countries. We intend to continue to grow our business internationally, and to do so we must attract additional +distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and +distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary +resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our +44 +Table of Contents +competitors. +If current or future distributors do not perform adequately, or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize +long-term international revenue growth. In addition, if our distributors fail to comply with applicable laws and ethical standards, including anti-bribery laws, this could damage our reputation and +could have a significant adverse effect on our business and our revenues. +We expect to generate a substantial portion of our revenue internationally in the future and can become +further subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +For the years ended December 31, 2017 and 2016, approximately 45% and 36%, respectively, of our product revenue was generated from +customers located outside of North America. We believe that a substantial percentage of our future revenue will come from international sources as we expand our overseas operations and develop +opportunities in additional areas. We have limited experience operating internationally and engaging in international business involves a number of difficulties and risks, +including: +• required compliance with existing and changing foreign regulatory requirements and laws; +• difficulties and costs of staffing and managing foreign operations; +• difficulties protecting or procuring intellectual property rights; +• required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, data privacy requirements, labor laws and +anti-competition regulations; +• export or import restrictions; +• laws and business practices favoring local companies; +• longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; +• political and economic instability; and +• potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers. +Historically, +most of our revenue has been denominated in U.S. dollars. In the future, we may sell our products and services in local currency outside of the United States. As our +operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm +our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could +be adversely affected as we convert revenue from local currencies to U.S. dollars. If we dedicate significant resources to our international operations and are unable to manage these risks +effectively, our business, operating results and financial condition will suffer. +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide +anti-bribery laws by us or our agents. +We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits companies and their intermediaries from making payments in +violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our +products internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents, and we +could be held responsible for their actions. Other U.S. companies in +45 +Table of Contents +the +medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We +are also subject to similar antibribery laws in the jurisdictions in which we operate, including the United Kingdom's Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime +for companies to fail to prevent bribery. We have limited experience in complying with these laws and in developing procedures to monitor compliance with these laws by our agents. These laws are +complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any +changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve +significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also incur +severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures. +If we are unable to attract, recruit, train, retain, motivate and integrate key personnel, we may not achieve +our goals. +Our future success depends on our ability to attract, recruit, train, retain, motivate and integrate key personnel, including our recently +expanded senior management team, as well as our research and development, manufacturing and sales and marketing personnel. Competition for qualified personnel is intense. Our growth depends, in +particular, on attracting and retaining highly-trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and +sell to potential new customers and develop new products. Because of the complex and technical nature of our products and the dynamic market in which we compete, any +failure to attract, recruit, train, retain, motivate and integrate qualified personnel could materially harm our operating results and growth prospects. +We have limited experience in marketing and selling our products, and if we are unable to successfully +commercialize our products, our business and operating results will be adversely affected. +We have limited experience marketing and selling our products. We currently sell all our products for research use only, through our direct +field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional major markets, including +Australia, China, India, Japan, Lebanon, Singapore, South Korea and Taiwan. +The +future sales of our products will depend in large part on our ability to effectively market and sell our products, successfully manage and expand our sales force, and increase the +scope of our marketing efforts. We may also enter into additional distribution arrangements in the future. Because we have limited experience in marketing and selling our products, our ability to +forecast demand, the infrastructure required to support such demand and the sales cycle to customers is unproven. If we do not build an efficient and effective sales force, our business and operating +results will be adversely affected. +We rely on a single contract manufacturer to manufacture and supply our Simoa HD-1 Analyzer and rely on a +different single contract manufacturer to manufacture and supply our Quanterix SR-X. If either of these manufacturers should fail or not perform satisfactorily, our ability to supply these instruments +would be negatively and adversely affected. +We currently rely on a single contract manufacturer, STRATEC Biomedical AG, or STRATEC, an analytical and diagnostic systems manufacturer +located in Germany, to manufacture and supply all of our Simoa HD-1 Analyzer instruments. In addition, we currently rely on a single contract manufacturer, Paramit Corporation, or Paramit, a contract +manufacturer located in California, to +46 +Table of Contents +manufacture +and supply all of our Quanterix SR-X instruments. Since our contract with STRATEC does not commit them to supply quantities beyond the amounts included in our forecasts and our contract +with Paramit does not commit them to carry inventory or make available any particular quantities, these contract manufacturers may give other customers' needs higher priority than ours, and we may not +be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. If either of these manufacturers were to be unable to supply instruments, our business would be harmed. +Pursuant +to our Supply Agreement with STRATEC, as amended, we are required to purchase a minimum number of commercial units of our Simoa HD-1 Analyzer over a seven-year period ending in +May 2021. If we fail to purchase a required minimum number of commercial units, including as a result of the impact of sales of the Quanterix SR-X going forward, we would be obligated to pay a fee +based on the shortfall of commercial units purchased compared to the required number. If we fail to purchase a required minimum number of commercial instruments and terminate the arrangement in +certain circumstances, we would be obligated to issue a warrant to purchase shares of our common stock. Any amount we may have to pay STRATEC for failing to purchase the minimum number of commercial +units of our Simoa HD-1 Analyzer will cause our operating results to suffer. +In +the event it becomes necessary to utilize a different contract manufacturer for either the Simoa HD-1 Analyzer or the Quanterix SR-X, we would experience additional costs, delays and +difficulties in doing so as a result of identifying and entering into an agreement with a new supplier as well as preparing such new supplier to meet the logistical requirements associated with +manufacturing our units, and our business would suffer. We may also experience additional costs and delays in the event we need access to or rights under any intellectual property of STRATEC. +In +addition, certain of the components used in our instruments are sourced from limited or sole suppliers. If we were to lose such suppliers, there can be no assurance that we will be +able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our ability to sell and deliver instruments to customers could +occur if we encounter delays or difficulties in securing these components, or if the quality of the components supplied do not meet specifications, or if we cannot then obtain an acceptable +substitute. If any of these events occur, our business and operating results could be harmed. +We may experience manufacturing problems or delays that could limit the growth of our revenue or increase our +losses. +We may encounter unforeseen situations that would result in delays or shortfalls in our production as well as delays or shortfalls caused by our +outsourced manufacturing suppliers and by other third-party suppliers who manufacture components for our products. If we are unable to keep up with demand for our products, our revenue could be +impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors' products. Our inability to successfully manufacture our products +would have a material adverse effect on our operating results. +We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and +components used in our consumable products, and may not be able to find replacements or immediately transition to alternative suppliers, which could have a material adverse effect on our business, +financial condition, results of operations and reputation. +We rely on limited or sole suppliers for certain reagents and other materials and components that are used in our consumable products. While we +periodically forecast our needs for such materials and enter into standard purchase orders with them, we do not have long-term contracts with many of these suppliers. If we were to lose such +suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An +47 +Table of Contents +interruption +in our operations could occur if we encounter delays or difficulties in securing these materials, or if the quality of the materials supplied do not meet our requirements, or if we cannot +then obtain an acceptable substitute. The time and effort required to qualify a new supplier and ensure that the new materials provide the same or better quality results could result in significant +additional costs. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. +If we cannot provide quality technical and applications support, we could lose customers and our business and +prospects will suffer. +The placement of our products at new customer sites, the introduction of our technology into our customers' existing laboratory workflows and +ongoing customer support can be complex. Accordingly, we need highly trained technical support personnel. Hiring technical support personnel is very competitive in our industry due to the limited +number of people available with the necessary scientific and technical backgrounds and ability to understand our Simoa technology at a technical level. To effectively support potential new customers +and the expanding needs of current customers, we will need to substantially expand our technical support staff. If we are unable to attract, train or retain the number of highly qualified technical +services personnel that our business needs, our business and prospects will suffer. +The life sciences research and diagnostic markets are highly competitive. If we fail to effectively compete, +our business, financial condition and operating results will suffer. +We face significant competition in the life sciences research and diagnostic markets. We currently compete with both established and early stage +companies that design, manufacture and market systems and consumable supplies. We believe our principal competitors in the life sciences research and diagnostic markets include Bio-Techne, Luminex +Corporation, MesoScale Diagnostics, Singulex, Gyros Corporation and Nanostring Technologies, Inc. As we expand the applications for our products to include health screening, we expect to +compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. In addition, there are a number of new market entrants in the process of developing +novel technologies for the life sciences research, diagnostic and screening markets. +Many +of our current competitors are either publicly traded, or are divisions of publicly-traded companies, and may enjoy a number of competitive advantages over us, +including: +• greater name and brand recognition; +• substantially greater financial and human resources; +• broader product lines; +• larger sales forces and more established distributor networks; +• substantial intellectual property portfolios; +• larger and more established customer bases and relationships; and +• better established, larger scale, and lower cost manufacturing capabilities. +We +believe that the principal competitive factors in all of our target markets include: +• cost of instruments and consumables; +• accuracy, including sensitivity and specificity, and reproducibility of results; +• reputation among customers; +48 +Table of Contents +• innovation in product offerings; +• flexibility and ease of use; and +• compatibility with existing laboratory processes, tools and methods. +We +cannot assure investors that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by +our existing competitors or new companies entering our markets. In addition, we cannot assure investors that our competitors do not have or will not develop products or technologies that currently or +in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our +business, financial condition and operating results. +Integrating any business, product or technology we acquire, including recently acquired Aushon +Biosystems, Inc., can be expensive, time consuming and can disrupt and adversely affect our ongoing business, including product sales, and distract our management. +We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or +investments in complementary businesses, such as our recent acquisition of Aushon Biosystems, Inc. Our ability to successfully integrate any business, +product or technology we acquire depends on a number of factors, including, but not limited to, our ability to: +• minimize the disruption and distraction of our management and other employees, including our sales force, in connection with the integration of +any acquired business, product or technology; +• minimize disruption in our relationships with customers, distributors or suppliers as a result of such a transaction; +• avoid acquisition of unanticipated liabilities related to acquired companies; +• maintain and increase sales of our existing products; +• establish or manage the transition of the manufacture and supply of any acquired product; +• identify and add the necessary sales, marketing, manufacturing, regulatory and other related personnel, capabilities and infrastructure that +are required to successfully integrate any acquired business, product or technology; +• manage the transition and migration of acquired personnel and all commercial, financial, legal, regulatory and other pertinent information +relating to any acquired business, product or technology; +• comply with legal, regulatory and contractual requirements applicable to any acquired business, product or technology; and +• maintain and extend intellectual property protection for any acquired product or technology. +If +we are unable to perform the above functions or otherwise effectively integrate any acquired businesses, products or technologies, our business, financial condition and operating results will +suffer. +Foreign +acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency +risks and the particular economic, political and regulatory risks associated with specific countries. +Also, +the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the +incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our +49 +Table of Contents +financial +condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +Risks Related to Government Regulation and Diagnostic Product Reimbursement +If the FDA determines that our products are medical devices or if we seek to market our products for clinical +diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s), and may be required to cease or limit sales of our then marketed products, which could +materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +We have focused initially on the life sciences research market. This includes laboratories associated with academic and governmental research +institutions, as well as pharmaceutical, biotechnology and contract research companies. Accordingly, our products are labeled as "Research Use Only," or RUO, and are not intended for diagnostic use. +While we have focused initially on the life sciences research market and RUO products only, our strategy is to expand our product line to encompass products that are intended to be used for the +diagnosis of disease, either alone or in collaboration with third parties (such as our collaboration with bioMérieux). Such IVD products will be subject to regulation by the FDA as +medical devices, or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. If the FDA were to determine that our +products are intended for clinical use or if we decided to market our products for such use, we would be required to obtain FDA 510(k) clearance or premarket approval in order to sell our products in +a manner consistent with FDA laws and regulations. Such regulatory approval processes or clearances are expensive, time-consuming and uncertain; our efforts may never result in any approved PMA +application or 510(k) clearance for our products; and failure by us or a collaborator to obtain or comply with such approvals and clearances could have an adverse effect on our business, financial +condition or operating results. +IVD +products are regulated as medical devices by the FDA and comparable international agencies and may require either clearance from the FDA following the 510(k) pre-market notification +process or PMA from the FDA, in each case prior to marketing. If we or our collaborators are required to obtain a PMA or 510(k) clearance for products based on our technology, we or they would be +subject to a substantial number of additional requirements for medical devices, including establishment registration, device listing, Quality Systems Regulations, or QSRs, which cover the design, +testing, production, control, quality assurance, labeling, packaging, servicing, sterilization (if required), and storage and shipping of medical devices (among other activities), product labeling, +advertising, recordkeeping, post-market surveillance, post-approval studies, adverse event reporting, and correction and removal (recall) regulations. One or more of the products we or a collaborator +may develop using our technology may also require clinical trials in order to generate the data required for PMA. Complying with these requirements may be time-consuming and expensive. We or our +collaborators may be required to expend significant resources to ensure ongoing compliance with the FDA regulations and/or take satisfactory corrective action in response to enforcement action, which +may have a material adverse effect on the ability to design, develop, and commercialize products using our technology as planned. Failure to comply with these requirements may subject us or a +collaborator to a range of enforcement actions, such as warning letters, injunctions, civil monetary penalties, criminal prosecution, recall and/or seizure of products, and revocation of marketing +authorization, as well as significant adverse publicity. If we or our collaborators fail to obtain, or experience significant delays in obtaining, regulatory approvals for IVD products, such products +may not be able to be launched or successfully commercialized in a timely manner, or at all. +Laboratory +developed tests, or LDTs, are a subset of IVD tests that are designed, manufactured and used within a single laboratory. The FDA maintains that LDTs are medical devices and +has for the most part exercised enforcement discretion for most LDTs. A significant change in the way that the +50 +Table of Contents +FDA +regulates any LDTs that we, our collaborators or our customers develop using our technology could affect our business. The FDA has considered the appropriate way to regulate such tests, but after +publishing several draft guidances and holding a number of public hearings and workshops, no final guidance has been issued. However, if the FDA requires laboratories to undergo premarket review and +comply with other applicable FDA requirements in the future, the cost and time required to commercialize an LDT will increase substantially, and may reduce the financial incentive for laboratories to +develop LDTs, which could reduce demand for our instruments and our other products. +Failure +to comply with applicable FDA requirements could subject us to misbranding or adulteration allegations under the Federal Food, Drug, and Cosmetic Act. We could be subject to a +range of enforcement actions, including warning letters, injunctions, civil monetary penalties, criminal prosecution, and recall and/or seizure of products, as well as significant adverse publicity. +In addition, changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products, which +may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our products, if required. +Foreign +jurisdictions have laws and regulations similar to those described above, which may adversely affect our ability to market our products as planned in such countries. The number +and scope of these requirements are increasing. As in the United States, the cost and time required to comply with regulatory requirements may be substantial, and there is no guarantee that we will +obtain the necessary authorization(s) required to make our products commercially viable. As a result, the imposition of foreign requirements may also have a material adverse effect on the commercial +viability of our operations. +If we do not comply with governmental regulations applicable to our recently acquired CLIA-certified +laboratory, we may not be able to continue our operations. +The operation of our recently acquired CLIA-certified laboratory is subject to regulation by numerous federal, state and local governmental +authorities in the United States. This laboratory holds a CLIA certificate of compliance and is licensed by the Commonwealth of Massachusetts and the State of Maryland, and we intend to obtain other +state licenses as may be +required in the future. Failure to comply with federal or state regulations or changes in those regulatory requirements, could result in a substantial curtailment or even prohibition of the operations +of our laboratory and could have an adverse effect on our business. CLIA is a federal law that regulates clinical laboratories that perform testing on human specimens for the purpose of providing +information for the diagnosis, prevention or treatment of disease. To maintain CLIA certification, laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make +unannounced inspections of these laboratories. If we were to lose our CLIA certification or any required state licenses, whether as a result of a revocation, suspension or limitation, it could have a +material adverse effect on our business. +We expect to rely on third parties in conducting any required future studies of diagnostic products that may +be required by the FDA or other regulatory authorities, and those third parties may not perform satisfactorily. +We do not have the ability to independently conduct clinical trials or other studies that may be required to obtain FDA and other regulatory +clearance or approval for future diagnostic products. Accordingly, we expect that we would rely on third parties, such as clinical investigators, consultants, and collaborators to conduct such studies +if needed. Our reliance on these third parties for clinical and other development activities would reduce our control over these activities. If these third parties do not successfully carry out their +contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised, we may not be +able to obtain regulatory clearance or approval. +51 +Table of Contents +If diagnostic procedures that are enabled by our technology are subject to unfavorable pricing regulations or +third-party coverage and reimbursement policies, our business could be harmed. +The ability of our customers to commercialize diagnostic tests based on our technology will depend in part on the extent to which coverage and +reimbursement for these tests will be available from government health programs, private health insurers and other third-party payors. In the United States, the principal decisions about reimbursement +for new technologies are often made by the Centers for Medicare and Medicaid Services, or CMS. Private payors often follow CMS to a substantial degree. It is difficult to predict what CMS will decide +with respect to reimbursement. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by +limiting coverage and the amount of payments for particular products and procedures. We cannot be sure that coverage will be available for any diagnostic tests based on our technology, and, if +coverage is available, the level of payments. +Reimbursement may impact the demand for those tests. If reimbursement is not available or is available only to limited levels, our customers may not be able to successfully commercialize any tests for +which they receive marketing authorization. +Current and future legislation may increase the difficulty and cost to obtain marketing approval of and +commercialize any products based on our technology and affect the prices that may be obtained. +In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, +collectively, the ACA, became law. The ACA is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and +abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Since its +enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. Both Congress and President Trump have expressed their intention to repeal or repeal and replace the +ACA, and as a result certain sections of the ACA have not been fully implemented or were effectively repealed. The uncertainty around the future of the ACA, and in particular the impact to +reimbursement levels and the number of insured individuals, may lead to uncertainty or delay in the purchasing decisions of our customers, which may in turn negatively impact our product sales. If +there are not adequate reimbursement levels, our business and results of operations could be adversely affected. +In +addition, other legislative changes have been proposed and adopted since the ACA was enacted. We expect that the ACA, as well as other healthcare reform measures that may be adopted +in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we or our collaborators will receive for any cleared or approved product. Any +reduction in payments from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare +reforms may prevent us from being able to generate revenue, attain profitability, or commercialize any of our products for which we receive marketing approval. +In +addition, sales of our tests outside of the United States will subject us to foreign regulatory requirements, which may also change over time. +We +cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business, or the +effect any future legislation or regulation will have on us. The expansion in government's effect on the United States healthcare industry may result in decreased profits to us, lower reimbursements +by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations. +52 +Table of Contents +Risks Related to Our Operations +We depend on our information technology systems, and any failure of these systems could harm our business. +We depend on information technology and telecommunications systems to operate our business. We have installed, and expect to expand, a number of +enterprise software systems that affect a broad range of business processes and functional areas, including, for example, systems handling human resources, accounting, manufacturing, inventory +control, financial controls and reporting, sales administration, and other infrastructure operations. In addition to the aforementioned business systems, we intend to extend the capabilities of both +our preventative and detective security controls by augmenting the monitoring and alerting functions, network design, and automatic countermeasure operations of our technical systems. These +information technology and telecommunications systems support a variety of functions, including manufacturing operations, quality control, customer service support, and general administrative +activities. +Information +technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and +natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses, and similar disruptive +problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant +downtime of our information technology or telecommunications systems or those used by our third-party suppliers could prevent us from operating our business and managing the administrative aspects of +our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business. +Security breaches, loss of data and other disruptions could compromise sensitive information related to our +business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +In the ordinary course of our business, we collect and store sensitive data, intellectual property and proprietary business information owned or +controlled by ourselves or our customers. This data encompasses a wide variety of business-critical information including research and development information, commercial information, and business and +financial information. We face four primary risks relative to protecting this critical information: loss of access; inappropriate disclosure; inappropriate modification; and inadequate monitoring of +our controls over the first three risks. +The +secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to +protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to +attacks by hackers or viruses, breaches, interruptions due to employee error, malfeasance, lapses in compliance with privacy and security mandates, or other disruptions. Any such breach or +interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. Any such access, disclosure or other loss of +information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, government enforcement actions and regulatory penalties. Unauthorized +access, loss or dissemination could also disrupt our operations, including our ability to conduct research and development activities, process and prepare company financial information, manage various +general and administrative aspects of our business and damage our reputation, any of which could adversely affect our reputation and our business. In addition, there can be no assurance that we will +promptly detect any such disruption or security breach, if at all. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or +inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed. +53 +Table of Contents +We face risks related to handling of hazardous materials and other regulations governing environmental +safety. +Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public +officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous materials and the generation, +transportation and storage of waste. Although we have secured clearance from the EPA historically, and currently are operating in compliance with applicable EPA rules and regulations, our business +could be adversely affected if we discover that we or an acquired business is not in material compliance with these rules and regulations. In the future, we may pursue the use of other surfactant +substances that will require clearance from the EPA, and we may fail to obtain such clearance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may +become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of +accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business. +Risks Related to Intellectual Property +If we are unable to protect our intellectual property, it may reduce our ability to maintain any +technological or competitive advantage over our competitors and potential competitors, and our business may be harmed. +We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual +restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. As of +March 1, 2018, we owned or exclusively licensed 18 granted U.S. patents and approximately 11 pending U.S. patent applications. We also owned or exclusively licensed approximately 32 pending +patent applications and granted patents in particular jurisdictions outside of the United States. If we fail to protect our intellectual property, third parties may be able to compete more effectively +against us, we may lose our technological or competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. +We +cannot assure investors that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will take for such patents to +be granted. It is possible that, for any of our patents that have granted or that may grant in the future, others will design around our patented technologies. Further, we cannot assure investors that +other parties will not challenge any patents granted to us or that courts or regulatory agencies will hold our patents to be valid or enforceable. We cannot guarantee investors that we will be +successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such +patents, or to such patents being interpreted narrowly or otherwise in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our +competitors may be diminished because of these uncertainties. For these and other reasons, our intellectual property may not provide us with any competitive advantage. For +example: +• We or our licensors might not have been the first to make the inventions covered by each of our pending patent applications or granted patents; +• We or our licensors might not have been the first to file patent applications for these inventions. To determine the priority of these +inventions, we may have to participate in interference proceedings or derivation proceedings declared by the United States Patent and Trademark Office, or USPTO, that could result in substantial cost +to us. No assurance can be given that our patent applications or granted patents (or those of our licensors) will have priority over any other patent or patent application involved in such a +proceeding; +54 +Table of Contents +• Others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies; +• It is possible that our owned or licensed pending patent applications will not result in granted patents, and even if such pending patent +applications grant as patents, they may not provide a basis for intellectual property protection of commercially viable products, may not provide us with any competitive advantages, or may be +challenged and invalidated by third parties; +• We may not develop additional proprietary products and technologies that are patentable; +• The patents of others may have an adverse effect on our business; and +• While we apply for patents covering our products and technologies and uses thereof, as we deem appropriate, we may fail to apply for patents on +important products and technologies in a timely fashion or at all, or we may fail to apply for patents in potentially relevant jurisdictions. +To +the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our +intellectual property does not provide adequate coverage of our competitors' products, our competitive position could be adversely affected, as could our business. +Software +is a critical component of our instruments. To the extent such software is not protected by our patents, we depend on trade secret protection and non-disclosure agreements with +our employees, strategic partners and consultants, which may not provide adequate protection. +The measures that we use to protect the security of our intellectual property and other proprietary rights +may not be adequate, which could result in the loss of legal protection for, and thereby diminish the value of, such intellectual property and other rights. +In addition to pursuing patents on our technology, we also rely upon trademarks, trade secrets, copyrights and unfair competition laws, as well +as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Despite these measures, any of our intellectual property rights could be +challenged, invalidated, circumvented or misappropriated. In addition, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and +intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful +protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such +unauthorized disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be +undermined. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that +a third party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, the outcome would be unpredictable, and any remedy may be inadequate. In addition, +courts outside the United States may be less willing to protect trade secrets. +In +addition, competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our +intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property +does not adequately protect our market share against competitors' products and methods, our competitive position could be adversely affected, as could our business. +55 +Table of Contents +Some of our owned and in-licensed intellectual property has been discovered through government funded +programs and thus is subject to federal regulations such as "march-in" rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our +exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers. +Some of the intellectual property rights we own and have in-licensed have been generated through the use of U.S. government funding and are +therefore subject to certain federal regulations. For example, all of the issued U.S. patents we own and all of the intellectual property rights licensed to us under our license agreement with Tufts +have been generated using U.S. government funds. As a result, the U.S. government has certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act +of 1980, or Bayh-Dole Act. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to +use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions +to a third party if the government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or +safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as "march-in rights"). The U.S. government also has the +right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government, elect title, and file an application to register the intellectual +property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. +Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend +substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in +the U.S. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar +terms to potential licensees that would be likely to manufacture substantially in the U.S. or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. +manufacturing may limit our ability to license the applicable patent rights on an exclusive basis under certain circumstances. +If +we enter into future arrangements involving government funding, and we make inventions as a result of such funding, intellectual property rights to such discoveries may be subject to +the applicable provisions of the Bayh-Dole Act. To the extent any of our current or future intellectual property is generated through the use of U.S. government funding, the provisions of the +Bayh-Dole Act may similarly apply. Any exercise by the government of certain of its rights could harm our competitive position, business, financial condition, results of operations and prospects. +We depend on technology that is licensed to us by Tufts University. Any loss of our rights to this technology +could prevent us from selling our products. +Our core Simoa technology is licensed exclusively to us from Tufts University. We do not own the patents that underlie this license. Our rights +to use this technology and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of the license. Our principal obligations under our +license agreement with Tufts are as follows: +• royalty payments; +• milestone payments; +• annual maintenance fees; +56 +Table of Contents +• using commercially reasonable efforts to develop and sell a product using the licensed technology and developing a market for such product; +• paying and/or reimbursing fees related to prosecution, maintenance and enforcement of patent rights; and +• providing certain reports. +If +we breach any of these obligations, Tufts may have the right to terminate the license, which could result in our being unable to develop, manufacture and sell our Simoa products or a +competitor's gaining access to the Simoa technology. Termination of our license agreement with Tufts would have a material adverse effect on our business. +In +addition, we are a party to a number of other agreements that include licenses to intellectual property, including non-exclusive licenses. We expect that we may need to enter into +additional license agreements in the future. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the +licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. +As +we have done previously, we may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we +cannot provide any assurances that third-party patents do not exist that might be enforced against our current or future products in the absence of such a license. We may fail to obtain any of these +licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. +In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the +affected products, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to +our sales, an obligation on our part to pay royalties and/or other forms of compensation. +Licensing +of intellectual property is important to our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding +intellectual property subject to a license agreement, including: +• the scope of rights granted under the license agreement and other interpretation-related issues; +• whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the +licensing agreement; +• our right to sublicense patent and other rights to third parties under collaborative development relationships; +• our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our +products, and what activities satisfy those diligence obligations; and +• the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our +partners. +If +disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to +successfully develop and commercialize the affected product, or the dispute may have an adverse effect on our results of operation. +57 +Table of Contents +In +addition to agreements pursuant to which we in-license intellectual property, we have in the past and will continue in the future to grant licenses under our intellectual property. +For example, we have granted certain exclusive and co-exclusive licenses in certain fields to bioMérieux and a non-exclusive license to a diagnostic company in certain fields. Like our +in-licenses, our out-licenses are complex and disputes may arise between us and our licensees, such as the types of disputes described above. Moreover, our licensees may breach their obligations, or +we may be exposed to liability due to our failure or alleged failure to satisfy our obligations. Any such occurrence could have an adverse affect on our business. +If we or any of our partners are sued for infringing intellectual property rights of third parties, it would +be costly and time consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +Our success also depends on our ability to develop, manufacture, market and sell our products and perform our services without infringing upon +the proprietary rights of third parties. Numerous U.S. and foreign-issued patents and pending patent applications owned by third parties exist in the fields in which we are developing products and +services. As part of a business strategy to impede our successful commercialization and entry into new markets, competitors may claim that our products and/or services infringe their intellectual +property rights. +We +could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against claims of infringement made by third parties. Any +adverse ruling by a court or administrative body, or perception of an adverse ruling, may have a material adverse impact on our ability to conduct our business and our finances. Moreover, third +parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more products or services and could result in a substantial award of +damages against us. In addition, since we sometimes indemnify customers, collaborators or licensees, we may have additional liability in connection with any infringement or alleged infringement of +third party intellectual property. +Because +patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our products or +proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any +of our products. There is a substantial amount of litigation involving patent and other intellectual property rights in our industry. If a third-party claims that we or any of our licensors, customers +or collaboration partners infringe upon a third-party's intellectual property rights, we may have to: +• seek to obtain licenses that may not be available on commercially reasonable terms, if at all; +• abandon any infringing product or redesign our products or processes to avoid infringement; +• pay substantial damages including, in an exceptional case, treble damages and attorneys' fees, which we may have to pay if a court decides that +the product or proprietary technology at issue infringes upon or violates the third-party's rights; +• pay substantial royalties or fees or grant cross-licenses to our technology; or +• defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of +our financial and management resources. +58 +Table of Contents +We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could +be expensive, time consuming and unsuccessful. +Competitors may infringe our patents or the patents of our licensors. In the event of infringement or unauthorized use, we may file one or more +infringement lawsuits, which can be expensive and time consuming. An adverse result in any such litigation proceedings could put one or more of our patents at risk of being invalidated, being found to +be unenforceable or being interpreted narrowly and could put our patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with +intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. +Most +of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer +than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise any funds necessary to continue our operations, continue our +internal research programs, in-license needed technology, or enter into development partnerships that would help us bring our products to market. +In +addition, patent litigation can be very costly and time consuming. An adverse outcome in such litigation or proceedings may expose us or any of our future development partners to loss +of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all. +Our issued patents could be found invalid or unenforceable if challenged in court, which could have a +material adverse impact on our business. +If we or any of our partners were to initiate legal proceedings against a third-party to enforce a patent covering one of our products or +services, the defendant in such litigation could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity +and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or +non-enablement, or failure to claim patent eligible subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld +relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before the USPTO even outside the context of litigation. The +outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art +of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps +all, of the challenged patent. Such a loss of patent protection would have a material adverse impact on our business. +We may be subject to claims that our employees, consultants or independent contractors have wrongfully used +or disclosed alleged trade secrets of their other clients or former employers to us, which could subject us to costly litigation. +As is common in the life sciences industry, we engage the services of consultants and independent contractors to assist us in the development of +our products. Many of these consultants and independent contractors were previously employed at, or may have previously or may be currently providing consulting or other services to, universities or +other technology, biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may become subject to claims that our company, a consultant or an independent +contractor inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current +59 +Table of Contents +clients. +We may similarly be subject to claims stemming from similar actions of an employee, such as one who was previously employed by another company, including a competitor or potential competitor. +Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our +management team. If we were not successful we could lose access or exclusive access to valuable intellectual property. +We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual +property. +We generally enter into confidentiality and intellectual property assignment agreements with our employees, consultants, and contractors. These +agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, those agreements may not be honored and may not +effectively assign intellectual property rights to us. For example, even if we have a consulting agreement in place with an academic advisor pursuant to which such academic advisor is required to +assign any inventions developed in connection with providing services to us, such academic advisor may not have the right to assign such inventions to us, as it may conflict with his or her +obligations to assign all such intellectual property to his or her employing institution. +In +addition, we sometimes enter into agreements where we provide services to third parties, such as customers. Under such circumstances, our agreements may provide that certain +intellectual property that we conceive in the course of providing those services is assigned to the customer. In those cases, we would not be able to use that particular intellectual property in, for +example, our work for other customers without a license. +We may not be able to protect our intellectual property rights throughout the world, which could materially, +negatively affect our business. +Filing, prosecuting and defending patents on current and future products in all countries throughout the world would be prohibitively expensive, +and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect +intellectual property rights to the same extent as federal and state laws in the United States. Consequently, regardless of whether we are able to prevent third parties from practicing our inventions +in the United States, we may not be able to +prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other +jurisdictions. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products, and further, may export otherwise +infringing products to territories where we have patent protection, but enforcement is not as strong as it is in the United States. These products may compete with our products and our patents or +other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or +other intellectual property rights may not be effective or sufficient to prevent third parties from so competing. Patent protection must ultimately be sought on a country-by-country basis, which is an +expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in +such countries. +Many +companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, +particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it +difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights +60 +Table of Contents +generally. +Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our +patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any +lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world +may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license and may adversely impact our business. +In +addition, we and our partners also face the risk that our products are imported or reimported into markets with relatively higher prices from markets with relatively lower prices, +which would result in a decrease of sales and any payments we receive from the affected market. Recent developments in U.S. patent law have made it more difficult to stop these and related practices +based on theories of patent infringement. +Changes in patent laws or patent jurisprudence could diminish the value of patents in general, thereby +impairing our ability to protect our products. +As is the case with other life science industry companies, our success is heavily dependent on intellectual property, particularly patents. +Obtaining and enforcing patents involve both technological complexity and legal complexity. Therefore, obtaining and enforcing patents is costly, time-consuming and inherently uncertain. In addition, +the America Invents Act, or the AIA, was signed into law on September 16, 2011, and many of the substantive changes became effective on March 16, 2013. +An +important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a "first-to-file" system for deciding which party should be granted a +patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but before us +could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the +time from invention to filing of a patent application, but circumstances could prevent us from promptly filing patent applications on our inventions. +Among +some of the other changes introduced by the AIA are changes that limit where a patent holder may file a patent infringement suit and providing additional opportunities for +third parties to challenge any issued patent in the USPTO. This applies to all of our owned and in-licensed U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary +standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding +sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party +may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. The AIA +and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. +Additionally, +the U.S. Supreme Court has ruled on several patent cases in recent years, such as Impression Products, Inc. v. Lexmark +International, Inc., Association for Molecular Pathology v. Myriad Genetics, Inc ,, Mayo Collaborative Services v. Prometheus +Laboratories, Inc. and Alice Corporation Pty. Ltd. v. CLS Bank International , either narrowing the scope of patent +protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the +future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the +61 +Table of Contents +U.S. +Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our +existing patents and patents that we might obtain in the future. +Obtaining and maintaining our patent protection depends on compliance with various procedural, document +submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. +The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other +provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent +rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case. In some cases, our licensors may be responsible +for, for example, these payments, thereby decreasing our control over compliance with these requirements. +If our trademarks and trade names are not adequately protected, then we may not be able to build name +recognition in our markets of interest and our business may be adversely affected. +Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be +infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of +interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there +could be potential trade name or trademark infringement claims brought by owners of other registered trademarks. Over the long term, if we are unable to establish name recognition based on our +trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +We may use third-party open source software components in future products, and failure to comply with the +terms of the underlying open source software licenses could restrict our ability to sell such products. +While our current products do not contain any software tools licensed by third-party authors under "open source" licenses, we may choose to use +open source software in future products. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not +provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses may contain requirements that we make available source code for +modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under +certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products with less development effort +and time and ultimately could result in a loss of product sales. +Although +we intend to monitor any use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been +interpreted by U.S. courts, and there is a risk that any such licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our +products. Moreover, we cannot assure investors that our processes for controlling our use of open source software in our products will be effective. If we are held to have breached the terms of an +open source software license, we could be required to seek licenses from third parties to continue offering our products on terms that are not economically feasible, to re-engineer our products, to +discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, or to make generally available, +62 +Table of Contents +in +source code form, our proprietary code, any of which could adversely affect our business, operating results, and financial condition. +We use third-party software that may be difficult to replace or cause errors or failures of our products that +could lead to lost customers or harm to our reputation. +We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable +terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent +technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party software or other +third-party software failures could result in errors, defects or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose +limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and +increase our operating costs. +We +will need to maintain our relationships with third-party software providers and to obtain software from such providers that does not contain any errors or defects. Any failure to do +so could adversely impact our ability to deliver reliable products to our customers and could harm our results of operations. +Numerous factors may limit any potential competitive advantage provided by our intellectual property rights. +The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, +and may not adequately protect our business, provide a barrier to entry against our competitors or potential competitors, or permit us to maintain our competitive advantage. Moreover, if a third party +has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are +illustrative: +• others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology but that is not covered +by the claims of any patents that have issued, or may issue, from our owned or in-licensed patent applications; +• we might not have been the first to make the inventions covered by a pending patent application that we own or license; +• we might not have been the first to file patent applications covering an invention; +• others may independently develop similar or alternative technologies without infringing our intellectual property rights; +• pending patent applications that we own or license may not lead to issued patents; +• patents, if issued, that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a +result of legal challenges by our competitors; +• third parties may compete with us in jurisdictions where we do not pursue and obtain patent protection; +• we may not be able to obtain and/or maintain necessary or useful licenses on reasonable terms or at all; +• third parties may assert an ownership interest in our intellectual property and, if successful, such disputes may preclude us from exercising +exclusive rights over that intellectual property; +63 +Table of Contents +• we may not be able to maintain the confidentiality of our trade secrets or other proprietary information; +• we may not develop or in-license additional proprietary technologies that are patentable; and +• the patents of others may have an adverse effect on our business. +Should +any of these events occur, they could significantly harm our business and results of operations. +Risks Related to Our Common Stock and Being a Public Company +We expect that our stock price may fluctuate significantly. +The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, +and others beyond our control, including: +• actual or anticipated fluctuations in our financial condition and operating results; +• announcements by us, our partners or our competitors of new products, significant contracts, strategic partnerships, joint ventures, +collaborations, commercial relationships or capital commitments; +• competition from existing products or new products that may emerge; +• failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public; +• issuance of new or updated research or reports by securities analysts or recommendations for our stock; +• adverse regulatory announcements; +• disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent +protection for our technologies; +• commencement of, or our involvement in, litigation; +• fluctuations in the valuation of companies perceived by investors to be comparable to us; +• market conditions in our markets; +• manufacturing disputes or delays; +• any future sales of our common stock or other securities; +• any change to the composition of the board of directors or key personnel; +• expiration of the contractual lock-up agreements with our executive officers, directors and security holders entered into in connection with +our initial public offering; +• general economic conditions and slow or negative growth of our markets; +• share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; +• announcement or expectation of additional debt or equity financing efforts; and +• other factors described in this Risk Factor section of this Annual Report on Form 10-K. +These +and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which +may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and +life +64 +Table of Contents +science +companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, +when the market price of a stock has been volatile, holders of that stock have on occasion instituted securities class action litigation against the company that issued the stock. If any of our +stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. +If securities or industry analysts do not publish research reports about our business, or if they issue an +adverse opinion about our business, our stock price and trading volume could decline. +The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or +our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases coverage of us or +fails to regularly publish reports on us, we could lose visibility in the public markets, which could cause our stock price or trading volume to decline. +Our principal stockholders and management own a significant percentage of our stock and will be able to +exercise significant influence over matters subject to stockholder approval. +As of December 31, 2017, our executive officers, directors and 5% or greater stockholders owned approximately 64% of our outstanding +common stock. Accordingly, our executive officers, directors and principal stockholders have significant influence over our operations. This concentration of ownership could have the effect of +delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on our stock +price and may prevent attempts by our stockholders to replace or remove the board of directors or management. +Sales of a substantial number of shares of our common stock in the public market could cause our stock price +to fall. +Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the +market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Of the 21,937,510 shares of our common stock outstanding as of +March 1, 2018, approximately 16,991,531 shares are currently subject to restrictions on transfer under lock-up arrangements with the underwriters for our initial public offering. These +restrictions are due to expire June 4, 2018, resulting in these shares becoming eligible for public sale on June 5, 2018 if they are registered under the Securities Act of 1933, as +amended, which we refer to as the Securities Act, or if they qualify for an exemption from registration under the Securities Act, including under Rules 144 or 701. Moreover, holders of an +aggregate of 14,721,351 shares of our common stock will have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in +registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our equity incentive plans or that are +issuable upon exercise of outstanding options. These shares can be freely sold in the public market upon issuance and once vested, subject to volume limitations applicable to affiliates and the +lock-up agreements described above. If any of these additional shares are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline. +65 +Table of Contents +We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the +foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases. +We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund +the development and growth of our business. In addition, the terms of our indebtedness with Hercules prohibit us from paying dividends. As a result, capital appreciation, if any, of our common stock +will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from an investment in our common stock if the price of our +common stock increases. +We have broad discretion in the use of our cash and cash equivalents, including the net proceeds from our +initial public offering, and may not use these financial resources effectively, which could adversely affect our business, financial condition and results of operations and cause our stock price to +decline. +Our management has broad discretion in the application our cash and cash equivalents, including the net proceeds from our initial public +offering, and you will be relying on the judgment of our management regarding the application of these financial resources. Our management might not apply these financial proceeds in ways that +ultimately increase the value of your investment. If we do not invest or apply these financial resources in ways that enhance stockholder value, we may fail to achieve expected financial results, +which could adversely affect our business, financial condition and results of operations and cause our stock price to decline. +Anti-takeover provisions contained in our restated certificate of incorporation and restated by-laws, as well +as provisions of Delaware law, could impair a takeover attempt. +Our restated certificate of incorporation, restated by-laws and Delaware law contain provisions which could have the effect of rendering more +difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions: +• authorizing our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and +conditions and with the rights, privileges and preferences as our board of directors may determine; +• specifying that special meetings of our stockholders can be called only by our board of directors and that our stockholders may not act by +written consent; +• establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including +proposed nominations of persons for election to our board of directors; +• providing that directors may be removed only for cause; +• providing that our board of directors may create new directorships and that vacancies on our board of directors may be filled only by a +majority of directors then in office, even though less than a quorum; +• establishing that our board of directors is divided into three classes—Class I, Class II, and +Class III—with each class serving staggered three-year terms; +• providing that our board of directors may amend our restated by-laws without stockholder approval; and +• requiring a super-majority of votes to amend certain of the above-mentioned provisions. +These +provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. +66 +Table of Contents +As +a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders +holding more than 15% of +our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. +Any +provision of our restated certificate of incorporation, restated by-laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity +for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +We are an "emerging growth company" and are able to avail ourselves of reduced disclosure requirements +applicable to emerging growth companies, and we plan to avail ourselves of the ability to adopt new accounting standards on the timeline permitted for private companies, which could make our common +stock less attractive to investors and our financial statements less comparable to other companies who are complying with new accounting standards on public company timelines. +We are an "emerging growth company," as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting +requirements that are applicable to other public companies that are not "emerging growth companies," including not being required to comply with the auditor attestation requirements of +Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of +holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also +provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting +standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take +advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, will comply with new or revised accounting +standards not later than the relevant dates on which adoption of such standards is required for non-public companies. There are currently accounting standards that are expected to affect the financial +reporting of many public companies as early as the first calendar quarter of 2018, including ASC 606, Revenue from contracts with customers . As a result +of this election, the timeline to comply with these standards will in many cases be delayed as compared to other public companies who are not eligible to have made or have not made this election. For +more information on the effect of this election, including the timing of when we currently plan to adopt certain accounting standards that could materially affect our financial statements, refer to +Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. As a result, investors may view our financial statements as not comparable to other +public companies. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a +result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging +growth company. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.0 billion or more; +(ii) December 31, 2022; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on +which we are deemed to be a large accelerated filer under the rules of the SEC. +67 +Table of Contents +We incur increased costs and devote substantial management time as a result of operating as a public company. +As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, and these expenses +may increase even more after we are no longer an "emerging growth company." We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform +and Protection Act, as well as rules adopted, and to be adopted, by the SEC and the Nasdaq Global Market. Our management and other personnel devote a substantial amount of time to these compliance +initiatives. Moreover, these rules and regulations substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly. The increased costs increase +our net loss. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur +substantial costs to maintain the sufficient coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these +requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. +In +addition, as a public company we incur additional costs and obligations in order to comply with SEC rules that implement Section 404 of the Sarbanes-Oxley Act. Under these +rules, beginning with our annual report for the year ending December 31, 2018, we will be required to make a formal assessment of the effectiveness of our internal control over financial +reporting, and once we cease to be an emerging growth company, we will be required to include an attestation report on internal control over financial reporting issued by our independent registered +public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaging in a process to document and evaluate our internal control over financial +reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to +assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are designed and +operating effectively, and implement a continuous reporting and improvement process for internal control over financial reporting. +Item 1B. UNRESOLVED STAFF COMMENTS +Not applicable. +Item 2. PROPERTIES +We lease approximately 30,655 square feet of office, laboratory, and manufacturing space at our headquarters in Lexington, Massachusetts, under +a lease that expires June 30, 2020. In addition, pursuant to our acquisition of Aushon Biosystems, Inc. on January 30, 2018, we lease approximately 21,500 square feet of office, +laboratory, and manufacturing space in Billerica, Massachusetts, under a lease that expires February 28, 2021. We believe that this existing office, laboratory and manufacturing space will be +sufficient to meet our needs for the foreseeable future. However, we may choose in the future to terminate either or both of these leases in order to consolidate operations in one location. +Item 3. LEGAL PROCEEDINGS +We are not currently a party to any material legal proceedings. +Item 4. MINE SAFETY DISCLOSURES +Not applicable. +68 +Table of Contents +PART II +Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Market Information +Our common stock began trading on The Nasdaq Global Market on December 7, 2017 under the symbol "QTRX." The following table sets forth, +for the periods indicated, the high and low sales prices for the Common Stock, as reported by Nasdaq, since our common stock commenced public trading: +Common Stock +High +Low +Year Ended December 31, 2017: +Fourth Quarter (beginning December 7, 2017) +$ +23.70 +$ +15.56 +Year Ending December 31, 2018: +First Quarter (through March 15, 2018) +$ +24.805 +$ +17.45 +Stockholders +As of March 1, 2018, there were approximately 66 stockholders of record of the 21,937,510 outstanding shares of common stock. +Dividends +We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if +any, for use in the operation of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our indebtedness with Hercules +Capital, Inc. prohibit us from paying dividends. Any future determination to declare and pay dividends will be made at the discretion of our board of directors and will depend on various +factors, including applicable laws, our results of operations, our financial condition, our capital requirements, general business conditions, our future prospects and other factors that our board of +directors may deem relevant. +Unregistered Sales of Securities +Set forth below is information regarding shares of preferred stock, common stock and warrants issued, and options granted, by us in the year +ended December 31, 2017 that were not registered under the Securities Act. The share and per share amounts reflect the 1-for-3.214 reverse stock split of our common stock that was effected on +December 4, 2017. +Issuances of Stock and Warrants +On March 31, 2017, we issued a warrant to purchase 38,828 shares of Series D preferred stock at an exercise price of $3.67 per +share to our lender in connection with an amendment to our loan facility. Upon the closing of our initial public offering, this warrant was automatically converted into a warrant to purchase 12,080 +shares of our common stock at an exercise price of $11.795 per share. +On +June 2, 2017, we issued an aggregate of 2,113,902 shares of Series D-1 preferred stock to five accredited investors at a purchase price of $4.021 per share for an +aggregate of $8.5 million. The 2,113,902 shares of Series D-1 preferred stock outstanding converted into 657,715 shares of common stock upon the closing of our initial public offering. +On +November 30, 2017, we issued an aggregate of 31,283 shares of Series C preferred stock to 10 accredited investors upon the net exercise of warrants to purchase +102,636 shares of Series C +69 +Table of Contents +preferred +stock and the cash exercise of warrants to purchase 8,474 shares of Series C preferred stock at an exercise price of $3.3299 per share. +From +January 1, 2017 through December 31, 2017, we issued an aggregate of 90,265 shares of common stock upon the exercise of options and no shares of common stock +representing stock awards to certain of our employees, directors and consultants under the 2007 Stock Option and Grant Plan, as amended. +Stock Option and Restricted Stock Grants +From January 1, 2017 through December 31, 2017, we granted stock options under the 2007 Stock Option and Grant Plan, as amended, +to purchase an aggregate of 1,250,169 shares of common stock, net of forfeitures, at a weighted-average exercise price of $8.47 per share, to certain of our employees, consultants and directors. +Securities Act Exemptions +The offers, sales and issuances of the securities described above were exempt from registration under the Securities Act in reliance on +Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D. The grants of stock options described above under "Stock Option and Restricted Stock Grants" were exempt from +registration under the Securities Act in reliance on Rule 701 promulgated under the Securities Act as offers and sales of securities under compensatory benefit plans and contracts relating to +compensation in compliance with Rule 701. Each of the recipients of securities in any transaction exempt from registration either received or had adequate access, through employment, business +or other relationships, to information about us. +All +certificates representing the securities issued in the transactions described above included appropriate legends setting forth that the securities had not been offered or sold +pursuant to a registration statement and describing the applicable restrictions on transfer of the securities. There were no underwriters employed in connection with any of the transactions set forth +above. +Use of Proceeds from Initial Public Offering of Common Stock +On December 11, 2017, we completed the initial public offering of our common stock, which resulted in the sale of 4,916,480 shares, +including 641,280 shares sold by us pursuant to the +exercise in full by the underwriters of their option to purchase additional shares in connection with the initial public offering, at a price to the public of $15.00 per share. The offer and sale of +all of the shares in our initial public offering was registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-221475), which was declared +effective by the SEC on December 6, 2017, and a registration statement on Form S-1 (File No. 333-221932) under Rule 462(b) of the Securities Act that became effective upon +its filing. Following the sale of all of the shares in connection with the closing of our initial public offering, the offering terminated. J.P. Morgan Securities LLC, Leerink +Partners LLC and Cowen and Company, LLC acted as joint book-running managers for the initial public offering. BTIG, LLC and Evercore Group L.L.C. acted as a co-managers. +We +received approximately $65.6 million in net proceeds after deducting underwriting discounts and commissions and offering costs payable by us. As of December 31, 2017, we +had not used any of the net proceeds from the offering. None of the offering expenses consisted of direct or indirect payments made by us to directors, officers or persons owning 10% or more of our +common stock or to their associates, or to our affiliates, and we have not used any of the net proceeds from the offering to make payments, directly or indirectly, to any such persons. There has been +no material change in the planned use of the net proceeds from our initial public offering as described in our final prospectus filed with the SEC on December 7, 2017 pursuant to +Rule 424(b)(4) under the Securities Act. We have +70 +Table of Contents +invested +the unused proceeds from the offering in cash equivalents in accordance with our investment policy. +Issuer Purchases of Equity Securities +Not applicable. +Item 6. SELECTED FINANCIAL DATA +You should read the following selected financial data together with our consolidated financial statements and the related notes and the +information under the caption +"Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. We have derived the statement of operations data +for the years ended December 31, 2017, 2016 and 2015 and the balance sheet data as of December 31, 2017 and 2016 from our audited consolidated financial statements included elsewhere in +this Annual Report on Form 10-K. The selected balance sheet data as of December 31, 2015 is derived from audited financial statements that are not included in this Annual Report on +Form 10-K. Our historical results are not necessarily indicative of the results that should be expected in the future. +Consolidated statement of operations data (in thousands, except per share data) +Year ended December 31, +2017 +2016 +2015 +Total revenue +$ +22,874 +$ +17,585 +$ +12,180 +Cost of revenue +12,887 +9,837 +6,465 +Research and development +16,304 +16,993 +10,083 +Selling, general and administrative +19,688 +12,466 +10,155 +Total operating expenses +48,879 +39,296 +26,703 +Loss from operations +(26,005 +) +(21,711 +) +(14,523 +) +Interest expense, net +(951 +) +(1,298 +) +(1,040 +) +Other income (expense), net +(63 +) +(164 +) +(380 +) +Net loss +(27,019 +) +(23,173 +) +(15,943 +) +Accretion and accrued dividends on redeemable convertible preferred stock +(4,166 +) +(4,445 +) +(4,355 +) +Net loss attributable to common stockholders +$ +(31,185 +) +$ +(27,618 +) +$ +(20,298 +) +Net loss per share attributable to common stockholders, basic and diluted +$ +(8.30 +) +$ +(12.89 +) +$ +(11.19 +) +Weighted-average common shares outstanding +3,757 +2,143 +1,813 +Consolidated balance sheet data (in thousands) +As of December 31, +2017 +2016 +2015 +Cash and cash equivalents +$ +79,682 +$ +29,671 +2,323 +Total assets +91,779 +37,117 +7,351 +Total long term debt +9,382 +10,243 +9,726 +Total redeemable convertible preferred stock +— +128,585 +73,445 +Total stockholders' equity (deficit) +65,866 +(115,109 +) +(88,640 +) +71 +Table of Contents +Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis of our financial condition and results of operations should be read in conjunction +with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following +discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See +"Special Note Regarding Forward-Looking Statements." Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, +particularly in "Risk Factors." +Overview +We are a life sciences company that has developed a next generation, ultra-sensitive digital immunoassay platform that advances precision health +for life sciences research and diagnostics. Our platform enables customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, +are undetectable using conventional, analog immunoassay technologies. It also allows researchers to define and validate the function of novel protein biomarkers that are only present in very low +concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has +not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the +development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, +prevention. We are currently focusing our platform on protein detection, which we believe is an area of significant unmet need and where we have significant competitive advantages. In addition to +enabling new applications and insights in protein analysis, we are also developing our Simoa technology to detect nucleic acids in biological samples. +We +currently sell all of our products for life science research, primarily to laboratories associated with academic and governmental research institutions, as well as pharmaceutical, +biotechnology and contract research companies, through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets, +including Australia, China, Japan, India, Lebanon, Singapore, South Korea and Taiwan. We grew our revenue from $12.2 million to $17.6 million in 2016 and to $22.9 million in 2017. +Our +instruments are designed to be used either with assays fully developed by us, including all antibodies and supplies required to run the tests, or with "homebrew" kits where we supply +some of +the components required for testing, and the customer supplies the remaining required elements. Accordingly, our installed instruments generate a recurring revenue stream. We believe that our +recurring consumable revenue is driven by our customers' ability to extract more valuable data using our platform and to process a large number of samples quickly with little hands-on preparation. +While +we expect the Quanterix SR-X to generate lower consumables revenue per instrument than the Simoa HD-1 Analyzer due to its lower throughput, as the installed base of the Simoa +instruments increases, total consumables revenue overall is expected to increase. We believe that consumables revenue should be subject to less period-to-period fluctuation than our instrument sales +revenue, and will become an increasingly important contributor to our overall revenue. +As +of December 31, 2017, we had cash and cash equivalents of $79.7 million, including $65.6 million in net proceeds from the sale of 4,916,480 shares of common stock +in our initial public offering, or IPO atthe public offering price of $15.00 per share. Prior to the IPO, we had financed our operations principally through private placements of our convertible +preferred stock, borrowings from credit facilities and revenue from our commercial operations. +72 +Table of Contents +Since +inception, we have incurred net losses. Our net loss was $27.0 million, $23.2 million, and $15.9 million for the years ended December 31, 2017, 2016 and +2015, respectively. As of December 31, 2017, we had an accumulated deficit of $144.4 million and stockholders' equity of $65.9 million. We expect to continue to incur significant +expenses and operating losses at least through the next 24 months. We expect our expenses will increase substantially as we: +• expand our sales and marketing efforts to further commercialize our products; +• expand our research and development efforts to improve our existing products and develop and launch new products; +• hire additional personnel; +• enter into collaboration arrangements, if any, or in-license other products and technologies; +• add operational, financial and management information systems; and +• incur increased costs as a result of operating as a public company. +Financial Operations Overview +Revenue +We generate product revenue from sales of our Simoa HD-1 Analyzer and Quanterix SR-X instruments and related reagents and other consumables. We +currently sell our products for research use only applications and our customers are primarily laboratories associated with academic and governmental research institutions, as well as pharmaceutical, +biotechnology and contract research companies. Sales of our consumables have consistently increased due to an increasing number of Simoa instruments being installed in the field, all of which require +certain of our consumables to run customers' specific tests. Consumable revenue consists of sales of complete assays which are developed internally by us, plus sales of "homebrew" kits which contain +all the elements necessary to run tests with the exception of the specific antibodies utilized which are separately provided by the customer. +Service +and other revenue consists of testing services provided by us in our Simoa Accelerator Laboratory on behalf of certain research customers, in addition to warranty and other +service-based revenue. Services provided in our Simoa Accelerator Laboratory include sample testing, homebrew assay development and custom assay development. +Collaboration +and license revenue consists of revenue associated with licensing our technology to third parties and for related services. +The +following table presents our revenue for the periods indicated (in thousands): +Year ended December 31, +2017 +2016 +2015 +Product revenue +$ +14,124 +$ +10,601 +$ +9,477 +Service and other revenue +7,676 +5,012 +2,515 +Collaboration and license revenue +1,074 +1,972 +188 +Total revenue +$ +22,874 +$ +17,585 +$ +12,180 +The +following table reflects product revenue (in thousands) by geography and as a percentage of total product revenue, based on the billing address of our customers. North America +consists of the +73 +Table of Contents +United +States, Canada and Mexico; EMEA consists of Europe, the Middle East, and Africa; and Asia Pacific includes Japan, China, South Korea, Singapore, Malaysia and Australia. +Year ended December 31, +2017 +2016 +2015 +North America +$ +7,790 +55 +% +$ +6,816 +64 +% +$ +7,131 +75 +% +EMEA +$ +4,435 +31 +% +$ +2,679 +25 +% +$ +1,708 +18 +% +Asia Pacific +$ +1,899 +13 +% +$ +1,106 +11 +% +$ +638 +7 +% +Total +$ +14,124 +100 +% +$ +10,601 +100 +% +$ +9,477 +100 +% +Our +revenue is denominated primarily in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United +States. Changes in foreign currency exchange rates have not materially affected us to date; however, they may become material to us in the future as our operations outside of the United States expand. +Cost of Products, Services and Collaboration Revenue +Cost of goods sold for products consists of Simoa HD-1 Analyzer and Quanterix SR-X instrument cost from the manufacturer, raw material parts +costs and associated freight, shipping and handling costs, contract manufacturer costs, salaries and other personnel costs, stock-based compensation, overhead and other direct costs related to those +sales recognized as product revenue in the period. +Cost +of goods sold for services consists of salaries and other personnel costs, stock-based compensation and facility costs associated with operating the Simoa Accelerator Laboratory on +behalf of customers, in addition to costs related to warranties and other costs of servicing equipment at customer sites. +Cost +of collaboration revenue consists of royalty expense due to third parties from revenue generated by collaboration or license deals. +Research and Development Expenses +Research and development expenses consist of salaries and other personnel costs, stock-based compensation, research supplies, third-party +development costs for new products, materials for prototypes, and allocated overhead costs that include facility and other overhead costs. We have made substantial investments in research and +development since our inception, and plan to continue to make substantial investments in the future. Our research and development efforts have focused primarily on the tasks required to support +development and commercialization of new and existing products. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these +expenses to increase in future periods. +Selling, General and Administrative Expenses +Selling, general and administrative expenses consist primarily of salaries and other personnel costs, and stock-based compensation for our sales +and marketing, finance, legal, human resources and general management, as well as professional services, such as legal and accounting +services. We expect selling, general and administrative expenses to increase in future periods as the number of sales, technical support and marketing and administrative personnel grows and we +continue to introduce new products, broaden our customer base and grow our business. We also expect to incur additional expenses as a public company, including expenses related to compliance with the +rules and regulations of the Securities and Exchange Commission and the Nasdaq Stock Market, additional insurance expenses, and expenses related to investor relations activities and other +administrative and professional services. +74 +Table of Contents +Critical Accounting Policies, Significant Judgments and Estimates +Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in +accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the +reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be +reasonable under the circumstances. Changes in accounting estimates may occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. +We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement +presentation, financial condition, results of operations and cash flows will be affected. +We +believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other significant accounting policies. Accordingly, these are the +policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. Our significant accounting policies are more fully described +in Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. +Revenue Recognition +We recognize revenue when (1) persuasive evidence of an arrangement exists, (2) shipment and installation, if applicable, has +occurred or services have been rendered, (3) the price to the customer is fixed or determinable and (4) collection of the related receivable is reasonably assured. We primarily generate +revenue from the sale of products and delivery of services, as well as under license and collaboration agreements. Our product revenue includes the sale of instruments as well as assay kits and other +consumables which are used to perform tests on the instrument. Our service revenue is generated from service contracts related to research services performed on behalf of customers and maintenance and +support services. +Product Revenue +Revenue for instrument sales is recognized upon installation at the customer's location or upon transfer of title to the customer when +installation is not required, which is generally the case with sales to distributors. In sales to end-customers, we always provide the installation service and often payment is tied to the completion +of the installation service. When installation is required, we account for the instrument and installation service as one unit of accounting and recognize revenue when installation is completed, +assuming all other revenue recognition criteria are met. Instrument transactions often have multiple elements, as discussed below. Included with the purchase of an instrument is a one-year assurance +type product warranty assuring that the instrument is free of material defects and will function according to specifications. In addition, the sale of an instrument includes an implied warranty which +is promised to the customer during the pre-sales process, at the time that the sales quote is issued to the customer. The implied warranty is provided over the same one-year period as the standard +warranty. The services included in the implied warranty are the same as those included in the extended service contracts, and include two bi-annual preventative maintenance service visits, minor +hardware updates and software upgrades, additional training and troubleshooting, which is beyond the scope of the standard product warranty. The implied warranty has been identified by us as a +separate deliverable and unit of accounting. Consideration allocated to the implied one-year warranty is recognized over the one year period of performance as service and other revenue as described +below. Consideration allocated to any other elements is recognized as the goods are delivered or the services are performed. +75 +Table of Contents +Service and Other Revenue +Service revenue includes revenue from the implied one-year service type warranty obligation, revenue from extended service contracts, research +services performed on behalf of customers in our Simoa Accelerator Laboratory, and other services that may be performed. Revenue for extended warranty contracts is recognized ratably over the service +period. Revenue for the implied one-year service type warranty is initially deferred at the time of instrument revenue recognition and is recognized ratably over a 12-month period starting on the date +of instrument installation. Revenue for research and development services and other services is generally recognized based on proportional performance of the contract when our ability to complete +project requirements is reasonably assured. Most of these services are completed in a short period of time from the receipt of the customer's order. When significant risk exists in our ability to +fulfill project requirements, revenue is recognized upon completion of the contract. +Collaboration and License Revenue +Collaboration and license revenue relates to our agreements with bioMérieux and another diagnostic company. For a complete +discussion of the accounting policies specific to these collaboration and license agreements, refer to Note 11 to the consolidated financial statements included elsewhere in this Annual Report +on Form 10-K. +Multiple Element Arrangements +Many of our instrument sales involve the delivery of multiple products and services. The elements of an instrument sale typically include the +instruments, installation (when required), an implied one-year service type warranty, and in some cases, assays, consumables and other services. Revenue recognition for contracts with multiple +deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the +customer on a stand-alone basis. In determining the units of accounting, management evaluates certain criteria, including whether the deliverables have standalone value. Items are considered to have +stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis. +The +consideration received is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria are applied to +each of the separate units. We determine the estimated selling price for deliverables within the arrangement using vendor-specific objective evidence (VSOE) of selling price, if available. If VSOE is +not available, we consider whether third-party evidence is available. If third-party evidence of selling price or VSOE is not available, we use our best estimate of selling price for the deliverable. +In +order to establish VSOE of selling price, we must regularly sell the product or service on a standalone basis with a substantial majority priced within a relatively narrow range. If +there are not a sufficient number of standalone sales such that VSOE of selling price cannot be determined, then we consider whether third party evidence can be used to establish selling price. Due to +the lack of similar products and services sold by other companies within the industry, we have not established selling price using third-party evidence. +For +product and service sales, we determine our best estimate of selling price for instruments, consumables, services and assays using average selling prices over a rolling 12-month +period coupled with an assessment of market conditions, as VSOE and third-party evidence cannot be established. We recognize revenue for delivered elements only when we determine there are no +uncertainties regarding customer acceptance. +76 +Table of Contents +Distributor Transactions +In certain markets, we sell products and provide services to customers through distributors that specialize in life science products. In cases +where the product is delivered to a distributor, revenue recognition generally occurs when title transfers to the distributor. The terms of sales transactions through distributors are generally +consistent with the terms of direct sales to customers, except the distributors do not require our services to install the instrument at the end customer and perform the services for the customer that +are beyond our standard warranty in the first year following the sale. These transactions are accounted for in accordance with our revenue recognition policy described above. +Stock-Based Compensation +We account for stock-based compensation awards in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification +(ASC) Topic 718, Compensation—Stock Compensation , or ASC 718. ASC 718 requires all stock-based payments to employees, including grants of +employee stock options, to be recognized in the statement of operations based on their fair values. Our stock-based compensation awards have historically consisted of stock options. +Prior +to adoption of ASU 2016-09 on January 1, 2017, we recognized compensation costs related to stock options granted to employees based on the estimated fair value of the awards +on the date of grant, net of estimated forfeitures. Effective January 1, 2017, we ceased utilizing an estimated forfeiture rate and began recognizing forfeitures as they occur. We estimate the +grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on +a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. +We +recognized compensation costs related to stock options granted to non-employees based on the estimated fair value of the awards on the date of grant in the same manner as we do for +options for employees; however, the fair value of the stock options granted to non-employees is re-measured each reporting period until the service is complete, and the resulting increase or decrease +in value, if any, is recognized as expense or income, respectively, during the period the related services are rendered. There were no material non-employee awards outstanding during the years ended +December 31, 2017, 2016, and 2015. +The +Black-Scholes option-pricing model requires the use of subjective assumptions, including the expected volatility of our common stock, the assumed dividend yield, the expected term of +our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options, and the fair value of the underlying common stock on the date of grant. In +applying these assumptions, we considered the following factors: +• we do not have sufficient history to estimate the volatility of our common stock, as our IPO was completed in December 2017; +• we calculate expected volatility based on reported data for selected similar publicly traded companies for which the historical information is +available; +• we plan to continue to use the guideline peer group volatility information until the historical volatility of our common stock is sufficient to +measure expected volatility for future option grants; +• the assumed dividend yield of zero is based on our expectation of not paying dividends for the foreseeable future; +• we use the simplified method for determining the expected term of stock options due to the lack of historical exercise data and the plain +nature of the stock options; and +77 +Table of Contents +• we determine the risk-free interest rate by reference to implied yields available from U.S. Treasury securities with a remaining term equal to +the expected life assumed at the date of grant. +The +following summarizes the assumptions we used to estimate the fair value of stock options that we granted for the periods indicated: +Year ended +December 31, +2017 +2016 +2015 +Weighted-average expected volatility +50 +% +46 +% +41 +% +Weighted-average risk-free rate +1.9 +% +1.2 +% +1.7 +% +Dividend yield +0 +% +0 +% +0 +% +Expected term (in years) +6.0 +6.0 +6.0 +For +the years ended December 31, 2017, 2016, and 2015 stock-based compensation expense was $2.2 million, $0.9 million, and $1.1 million respectively. +The +table below summarizes the stock-based compensation expense recognized in our statements of operation by classification (in thousands): +Year ended December 31, +Stock-based compensation expense +2017 +2016 +2015 +Cost of product revenue +$ +24 +$ +6 +$ +6 +Cost of service revenue +52 +12 +1 +Research and development +180 +59 +112 +Selling, general and administrative +1,912 +851 +985 +Total +$ +2,168 +$ +928 +$ +1,104 +As +of December 31, 2017, we had $5.2 million of total unrecognized stock-based compensation costs which we expect to recognize over a weighted-average period of +2.7 years. +The +following table summarizes by grant date the number of shares of our common stock subject to stock options granted from January 1, 2016 through December 31, 2017, as +well as the associated per-share exercise price of the award and the estimated fair value per share of our common stock on the grant date. +Options +granted from January 1, 2016 to December 31, 2017, substantially all of which were granted to our employees and non-employee directors: +Grant date +Number of +shares +underlying option +granted +Exercise price +per share +Estimated fair value +per share of +common stock +at grant date +November 7, 2017 +45,111 +$ +10.25 +$ +10.25 +August 31, 2017 +85,586 +$ +9.42 +$ +9.42 +June 2, 2017 +301,722 +$ +8.68 +$ +8.68 +May 25, 2017 +51,484 +$ +8.68 +$ +8.68 +March 31, 2017 +797,234 +$ +8.16 +$ +8.68 +August 25, 2016 +66,892 +$ +5.43 +$ +5.43 +June 24, 2016 +208,592 +$ +5.08 +$ +5.08 +Prior +to our IPO, the fair value of our common stock underlying our stock options was estimated on each grant date by our board of directors. In order to determine the fair value of our +common stock underlying granted stock options, our board of directors considered, among other things, the most +78 +Table of Contents +recent +valuations of our common shares prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice +Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. +Given +the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to +determine the best estimate of the fair value of our common stock, including (1) our business, financial condition and results of operations, including related industry trends affecting our +operations; (2) our forecasted operating performance and projected future cash flows discounted to present value using our estimated weighted average cost of capital; (3) the illiquid +nature of our common stock; (4) liquidation preferences and other rights and privileges of our preferred stock over our common stock; (5) likeliness and estimated timing of the potential +option to have our stock become publicly traded; (6) market multiples of our most comparable public peers; (7) recently completed equity financing transactions; and (8) market +conditions affecting our industry. +Since +the completion of our IPO, we have determined the fair value of each common share underlying share-based awards based on the closing price of our common shares as reported by +Nasdaq on the date of grant. +Preferred Stock Warrant Liability +As of January 1, 2015, we had outstanding warrants to purchase 64,441 shares of Series A-2 redeemable convertible preferred stock, +or Series A-2 Preferred Stock, 1,300,000 shares of Series A-3 convertible preferred stock, or Series A-3 Preferred Stock, 562,488 shares of Series B redeemable convertible +preferred stock, or Series B Preferred Stock, and 226,733 shares of Series C redeemable convertible preferred stock, or Series C Preferred Stock. On March 4, 2015, we +issued a +warrant to purchase 46,248 shares of Series C Preferred Stock to a lender related to an amendment to a debt facility. The fair value of the warrant was initially accounted for as a debt +discount. On January 29, 2016, we issued a warrant to purchase 57,810 shares of Series C Preferred Stock to a lender related to a second amendment to a debt facility. The fair value of +the warrant was initially accounted for as a debt discount. On November 18, 2016, we issued a warrant to purchase 700,000 shares of Series A-3 Preferred Stock to a vendor. The fair value +of the warrant was recorded as research and development expense. On March 31, 2017, we issued a warrant to purchase 38,828 shares of Series D redeemable convertible preferred stock +(Series D Preferred Stock) to a lender as part of a third amendment to a debt facility. The fair value of the warrant was initially accounted for as a debt discount. All of the warrants were +initially recorded at fair value and marked to market on each reporting and exercise date with changes in the fair value recorded in other expense (income) on the statement of operations and +comprehensive loss. Holders of warrants to purchase shares of Series A-3 and B Preferred Stock exercised the warrants during the year ended December 31, 2016 and holders of warrants to +purchase shares of Series A-3 Preferred Stock exercised the warrants during the three months ended March 31, 2017. Upon exercise, the fair value of the warrants was reclassified to +redeemable convertible preferred stock along with any proceeds received. Upon the closing of the IPO, all warrants to purchase Preferred Stock automatically converted to warrants to purchase our +common stock. +79 +Table of Contents +The +changes in preferred stock warrant liability measured at fair value for which we have used Level 3 inputs to determine fair value are as follows (in thousands): +Warrant +liability +Balance at December 31, 2015 +$ +5,547 +Issuance of warrants related to debt facility +128 +Issuance of warrants related to a vendor +2,078 +Changes in fair value of warrants +307 +Warrant exercises +(5,258 +) +Balance at December 31, 2016 +2,802 +Issuance of warrants related to debt facility +119 +Changes in fair value of warrants +90 +Warrant exercises +(2,188 +) +Conversion to warrants in common stock in connection with IPO +(823 +) +Balance at December 31, 2017 +$ +— +The +warrants were classified as liabilities because they were exercisable into shares of redeemable convertible preferred stock. On each measurement date, we utilized a Black-Scholes +option pricing model to determine the fair value of the warrants and utilized various valuation assumptions based on available market data and other relevant but observable factors. Expected +volatility for our redeemable convertible preferred stock was determined based on an analysis of the historical volatility of a representative group of guideline public companies, because, prior to +our IPO, there was no market for our common stock and, therefore, a lack of market-based company-specific historical and implied volatility information. The expected term reflects the remaining +contractual term of the warrants. The assumed dividend yield is based upon our expectation of not paying dividends in the foreseeable future. The risk-free rate is based upon the U.S. Treasury yield +curve in effect at the valuation date, commensurate with the remaining contractual life of the warrants. The fair value of the underlying preferred shares was determined by management, with the +assistance of a third-party valuation specialist, using a hybrid valuation method, which includes a weighted analysis of two scenarios. The first scenario was based on the completion of an initial +public offering utilizing a market approach and the second scenario was based on remaining privately held utilizing either an income approach or a weighted-average of an income approach and a +backsolve to a recent financing event, depending on the proximity of the financing event to the measurement date. The assumption regarding our probability of completing an initial public offering was +the primary contributing factor to the changes in fair value of the common stock. See Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on +Form 10-K for further details on the changes of the probability of completing an initial public offering. Because all outstanding and exercisable warrants to purchase Preferred Stock were +automatically converted to warrants to purchase shares of common stock following the IPO, they are accounted for as equity instruments as of December 31, 2017. +80 +Table of Contents +The +following assumptions were utilized to determine the fair value of each warrant to purchase preferred stock at each reporting period and as of the change from liability to equity +accounting treatment in connection with the IPO: +Balance sheet date +Value of +underlying +Series D +preferred +stock +Value of +underlying +Series C +preferred +stock +Value of +underlying +Series B +preferred +stock +Value of +underlying +Series A-3 +preferred +stock +Value of +underlying +Series A-2 +preferred +stock +Volatility +Probability +of an initial +public +offering +December 7, 2017 +$4.67 +$ +4.67 +N/A +N/A +$ +4.67 +46 +% +100 +% +December 31, 2016 +N/A +$ +4.16 +N/A +$ +2.97 +$ +2.95 +52 +% +40 +% +December 31, 2015 +N/A +$ +3.92 +$3.00 +$ +3.00 +$ +1.90 +41 +% +25 +% +Results of Operations +Comparison of the Years Ended December 31, 2017 and December 31, 2016 (dollars in +thousands): +Year ended +December 31, +2017 +% of +revenue +Year ended +December 31, +2016 +% of +revenue +$ +change +% +change +Product revenue +$ +14,124 +61.7 +% +$ +10,601 +60.3 +% +$ +3,523 +33.2 +% +Service and other revenue +7,676 +33.6 +% +5,012 +28.5 +% +2,664 +53.2 +% +Collaboration and license revenue +1,074 +4.7 +% +1,972 +11.2 +% +(898 +) +(45.5 +)% +Total revenue +22,874 +100.0 +% +17,585 +100.0 +% +5,289 +30.1 +% +Cost of product revenue +7,742 +33.8 +% +6,299 +35.8 +% +1,443 +22.9 +% +Cost of service revenue +5,145 +22.5 +% +3,163 +18.0 +% +1,982 +62.7 +% +Cost of license revenue +— +— +% +375 +2.1 +% +(375 +) +(100 +)% +Research and development +16,304 +71.3 +% +16,993 +96.6 +% +(689 +) +(4.1 +)% +Selling, general and administrative +19,688 +86.1 +% +12,466 +70.9 +% +7,222 +57.9 +% +Total operating expenses +48,879 +213.7 +% +39,296 +223.5 +% +9,583 +24.4 +% +Loss from operations +(26,005 +) +(113.7 +)% +(21,711 +) +(123.5 +)% +(4,294 +) +19.8 +% +Interest expense, net +(951 +) +(4.2 +)% +(1,298 +) +(7.4 +)% +347 +(26.7 +)% +Other income (expense), net +(63 +) +(0.2 +)% +(164 +) +(0.9 +)% +102 +(61.6 +)% +Net loss +$ +(27,019 +) +(118.1 +)% +$ +(23,173 +) +(131.8 +)% +$ +(3,846 +) +16.6 +% +Revenue +Revenue increased by $5.3 million, or 30%, to $22.9 million for the year ended December 31, 2017 as compared to +$17.6 million for the year ended December 31, 2016. Product revenue consisted of sales of instruments totaling $6.5 million and sales of consumables and other products of +$7.6 million for the year ended December 31, 2017. Product revenue consisted of sales of instruments totaling $6.2 million and sales of consumables and other products totaling +$4.4 million for the year ended December 31, 2016. Average sales prices of instruments and consumables did not change materially in the year ended December 31, 2017 as compared +with the year ended December 31, 2016. The increase in product revenue of $3.5 million was primarily due to the sale of more instruments in the twelve months ended December 31, +2017 and increased sales of consumables. The installed base of Simoa instruments increased from December 31, 2016 to December 31, 2017, and as these additional instruments were used by +customers, the consumable sales increased. The increase in service and other revenue of $2.7 million was due to increased services performed in our Simoa Accelerator Laboratory; more customers +are using these services, and existing customers are using the Accelerator Laboratory more frequently. Collaboration and license revenue in the year ended December 31, 2017 consists of revenue +related to the collaboration arrangement with bioMérieux that was modified in the fourth quarter of +81 +Table of Contents +2016. +Collaboration and license revenue in the year ended December 31, 2016 consists of one-time payment of $1.8 million of revenue related a licensing arrangement executed in the fourth +quarter of 2016, and revenue related to the collaboration arrangement with bioMérieux of $0.2 million. +As +part of the modification in the fourth quarter of 2016, we received $2.0 million in additional consideration. This additional consideration along with the deferred revenue on +the date of the modification is being recognized over our estimated period of performance, which was initially determined to be 36 months. The estimated performance period is evaluated each +reporting period and continues to be consistent with the initial estimate. +Cost of Product, Service and License Revenue +Cost of product revenue increased by $1.4 million, or 23%, to $7.7 million for the year ended December 31, 2017 as compared +to $6.3 million for the year ended December 31, 2016. The increase was primarily due to increased sales of consumables and instruments. Cost of service revenue increased to +$5.1 million for the year ended December 31, 2017 from $3.2 million forthe year ended December 31, 2016. The increase was primarily due to higher utilization of the Simoa +Accelerator Laboratory, plus increased personnel costs from the build out of our field service organization. Overall cost of goods sold as a percentage of revenue slightly increased to 56.3% of total +revenue for the year ended December 31, 2017 as compared to 55.9% for the year ended December 31, 2016, primarily as a result of increased headcount in field service and accelerator +service groups. +Research and Development Expense +Research and development expense decreased slightly by $0.7 million, or 4%, to $16.3 million for the year ended +December 31, 2017 as compared to $17.0 million for the year ended December 31, 2016. The decrease was primarily due to a reduction in outside development costs related to our +Quanterix SR-X instrument for which development was completed and product launched commercially in the fourth quarter of 2017. The reduction in project costs for the Quanterix SR-X instrument offset +other increase in research and development costs as we have increased headcount in +research and development and the increased use of outside development firms as we increased our new product development efforts. +Selling, General and Administrative Expense +Selling, general and administrative expense increased by $7.2 million, or 58%, to $19.7 million for the year ended +December 31, 2017 as compared to $12.5 million for the same period in 2016. The increase was primarily due to headcount additions in various departments as we build out our organization +to support future growth, and stock compensation expense. +Interest and Other Expense, Net +Interest and other expense, net decreased by $0.5 million, to $1 million for the year ended December 31, 2017 as compared +to $1.5 million for the same period in 2016, primarily due to the amortization of debt discounts from warrants we have issued to a lender. +82 +Table of Contents +Comparison of the Years Ended December 31, 2016 and December 31, 2015 (dollars in +thousands): +Year ended +December 31, +2016 +% of +revenue +Year ended +December 31, +2015 +% of +revenue +$ +change +% +change +Product revenue +$ +10,601 +60.3 +% +$ +9,477 +77.8 +% +$ +1,124 +11.9 +% +Service and other revenue +5,012 +28.5 +% +2,515 +20.7 +% +2,497 +99.3 +% +Collaboration and license revenue +1,972 +11.2 +% +188 +1.5 +% +1,784 +948.9% +* +Total revenue +17,585 +100.0 +% +12,180 +100.0 +% +5,405 +44.4 +% +Cost of product revenue +6,299 +35.8 +% +5,661 +46.5 +% +638 +11.3 +% +Cost of service revenue +3,163 +18.0 +% +804 +6.6 +% +2,359 +293.4 +% +Cost of license revenue +375 +2.1 +% +— +0.0 +% +375 +— +Research and development +16,993 +96.7 +% +10,083 +82.8 +% +6,910 +68.5 +% +Selling, general and administrative +12,466 +70.9 +% +10,155 +83.3 +% +2,311 +22.8 +% +Total operating expenses +$ +39,296 +223.5 +% +$ +26,703 +219.2 +% +$ +12,593 +47.2 +% +Loss from operations +(21,711 +) +(123.5 +)% +(14,523 +) +(119.2 +)% +(7,188 +) +49.5 +% +Interest expense, net +(1,298 +) +(7.4 +)% +(1,040 +) +(8.6 +)% +(258 +) +24.8 +% +Other income (expense), net +(164 +) +(0.9 +)% +(380 +) +(3.1 +)% +216 +(56.8 +)% +Net loss +$ +(23,173 +) +(131.8 +)% +$ +(15,943 +) +(130.9 +)% +$ +(7,230 +) +45.4 +% +* Not +meaningful. +Revenue +Revenue increased by $5.4 million, or 44%, to $17.6 million for the year ended December 31, 2016 as compared to +$12.2 million for the year ended December 31, 2015. Product revenue consisted of sales of instruments totaling $6.2 million and consumable and assay revenue of $4.4 million +for the year ended December 31, 2016. Product revenue consisted of sales of instruments totaling $6.5 million and consumable and assay revenue of $3.0 million for the year ended +December 31, 2015. Average sales price of instruments and consumables did not change materially in the year ended December 31, 2016 as compared with the year ended December 31, +2015. The increase in product revenue of $1.1 million was primarily due to increased sales of consumables of $1.5 million due to having +an increased installed base of Simoa instruments as a result of the sale of instruments during 2016. This was partially offset by decreased revenue related to the sale of instruments during the year +ended December 31, 2016 compared to the year ended December 31, 2015 due to timing of customer orders. The increase in service and other revenue of $2.5 million was primarily due +to increased utilization of our Simoa Accelerator Laboratory, plus increased warranty revenues. The increase in collaboration and license revenue was primarily due to the execution of a license with a +diagnostic company in 2016 which resulted in the recognition of $1.8 million of revenue in 2016. +Cost of Product, Service and License Revenue +Cost of product revenue increased by $0.6 million, or 11%, to $6.3 million for the year ended December 31, 2016 as compared +to $5.7 million for the year ended December 31, 2015. The increase was primarily due to increased sales of instruments and consumables. Cost of service revenue increased from +$0.8 million for the year ended December 31, 2015 to $3.2 million for the year ended December 31, 2016. The increase was primarily due to higher utilization of our Simoa +Accelerator Laboratory and a significant increase in the staffing of our field service team. Cost of license revenue was $0.4 million for the year ended December 31, 2016 versus $0 in +the prior year due to a royalty payment that we are required to pay Tufts, a related party, as a result of the license with a diagnostic company and a modification to our bioMérieux +collaboration agreement. Overall cost of goods sold as a percentage of revenue increased to 55.9% of revenue for the year ended December 31, 2016 as +83 +Table of Contents +compared +to 53.1% in the comparable prior year period, primarily as a result of lower gross margins on service and other revenue due to the increase in staffing as noted previously. +Research and Development Expense +Research and development expense increased by $6.9 million, or 69%, to $17.0 million for the year ended December 31, 2016 +as compared to $10.1 million for the year ended December 31, 2015. The increase was primarily due to increases in salary and other compensation costs from increases in research and +development headcount and increased use of outside development firms as we increased our new product development efforts, primarily in regards to our recently launched Quanterix SR-X instrument. +Selling, General and Administrative Expense +Selling, general and administrative expense increased by $2.3 million, or 23%, to $12.5 million for the year ended +December 31, 2016 as compared to $10.2 million for the year ended December 31, 2015. The increase was primarily due to headcount additions in various departments as we build out +our organization to support future growth. +Interest and Other Expense, Net +Interest and other expense, net increased by less than $0.1 million to $1.5 million for the year ended December 31, 2016 as +compared to $1.4 million for the year ended December 31, 2015, primarily due to higher interest expense related to the amortization of debt discounts and higher average borrowings. +Liquidity and Capital Resources +Since our inception, we have incurred net losses and negative cash flows from operations. We incurred net losses of $27.0 million, +$23.2 million and $15.9 million and used $22.1 million, $17.7 million and $12.5 million of cash from our operating activities for the years ended December 31, +2017, 2016 and 2015, respectively. As of December 31, 2017, we had an accumulated deficit of $144.4 million. +As +of December, 2017, we had cash and cash equivalents of $79.7 million. In addition, our debt facility was amended in March 2017 to increase the amount of the facility by +$5 million. +Sources of Liquidity +To date, we have financed our operations principally through private placements of our convertible preferred stock, the sale of our common stock +in our IPO that was completed in December 2017, borrowings from credit facilities and revenue from our commercial operations. +Preferred Stock Financings +Prior to our IPO, we had raised approximately $107.5 million in gross proceeds through sales of our preferred stock, including the sale +of 12,420,262 shares of our Series D redeemable convertible preferred stock, or Series D Preferred Stock, in March 2016 at a purchase price of $3.67 per share for gross proceeds of +$45.6 million, and the sale of 2,113,902 shares of our Series D-1 redeemable convertible preferred stock, or Series D-1 Preferred Stock, in June 2017 at a purchase price of $4.021 +per share for gross proceeds of $8.5 million. +See +Note 7 to our consolidated financial statements for a discussion of the terms and provisions of our Series D Preferred Stock and Series D-1 Preferred Stock +issued in 2016 and 2017. All shares of preferred stock were converted to shares of common stock upon completion of the IPO. +84 +Table of Contents +Initial Public Offering +In December 2017, we completed our IPO in which we sold 4,916,480 shares of common stock at an initial public offering price of $15.00 per +share. The aggregate net proceeds received by us from the offering, net of underwriting discounts and commissions and offering expenses, were $65.6 million. +Loan Facility with Hercules +On April 14, 2014, we executed a Loan Agreement with Hercules Capital, Inc. (formerly known as Hercules Technology Growth +Capital, Inc.). The Loan Agreement provided a total debt facility of $10.0 million, which is secured by substantially all of our assets. At closing, we borrowed $5.0 million in +principal and had the ability to draw the additional $5.0 million over the period from November 1, 2014 to March 31, 2015. The interest rate on this term loan was variable based +on a calculation of 8% plus the prime rate less 5.25%, with a minimum interest rate of 8%. Interest was to be paid monthly beginning the month following the borrowing date. Principal payments were +scheduled to begin on September 1, 2015, unless we achieved certain milestones which would have extended this date to December 1, 2015 or March 1, 2016. In connection with the +execution of the Loan Agreement, we issued Hercules a warrant to purchase up to 173,428 shares of our Series C Preferred Stock at an exercise price of $3.3299 per share. +On +March 4, 2015, we executed Amendment 1 to the Loan Agreement and drew the additional $5.0 million available under the Loan Agreement at that time. The terms of the +amendment deferred principal payments to start on December 1, 2015 or March 1, 2016 if we obtained at least $10.0 million in equity financing before December 1, 2015. This +equity financing did not occur before December 1, 2015. +In +January 2016, we executed Amendment 2 to the Loan Agreement, which increased the total facility available by $5.0 million to a total of $15.0 million and further +delaying the start of principal payments to July 1, 2016. Following the Series D Preferred Stock financing in March 2016, we could have elected to further delay the start of principal +payments until January 1, 2017, however we voluntarily began paying principal on July 1, 2016. Upon signing this amendment, we drew an additional $3.0 million under the debt +facility. The remaining $2.0 million available for borrowing expired unused in 2016, decreasing the amounts available under the debt facility to $13.0 million. +In +March 2017, we signed Amendment 3 to the Loan Agreement increasing the total facility available by $5.0 million to a total of $18.0 million. Additionally, the lender is +providing an optional term loan, solely at the lender's discretion, for an incremental $5.0 million, increasing the total potential facility to $23.0 million. As of December 31, +2017, we have not drawn any of this additional facility. Principal payments were delayed to March 1, 2018 and the loan maturity date was extended to March 1, 2019. 7. The amendment did +not affect the due date of the existing end of term fees (in aggregate $0.5 million) which remain due on February 1, 2018. Upon signing Amendment 3 to the Loan Agreement, we did not draw +any of the additional amounts available under the amended debt facility and no amounts have been subsequently drawn under the facility. In connection with this amendment, we issued Hercules a warrant +to purchase up to 38,828 shares of our Series D Preferred Stock at an exercise price of $3.67 per share. +The +Loan Agreement and amendments contain end of term payments and are recorded in the debt accounts. $0.5 million of end of term payments are due in the first quarter of 2018. +The +Loan Agreement contains negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying +dividends or making investments and certain other business transactions. There are no financial covenants associated with the Loan Agreement. The obligations under the Loan Agreement are subject to +acceleration upon the occurrence of specified events of default, including a material adverse change in our business, +85 +Table of Contents +operations +or financial or other condition, which is subjective in nature. We have determined that the risk of subjective acceleration under the material adverse events clause is not probable and +therefore have classified the outstanding principal in current and long-term liabilities based on scheduled principal payments. +Debt +principal repayments, including the end of term fees, due as of December 31, 2017 are (in thousands): +Years ending December 31: +2018 +$ +5,133 +2019 +4,430 +$ +9,563 +Cash Flows +The following table presents our cash flows for each period presented (in thousands): +Year ended +December 31, +2017 +2016 +2015 +Net cash used in operating activities +$ +(22,106 +) +$ +(17,742 +) +$ +(12,517 +) +Net cash used in investing activities +(1,132 +) +(826 +) +(554 +) +Net cash provided by financing activities +73,249 +45,916 +11,704 +Net increase (decrease) in cash and cash equivalents +$ +50,011 +$ +27,348 +$ +(1,367 +) +Net Cash Used in Operating Activities +We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also +significantly influenced by our use of cash for operating expenses to support the growth of our business. We have historically experienced negative cash flows from operating activities as we have +developed our technology, expanded our business and built our infrastructure and this may continue in the future. +Net +cash used in operating activities was $22.1 million during the year ended December 31, 2017. Net cash used in operating activities primarily consisted of net loss of +$27.0 million and an increase of $2.0 million in inventory and an increase in accounts receivable of $1.7 million, primarily offset by non-cash stock compensation expense of +$2.2 million, an increase of $2.9 million in deferred revenue, an increase of $2.0 million in accrued expenses and and increase of $1 million in accounts payable. +Net +cash used in operating activities was $17.7 million during the year ended December 31, 2016. Net cash used in operating activities primarily consisted of a net loss of +$23.2 million and an increase in accounts receivable of $1.7 million, primarily offset by non-cash charges related to issuance of warrants of $2.1 million, other non-cash items +including depreciation and stock based compensation, of $1.8 million, and an increase in current liabilities of $2.3 million and an increase in deferred revenue of $0.9 million. +Net +cash used in operating activities was $12.5 million during the year ended December 31, 2015. Net cash used in operating activities primarily consisted of a net loss of +$15.9 million and an increase in accounts receivable of $1.5 million, primarily offset by non-cash items including depreciation and stock based compensation expense of +$1.8 million and increases in current liabilities of $1.8 million and deferred revenue of $0.8 million. +86 +Table of Contents +Net Cash Used in Investing Activities +Historically, our primary investing activities have consisted of capital expenditures for the purchase of capital equipment to support our +expanding infrastructure and work force. We expect to continue to incur additional costs for capital expenditures related to these efforts in future periods. +We +used $1.1 million of cash in investing activities during the year ended December 31, 2017 for purchases of capital equipment to support our infrastructure. +We +used $0.8 million of cash in investing activities during the year ended December 31, 2016 primarily for purchases of capital equipment to support our infrastructure, and +for a $0.3 million equity investment in another company. +We +used $0.6 million of cash in investing activities during the year ended December 31, 2015 for purchases of capital equipment to support our infrastructure. +Net Cash Provided by Financing Activities +Historically, we have financed our operations principally through private placements of our convertible preferred stock and borrowings from +credit facilities, the sale of shares of our common stock in our IPO and revenues from our commercial operations. +We +generated $73.2 million of cash in financing activities during the year ended December 31, 2017, which primarily was from the sale of 4,916,480 shares of common stock in +our IPO in December 2017 for net proceeds of $65.6 million, and the sale of 2,113,902 shares of our Series D-1 Preferred Stock in June 2017 for net proceeds of $8.4 million, which +was partially offset by payments of outstanding debt. +We +generated $45.9 million of cash from financing activities during the year ended December 31, 2016, which was primarily from the sale of our Series D Preferred +Stock in March 2016 for net proceeds of $45.4 million. +We +generated $11.7 million of cash from financing activities during the year ended December 31, 2015, which was primarily from the sale of preferred stock of +$7.0 million plus an increase in long-term debt of $4.7 million, net of principal payments. +Capital Resources +We have not achieved profitability on a quarterly or annual basis since our inception, and we expect to continue to incur net losses in the +future. We also expect that our operating expenses will increase as we continue to increase our marketing efforts to drive adoption of our commercial products. Additionally, as a public company, we +have incurred and will continue to incur significant audit, legal and other expenses that we did not incur as a private company. Our liquidity requirements have historically consisted, and we expect +that they will continue to consist, of sales and marketing expenses, research and development expenses, working capital, debt service and general corporate expenses. +We +believe cash generated from commercial sales, our current cash and cash equivalents, and interest income we earn on these balances will be sufficient to meet our anticipated operating +cash requirements for at least the next 24 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our sales and marketing +activities and grow our customer base. Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and +development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of +factors, including the factors discussed in Item 1A, "Risk Factors" of this Annual Report on Form 10-K. We have based our +87 +Table of Contents +estimates +on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, +including: +• market acceptance of our products, including the Quanterix SR-X that we launched in the fourth quarter of 2017; +• the cost and timing of establishing additional sales, marketing and distribution capabilities; +• the cost of our research and development activities; +• the success of our existing collaborations and our ability to enter into additional collaborations in the future; +• the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +• the effect of competing technological and market developments. +We +cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our +stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that +we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to +relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, we may have to delay +development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. +Off-Balance Sheet Arrangements +We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC +rules. +Contractual Obligations, Commitments and Contingencies +The following table summarizes our contractual obligations as of December 31, 2017 (in thousands): +Payments due by period +(in thousands) +Less than +1 Year +1 to 3 +years +3 to 5 +years +More than +5 years +Total +Contractual Obligations:(1) +Operating lease obligations +$ +1,155 +$ +1,801 +$ +0 +$ +0 +$ +2,956 +Principal payments and end of term fees on the term loan +$ +5,133 +$ +4,430 +$ +0 +$ +0 +$ +9,563 +Total +$ +6,288 +$ +6,231 +$ +0 +$ +0 +$ +12,519 +(1) See +"—Development and Supply Agreement" for additional contractual obligations. +Our +operating lease obligations primarily relate to leases for our current headquarters in Lexington, Massachusetts. The table above does not include lease obligations we assumed in our +88 +Table of Contents +acquition +of Aushon Biosystems, Inc. in January 2018 for facilities in Billerica, Massachusetts. Including these lease obligations, our contractual obligations as of December 31, 2017 +were (in thousands): +Payments due by period +(in thousands) +Less than +1 Year +1 to 3 +years +3 to 5 +years +More than +5 years +Total +Contractual Obligations:(1) +Operating lease obligations +$ +1,353 +$ +2,248 +$ +0 +$ +0 +$ +3,601 +Principal payments and end of term fees on the term loan +$ +5,133 +$ +4,430 +$ +0 +$ +0 +$ +9,563 +Total +$ +6,486 +$ +6,678 +$ +0 +$ +0 +$ +13,164 +We +also have ongoing obligations related to license agreements which contain immaterial minimum annual payments that are credited against the actual royalty expense. +Purchase +orders or contracts for the purchase of supplies and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such +purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current +procurement or development needs and are fulfilled by our vendors within short time horizons. +Development and Supply Agreement +We do not have significant agreements for the purchase of supplies or other goods specifying minimum quantities or set prices that exceed our +expected requirements for the next three to six months, with the exception of the agreement with STRATEC, who manufactures our Simoa HD-1 Analyzer system. In 2013, we entered into a supply agreement, +or the Supply Agreement, with STRATEC which requires us to purchase a minimum number of commercial units over a seven-year period ending in May 2021. We could be obligated to pay a fee based on the +shortfall of commercial units purchased compared to the required number. Based on the commercial units purchased as of December 31, 2017, assuming no additional commercial units were purchased +thereafter but prior to May 2021, this fee would equal $11.9 million. The amount we could be obligated to pay under the +minimum purchase commitment is reduced as each commercial unit is purchased. We believe that we will purchase sufficient units to meet the requirements of the minimum purchase commitment and, +therefore, have not accrued for any of the minimum purchase commitment. +Also, +if we terminate the Supply Agreement under certain circumstances and do not purchase up to a required number of commercial units, we would be required to issue warrants to purchase +93,341 shares of common stock at $0.003214 per share. We believe that we will not issue such warrant and therefore have not recorded any amounts related to the potential equity consideration. +In +August 2011, we entered into a Strategic Development Services and Equity Participation Agreement, or the Development Agreement, with STRATEC, pursuant to which STRATEC undertook the +development of the Simoa HD-1 Analyzer for manufacture and sale to us or a partner whom we designate. During the year ended December 31, 2016, the Development Agreement was amended to modify +the deliverables related to the final milestone, to agree on instrument design changes to be implemented, and to reduce the minimum purchase commitment in the Supply Agreement. Additionally, the +parties agreed on additional development services for a total fee of $1.5 million, which is payable when development is completed. This amount includes the final milestone payment that was due +under the terms of the original agreement. +89 +Table of Contents +Backlog +We generally expect to ship all orders received in a given period and as a result our backlog at the end of any period is typically +insignificant. +Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our +market risk exposure is primarily a result +of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes. +Foreign Currency Exchange Risk +As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign +currency exchange rates. Historically, the substantial majority of our revenue has been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations +are located, which is primarily in the United States, with a portion of expenses incurred in Canada, Europe, Japan and China. Our results of operations and cash flows are, therefore, subject to +fluctuations due to changes in foreign currency exchange rates. Fluctuations in currency exchange rates could harm our business in the future. The effect of a 10% adverse change in exchange rates on +foreign denominated cash, receivables and payables as of December 31, 2017 would not have been material. +To +date, we have not entered into any material foreign currency hedging contracts although we may do so in the future. +Interest Rate Sensitivity +We had cash and cash equivalents of $79.7 million as of December 31, 2017. These amounts were held primarily in cash on deposit +with banks. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in +interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had decreased by 10% during the periods presented, our interest income would not +have been materially affected. +As +of December 31, 2017, the principal amount of our term debt outstanding with Hercules was $9.0 million. If overall interest rates had increased by 10% during the periods +presented, our interest expense would have increased by approximately $0.8 million on an annualized basis. +Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K beginning on +page F-1. +Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +Item 9A. CONTROLS AND PROCEDURES +(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial +officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this +90 +Table of Contents +Form 10-K, +have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we +file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our +management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. +(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, +identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to +materially affect, our internal control over financial reporting. +(c) Management's Annual Report on Internal Control Over Financial Reporting. This Annual Report on +Form 10-K does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm +due to a transition period established by rules of the SEC for newly public companies. +Item 9B. OTHER INFORMATION +Not applicable. +PART III +Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by this Item 10 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2018 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 11. EXECUTIVE COMPENSATION +The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2018 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2018 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2018 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2018 Annual Meeting of Stockholders and is incorporated herein by reference. +91 +Table of Contents +PART IV +Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES +(1) Financial Statements +The +consolidated financial statements are included on pages F-1 through F-48 attached hereto and are filed as part of this Annual Report on Form 10-K. +(2) Financial Statement Schedules +Schedules +have been omitted since they are either not required or not applicable or the information is otherwise included herein. +(3) Exhibits +The following is a list of exhibits filed as part of this Annual Report on Form 10-K +Exhibit +Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +3.1 +Amended and Restated Certificate of Incorporation +8-K +12/15/17 +001-38319 +3.2 +Restated Bylaws +8-K +12/15/17 +001-38319 +4.1 +Form of Common Stock Certificate +S-1 +11/9/17 +333-221475 +4.2 +Form of Warrant to Purchase Series A-2 Preferred Stock of the Registrant issued to Silicon Valley Bank +S-1 +11/9/17 +333-221475 +4.3 +Form of Warrant to Purchase Series C Preferred Stock of the Registrant +S-1 +11/9/17 +333-221475 +4.4 +Warrant Agreement, dated as of April 14, 2014, by and between the Registrant and Hercules Capital, Inc. (formerly +known as Hercules Technology Group Capital, Inc.) +S-1 +11/9/17 +333-221475 +4.5 +Warrant Agreement, dated as of January 29, 2016, by and between the Registrant and Hercules Capital, Inc. (formerly +known as Hercules Technology Group Capital, Inc.) +S-1 +11/9/17 +333-221475 +4.6 +Warrant Agreement, dated as of March 31, 2017, by and between the Registrant and Hercules Capital, Inc. (formerly +known as Hercules Technology Group Capital, Inc.) +S-1 +11/9/17 +333-221475 +4.7 +Fourth Amended and Restated Stockholders Agreement, dated as of June 2, 2017, by and among the Registrant and the +stockholders named therein +S-1 +11/9/17 +333-221475 +92 +Table of Contents +Exhibit +Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +4.8 +Fourth Amended and Restated Registration Rights Agreement, dated as of June 2, 2017, by and among the Registrant and the +investors named therein +S-1 +11/9/17 +333-221475 +4.9 +Warrant Agreement, dated as of January 30, 2018, by and between the Registrant and Azul Divinal Consultoria Unipessoal LDA +X +10.1.1 ++ +2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.1.2 ++ +Form of Incentive Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.1.3 ++ +Form of Non-qualified Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.1.4 ++ +Form of Restricted Stock Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.2.1 ++ +2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +10.2.2 ++ +Form of Stock Option Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +10.2.3 ++ +Form of Restricted Stock Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +10.2.4 ++ +Form of Restricted Stock Unit Agreement under the 2017 Employee, Director and Consultant Equity Incentive +Plan +S-1/A +11/27/17 +333-221475 +10.3 ++ +Employment Agreement, dated January 1, 2015, by and between the Registrant and E. Kevin Hrusovsky +S-1 +11/9/17 +333-221475 +10.4 ++ +Letter Agreement, dated April 8, 2017, by and between the Registrant and Joseph Driscoll +S-1 +11/9/17 +333-221475 +10.5 ++ +Letter Agreement, dated December 1, 2011, by and between the Registrant and Ernest Orticerio +S-1 +11/9/17 +333-221475 +10.6 ++ +Letter Agreement, dated April 6, 2016, by and between the Registrant and Bruce Bal +S-1 +11/9/17 +333-221475 +93 +Table of Contents +Exhibit +Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.7 ++ +Letter Agreement, dated August 8, 2014, by and between the Registrant and Mark T. Roskey, Ph.D. +S-1 +11/9/17 +333-221475 +10.8 ++ +Letter Agreement, dated March 20, 2017, by and between the Registrant and Marijn Dekkers, Ph.D. +S-1 +11/9/17 +333-221475 +10.9 ++ +Letter Agreement, dated August 7, 2013, by and between the Registrant and Paul M. Meister +S-1 +11/9/17 +333-221475 +10.10 +Lease Agreement, dated as of November 22, 2011, between the Registrant and King 113 Hartwell LLC +S-1 +11/9/17 +333-221475 +10.11 +First Amendment to lease dated August 22, 2014, by and between the Registrant and King 113 +Hartwell LLC +S-1 +11/9/17 +333-221475 +10.12.1 +* +Exclusive License Agreement, dated June 18, 2007, between the Registrant and Tufts University, as amended on +April 29, 2013 +S-1 +11/9/17 +333-221475 +10.12.2 +* +Second Amendment, dated August 22, 2017, to the Exclusive License Agreement between the Registrant and Tufts +University +S-1 +11/9/17 +333-221475 +10.13 +* +Amended and Restated License Agreement, dated December 22, 2016, between the Registrant and bioMérieux, +S.A. +S-1 +11/9/17 +333-221475 +10.14.1 +* +Supply and Manufacturing Agreement, dated September 14, 2011, between the Registrant and STRATEC Biomedical +AG +S-1 +11/9/17 +333-221475 +10.14.2 +First Amendment to Supply and Manufacturing Agreement, dated October 17, 2013, between the Registrant and STRATEC +Biomedical AG +S-1 +11/9/17 +333-221475 +10.15.1 +* +STRATEC Development Services and Equity Participation Agreement, dated August 15, 2011, between the Registrant and +STRATEC Biomedical Systems AG +S-1 +11/9/17 +333-221475 +94 +Table of Contents +Exhibit +Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.15.2 +* +First Amendment to STRATEC Development Services and Equity Participation Agreement and Second Amendment to Supply and +Manufacturing Agreement, dated November 18, 2016, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/17 +333-221475 +10.16 +* +Manufacturing Services Agreement, dated November 23, 2016, between the Registrant and Paramit +Corporation +S-1 +11/9/17 +333-221475 +10.17.1 +Loan and Security Agreement, dated April 14, 2014, by and between the Registrant and Hercules Capital, Inc. +(formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.17.2 +Amendment No. 1 to Loan and Security Agreement, dated March 4, 2015, by and between the Registrant and Hercules +Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.17.3 +Amendment No. 2 to Loan and Security Agreement, dated January 29, 2016, by and between the Registrant and +Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.17.4 +Amendment No. 3 to Loan and Security Agreement, dated March 31, 2017, by and between the Registrant and Hercules +Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.18 ++ +Form of Indemnification Agreement +S-1/A +11/27/17 +333-221475 +10.19 ++ +Letter Agreement, dated January 1, 2014, by and between the Registrant and David R. Walt, Ph.D. +S-1 +11/9/17 +333-221475 +10.20.1 +Lease, dated September 24, 2007, between RAR2 Boston Industrial QRS-MA, Inc. and Aushon Biosystems, Inc. +X +10.20.2 +First Amendment, dated October 28, 2009, to Lease, dated September 24, 2007, between RAR2 Boston Industrial QRS-MA, Inc. and Aushon Biosystems, Inc. +X +95 +Table of Contents +Exhibit +Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.20.3 +Second Amendment, dated September 23, 2015, to Lease, dated September 24, 2007, between RAR2 Boston Industrial QRS-MA, Inc. and Aushon Biosystems, Inc. +X +21.1 +Subsidiaries of Registrant +X +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +32.1 +Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +X ++ Management +contract or compensatory plan or arrangement. +* Confidential +treatment has been granted for portions of this Exhibit. Redacted portions have been filed separately with the Securities and Exchange Commission. +Item 16. FORM 10-K SUMMARY +Not applicable. +96 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to +be signed on its behalf by the undersigned, thereunto duly authorized. +QUANTERIX CORPORATION +Date: March 19, 2018 +By: +/s/ E. KEVIN HRUSOVSKY +E. Kevin Hrusovsky +Chairman, President and Chief Executive Officer +Pursuant +to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities +indicated below and on the dates indicated. +Signature +Title +Date +/s/ E. KEVIN HRUSOVSKY +E. Kevin Hrusovsky +Chairman, President and Chief Executive Officer and Director (principal executive officer) +March 19, 2018 +/s/ JOSEPH DRISCOLL +Joseph Driscoll +Chief Financial Officer (principal financial officer and principal accounting officer) +March 19, 2018 +/s/ DOUGLAS G. COLE, M.D. +Douglas G. Cole, M.D. +Director +March 19, 2018 +/s/ JOHN M. CONNOLLY +John M. Connolly +Director +March 19, 2018 +/s/ KEITH L. CRANDELL +Keith L. Crandell +Director +March 19, 2018 +/s/ MARIJN DEKKERS, PH.D. +Marijn Dekkers, Ph.D. +Director +March 19, 2018 +/s/ MARTIN D. MADAUS, PH. D. +Martin D. Madaus, Ph. D. +Director +March 19, 2018 +97 +Table of Contents +Signature +Title +Date +/s/ PAUL M. MEISTER +Paul M. Meister +Director +March 19, 2018 +/s/ DAVID R. WALT, PH.D. +David R. Walt, Ph.D. +Director +March 19, 2018 +98 +Table of Contents +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +QUANTERIX CORPORATION +Years ended December 31, 2017, 2016 and 2015 +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations and Comprehensive Loss +F-4 +Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity +F-5 +Consolidated Statements of Cash Flows +F-6 +Notes to Consolidated Financial Statements +F-7 +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To +the Stockholders and the Board of Directors of Quanterix Corporation +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of Quanterix Corporation ("the Company") as of December 31, 2017 and 2016, +the consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' (deficit) equity, and cash flows for each of the three years in the period +ended December 31, 2017, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in +all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended +December 31, 2017, in conformity with U.S. generally accepted accounting principles. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's +financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with +respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We +conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the +financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over +financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness +of the Company's internal control over financial reporting. Accordingly, we express no such opinion. +Our +audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond +to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting +principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our +opinion. +/s/ Ernst & Young LLP +We +have served as the Company's auditor since 2008. +Boston, +Massachusetts +March 19, +2018 +F-2 +Table of Contents +Quanterix Corporation +Consolidated Balance Sheets +(amounts in thousands, except share and per share data) +December 31, +2017 +2016 +Assets +Current assets: +Cash and cash equivalents +$ +79,682 +$ +29,671 +Accounts receivable (including $123 and $124 from related parties as of December 31, 2017 and 2016, respectively) +5,599 +3,917 +Inventory +3,571 +1,528 +Prepaid expenses and other current assets +400 +127 +Total current assets +89,252 +35,243 +Property and equipment, net +1,874 +1,223 +Other non-current assets +653 +651 +Total assets +$ +91,779 +$ +37,117 +Liabilities, redeemable convertible preferred stock and stockholders' (deficit) equity +Current liabilities: +Accounts payable (including $0 and $8 to related parties as of December 31, 2017 and 2016, respectively) +$ +3,552 +$ +2,549 +Accrued compensation and benefits +2,624 +1,693 +Other accrued expenses (including $170 and $516 to related parties as of December 31, 2017 and 2016, respectively) +3,560 +2,386 +Deferred revenue (including $1,182 and $1,204, with related parties as of December 31, 2017 and 2016, respectively) +4,942 +3,428 +Current portion of long term debt +5,036 +899 +Total current liabilities +19,714 +10,955 +Preferred stock warrant liability +— +2,802 +Deferred revenue, net of current portion (including $1,074 and $149 with related parties as of December 31, 2017 and 2016, respectively) +1,709 +328 +Long term debt, net of current portion +4,346 +9,344 +Other non-current liabilities +144 +212 +Total liabilities +$ +25,913 +$ +23,641 +Commitments and contingencies ( Note 9 ) +Redeemable convertible preferred stock: +Series A redeemable convertible preferred stock, $0.001 par value: authorized—no shares and 16,464,442 shares as of December 31, 2017 and +2016, respectively; issued and outstanding—no shares and 15,700,001 shares as of December 31, 2017 and 2016, respectively +— +28,979 +Series B redeemable convertible preferred stock, $0.001 par value: authorized—no shares and 6,186,594 shares as of December 31, 2017 and +2016, respectively; issued and outstanding—no shares and 6,021,636 shares as of December 31, 2017 and 2016, respectively +— +17,459 +Series C redeemable convertible preferred stock, $0.001 par value: authorized—no shares and 9,791,421 shares as of December 31, 2017 and +2016; issued and outstanding—no shares and 8,605,944 shares as of December 31, 2017 and 2016, respectively +— +36,678 +Series D redeemable convertible preferred stock, $0.001 par value: authorized—no shares and 12,420,262 shares as of December 31, 2017 and +2016, respectively; issued and outstanding—no shares and 12,420,262 shares as of December 31, 2017 and 2016, respectively +— +45,469 +Total redeemable convertible preferred stock +— +128,585 +Stockholders' (deficit) equity: +Preferred stock, $0.001 par value: +Authorized—5,000,000 and no shares as of December 31, 2017 and 2016, respectively; no shares outstanding as of December 31, 2017 and 2016, +respectively +— +— +Common stock, $0.001 par value: +Authorized—120,000,000 and 70,000,000 shares as of December 31, 2017 and 2016, respectively; issued and outstanding—21,707,041 and +2,315,496 shares as of December 31, 2017 and 2016, respectively +22 +2 +Additional paid-in capital +210,196 +— +Accumulated deficit +(144,352 +) +(115,111 +) +Total stockholders' (deficit) equity +65,866 +(115,109 +) +Total liabilities, redeemable convertible preferred stock and stockholders' (deficit) equity +$ +91,779 +$ +37,117 +See accompanying notes. +F-3 +Table of Contents +Quanterix Corporation +Consolidated Statements of Operations and Comprehensive Loss +(amounts in thousands, except share and per share data) +Year ended December 31, +2017 +2016 +2015 +Product revenue (including related party activity of $339, $509, and $527 for the years ended December 31, 2017, 2016 and 2015, respectively) +$ +14,124 +$ +10,601 +$ +9,477 +Service and other revenue (including related party activity of $165, $107 and $93 for the years ended December 31, 2017, 2016, and 2015, +respectively) +7,676 +5,012 +2,515 +Collaboration and license revenue (including related party activity of $1,074, $172 and $188 for the years ended December 31, 2017, 2016, and 2015, +respectively) +1,074 +1,972 +188 +Total revenue +22,874 +17,585 +12,180 +Operating expenses: +Cost of product revenue (including related party activity of $235, $322 and $415 for the years ended December 31, 2017, 2016 and 2015, +respectively) +7,742 +6,299 +5,661 +Cost of services and other revenue +5,145 +3,163 +804 +Cost of license revenue, related party +— +375 +— +Research and development +16,304 +16,993 +10,083 +Selling, general and administrative +19,688 +12,466 +10,155 +Total operating expenses +48,879 +39,296 +26,703 +Loss from operations +(26,005 +) +(21,711 +) +(14,523 +) +Interest expense, net +(951 +) +(1,298 +) +(1,040 +) +Other (expense) income, net +(63 +) +(164 +) +(380 +) +Net loss +$ +(27,019 +) +$ +(23,173 +) +$ +(15,943 +) +Reconciliation of net loss to net loss attributable to common stockholders: +Net loss +$ +(27,019 +) +$ +(23,173 +) +$ +(15,943 +) +Accretion of preferred stock to redemption value +(4,110 +) +(4,437 +) +(4,355 +) +Accrued dividends on preferred stock +(59 +) +(8 +) +— +Net loss attributable to common stockholders +$ +(31,188 +) +$ +(27,618 +) +$ +(20,298 +) +Net loss per share attributable to common stockholders, basic and diluted +$ +(8.30 +) +$ +(12.89 +) +$ +(11.19 +) +Weighted-average common shares outstanding, basic and diluted +3,756,954 +2,142,840 +1,813,203 +See accompanying notes. +F-4 +Table of Contents +Quanterix Corporation +Year ended December 31, 2017, 2016 and 2015 +Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity +Series A +redeemable +convertible +preferred stock +Series B +redeemable +convertible +preferred stock +Series C +redeemable +convertible +preferred stock +Series D +redeemable +convertible +preferred stock +Common stock +Total +stockholders' +(deficit) +equity +Additional +paid-in +capital +Accumulated +(deficit) +Shares +Value +Shares +Value +Shares +Value +Shares +Value +Shares +Value +Balance at December 31, 2014 +14,400,001 +$ +22,692 +5,624,106 +$ +14,266 +6,503,780 +$ +25,132 +— +$ +— +1,705,541 +$ +2 +— +$ +(69,491 +) +$ +(69,489 +) +Issuance of Series C preferred stock, net of issuance costs +— +— +— +— +2,102,164 +7,000 +— +— +— +— +— +— +— +Exercise of common stock options +— +— +— +— +— +— +— +— +35,348 +— +43 +— +43 +Vesting of restricted stock +— +— +— +— +— +— +— +— +236,103 +— +— +— +— +Accretion of preferred stock to redemption value +— +1,206 +— +912 +— +2,237 +— +— +— +— +(1,147 +) +(3,208 +) +(4,355 +) +Stock-based compensation expense +— +— +— +— +— +— +— +— +— +— +1,104 +— +1,104 +Net loss +— +— +— +— +— +— +— +— +— +— +— +(15,943 +) +(15,943 +) +Balance at December 31, 2015 +14,400,001 +$ +23,898 +5,624,106 +$ +15,178 +8,605,944 +$ +34,369 +— +$ +— +1,976,992 +$ +2 +$ +— +$ +(88,642 +) +$ +(88,640 +) +Issuance of Series D preferred stock, net of issuance costs +— +— +— +— +— +— +12,420,262 +45,428 +— +— +— +— +— +Exercise of preferred stock warrants +1,300,000 +3,901 +397,530 +1,374 +— +— +— +— +— +— +— +— +— +Exercise of common stock options +— +— +— +— +— +— +— +— +90,883 +— +213 +— +213 +Vesting of restricted stock +— +— +— +— +— +— +— +— +247,621 +— +— +— +— +Accretion of preferred stock to redemption value +— +1,180 +— +907 +— +2,309 +— +41 +— +— +(1,141 +) +(3,296 +) +(4,437 +) +Stock-based compensation expense +— +— +— +— +— +— +— +— +— +— +928 +— +928 +Net loss +— +— +— +— +— +— +— +— +— +— +— +(23,173 +) +(23,173 +) +Balance at December 31, 2016 +15,700,001 +$ +28,979 +6,021,636 +$ +17,459 +8,605,944 +$ +36,678 +12,420,262 +$ +45,469 +2,315,496 +$ +2 +$ +— +$ +(115,111 +) +$ +(115,109 +) +Issuance of Series D-1 preferred stock, net of issuance costs +— +— +— +— +— +— +2,113,902 +8,423 +— +— +— +— +— +Exercise of preferred stock warrants +700,000 +2,078 +— +— +31,283 +138 +— +— +— +— +— +— +Exercise of common stock options and vesting of restricted stock +— +— +— +— +— +— +— +— +289,321 +— +204 +— +204 +Cumulative effect of adoption of ASU No. 2016-09 +— +— +— +— +— +— +— +— +— +— +141 +(141 +) +— +Accretion of preferred stock to redemption value +— +1,080 +— +840 +— +2,140 +— +50 +— +— +(2,029 +) +(2,081 +) +(4,110 +) +Conversion of preferred stock into common stock +(16,400,001 +) +(32,137 +) +(6,021,636 +) +(18,299 +) +(8,637,227 +) +(38,956 +) +(14,534,164 +) +(53,942 +) +14,185,744 +15 +143,319 +— +143,334 +Warrant liability reclassified to equity upon IPO +— +— +— +— +— +— +— +— +— +— +823 +— +823 +Issuance of common stock in initial public offering, net of $8,173 in offering costs +— +— +— +— +— +— +— +— +4,916,480 +5 +65,570 +— +65,575 +Stock-based compensation expense +— +— +— +— +— +— +— +— +— +— +2,168 +— +2,168 +Net loss +— +— +— +— +— +— +— +— +— +— +— +(27,019 +) +(27,019 +) +Balance at December 31, 2017 +— +$ +— +— +$ +— +— +$ +— +— +$ +— +21,707,041 +$ +22 +$ +210,196 +$ +(144,352 +) +$ +65,866 +See +accompanying notes. +F-5 +Table of Contents +Quanterix Corporation +Consolidated Statements of Cash Flows +(amounts in thousands) +Year ended +December 31, +2017 +2016 +2015 +Operating activities +Net loss +$ +(27,019 +) +$ +(23,173 +) +$ +(15,943 +) +Adjustments to reconcile net loss to net cash used in operating activities: +Depreciation expense +482 +444 +425 +Stock-based compensation expense +2,168 +928 +1,104 +Non-cash interest expense +238 +388 +306 +Gain on disposal of fixed assets +— +11 +— +Non-cash research and development expense for issuance of warrants to a vendor +— +2,078 +— +Change in fair value of preferred stock warrants +90 +307 +598 +Changes in operating assets and liabilities: +Accounts receivable +(1,682 +) +(1,655 +) +(1,467 +) +Restricted cash and deposits +— +200 +(1 +) +Prepaid expenses and other assets +(273 +) +6 +65 +Inventory +(2,043 +) +(526 +) +(254 +) +Accounts payable +1,003 +1,131 +542 +Accrued compensation and benefits, other accrued expenses and other liabilities +2,035 +1,200 +1,302 +Deferred revenue +2,895 +919 +806 +Net cash used in operating activities +(22,106 +) +(17,742 +) +(12,517 +) +Investing activities +Purchases of property and equipment +(1,132 +) +(526 +) +(597 +) +Investment in equity securities +— +(300 +) +— +Proceeds from sale of property and equipment +— +— +43 +Net cash used in investing activities +(1,132 +) +(826 +) +(554 +) +Financing activities +Proceeds from sale of common stock, net of issuance costs +65,575 +— +— +Proceeds from sale of preferred stock, net of issuance costs +8,423 +45,428 +7,000 +Proceeds from exercise of stock warrants +29 +18 +— +Proceeds from stock options exercised +202 +213 +43 +Proceeds from the issuance of notes payable and warrants, net of issuance costs +(59 +) +2,954 +5,000 +Payments on notes payable +(921 +) +(2,697 +) +(339 +) +Net cash provided by financing activities +73,249 +45,916 +11,704 +Net increase (decrease) in cash and cash equivalents +50,011 +27,348 +(1,367 +) +Cash and cash equivalents at beginning of year +29,671 +2,323 +3,690 +Cash and cash equivalents at end of year +$ +79,682 +$ +29,671 +$ +2,323 +Supplemental cash flow information +Accretion of redeemable convertible preferred stock to redemption value +$ +4,110 +$ +4,437 +$ +4,355 +Cash paid for interest +$ +743 +$ +945 +$ +702 +Warrants issued to lenders +$ +119 +$ +128 +$ +87 +Purchases of property and equipment included in accounts payable +$ +74 +$ +72 +$ +— +Fair value of preferred stock warrants exercised and reclassified as shares of preferred stock +$ +2,187 +$ +5,257 +$ +— +See accompanying notes. +F-6 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements +1. Organization and operations +Quanterix Corporation (the Company) is a life sciences company that has developed a next generation, ultra-sensitive digital immunoassay platform that advances precision health for life +sciences research and diagnostics. The Company's platform enables customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, +are undetectable using conventional, analog immunoassay technologies. It also allows researchers to define and validate the function of novel protein biomarkers that are only present in very low +concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide the Company's customers with insight into the role of protein biomarkers in human +health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the +continuum between health and disease. The Company is currently focusing its platform on protein detection and is also developing its Simoa technology to detect nucleic acids in biological samples. +The +Company currently markets the Simoa HD-1 Analyzer, a fully automated immunoassay platform with multiplexing and custom assay capability, and related assay test kits and consumable +materials. The Company launched a second immunoassay platform to early adopters in the fourth quarter of 2017 and will launch commercially in the first quarter of 2018 with a more compact footprint +than the Simoa HD-1 Analyzer and less automation designed for lower volume requirements while still allowing multiplexing and custom assay capability. The Company also performs research services on +behalf of customers to apply the Simoa technology to specific customer needs. The Company's primary customers are in the research use only market which includes academic and governmental research +institutions, the research and development laboratories of pharmaceutical manufacturers, contract research organizations, and specialty research laboratories performing lab developed tests. +Initial Public Offering +In December 2017, the Company completed its initial public offering (IPO) in which the Company sold 4,916,480 shares of its common stock at the +initial public offering price of $15.00 per share. The Company's common stock began trading on The Nasdaq Global Market on December 7, 2017. The aggregate net proceeds received by us from the +IPO, net of underwriting discounts and commissions and offering expenses, was $65.6 million. Immediately prior to the completion of the IPO, all then outstanding shares of our convertible +preferred stock were converted into 14,185,744 shares of common stock. The related carrying value of shares of preferred stock, notes and warrants in the aggregate amount of $143.3 million was +reclassified as common stock and additional paid-in capital. Additionally, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, +effective December 11, 2017 to, among other things, change the authorized number of shares of common stock to 120,000,000 and the authorized number of shares of preferred stock to 5,000,000. +Liquidity +The Company has had recurring losses from operations since inception and has an accumulated deficit of $144.4 million at +December 31, 2017 and the Company incurred a net loss of $27.0 million, $23.2 million, and $15.9 million for the years ended December 31, 2017, 2016, and 2015, +respectively. Prior to the IPO the Company had funded its operations principally from issuances of preferred stock, debt financings, grants, product and service sales and development and license +agreements. At December 31, 2017, the Company had $79.7 million of unrestricted cash and cash equivalents. The Company expects the current cash balance will be sufficient to fund +operations for a period of at least +F-7 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +1. Organization and operations (Continued) +one +year from the date the consolidated financial statements are issued. Prior to achieving profitability, the Company projects that it will not need additional funding. There can be no assurances, +however, that no additional funding will be required or that additional funding will be available on terms acceptable to the Company, or at all. +2. Significant accounting policies +The following is a summary of significant accounting policies followed in the preparation of these financial statements. +Reverse Stock Split +On December 4, 2017 the Company effected a reverse stock split at a ratio of 1-for-3.214 of its common stock. The shares of common stock +subject to then outstanding stock options were adjusted accordingly to reflect the reverse stock split. +All +common stock and related per share amounts presented in these financial statements and related notes have been retroactively adjusted to reflect the 1-for-3.214 reverse stock split. +Principles of consolidation +The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United +States of America (U.S. GAAP) and include the accounts of Quanterix Corporation and its wholly-owned subsidiary. All material intercompany transactions and balances have been eliminated in +consolidation. +Use of estimates +The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions +that affect the amounts reported in the consolidated financial statements and accompanying notes. In making those estimates and assumptions, the Company bases its estimates on historical experience +and on various other assumptions believed to be reasonable. The Company's significant estimates included in the preparation of the consolidated financial statements are related to revenue recognition, +fair value of equity instruments, valuation allowances recorded against deferred tax assets, and stock-based compensation. Actual results could differ from those estimates. +Revenue recognition +The Company recognizes revenue when (1) persuasive evidence of an arrangement exists, (2) shipment and installation, if +applicable, has occurred or services have been rendered, (3) the price to the customer is fixed or determinable and (4) collection of the related receivable is reasonably assured. The +Company primarily generates revenue from the sale of products and delivery of services, as well as under license and collaboration agreements. The Company's product revenue includes the sale of +instruments as well as assay kits and consumables which are used to perform tests on the instrument. The Company's service revenue is generated from services performed in the Company's Simoa +Accelerator Lab under contracts to perform research services on behalf of customers and maintenance and support services. +F-8 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +Product revenue +Revenue for instrument sales is recognized upon installation at the customer's location or upon transfer of title to the customer when +installation is not required, which is generally the case with sales to distributors. In sales to end-customers, the Company provides the installation service and often payment is tied to the +completion of the installation service. When installation is required, the Company accounts for the instrument and installation service as one unit of accounting and recognizes revenue when +installation is completed, assuming all other revenue recognition criteria are met. Instrument transactions often have multiple elements, as discussed below. Included with the purchase of an +instrument is a one-year assurance type product warranty assuring that the instrument is free of material defects and will function according to specifications. In addition, the sale of an instrument +includes an implied warranty which is promised to the customer during the pre-sales process, at the time that the sales quote is issued to the customer. The implied warranty is provided over the same +one-year period as the standard warranty. The services included in the implied warranty are the same as those included in the extended service contracts, and include two bi-annual preventative +maintenance service visits, minor hardware updates and software upgrades, additional training and troubleshooting which is beyond the scope of the standard product warranty. The implied warranty has +been identified by the Company as a separate deliverable and unit of accounting. Consideration allocated to the implied one year service type warranty is recognized over the one year period of +performance as service and other revenue as described below. Consideration allocated to any other elements is recognized as the goods are delivered or the services are performed. +Service and other revenue +Service revenue includes revenue from the implied one-year service type warranty obligation, revenue from extended service contracts, research +services performed on behalf of a customer in the Company's Simoa Accelerator Lab, and other services that may be performed. Revenue for the implied one-year service type warranty is initially +deferred at the time of instrument revenue recognition and is recognized ratably over a 12-month period starting on the date of instrument installation. Revenue for extended warranty contracts is +recognized ratably over the service period. Revenue for research and development services and other services is generally recognized based on proportional performance of the contract, when the +Company's ability to complete project requirements is reasonably assured. Most of these services are completed in a short period of time +from the receipt of the customer's order. When significant risk exists in the Company's ability to fulfill project requirements, revenue is recognized upon completion of the contract. +Collaboration and license revenue +Collaboration and license revenue relates to the Joint Development and License Agreement (JDLA) with bioMérieux SA +(bioMérieux) as amended and restated in December 2016 by the Amended and Restated License Agreement (the 2016 Amendment) and the agreements with a diagnostics company. Refer to +Note 11 for a description of these arrangements and the Company's revenue recognition policies for these agreements. +F-9 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +Multiple element arrangements +Many of our instrument sales involve the delivery of multiple products and services. The elements of an instrument sale typically include the +instrument installation (when required), an implied one year service type warranty, and in some cases the Company may also sell assays, consumables, or other services. Revenue recognition for +contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered +item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a +stand-alone basis. +The +consideration received is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria are applied to +each of the separate units. The Company determines the estimated selling price for deliverables within the arrangement using vendor-specific objective evidence (VSOE) of selling price, if available. +If VSOE is not available, the Company considers if third-party evidence is available. If third-party evidence of selling price or VSOE is not available, the Company uses its best estimate of selling +price for the deliverable. +In +order to establish VSOE of selling price, the Company must regularly sell the product or service on a standalone basis with a substantial majority priced within a relatively narrow +range. If there are not a sufficient number of standalone sales such that VSOE of selling price cannot be determined, then the Company considers whether third party evidence can be used to establish +selling price. Due to the lack of similar products and services sold by other companies within the industry, the Company has not established selling price using third-party evidence. +For +product and service sales, the Company determines its best estimate of selling price for instruments, consumables, services and assays using average selling prices over a rolling +12-month period coupled with an assessment of market conditions, as VSOE and third-party evidence cannot be established. The Company recognizes revenue for delivered elements only when it determines +there are no uncertainties regarding customer acceptance. +Distributor transactions +In certain markets, the Company sells products and provides services to customers through distributors that specialize in life sciences +products. In cases where the product is delivered to a distributor, revenue recognition generally occurs when title transfers to the distributor. The terms of sales transactions through distributors +are generally consistent with the terms of direct sales to customers, except the distributors do not require the Company's services to install the instrument at the end customer and perform the +services for the customer that are beyond our standard warranty in the first year following the sale. These transactions are accounted for in accordance with the Company's revenue recognition policy +described herein. +Cost of revenue +Cost of product revenue consists of raw materials, part costs and associated freight, shipping and handling costs, contract manufacturer costs, +personnel costs, yield loss, in-license payments and royalties, stock-based compensation, other direct costs and overhead. +F-10 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +Cost +of service and other revenue consists of personnel, facility costs associated with operating the Simoa Accelerator Lab on behalf of customers, costs related to instrument +maintenance and servicing equipment at customer sites, other direct costs and overhead. +Cost +of license revenue, related party consists of license fees that are the direct result of cash payments received related to license agreements. +Research and development expenses +Research and development expenses, including personnel costs, allocated facility costs, lab supplies, outside services, and contract laboratory +costs are charged to research and development expense as incurred. The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development +activities as expenses when the service has been performed or when the goods have been received rather than when the payment is made. +Selling, general, and administrative expenses +Selling, general, and administrative expenses are primarily composed of compensation and benefits associated with sales and marketing, finance, +human resources, and other administrative personnel, outside marketing, advertising, allocated facilities costs, legal expenses, and other general and administrative costs. +Comprehensive loss +Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and +circumstances from non-owner sources. For the years ended December 31, 2017 and 2016, comprehensive loss was equal to net loss. +Net loss per share +Basic net loss per common share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders +by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net +loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and +if-converted methods. For purposes of the diluted net loss per share calculation, preferred stock, unvested restricted common stock and stock options are considered to be potentially dilutive +securities, but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore basic and diluted net loss per share were the same for all +periods presented. +F-11 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +The +following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be +anti-dilutive (in common stock equivalent shares): +Year ended December 31, +2017 +2016 +2015 +Series A redeemable convertible preferred stock +— +4,884,869 +4,480,389 +Series B redeemable convertible preferred stock +— +1,873,561 +1,749,877 +Series C redeemable convertible preferred stock +— +2,677,649 +2,677,649 +Series D redeemable convertible preferred stock +— +3,864,421 +— +Unvested restricted common stock +177,192 +376,248 +623,869 +Outstanding stock options +2,249,843 +1,119,671 +1,043,030 +Outstanding preferred warrants +— +326,374 +670,086 +Outstanding common stock warrants +86,090 +— +— +Total +2,513,125 +15,122,793 +11,244,900 +As +of December 31, 2017, 2016, and 2015 the Company had an obligation to issue warrants to purchase an additional 93,341 shares of common stock, 300,000 shares of +Series A-3 Preferred Stock, and 300,000 shares of Series A-3 Preferred Stock, respectively, to a vendor if a contract is terminated prior to a minimum purchase commitment being met. Upon +completion of the IPO in December 2017, the warrants to purchase shares of Preferred Stock were converted to warrants to purchase shares of common stock at a one-for-3.214 basis. No amounts are +presented in the table above for this obligation to issue a warrant as the issuance of the warrant is not considered probable. +The +Company's redeemable convertible preferred stock was entitled to receive dividends based on dividends declared to common stockholders, thereby giving the preferred stockholders the +right to participate in undistributed earnings of the Company above the stated dividend rate. However, preferred stockholders did not have a contractual obligation to share in the net losses of the +Company. The Company operated in a net loss position for the years ended December 31, 2017, 2016 and 2015 and, therefore the Company's accounting for basic and diluted earnings per share was +unaffected by the participation rights of the preferred stockholders. +Cash and cash equivalents +Cash and cash equivalents consists of cash deposits and short-term, highly liquid investments that are readily convertible into cash, with +original maturities of three months or less. Cash equivalents are carried at fair value based on third-party pricing services. Cash and cash equivalents consist of the following (in thousands): +As of December 31, +2017 +2016 +Cash and cash equivalents: +Cash +$ +1,500 +$ +29,671 +Money market funds invested in U.S. Treasury obligations +78,182 +— +Total cash and cash equivalents +$ +79,682 +$ +29,671 +F-12 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +Restricted cash and deposits +As of December 31, 2017 and 2016, the Company had $0.4 million and $0.4 million, respectively, in restricted cash and +deposits related to amounts held as a security deposit for the Company's facility lease obligation and a business registration application, which are recorded in other non-current assets on the +consolidated balance sheets. +Accounts receivable and allowance for doubtful accounts +The Company provides credit, in the normal course of business, to customers and does not require collateral. Accounts receivable consist of +amounts due to the Company for sales to customers and are recorded net of an allowance for doubtful accounts. The Company reviews accounts receivable on a regular basis to determine if any receivable +will potentially be uncollectable and to estimate the amount of allowance for doubtful accounts necessary. Once a receivable is deemed uncollectible, such balance is written off and charged against +the allowance for doubtful accounts. The Company has not incurred material write offs in any of the periods presented. As of December 31, 2017, and 2016, no allowance for doubtful accounts has +been recorded. +Inventory +Inventory is stated at the lower of cost or market on a first-in, first-out (FIFO) basis. The Company analyzes its inventory levels on each +reporting date and writes down inventory that is expected to expire prior to being sold and inventory in excess of expected sales requirements. In the event that the Company identifies these +conditions exist in its inventory, the carrying value is reduced to its estimated net realizable value. +Property and equipment +Property and equipment, including leasehold improvements, are stated at cost and are depreciated, or amortized in the case of leasehold +improvements, over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized +as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be +recoverable and recognizes an impairment loss when it is probable that an asset's realizable value is less than the carrying value. To date, no such impairment losses have been recorded. Depreciation +is calculated based upon the following estimated useful lives of the assets: +Laboratory and manufacturing equipment +Five years +Computers and software +Three years +Office furniture and equipment +Seven years +Leasehold improvements +Shorter of the useful life of the asset or the remaining term of the lease +F-13 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +Software development costs +The Company develops and modifies software related to the operation of the instrument. Software development costs are expensed as incurred until +the point the Company establishes technological feasibility. Based on the Company's product development process, technological feasibility is established upon the completion of a working model. The +Company does not incur material costs between the completion of the working model and the point at which the product is ready for release. Therefore, software development costs are charged to the +statement of operations as incurred as research and development expense. +Investments +During the third quarter of 2016, the Company purchased a minority interest in preferred stock in a privately held company for +$0.3 million. The investment is recorded on a cost basis in other non-current assets on the accompanying consolidated balance sheets as the Company does not have a controlling investment, does +not have the ability to exercise significant influence over the privately held company and the fair value of this equity investment is not readily determinable. The Company performs an impairment +analysis at each reporting period to determine if the carrying value must be reduced due to a decrease in the value of the investment, which includes consideration of whether an event or change in +circumstances has occurred that may have a significant adverse effect on the fair value of the investment. The Company determined there was no impairment during the years ended December 31, +2017 and 2016. +Fair value of financial instruments +ASC Topic 820, Fair Value Measurement (ASC 820), establishes a fair value hierarchy for +instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company's own assumptions (unobservable inputs). Observable inputs are inputs +that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's +assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. +ASC +820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly +transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes +between the following: +Level 1 +inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. +Level 2 +inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and +Level 3 +inputs are unobservable inputs that reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability. +To +the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, +the +F-14 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +degree +of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based +on the lowest level of any input that is significant to the fair value measurement. +The +carrying amount reflected on the balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued +liabilities approximated their fair values, due to the short-term nature of these instruments. The carrying value of the long-term debt approximates its fair value as the debt arrangement is based on +interest rates the Company believes it could obtain for borrowings with similar terms. The Company has an investment in the preferred stock of a privately held company which is recorded within other +non-current assets on a cost basis. This cost method investment's fair value has not been estimated as there are no identified events or changes in circumstances that would indicate a significant +adverse effect on the fair value of the investment and to do so would be impractical. +Fair +value measurements as of December 31, 2017 are as follows (in thousands): +Description +Total +Quoted +prices +in active +markets +(Level 1) +Significant +other +observable +inputs +(Level 2) +Significant +unobservable +inputs +(Level 3) +(unaudited) +Financial assets +Cash equivalents +$ +78,182 +$ +78,182 +$ +— +$ +— +Total +$ +78,182 +$ +78,182 +$ +— +$ +— +Fair +value measurements as of December 31, 2016 are as follows (in thousands): +Description +Total +Quoted +prices +in active +markets +(Level 1) +Significant +other +observable +inputs +(Level 2) +Significant +unobservable +inputs +(Level 3) +Financial liabilities +Preferred stock warrant liability +$ +2,802 +$ +— +$ +— +$ +2,802 +Total +$ +2,802 +$ +— +$ +— +$ +2,802 +As +of January 1, 2016, the Company had outstanding warrants to purchase 64,441 shares of Series A-2 redeemable convertible preferred stock (Series A-2 Preferred +Stock), 1,300,000 shares of Series A-3 convertible preferred stock (Series A-3 Preferred Stock), 562,488 shares of Series B redeemable convertible preferred stock (Series B +Preferred Stock), and 226,733 shares of Series C redeemable convertible preferred stock (Series C Preferred Stock). During the years ended December 31, 2017 and 2016, the Company +issued the following warrants: +• On January 29, 2016, the Company issued a warrant to purchase 57,810 shares of Series C Preferred Stock to a lender related to a +second amendment to a debt facility (Note 10) +• On November 18, 2016, the Company issued a warrant to purchase 700,000 shares of Series A-3 Preferred Stock to a vendor +(Note 9). +F-15 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +• On March 31, 2017, the Company issued a warrant to purchase 38,828 shares of Series D redeemable convertible preferred stock +(Series D Preferred Stock) to a lender as part of a third amendment to a debt facility (Note 10). +All +of the warrants were initially recorded as a preferred stock warrant liability on the accompanying consolidated balance sheets at fair value. Warrants issued for goods or services +are initially accounted for under ASC 505-50 and are recognized over the required performance period in the consolidated statements of operations or consolidated balance sheets at the vesting date or +reporting date fair value based on the nature of the underlying arrangement. Warrants issued in connection with a product development contract were recorded to research and development expense. +Warrants issued in connection with a revenue arrangement were recorded as a reduction in revenue. Warrants issued in connection with debt arrangements were recorded as a reduction in the carrying +value of debt. Once the counterparty's performance is complete and the warrants have become fully vested, they are marked to market on each reporting and exercise date with changes in the fair value +recorded in other expense (income) on the statement of operations and comprehensive loss. Holders of warrants to purchase 1,300,000 shares of Series A-3 Preferred Stock and 562,488 +Series B Preferred Stock exercised the warrants during the year ended December 31, 2016 and holders of warrants to purchase 700,000 shares of Series A-3 Preferred stock, and +holders of warrants to purchase 111,114 shares of Series C Preferred Stock exercised the warrants during the year ended December 31, 2017. Upon exercise, the fair value of the +warrants was reclassified to redeemable convertible preferred stock along with any proceeds received. Upon completion of the IPO, the outstanding warrants to purchase shares of preferred stock were +automatically converted into warrants to purchase shares of common stock and are therefore accounted for as equity instruments. +The +changes in preferred stock warrant liability measured at fair value for which the Company has used Level 3 inputs to determine fair value are as follows (in thousands): +Warrant +liability +Balance at December 31, 2015 +$ +5,547 +Issuance of warrants related to debt facility +128 +Issuance of warrants related to a vendor +2,078 +Changes in fair value of warrants +307 +Warrant exercises +(5,258 +) +Balance at December 31, 2016 +2,802 +Issuance of warrants related to debt facility +119 +Changes in fair value of warrants +90 +Warrant exercises +(2,188 +) +Conversion to warrants to purchase common stock in connection with IPO +(823 +) +Balance at December 31, 2017 +$ +— +Prior +to the completion of the IPO, the warrants were classified as liabilities because they were exercisable for shares of redeemable convertible preferred stock. On each measurement +date and immediately prior to the IPO and the resulting change in classification of the warrants to equity instruments, the Company utilized a black-scholes option pricing model to determine the fair +value of the warrants and utilized various valuation assumptions based on available market data and other +F-16 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +relevant +but unobservable factors. Expected volatility for the Company's redeemable convertible preferred stock was determined based on an analysis of the historical volatility of a representative +group of guideline public companies because, prior to the IPO, there was no market for the Company's common stock and, therefore, a lack of market-based company-specific historical and implied +volatility information. The expected term reflects the remaining contractual term of the warrants. The assumed dividend yield is based upon the Company's expectation of not paying dividends in the +foreseeable future. The risk-free rate is based upon the U.S. Treasury yield curve in effect at the valuation date, commensurate with the remaining contractual life of the warrants. The fair value of +the underlying preferred shares was determined by management, with the assistance of a third party valuation specialist, using a hybrid valuation method, which includes a probability weighted analysis +of two scenarios. The first scenario was based on the completion of an initial public offering utilizing a market approach and the second scenario was based on the Company remaining privately held +utilizing either an income approach or a weighted-average of an income approach and a backsolve to a recent financing event, depending on the proximity of the financing event to the measurement date. +The assumption regarding the Company's probability of completing an initial public offering was the primary contributing factor to the changes in fair value of the underlying preferred stock. See +"Stock-based Compensation" section of this Note 2 for discussion of the changes of the probability of completing an initial public offering. +The +following assumptions were utilized to determine the fair value of each warrant to purchase preferred stock at each reporting period and as of the change from liability to equity +accounting treatment of the warrants in connection with the IPO: +Balance sheet date +Value of +underlying +Series D +preferred +stock +Value of +underlying +Series C +preferred +stock +Value of +underlying +Series B +preferred +stock +Value of +underlying +Series A-3 +preferred +stock +Value of +underlying +Series A-2 +preferred +stock +Volatility +Probability +of an initial +public +offering +December 7, 2017 +$4.67 +$ +4.67 +N/A +$ +4.67 +$ +4.67 +46 +% +100 +% +December 31, 2016 +N/A +$ +4.16 +N/A +$ +2.97 +$ +2.95 +52 +% +40 +% +December 31, 2015 +N/A +$ +3.92 +$3.00 +$ +3.00 +$ +1.90 +41 +% +25 +% +Warranties +The Company provides a one-year warranty and maintenance service related to its instruments and sells extended warranty contracts for additional +periods. The Company defers revenue associated with these services and recognizes them on a pro-rata basis over the period of service. If expected costs are in excess of deferred revenue, a warranty +accrual is recorded. As of December 31, 2017 and 2016 no warranty accruals were recorded. +Income taxes +The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the +Company's consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement +carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against +deferred tax assets is recorded if, based on the +F-17 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +weight +of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. +The +Company accounts for uncertain tax positions in accordance with the provisions of ASC 740 Income Taxes ("ASC 740"). When uncertain tax +positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more +likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2017 and 2016 the +Company did not have any significant uncertain tax positions. +Credit, product and supplier concentrations and off-balance-sheet risk +The Company has no significant off-balance-sheet risk, such as foreign exchange contracts, option contracts, or other hedging arrangements. +Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash and cash equivalents and a cost method investment. The Company places its cash and +cash equivalents principally in depository accounts with a bank. +The +Company is also subject to supply chain risks related to the outsourcing of the manufacturing of its instruments. Although there are a limited number of manufacturers for instruments +of this type, the Company believes that other suppliers could provide similar products on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of +sales, which would adversely affect operating results. In addition to outsourcing the manufacturing of its instruments, the Company also purchases antibodies through a number of different suppliers. +Although a disruption in service from any one of its antibody suppliers is possible, the Company believes that it would be able to find an adequate supply from alternative suppliers. +Customers +outside the United States represented 34%, and 21% of the Company's gross trade accounts receivable balance as of December 31, 2017 and 2016, respectively. +At +December 31, 2017, one customer's accounts receivable balance was 16% of the Company's aggregate accounts receivable, and no single customer represented 10% of the Company's +revenue for the year ended December 31, 2017. At December 31, 2016, one customer's accounts receivable balance +was 26% of the Company's aggregate accounts receivable and represented 11% of the Company's revenue for the year ended December 31, 2016. +Segment information +Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief +operating decision-maker in deciding how to allocate resources and assess performance. The Company and the Company's chief operating decision-maker reviews the Company's operations and manages its +business as a single operating segment. +F-18 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +Net +revenue by product and service line are as follows (in thousands): +Year ended December 31, +2017 +2016 +2015 +Product revenue +Instrument +$ +6,494 +$ +6,167 +$ +6,542 +Consumable and other product +7,630 +4,434 +2,935 +Total +$ +14,124 +$ +10,601 +$ +9,477 +Service and other revenue +Simoa Accelerator Lab services +$ +4,859 +$ +3,092 +$ +1,625 +Other services +2,817 +1,920 +890 +Total +$ +7,676 +$ +5,012 +$ +2,515 +The +following table reflects total revenue (in thousands) by geography and as a percentage of total revenue, based on the billing address of our customers. North America consists of the +United States, Canada and Mexico; EMEA consists of Europe, Middle East, and Africa; and Asia Pacific includes Japan, China, South Korea, Singapore, Malaysia and Australia. +Year ended December 31, +2017 +2016 +2015 +North America +$ +13,864 +61 +% +$ +13,018 +74 +% +$ +9,417 +77 +% +EMEA +$ +6,922 +30 +% +$ +3,416 +19 +% +$ +2,081 +17 +% +Asia Pacific +$ +2,088 +9 +% +$ +1,151 +7 +% +$ +682 +6 +% +Total +$ +22,874 +100 +% +$ +17,585 +100 +% +$ +12,180 +100 +% +Stock-based compensation +The Company accounts for stock-based compensation awards in accordance with Financial Accounting Standards Board (FASB) Accounting Standards +Codification (ASC) Topic 718, Compensation—Stock Compensation , or ASC 718. ASC 718 requires all stock-based payments to employees, including +grants of employee stock options, to be recognized in the statement of operations based on their fair values. Stock-based compensation awards have historically consisted of stock options and +restricted stock. +Prior +to adoption of ASU 2016-09 on January 1, 2017, the Company recognized compensation costs related to stock options granted to employees based on the estimated fair value of +the awards on the date of grant, net of estimated forfeitures. Effective January 1, 2017, the Company ceased utilizing an estimated forfeiture rate and began recognizing forfeitures as they +occur. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based +awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. +F-19 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +The Company recognizes compensation costs related to share-based payments granted to non-employees based on the estimated fair value of the awards on the date of grant in the same manner +as options for employees; however, the fair value of the stock options granted to non-employees is re-measured each reporting period until the service is complete, and the resulting increase or +decrease in value, if any, is recognized as expense or income, respectively, during the period the related services are rendered to the same financial statement line item as any cash consideration +would be recognized. There were no material non-employee awards outstanding during the years ended December 31, 2017, 2016 and 2015. +The +fair value of stock options granted to employees and directors for their services on the Company's Board of Directors is estimated on the grant date using the Black-Scholes +option-pricing model, based on the assumptions noted in the following table: +Year ended +December 31, +2017 +2016 +2015 +Risk-free interest rate +1.9% +1.2% +1.7% +Expected dividend yield +None +None +None +Expected term (in years) +6.0 +6.0 +6.0 +Expected volatility +50.0% +46.0% +41.3% +Using +the Black-Scholes option-pricing model, the weighted-average grant date fair value of options granted for the years ended December 31, 2017, 2016, and 2015 was $4.52, $2.41 +and $2.06 per share, respectively. Expected volatility was calculated based on reported volatility data for a representative group of guideline publicly traded companies for which historical +information was available. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. The Company estimates +the expected life of options +granted to employees utilizing the simplified method which calculates the expected life of an option as the average of the time to vesting and contractual life of the options. The expected life is +applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. The Company uses +the simplified method due to the lack of historical exercise data and the plain nature of the stock options. The Company uses the remaining contractual term for the expected life of non-employee +awards. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on common stock. Prior to the completion of the IPO, the +fair value of the underlying common shares was determined by management, with the assistance of a third party valuation specialist, using a hybrid valuation method, which includes a weighted analysis +of two scenarios. The first scenario is based on the completion of an initial public offering utilizing a market approach and the second scenario is based on the Company remaining privately held +utilizing either an income approach or a weighted-average of an income approach and a backsolve to a recent financing event approach, depending on the proximity of the financing event to the +measurement date. The initial public offering scenario reflected data gathered from relevant comparable initial public offering transactions and the current value method of equity allocation was used +in determining the value of common stock. For the privately held scenario, traditional income methods of business valuation were employed, where the total equity value was then allocated using the +option pricing model (OPM). The assumption regarding the Company's probability of completing an initial public +F-20 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +offering +was the primary contributing factor to the changes in fair value of the common stock. The probability of initial public offering was 40% at December 31, 2016. Since December 31, +2015, the Company had performed the common stock valuations on a quarterly basis. Upon completion of the IPO in December 2017, the Company determines the fair value of the underlying common shares +based on the closing price of the common stock on the option grant date. +The +probability of completing an initial public offering was based on the facts and circumstances as of each measurement date. During the three months ended December 31, 2016, the +Company began initial preparations for completing an initial public offering; including assessing quarterly financial information and holding initial discussions with prospective investment bankers, +which resulted in an increase in the probability of completing an initial public offering. Subsequent to March 31, 2017, the Company obtained approval from the Board of Directors to pursue the +transaction, selected investment bankers, held an organizational meeting, and performed other procedures necessary to complete an initial public offering. As a result, the probability of completing an +initial public offering increased subsequent to March 31, 2017. +The +Company is using the straight-line attribution method to recognize stock-based compensation expense for service based awards for employees and non-employees. However, cumulative +compensation expense recognized through the end of any period must at least equal the value of vested awards through that period, with compensation expense adjusted accordingly. For the year ended +December 31, 2016, the amount of stock-based compensation expense recognized during a period was based on the value of the portion of the awards that were ultimately expected to vest. Prior to +January 1, 2017, forfeitures were estimated at the time of grant, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. During the year ended +December 31, 2016, the Company applied an estimate of forfeitures which did not have a material effect on the consolidated financial statements. Effective January 1, 2017, the Company +adopted Accounting Standards Update (ASU) 2016-09 Stock Compensation , and has elected to account for forfeitures as incurred and therefore no forfeiture +estimate is utilized in the year ended December 31, 2017. The effect of this adoption has been recorded as a $0.1 million cumulative effect adjustment to accumulated deficit as of +January 1, 2017. +The +Company applies an accelerated attribution method to recognize stock-based compensation expense when accounting for performance-based stock awards. The Company records the expense +for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. +Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. Compensation expense +for performance-based stock awards is included in total stock-based compensation expense. There were no material performance-based stock awards outstanding as of December 31, 2017, 2016, and +2015. +Recent accounting pronouncements +The Company is considered to be an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS +Act). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company +can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected +F-21 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +to +avail itself of this extended transition period and, as a result, the Company will not be required to adopt new or revised accounting standards on the relevant dates on which adoption of such +standards is required for other public companies so long as the Company remains an emerging growth company. +In +May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). The FASB has +issued several updates to the standard which (i) clarify the application of the principal versus agent guidance; (ii) clarify the guidance relating to performance obligations and +licensing; (iii) clarify assessment of the collectability criterion, presentation of sales taxes, measurement +date for non-cash consideration and completed contracts at transaction; and (iv) clarify narrow aspects of ASC 606 or corrects unintended application of the guidance (collectively, the Revenue +ASUs). The Revenue ASUs provide an accounting standard for a single comprehensive model for use in accounting for revenue arising from contracts with customers and supersedes most current revenue +recognition guidance. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity +expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the +following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; +(iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Topic 606 also +impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. The standard also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash +flows arising from contracts with customers. +The +accounting standard is effective for the Company for the year ended December 31, 2019 and for interim periods within such year. Early adoption is permitted. The guidance +permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative effect of initially applying the +guidance recognized at the date of initial application (the modified retrospective method). The Company does not currently intend to early adopt the provisions of this accounting standard and +currently intend to adopt the standard effective January 1, 2019. The Company is in the process of determining which adoption method will be utilized and assessing the effect of this accounting +standard with regards to the arrangements with bioMérieux and a diagnostic company (see Note 11 for the Company's revenue recognition under current guidance for these +agreements). The Company's performance under the bioMérieux arrangement is not expected to be completed prior to the anticipated date of adoption on January 1, 2019, and the +revenue recognition for this contract may be affected by Topic 606. The Company cannot predict at this time whether performance obligations under the arrangement with a diagnostic company will remain +open at January 1, 2019. The Company is also assessing the other significant revenue streams, including instrument revenue, consumable revenue, research services revenue, and services contract +revenue, to determine the effect of the adoption of this standard on those arrangements. +In +July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11). ASU +2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in +the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11, which is applied prospectively, is effective for the Company for the year +ended December 31, 2017 and for interim periods beginning in the three months ending March 31, 2018 with early application permitted. The +F-22 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +Company +adopted ASU 2015-11 as of January 1, 2017. The adoption of this standard did not have, for 2017, and is not expected to have, in future periods, a material impact on the Company's +consolidated financial statements. +In +February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Recognition and Measurement of Financial Assets and Financial +Liabilities (ASU 2016-02). Under ASU 2016-02, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short term +leases) at the commencement date. Lessor accounting under ASU 2016-02 is largely unchanged. ASU 2016-02 is effective for the Company for the year ending December 31, 2020. Early adoption is +permitted. Under ASU 2016-02, lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach +for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and lessors may not apply a full retrospective transition +approach. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined whether the adoption of the standard will have a material impact on its consolidated financial +statements. +In +March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based +Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies the accounting for share-based payment award transactions including the financial statement presentation +of excess tax benefits and deficiencies, classification of awards as either equity or liabilities, accounting for forfeitures and classifica7tion on the statement of cash flows. The Company early +adopted ASU 2016-09 on January 1, 2017 and elected to account for forfeitures as they occur. The effect of this change in accounting policy has been recorded as a $0.1 million cumulative +effect adjustment to accumulated deficit, as of January 1, 2017. ASU 2016-09 also provides that companies no longer record excess tax benefits or certain tax deficiencies in additional +paid-in capital. Instead, all excess tax benefits and tax deficiencies are recorded as income tax expense or benefit in the statement of operations and comprehensive loss. There was no financial +statement impact of adopting this provision of ASU 2016-09 as the Company is currently in a net operating loss position and the excess tax benefits that existed from options previously +exercised had a full valuation allowance. The effects of adopting the remaining provisions in ASU 2016-09 affecting the classification of awards as either equity or liabilities when an entity +partially settles the award in cash in excess of the employer's minimum statutory withholding requirements and classification in the statement of cash flows did not have a significant impact on the +Company's financial position, results of operations or cash flows. +In +January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of +Financial Assets and Financial Liabilities (ASU 2016-01). This guidance changes how entities measure equity investments that do not result in consolidation and are not +accounted for under the equity method. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A +practicability exception will be available for equity investments that do not have readily determinable fair values, however; the exception requires the Company to consider relevant transactions that +can be reasonably known to identify any observable price changes that would impact the fair value. This guidance also changes certain disclosure requirements and other aspects of current +U.S. GAAP. This guidance is effective for the Company for the year ending December 31, 2019 and for interim periods effective the three months ending March 31, 2020. Early +adoption is permitted. The +F-23 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +Company +is currently evaluating the requirements of ASU 2016-01 and has not yet determined whether the adoption of the standard will have a material impact on its consolidated financial statements. +In +August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going +Concern (ASU 2014-15). ASU 2014-15 requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist that raise +substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is +effective for the Company for the year ended December 31, 2016 and interim periods thereafter. The adoption of ASU 2014-15 did not have a material effect on the Company's consolidated +financial statements but the standard requires enhanced disclosures in certain circumstances based on the Company's assessment of whether any such conditions or events exist that raise substantial +doubt regarding the Company's ability to continue as a going concern within the one-year period. +In +August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow (Topic 230) (ASU 2016-15). The +guidance reduces diversity in how certain cash receipts and cash payments are presented and classified in the Statements of Cash Flows. Certain requirements of ASU 2016-15 are as follows: +(i) cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities, (ii) contingent consideration payments made soon after +a business combination should be classified as cash outflows for investing activities and cash payment made thereafter should be classified as cash outflows for financing up to the amount of the +contingent consideration liability recognized at the acquisition date with any excess classified as operating activities, (iii) cash proceeds from the settlement of insurance claims should be +classified on the basis of the nature of the loss, (iv) cash proceeds from the settlement of Corporate-Owned Life Insurance (COLI) Policies should be classified as cash inflows from investing +activities and cash payments for premiums on COLI policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities, +and (v) cash paid to a tax authority by an employer when withholding shares from an employee's award for tax-withholding purposes should be classified as cash outflows for financing activities. +The guidance is effective for the Company for the year ending December 31, 2019 and for interim periods for the three months ending March 31, 2020. Early adoption is permitted. The +adoption of ASU 2016-15 is not expected to have a material effect on the Company's consolidated financial statements. +In +November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (ASU 2016-18). The +amendments of ASU 2016-18 were issued to address the diversity in classification and presentation of changes in restricted cash and restricted cash equivalents on the statement of cash flows which is +currently not addressed under Topic 230. The ASU would require an +entity to include amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning of period and end of period total amounts +on the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted +and the adoption of the ASU should be applied retrospectively. The Company does not believe the accounting standard will have a material effect on the consolidated financial statements upon adoption, +but would affect the presentation of restricted cash in the statement of cash flows. The amount of restricted cash held as of December 31, 2017 and 2016 was $50 thousand. +F-24 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +2. Significant accounting policies (Continued) +There +have been no other changes in accounting standards issued by the FASB which have not yet been adopted that are expected to have a material impact on the Company's financial +position, results of operations or cash flows. +3. Inventory +Inventory consists of the following (in thousands): +As of +December 31, +2017 +2016 +Raw materials +$ +1,032 +$ +563 +Work in process +968 +304 +Finished goods +1,571 +661 +Total +$ +3,571 +$ +1,528 +Inventory +comprises commercial instruments, assays, and the materials required to manufacture assays. +4. Property and equipment +Property and equipment consists of the following (in thousands): +As of +December 31, +2017 +2016 +Laboratory and manufacturing equipment +$ +2,969 +$ +1,937 +Office furniture and equipment +689 +657 +Computers and software +459 +451 +Leasehold improvements +180 +133 +4,297 +3,178 +Less: accumulated depreciation +(2,423 +) +(1,955 +) +Property and equipment, net +$ +1,874 +$ +1,223 +The +Company incurred depreciation expense of $0.5 million, and $0.4 million for the years ended December 31, 2017 and 2016, respectively. +F-25 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +5. Other accrued expenses +Other accrued expenses consist of the following (in thousands): +As of December 31, +2017 +2016 +Accrued inventory +$ +835 +$ +70 +Accrued royalties +221 +544 +Accrued professional services +346 +396 +Accrued development costs +1,559 +843 +Accrued other +599 +533 +Total accrued expenses +$ +3,560 +$ +2,386 +6. Income taxes +In 2017, the Company adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which eliminates the +requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated tax benefit can be recognized in additional paid-in capital. The Company does not have +any excess tax benefits, as a result, there was no cumulative effect adjustment to accumulated deficit. +The +Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system. +These changes include a federal statutory tax rate reduction from 34% to 21%, which reduced the Company's deferred tax assets and corresponding valuation allowance. The Company reevaluates the +positive and negative evidence bearing upon the realizability of its deferred tax assets on an annual basis. Since the Company has generated operating losses and expects to continue to incur future +losses, the Company has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of all of its deferred tax +assets. Accordingly, the Company has recorded a full valuation allowance against its deferred tax assets. The $3.9 million decrease in the valuation allowance for the year ended +December 31, 2017 was primarily driven by $14.4 million reduction in the federal statutory tax rate partially offset by the current period net loss. +On +December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118, or SAB 118, to address the application of U.S. GAAP in situations when a +registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax +Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of the deferred tax assets and liabilities and included these amounts in its consolidated financial +statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and +assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when +the 2017 U.S. corporate income tax return is filed in 2018. +Deferred +income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for +income tax +F-26 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +6. Income taxes (Continued) +purposes. +Significant components of the Company's net deferred income taxes are as follows (in thousands): +Deferred tax component reconciliation +December 31, +2017 +December 31, +2016 +Deferred tax assets / (liabilities) +Net operating loss carryforwards +$ +27,952 +$ +33,461 +Research & development credits +3,637 +2,801 +Deferred revenue +1,795 +1,443 +Depreciation and amortization +629 +879 +Stock compensation +185 +73 +Other deferred tax assets +496 +206 +Total deferred tax assets +34,694 +38,863 +Valuation allowance +(34,552 +) +(38,457 +) +Subtotal +142 +406 +Stock-based compensation +(142 +) +(406 +) +Net deferred tax assets +— +— +A +reconciliation of the expected income tax provision computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows: +Effective tax rate reconciliation +December 31, +2017 +December 31, +2016 +Tax due at statutory rate +34.0 +% +34.0 +% +State taxes, net of federal benefit +4.8 +% +4.3 +% +Permanent items +–1.6 +% +–0.8 +% +Tax credits +2.6 +% +2.9 +% +Valuation allowance +14.5 +% +–42.4 +% +U.S. tax reform +–53.2 +% +0.0 +% +Other, net +–1.1 +% +2.0 +% +0.00 +% +0.00 +% +No +provision for income taxes has been recorded as the Company has incurred losses since inception. As of December 31, 2017, the Company had federal and state net operating loss +(NOL) carryforwards of approximately $108.4 million and $81.8 million, respectively, which may be used to offset future taxable income. The Company also had federal and state credits of +$2.9 million and $0.9 million, respectively, to offset future tax liabilities as of December 31, 2017. The NOL and tax credit carryforwards will expire at various dates through +2035, and are subject to review and possible adjustment by federal and state tax authorities. The Internal Revenue Code of 1986, as amended (the Code) contains provisions that may limit the NOL and +tax credit carryforwards available to be used in any given year in the event of certain changes in the ownership interests of significant stockholders under Section 382 and 383 of the Code. The +Company has not determined whether such a change has occurred. +F-27 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +6. Income taxes (Continued) +At December 31, 2017 and 2016, the Company had no unrecognized tax benefits. For all tax years through December 31, 2017, the Company generated research credits but have +not conducted a study to document the qualified activities. This study may result in an adjustment to the Company's research and development credit carryforwards; however, until a study is completed +and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company's research and development credits and, if an +adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheets or consolidated statements of +operations and comprehensive loss if an adjustment were required. +Interest +and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying consolidated statements of operations and +comprehensive loss. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state, and local income tax authorities for all tax years +in which a loss carryforward is available. There are no current examinations pending. +7. Redeemable convertible preferred stock +Preferred Stock Prior to IPO +The Company had authorized 47,015,449 shares of preferred stock, $0.001 par value per share, of which 3,972,415 shares were designated +Series A-1 redeemable convertible preferred stock (Series A-1 Preferred Stock), 10,492,027 shares were designated Series A-2 Preferred Stock, 2,000,000 shares were designated +Series A-3 Preferred Stock, 6,186,594 shares were designated Series B Preferred Stock, 9,247,089 shares were designated as Series C Preferred Stock, 544,332 shares were designated +Series C-1 redeemable convertible preferred stock (Series C-1 Preferred Stock), 12,459,090 shares were designated Series D Preferred Stock and 2,113,902 were designated +Series D-1 redeemable convertible preferred stock (Series D-1 Preferred Stock) as of immediately prior to the completion of the IPO. +In +February 2016, the Company issued 1,300,000 shares of Series A-3 Preferred Stock to a vendor (Note 9) upon the exercise of Series A-3 Preferred Stock warrants at +a purchase price of $0.001 per share. The fair value of the settled warrant was $3.9 million at the time of exercise which was reclassified from Preferred Stock Warrant Liability to +Series A Preferred Stock. +In +March 2016, the Company issued 12,420,262 shares of Series D Preferred Stock at a purchase price of $3.67 per share. The issuance resulted in cash proceeds of +$45.4 million, net of issuance costs. +In +June and July 2016, the Company issued 397,530 shares of Series B Preferred Stock upon exercise of Series B Preferred Stock warrants, which included 312,500 shares of +Series B Preferred Stock at a purchase price of $0.001 per share, 8,330 shares of Series B Preferred Stock at purchase price of $2.00 per share, and 76,700 shares of Series B +Preferred Stock upon a cashless exercise of a warrant. The fair value of the settled warrants was $1.4 million at the time of exercise which was reclassified from Preferred Stock Warrant +Liability to Series B Preferred Stock. +In +January 2017, the Company issued 700,000 shares of Series A-3 Preferred Stock to a vendor (Note 9) upon the exercise of Series A-3 Preferred Stock warrants at a +purchase price of $0.001 per share. The fair value of the settled warrant was $2.1 million at the time of exercise which was reclassified from Preferred Stock Warrant Liability to +Series A Preferred Stock. +F-28 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +7. Redeemable convertible preferred stock (Continued) +In +June 2017, the Company issued 2,113,902 shares of Series D-1 Preferred Stock at a purchase price of $4.021 per share. The issuance resulted in cash proceeds of +$8.4 million, net of issuance costs. +In +November 2017, the Company issued 31,283 shares of Series C Preferred Stock upon exercise of Series C Preferred Stock warrants, which included 8,474 shares of +Series C Preferred Stock at a purchase price of $3.3299 per share, and 22,809 shares of Series C Preferred Stock upon a cashless exercise of a warrant. The fair value of the settled +warrants was $0.1 million at the time of exercise which was reclassified from Preferred Stock Warrant Liability to Series C Preferred Stock. +The +Company had a Stock Purchase Agreement (SPA) with bioMérieux, a related party, which required the Company to issue additional shares of Series C Preferred Stock +if certain milestones were met in exchange for $10.0 million in gross proceeds. The milestones were related to activities under a Joint Development and License Agreement (JDLA) +(Note 11). bioMérieux also purchased Series C Preferred Stock when the JDLA was entered into in 2012. When the SPA was entered into, the Company evaluated whether the +requirement to issue additional shares ('Tranche Feature") required separate accounting. The Company determined that the Tranche Feature was not legally detachable and therefore was an embedded +feature in the Series C Preferred Stock that bioMérieux purchased. +During +the year ended December 31, 2015, the Company amended the terms of the SPA which restructured the equity milestone from one payment of $10.0 million to three +separate payments ($5.0 million; $3.0 million and $2.0 million) based on components of the initial technical milestones. No other terms of the Series C Preferred Stock +changed. The Company achieved the first milestone in January 2015 at which time bioMérieux purchased 1,501,546 shares of Series C Preferred Stock at a price of $3.3299 for total +gross proceeds of $5.0 million. The Company also achieved the second milestone in May 2015 at which time bioMérieux purchased 600,618 shares of Series C Preferred Stock at +a price of $3.3299 for total gross proceeds of $2.0 million. In December 2016, the Company further amended the JDLA and SPA which cancelled the third and final milestone (Note 11). +The +rights, preferences, and privileges of Series A-1, A-2, A-3, B, C, C-1, D, and D-1 Preferred Stock were as follows: +Conversion +Shares of Series A-1, A-2, A-3, B, C, C-1, D, and D-1 Preferred Stock were convertible into common stock on a 3.214-for-one basis, +adjustable for certain dilutive events. Conversion was at the option of the preferred stockholders, although conversion was automatic upon the earlier of the consummation of an initial public +offering, resulting in gross proceeds to the Company of at least $40.0 million and for a minimum per-share amount of $5.00 per share, or the approval of a Preferred Majority, defined as 60% of +the outstanding shares of Series A-1, A-2, B, C, D, and D-1 Preferred Stock voting as a single class. +Dividends +Holders of the Series A-1, A-2, B, C, and C-1 Preferred Stock were entitled to receive, before any cash was paid out or set aside for any +common stock, cumulative dividends in arrears at the annual rate of $0.08, $0.08, $0.16, $0.2664, and $0.2664 per share, respectively, subject to adjustment for stock splits, stock dividends, +combinations and reorganizations. Holders of Series D, and D-1 Preferred Stock were entitled to receive non-cumulative dividends at the rate of $0.2936, and $0.3217 per share, +F-29 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +7. Redeemable convertible preferred stock (Continued) +respectively, +subject to adjustment for stock splits, when and if declared by the Board of Directors of the Company. The cumulative accrued dividends as of immediately prior to the completion of the +IPO were $3.3 million, $7.8 million, $5.7 million, $9.5 million, and $0.7 million for Series A-1, A-2, B, C and C-1 Preferred Stock, respectively. Holders of +Series A-3 Preferred Stock were not entitled to receive any preferred stock dividends. Upon full payment of preferred dividends, additional dividends would have been shared among all preferred +stock holders and common stock holders on a pro rata basis. +Liquidation preference +Holders of the Series A-1, A-2, A-3, B, C, C-1, D, and D-1 Preferred Stock had preference in the event of a liquidation or dissolution of +the Company equal to $1.0416667, $1.0416667, $2.00, $2.00, $3.3299, $3.3299, $3.67, and $4.021 per share, respectively, plus any accrued but unpaid dividends. In any liquidation event, Series D +and D-1 Preferred Stock holders would receive first priority in liquidation payments. In the event that the amounts available for distribution were insufficient to pay the full amounts, the assets +would be distributed ratably among Series D, and D-1 Preferred Stock holders in proportion to their aggregate liquidation preference amounts until such amounts were paid full. Series B, +C, and C-1 Preferred Stock holders would receive next priority in liquidation payments after Series D Preferred Stock holders. In the event that the amounts available for distribution were +insufficient to pay the full amounts, the assets would be distributed ratably among B, C, and C-1 Preferred Stock holders in proportion to their aggregate liquidation preference amounts. +Series A-1, A-2, and A-3 Preferred Stock holders would receive next priority in liquidation preference after Series B, C, and C-1 Preferred Stock holders. In the event that the amounts +available for distribution after payment were insufficient to pay the full amounts, the assets would be distributed ratably among A-1, A-2, and A-3 Preferred Stock holders in proportion to their +aggregate liquidation preference amounts. Any remaining amounts would be distributed to holders of common stock on a pro rata basis. However, if the holders of any series of preferred stock would +receive a greater liquidation preference if they were converted into shares of common stock immediately prior to the liquidation event, then these shares would receive consideration equal to the +amount that would be received if the shares had been converted in common stock in lieu of the applicable liquidation preference. +Voting rights +Holders of the Series A-1, A-2, A-3, B, C, D and D-1 Preferred Stock (Voting Preferred) were entitled to vote as a single class with the +holders of common stock, and had one vote +for each equivalent common share into which the preferred stock was convertible. A Preferred Majority vote was required in order to amend the Certificate of Incorporation or By-Laws, reclassify common +stock or establish another class of stock, create or authorize additional shares of preferred stock, effect a sale, liquidation, or merger of the Company, repurchase or redeem any capital stock, or +engage in any action which would adversely affect the holders of the preferred stock. +The +holders of the Series A-1, A-2 and B Preferred Stock could elect three members to the Board of Directors, voting as a single class. The holders of the Series C +Preferred Stock could elect one member to the Board of Directors. The holders of the Voting Preferred could elect one member to the Board of Directors, voting as a single class. +Holders +of Series C-1 Preferred Stock had no voting rights. +F-30 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +7. Redeemable convertible preferred stock (Continued) +Redemption rights +Prior to the issuance of Series D Preferred Stock in March 2016, a majority vote of the Series B, C and C-1 Preferred Stock +holders could elect to redeem all of the outstanding shares of Series B, C and C-1 Preferred Stock at any time on or after November 14, 2016. The Series A-1 and A-2 Preferred +Stockholders had the right to elect to redeem all of the outstanding shares at any time after the redemption of the Series B, C and C-1 Preferred Stock shares was made. The preferred +stockholders were entitled to the redemption in three equal annual installments. +Upon +issuance of the Series D Preferred Stock in March 2016, the redemption rights were adjusted. A majority vote of the Series D Preferred Stockholders could elect to +redeem all of the outstanding shares of Series D on or after March 18, 2019. Upon issuance of the Series D-1 Preferred Stock in June 2017 the redemption rights were adjusted. A +majority vote of the Series D and D-1 Preferred Stockholders, voting as separate classes, could elect to redeem all of the outstanding shares of Series D and D-1 Preferred Stock on or +after June 2, 2020. Holders of the Series C-1, C and B Preferred Stock could only redeem their shares following the redemption in full of all shares of Series D and D-1 Preferred +Stock and upon a Preferred Majority Vote. Holders of the Series A-1 and A-2 Preferred Stock could only redeem their shares following the redemption in full of the Series D-1, D, C-1, C +and B Preferred Stock, and upon a Preferred Majority Vote. Series A-3 Preferred Stock didnot have redemption rights other than in certain deemed liquidation scenarios. +The +redemption value of the Series A-1, A-2, B, C and C-1 Preferred Stock was equal to the original issuance price of the preferred stock plus any accrued or declared but unpaid +cumulative dividends. The redemption price of the Series D and D-1 Preferred Stock was the greater of (i) the fair market value of the common stock which it was convertible into or +(ii) the original issuance price plus all declared but unpaid dividends, which were non-cumulative. As of December 31, 2016, the fair market value of the Company's common stock was less +than the original issuance price of the Series D Preferred Stock. +Preferred +stock was presented in mezzanine equity. The Series A-1, A-2, B, C, C-1, D and D-1 Preferred Stock were redeemable at the option of the holder at a fixed date and +therefore the Company was accreting the preferred stock to its redemption value through the earliest possible redemption date for all issuances where the carrying value is less than the redemption +value. The Series A-3 Preferred Stock was redeemable only upon certain deemed liquidation scenarios which were outside of the Company's control. The accretion included the accretion of issuance +costs and cumulative preferred stock dividends. Series A-3 Preferred Stock was not entitled to dividends. The Company assessed all terms and features of the preferred stock in order to identify +any potential embedded features that would require bifurcation or any beneficial conversion features. As part of this analysis, the Company assessed the economic characteristics and risks of its +preferred stock, including conversion and liquidation features, as well as dividend and voting rights. The Company determined that all features of the preferred stock were clearly and closely +associated with an equity host, and although the preferred stock included conversion features, such conversion features did not require bifurcation as a derivative liability. On the date of issuance, +the fair value of common stock into which the Series A-1, A-2, A-3, B, C, C-1, D and D-1 Preferred Stock was convertible was less than the effective conversion price of the Series A-1, +A-2, A-3, B, C, C-1, D and D-1 Preferred Stock and as such, there was no intrinsic value of the conversion option at the commitment date. +F-31 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +7. Redeemable convertible preferred stock (Continued) +Automatic Conversion Upon IPO +Upon completion of the IPO on December 7, 2017 all outstanding shares of Preferred Stock were automatically converted into shares of +common stock on a 3.214-for-one basis, resulting in the issuance of 14,185,744 shares of common stock. Details of the shares of Preferred Stock converted to common stock upon the completion of the IPO +by class of Preferred Stock is as follows: +Preferred Stock +Shares of +Preferred +Stock +A-1 +3,972,415 +A-2 +10,427,586 +A-3 +2,000,000 +B +6,021,636 +C +8,092,895 +C-1 +544,332 +D +12,420,262 +D-1 +2,113,902 +Total +45,593,028 +Pursuant +to the amended and restated certificate of incorporation filed in connection with the IPO in December 2017, the Company authorized 5,000,000 shares of preferred stock. The +amended and restated certificate of incorporation authorized our board of directors, without any further stockholder action or approval, to issue these shares in one or more classes or series, to +establish from time to time the number of shares to be included in each class or series and to fix the rights, preferences and privileges of the shares of each wholly unissued class or series and any +of its qualifications, limitations or restrictions. There was no preferred stock issued or outstanding as of December 31, 2017. +8. Common stock, restricted stock, stock options and warrants +Common stock reserved +The Company reserved the following shares of common stock, on a common stock equivalent basis, for the conversion of shares of preferred stock, +the exercise of warrants and common stock options and vesting of restricted common stock: +Year ended December 31, +2017 +2016 +Series A Preferred Stock +— +4,884,869 +Series B Preferred Stock +— +1,873,561 +Series C Preferred Stock +— +2,677,649 +Series D Preferred Stock +— +3,864,421 +Preferred stock warrants +— +326,374 +Common stock warrants +86,090 +— +Common stock options and unvested restricted common stock +2,427,035 +1,495,919 +Shares reserved for future awards under compensation plan +3,500,620 +499,609 +6,013,745 +15,622,402 +F-32 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +8. Common stock, restricted stock, stock options and warrants (Continued) +Warrants +The following tables summarize the Company's outstanding warrants as of December 31, 2017, and 2016: +As +of December 31, 2017: +Class +Issued +and +exercisable +Weighted +Average +Exercise +price +Common stock +86,090 +$ +9.14 +86,090 +As +of December 31, 2016: +Series +Issued and +exercisable +Exercise +price +Series A-3 Preferred Stock +700,000 +$ +0.0010 +Series A-2 Preferred Stock +64,441 +$ +1.0417 +Series C Preferred Stock +111,114 +$ +3.3299 +Series C Preferred Stock +173,428 +$ +3.3299 +1,048,983 +The +Company has an agreement with a vendor (Note 9) where the Company could be obligated to issue warrants to purchase an additional 93,341 shares of common stock to the vendor if +the contract with the vendor is terminated prior to a minimum purchase commitment being met. No shares have been reserved related to these potential obligations to issue warrants in the future. +Stock options and restricted stock +Share-based compensation expense for all stock awards consists of the following: +Year ended December 31, +2017 +2016 +2015 +Cost of product revenue +$ +24 +$ +6 +$ +6 +Cost of service and other revenue +52 +12 +1 +Research and development +180 +59 +112 +General and administrative +1,912 +851 +985 +Total +$ +2,168 +$ +928 +$ +1,104 +In +June 2007, the Company adopted the 2007 Stock Option and Grant Plan (the 2007 Plan), under which it could grant incentive stock options, non-qualified stock options, restricted stock, +and stock grants. At December 31, 2016, the 2007 Plan allowed for the issuance of up to 3,229,935 shares of common stock. During the three months ended March 31, 2017, the 2007 Plan was +amended to allow for the issuance of an additional 622,277 shares of common stock for total issuance of up to 3,852,213 shares of common stock at June 30, 2017. During the three months ended +September 30, 2017 the 2007 +F-33 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +8. Common stock, restricted stock, stock options and warrants (Continued) +Plan +was further amended to allow for the issuance of an additional 497,822 shares of common stock for total issuance of up to 4,350,035 shares of common stock at September 30, 2017. As of +December 31, 2017, under the 2007 Plan, options to purchase 2,249,843 shares of our common stock were outstanding, 571,838 shares of our common stock had been issued and were outstanding +pursuant to the exercise of options, 1,128,975 shares of our common stock had been issued and were outstanding pursuant to restricted or unrestricted stock awards, and 399,379 shares of our common +stock were available for future awards. In connection with the completion of the IPO, the Company terminated the 2007 Plan. +In +December 2017, the Company adopted the 2017 Employee, Director and Consultant Equity Incentive Plan (the 2017 Plan), under which it may grant incentive stock options, non-qualified +stock options, restricted stock, and other stock-based awards. As of December 31, 2017, the 2017 Plan allowed for the issuance of up to 1,042,314 shares of common stock plus up to +2,490,290 shares of our common stock represented by awards granted under the 2007 Plan that are forfeited, expire or are cancelled without delivery of shares or which result in the forfeiture of +shares of common stock back to the Company on or after the date the 2017 Plan becomes effective. As of December 31, 2017, 1,042,314 shares were available for grant under the 2017 Plan. +In +addition, the 2017 Plan contains an "evergreen" provision, which allows for an annual increase in the number of shares of common stock available for issuance under the 2017 Plan on +the first day of each fiscal year during the period beginning in fiscal year 2019 and ending in fiscal year 2027. The annual increase in the number of shares shall be equal to the lowest of: 4% of the +number of shares of common stock outstanding as of such date; and an amount determined by the Company's Board of directors or Compensation Committee. +In +December 2017, the Company adopted the 2017 Employee Stock Purchase Plan (the 2017 ESPP). As December 31, 2017, the 2017 ESPP allowed for the issuance of up to 208,463 shares +of common stock. As of December 31, 2017, 208,463 shares were available for grant under the 2017 ESPP. +In +addition, the 2017 ESPP contains an "evergreen" provision, which allows for an increase on the first day of each fiscal year beginning with fiscal year 2018. The increase in the +number of shares shall be equal to the lowest of: 1% of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or an amount determined by the +Company's Board of Directors or Compensation Committee. +Stock options +Under the 2007 and 2017 Plans, stock options may not be granted with exercise prices of less than fair market value on the date of the grant. +Options generally vest ratably over a four-year period with 25% vesting on the first anniversary and the remaining 75% vesting ratably on a monthly basis over the +F-34 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +8. Common stock, restricted stock, stock options and warrants (Continued) +remaining +three years. These options expire ten years after the grant date. Activity under the 2007 and the 2017 Plans was as follows: +Options +Weighted- +average +exercise +price +Remaining +contractual +life +(in years) +Aggregate +intrinsic +value +(in thousands) +Outstanding at December 31, 2015 +1,043,030 +$ +2.47 +7.1 +$ +2,313 +Granted +275,484 +$ +5.16 +Exercised +(90,883 +) +$ +2.35 +Cancelled or forfeited +(107,960 +) +$ +4.13 +Outstanding at December 31, 2016 +1,119,671 +$ +2.99 +6.8 +$ +5,796 +Granted +1,281,135 +$ +8.46 +Exercised +(90,265 +) +$ +2.25 +Cancelled or forfeited +(60,698 +) +$ +6.16 +Outstanding at December 31, 2017 +2,249,843 +$ +6.05 +7.8 +$ +34,695 +Vested and expected to vest at December 31, 2017 +2,249,843 +$ +6.05 +7.8 +$ +34,695 +Exercisable at December 31, 2017 +936,334 +$ +3.50 +5.9 +$ +16,676 +Using +the Black-Scholes option pricing model, the weighted-average fair value of options granted to employees and directors during the years ended December 31, 2017, 2016, and +2015 was $4.52, $2.41 +and $2.06 per share, respectively. The expense related to awards granted to employees was $1.5 million, $0.2 million, and $0.3 million for the years ended December 31, +2017, 2016 and 2015 respectively. The intrinsic value of stock options exercised was $1.1 million, $0.4 million, and $0.1 million for the years ended December 31, 2017, +2016 and 2015, respectively. Activity related to non-employee awards was not material to the years ended December 31, 2017, 2016 and 2015. +At +December 31, 2017, there was $4.8 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the +remaining weighted-average vesting period of 3.1 years. +Restricted stock +In December 2014, the Company issued 78,912 shares of restricted common stock to a director of the Company under the 2007 Plan. Under the terms +of the agreement, shares of common stock issued are subject to a four year vesting schedule. Vesting occurs periodically at specified time intervals and specified percentages. In January 2015, the +Company issued 781,060 shares of restricted common stock to an executive of the Company under the 2007 Plan. The majority of these shares were issued subject to a four year vesting schedule with 25% +vesting on the first anniversary and the remaining vesting 75% ratably on a monthly basis over the remaining three years, while another portion was issued subject to performance based vesting. The +vesting of performance based awards is dependent upon achievement of specified financial targets of the Company. The majority of the performance criteria were achieved during the years ended +December 31, 2016 and 2015 and the remaining unvested awards with +F-35 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +8. Common stock, restricted stock, stock options and warrants (Continued) +performance +conditions are not material. No restricted stock awards were granted during the years ended December 31, 2017 or 2016. A summary of restricted stock activity is as follows: +Shares +Weighted-average +grant date +fair value +per share +Unvested restricted common stock as of December 31, 2014 +78,912 +$ +2.96 +Granted +781,060 +$ +3.12 +Vested +(236,103 +) +$ +3.12 +Unvested restricted common stock as of December 31, 2015 +623,869 +$ +3.12 +Vested +(247,621 +) +$ +3.09 +Unvested restricted common stock as of December 31, 2016 +376,248 +$ +3.12 +Vested +(199,056 +) +$ +3.12 +Unvested restricted common stock as of December 31, 2017 +177,192 +$ +3.11 +The +expense related to awards granted to employees and directors was $0.6 million, $0.7 million, and $0.8 million for the years ended December 31, 2017, 2016, +and 2015, respectively. +At +December 31, 2017, there was $0.5 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over the +remaining weighted-average vesting period of 0.7 years. +The +aggregate fair value of restricted stock awards that vested during the years ended December 31, 2017, 2016, and 2015, based on estimated fair values of the stock underlying +the restricted stock awards on the day of vesting, was $1.9 million, $1.1 million and $1.1 million, respectively. +9. Commitments and contingencies +License agreements +Tufts University +In June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University +(Tufts). Tufts is a related party to the Company due to Tuft's equity ownership in the Company and because a board member of the Company's Board of Directors was affiliated with Tufts. The License +Agreement, which was subsequently amended, is exclusive and sub licensable, and will continue in effect on a country by country basis as long as there is a valid claim of a licensed patent in a +country. The Company is committed to pay license and maintenance fees, prior to commercialization, in addition to low single digit royalties on direct sales and services and a royalty on sublicense +income. During the year ended December 31, 2016, the Company executed a license agreement with a diagnostic company and also amended the bioMérieux agreement (Note 11). +The Company accrued $0.4 million for license fees related to these arrangements during the year ended +F-36 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +9. Commitments and contingencies (Continued) +December 31, +2016, which were recorded to cost of collaboration and license revenue on the consolidated statements of operations and comprehensive loss. During the years ended +December 31, 2017, 2016 and 2015, the Company recorded royalty expense of $0.5 million, $0.3 million and $0.2 million, respectively, in cost of product revenue on the +consolidated statements of operations and comprehensive loss. +Other licenses +During the year ended December 31, 2012, the Company entered into a license agreement for certain intellectual property with a third +party. The non-exclusive, non-sublicenseable +third party's license provides the Company access to certain patents specifically for protein detection, and shall be in effect until the expiration of the last licensed patent. In consideration for +these rights, the Company committed to certain license fees, milestone payments, minimum annual royalties and a mid-single digit royalty. The license also extends to bioMérieux as a +partner of the Company, in addition to containing restrictions on a change of control of the Company and identification of excluded parties, without the third party's prior consent. The Company is +required to make mid-single digit royalty payments on net sales of products and services which utilize the licensed technology. The Company must pay the greater of calculated royalties on net sales or +an annual minimum royalty of $50 thousand. During the year ended December 31, 2017, 2016 and 2015, the Company recorded royalty expense of $0.2 million, $0.3 million, and +$0.2 million, respectively, in cost of product revenue on the consolidated statements of operations. +Lease commitments +During the year ended December 31, 2014, the Company entered into a lease agreement for the Company's current corporate headquarters with +a lease term that expires in June 2020 which can be extended to June 2023. The lease agreement contains a period of free rent and annual increases to rental amounts. Rent expense is recognized +straight-line over the course of the lease term. As of December 31, 2017, $0.1 million of deferred rent expense was recorded in other non-current liabilities, and less than +$0.1 million was recorded in other accrued expenses. +As +of December 31, 2017, the minimum future rent payments under the lease agreement and amendment are as follows (in thousands): +Years ending December 31: +2018 +$ +1,155 +2019 +1,196 +2020 +605 +$ +2,956 +The +Company recorded $1.1 million, $1.1 million and $0.9 million in rent expense for the years ended December 31, 2017, 2016 and 2015, respectively. +F-37 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +9. Commitments and contingencies (Continued) +Development and supply agreement +On August 15, 2011, the Company signed a Development Services and Equity Participation Agreement (Development Agreement) with a strategic +manufacturing partner, STRATEC Biomedical Systems (STRATEC Biomedical), for the development/customization and manufacture of an instrument based on STRATEC technology using the Company's +single-molecule assay (Simoa) technology. Under the terms of the Development Agreement, the Company was originally required to pay a fee of $1.5 million (the Development Fee) and issue warrants +(the Development Warrants) for the purchase of 2,000,000 shares of Series A-3 Preferred Stock at an exercise price of $0.001 per share. The Development Warrants become exercisable upon the +achievement of certain developmental milestones. +The +Company also had entered into a supply agreement with STRATEC Biomedical which requires the Company to purchase a minimum number of commercial units over a seven-year period ending +in May 2021. If the Company were to fail to purchase a required number of commercial units, the Company would be obligated to pay termination costs and in addition a fee based on the shortfall of +commercial units purchased compared to the required minimum amount. Based on the number of commercial instruments purchased as of December 31, 2017, assuming no additional commercial units were +purchased, this fee would equal $11.9 million. The amount the Company could be obligated to pay under the minimum purchase commitment is reduced as each commercial unit is purchased. Also, if +the Company terminates the Supply Agreement under certain circumstances and has not purchased a required number of commercial units, it would be obligated to issue warrants to purchase 93,341 shares +of common stock (the Supply Warrants) at $0.003.214 per share. The Company believes that it will purchase sufficient units to meet the requirements of the minimum purchase commitment and, therefore, +has not accrued for any of the potential cash consideration. The Supply Warrants are accounted for at fair value; however, the fair value of the Supply Warrants as of December 31, 2017 and 2016 +was insignificant as there was a low probability of the warrants being issued. +During +the year ended December 31, 2016, the Development Agreement was amended (the Amendment) to modify the deliverables related to the final milestone, to agree on instrument +design changes to be implemented, and to reduce the minimum purchase commitment. Prior to the Amendment, the Company had paid $0.9 million of the $1.5 million Development Fee and issued +1.3 million of the 2.0 million Development Warrants to purchase shares of Series A-3 Preferred Stock, which were exercised during the year ended December 31, 2016. The +final milestone in the Development Agreement included the release of an in vitro diagnostic (IVD) instrument for manufacturing and was determined to not be probable of completion and, as a result, no +expense had been recorded related to this milestone in the year ended December 31, 2016 or prior years. +Upon +signing the Amendment, the Company agreed to issue the remaining 700,000 Development Warrants immediately, in consideration for reducing the required number of commercial units to +be purchased and certain development activities, and those warrants were fully vested upon issuance. The reduction in the minimum purchase commitment did not affect the fee that would be payable based +on the units purchased as of December 31, 2016 assuming no additional units were purchased. The Company recognized a total of $2.1 million in research and development expense for the +year ended +December 31, 2016 for the issuance of the additional Development Warrants representing the fair value of the 700,000 warrants at the time of issuance. These Development Warrants were exercised +during the three months ended March 31, 2017. +F-38 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +9. Commitments and contingencies (Continued) +Additionally, +the parties agreed on additional development services for an additional fee, which is payable when the additional development is completed. The fee includes the final +Development Fee of $0.6 million that was due under the terms of the Development Agreement. These amounts are being recorded to research and development expense and accrued expenses as the +services are performed. The services are expected to be completed during the year ending December 31, 2018. Substantive efforts related to these additional development activities started in the +first quarter of 2017. +Legal contingencies +The Company is subject to claims in the ordinary course of business; however, the Company is not currently a party to any pending or threatened +litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results of its operations. The Company accrues for contingent liabilities to the +extent that the liability is probable and estimable. +10. Notes payable +Loan agreement +On April 14, 2014, the Company executed a Loan Agreement with a lender. The Loan Agreement provided a total debt facility of +$10.0 million which is secured by substantially all of the assets of the Company. At closing, the Company borrowed $5.0 million in principal and had the ability to draw the additional +$5.0 million over the period from November 1, 2014 to March 31, 2015. The interest rate on this term loan is variable based on a calculation of the prime rate less 5.25% with a +minimum interest rate of 8%. Interest is paid monthly beginning the month following the borrowing date. Principal payments were scheduled to begin on September 1, 2015, unless the Company +achieved certain milestones which would extend this date to either December 1, 2015 or March 1, 2016. The Loan Agreement also contains prepayment penalties and an end of term charge. The +end of term charge of $0.2 million is being accreted over the life of the loan. +In +connection with the Loan Agreement, the Company granted the lender warrants to purchase shares of either Series C Preferred Stock or shares of preferred stock in the next +financing round. Following the completion of the IPO, these warrants became exercisable for shares of the Company's common stock. The number of warrants eligible to be issued increases as the Company +draws on the facility. Therefore, additional warrants will be issued if the Company draws on any of the remaining debt facility. The warrants issued in connection with the initial borrowing were +initially recorded at fair value of $0.1 million as a preferred stock warrant liability in the accompanying consolidated balance sheets and a corresponding debt discount was recorded. +The +Company also incurred debt issuance costs of $0.1 million. As a result of the debt discounts recorded related to the warrants and the debt issuance costs, the debt was +initially recorded at less than +its face value. The debt, including the end of term charge, is being accreted over the life of the loan using the effective interest method. +The +Loan Agreement also provided the lender with a right to invest up to $1.0 million or, subject to Company approval and consent, to convert up to $1.0 million of +outstanding principal into shares of preferred stock in the next financing round at the same price as all other investors. The lender invested $1.0 million in March 2016 as part of the +Series D Preferred Stock financing. +F-39 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +10. Notes payable (Continued) +Amendment 1 to loan agreement +On March 4, 2015, the Company executed Amendment 1 to the Loan Agreement (Amendment 1) and borrowed the remaining +$5.0 million that was available under the loan facility. The terms of Amendment 1 allowed the Company to defer the commencement of principal payments to December 1, 2015 and extended the +loan maturity date to February 1, 2018. If the Company obtained at least $10.0 million in equity financing before December 1, 2015, the commencement of principal payments could be +further deferred until March 1, 2016 and the loan maturity date could be extended to May 1, 2018. As the financing milestone was not achieved, the Company made the first principal +payment of $0.3 million on December 1, 2015 and the loan maturity date was February 1, 2018 under Amendment 1. +The +additional $5.0 million borrowed included an additional $0.2 million end of term charge. The end of term charge on this borrowing is being accreted over the life of the +loan as additional interest expense. The additional borrowing also resulted in the issuance of additional warrants with a grant date fair value of $0.1 million. The fair value of the additional +warrants were initially recorded at fair value as a preferred stock warrant liability in the accompanying consolidated balance sheets and a corresponding debt discount was recorded. The debt, +including the end of term charge, is being accreted over the remaining life of the loan using the effective interest method. +Amendment 2 to loan agreement +In January 2016, the Company executed Amendment 2 to the Loan Agreement (Amendment 2). Amendment 2 increased the total facility available by +$5.0 million to a total of $15.0 million and further delayed the commencement of principal payments to July 1, 2016. Under Amendment 2, following the Series D Preferred +Stock financing (Note 6), the Company could have elected to further delay the commencement of principal payments until January 1, 2017, however the Company voluntarily began paying +principal on July 1, 2016. Upon signing Amendment 2, the Company drew an additional $3.0 million under the debt facility. The remaining $2.0 million available under the facility +expired unexercised in April 2016, which reduced the amounts available under the facility to $13.0 million. +The +additional $3.0 million borrowed included an additional $0.1 million end of term charge. The end of term charge on this borrowing is being accreted over the life of the +loan. The additional borrowing also resulted in the issuance of additional warrants with a grant date fair value of $0.1 million. The fair value of the additional warrants were initially +recorded at fair value as a preferred stock warrant liability in the accompanying consolidated balance sheets and a corresponding debt discount was recorded. The debt, including the end of term +charge, is being accreted to over the remaining life of the loan using the effective interest method. +Amendment 3 to loan agreement +In March 2017, the Company signed Amendment 3 to the Loan Agreement (Amendment 3). Amendment 3 increased the total facility available by +$5.0 million to a total of $18.0 million. Additionally, the lender may provide an additional optional term loan, solely at the lender's discretion, for an incremental +$5.0 million, increasing the total potential facility to $23.0 million. As of December 31, 2017, the Company has not drawn any of this additional facility. The terms of Amendment +3 allowed the Company to defer the commencement of principal payments to March 1, +F-40 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +10. Notes payable (Continued) +2018 +and extended the loan maturity date to March 1, 2019. Amendment 3 did not change the due date of the existing end of term fees of $0.5 million which remained due on +February 1, 2018. Upon signing Amendment 3, the Company did not draw any of the additional amounts available under the amended +debt facility and no amounts have been subsequently drawn under the facility. The Company has until September 3, 2018 to draw the additional amounts. +In +connection with Amendment 3, the Company issued the lender additional warrants with a grant date fair value of $0.1 million. The fair value of the additional warrants were +initially recorded at fair value as a preferred stock warrant liability in the accompanying consolidated balance sheets and a corresponding debt discount was recorded. The debt is being accreted to +its face value over the remaining life of the loan using the effective interest method. +Debt +payment obligations and end of term fees due based on principal payments commencing on March 1, 2018, are as follows (in thousands): +Years ending December 31: +2018 +$ +5,133 +2019 +4,430 +$ +9,563 +Non-cash +interest expense related to debt discount amortization and accretion of end of term fees was $0.2 million, $0.4 million, and $0.3 million for the year ended +December 31, 2017, 2016, and 2015, respectively. +The +Company assessed all terms and features of the Loan Agreement and the subsequent amendments in order to identify any potential embedded features that would require bifurcation. As +part of this analysis, the Company assessed the economic characteristics and risks of the debt. The Company determined that all features of the Loan Agreement and the subsequent amendments are either +clearly and closely associated with a debt host or have a de minimis fair value and, as such, do not require separate accounting as a derivative liability. The Company assessed each amendment under +ASC 470-50 and concluded that all of the amendments constituted modifications. In this analysis, consideration was given to the fact that Amendments 1 and 2 were executed within one year of each +other. The Company also assessed whether the amendments represented a troubled debt restructuring and concluded they did not. The Company accounted for each of the amendments to the Loan Agreement as +a modification of its debt and the unamortized discount and issuance costs related to the prior debt are amortized over the modified term of the new debt. +The +Loan Agreement and the subsequent amendments contain negative covenants restricting the Company's activities, including limitations on dispositions, mergers or acquisitions, +incurring indebtedness or liens, paying dividends or making investments and certain other business transactions. There are no financial covenants associated with the Loan Agreement and the subsequent +amendments. The obligations under the Loan Agreement and subsequent amendments are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in +the Company's business, operations or financial or other condition. The Company has determined that the risk of subjective acceleration under the material adverse events clause is not probable and +therefore has classified the outstanding principal in current and long-term liabilities based on scheduled principal payments. +F-41 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +11. Collaboration and license arrangements +Joint development and license agreement (JDLA) +In November 2012, the Company entered into the JDLA with bioMérieux, a related party. As discussed below, the JDLA has been +subsequently amended. Under the terms the JDLA, the Company granted bioMérieux an exclusive, royalty-bearing license, without right to sublicense, to manufacture and sell instruments +and assays using our Simoa technology exclusively for in vitro diagnoses used in clinical lab applications, food quality control testing, and pharma quality control testing, and co-exclusively in +certain related fields, as defined in the contract. As part of the JDLA, the Company was also to develop and manufacture instruments to bioMérieux's specifications for +bioMérieux's use or for sale by bioMérieux. The Company retained rights to sell the instrument in the co-exclusive fields and any other fields not licensed exclusively to +bioMérieux. bioMérieux was to develop and sell diagnostic assays to be used in conjunction with the Company's instruments. +Upon +execution of the JDLA, the Company received $10.0 million in consideration and was entitled to receive two additional payments of $5.0 million each upon the +achievement of certain developmental criteria. Neither of these criteria have been achieved. The Company was also entitled to receive royalty payments on the sale of assays and payments for the +manufacture and delivery of instruments based on a contractual rate subject to future adjustments. +At +the inception of the JDLA, the Company determined that the deliverables were as follows: (1) licenses to the Company's technology and trademarks, training, completion and +delivery of a prototype instrument per contractual specifications (License and Protoype), (2) various activities to assist bioMérieux in the development of the initial assay and +an instrument that is IVD compliant (Initial Assay Assistance), (3) various activities to assist bioMérieux in the development of a benchtop instrument (Benchtop Assistance), and +(4) joint steering committee participation (JSC). Each of these deliverables were considered separate units of accounting, and the License and Prototype unit of accounting was determined to +have standalone value as the License and Prototype unit of accounting could be utilized by bioMérieux without the related services included in the other units of accounting. +The +Company allocated the allocable arrangement consideration based on the relative selling price of each unit of accounting. For all units of accounting, the Company determined the +selling price using the best estimate of selling price (BESP). Management's best estimate of the selling price of the License and Prototype unit of accounting was based on a discounted cash flow +analysis to support the estimated selling price of the license. The Company determined the BESP of the other units of accounting based on internal estimates of the costs to perform the services, +adjusted to reflect a reasonable profit margin as well as based on market prices for similar instruments and services. +Revenue +related to the License and Prototype unit of accounting of $8.3 million was recognized in 2013 upon delivery of both the license which was delivered at inception, and the +first prototype instrument, which was required for bioMérieux to make use of the license. Prior to the effect of the 2016 Amendment described below, revenue for the other units of +accounting were recognized over an estimated period of performance. +Amendments to the JDLA +In May 2014 and January 2015, the parties executed a First and Second Amendment to the JLDA, respectively. These amendments addressed revised +timelines related to completing the development activities under the JDLA and enacted additional governance protocols to monitor those activities. +F-42 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +11. Collaboration and license arrangements (Continued) +These +amendments did not change the deliverables under the JDLA or the total arrangement consideration. The Company revised its estimates of the remaining period of performance for the +remaining undelivered units of accounting and these revisions did not have a material effect on revenue recognition. +On +December 22, 2016, the Company entered into the 2016 Amendment which ended the ongoing joint development efforts between the parties, and modified the rights and obligations of +both parties accordingly, as follows: +• For a period of not more than three years from the date of the 2016 Amendment bioMérieux has the ability to evaluate +independently whether it will develop a new, smaller in vitro diagnostic instrument using the Simoa technology for use in clinical lab applications, food quality control testing, and pharmaceutical +quality control testing benchtop (the "Feasibility Period") and has the sole right to determine whether or not to develop such a new instrument during the Feasibility Period. If +bioMérieux does elect to pursue development of such a new instrument, they will have a set number of years to complete development within a specified period, which contains various +development milestones which must be accomplished. +• bioMérieux received a license to the source and object code of the Company's Level 1 Data Reduction (L1DR) software. The +L1DR software the Company's proprietary image processing algorithms that convert images of microscopic beads associated with biomarker molecules in microwells. Also, the Company must provide to +bioMérieux access to any know how and intellectual property associated with the L1DR software, including any updates and upgrades to the L1DR software during the Feasibility Period. If +bioMéreiux exercises its right to develop an instrument independently, this right will continue throughout the development period to the end of the term of the agreement related to +independently developed instruments. +• It was clarified that the Company can engage a collaboration partner (IVD Partner), subject to restrictions as to the particular parties with +which the Company could elect to partner and the assays that can be developed, in the field of in vitro diagnostics used in Clinical Lab Applications. The Company shall pay bioMérieux a +mid-double-digit percentage of royalties received from the IVD Partner based on assays sales by the IVD Partner. +• bioMérieux's licenses include all patents and know-how owned or controlled by the Company related to the Company's Simoa +technology and upgrades thereto that are necessary for the development, manufacture, use or sale of instruments and assays or consumables on such instruments over the Feasibility Period. If +bioMérieux exercises its right to develop an instrument independently, this right will continue throughout the development period to the end of the term of the 2016 Amendment related to +independently developed instruments. +• bioMérieux retains an option (the Option) to obtain worldwide distribution rights to the HD-1 floor standing instrument in the +applicable fields. The Option is exercisable over a three year period and upon exercise, the Company and bioMérieux are required to negotiate, in good faith, a distribution agreement +that would include a specified upfront payment. +The +2016 Amendment included a cash payment of $2.0 million from bioMérieux which was paid in January 2017. +F-43 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +11. Collaboration and license arrangements (Continued) +Accounting assessment +Prior to the execution of the 2016 Amendment, the Company was recognizing revenue over the estimated period of performance of the ongoing units +of accounting (Initial Assay Assistance, Benchtop Assistance, and JSC). As a result, the Company recognized $0.2 million and $0.2 million in revenue for the years ended +December 31, 2015 and 2016, respectively. At the date of the execution of the 2016 Amendment, the Company had $1.2 million in deferred revenue related to the JDLA. Upon the execution of +the 2016 Amendment, all undelivered elements and contingent consideration of the JDLA were cancelled. The Company determined the 2016 Amendment should be accounted for as a modification to the JDLA +and the balance of deferred revenue prior to the 2016 Amendment should be included as allocable consideration under the 2016 Amendment resulting in total allocable consideration of +$3.2 million. The Company recorded an increase to deferred revenue upon receipt of the $2.0 million during the three months ended March 31, 2017. +The +Company has determined that the deliverables included under the 2016 Amendment are rights to the L1DR software, training and rights to future technology improvements for L1DR +Software, rights +to all future technological improvements related to the Simoa technology, and participation on joint committees. +The +Company determined that the L1DR and rights to unspecified technology improvements (the "L1DR Unit of Accounting") includes the sale of software and software related elements and +therefore should be accounted for under ASC 985-605 —Software Revenue Recognition . The Company cannot demonstrate Vendor Specific Objective +Evidence (VSOE) of fair value for the ongoing obligation to provide unspecified technology improvements. Therefore, the deliverables in the L1DR Unit of Accounting cannot be separated. The Company has +applied the combined service approach and the consideration allocated to this unit of accounting is being recognized ratably over the estimated period of performance, which has initially been +determined to be estimated to be the three year Feasibility Period. This will be reevaluated each period to determine if there are any changes to the estimated period of performance. +The +Company concluded that the rights to future technology improvements for the Simoa technology and the participation on joint committees represented a second unit of accounting (the +"Instrument Know How Unit of Accounting"). The deliverables in the Instrument Know How Unit of Accounting are considered non-software deliverables that are subject to ASC 605-25 and will be delivered +over time on a when and if available basis. Revenue is being recognized on a straight line basis over the estimated period of performance, which has initially been determined to be the three year +Feasibility Period. This period will be reevaluated each period to determine if there are any changes to the period of performance. +The +Option is considered substantive as the Company is at risk with regard to whether bioMérieux will exercise the Option. In addition, the Option exercise payment payable +by bioMérieux upon exercise is not priced at a significant and incremental discount. Accordingly, the Option is not considered a deliverable at the inception of the arrangement and the +associated Option exercise payment is not included in allocable arrangement consideration. +The +Company recognized revenue of $1.1 million for the year ended December 31, 2017 as collaboration revenue and as of December 31, 2017, $2.1 million of +arrangement consideration remains +F-44 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +11. Collaboration and license arrangements (Continued) +in +deferred revenue. Revenue recognized for the year ended December 31, 2016 following the 2016 Amendment was not material. +Under +the 2016 Agreement the Company is eligible to receive royalties on net sales of assays sold by bioMérieux in the mid to high single digits, and to receive low double +digit royalties on sales of instruments by bioMérieux based on manufactured cost. No royalties have been recognized through December 31, 2017. +Evaluation and option agreements and license agreement +In 2015, the Company entered into three agreements, for three separate fields, with a diagnostic company for the evaluation of the Company's +Simoa technology. These agreements each allowed for the option to negotiate a license agreement. In return, the Company received non-refundable payments totaling $2.0 million. In December 2016, +the diagnostic company exercised one of its options and the parties entered into a license agreement in one of the fields. This agreement has a one-time non-refundable license fee of +$1.0 million and the right to receive running low single digit royalties on licensed products. The negotiation periods for the other two agreements were extended and the negotiations remain +ongoing. +For +each of the three fields, the right to evaluate the technology, the right to negotiate a license to the technology, and the undelivered license to the technology represents a +combined unit of accounting, and the licenses to each of the three fields each have standalone value. The Company has allocated the allocable arrangement consideration based on the relative selling +price of each unit of accounting. The BESP of each of the three options was determined to be representative of the contractual amount paid for each option. The Company defers the amounts allocated to +each of the three options until the corresponding license is delivered or, if no license agreement is executed and delivered, when the negotiations for each option terminates. +Upon +execution of the license in one of the fields in December 2016, the $1.0 million license fee, in addition to the $0.8 million allocated to the option for this field, +resulted in a total of $1.8 million of consideration being recognized as revenue as there were no remaining undelivered performance obligations. Because the negotiations remain ongoing with +respect to the other two fields, the consideration allocated to these options of $1.2 million has been deferred and is recorded as deferred revenue as of December 31, 2017 and 2016. +12. Employee benefit-plans +The Company sponsors a 401(k) savings plan for our employees The Company may make discretionary contributions for each 401(k) plan year. During the year years ended December 31, +2017 and 2016 the Company did not make contributions to the plan. +13. Related party transactions +As described in Notes 11 and 7, bioMérieux is a customer through its Joint Development and License Agreement and also a holder of the Company's common stock. +bioMérieux formerly also had a designee on the Company's Board of Directors. The Company recognized revenue related to the JDLA with bioMérieux of $1.1 million, +$0.2 million, and $0.2 million, in the years ended December 31, 2017, 2016, and 2015 respectively, from bioMérieux. The Company also had deferred revenue of +$2.1 million +F-45 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +13. Related party transactions (Continued) +and +$1.3 million at December 31, 2017 and 2016, respectively. As described in Note 7, bioMérieux purchased shares of our Series C Preferred Stock totaling +$7.0 million in the year ended December 31, 2015. +As +described in Note 7, in March 2016, the Company issued an aggregate of 12,420,262 shares of Series D Preferred Stock for an aggregate purchase price of +$45.6 million. Of the amount issued, $22.9 million was purchased by the Company's existing principal stockholders, officers and directors. +As +described in Note 7, in June 2017, the Company issued an aggregate of 2,113,902 share of Series D-1 Preferred Stock for an aggregate purchase price of +$8.5 million. Of the amount issued, $1.0 million was purchased by a director of the Company. +As +described in Note 9, in June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University (Tufts). Tufts +is a related party to the Company due to Tuft's equity ownership in the Company and because a board member of the Company's Board of Directors was affiliated with Tufts. During the years ended +December 31, 2017, 2016, and 2015 the Company recorded royalty expense of $0.5 million, $0.3 million and $0.2 million, respectively, in cost of product revenue on the +consolidated statements of operations and comprehensive loss. During the year ended December 31, 2016, the Company recognized $0.4 million as cost of license revenue associated with a +payment made to Tufts. +During +the year ended December 31, 2017 Harvard University became a related party. Revenue recorded from sales to Harvard University were less than $0.1 million for the +year ended December 31, 2017. +F-46 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +14. Quarterly Data +Quarterly Results (Unaudited) +(in thousands, except per share data) +2017 +Q1 +Q2 +Q3 +Q4 +Total Year +Product revenue +$ +3,425 +$ +3,337 +$ +3,293 +$ +4,069 +$ +14,124 +Service and other revenue +1,644 +1,608 +2,172 +2,252 +7,676 +Collaboration and license revenue +269 +268 +269 +268 +1,074 +Total revenue +5,338 +5,213 +5,734 +6,589 +22,874 +Operating expenses: +Cost of product revenue +1,834 +1,834 +1,905 +2,169 +7,742 +Cost of services and other revenue +1,144 +1,198 +1,264 +1,539 +5,145 +Cost of license revenue, related party +— +— +— +— +— +Research and development +4,250 +3,903 +4,224 +3,927 +16,304 +Selling, general and administrative +4,166 +4,747 +4,728 +6,047 +19,688 +Total operating expenses +11,394 +11,682 +12,121 +13,682 +48,879 +Loss from operations +(6,056 +) +(6,469 +) +(6,387 +) +(7,093 +) +(26,005 +) +Interest expense, net +(255 +) +(240 +) +(240 +) +(216 +) +(951 +) +Other (expense) income, net +(80 +) +77 +13 +(73 +) +(63 +) +Net loss +$ +(6,391 +) +$ +(6,632 +) +$ +(6,614 +) +$ +(7,382 +) +$ +(27,019 +) +Reconciliation of net loss to net loss attributable to common stockholders: +Net loss +$ +(6,391 +) +$ +(6,632 +) +$ +(6,614 +) +$ +(7,382 +) +$ +(27,019 +) +Accretion of preferred stock to redemption value +(1,090 +) +(1,099 +) +(1,112 +) +(809 +) +(4,110 +) +Accrued dividends on preferred stock +(16 +) +(16 +) +(16 +) +(11 +) +(59 +) +Net loss attributable to common stockholders +$ +(7,497 +) +$ +(7,747 +) +$ +(7,742 +) +$ +(8,202 +) +$ +(31,188 +) +Net loss per share attributable to common stockholders, basic and diluted +$ +(3.18 +) +$ +(3.21 +) +$ +(3.13 +) +$ +(1.06 +) +$ +(8.30 +) +Weighted-average common shares outstanding, basic and diluted +2,357,503 +2,416,984 +2,475,166 +7,731,514 +3,756,954 +F-47 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +14. Quarterly Data (Continued) +2016 +Q1 +Q2 +Q3 +Q4 +Total Year +Product revenue +$ +2,999 +$ +2,307 +$ +2,129 +$ +3,166 +$ +10,601 +Service and other revenue +1,014 +1,090 +1,226 +1,682 +5,012 +Collaboration and license revenue +47 +47 +47 +1,831 +1,972 +Total revenue +4,060 +3,444 +3,402 +6,679 +17,585 +Operating expenses: +Cost of product revenue +1,543 +1,650 +1,308 +1,798 +6,299 +Cost of services and other revenue +742 +732 +771 +918 +3,163 +Cost of license revenue, related party +— +— +— +375 +375 +Research and development +3,366 +3,423 +3,403 +6,801 +16,993 +Selling, general and administrative +2,723 +3,067 +3,076 +3,600 +12,466 +Total operating expenses +8,374 +8,872 +8,558 +13,492 +39,296 +Loss from operations +(4,314 +) +(5,428 +) +(5,156 +) +(6,813 +) +(21,711 +) +Interest expense, net +(325 +) +(364 +) +(323 +) +(286 +) +(1,298 +) +Other (expense) income, net +164 +(76 +) +(37 +) +(215 +) +(164 +) +Net loss +$ +(4,475 +) +$ +(5,868 +) +$ +(5,516 +) +$ +(7,314 +) +$ +(23,173 +) +Reconciliation of net loss to net loss attributable to common stockholders: +Net loss +$ +(4,475 +) +$ +(5,868 +) +$ +(5,516 +) +$ +(7,314 +) +$ +(23,173 +) +Accretion of preferred stock to redemption value +(1,110 +) +(1,101 +) +(1,113 +) +(1,113 +) +(4,437 +) +Accrued dividends on preferred stock +— +— +(1 +) +(7 +) +(8 +) +Net loss attributable to common stockholders +$ +(5,585 +) +$ +(6,969 +) +$ +(6,630 +) +$ +(8,434 +) +$ +(27,618 +) +Net loss per share attributable to common stockholders, basic and diluted +$ +(2.73 +) +$ +(3.30 +) +$ +(3.06 +) +$ +(3.77 +) +$ +(12.89 +) +Weighted-average common shares outstanding, basic and diluted +2,046,895 +2,114,136 +2,169,105 +2,239,869 +2,142,840 +15. Subsequent events +The Company has evaluated, for potential recognition and disclosure, events that occurred prior to the date at which the consolidated financial statements were available to be issued. +All material subsequent events are disclosed in the preceding notes and in the following paragraph. +(a) On +January 30, 2018, the Company acquired Aushon Biosystems, Inc. (Aushon). Aushon is a leader in protein biomarker discovery, development and +analysis. The Company paid $3.2 million in cash, with an additional payment of $0.8 million to be made six months after the acquisition date assuming certain post-closing conditions are +met. +F-48 \ No newline at end of file diff --git a/raw/filings/0001503274/2017/0001047469-18-001842/filing_metadata.csv b/raw/filings/0001503274/2017/0001047469-18-001842/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..636d7e1f54e3d2b31a3475d381508e3eafb30660 --- /dev/null +++ b/raw/filings/0001503274/2017/0001047469-18-001842/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001503274,QTRX,Quanterix Corp,10-K,2018-03-19,2017-12-31,2018-03-19T20:48:00.000Z,0001047469-18-001842,a2234843z10-k.htm,10-K,6431602,0,0,https://www.sec.gov/Archives/edgar/data/1503274/000104746918001842/a2234843z10-k.htm,https://www.sec.gov/Archives/edgar/data/1503274/000104746918001842/,2017,2017,1 diff --git a/raw/filings/0001503274/2017/0001047469-18-001842/item1.txt b/raw/filings/0001503274/2017/0001047469-18-001842/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..3a153da6acad351b77b2d68c948b5995b6d2bbd8 --- /dev/null +++ b/raw/filings/0001503274/2017/0001047469-18-001842/item1.txt @@ -0,0 +1,1087 @@ +Item 1. BUSINESS +Overview +We are a life sciences company that has developed a next generation, ultra-sensitive digital immunoassay platform that advances precision health +for life sciences research and diagnostics. Our platform enables customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, +are undetectable using conventional, analog immunoassay technologies. It also allows researchers to define and validate the function of novel protein biomarkers that are only present in very low +concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has +not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the +development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, +prevention. We are currently focusing our platform on protein detection, which we believe is an area of significant unmet need and where we have significant competitive advantages. In addition to +enabling new applications and insights in protein analysis, we are also developing our Simoa technology to detect nucleic acids in biological samples. +Our +platform is based on our proprietary digital si ngle mo lecule a rray, or Simoa, detection technology, which is +the most sensitive commercially available protein detection technology. Simoa significantly advances +ELISA technology, which has been the industry standard for protein detection for over forty years. Proteins are complex molecules that are required for the structure, function and regulation of the +body's tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It +is estimated that these 20,000 genes can produce over 100,000 different proteins, approximately 10,500 of which are known to be secreted in blood. Accordingly, while research on nucleic acids provides +valuable information about the role of genes in health and disease, proteins are more prevalent and, we believe, more relevant to a precise understanding of the nuanced continuum between health and +disease. Protein measurement goes beyond genetic predisposition, reflecting the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more +relevant insight into what is happening in a person's body in real time. +Researchers +and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable using +conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low +abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa's sensitivity offers a new way to monitor healthy individuals and detect +proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical +signs and symptoms have appeared. +Our +Simoa platform has achieved significant scientific validation and commercial adoption. Simoa has been cited by published research in more than 215 articles in peer-reviewed +publications covering over +165 biomarkers in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over +200 customers across our end markets, and includes 17 of the 20 largest biopharmaceutical companies. +On +January 30, 2018, we acquired Aushon BioSystems, Inc., or Aushon. We believe that this acquisition provides us technologies and expertise to help further expand our +instrument and biomarker menu. Additionally, we expect that Aushon's CLIA-certified laboratory will help accelerate our entry into pharmaceutical services. +Table of Contents +Our Market Opportunities +Our Simoa technology has applications across the life science research, diagnostics and precision health screening markets. Our initial target +market has been the life science research market. While we have received revenue from upfront and milestone payments related to collaborations with diagnostic companies, neither we nor any of our +diagnostic partners have sold Simoa products or services in the diagnostics or precision health screening markets. As our customers continue to gain experience with our proprietary Simoa technology, +we believe the opportunity to access markets beyond research will be significant. According to estimates in the Third-Party Research Report, we believe the future aggregate market opportunity for us +and others using our Simoa technology has the potential to expand to approximately $38 billion, approximately $30 billion of which would be addressable by Simoa upon receipt of the +necessary regulatory approvals to market our products in areas other than life science research, which we have not yet begun the process to obtain. +Life Science Research +Our initial target market is the large and growing life science research market. We believe Simoa is well-positioned to capture a significant +share of this market because of its superior sensitivity, automated workflow capabilities, multiplexing and its ability to work with a broader range of sample types. By substantially lowering the +limit of detection of protein biomarkers, we believe that Simoa is penetrating the existing market for protein analysis and holds potential to significantly grow the life science research market as +researchers expand their research into the diseases associated with the thousands of proteins that were previously undetectable. Simoa also enables earlier detection of the proteins that are currently +detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. As an indication of the market's acceptance of our Simoa platform, biopharmaceutical +researchers are also integrating our platform into drug development protocols to more efficiently and effectively develop drugs. In addition to enabling new applications and insights in protein +analysis, our Simoa technology can be used to detect nucleic acids, which expands our market opportunity. We believe that Simoa has the potential to ultimately provide the same sensitivity as +polymerase chain reaction, or PCR, which is the most commonly used technology for nucleic acid detection, without the distortion and bias issues associated with amplification used in PCR. +According +to estimates in the Third-Party Research Report, we believe that the total life science research market addressable by Simoa, including both proteomics and genomics research, +is $3 billion per year and has the potential to reach $8 billion per year. +Diagnostics +The diagnostic market represents a significant commercial opportunity for Simoa as well. We believe existing diagnostics can be improved by +Simoa's sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog +immunoassay technologies but are detectable using Simoa. We also believe that the ultra-sensitive protein detection provided by Simoa can enable the development of a new category of non-invasive +diagnostic tests and tools based on blood, serum, saliva and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, +diagnostic imaging and biopsy. In order to accelerate the use of our technology to develop applications in the diagnostic market, we have entered into a collaboration agreement with +bioMérieux, a leading diagnostic company. +Simoa +also has significant potential in the emerging field of companion diagnostics. Drug developers can use Simoa to stratify patients into categories, enabling selection of those +patients for whom a drug is expected to be most effective and safe. Not only can Simoa be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa's +sensitivity also +2 +Table of Contents +enables +the development of companion diagnostics based on protein biomarkers that can regularly monitor whether an approved drug is having the desired biological effect, enabling doctors to quickly +and efficiently adjust the course of treatment as appropriate. +Precision Health Screening +Simoa's ability to detect and quantify normal physiological levels of proteins in low abundance that are undetectable using conventional, analog +immunoassay technologies may enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of +the onset of disease. We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood +draw on a regular, ongoing basis as part of a patient's routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of +disease, prior to the appearance of symptoms. +According +to estimates in the Third-Party Research Report, we believe that the total diagnostic and precision health screening markets addressable by us and others using Simoa have the +potential to reach an aggregate of $30 billion per year, which would be addressable upon receipt of the necessary regulatory approvals to market our products in areas other than life science +research, which we have not yet begun the process to obtain. +Products +sold by us or collaborators in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including +requirements for regulatory clearance or approval of such products before they can be marketed. To date, neither we nor any of our diagnostic partners have received or applied for regulatory approvals +for Simoa products. See "Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement" and "—Government Regulation" for a more detailed discussion +regarding the regulatory approvals that may be required. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme-linked immunosorbent assay, or ELISA, technology, which has been the most widely +used method of detection of proteins for over 40 years. Given our target customers' familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. +Simoa differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional +ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to Simoa's unprecedented +sensitivity. +We +commercially launched our Simoa HD-1 Analyzer in January 2014. The HD-1 Analyzer is the most sensitive protein detection platform commercially available, and is currently capable of +analyzing up to six biomarkers per test, with anticipated expansion of biomarker capability per test in 2018. Assays run on the HD-1 Analyzer are also fully automated. We believe that the increased +multiplexing capability and the full automation of the HD-1 Analyzer provides us with an additional significant competitive advantage with biopharmaceutical customers. We have currently developed more +than 80 Simoa digital biomarker assays. The Simoa platform also allows ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called "homebrew" assays. We +intend to continue to increase the number of Simoa digital biomarker assays. +We +continually seek to expand our product offerings to meet the needs of our customers. To that end, we have developed a new instrument, the Quanterix SR-X, which we commercially +launched in December 2017. The Quanterix SR-X utilizes the same core Simoa technology and assay kits as the HD-1 Analyzer in a compact benchtop form with a lower price point, more flexible assay +preparation, +3 +Table of Contents +and +a wider range of applications, including direct detection of nucleic acids. The Quanterix SR-X supports detection capability of up to six biomarkers per test, with anticipated expansion of +biomarker capability per test in 2018. +We +also provide contract research services for customers through our Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa's technology, and supports +multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 350 projects for more than 150 customers from all +over the world using our Simoa platform. In addition to being an important source of revenue, we have also +found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as over 36 customers for whom we have provided contract research services have subsequently purchased +an instrument from us. In addition, with our acquisition of Aushon in January 2018, we acquired Aushon's CLIA-certified lab. We have integrated this lab into our Accelerator Laboratory, and intend to +move Simoa instruments into this CLIA-certified lab. We believe the ability to offer services from a CLIA-certified lab will help accelerate our entry into pharmaceutical services. +We +sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America +and Europe, and through distributors or sales agents in other select markets. We have an extensive base of customers in world class academic and governmental research institutions, as well as +pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Competitive Strengths +We believe that our competitive strengths include the following: +• Proprietary ultra-sensitive digital immunoassay Simoa technology platform, enabling +researchers and clinicians to obtain information from less invasive procedures in smaller sample sizes. Simoa is the most sensitive commercially +available protein detection technology, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows +researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and +facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our Simoa technology +allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. +• Technology platform that leverages and improves upon industry standard ELISA +technology. Simoa uses the basic principles of conventional bead-based ELISA. However, unlike ELISA, which runs the enzyme-substrate reactions on +all molecules in one well, Simoa reactions are run on individual molecules in tiny microwells that are 2.5 billion times smaller than traditional ELISA wells. Adding digital capability to this +industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers' familiarity with the core ELISA technology, Simoa is easily integrated with +existing customer workflows including data analysis. +• Leader in large and growing market for detecting proteins in low +abundance. Simoa is the most sensitive commercially available protein detection technology. We believe our growing market acceptance is +establishing Simoa as the reference platform for detecting proteins in low abundance across sample types in our end markets. +4 +Table of Contents +• Deep and expanding scientific +validation. Our Simoa technology has been cited in more than 215 articles in peer-reviewed publications, including JAMA Neurology and Nature , covering over 165 biomarkers, and is becoming a vital tool in cutting edge +life sciences research. Our company has established relationships with key opinion leaders, and our growing base of over 200 customers includes some of the world's leading academic and government +research institutions as well as 17 of the 20 largest pharmaceutical and biotechnology companies. +• Leading position in market solidified by robust customization capabilities, assay design +flexibility and automation of our HD-1 Analyzer. Our technical capabilities and expertise allow our customers to design high-quality, customized +assays utilizing our Simoa platform. The needs of our customers vary widely, and the flexibility of the Simoa detection technology allows us to provide innovative, low cost solutions for customers in +multiple markets across various applications. In addition, the Simoa HD-1 Analyzer provides fully automated analysis from sample introduction to analytical results. Furthermore, our proprietary array +approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater +throughput and lab efficiency. +• Highly attractive business model that leverages growing installed base of +instruments. As we continue to grow our installed base, optimize workflows and expand our assay menu, we expect to increase our revenues derived +from consumables. The integration of our technology in our customers' projects also provides ongoing sales of assays and consumables, resulting in a growing revenue stream. +• Our highly experienced senior management +team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop +novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into protein and nucleic acids to allow greater insight into their role in human health in ways that have not +been possible with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on +earlier detection, monitoring, prognosis and, ultimately, prevention. +Our +strategy to achieve this includes: +• Focus on the highly attractive, expanding market for protein detection and +analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on +human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to +a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including +environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person's body in real time. Our technology provides a unique bridge between understanding +the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and drug development. +• Continue to drive adoption of the Simoa platform in the life science research, +diagnostics and precision health screening markets. Simoa has the potential to significantly expand the life science research market because of +its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We believe Simoa +5 +Table of Contents +has +the capability to enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive +and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. In the precision health screening market, we believe that Simoa can be used to monitor protein biomarker +levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of disease. +• Leverage the Simoa "ecosystem" to grow our customer base and further penetrate our +existing customer base. In an effort to enhance the productivity of our instrument base, we have launched an extensive customer outreach program +that we call Catalyzing Customer Engagement, or CCE. Through CCE, we actively engage customers to optimize their workflow and better understand our instruments' and products' capabilities, resulting +in increased utilization of our installed instrument base. +• Utilize the flexibility of the Simoa platform to expand into complementary markets, +including nucleic acid detection. We plan to utilize the flexibility of the Simoa platform to expand our product offering to include other +testing capabilities, including detection of nucleic acids. We believe that our Simoa technology has the potential to provide the same sensitivity as PCR-based assays in detecting nucleic acids +without the issues associated with amplification. The ability to integrate nucleic acid and protein testing capabilities into a full service instrument would hold significant value to our customers. +• Leverage the data generated by Simoa to drive adoption of our +technology. Technology being employed in the healthcare industry has become increasingly sophisticated, creating the need to aggregate and +digitize the significant amount of data being created in order to better achieve the goals of higher quality and more efficient care. Simoa generates digitized data for highly relevant biomarkers that +can provide a nuanced view into the continuum of health and disease. We plan to use the data generated by the Simoa technology to improve and create additional assays, with the goal of enabling more +precise research today and contributing to precision health in the future. +• Grow into new markets organically with our customers and through strategic +collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers +continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of +some of the work that our customers are doing today in the research market. For example, Simoa's unprecedented sensitivity has the potential to uncover research insights that could identify novel +biomarkers, which could help stratify patients in clinical trials potentially leading to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. +This progression with our customers will help us move into new markets organically in a cost effective manner, while also retaining significant upside. Additionally, we currently have partnerships in +place with leading diagnostics companies and plan to continue evaluating strategic collaborations that could help us access these new markets. +• Grow through strategic +acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For +example, in January 2018, we acquired Aushon Biosystems. This will continue to be an important part of our strategy to increase scale. We intend to pursue acquisitions to expand product offerings, +strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +6 +Table of Contents +Industry Background +We intend to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. +Our initial commercial strategy targets the large and growing life science research market and we believe that the diagnostic market and the precision health screening market represents a significant +future commercial opportunities for Simoa. According to estimates in the Third-Party Research Report, we believe the aggregate market opportunity for us or others using Simoa has the potential to +expand to $38 billion as researchers and healthcare practitioners develop new applications for our products that span the continuum from research through diagnosis and precision health. +Proteins +are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and +regulation of the body's tissues and organs. For example, proteins provide immune protection, generate movement, +transmit nerve impulses and control cell growth and differentiation. Understanding an organism's proteome, the complete set of proteins and their expression levels, can provide a powerful and unique +window into its health, a window that other types of research, such as genomics, cannot provide. +The +human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, +the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, approximately 10,500 +of which are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of +much of the proteome has not been practical given the limited level of sensitivity of existing technologies. To date, we have developed assays that address approximately 80 of the proteins secreted in +blood. We estimate that the current sensitivity of our Simoa technology has the potential to detect and measure up to one-third of the approximately 9,200 proteins secreted in blood that are not +consistently detectable using conventional immunoassay technologies. +While +genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to +understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of +environmental factors and lifestyle, such as diet and exercise, or provide insight into what is happening in a patient's body in real time. For example, identical twins have the same genotype, but may +develop different diseases over the course of their lifetime, largely due to environmental factors. +Much +like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of +which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic +research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not +detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and +well-being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, +ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +7 +Table of Contents +Existing Technologies and Their Limitations +Protein Analysis +The enzyme-linked immunosorbent assay, or ELISA, has been the most widely used method of sensitive detection of proteins for over +40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either +directly, or indirectly through use of a conjugated +secondary or "capture" antibody (sandwich ELISA). A specific "detection" antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final +step, a substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the +graphic below: +Aside +from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, +Raman-enhanced signal detection, immune-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of what is +estimated to be approximately 10,500 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of +these approaches have limitations, including: +• dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +• narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules +and increasing sample volume requiring additional enzymes to reach detection limit; +• low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal +physiological levels; and +• limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers +aimed at more effectively detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and +then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated +during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become +8 +Table of Contents +detectable. +PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide +availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias +into the data, potentially compromising the reliability of results, particularly at low concentrations. +Due +to the complexity, susceptibility to contamination and significant costs related to PCR and other existing technologies, the genomic testing market generally remains limited to +reference laboratories, research facilities and laboratories associated with large hospitals. A typical molecular diagnostics laboratory in a hospital or research laboratory setting is a dedicated +facility that employs highly skilled technologists and is supervised by a technician with a Ph.D. or M.D./Ph.D. To guard against contamination, which is a common result of target amplification, a +typical laboratory will require at least three separate rooms, or isolation areas, to perform PCR-based assay methods for genomic testing. +Our Simoa Digital Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection +sensitivity. Simoa digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for +detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that +are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa digital technology +measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our +Simoa platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high +throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa technology detects proteins: +Simoa Analytic Process +Sample Preparation of ELISA Sandwich +Simoa uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white +star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the +graphic). +9 +Table of Contents +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 +microwells, each of which is large enough to accommodate only a single bead. +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is +introduced into the channel to displace the substrate solution and excess beads, and, most importantly, to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our +Simoa technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. The following chart shows examples +of the levels of detection, or LoD, of certain Simoa assays and commercially available ELISA assay compared to the median lower normal plasma or clinical ranges of various protein biomarkers. As shown +below, the LoD for most of the assays from a leading manufacturer of commercial ELISA assays is above the median lower normal plasma or clinical ranges, making these biomarkers undetectable at normal +physiological levels with these assays. +10 +Table of Contents +LoD Comparison +Each +of the increments in the horizontal axis in the table above represents a 10-fold increase in sensitivity. Using the protein IL-2 as an example from the graphic above, the LoD for +the leading commercially available IL-2 assay is approximately 9 pg/mL, whereas the LoD for our Simoa assay is approximately 0.01 pg/mL, representing a 900-fold increase in sensitivity. +Multiplexing Capability +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers +to maximize the biological information from a sample, and to develop more specific diagnostic tests. Importantly, Simoa multiplexing maintains single plex precision, while competitive platforms lose +sensitivity when multiplexing is used. Multiplexing is achieved with our Simoa technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the +assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. +We +have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the Simoa HD-1 Analyzer, which is a prerequisite to our ability to develop an +assay with the capacity to detect an equivalent number of proteins in a single sample. +In +2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of traumatic brain injury and other neurodegenerative conditions. Simoa is the +only +technology with the sensitivity to detect all four of these markers in blood, whereas other assay technologies require cerebrospinal fluid, or CSF, to detect all four of these markers due to +sensitivity limitations. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. +11 +Table of Contents +Nucleic Acid Testing +Our initial focus has been on the use of Simoa to detect protein biomarkers. However, we are also developing our Simoa technology to detect +nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, polymerase chain +reaction, or PCR, is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and +heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional +PCR-based assays with the following benefits: +• no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +• reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; +and +• the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water. +For +detection of nucleic acids with Simoa, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. +Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target +nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. This assay is pictured below: +Simoa +has been used to detect short sequences of RNA, known as microRNA, that are important in a number of biological systems, and are widely used in innovative therapeutic and gene +editing technologies. The assay was used to detect microRNA-122, or miR-122, a marker of liver toxicity, from +12 +Table of Contents +the +serum of patients who had overdosed with acetaminophen. As shown in the graph below, these patients had elevated miR-122 levels compared to healthy controls. +This +approach suggests potential for applications for measuring drug-induced liver injury for both safety testing of drugs in development and for monitoring of approved drugs. In March +2018, we began offering miR-122 testing for liver toxicity through our Accelerator Laboratory. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research, diagnostics and precision health +screening markets. +Life Science Research +Our initial target market is the large and growing life science research market, including both proteomics and genomics research. We believe +Simoa is well-positioned to capture a significant share of this market because of its superior sensitivity, automated workflow capabilities, multiplexing and its ability to work with a broader range +of sample types. +Proteomics, +the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how +to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa, and we believe +that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. While it is estimated that there are approximately 10,500 secreted proteins in +circulation in human blood, fewer than 1,300 of them can be detected in healthy individuals using conventional immunoassay technologies. In addition, many of the proteins which can be detected by +other technologies are only detectable after they have reached levels that reflect more advanced disease or injury. By substantially lowering the limit of detection of protein biomarkers, Simoa holds +significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently +detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa provides researchers the ability to see the nuanced continuum of health to +disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and +catalyzing a new era of medical and life science research, drug discovery and disease prevention. +As +an indication of the market's acceptance of our Simoa platform, researchers at pharmaceutical and biotechnology companies are integrating our platform into drug development protocols +to more efficiently and effectively develop drugs. Using Simoa's unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a +drug, drug +13 +Table of Contents +developers +can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. We estimate that our Simoa technology has been utilized in over 500 +clinical trials to date. +In +addition, researchers can also use Simoa to monitor a drug candidate's unwanted effect on "off-target" biomarkers and predict side effects, addressing the significant issue of drug +toxicity, which is the fourth leading cause of death in the United States. +According +to estimates in the Third-Party Research Report, we believe that the total life science research market addressable by Simoa, including both proteomics and genomics research, +is $3 billion per year and has the potential to reach $8 billion per year. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for Simoa as well. We believe existing biomarker diagnostics can be +improved by Simoa's sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, +analog immunoassay technologies but are detectable using Simoa. We also believe that the ultra-sensitive protein detection provided by Simoa can enable the development of a new category of +non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal +tap, diagnostic imaging and biopsy. +For +example, researchers have conducted studies using Simoa that indicate that neurological biomarkers, including tau and Nf-L, may someday be able to replace diagnostic imaging to +diagnose traumatic brain injury, or TBI. Our Simoa assays for tau and Nf-L are 3,500-fold and 840-fold more sensitive, respectively, than the leading assay platforms, and are the only assays that can +reliably detect these critical protein biomarkers in blood. Almost 90% of patients who visit U.S. hospital emergency rooms and receive a computerized tomography, or CT, scan show no structural brain +injury. In addition, CT scans have approximately 100 times more radiation than a chest x-ray, and are suspected of causing cancer in up to 29,000 people per year, underscoring the need for development +of a safe and accurate blood-based diagnostic test for TBI, which we believe may be enabled by our Simoa technology. +Simoa +also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a therapeutic drug +that can help predict +how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients to study for whom a drug is expected to be most effective and +safe. Companion diagnostics have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only can Simoa be used to develop companion diagnostics +to stratify patients in clinical trials and for treatment, but Simoa's sensitivity also enables the development of companion diagnostics based on protein biomarkers that can actively and regularly +monitor whether an approved drug is having the desired biological effect. This can quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing +dosages or even switching therapies. +There +has been significant interest from third parties to use our technology to develop applications for the diagnostic market, which has resulted in collaborations with leading +diagnostic companies, such as bioMérieux. In addition, we have had discussions with lab service companies that are interested in using our technology to develop laboratory developed +tests that may be more sensitive than currently available commercial tests. +14 +Table of Contents +Precision Health Screening +We believe that Simoa's ability to detect and quantify normal physiological levels of low abundance proteins that are undetectable using +conventional, analog immunoassay technologies will enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide +earlier detection of the onset of disease. This may facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, +prevention, enabling a "precision health" revolution. +We +believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on +a regular, ongoing basis as part of a patient's routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, +prior to the appearance of symptoms. +According +to estimates in the Third-Party Research Report, we believe that the total diagnostic and precision health screening markets addressable by us and others using Simoa have the +potential to +reach an aggregate of $30 billion per year upon receipt of the necessary regulatory approvals, which we have not yet begun the process to obtain. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have +significant shortcomings that our technology addresses. In particular, we have focused on the following areas: neurology, oncology, cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally +only been detectable in cerebrospinal fluid, or CSF, has the potential to rapidly advance neurology research and drug development, and transform the way brain injuries and diseases are diagnosed and +treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that +the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these +endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of +which are costly and highly invasive for the patient. The sensitivity of the Simoa platform has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse +through the blood-brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of these neural biomarkers in +the blood are so low that they are undetectable by conventional, analog immunoassay technologies. +As +one example, we have developed ultra-sensitive protein assays for the neural biomarkers A b 42 and tau that are approximately 2,000 to 3,500-fold +more sensitive, respectively, than benchmark commercial assays. Our protein assays are the only currently available assays on the market capable of precise measurement of these neural biomarkers in +blood in diseased and healthy individuals. +To +date, there have been over 100 scientific publications on approximately 52 neural biomarkers using our Simoa technology, and we believe that ultra-sensitive digital detection of +neural related biomarkers +in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including CTE, Alzheimer's disease, dementia, Parkinson's disease, +15 +Table of Contents +multiple +sclerosis and TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. +In +2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for ther +neurological biomarker Nf-L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer's disease as currently established CSF biomarkers. The study was a major study of almost 600 +patients from the Alzheimer's Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf-L measurements compared with traditional CSF biomarkers. The +diagnostic accuracy of the plasma Simoa Nf-L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +In +addition, Simoa plasma Nf-L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer's disease at baseline and during follow-up. High plasma Nf-L +correlated with poor cognition and Alzheimer's disease -related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf-L may have +clinical utility as a noninvasive biomarker in Alzheimer's disease. +Traumatic +brain injuries, or TBIs, lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive +diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa has demonstrated the sensitivity to identify relevant neurological biomarkers, +such as Nf-L, tau, GFAP and UCHL-1, to more adequately address diagnosis of TBIs and overall brain health. +Leading +researchers in neurology have used Simoa to study biomarkers in the blood of athletes after concussion in many high-impact sports. Our platform measures critical neural +biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic +Encephalopathy, or CTE, which currently can be diagnosed after death via a brain autopsy. A recent publication by an National Institute of Health researcher indicates that measuring tau in the blood +with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling +clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +16 +Table of Contents +In 2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of traumatic brain injury and other neurodegenerative +conditions. Whereas other assay technologies require cerebrospinal fluid, or CSF, to detect all four of these markers, due to its sensitivity, Simoa is the only assay that can detect all of these +biomarkers directly from blood samples. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. +In +2016, Fast Company named Quanterix one of the "World's Most Innovative Companies" for our work in concussion detection. We also were awarded two competitive grants from the NFL-GE +Head Health Challenge to advance this work in the detection and quantification of mild TBI. +We +estimate that the total addressable market for Simoa for neurology has the potential to reach $6 billion across research, diagnostic and precision health screening indications. +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease +development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the +disease has progressed and the patient has become symptomatic. Simoa's highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for +patients. Additionally, Simoa has shown early promise as an alternative to more invasive diagnostic procedures. To date, there have been 17 scientific publications on approximately 40 cancer +biomarkers using our Simoa technology. +Simoa +was used in a recent unpublished scientific study that we understand indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low +cost, non-invasive blood test. In this retrospective study, researchers found that Simoa resulted in significantly fewer false positives and false negatives than mammography. Inaccurate mammography +results in unnecessary stress, additional health care costs from follow up diagnostic mammograms, unnecessary biopsies and increased lifetime exposure to radiation. Researchers are also developing +ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa, potentially replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, +cost effective, accurate blood-based health screens, further enabling the liquid biopsy market, which is estimated to grow to almost $3 billion by 2026. +Cancer +immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are +not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Serum protein +biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and predict side effects. One technical +challenge to using these biomarkers has been the development of immunoassays with sufficient sensitivity to measure immune modulates directly in serum. We have developed a set of +38 ultrasensitive immune modulation assays (cytokines and chemokines) that can be used to directly monitor the immune response. In particular key immune regulatory cells (T-regs, dendritic +cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be detected in serum using conventional, analog immunoassay technology, however they +can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for PD-L1 which is one of the major immuno-oncology targeted antigens. Several studies have +shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We +also believe residual cancer cell detection post-surgery or treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a +greater risk of +17 +Table of Contents +reoccurrence +post-surgery due to residual cancer. We have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen, or PSA, that is over 1,000-fold more sensitive than benchmark +commercial PSA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we +and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate +cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of +traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our +Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant +radiation treatment to be targeted only to the men who actually would benefit. +We +estimate that the total addressable market for Simoa for oncology has the potential to reach $25 billion across research, diagnostic and precision health screening indications. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths +in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa's highly sensitive digital measurement capabilities have +the potential to be used to predict early cardiac disease. +To +date, there have been six scientific publications on approximately 11 cardiology biomarkers using our Simoa technology. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying +rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology can have a significant impact in reducing the spread of infectious diseases by making early stage +detection more specific and widely available. +18 +Table of Contents +Today, +early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious +disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables +the detection of extremely low levels of infectious disease specific antigens with sensitivity that rivals the use of nucleic acid testing in this application, without the potential biases inherent in +amplification technologies, such as PCR. +We +have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than benchmark commercial protein assays capable of detecting the HIV-specific antigen, p24. This +Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a +commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early +as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of +acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In +addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry +a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa can detect Clostridium difficile ( C. +diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism +does not always produce toxins, PCR methods that detect the C. diff organism suffer +from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential +to provide a higher level of sensitivity and specificity, greatly reducing false positives. +We +will continue to develop Simoa assays for pathogenic antigens that are competitive in sensitivity to PCR but more specific to the pathogenicity of the offending organism. We believe +that these Simoa +19 +Table of Contents +assays +could also be invaluable tools for the development of anti-infective drugs and treatment monitoring of anti-viral and anti-bacterial drugs. +To +date, there have been 27 scientific publications on approximately 13 infectious disease biomarkers using our Simoa technology. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory +molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology +measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn's disease, asthma, rheumatoid arthritis and +neuro-inflammation. We believe the sensitivity of Simoa can provide a clearer picture of the underlying state of the immune response and disease progression. +Our +Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to +monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn's disease undergoing +anti-TNF- a therapy with Remicade, Humira or +Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF- a levels of the patients before and after treatment. These levels were +all below the limit of detection, or LoD, of traditional immunoassays. +We +believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory +drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side +effects or increase efficacy. +To +date, there have been 25 scientific publications on approximately 47 inflammatory biomarkers using our Simoa technology. +20 +Table of Contents +Our Products and Services +Our Quanterix commercial portfolio includes instruments, assay kits and other consumables, and contract research services offered through our +Accelerator Laboratory, as follows: +Product +Key attributes +Simoa HD-1 Analyzer +• +commercially launched in +January 2014 +• +most sensitive immunoassay platform on market +• +fully automated, floor-standing instrument +• +wide dynamic range +• +multiplexing capability with small sample volume +• +up to 400 samples per eight-hour shift +• +homebrew capabilities +Quanterix SR-X +• +commercial launch in +December 2017 +• +reader only, benchtop instrument with lower price point +• +same sensitivity, dynamic range and homebrew capabilities as HD-1 +• +multiplexing capability: Quanterix SR-X currently has up to have 6-plex capability with anticipated expansion of biomarker capability per test in 2018 +• +sample prep and assay protocol flexibility +Assays and other consumables +• +over 85 assays developed +for neurology, oncology, cardiology, infectious diseases and inflammation research +• +homebrew kits containing beads and reagents required for customers to +custom build assays +• +proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells +21 +Table of Contents +Product +Key attributes +Services +• +contract research services +provided through our Accelerator Laboratory +• +over 350 projects completed to date +• +extended warranty and service contracts +• +CLIA-certified lab available +Instruments and Consumables +Simoa HD-1 Analyzer +We commercially launched the Simoa HD-1 Analyzer in January 2014. The HD-1 Analyzer is the most sensitive protein detection platform +commercially available, and is currently capable of analyzing up to six biomarkers per test, with anticipated expansion of biomarker capability per test in 2018. Assays for the HD-1 Analyzer are fully +automated (i.e. sample in to result out), and results for up to 66 samples are available in approximately one hour. We believe that this automation provides us an additional significant +competitive advantage with pharmaceutical and biotechnology customers. Samples can be input into the instrument via 96-well microtiter plates or sample tubes where the system can multiplex and +process tests in a variety of assay protocol configurations. Simoa digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for +capture onto the beads, and one for detection (antigen 'sandwich'). +Specialized +software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration +of multiple biological molecules. The Simoa HD-1 Analyzer software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis +software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals +to concentrations for the different biological molecules. +Quanterix SR-X +We commercially launched the Quanterix SR-X in the fourth quarter of 2017 and installed five instruments in December 2017. The Quanterix +SR-X utilizes the same core Simoa technology and assay kits as the HD-1 Analyzer in a compact benchtop form with a lower price point designed to address the needs of researchers who value the +ultra-sensitive detection capabilities enabled by Simoa. +In +contrast to the fully automated workflow of the HD-1 Analyzer, the assay incubation and washing steps for the Quanterix SR-X are performed outside of the instruments using +conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct +detection of nucleic acids. The Quanterix SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 +well plate is approximately 2.5 hours. +The +Quanterix SR-X system currently supports detection capability of up to six biomarkers per test with anticipated expansion of biomarker capability per test in 2018. +22 +Table of Contents +Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital +biomarker assays, with more than 85 assays developed to date. In addition to these assays we have developed, the Simoa platform allows ease and flexibility in assay design, enabling our customers to +develop their own proprietary in-house assays, called homebrew assays, using our Homebrew Assay Development Kit. Our kits include all components required to run tests, such as beads, capture and +detector reagents, enzyme reagents and enzyme substrate. Our consumables portfolio also includes our proprietary Simoa disks that are unique to our systems, as well as cuvettes, and disposable tips. +Our goal is to continue to add to our assay kits to extend our application base. +We +have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to +manufacturing +and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu +expansion goals. +Services +Our Accelerator Laboratory provides customers a contract research option. Researchers, academics and principal investigators can work with our +scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, +including: +• Sample testing. Utilizing commercially available Simoa kits, we have run +large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer's needs and even large studies can +be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +• Homebrew assay development. Utilizing proprietary or commercially available +reagents in combination with the Quanterix Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to ELISA. The Accelerator Laboratory can +also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +• Custom development. After identifying the optimal assay and conditions, the +Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa +platform. +To +date, we have completed over 350 projects for over 150 customers from all over the world using our Simoa platform. In addition to being an important source of revenue, we have also +found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as over 36 customers for whom we have provided contract research services have subsequently purchased +an instrument from us. +In +addition, with our acquisition of Aushon in January 2018, we acquired Aushon's CLIA-certified lab. We have integrated this lab into our Accelerator Laboratory, and intend to move +Simoa instruments into this CLIA-certified lab. We believe the ability offer services from a CLIA-certified lab will help accelerate our entry into pharmaceutical services. +23 +Table of Contents +We +also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This +evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We are particularly focused on expanding +our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, +customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and marketing team. We also intend to continue +to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our instruments and reagents via direct field sales and support organizations located in North America and Europe and through a +combination of our own sales force and third-party distributors in additional major markets such as Australia, China, India, Japan, South Korea, Lebanon, Singapore and Taiwan. Our domestic and +international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological advances in Simoa systems, workflows, and +notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on +delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As +of March 1, 2018, we had approximately 43 people employed in sales, sales support and marketing, including 19 technical field application scientists. This staff is primarily +located in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a +comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region +countries such as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with +Quanterix-employed sales and support personnel. +Our +sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and +governmental research institutions. +In +addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness +of our technology, demonstrate its benefits relative to existing technologies and accelerate its adoption. We also seek to increase awareness of our products through participation at trade shows, +academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +To +develop a thought leadership position in the precision health arena, we were a Platinum Sponsor of the inaugural Powering Precision Health Summit, or PPHS, in Cambridge, Massachusetts +in September 2016 and of the second annual PPHS in Cambridge in October 2017. At PPHS in 2016, there were 22 cutting edge scientific talks covering neurology, cardiology, oncology and inflammation. +There were over 200 registered attendees, including senior scientists, patient advocates, investors, and potential partners. At PPHS in 2017, there were 37 scientific talks and over 425 registered +attendees. +24 +Table of Contents +Our +systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and +demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the system including running experiments in the Accelerator Laboratory and +comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive +documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time +from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource instrument development and manufacturing with industry leaders, and to internally +develop and assay kits in our own facility. +Systems +HD-1/Quanterix SR-X +The Simoa HD-1 Analyzer is manufactured by STRATEC Biomedical AG, based in Birkenfeld, Germany, and is manufactured and shipped from their +Birkenfeld and Beringen, Switzerland facilities. See "—Key Agreements—Development Agreement and Supply Agreement with STRATEC" for a description of this agreement. Simoa HD-1 +Analyzers are shipped by STRATEC to our global customers' locations. Installation of, and training on, our products is provided by our employees in the markets where we conduct direct sales, and by +distributors in those markets where we operate with distributors. The Quanterix SR-X is manufactured by Paramit Corporation, based in Morgan Hill, California, and is shipped to global customers by +Paramit. +We +believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for either the Simoa +HD-1 Analyzer or the Quanterix SR-X, we would experience additional costs, delays and difficulties in doing so, and our business would be harmed. +Consumables +Simoa Consumables +We assemble our assay kits in our Lexington, Massachusetts facility. Our reagents are sourced from a limited number of suppliers, including +certain single-source suppliers. Reagents include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. +Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay +kits on a timely basis. +Simoa +disks are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. This agreement provides +for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our +cuvettes are single sourced through STRATEC Biomedical, and the disposable tips used in our assays are commercially available. +25 +Table of Contents +Key Agreements +License Agreement with bioMérieux SA +In November 2012, we entered into a Joint Development and License Agreement, or JDLA, with bioMérieux SA. Under the terms +of the JDLA, we granted bioMérieux an exclusive, royalty-bearing license to manufacture and sell instruments and assays using our Simoa technology for in vitro diagnostics used in +clinical lab applications, food quality control testing, in vitro diagnostics and pharmaceutical quality control testing, and a co-exclusive, royalty-bearing license in certain other fields. Under the +JDLA, bioMérieux was required to purchase instruments from us subject to certain minimum purchase requirements. We received a $10 million upfront payment and we were eligible to +receive developmental and regulatory milestone payments, royalties on the sale of assays by bioMérieux and payments for the manufacture and delivery of instruments based on a +contractual rate subject to future adjustments. +On +December 22, 2016, we entered into an Amended and Restated License Agreement with bioMérieux, or the BMX Agreement, which modified the JDLA resulting in the +termination of the ongoing joint development efforts between the parties and clarified and amended prospective rights and obligations of both parties. Under the BMX Agreement, +bioMérieux retains an exclusive license to our Simoa technology for in vitro diagnostics used in clinical lab applications, food quality control testing, and pharmaceutical quality +control testing, each as defined in the agreement, subject to a right we have retained to make and sell the current version of our HD-1 instrument for use in clinical lab applications, either directly +or through a partner (but not both), if an affiliate of ours is manufacturing and selling in vitro diagnostics tests, or solely through a partner (subject to restrictions as to the particular parties +with which we could elect to partner and the assays that can be developed) in the event we do not have an affiliate manufacturing and selling in vitro diagnostics tests. For sales by a partner, we +would be required to pay to bioMérieux a mid-double-digit percentage of royalties received based on sales of assays by the partner. bioMérieux also retains a co-exclusive +license to our Simoa technology for certain in vitro diagnostics, including point-of-care testing and laboratory developed testing. We retained rights to research use only applications and to nucleic +acid assay applications. We also granted bioMérieux a non-exclusive, royalty-free license to the source and object code of our Level 1 Data Reduction, or L1DR, software including +rights to updates and upgrades in the future. The L1DR software is our proprietary image processing algorithms that convert images of microscopic beads associated with biomarker molecules in +microwells. bioMérieux's minimum purchasing requirements were eliminated and it is permitted to independently develop and manufacture certain instruments. +bioMérieux +has a three-year option to acquire distribution rights to the HD-1 instrument in the exclusive and co-exclusive fields. If the option to acquire distribution +rights to the HD-1 is exercised, the BMX Agreement provides that we and bioMérieux shall negotiate, in good faith, a distribution agreement which will include a specified lump sum +payment. If bioMérieux does not exercise this right prior to December 22, 2019, all rights and licenses granted to bioMérieux with respect to the HD-1 instrument +(other than the license to the L1DR software) will terminate. +bioMérieux +also has a period of not more than three years from the date of the BMX Agreement to evaluate its interest in developing a new, smaller in vitro diagnostic +instrument using the Simoa +technology for use in clinical lab applications, food quality control testing, and pharmaceutical quality control testing. If bioMérieux does not elect to pursue development of a new +instrument within the three year period ending December 22, 2019, all rights and licenses granted to bioMérieux for instruments other than the HD-1 instrument will terminate. If +bioMérieux does elect to pursue development of a new instrument, they will have a set number of years to obtain a CE mark for such instrument and a set period of time thereafter to +obtain FDA approval. Subject to a cure period, if these regulatory milestones are not met, the BMX Agreement will terminate (subject to the continuing +26 +Table of Contents +right +of bioMérieux to distribute the HD-1 instrument if it had previously exercised its option and negotiated a distribution agreement). +We +have been advised by bioMérieux that its current objective is to identify and develop an assay menu supporting the commercial launch of a new, benchtop in-vitro +diagnostic instrument using the Simoa technology for use in clinical lab applications, food quality control testing, and pharmaceutical quality control testing. This will require identifying assays +that support the commercial launch of such an instrument and developing or adapting technology to facilitate a benchtop platform. Pursuant to the exclusive license to the Simoa technology granted in +the BMX Agreement, bioMérieux has the sole right to determine whether or not to develop such an instrument for use in clinical lab applications, food quality control testing, and +pharmaceutical quality control testing, and we can not assure you that bioMérieux will decide to do so. If they were to do so, we would be restricted from selling a benchtop instrument +for use in clinical lab applications, food quality control testing, and pharmaceutical quality control testing, but not for use in any other applications. +On +execution of the BMX Agreement, we received an upfront payment of $2 million. We are also eligible to receive royalties on net sales of assays sold by bioMérieux +in the mid to high single digits, and to receive low double digit royalties on sales of instruments by bioMérieux based on manufacturing cost. The future developmental and regulatory +milestone payments under the JDLA were not achieved as the parties agreed to no longer pursue joint development, subject to the right for bioMérieux to develop its own instrument using +the Simoa technology with a different form and size than our HD-1 instrument, prior to the achievement of these milestones. Accordingly, these milestones were no longer applicable and were removed in +the BMX Agreement and are no longer eligible to be earned. The BMX Agreement has an indefinite term, but can be terminated by bioMérieux for any reason with six months notice to us. In +addition, either party may terminate the agreement upon 60 days notice in the event of an uncured material breach by the other party. +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement, or the Development Agreement, with STRATEC +Biomedical Systems AG, pursuant to which STRATEC undertook the development of the Simoa HD-1 instrument for manufacture and sale to us or a partner whom we designate. Under the Development Agreement, +we were required to pay a fee and issue to STRATEC warrants to purchase 2,000,000 shares of our Series A-3 Preferred Stock at an exercise price of $0.001 per share, all of which have been +exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The Development Agreement was amended in November 2016. The Amendment reduced our +obligation to satisfy a minimum purchase commitment under the Supply and Manufacturing Agreement described below. Additionally, the parties agreed on additional development services for an additional +fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with the final milestone due under the terms of the Development +Agreement. The services are expected to be completed during the year ending December 31, 2018. +The +Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations +to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In +September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC, or the Supply Agreement, pursuant to which STRATEC agreed to supply HD-1 instruments to us, and +we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC's ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the +instruments. We agreed to purchase a certain number of instruments in the seven years following the +27 +Table of Contents +acceptance +of the first validation instrument. The Supply Agreement was amended in November 2016 to reduce the number of instruments we are committed to procure from STRATEC. The instrument price +stipulated in the Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The +Supply Agreement is terminable by either party on 12 months' notice to the other party, provided that neither party may terminate the Supply Agreement prior to the later of +the seven year anniversary +of the acceptance of the first prototype instrument and the purchase of the minimum number of instruments which we committed to procure. The Supply Agreement may also be terminated on the insolvency +of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us +for STRATEC's insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the +instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement, or the Paramit Agreement, with Paramit Corporation, or Paramit. Under the +terms of the Paramit Agreement, we engaged Paramit to produce and test our Quanterix SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to +manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines +will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess +pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in +cost. +The +Paramit Agreement has an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with nine months' written notice to the other +party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months' notice to Paramit upon the occurrence of (i) a failure +of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under +the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days' notice to us in the event of a material breach after written notice and a 60-day opportunity to +cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for protein +detection, nucleic acid detection and additional applications. For example, companies such as Bio-Techne, Luminex Corporation, MesoScale Diagnostics, Singulex, Gyros Corporation, Nanostring +Technologies, Inc., and others, have products for protein detection that compete in certain segments of the market in which we sell our products. As we or our partners expand the applications +for our products to include diagnostics and precision health +screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. In addition, a number of other companies and academic groups are +in the process of developing novel technologies for the life science research, diagnostic and precision health screening markets. Many of the companies with which we compete have substantially greater +resources than we have. +28 +Table of Contents +The life science instrumentation industry is highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research +and development. We believe the principal competitive factors in our target markets include: +• sensitivity; +• cost of instruments and consumables; +• assay menu; +• reputation among customers and key opinion leaders; +• innovation in product offerings; +• accuracy and reproducibility of results; and +• customer support infrastructure. +We +believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions +and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core technology, directed to general methods and devices for single molecule detection, originated at Tufts University, in the laboratory of +Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies +that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from +Tufts the relevant patent filings related to these technologies. (See "—License Agreement with Tufts University" below). In addition to licensed patents, we have developed our own +portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. We believe our proprietary platform is a core strength of our business +and our strategy includes the continued development of our patent portfolio. +Our +patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products +and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers +embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the +invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent +strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of March 1, 2018, we had exclusively licensed 17 patents and one patent application from Tufts. These patents and patent applications +include eight issued U.S. patents and one pending U.S patent application, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian +patent. +A +first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes five granted U.S. patents, one pending U.S. patent +application, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted +29 +Table of Contents +Australian +patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A +second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. +The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A +third patent family licensed from Tufts is directed to methods for analyzing analytes using a sensor system with cross-reactive elements. This patent family includes one granted U.S. +patent. The standard patent expiration date for the U.S. patent in this family is March 14, 2021. +A +fourth patent family licensed from Tufts is directed to electro-optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. +The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +As +of March 1, 2018, we owned ten issued U.S. patents and ten pending U.S. patent applications, three granted European patents and three pending European patent applications, five +granted Japanese patents and one pending Japanese patent applications, three granted Chinese patents and three pending Chinese patent applications, two granted Canadian patents and one pending +Canadian patent application, and two registered Hong Kong patent applications. +A +first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for analyte capture on beads, including multiplexing. This patent family includes three granted U.S. patents and one pending U.S. patent application, two granted European patent (nationalized in eight +countries) and one pending European application, two granted Japanese patents, one granted Chinese patent and one pending Chinese patent application, and one granted Canadian patent. The standard +patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A +second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in +particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes four granted U.S. patents and +one pending U.S. patent application, one granted European patent (nationalized in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The +standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A +third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is +September 28, 2028. +A +fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent +in this family is March 24, 2030. +A +fifth patent family owned by us is directed to instruments and consumables. This patent family includes one granted Japanese patent and one pending Japanese patent application, one +pending +Chinese patent application, two registered Hong Kong patent applications and one pending patent application in each of the United States, Europe, and Canada. The standard patent expiration date for +30 +Table of Contents +any +U.S. patents that may issue from this family is February 25, 2031, and for any non-U.S. patents is January 27, 2032. +A +sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent +application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A +seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The +standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An +eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending U.S. provisional patent +application. If we pursue protection by filing any non-provisional applications, the standard patent expiration date for any patents that may issue from this family will be in 2038. +We +own or co-own six patent families directed to the measurement of particular types of analytes, including prostate specific antigen (PSA), +b -amyloid peptide, tau protein, toxin B of C. difficile , and DNA or RNA molecules. Any patents that may issue from +these patent applications would have standard expiration dates between 2032 and 2038. +We +have licensed additional patents and patent applications from third parties. +In +addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and +intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +With +the acquisition of Aushon, we acquired their patent portfolio. As of March 1, 2018, the acquired patent portfolio includes at least seven issued U.S. patents and six pending +U.S. patent applications, one granted Australian patent, two granted Canadian patents and two pending Canadian patent application, five granted European patents and three pending European patent +applications, three granted Japanese patents and one pending Japanese patent application, one pending Korean patent application, and one registered Hong Kong patent application. +License Agreement with Tufts University +In June 2007, as amended in April 2013 and August 2017, we entered into a license agreement with Tufts University, or Tufts, pursuant to which +we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or +have sold products and services covered by patent rights to the Simoa technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of +use and are sublicensable for a fee. +Under +the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 +amendment, we issued Tufts shares of our Series C-1 Preferred Stock. We are required to pay Tufts low single-digit royalties on all net sales of products and services as well as a portion of +any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. +We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The +term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or +convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to +31 +Table of Contents +cure +such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within +60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five +separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly +or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within +60 days. We may terminate the agreement at any time upon at least 60 days' written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Our products are currently intended for research use only, or RUO, applications, although our customers may use our products to develop their +own products that are subject to regulation by the FDA. Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products fall under the FDA's +jurisdiction if they are used for clinical rather than research purposes. Consequently, our products are labeled "For Research Use Only." +On +November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on "Distribution of In Vitro Diagnostic Products Labeled for Research Use +Only or Investigational Use Only," or, the RUO/IUO Guidance. The purpose of an FDA guidance document is to provide the FDA's current thinking on when IVD products are properly labeled for RUO or for +IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory +requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. +Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA's 510(k) clearance, premarket approval, or other +requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may +include written or verbal marketing claims or links to articles regarding a product's performance in clinical applications, a manufacturer's provision of technical support for clinical validation or +clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance +is a statement of the FDA's thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and promotion of our products is +consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. When we develop products for clinical use, we will do so in accordance with FDA requirements +at that time. +When +our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, +apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, +mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising +and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The +FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as +determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated +with them, are subject to +32 +Table of Contents +general +controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk +associated with them, are subject to general controls and premarket approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a +premarket notification, or 510(k), and receive clearance from the FDA which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized +until a premarket approval application, or PMA, is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent, +or SE, to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA's receipt of the 510(k), but it often +takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time +consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the +FDA's satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of +the submitted information. By statute, +the FDA has 180 days to review the accepted application, although, review of the application generally can take between one and three years. During this review period, the FDA may request +additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the +application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance +with its quality system regulations, or QSRs. New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and +efficacy of the device. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to +present a "significant risk," the manufacturer may not begin a clinical trial until it submits an investigational device exemption application, or IDE, and obtains approval of the IDE from the FDA. +These clinical trials are also subject to the review, approval and oversight of an institutional review board, or IRB, at each clinical trial site. The clinical trials must be conducted in accordance +with the FDA's IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that +the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to +the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +33 +Table of Contents +After +a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +compliance +with QSRs, which require manufacturers to follow stringent design, testing, control, documentation, record maintenance, including maintenance of complaint and related +investigation files, and other quality assurance controls during the manufacturing process; +• reporting of device malfunctions, serious injuries or deaths; +• registration of the establishments where the devices are produced; +• labeling regulations, which prohibit the promotion of products for uncleared or unapproved uses; and +• medical device reporting obligations, which require that manufacturers investigate and report to the FDA adverse events, including deaths, or +serious injuries that may have been or were caused by a medical device and malfunctions in the device that would likely cause or contribute to a death or serious injury if it were to recur. +Failure +to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, +injunctions, and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new +devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. To ensure compliance with regulatory requirements, medical device manufacturers are subject to market +surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. +Clinical Laboratory Improvement Amendments of 1988 and State Regulation +In January 2018, we acquired Aushon Biosystems, Inc., which owns and operates a CLIA certified laboratory. The Clinical Laboratory +Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and +basic research). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health +assessment and for the diagnosis, prevention, or treatment of disease."). CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, +personnel, facilities administration, quality and proficiency testing +requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as +well as many private insurers, for laboratory testing services. +In +addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If +a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As +a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial +survey is conducted by the Centers for Medicare & Medicaid Services ("CMS"), a CMS agent (typically a state agency), or, a CMS-approved accreditation organization. +In +addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, +as applicable, from various states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of +these states, each of which requires out-of-state laboratories to obtain licensure. +34 +Table of Contents +If +a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, +limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory's CLIA certificate or state license may also result in +the inability to receive payments from state and federal health care programs as well as private third party payors. +If, +in the future, we utilize Aushon to perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as +well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries +prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be +easier or more difficult to satisfy and are subject to change. For example, the European Union, or EU, recently published new regulations that will result in greater regulation of medical devices and +IVDs. The IVD Regulation is significantly different from the IVD Directive that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member +states, include a risk-based classification system and increase the requirements for conformity assessment. The conformity assessment process results in the receipt of a CE designation which has been +sufficient to begin marketing many types of IVDs. That process will become more difficult and costly to complete. +Other Governmental Regulation +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, +transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration, or OSHA, has +established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect +workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory +supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United +States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may +use during our research. +Employees +As of December 31, 2017, we had 126 employees, of which 43 work in sales, sales support and marketing, 43 work in engineering and +research and development, 23 work in manufacturing and operations and 17 work in general and administrative. As of December 31, 2017, of our 126 employees, 116 were located in the United States +and 10 were employed outside the United +States. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name "Digital Genomics, Inc." In August 2007, we +changed our name to "Quanterix Corporation." Our principal executive offices are located at 113 Hartwell Avenue, Lexington, MA 02421, and our telephone number is (617) 301-9400. +35 +Table of Contents +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be +accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K +solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on +Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amdended, or the Exchange Act. We make these +reports available through the "Investors—Financial Information—SEC Filings" section of our website as soon as reasonably practicable after we electronically file such reports +with, or furnish such reports to, the Securities and Exchange Commission, or SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, +directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can find, +copy and inspect information we file at the SEC's public reference room, which is located at 100 F Street, N.E., Room 1580, Washington, DC 20549. +Please call the SEC at 1-800-SEC-0330 for more information about the operation of the SEC's public reference room. You can review our electronically filed reports and other information that we file +with the SEC on the SEC's website at http://www.sec.gov . \ No newline at end of file diff --git a/raw/filings/0001503274/2017/0001047469-18-001842/item13.txt b/raw/filings/0001503274/2017/0001047469-18-001842/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..feb6f81a48f06d39bc4cba6126e6a4abdae6f957 --- /dev/null +++ b/raw/filings/0001503274/2017/0001047469-18-001842/item13.txt @@ -0,0 +1,3 @@ +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2018 Annual Meeting of Stockholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001503274/2017/0001047469-18-001842/item9a.txt b/raw/filings/0001503274/2017/0001047469-18-001842/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..473671014830077fc019321d43bf987727dadfb8 --- /dev/null +++ b/raw/filings/0001503274/2017/0001047469-18-001842/item9a.txt @@ -0,0 +1,15 @@ +Item 9A. CONTROLS AND PROCEDURES +(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial +officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this +90 +Table of Contents +Form 10-K, +have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we +file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our +management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. +(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, +identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to +materially affect, our internal control over financial reporting. +(c) Management's Annual Report on Internal Control Over Financial Reporting. This Annual Report on +Form 10-K does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm +due to a transition period established by rules of the SEC for newly public companies. \ No newline at end of file diff --git a/raw/filings/0001503274/2017/0001047469-18-001842/rp_note.txt b/raw/filings/0001503274/2017/0001047469-18-001842/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..08bb74a148e2b3f08570a64bdd2ac8b876fec9ea --- /dev/null +++ b/raw/filings/0001503274/2017/0001047469-18-001842/rp_note.txt @@ -0,0 +1,32 @@ +13. Related party transactions +As described in Notes 11 and 7, bioMérieux is a customer through its Joint Development and License Agreement and also a holder of the Company's common stock. +bioMérieux formerly also had a designee on the Company's Board of Directors. The Company recognized revenue related to the JDLA with bioMérieux of $1.1 million, +$0.2 million, and $0.2 million, in the years ended December 31, 2017, 2016, and 2015 respectively, from bioMérieux. The Company also had deferred revenue of +$2.1 million +F-45 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) +13. Related party transactions (Continued) +and +$1.3 million at December 31, 2017 and 2016, respectively. As described in Note 7, bioMérieux purchased shares of our Series C Preferred Stock totaling +$7.0 million in the year ended December 31, 2015. +As +described in Note 7, in March 2016, the Company issued an aggregate of 12,420,262 shares of Series D Preferred Stock for an aggregate purchase price of +$45.6 million. Of the amount issued, $22.9 million was purchased by the Company's existing principal stockholders, officers and directors. +As +described in Note 7, in June 2017, the Company issued an aggregate of 2,113,902 share of Series D-1 Preferred Stock for an aggregate purchase price of +$8.5 million. Of the amount issued, $1.0 million was purchased by a director of the Company. +As +described in Note 9, in June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University (Tufts). Tufts +is a related party to the Company due to Tuft's equity ownership in the Company and because a board member of the Company's Board of Directors was affiliated with Tufts. During the years ended +December 31, 2017, 2016, and 2015 the Company recorded royalty expense of $0.5 million, $0.3 million and $0.2 million, respectively, in cost of product revenue on the +consolidated statements of operations and comprehensive loss. During the year ended December 31, 2016, the Company recognized $0.4 million as cost of license revenue associated with a +payment made to Tufts. +During +the year ended December 31, 2017 Harvard University became a related party. Revenue recorded from sales to Harvard University were less than $0.1 million for the +year ended December 31, 2017. +F-46 +Table of Contents +Quanterix Corporation +Notes to consolidated financial statements (Continued) \ No newline at end of file diff --git a/raw/filings/0001503274/2017/0001047469-18-001842/rpt_disclosure.txt b/raw/filings/0001503274/2017/0001047469-18-001842/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..65c3c99fb602bf5410fc435fffb60742d31eca4d --- /dev/null +++ b/raw/filings/0001503274/2017/0001047469-18-001842/rpt_disclosure.txt @@ -0,0 +1,171 @@ +CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS +Since January 1, 2017, we have engaged in the following transactions with our directors, executive officers and holders of more than 5% +of our common stock, which we refer to as our principal stockholders, and affiliates or immediate family members of our directors, executive officers and principal stockholders. We believe that all of +these transactions were on terms as favorable as could have been obtained from unrelated third parties. +Some +of our directors are or were recently affiliated with our principal stockholders as indicated in the table below: +Director +Affiliation with principal stockholder +Keith L. Crandell +Managing Director of ARCH Venture Partners VI, LLC, the ultimate general partner of ARCH Venture Fund VI, L.P., and Managing Director of ARCH Venture Partners VIII, LLC, the general partner of ARCH Venture +Fund VIII Overage, L.P. +Douglas G. Cole, M.D. +Managing Partner of Flagship Pioneering and a member of Flagship Ventures General Partner LLC, the sole general partner of Flagship Ventures Fund 2004, L.P. +John M. Connolly +Senior Advisor to Bain Capital Ventures, the ultimate general partner of Bain Capital Venture Fund 2005, L.P., BCIP Associates III, LLC and BCIP Associates III-B, LLC. +Participation in Our Initial Public Offering +In December 2017, we issued an aggregate of 4,916,480 shares of our common stock at a purchase price of $15.00 per share, which included 641,280 +shares of common stock issued upon exercise by the underwriters of their option to purchase additional shares. Gross proceeds from the offering were approximately $73 million, prior to +deducting underwriting discounts and commissions and offering expenses payable by the Company. +29 +Table of Contents +The +table below sets forth the aggregate number of common shares issued to our directors, executive officers or holders of more than 5% of our capital stock, or an affiliate or immediate +family member thereof, at the time of the transaction: +Shares +Aggregate +Purchase Price +David R. Walt, Ph.D. +200,000 +$ +3,000,000 +Marijn Dekkers, Ph.D. +40,000 +$ +600,000 +E. Kevin Hrusovsky +34,000 +$ +510,000 +Arch Venture Fund VIII Overage +266,000 +$ +3,990,000 +Cormorant Global Healthcare Fund, LP +100,000 +$ +1,500,000 +Trinitas Innovation-Q Investment Co., Ltd. +55,000 +$ +825,000 +Series D-1 Preferred Stock Financing +In June 2017, we issued an aggregate of 2,113,902 shares of our Series D-1 preferred stock at $4.021 per share for an aggregate purchase +price of approximately $8.5 million, which we refer to as the Series D-1 preferred stock financing. Each share of our Series D-1 preferred stock converted automatically into +0.3111 shares of our common stock immediately prior to the completion of our initial public offering on December 11, 2017. +The +following table summarizes the Series D-1 preferred stock purchased by our directors, executive officers and principal stockholders. +Name of Purchaser +Number of Shares +of Series D-1 +Preferred Stock +Purchased +Aggregate +Purchase +Price +Marijn Dekkers, Ph.D.(1) +248,694 +$ +999,999 +(1) Dr. Dekkers +is a director of the Company. +License Agreement with Tufts University +We entered into a License Agreement with Tufts University pursuant to which we obtained an exclusive, worldwide license to research, develop, +commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the +Simoa technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable for a fee. One of our directors and +our founding scientist, David R. Walt, Ph.D. previously served as University Professor, Professor of Biomedical Engineering, Professor of Genetics, Professor of Neuroscience, Professor of Cell and +Molecular Biology, and Professor of Oral Medicine at +Tufts University. Under that agreement, we are required to pay Tufts University royalties on all net sales of products and services as well as a portion of any sublicensing revenues. Tufts University +pays a portion of the royalties received from us to Dr. Walt, the amount of which is controlled solely by Tufts University. +Registration Rights +Pursuant to our registration rights agreement to which certain of our principal stockholders, directors and their affiliates are parties, the +holders of 15,481,262 shares of common stock are entitled to registration rights with respect to the shares of common stock held by them. These shares include the shares held (and shares issuable upon +the exercise of warrants held) by ARCH Venture Partners and affiliated funds, Bain Capital Venture entities, Flagship Ventures Fund 2005, L.P., bioMerieux SA +30 +Table of Contents +and +our directors Marijn Dekkers, Ph.D. and David R. Walt, Ph.D., and an affiliate of our director Paul M. Meister. +Under +our registration rights agreement, holders of registrable shares can demand that we file a registration statement or request that their shares be included on a registration +statement that we are otherwise filing, in either case, registering the resale of their shares of common stock. The registration rights will terminate at the earlier of the closing of a Change of +Control Event, as such term is defined in our restated certificate of incorporation, (b) such time as Rule 144 under the Securities Act or another similar exemption under the Securities +Act is available for the sale of all of such registrable shares without limitation during a three-month period without registration (and without the requirement for us to be in compliance with the +current public information required under Rule 144(c)(1)), or (3) the fifth anniversary of the completion of our initial public offering. +Demand Registration Rights. Following the date that is 180 days after the date of our initial public offering, the holders +of a majority of +the registrable shares may require us to file a registration statement under the Securities Act at our expense, subject to certain exceptions, with respect to the resale of their registrable +shares having an aggregate offering price (net of underwriting discounts and commissions, if any) of at least $5 million, and we are required to use our reasonable best efforts to effect the +registration. The holders of a majority of the registrable shares may require us to effect up to +two such demand registrations for the holders of registrable shares as a group. In the event we are required to effect such a demand registration, we may not effect any other registration of +securities for sale for our own account (other than a registration effected solely to implement an employee benefit plan or in certain business combination transactions) within 120 days +following the effective date of the demand registration. +We +are also required to use our reasonable best efforts to qualify and remain qualified to register securities pursuant to a registration statement on Form S-3 under the +Securities Act. Any holder or holders of registrable shares anticipated to have an aggregate sale price (net of underwriting discounts and commissions, if any) in excess of $1 million will have +the right to require us to file, at our expense, an unlimited number of registration statements on Form S-3 for the registrable shares held by such requesting holder or holders, and we are +required to use our reasonable best efforts to effect such registrations. +Piggyback Registration Rights. If we propose to register any of our securities under the Securities Act for sale to the public +(except with respect +to registration statements on Form S-4, Form S-8 or another form not available for registering the registrable shares for sale to the public), the holders of registrable shares are +entitled to notice of such registration and to request that we include registrable shares for resale on such registration statement, subject to the right of any underwriter to limit the number of +shares included in such registration. +We +will pay all registration expenses, other than underwriting fees, commissions or discounts, related to any demand or piggyback registration, including up to $50,000 of fees and +disbursements of counsel for the holders of registrable shares. The Registration Rights Agreement contains customary cross-indemnification provisions, pursuant to which we are obligated to indemnify +the selling stockholders in the event of misstatements or omissions in the registration statement attributable to us and they are obligated to indemnify us for misstatements or omissions attributable +to them. +Agreements with Directors +On March 20, 2017, we entered into a letter agreement with our director Marijn Dekkers, Ph.D. pursuant to which Dr. Dekkers agreed +to serve as a member of our board of directors. Pursuant to the letter agreement, we granted Dr. Dekkers an option to purchase 100,000 shares of our common stock vesting over four years. In +addition, we agreed to provide Dr. Dekkers with the opportunity to participate in any private placement financing transaction we entered into prior to completion of this +31 +Table of Contents +offering +on the same terms as other investors in such transaction. We also agreed to pay Dr. Dekkers compensation of $25,000 per year for service on our board of directors and to reimburse +Dr. Dekkers for his reasonable out-of-pocket expenses in attending board and committee meetings. We also agreed to provide indemnification of Dr. Dekkers pursuant to our certificate of +incorporation, an indemnification agreement and our director and officer insurance. +On +August 7, 2013, we entered into a letter agreement with our director Paul M. Meister pursuant to which Mr. Meister agreed to serve as a member of our board of directors. +Pursuant to the letter agreement, we granted Mr. Meister an option to purchase 75,000 shares of our common stock vesting over four years. We also agreed to pay Mr. Meister compensation +of $25,000 per year for service on our board of directors and to reimburse Mr. Meister for his reasonable out-of-pocket expenses in attending board and committee meetings. We also agreed to +provide indemnification of Mr. Meister pursuant to our certificate of incorporation, an indemnification agreement and our director and officer insurance. +On +January 1, 2014, we entered into a letter agreement with our director David Walt, Ph.D. pursuant to which we agreed to pay Dr. Walt compensation of $25,000 per year for +service on our board of directors, commencing as of January 1, 2014 and for so long as he continues to serve as a non-employee member of our board of directors, and to reimburse Dr. Walt +for his reasonable out-of-pocket expenses in attending board and committee meetings. +Indemnification Agreements with Officers and Directors and Directors' and Officers' Liability Insurance +We have entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements, our restated +certificate of incorporation and our restated bylaws require us to indemnify our directors to the fullest extent not prohibited by Delaware law. Subject to certain limitations, our restated bylaws +also require us to advance expenses incurred by our directors and officers. +Our +2007 Stock Option and Grant Plan, as amended, also provides that our directors will not be liability for any act, omission, interpretation, construction or determination made in good +faith in connection with the plan, and the members of our board of directors and any committee administering the plan will be entitled to indemnification and reimbursement by us in respect of any +claim, loss, damage or expense (including reasonable attorneys' fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors' and officers' liability +insurance coverage which may be in effect from time to time. +We +also maintain a general liability insurance policy which covers certain liabilities of directors and officers of our company arising out of claims based on acts or omissions in their +capacities as directors or officers. +Policies and Procedures for Related Party Transactions +Pursuant to its charter, our audit committee is responsible for reviewing and approving, prior to our entry into any such transaction, all +transactions reportable by us under Item 404 of Regulation S-K in which we are a participant and in which any parties related to us, including our executive officers, our directors, +beneficial owners of more than 5% of our securities, immediate family members of the foregoing persons and any other persons whom our board of directors determines may be considered related persons +under Item 404 of Regulation S-K, has or is expected to have a direct or indirect material interest. +In +reviewing and approving such transactions, the audit committee will obtain, or will direct our management to obtain on its behalf, all information that the committee believes to be +relevant and +32 +Table of Contents +important +to a review of the transaction prior to its approval. Following receipt of the necessary information, a discussion will be held of the relevant factors if deemed to be necessary by the +committee prior to approval. If a discussion is not deemed to be necessary, approval may be given by written consent of the committee. This approval authority may also be delegated to the chair of the +audit committee in some circumstances. No related person transaction will be entered into prior to the completion of these procedures. +The +audit committee or its chair, as the case may be, will approve only those related person transactions that are determined to be in, or not inconsistent with, the best interests of us +and our stockholders, taking into account all available facts and circumstances as the committee or the chair determines in good faith to be necessary in accordance with principles of Delaware law +generally applicable to directors of a Delaware corporation. These facts and circumstances will typically include, but not be limited to, the benefits of the transaction to us; the impact on a +director's independence in the event the related person is a director, an immediate family member of a director or an entity in which a director is a partner, stockholder or executive officer; the +availability of other sources for comparable products or services; the terms of the transaction; and the terms of comparable transactions that would be available to unrelated third parties or to +employees generally. No member of the audit +committee will participate in any review, consideration or approval of any related person transaction with respect to which the member or any of his or her immediate family members has an interest. +33 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001503274/2018/0001047469-19-001374/filing.txt b/raw/filings/0001503274/2018/0001047469-19-001374/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a2ccdbbdef8b9d542a2254ddc4cca83eb51937f --- /dev/null +++ b/raw/filings/0001503274/2018/0001047469-19-001374/filing.txt @@ -0,0 +1,8058 @@ +10-K +1 +a2237889z10-k.htm +10-K +Use these links to rapidly review the document +TABLE OF CONTENTS +TABLE OF CONTENTS 2 +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2018 +OR +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period +from to +Commission file number: 001-38319 +QUANTERIX CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +20-8957988 +(I.R.S. Employer Identification No.) +113 Hartwell Avenue, Lexington, MA +(Address of principal executive offices) +02421 +(Zip Code) +Registrant's +telephone number, including area code: (617) 301-9400 +Securities +registered pursuant to Section 12(b) of the Exchange Act: +Title of each class +Name of each exchange on which registered +Common Stock, $0.001 par value per share +The Nasdaq Global Market +Securities +registered pursuant to Section 12(g) of the Exchange Act: None +Indicate +by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes o No ý +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange +Act. Yes o No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act +of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the +past 90 days. Yes ý No o +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of +Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such +files). Yes ý No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, +to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this +Form 10-K. ý +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an +emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer o +Accelerated filer ý +Non-accelerated filer o +Smaller reporting company ý +Emerging growth company ý +If +an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting +standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange +Act). Yes o No ý +As of June 30, 2018, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last +reported sales price for the registrant's common stock, par value $0.001 per share, on The Nasdaq Global Market on such date, was approximately $162.8 million. +As +of March 1, 2019, the registrant had 22,461,202 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant's definitive proxy statement for its 2019 Annual Meeting of Stockholders, which the registrant intends to file with the Securities and +Exchange Commission pursuant to Regulation 14A within 120 days after the end of the registrant's fiscal year ended December 31, 2018, are incorporated by reference into +Part III of this Annual Report on Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +1 +Item 1A. +Risk Factors +38 +Item 1B. +Unresolved Staff Comments +72 +Item 2. +Properties +72 +Item 3. +Legal Proceedings +73 +Item 4. +Mine Safety Disclosures +73 +PART II +Item 5. +Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +74 +Item 6. +Selected Financial Data +75 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +76 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +94 +Item 8. +Financial Statements and Supplementary Data +95 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +95 +Item 9A. +Controls and Procedures +95 +Item 9B. +Other Information +96 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +97 +Item 11. +Executive Compensation +97 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +97 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +97 +Item 14. +Principal Accountant Fees and Services +97 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +98 +Item 16. +Form 10-K Summary +103 +Signatures +104 +Consolidated Financial Statements +F-1 +i +Table of Contents +Special Note Regarding Forward-Looking Statements +This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. All statements other than +statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements by words such as +"anticipate," "believe," "contemplate," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "seek," "should," "target," "will," "would," or the +negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about: +• the implementation of our business model and strategic plans for our business, products and services; +• the potential size of the markets and fields addressable by our Simoa technology; +• the commercialization and adoption of our existing products and services and the success of our new product offerings; +• our ability to develop additional assays, including multiplexed assays; +• the accuracy of our estimates regarding expenses, future revenues, capital requirements and our needs for additional financing; +• the ability of our Simoa technology's sensitivity to improve existing diagnostics and to enable the development of new diagnostic tests and +tools; +• the potential of our Simoa technology in the field of companion diagnostics and its adoption by healthcare professionals; +• the impact of our Simoa technology on proteomic research; +• the usefulness of the data generated by our Simoa technology in the life science research, diagnostic and precision health screening fields; +• our new principal office and laboratory space; and +• our financial performance. +These +forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Part I, Item 1A, Risk Factors" and elsewhere +in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and new +risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or +combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the +forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in +the forward-looking statements. +You +should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, +we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no +obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to new information, actual results or +to changes in our expectations, except as required by law. +ii +Table of Contents +You +should read this Annual Report on Form 10-K and the documents that we reference herein and have filed with the Securities and Exchange Commission, or SEC, as exhibits to this +Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect. +This +Annual Report on Form 10-K includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by +third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do +not guarantee the accuracy or completeness of such information. This Annual Report on Form 10-K also contains estimates and other statistical data from a custom market research report by an +independent third-party research firm, which was commissioned by us and was issued in June 2017, referred to herein as the Third-Party Research Report. Such data involves a number of assumptions and +limitations and contains projections and estimates of the future performance of the markets in which we operate and intend to operate that are subject to a high degree of uncertainty. We caution you +not to give undue weight to such projections, assumptions and estimates. +Unless +the context otherwise requires, the terms "Quanterix," the "Company," "we," "us" and "our" in this Annual Report on Form 10-K refer to Quanterix Corporation. "Quanterix," +"Simoa," "Simoa HD-1," "SR-X," "SP-X", "HD-1 Analyzer" and our logo are our trademarks. All other service marks, trademarks and trade names appearing in this Annual Report on Form 10-K are the +property of their respective owners. We do not intend our use or display of other companies' trade names, trademarks or +service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. +iii +Table of Contents +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health +for life sciences research and diagnostics. Our platforms are based on our proprietary digital "Simoa" detection technology. Our Simoa bead-based and planar array platforms enable customers to +reliably detect protein biomarkers in +extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and +validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our +customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the +continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on +treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We are currently focusing on protein detection, which we believe is an area of significant unmet need and +where we have significant competitive advantages. However, in addition to enabling new applications and insights in protein analysis, we are also developing our Simoa bead-based technology to detect +nucleic acids in biological samples. +We +believe that our Simoa platforms are the most sensitive commercially available protein detection platforms and significantly advance ELISA technology, which has been the industry +standard for protein detection for over forty years. Proteins are complex molecules that are required for the structure, function and regulation of the body's tissues and organs, and are the +functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes +can produce over 100,000 different proteins, approximately 10,500 of which are known to be secreted in blood. Accordingly, while research on nucleic acids provides valuable information about the role +of genes in health and disease, proteins are more prevalent and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes +beyond genetic predisposition, reflecting the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is +happening in a person's body in real time. +Researchers +and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable using +conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low +abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa's sensitivity offers a new way to monitor healthy individuals and detect +proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical +signs and symptoms have appeared. +Our +Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited by published research in more than 400 articles in +peer-reviewed publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is +comprised of over 420 customers across our end markets, and includes 19 of the 20 largest biopharmaceutical companies. +1 +Table of Contents +Our Market Opportunities +Our Simoa platforms have applications across the life science research, diagnostics and precision health screening markets. Our initial target +market has been the life science research market, and according to estimates in the Third-Party Research Report, we believe that the life science research market, including both proteomics and +genomics research, is $3 billion per year and has the potential to reach $8 billion per year. However, as our customers continue to gain experience with our proprietary Simoa technology, +we believe the opportunity to access markets beyond research, such as diagnostics and precision health screening, will be significant. The Third-Party Research Report also estimates that the +diagnostic and precision health screening markets have the potential to reach an aggregate of $30 billion per year. +Life Science Research +Our initial target market is the large and growing life science research market. We believe our Simoa platforms are well-positioned to capture a +significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. By substantially lowering +the limit of detection of protein biomarkers, we believe that Simoa is penetrating the existing market for protein analysis and holds potential to significantly grow the life science research market +as researchers expand their research into the diseases associated with the thousands of proteins that were previously undetectable. Simoa also enables earlier detection of the proteins that are +currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. As an indication of the market's acceptance of our technology, +biopharmaceutical researchers are also integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. In addition to enabling new applications and +insights in protein analysis, our Simoa bead-based technology can be used to detect nucleic acids, which expands our market opportunity. We believe that this technology has the potential to ultimately +provide the same sensitivity as polymerase chain reaction, or PCR, which is the most commonly used technology for nucleic acid detection, without the distortion and bias issues associated with +amplification used in PCR. +Diagnostics +We believe the diagnostic market represents a significant commercial opportunity for our Simoa technology as well. We believe existing +diagnostics can be improved by Simoa's sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable +using conventional, analog immunoassay technologies but are detectable using Simoa. We also believe that the ultra-sensitive protein detection provided by Simoa can enable the development of a new +category of non-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic +methods, including spinal tap, diagnostic imaging and biopsy. +Simoa +technology also has significant potential in the emerging field of companion diagnostics. Drug developers can use Simoa to stratify patients into categories, enabling selection of +those patients for whom a drug is expected to be most effective and safe. Not only does Simoa have the potential to be used to develop companion diagnostics to stratify patients in clinical trials and +for treatment, but Simoa's sensitivity may also enable the development of companion diagnostics based on protein biomarkers that can regularly monitor whether an approved drug is having the desired +biological effect, enabling doctors to quickly and efficiently adjust the course of treatment as appropriate. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of proteins in low abundance that are undetectable using +conventional, analog immunoassay technologies may enable +2 +Table of Contents +our +technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. We believe +there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis +as part of a patient's routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance +of symptoms. +Simoa +products sold or used in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including +requirements for regulatory clearance or approval of such products before they can be marketed. To date, we have not received or applied for regulatory approvals for Simoa products. See "Risk +Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement" and "—Government Regulation" for a more detailed discussion regarding the regulatory +approvals that may be required. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme-linked immunosorbent assay, or ELISA, technology, which has been the most widely +used method of detection of proteins for over 40 years. Given our target customers' familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. +Our Simoa bead-based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times +smaller than traditional ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to our +bead-based technology's unprecedented sensitivity. In January 2018, we acquired Aushon BioSystems, Inc., or Aushon, and its proprietary sensitive planar array detection technology. Leveraging +our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to provide the same Simoa sensitivity found in our Simoa bead-based +platform. We currently offer the following three Simoa instruments, which we believe are the most sensitive protein detection platforms commercially available today: +• HD-1 : We +commercially launched our HD-1 instrument in January 2014. The HD-1 is based on our bead-based technology, and assays run on the HD-1 are fully automated. The full automation of the HD-1 provides us +with an additional significant competitive advantage with biopharmaceutical customers. +• SR-X : We +commercially launched our SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-1 in a compact benchtop form with a lower price point, more +flexible assay preparation, and a wider range of potential applications, including direct detection of nucleic acids. +• SP-X : We +initiated an early-access program for the SP-X instrument in January 2019, with the full commercial launch planned for April 2019. The SP-X is based on our planar array technology, which allows for +significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The +current menu of approximately 80 analyte-specific single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, +immunology and oncology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 50 biomarkers ranging from 1-10 analytes per assay in the areas of +immunology and oncology research. We intend to continue to increase the number of Simoa biomarker assays across our platforms. In addition, both the bead-based platform and the planar array platform +allow ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called "homebrew" assays. We intend to continue to increase the number of Simoa digital +biomarker assays. +3 +Table of Contents +We +continually seek to improve and expand our product offerings to meet the needs of our customers. To that end, we are developing the next generation HD instrument, the HD-X, which we +expect to launch in the second half of 2019. The HD-X will increase the multiplexing capability from 4-plex (current HD-1 limit) to six-plex and will include software features to facilitate compliance +with 21 CFR part 11 procedures. +We +also provide contract research services for customers through our CLIA-certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, +and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 500 projects for more than 179 customers +from all over the world using our Simoa platform. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional +instruments, as more than 45 customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We +sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America +and Europe, and through distributors or sales agents in other select markets. We have an extensive base of customers in world class academic and governmental research institutions, as well as +pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Competitive Strengths +We believe that our competitive strengths include the following: +• Proprietary ultra-sensitive digital immunoassay Simoa technology platforms, that enable +researchers and clinicians to obtain information from less invasive procedures in smaller sample sizes. We believe our Simoa platforms are the +most sensitive commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. +This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies +and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our +Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. We have also +recently implemented a research and development effort with a goal to increase the sensitivity of our Simoa technology 100-fold by 2021. +• Technology platforms that leverage and improve upon industry standard ELISA +technology. Simoa uses the basic principles of conventional bead-based ELISA. Adding digital capability to this industry standard platform has +resulted in expanded capabilities and improved performance. Given our target customers' familiarity with the core ELISA technology, our Simoa platforms are easily integrated with existing customer +workflows including data analysis. +• Leader in large and growing market for detecting proteins in low +abundance. We believe Simoa is the most sensitive commercially available protein detection technology, and our growing market acceptance is +establishing Simoa as the reference technology for detecting proteins in low abundance across sample types in our end markets. +• Deep and expanding scientific +validation. Our Simoa technology has been cited in more than 400 articles in peer-reviewed publications, including JAMA +Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. As of March 1, 2019, Simoa +technology had been +4 +Table of Contents +cited +in 409 publications, with 192 related to neurology and 88 related to oncology and inflammation. We have established relationships with key opinion leaders, and our growing base of over 420 +customers includes some of the world's leading academic and government research institutions as well as 19 of the 20 largest pharmaceutical and biotechnology companies. +• Leading position in market solidified by robust customization capabilities, assay design +flexibility and automation of our HD-1 instrument. Our technical capabilities and expertise allow our customers to design high-quality, +customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead-based and planar array +platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD-1 instrument provides fully automated analysis from +sample introduction to analytical results. Furthermore, our proprietary array approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed +provides customers high research and development productivity through greater throughput and lab efficiency. +• Highly attractive business model that leverages growing installed base of +instruments. As we continue to grow our installed base, optimize workflows and expand our assay menu, we expect to increase our revenues derived +from consumables. The integration of our technology in our customers' projects also provides ongoing sales of assays and consumables, resulting in a growing revenue stream. Our consumables revenue +increased to $13.8 million in 2018 from $7.6 million in 2017. +• Our highly experienced senior management +team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop +novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible +with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, +monitoring, prognosis and, ultimately, prevention. +Our +strategy to achieve this includes: +• Focus on the highly attractive, expanding market for protein detection and +analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on +human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to +a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including +environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person's body in real time. Our technology provides a unique bridge between understanding +the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and drug development. +• Continue to drive adoption of our Simoa technology in the life science research, diagnostics and precision health +screening markets. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in +particular by enabling researchers to perform studies on protein biomarkers that they were +5 +Table of Contents +previously +unable to perform. We believe Simoa has the capability to enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids +that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. In the precision health screening market, we believe that Simoa +technology has the potential to be used to monitor biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of +disease. +• Leverage the Simoa "ecosystem" to grow our customer base and further penetrate our existing customer +base. In an effort to enhance the productivity of our instrument base, we employ an extensive customer outreach program that we call Catalyzing Customer Engagement, or CCE. +Through CCE, we actively engage customers to optimize their workflow and better understand our instruments' and products' capabilities, resulting in increased utilization of our installed instrument +base. +• Utilize the flexibility of the Simoa platforms to expand into complementary markets, including nucleic acid +detection. We plan to utilize the flexibility of the Simoa platforms to expand our product offering to include other testing capabilities, including detection of nucleic acids. +We believe that our Simoa bead-based technology has the potential to provide the same sensitivity as PCR-based assays in detecting nucleic acids without the issues associated with amplification. We +believe the ability to integrate nucleic acid and protein testing capabilities into a full service instrument would hold significant value to our customers. +• Leverage the data generated by Simoa to drive adoption of our +technology. Technology being employed in the healthcare industry has become increasingly sophisticated, creating the need to aggregate and +digitize the significant amount of data being created in order to better achieve the goals of higher quality and more efficient care. Simoa generates digitized data for highly relevant biomarkers that +can provide a nuanced view into the continuum of health and disease. We plan to use the data generated by the Simoa technology to improve and create additional assays, with the goal of enabling more +precise research today and contributing to precision health in the future. +• Grow into new markets organically with our customers and through strategic +collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers +continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of +some of the work that our customers are doing today in the research market. For example, Simoa's unprecedented sensitivity has the potential to uncover research insights that could identify novel +biomarkers, which could help stratify patients in clinical trials potentially leading to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. +This progression with our customers will help us move into new markets organically in a cost effective manner, while also retaining significant upside. Additionally, we currently have a partnership in +place with a leading diagnostics company in the field of blood screening and plan to continue evaluating strategic collaborations that could help us access these new markets. +• Grow through strategic +acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For +example, in January 2018, we acquired Aushon and its proprietary sensitive planar array detection technology, which led to the development of our SP-X instrument for which we initiated an early-access +program in January 2019, with the full commercial launch planned for April 2019. This will continue to be an important part of our strategy to increase scale. We intend to pursue acquisitions to +expand +6 +Table of Contents +product +offerings, strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +Industry Background +We intend to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. +Our initial commercial strategy targets the large and growing life science research market, and we believe that the diagnostic market and the precision health screening market represent significant +future commercial opportunities for Simoa. +According to estimates in the Third-Party Research Report, we believe the aggregate commercial opportunity across these markets has the potential to expand to $38 billion. +Proteins +are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and +regulation of the body's tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an +organism's proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot +provide. +The +human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, +the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, approximately 10,500 +of which are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of +much of the proteome has not been practical given the limited level of sensitivity of existing technologies. To date, across our platforms, we have developed assays that address approximately 120 of +the proteins secreted in blood. We estimate that the current sensitivity of our Simoa technology has the potential to detect and measure up to one-third of the approximately 9,200 proteins secreted in +blood that are not consistently detectable using conventional immunoassay technologies. +While +genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to +understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of +environmental factors and lifestyle, such as diet and exercise, or provide insight into what is happening in a patient's body in real time. For example, identical twins have the same genotype, but may +develop different diseases over the course of their lifetime, largely due to environmental factors. +Much +like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of +which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic +research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not +detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and +well-being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, +ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +7 +Table of Contents +Existing Technologies and Their Limitations +Protein Analysis +The enzyme-linked immunosorbent assay, or ELISA, has been the most widely used method of sensitive detection of proteins for over +40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either +directly, or indirectly through use of a conjugated +secondary or "capture" antibody (sandwich ELISA). A specific "detection" antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final +step, a substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the +graphic below: +Aside +from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, +Raman-enhanced signal detection, immuno-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of what is +estimated to be approximately 10,500 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of +these approaches have limitations, including: +• dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +• narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules +and increasing sample volume requiring additional enzymes to reach detection limit; +• low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal +physiological levels; and +• limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers +aimed at more effectively detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and +then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated +during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become +8 +Table of Contents +detectable. +PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide +availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias +into the data, potentially compromising the reliability of results, particularly at low concentrations. +Due +to the complexity, susceptibility to contamination and significant costs related to PCR and other existing technologies, the genomic testing market generally remains limited to +reference laboratories, research facilities and laboratories associated with large hospitals. A typical molecular diagnostics laboratory in a hospital or research laboratory setting is a dedicated +facility that employs highly skilled technologists and is supervised by a technician with a Ph.D. or M.D./Ph.D. To guard against contamination, which is a common result of target amplification, a +typical laboratory will require at least three separate rooms, or isolation areas, to perform PCR-based assay methods for genomic testing. +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection +sensitivity. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for +capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual +molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as +the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, +enabling detection sensitivity that was not previously possible. +Our +Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to +high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead-based technology detects proteins: +Simoa Bead-Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead-based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as +depicted by the white star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of +the star in the graphic). +9 +Table of Contents +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 +microwells, each of which is large enough to accommodate only a single bead. +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is +introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our +Simoa bead-based technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. The following chart +shows examples of the levels of detection, or LoD, of certain Simoa bead-based assays and commercially available ELISA assays compared to the median lower normal plasma or clinical ranges of various +protein biomarkers. As shown below, the LoD for most of the assays from a leading manufacturer of commercial ELISA assays is above the median lower normal plasma or clinical ranges, making these +biomarkers undetectable at normal physiological levels with these assays. +10 +Table of Contents +LoD Comparison +Each +of the increments in the horizontal axis in the table above represents a 10-fold increase in sensitivity. Using the protein IL-2 as an example from the graphic above, the LoD for +the leading commercially available IL-2 assay is approximately 9 pg/mL, whereas the LoD for our Simoa assay is approximately 0.01 pg/mL, representing a 900-fold increase in sensitivity. +The +ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from +a sample, and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while +competitive platforms lose sensitivity when multiplexing is used. +Multiplexing +is achieved with our Simoa bead-based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the +array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. While we have demonstrated the +ability to identify and differentiate up to 35 different bead subpopulations on the HD-1, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of +proteins in a single sample, we believe that the ability to multiplex above a 6-plex and maintain single-plex sensitivity and precision may be limited using bead-based technology due to constraints in +the number of bead-containing wells for each plex that are imaged on the Simoa disk. In 2017, we commercially launched a Simoa neurology 4-plex (Nf-L, Tau, GFAP and UCH-L1) bead-based assay for the +study of traumatic brain injury and other neurodegenerative conditions. Simoa is the only technology with the sensitivity to detect all four of these markers in blood, whereas other assay technologies +require cerebrospinal fluid, or CSF, to detect all four of these markers due to sensitivity limitations. This is a significant advantage in terms of ease of use, patient comfort, speed and +cost-effectiveness. We plan to introduce a new 6-plex human cytokine panel using Simoa bead-based assay in the middle of 2019. +11 +Table of Contents +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA and require two antibodies: one for +capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array +reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small +spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our +Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as +translational +biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +A) Analyte-specifc +capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96-well microtiter plate. Each microspot contains +capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) Samples +are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by +washing the plate with a benchtop plate washer or manual wash manifold. +C) A +mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +D) Streptavidin-HRP +(horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a +washing step. +E) A +high-sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the +enzyme substrate causing the enzyme substrate to emit light. +F) The +plate is placed into the Quanterix SP-X imaging system. A scientific-grade CCD camera images the entire plate and all micro-spots simultaneously. The low +background of the plate +12 +Table of Contents +surface +and the high-sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The SP-X imaging software utilizes algorithms to optimize exposure time and +combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +Below +is an image of a 96-well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We +believe the Simoa planar array technology is well-suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with +ultra-sensitive +detection in a multiplex assay format. The figure below demonstrates 10-plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) +listed in femtogram per ml. +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, we are also developing our Simoa bead-based +technology to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For +example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating +and cooling cycles needed to amplify a copy of the nucleic +13 +Table of Contents +acid +being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR-based assays with the following +benefits: +• no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +• reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; +and +• the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water. +For +detection of nucleic acids with our Simoa bead-based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with +nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added +and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. This assay is pictured below: +Simoa +has been used to detect short sequences of RNA, known as microRNA, that are important in a number of biological systems, and are widely used in innovative therapeutic and gene +editing technologies. The assay was used to detect microRNA-122, or miR-122, a marker of liver toxicity, from the serum of patients who had overdosed with acetaminophen. As shown in the graph below, +these patients had elevated miR-122 levels compared to healthy controls. +This +approach suggests potential for applications for measuring drug-induced liver injury for both safety testing of drugs in development and for monitoring of approved drugs. +14 +Table of Contents +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research, diagnostics and precision health +screening markets. +Life Science Research +Our initial target market is the large and growing life science research market. We believe our Simoa platforms are well-positioned to capture a +significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, +the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how +to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we +believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, +our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of +the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the +nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset +of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +As +an indication of the market's acceptance of our Simoa technology, researchers at pharmaceutical and biotechnology companies are integrating our platforms into drug development +protocols to more efficiently and effectively develop drugs. Using Simoa's unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following +administration of a drug, drug +developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. We estimate that our Simoa technology has been utilized in over 800 +clinical trials to date. +In +addition, researchers can also use Simoa to monitor a drug candidate's unwanted effect on "off-target" biomarkers and predict side effects, addressing the significant issue of drug +toxicity, which is a leading cause of death in the United States. +According +to estimates in the Third-Party Research Report, we believe that the total life science research market, including both proteomics and genomics research, is $3 billion +per year and has the potential to reach $8 billion per year. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker +diagnostics can be improved by Simoa's sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable +using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the +development of a new category of non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient +diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +15 +Table of Contents +For +example, researchers have conducted studies using Simoa that indicate that neurological biomarkers, including tau and Nf-L, may someday be able to replace diagnostic imaging to +diagnose traumatic brain injury, or TBI. Our Simoa assays for tau and Nf-L are 3,500-fold and 840-fold more sensitive, respectively, than the leading assay platforms, and are the only assays that can +reliably detect these critical protein biomarkers in blood. Almost 90% of patients who visit U.S. hospital emergency rooms and receive a computerized tomography, or CT, scan show no structural brain +injury. In addition, CT scans have approximately 100 times more radiation than a chest x-ray, and are suspected of causing cancer in up to 29,000 people per year, underscoring the need for development +of a safe and accurate blood-based diagnostic test for TBI, which we believe may be enabled by our Simoa technology. +Simoa +technology also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a +therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients to study for whom a +drug is expected to be most effective and safe. Companion diagnostics have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only can Simoa +be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa's sensitivity also enables the development of companion diagnostics based on protein +biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This can quickly and efficiently enable doctors to adjust the course of treatment +as appropriate by increasing or decreasing dosages or even switching therapies. +There +has been significant interest from third parties to use our technology to develop applications for the diagnostic market. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using +conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and +provide earlier detection of the onset of disease. This may facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, +ultimately, prevention, enabling a "precision health" revolution. +We +believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on +a regular, ongoing basis as part of a patient's routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, +prior to the appearance of symptoms. +According +to estimates in the Third-Party Research Report, we believe that the total diagnostic and precision health screening markets addressable using Simoa technology have the +potential to reach an aggregate of $30 billion per year upon receipt of the necessary regulatory approvals, which we have not yet begun the process to obtain. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have +significant shortcomings that our technology addresses. In particular, we have focused on the following areas: neurology, oncology, cardiology, infectious disease and inflammation. +16 +Table of Contents +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally +only been detectable in cerebrospinal fluid, or CSF, has the potential to rapidly advance neurology research and drug development, and transform the way brain injuries and diseases are diagnosed and +treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that +the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these +endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of +which are costly and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse +through the blood-brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of these neural biomarkers in +the blood are so low that they are undetectable by conventional, analog immunoassay technologies. +As +one example, we have developed ultra-sensitive protein assays for the neural biomarkers A b 42 and tau that are approximately 2,000 and 3,500-fold +more sensitive, respectively, than benchmark commercial assays. Our protein assays are the only currently available assays on the market capable of precise measurement of these neural biomarkers in +blood in diseased and healthy individuals. +To +date, there have been over 190 neurology related scientific publications using our Simoa technology, and we believe that ultra-sensitive digital detection of neural related biomarkers +in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including CTE, Alzheimer's disease, dementia, Parkinson's disease, multiple +sclerosis and TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. +In +2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for the +neurological biomarker Nf-L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer's disease as currently established CSF biomarkers. The study was a major study of almost 600 +patients from the Alzheimer's Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf-L measurements compared with traditional CSF biomarkers. The +diagnostic accuracy of the plasma Simoa Nf-L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +17 +Table of Contents +In +addition, Simoa plasma Nf-L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer's disease at baseline and during follow-up. High plasma Nf-L +correlated with poor cognition and Alzheimer's disease -related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf-L may have +clinical utility as a noninvasive biomarker in Alzheimer's disease. Nf-L is becoming an increasingly important biomarker for neurology research, with over 90 Nf-L-related research publications in 2018 +alone, covering a number of neurological disorders, including multiple sclerosis, Alzheimer's disease, ALS, Parkinson's disease and others. +Traumatic +brain injuries, or TBIs, lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive +diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological +biomarkers, such as Nf-L, tau, GFAP and UCHL-1, to more adequately address diagnosis of TBIs and overall brain health. +Leading +researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural +biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic +Encephalopathy, or CTE, which currently can only be diagnosed after death via a brain autopsy. A recent publication by a National Institute of Health researcher indicates that measuring tau in the +blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling +clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +In +2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of traumatic brain injury and other neurodegenerative conditions. Whereas +other assay technologies require cerebrospinal fluid, or CSF, to detect all four of these markers, due to Simoa's sensitivity, this is the only assay that can detect all of these biomarkers directly +from blood samples. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. +In +2016, Fast Company named Quanterix one of the "World's Most Innovative Companies" for our work in concussion detection. We also were awarded two competitive grants from the NFL-GE +Head Health Challenge to advance this work in the detection and quantification of mild TBI. +We +estimate that the total addressable market for Simoa technology in neurology has the potential to reach $6 billion across research, diagnostic and precision health screening +indications. +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease +development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the +disease has progressed and the patient has become symptomatic. Simoa's highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for +patients. Additionally, Simoa technology has shown early promise as an alternative to more invasive diagnostic procedures. +Simoa +technology was used in a recent unpublished scientific study that indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low +cost, non-invasive blood test. In this retrospective study, researchers found that Simoa assays resulted in significantly fewer false positives and false negatives than mammography. Inaccurate +mammography can result in unnecessary stress, additional health care costs from follow up diagnostic mammograms, +18 +Table of Contents +unnecessary +biopsies and increased lifetime exposure to radiation. Researchers are also developing ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa technology, potentially +replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, cost effective, accurate blood-based health screens, further enabling the liquid biopsy +market, which is estimated to grow to almost $3 billion by 2026. +Cancer +immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are +not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating +(serum and plasma) protein biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor +for adverse effects. One technical challenge facing the immuno-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory +biomarkers directly in serum and plasma. We have developed a set of 38 ultra-sensitive immune modulation assays (cytokines and chemokines) that can be used to monitor the immune response. In +particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum +and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6 which is one of the +cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in +immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We +also believe residual cancer cell detection post-surgery or treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a +greater risk of reoccurrence post-surgery due to residual cancer. For example, we have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen, or PSA, that is over 1,000-fold more +sensitive than benchmark commercial PSA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following +radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this +study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels +below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated +that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, +and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +19 +Table of Contents +We +estimate that the total addressable market for Simoa in oncology has the potential to reach $25 billion across research, diagnostic and precision health screening indications. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths +in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa's highly sensitive digital measurement capabilities have +the potential to be used to predict early cardiac disease. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying +rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making +early stage detection more specific and widely available. +Today, +early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious +disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables +the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent +in amplification technologies, such as PCR. +For +example, we have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than benchmark commercial protein assays capable of detecting the HIV-specific antigen, +p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 +assay with a commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects +infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the +20 +Table of Contents +conventional +p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In +addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry +a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile +( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. +Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff +organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism +has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +We +will continue to develop Simoa assays for pathogenic antigens that are competitive in sensitivity to PCR but more specific to the pathogenicity of the offending organism. We believe +that these Simoa assays could also be invaluable tools for the development of anti-infective drugs and treatment monitoring of anti-viral and anti-bacterial drugs. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory +molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology +measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn's disease, asthma, rheumatoid arthritis and +neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our +Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to +21 +Table of Contents +monitor +therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn's disease undergoing +anti-TNF- a therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the +TNF- a levels of the patients before and after treatment. These levels were all below the limit of detection, or LoD, of traditional immunoassays. +We +believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory +drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side +effects or increase efficacy. +Our Products and Services +Our Quanterix commercial portfolio includes research use only instruments, assay kits and other consumables, and contract research services +offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD-1/HD-X +• +commercially launched the +HD-1 in January 2014 +• +expect to commercially launch the next-generation HD-X in the second half of 2019 +• +Simoa bead-based platform +technology +• +most widely referenced ultra-sensitive multiplex immunoassay platform on market +• +fully automated, floor-standing +instrument +• +wide dynamic range +• +multiplexing capability with small sample volume +• +up to 400 samples per eight-hour shift +• +homebrew capabilities +• +HD-1 supports multiplexing up to 4-plex; HD-X will support up to 6-plex +22 +Table of Contents +Product +Key attributes +SR-X +• +commercial launch in +December 2017 +• +Simoa bead-based platform technology +• +reader only, benchtop instrument with lower price point +• +same sensitivity, dynamic range and homebrew capabilities as HD-1 +• +multiplexing capability: SR-X currently has up to 6-plex +capability +• +sample prep and assay protocol flexibility +SP-X +• +early access program in +January 2019; commercial launch expected in April 2019 +• +Simoa planar array platform technology +• +reader only, benchtop instrument with lower price point +• +similar sensitivity, dynamic range and homebrew capabilities as HD-1 +• +multiplexing capability: SP-X currently has up to +10-plex capability +• +sample prep and assay protocol flexibility +Assays and other consumables +• +over 120 biomarker assays +developed for neurology, oncology, cardiology, infectious diseases and immunology research +• +homebrew kits containing reagents and supporting user guides enabling +customers to develop custom assays +• +proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead-based assays +Services +• +contract research services +provided through our Accelerator Laboratory +• +over 500 projects completed to date +• +extended warranty and service contracts +• +CLIA-certified lab available +Instruments and Consumables +HD-1/HD-X +We commercially launched the HD-1 instrument in January 2014. The HD-1 uses our Simoa bead-based technology and is the most sensitive automated +multiplex protein detection platform commercially available. Assays for the HD-1 are fully automated (i.e. sample in to result out), and results for up to 66 samples are available in +approximately one hour. We believe that this automation +23 +Table of Contents +provides +us an additional significant competitive advantage with pharmaceutical and biotechnology customers. Samples can be input into the instrument via 96-well microtiter plates or sample +tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +Specialized +software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration +of multiple biological molecules. The HD-1 software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis software is +embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to +concentrations for the different biological molecules. +We +continually seek to improve our platforms and technology and to that end, we expect to commercially launch our next-generation fully automated, bead-based Simoa instrument, the HD-X, +in the second half of 2019. The HD-X will increase the multiplexing capability from 4-plex (current HD-1 limit) to six-plex and will include software features to facilitate compliance with 21 CFR +part 11 procedures. +SR-X +We commercially launched the SR-X instrument in the fourth quarter of 2017. The SR-X utilizes the same Simoa bead-based technology and assay +kits as the HD-1 in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra-sensitive detection capabilities enabled by Simoa. +In +contrast to the fully automated workflow of the HD-1, the assay incubation and washing steps for the SR-X are performed outside of the instruments using conventional liquid handling +methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The +SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately +2.5 hours. +SP-X +We initiated an early-access program for the SP-X instrument in January 2019, with the full commercial launch planned for April 2019. The SP-X +uses the Simoa planar array technology developed initially by Aushon Biosystems for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated +Simoa image analysis and data analysis algorithms to provide the same Simoa sensitivity found in our Simoa bead-based platform. The Simoa planar array technology utilizes a 96-well microtiter plate +with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar +to the SR-X, the assay prep workflow utilized for the SP-X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid +handling methods as the SR-X. The SP-X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital +biomarker assays. The current menu +of approximately 80 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and +oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 50 biomarkers ranging from 1-10 analytes per assay in the areas of +immunology and oncology research. +24 +Table of Contents +In addition to these assays we have developed, the Simoa platform allows ease and flexibility in assay design, enabling our customers to develop their own +proprietary in-house assays, called homebrew assays, using our bead-based Homebrew Assay Development Kit. These kits include all components required for customers to run tests using their own +antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes, and disposable tips. Our +goal is to continue to add to our assay kits to extend our application base. Our consumables portfolio for our planar array platform also includes assay-specific reagent kits as well as the Simoa +Planar Array Homebrew Starter Kit which enables our customers to run tests using their own antibodies and reagents in a similar manner to the bead-based homebrew kits. +We +have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to +manufacturing and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our +aggressive menu expansion goals. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. Researchers, +academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports +multiple projects and services, including: +• Sample testing. Utilizing commercially available Simoa kits, we have run +large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer's needs and even large studies can +be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +• Homebrew assay development. Utilizing proprietary or commercially available +reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can +also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +• Custom development. After identifying the optimal assay and conditions, the +Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa +platform. +To +date, we have completed over 500 projects for over 179 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also +found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as more than 45 customers for whom we have provided contract research services have +subsequently purchased an instrument from us. +We +also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This +evaluation includes examining new assay formats and +25 +Table of Contents +instrumentation +improvements and upgrades to increase the performance of our Simoa assays and instruments. We have implemented a research and development program that aims to increase the sensitivity +of our Simoa technology 100-fold by 2021. We are also focused on expanding our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is +driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and +feedback from our sales and marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our instruments and consumables via direct field sales and support organizations located in North America and Europe and through a +combination of our own sales force and third-party distributors in additional major markets such as Australia, Brazil, Czech Republic, China, India, Israel, Japan, Mexico, South Korea, Lebanon, Qatar, +Singapore and Taiwan. Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological +advances in Simoa systems, workflows, and notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on delivering a +consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As +of March 1, 2019, we had approximately 78 people employed in sales, sales support and marketing, including technical field application scientists and field service personnel. +This staff is primarily located +in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive +distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region countries such +as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with Quanterix-employed sales and +support personnel. +Our +sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and +governmental research institutions. +In +addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness +of our technology, demonstrate its benefits relative to existing technologies and accelerate its adoption. We also seek to increase awareness of our products through participation at trade shows, +academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +To +develop a thought leadership position in the precision health arena, we have been a Platinum Sponsor of the annual Powering Precision Health Summit, or PPHS. PPHS is an annual summit +founded in 2016 by our President and Chief Executive Officer, Kevin Hrusovsky, that aims to gather many of the world's top innovators, scientists, physicians, medical professionals, patient advocates, +government officials, regulators and investors to debate and collaborate around crucial issues from neurology, oncology and cardiology to inflammation and infectious disease. At PPHS in 2016, there +were 22 cutting edge scientific talks covering neurology, cardiology, oncology and inflammation. There were over 200 registered attendees, including senior scientists, patient advocates, investors, +and potential partners. At PPHS in 2017, there were 37 scientific talks and over 425 registered attendees and at PPHS Europe in 2018, there were 20 scientific talks and over 150 registered attendees. +26 +Table of Contents +Our +systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and +demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the system including running experiments in the Accelerator Laboratory and +comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive +documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a +purchase order, can often be six to 12 months, or longer. +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource the Simoa bead-based instrument development and manufacturing with industry leaders, +and to internally develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-1 and HD-X instruments are manufactured by STRATEC Biomedical AG, based in Birkenfeld, Germany, and is manufactured and shipped from +their Birkenfeld and Beringen, Switzerland facilities. See "—Key Agreements—Development Agreement and Supply Agreement with STRATEC" for a description of this agreement. HD-1 +instruments are shipped by STRATEC to our global customers' locations. Installation of, and training on, our products is provided by our employees in the markets where we conduct direct sales, and by +distributors in those markets where we operate with distributors. The SR-X is manufactured by Paramit Corporation, based in Morgan Hill, California, and is shipped to global customers by Paramit. +We +believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-1, the HD-X +or the SR-X, we would experience additional costs, delays and difficulties in doing so, and our business would be harmed. +The +SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one +significant component is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be +available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. To mitigate this risk, we typically +carry significant inventory of critical components. +Consumables +We assemble our assay kits for our bead-based platform in our Lexington, Massachusetts facility. Reagents for our bead-based assays include all +components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of +suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, +which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we have increased the shelf life of the vast majority of +our bead-based assays from six months to 12 months or more. +Simoa +disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC +Biomedical. +27 +Table of Contents +This +agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the +relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead-based platform are commercially available. +We +assemble our assay 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components +required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a +limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for +our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to +mitigate this risk through inventory control. +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement, or the Development Agreement, with STRATEC +Biomedical Systems AG, pursuant to which STRATEC undertook the development of the Simoa HD-1 instrument. Under the Development Agreement, we were required to pay a fee and issue to STRATEC warrants to +purchase our equity securities, all of which have been exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The Development Agreement +was amended in November 2016. The Amendment reduced our obligation to satisfy a minimum purchase commitment under the Supply and Manufacturing Agreement described below. Additionally, the parties +agreed on additional development services for an additional fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with +the final milestone due under the terms of the Development Agreement. The services are expected to be completed in the second half of 2019. +The +Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations +to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In +September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC, or the Supply Agreement, pursuant to which STRATEC agreed to supply HD-1 instruments to us, and +we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC's ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the +instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The Supply Agreement was amended in November 2016 to +reduce the number of instruments we are committed to procure from STRATEC. The instrument price stipulated in the Supply Agreement was established based on certain specified assumptions and is subject +to certain adjustments. +The +Supply Agreement is terminable by either party on 12 months' notice to the other party, provided that neither party may terminate the Supply Agreement prior to the later of +the seven year anniversary of the acceptance of the first prototype instrument and the purchase of the minimum number of +instruments which we committed to procure. The Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our +company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC's insolvency or uncured material breach or termination by STRATEC for convenience, +we are granted a nonexclusive royalty free license of STRATEC intellectual +28 +Table of Contents +property +to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement, or the Paramit Agreement, with Paramit Corporation, or Paramit. Under the +terms of the Paramit Agreement, we engaged Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to +manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines +will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess +pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in +cost. +The +Paramit Agreement has an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with nine months' written notice to the other +party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months' notice to Paramit upon the occurrence of (i) a failure +of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under +the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days' notice to us in the event of a material breach after written notice and a 60-day opportunity to +cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for protein +detection, nucleic acid detection and additional applications. For example, companies such as Bio-Techne, Luminex Corporation, MesoScale Diagnostics, Singulex, Gyros Corporation, Nanostring +Technologies, Inc., and others, have products for protein detection that compete in certain segments of the market in which we sell our products. As we or our partners expand the applications +for our products to include diagnostics and precision health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. +Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging +and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research, diagnostic +and precision health screening markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The +life science instrumentation industry is highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We +believe the principal competitive factors in our target markets include: +• sensitivity; +• cost of instruments and consumables; +• assay menu; +• reputation among customers and key opinion leaders; +• innovation in product offerings; +29 +Table of Contents +• accuracy and reproducibility of results; and +• customer support infrastructure. +We +believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions +and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University, in +the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, +including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have +exclusively licensed from Tufts the relevant patent filings related to these technologies. (See "—License Agreement with Tufts University" below). In addition to licensed patents, we have +developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. We believe our proprietary platforms are a core +strength of our business and our strategy includes the continued development of our patent portfolio. +Our +patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products +and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers +embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the +invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent +strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of March 1, 2019, we had exclusively licensed 17 patents and two patent applications from Tufts. These patents and patent applications +include eight issued U.S. patents and two pending U.S patent applications, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian +patent. +A +first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes five granted U.S. patents, two pending U.S. patent +applications, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A +second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. +The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A +third patent family licensed from Tufts is directed to methods for analyzing analytes using a sensor system with cross-reactive elements. This patent family includes one granted U.S. +patent. The standard patent expiration date for the U.S. patent in this family is March 14, 2021. +30 +Table of Contents +A +fourth patent family licensed from Tufts is directed to electro-optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. +The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +As +of March 1, 2019, we owned 19 issued U.S. patents and 16 pending U.S. patent applications, three pending Patent Cooperation Treaty applications, eight granted European patents +and six pending European patent applications, eight granted Japanese patents and one pending Japanese patent applications, four granted Chinese patents and two pending Chinese patent applications, +five granted Canadian patents and two pending Canadian patent applications, and four registered Hong Kong patent applications. +A +first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for analyte capture on beads, including multiplexing. This patent family includes three granted U.S. patents and one pending U.S. patent application, two granted European patent (nationalized and +active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the +U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A +second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in +particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes four granted U.S. patents and +one pending U.S. patent application, one granted European patent (nationalized and active in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian +patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A +third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is +September 28, 2028. +A +fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent +in this family is March 24, 2030. +A +fifth patent family owned by us is directed to instruments and consumables. This patent family includes one granted U.S. patent and one pending U.S. patent application, one granted +Japanese patent +and one pending Japanese patent application, one granted Chinese patent and two pending Chinese patent applications, three registered Hong Kong patent applications and one pending patent application +in each of Europe, and Canada. The standard patent expiration date for any U.S. patents that may issue from this family is February 25, 2031, and for any non-U.S. patents is January 27, +2032. +A +sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent +application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A +seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The +standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +31 +Table of Contents +An +eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending Patent Cooperation Treaty +patent application. If we pursue protection by filing any national stage applications, the standard patent expiration date for any patents that may issue from this family will be in 2038. +We +own or co-own seven patent families directed to the measurement of particular types of analytes, including prostate specific antigen (PSA), +b -amyloid peptide, tau protein, toxin B of C. difficile , and DNA or RNA molecules. Any patents that may issue from +these patent applications would have standard expiration dates between 2032 and 2039. +With +the acquisition of Aushon in January 2017, we acquired their patent portfolio for our planar array technology. As of March 1, 2019, the acquired patent portfolio includes at +least eight issued U.S. patents and five pending U.S. patent applications, one granted Australian patent, three granted Canadian patents and one pending Canadian patent application, five granted +European patents (each nationalized and active in between eight and 14 countries) and three pending European patent applications, three granted Japanese patents, one registered Hong Kong patent +application and one pending Patent Cooperation Treaty patent application. +We +have licensed additional patents and patent applications from third parties. +In +addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and +intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +License Agreement with Tufts University +In June 2007, as amended in April 2013 and August 2017, we entered into a license agreement with Tufts University, or Tufts, pursuant to which +we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or +have sold products and services covered by patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for +all fields of use and are sublicensable for a fee. +Under +the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 +amendment, we issued Tufts shares of our Series C-1 Preferred Stock. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed +technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone +payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The +term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or +convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from +Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate +diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we +cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a +petition in bankruptcy filed for or against us that is not removed within 60 days. We may +32 +Table of Contents +terminate +the agreement at any time upon at least 60 days' written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Our products are currently intended for research use only, or RUO, applications, although our customers may use our products to develop their +own products that are subject to regulation by the FDA. Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products fall under the FDA's +jurisdiction if they are used for clinical rather than research purposes. Consequently, our products are labeled "For Research Use Only." +On +November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on "Distribution of In Vitro Diagnostic Products Labeled for Research Use +Only or Investigational Use Only," or the RUO/IUO Guidance. The purpose of an FDA guidance document is to provide the FDA's current thinking on when IVD products are properly labeled for RUO or for +IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory +requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. +Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA's 510(k) clearance, premarket approval, or other +requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may +include written or verbal marketing claims or links to articles regarding a product's performance in clinical applications, a manufacturer's provision of technical support for clinical validation or +clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance +is a statement of the FDA's thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and promotion of our products, +including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. We also +are not promoting or using our products in the development or promotion of laboratory developed test, or LDT, services. When we develop products for clinical use, we will do so in accordance with FDA +requirements applicable to those products at that time. Separately, when we become aware that accredited or licensed clinical laboratories may be using our RUO products either for research or clinical +uses, such as part of LDT services, in accordance with the regulations that apply to clinical laboratories, we will continue to review the labeling and promotion of our products for consistency with +the RUO/IUO Guidance. +When +our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, +apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, +mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising +and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The +FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as +determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated +with them, are subject to general controls. Class II devices are subject to general controls and special controls, including +33 +Table of Contents +performance +standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices and some +Class II devices are exempt from a requirement that the manufacturer submit a premarket notification, or 510(k), and receive clearance from the FDA which is otherwise a premarketing requirement +for a Class II device. Class III devices may not be commercialized until a premarket approval application, or PMA, is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent, +or SE, to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA's receipt of the 510(k), but it often +takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, +any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre-market +approval. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III +regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically +placed into Class III due to the absence of a predicate device, called the "Request for Evaluation of Automatic Class III Designation," or the de novo classification procedure. +This +procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or +Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug +Administration Safety and Innovation Act of 2012, or FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and +received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo +classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify +the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for +special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it +identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control +the risks and special controls cannot be developed. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time +consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the +FDA's satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of +the submitted information. By statute, the FDA has 180 days to review the accepted application, although, review of the application generally can take between one +34 +Table of Contents +and +three years. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts +from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory +panel decision, the panel's recommendations are important to the FDA's overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to +ensure compliance with its quality system regulations, or QSRs. New premarket approval applications or premarket approval application supplements are also required for product modifications that +affect the safety and efficacy of the device. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to +present a "significant risk," the manufacturer may not begin a clinical trial until it submits an investigational device exemption application, or IDE, and obtains approval of the IDE from the FDA. +These clinical trials are also subject to the review, approval and oversight of an institutional review board, or IRB, at each clinical trial site. The clinical trials must be conducted in accordance +with the FDA's IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that +the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to +the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other +things: +• establishment registration and device listing; +• the QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and +other quality assurance procedures during all aspects of the manufacturing process; +• labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or "off-label" uses and other +requirements related to promotional activities; +• medical device reporting regulations, which require that manufacture's report to the FDA if their device may have caused or contributed to a +death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the +malfunction were to recur; +• corrections and removal reporting regulations, which require that manufacture's report to the FDA field corrections or removals if undertaken +to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +• post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to +provide additional safety and effectiveness data for the device. +To +ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. +Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which +35 +Table of Contents +may +include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial +suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +Since our acquisition of Aushon Biosystems, Inc. in January 2018, we own and operate a CLIA certified laboratory. The Clinical Laboratory +Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and +basic research). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health +assessment and for the diagnosis, prevention, or treatment of disease. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, +personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite +to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In +addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If +a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As +a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial +survey is conducted by the Centers for Medicare & Medicaid Services ("CMS"), a CMS agent (typically a state agency), or, a CMS-approved accreditation organization. +High +complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered +by nearly all complex laboratories for the last few decades as Laboratory Developed Tests, or LDTs, which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it +has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA +regulations regarding medical devices. During 2010, the FDA publicly announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the +industry +regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the +highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced its framework and timetable for implementing +this guidance. On November 18, 2016, the FDA announced it would not release final guidance at that time and instead would continue to work with stakeholders, the new administration and Congress +to determine the right approach. On January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA +indicated that Congress should enact legislation to address improved oversight of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. We +cannot predict the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory approach by the FDA may lead to an increased regulatory burden, +including additional costs and delays in introducing new tests. While the ultimate impact of the FDA's approach is unknown, it may be extensive and may result in significant change. +In +addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, +as applicable, from +36 +Table of Contents +various +states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of +which requires out-of-state laboratories to obtain licensure. +If +a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, +limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory's CLIA certificate or state license may also result in +the inability to receive payments from state and federal health care programs as well as private third party payors. +If, +in the future, we perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as +additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries +prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be +easier or more difficult to satisfy and are subject to change. For example, the European Union, or EU, recently published new regulations that will result in greater regulation of medical devices and +IVDs. The IVD Regulation is significantly different from the IVD Directive that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member +states, include a risk-based classification system and increase the requirements for conformity assessment. The conformity assessment process results in the receipt of a CE designation which has been +sufficient to begin marketing many types of IVDs. That process will become more difficult and costly to complete. +Other Governmental Regulation +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, +transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration, or OSHA, has +established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect +workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory +supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United +States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may +use during our research. +Employees +As of December 31, 2018, we had 177 employees, of which 78 work in sales, sales support, field service, and marketing, 38 work in +engineering and research and development, 36 work in manufacturing and operations and 25 work in general and administrative. As of December 31, 2018, of our 177 employees, 160 were located in +the United States and 17 were employed outside the United +States. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. +37 +Table of Contents +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name "Digital Genomics, Inc." In August 2007, we +changed our name to "Quanterix Corporation." Our principal executive offices are located at 113 Hartwell Avenue, Lexington, Massachusetts 02421, and our telephone number is (617) 301-9400. We +expect to relocate our principal executive offices in the second quarter of 2019 to 900 Middlesex Turnpike, Billerica, Massachusetts 01821. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be +accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K +solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on +Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amdended, or the Exchange Act. We make these +reports available through the "Investors—Financial Information—SEC Filings" section of our website as soon as reasonably practicable after we electronically file such reports +with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to +Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can review our electronically filed reports and other +information that we file with the SEC on the SEC's website at http://www.sec.gov . +Item 1A. RISK FACTORS +The following risk factors and other information included in this Annual Report on Form 10-K should be carefully +considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also +impair our business operations. Please see page ii of this Annual Report on Form 10-K for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any +of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. +Risks Related to Our Financial Condition and Need for Additional Capital +We have incurred losses since we were formed and expect to incur losses in the future. We cannot be certain +that we will achieve or sustain profitability. +We incurred net losses of $31.5 million, $27.0 million and $23.2 million for the years ended December 31, 2018, 2017 +and 2016, respectively. As of December 31, 2018, we had an accumulated deficit of $175.9 million. We cannot predict if we will achieve sustained profitability in the near future or at +all. We expect that our losses will continue at least through the next 24 months as we plan to invest significant additional funds toward expansion of our commercial organization and the +development of our technology and related assays. In addition, as a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. These +increased expenses will make it harder for us to achieve and sustain future profitability. We may incur significant losses in the future for a number of reasons, many of which are beyond our control, +including the other risks described in this Annual Report on Form 10-K, the market acceptance of our products, future product development and our market penetration and margins. +38 +Table of Contents +Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to +fluctuate, causing the value of our common stock to decline substantially. +Numerous factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual +operating results. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could +negatively affect our business and prospects. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to +the others. As a result, comparing our operating results on a period-to-period basis might not be meaningful. You should not rely on our past results as indicative of our future performance. Moreover, +our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below the expectations of investors or +securities analysts, the price of our common stock could decline substantially. +Our +operating results have varied in the past. In addition to other risk factors listed in this section, some of the important factors that may cause fluctuations in our quarterly and +annual operating results include: +• adoption of our Simoa technology platforms and products by customers; +• the timing of customer orders to purchase our Simoa instruments; +• the rate of utilization of consumables by our customers; +• receipt and timing of revenue for services provided in our Simoa Accelerator Laboratory; +• the timing of the introduction of new products, product enhancements and services; and +• the receipt and timing of revenue from collaborations. +In +addition, a significant portion of our operating expenses is relatively fixed in nature, and planned expenditures are based in part on expectations regarding future revenue. +Accordingly, unexpected revenue shortfalls might decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. If this occurs, the trading price of +our common stock could fall substantially. +We are an early, commercial-stage company and have a limited commercial history, which may make it difficult +to evaluate our current business and predict our future performance. +We are an early, commercial-stage company and have a limited commercial history. Our revenues are derived from sales of our instruments, +consumables and services, which are all based on our Simoa technology. We commercially launched our first Simoa instrument and consumables in 2014. Our limited commercial history may make it difficult +to evaluate our current business and make predictions about our future success or viability subject to significant uncertainty. We will continue to encounter risks and difficulties frequently +experienced by early, commercial-stage companies, including scaling up our infrastructure and headcount. If we do not address these risks successfully, our business will suffer. +If we are unable to maintain adequate revenue growth or do not successfully manage such growth, our business +and growth prospects will be harmed. +We have experienced significant revenue growth in a short period of time. We may not achieve similar growth rates in future periods. Investors +should not rely on our operating results for any prior periods as an indication of our future operating performance. To effectively manage our anticipated future growth, we must continue to maintain +and enhance our financial, accounting, manufacturing, customer support and sales administration systems, processes and controls. Failure to effectively +39 +Table of Contents +manage +our anticipated growth could lead us to over-invest or under-invest in development, operational, and administrative infrastructure; result in weaknesses in our infrastructure, systems, or +controls; give rise to operational mistakes, losses, loss of customers, productivity or business opportunities; and result in loss of employees and reduced productivity of remaining employees. +Our +continued growth could require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. As +additional products are commercialized, we may need to incorporate new equipment, implement new technology systems, or hire new personnel with different qualifications. Failure to manage this growth +or transition could result in turnaround time delays, higher product costs, declining product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any +one of these areas could make +it difficult for us to meet market expectations for our products, and could damage our reputation and the prospects for our business. +If +our management is unable to effectively manage our anticipated growth, our expenses may increase more than expected, our revenue could decline or grow more slowly than expected and we +may be unable to implement our business strategy. In addition, the quality of our products and services may suffer, which could negatively affect our reputation and harm our ability to retain and +attract customers. +Our future capital needs are uncertain and we may need to raise additional funds in the future. +We believe that our existing cash and cash equivalents as of December 31, 2018, together with our cash generated from commercial sales, +will enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months. However, we may need to raise substantial additional capital +to: +• expand our sales and marketing efforts to further commercialize our products; +• strategically acquire companies or technologies that may be complementary to our business; +• expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our +products are deemed by the United States Food and Drug Administration, or FDA, to be medical devices or otherwise subject to additional regulation by the FDA; +• seek premarket approval, or PMA, or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market +products for use in the prevention, diagnosis or treatment of a disease or other condition (see "Risk Factors—If the FDA determines that our products are medical devices or if we seek to +market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s), and may be required to cease or limit sales of our then +marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain +both in timing and in outcome." and "Business—Government Regulation" for further information about the FDA approvals that we may be required to seek and obtain in that circumstance); +• build out our new facility as we continue to grow our employee headcount; +• hire additional personnel; +• enter into collaboration arrangements, if any, or in-license other products and technologies; +• add operational, financial and management information systems; and +• incur increased costs as a result of operating as a public company. +40 +Table of Contents +Our +future funding requirements will depend on many factors, including: +• market acceptance of our products, including our SP-X instrument; +• the cost and timing of establishing additional sales, marketing and distribution capabilities; +• the cost of our research and development activities; +• our ability to enter into collaborations in the future, and the success of any such collaborations; +• the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +• the effect of competing technological and market developments. +We +cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our +stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing may +contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some +rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or +commercialization of our products. We also may +have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could have a material adverse effect on our financial condition, +operating results and business. +Our ability to use net operating losses to offset future income may be subject to certain limitations. +As of December 31, 2018, we had federal net operating loss carry forwards, or NOLs, to offset future taxable income of approximately +$136.8 million, which begin to expire in 2026, if not utilized. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 +of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its NOLs to offset future taxable +income. We have already experienced one or more ownership changes as defined under Section 382 of the Code. Depending on the timing of any future utilization of our NOLs, we may be limited as +to the amount that can be utilized each year as a result of such previous ownership changes. In addition, future changes in our stock ownership, including changes that may be outside of our control, +could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance +related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. +U.S. taxation of international business activities or the adoption of tax reform policies could materially +impact our future financial position and results of operations. +Limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings +outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of future foreign earnings. +Should the scale of our international business activities expand, any changes in the U.S. taxation of such activities could increase our worldwide effective tax rate and harm our future financial +position and results of operations. +41 +Table of Contents +Provisions of our secured term loan facility with Hercules Capital, Inc. may restrict our ability to +pursue our business strategies. In addition, repayment of our outstanding debt and other obligations under our secured term loan facility with Hercules is subject to acceleration upon the occurrence +of an event of default, which would have a material adverse effect on our business, financial condition and results of operations. +Our secured term loan facility with Hercules Capital, Inc., or Hercules, requires us, and any debt instruments we may enter into in the +future may require us, to comply with various covenants that limit our ability to take on new indebtedness, to permit new liens, to pay dividends, to dispose of our property (including to license in +certain situations), to engage in mergers or acquisitions and make certain other changes in our business. Debt instruments we may enter into in the future may also include financial covenants such as +a requirement to maintain a specified minimum liquidity level or achieve a minimum annual revenue level. These restrictions could inhibit our ability to pursue our business strategies, including our +ability to raise additional capital and make certain dispositions or investments without the consent of our lenders. +The +obligations under our secured term loan facility with Hercules are subject to acceleration upon the occurrence of specified events of default, including our failure to make payments +when due, our breach or default in the performance of our covenants and obligations under the facility following a cure period, bankruptcy and similar events, and the occurrence of a circumstance that +would reasonably be expected to have a material adverse effect on (i) our business, operations, properties, assets or financial condition, (ii) our ability to perform our obligations in +accordance with the facility documents, (iii) the lender's ability to enforce any of its rights or remedies with respect to our obligations, or (iv) the collateral, the liens on the +collateral or the first priority of the lender's liens. While we do not believe it is probable that the lender would accelerate the obligations under the facility, the definition of a material adverse +effect is inherently subjective in nature, and we cannot assure that a material adverse effect will not occur or be deemed to have occurred by the lender. +Risks Related to Our Business +If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely +affected. +Our success depends on our ability to develop and market products that are recognized and accepted as reliable, enabling and cost-effective. +Most of the potential customers for our products already use expensive research systems in their laboratories that they have used for many +years and may be reluctant to replace those systems with ours. Market acceptance of our Simoa technology will depend on many factors, including our ability to convince potential customers that our +technology is an attractive alternative to other available technologies. Compared to some competing technologies, our Simoa technology is new and complex, and many potential customers have limited +knowledge of, or experience with, our products. Prior to adopting our systems, some potential customers may need to devote time and effort to testing and validating our systems. Any failure of our +systems to meet these customer benchmarks could result in potential customers choosing to retain their existing systems or to purchase systems other than ours. In addition, it is important that our +Simoa technology be perceived as accurate and reliable by the scientific and medical research community as a whole. Historically, a significant part of our sales and marketing efforts has been +directed at demonstrating the advantages of our technology to industry leaders and encouraging such leaders to publish or present the results of their evaluation of our system. If we are unable to +continue to motivate leading researchers to use Simoa technology, or if such researchers are unable to achieve or unwilling to publish or present significant experimental results using our systems, +acceptance and adoption of our systems may be slowed and our ability to increase our revenue would be adversely affected. +42 +Table of Contents +Our future success is dependent upon our ability to further penetrate our existing customer base and attract +new customers. +Our current customer base is primarily composed of academic and governmental research institutions, as well as biopharmaceutical and contract +research companies. Our success will depend upon our ability to respond to the evolving needs of, and increase our market share among, existing customers and additional potential customers, marketing +new products as we develop them. Identifying, engaging and marketing to customers who are unfamiliar with our current products requires substantial time, expertise and expense and involves a number of +risks, including: +• our ability to attract, retain and manage the sales, marketing and service personnel necessary to expand market acceptance for our Simoa +technology; +• the time and cost of maintaining and growing a specialized sales, marketing and service force; and +• our sales, marketing and service force may be unable to execute successful commercial activities. +We +have utilized third parties to assist with sales, distribution and customer support in certain regions of the world. There is no guarantee, when we enter into such arrangements, that +we will be successful in attracting desirable sales and distribution partners. There is also no guarantee that we will be able to enter into such arrangements on favorable terms. Any failure of our +sales and marketing efforts, or those of any third-party sales and distribution partners, would adversely affect our business. +Sales of our assay for the neurological biomarker Nf-L have become increasingly important to our business, +and any significant decrease in sales of that assay could have a material adverse effect on our business. +Neurology has been a primary focus area for commercialization of our Simoa technology and the services that we provide to our customers. Sales +from neurological-related biomarkers, Nf-L in particular, have become an increasingly important part of our business. We estimate that revenue from services and sales of consumables relating to Nf-L +represented approximately 17% of our total revenue for the fiscal year ended December 31, 2018. There can be no assurance that we will continue to derive meaningful revenues from the sale of +our Nf-L assay, from services related to that assay or from sales of instruments driven by customers desiring access to the Nf-L assay. Further, we rely on a single source supplier for the antibodies +used in our Nf-L assay. Although we have a supply agreement with this supplier, any disruption in the supply of this antibody, or the adoption by our customers of competitive technologies for +detecting biomarkers of neurodegenerative conditions, could negatively impact our revenues and have a material adverse effect on our business. +Some of the reagents used in our products are labeled for "research use only" and will have to undergo +additional testing before we could use them in a product intended for clinical use. +Some of the materials that are used in our consumable products, including certain reagents, are purchased from suppliers with a restriction that +they be used for research use only, or RUO. While we have focused initially on the life sciences research market, part of our business strategy is to expand our product line, either alone or in +collaboration with third parties, to encompass +systems and products that can be used for clinical purposes. Whether or not we continue to use the same RUO materials that we currently use, or obtain similar materials that are not labeled with the +RUO restriction, we or a collaborator will be required to demonstrate that the use of our system and products as a clinical test complies with all applicable requirements. In addition, if the supplier +of any material or component used in a clinical test were changed, it would require confirmation through additional testing that the change does not adversely affect the reliability of the test. Any +such additional testing may be expensive and time-consuming and delay the introduction of new products based on our technology. +43 +Table of Contents +In the near term, our business will depend on levels of research and development spending by academic and +governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results. +In the near term, we expect that our revenue will be derived primarily from sales of our instruments and consumables to academic and +governmental research institutions, as well as biopharmaceutical and contract research companies worldwide for research applications. The demand for our products will depend in part upon the research +and development budgets of these customers, which are impacted by factors beyond our control, such as: +• changes in government programs that provide funding to research institutions and companies; +• macroeconomic conditions and the political climate; +• changes in the regulatory environment; +• differences in budgetary cycles; and +• market acceptance of relatively new technologies, such as ours. +For +example, in March 2017, the federal government announced the intent to cut federal biomedical research funding by as much as 18%. The uncertainty regarding the availability of +research funding for potential customers may adversely affect our operating results. Our operating results may fluctuate substantially due to reductions and delays in research and development +expenditures by these customers. Any decrease in customers' budgets or expenditures, or in the size, scope or frequency of capital or operating expenditures, could materially and adversely affect our +business, operating results and financial condition. +The sales cycle for our Simoa instruments can be lengthy and variable, which makes it difficult for us to +forecast revenue and other operating results. +The sales process for our Simoa instruments generally involves numerous interactions with multiple individuals within an organization, and often +includes in-depth analysis by potential customers of our technology and products and a lengthy review process. Our customers' evaluation processes often involve a number of factors, many of which are +beyond our control. As a result of these factors, the capital investment required to purchase our systems, and the budget cycles of our customers, the time from initial contact with a customer to our +receipt of a purchase order can vary significantly. Given the length and uncertainty of our sales cycle, we have in the past experienced, and expect to in the future experience, fluctuations in our +sales on a period-to-period basis. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems, use existing assays not requiring capital +equipment or purchase systems other than ours. +Our long-term results depend upon our ability to improve existing products and introduce and market new +products successfully. +Our business is dependent on the continued improvement of our existing Simoa products and our development of new products utilizing our Simoa or +other potential future technology. As we introduce new products or refine, improve or upgrade versions of existing products, we cannot predict the level of market acceptance or the amount of market +share these products will +achieve, if any. We cannot assure you that we will not experience material delays in the introduction of new products in the future. In addition, introducing new products could result in a decrease in +revenues from our existing products. For example, introduction of the SP-X and the anticipated introduction of the HD-X may result in a decrease in revenue from our SR-X and HD-1 instruments. +Consistent with our strategy of offering new products and product refinements, we expect to continue to use a substantial amount of capital for product development and refinement. We may need more +capital for product development and +44 +Table of Contents +refinement +than is available on terms favorable to us, if at all, which could adversely affect our business, financial condition or results of operations. +We +generally sell our products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. If we do not +develop new products and product enhancements based on technological innovation on a timely basis, our products may become obsolete over time and our revenues, cash flow, profitability and competitive +position will suffer. Our success will depend on several factors, including our ability to: +• correctly identify customer needs and preferences and predict future needs and preferences; +• allocate our research and development funding to products with higher growth prospects; +• anticipate and respond to our competitors' development of new products and technological innovations; +• innovate and develop new technologies and applications, and acquire or obtain rights to third-party technologies that may have valuable +applications in the markets we serve; +• successfully commercialize new technologies in a timely manner, price them competitively and manufacture and deliver sufficient volumes of new +products of appropriate quality on time; and +• convince customers to adopt new technologies. +In +addition, if we fail to accurately predict future customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products +that do not lead to significant revenue. Even if we successfully innovate and develop new products and product enhancements, we may incur substantial costs in doing so, and our profitability may +suffer. +Our +ability to develop new products based on innovation can affect our competitive position and often requires the investment of significant resources. Difficulties or delays in +research, development or production of new products and services or failure to gain market acceptance of new products and technologies may reduce future revenues and adversely affect our competitive +position. +If we do not successfully develop and introduce new assays for our technology, we may not generate new +sources of revenue and may not be able to successfully implement our growth strategy. +Our business strategy includes the development of new assays for our Simoa instruments. New assays require significant research and development +and a commitment of significant resources prior to their commercialization. Our technology is complex, and we cannot be sure that any assays we may intend to develop will be developed successfully, be +proven to be effective, offer improvements over currently available tests, meet applicable standards, be produced in commercial quantities at acceptable costs or be successfully marketed. Moreover, +development of particular assays may require licenses or access to third-party intellectual property which may not be available on commercially reasonable terms, or at all. In addition, we believe +that our future success will depend, in part, on our ability to develop and commercialize multiplex assays that can simultaneously measure multiple biomarkers, particularly for oncology indications. +While we have developed and validated a 10-plex assay for the SP-X using our Simoa planar array technology, the most robust multiplex assay that we have commercially launched to date using our Simoa +bead-based technology is a 4-plex assay. If +we do not successfully develop new assays for our Simoa instruments, including multiplex assays with the ability to detect an increased number of biomarkers in a single sample, we could lose revenue +opportunities with existing or future customers. +45 +Table of Contents +If we do not successfully manage the development and launch of new products, our financial results could be +adversely affected. +We initiated an early-access program for the SP-X instrument in January 2019, with the full commercial launch planned for April 2019, and intend +to launch the HD-X, our next generation bead-based instrument, in the second half of 2019. We face risks associated with launching new products such as the SP-X and HD-X. If we encounter development +or manufacturing challenges or discover errors during our product development cycle, the product launch dates of new products may be delayed. The expenses or losses associated with unsuccessful +product development or launch activities or lack of market acceptance of our new products could adversely affect our business or financial condition. +Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our +products or expose us to product liability claims. +Our Simoa products may contain undetected errors or defects when first introduced or as new versions or new products are released. Disruptions +affecting the introduction or release of, or other performance problems with, our products may damage our customers' businesses and could harm their and our reputation. If that occurs, we may incur +significant costs, the attention of our key personnel could be diverted, or other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages +related to errors or defects in our products. In addition, if we do not meet industry or quality standards, if applicable, our products may be subject to recall. A material liability claim, recall or +other occurrence that harms our reputation or decreases market acceptance of our products could harm our business and operating results. +Although +we do not, and cannot currently, promote the use of our products, or services based on our products, for diagnostic purposes, if our customers develop or use them for diagnostic +purposes, someone could file a product liability claim alleging that one of our products contained a design or manufacturing defect that resulted in the failure to adequately perform, leading +to death or injury. A +product liability claim could result in substantial damages and be costly and time-consuming to defend, either of which could materially harm our business or financial condition. We cannot assure +investors that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, +with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future. +We may seek to enter into strategic collaborations and licensing arrangements with third parties, but we may +not be successful in establishing or maintaining such arrangements. +We may seek to enter into strategic collaborations and licensing agreements with third parties to develop products based on our Simoa +technology, such as for certain in vitro diagnostic, or IVD, purposes. However, there is no assurance that we will be successful in doing so. Establishing collaborations and licensing arrangements is +difficult and time-consuming, and discussions may not lead to collaborations or licenses on favorable terms, if at all. Even if we establish such relationships, if our partners do not prioritize and +commit sufficient resources to develop and sell products based on our Simoa technology, they may never result in the successful development or commercialization of products based on our Simoa +technology. +Our reliance on distributors for sales of our products outside of the United States could limit or prevent us +from selling our products and could impact our revenue. +We have established exclusive distribution agreements for our Simoa instruments and related consumable products within Australia, Brazil, Czech +Republic, China, India, Israel, Japan, Mexico, +46 +Table of Contents +South +Korea, Lebanon, Qatar, Singapore and Taiwan, as well as other foreign countries. We intend to continue to grow our business internationally, and to do so we must attract additional distributors +and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution +partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our +expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or we are unable to enter into effective arrangements with +distributors in +particular geographic areas, we may not realize long-term international revenue growth. In addition, if our distributors fail to comply with applicable laws and ethical standards, including +anti-bribery laws, this could damage our reputation and could have a significant adverse effect on our business and our revenues. +We expect to generate a substantial portion of our revenue internationally in the future and can become +further subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +For the years ended December 31, 2018, 2017 and 2016, approximately 43%, 45% and 36%, respectively, of our product revenue was generated +from customers located outside of North America. We believe that a substantial percentage of our future revenue will come from international sources as we expand our overseas operations and develop +opportunities in additional areas. We have limited experience operating internationally and engaging in international business involves a number of difficulties and risks, +including: +• required compliance with existing and changing foreign regulatory requirements and laws; +• difficulties and costs of staffing and managing foreign operations; +• difficulties protecting or procuring intellectual property rights; +• required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, data privacy requirements, labor laws and +anti-competition regulations; +• export or import restrictions; +• laws and business practices favoring local companies; +• longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; +• political and economic instability; and +• potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers. +Historically, +most of our revenue has been denominated in U.S. dollars. In the future, we may sell our products and services in local currency outside of the United States. As our +operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm +our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could +be adversely affected as we convert revenue from local currencies to U.S. dollars. If we dedicate significant resources to our international operations and are unable to manage these risks +effectively, our business, operating results and financial condition will suffer. +47 +Table of Contents +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide +anti-bribery laws by us or our agents. +We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits companies and their intermediaries from making payments in +violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our +products internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents, and we +could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing their agents to deviate from +appropriate practices in doing business with these individuals. We are also subject to similar antibribery laws in the jurisdictions in which we operate, including the United Kingdom's Bribery Act of +2010, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. We have limited experience in complying with these laws and in developing procedures to +monitor compliance with these laws by our agents. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or +more of our practices to be in compliance with +these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management +distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We +could also incur severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures. +If we are unable to attract, recruit, train, retain, motivate and integrate key personnel, we may not achieve +our goals. +Our future success depends on our ability to attract, recruit, train, retain, motivate and integrate key personnel, including our recently +expanded senior management team, as well as our research and development, manufacturing and sales and marketing personnel. Competition for qualified personnel is intense. Our growth depends, in +particular, on attracting and retaining highly-trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and +sell to potential new customers. Because of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract, recruit, train, retain, motivate and +integrate qualified personnel could materially harm our operating results and growth prospects. +We have limited experience in marketing and selling our products, and if we are unable to successfully +commercialize our products, our business and operating results will be adversely affected. +We have limited experience marketing and selling our products. We currently sell all our products for research use only, through our direct +field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional major markets, including +Australia, Brazil, Czech Republic, China, India, Israel, Japan, Mexico, South Korea, Lebanon, Qatar, Singapore and Taiwan. +The +future sales of our products will depend in large part on our ability to effectively market and sell our products, successfully manage and expand our sales force, and increase the +scope of our marketing efforts. We may also enter into additional distribution arrangements in the future. Because we have limited experience in marketing and selling our products, our ability to +forecast demand, the infrastructure required to support such demand and the sales cycle to customers is unproven. If we do not build an efficient and effective sales force, our business and operating +results will be adversely affected. +48 +Table of Contents +We rely on a single contract manufacturer to manufacture and supply our Simoa HD instruments and rely on a +different single contract manufacturer to manufacture and supply our Simoa SR-X. If either of these manufacturers should fail or not perform satisfactorily, our ability to supply these instruments +would be negatively and adversely affected. +We currently rely on a single contract manufacturer, STRATEC Biomedical AG, or STRATEC, an analytical and diagnostic systems manufacturer +located in Germany, to manufacture and supply all of our Simoa HD1 instruments and will continue to rely on STRATEC when we launch the HD-X. In addition, we currently rely on a single contract +manufacturer, Paramit Corporation, or Paramit, a contract manufacturer located in California, to manufacture and supply all of our SR-X instruments. Since our contract with STRATEC does not commit +them to supply quantities beyond the amounts included in our forecasts and our contract with Paramit does not commit them to carry inventory or make available any particular quantities, these contract +manufacturers may give other customers' needs higher priority than ours, and we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. If either of these +manufacturers were not able to supply instruments, our business would be harmed. +Pursuant +to our Supply Agreement with STRATEC, as amended, we are required to purchase a minimum number of commercial units of HD instruments over a seven-year period ending in May 2021. +If we fail to purchase the required minimum number of commercial units, including as a result of the impact of sales of the SR-X and SP-X going forward, we would be obligated to pay a fee based on the +shortfall of commercial units purchased compared to the required number. If we fail to purchase the required minimum number of commercial instruments and terminate the arrangement in certain +circumstances, we would be obligated to issue a warrant to purchase shares of our common stock. Any amount we may have to pay STRATEC for failing to purchase the minimum number of commercial units of +HD instruments will cause our operating results to suffer. +In +the event it becomes necessary to utilize a different contract manufacturer for the HD instruments or the SR-X, we would experience additional costs, delays and difficulties in doing +so as a result of identifying and entering into an agreement with a new supplier as well as preparing such new supplier to meet the logistical requirements associated with manufacturing our units, and +our business would suffer. We may also experience additional costs and delays in the event we need access to or rights under any intellectual property of STRATEC. +In +addition, certain of the components used in our instruments are sourced from limited or sole suppliers. If we were to lose such suppliers, there can be no assurance that we will be +able to identify +or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our ability to sell and deliver instruments to customers could occur if we +encounter delays or difficulties in securing these components, or if the quality of the components supplied do not meet specifications, or if we cannot then obtain an acceptable substitute. If any of +these events occur, our business and operating results could be harmed. +We may experience manufacturing problems or delays that could limit the growth of our revenue or increase our +losses. +We may encounter unforeseen situations that would result in delays or shortfalls in our production as well as delays or shortfalls caused by our +outsourced manufacturing suppliers and by other third-party suppliers who manufacture components for our products. If we are unable to keep up with demand for our products, our revenue could be +impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors' products. Our inability to successfully manufacture our products +would have a material adverse effect on our operating results. +49 +Table of Contents +We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and +components used in our consumable products and the SP-X instrument, and may not be able to find replacements or immediately transition to alternative suppliers, which could have a material adverse +effect on our business, financial condition, results of operations and reputation. +We rely on limited or sole suppliers for certain reagents and other materials and components that are used in our consumable products and in the +SP-X instrument. While we periodically forecast our needs for such materials and enter into standard purchase orders with them, we do not have long-term contracts with many of these suppliers. If we +were to lose such suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An +interruption in our operations could occur if we encounter delays or difficulties in securing these materials, or if the quality of the materials supplied do not meet our requirements, or if we cannot +then obtain an acceptable substitute. The time and effort required to qualify a new supplier and ensure that the new materials provide the same or better quality results could result in significant +additional costs. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. +If we cannot provide quality technical and applications support, we could lose customers and our business and +prospects will suffer. +The placement of our products at new customer sites, the introduction of our technology into our customers' existing laboratory workflows and +ongoing customer support can be complex. Accordingly, we need highly trained technical support personnel. Hiring technical support personnel is very competitive in our industry due to the limited +number of people available with the necessary scientific and technical backgrounds and ability to understand our Simoa technology at a technical level. To effectively support potential new customers +and the expanding needs of current customers, we will need to substantially expand our technical support staff. If we are unable to attract, train or retain the number of highly qualified technical +services personnel that our business needs, our business and prospects will suffer. +The life sciences research and diagnostic markets are highly competitive. If we fail to effectively compete, +our business, financial condition and operating results will suffer. +We face significant competition in the life sciences research and diagnostic markets. We currently compete with both established and early stage +companies that design, manufacture and market systems and consumable supplies. We believe our principal competitors in the life sciences research and diagnostic markets include Bio-Techne, Luminex +Corporation, MesoScale Diagnostics, Singulex, Gyros Corporation and Nanostring Technologies, Inc. As we expand the applications for our products to include health screening, we expect to +compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. In addition, there are a number of new market entrants in the process of developing +novel technologies for the life sciences research, diagnostic and screening markets. +Many +of our current competitors have competitive advantages over us, including: +• greater name and brand recognition; +• substantially greater financial and human resources; +• broader product lines; +• larger sales forces and more established distributor networks; +• substantial intellectual property portfolios; +• larger and more established customer bases and relationships; and +50 +Table of Contents +• better established, larger scale, and lower cost manufacturing capabilities. +We +believe that the principal competitive factors in all of our target markets include: +• accuracy, including sensitivity and specificity, and reproducibility of results; +• cost of instruments and consumables; +• reputation among customers; +• innovation in product offerings; +• flexibility and ease of use; and +• compatibility with existing laboratory processes, tools and methods. +We +cannot assure you that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our +existing competitors or new companies entering our markets. In addition, we cannot assure you that our competitors do not have or will not develop products or technologies that currently or in the +future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, +financial condition and operating results. +Integrating any business, product or technology we acquire can be expensive and time-consuming and can +disrupt and adversely affect our ongoing business, including product sales, and distract our management. +We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or +investments in complementary businesses, such as our January 2018 acquisition of Aushon Biosystems, Inc. Our ability to successfully integrate any +business, product or technology we acquire depends on a number of factors, including, but not limited to, our ability to: +• minimize the disruption and distraction of our management and other employees, including our sales force, in connection with the integration of +any acquired business, product or technology; +• minimize disruption in relationships with customers, distributors or suppliers as a result of such a transaction; +• avoid acquisition of unanticipated liabilities related to acquired companies; +• maintain and increase sales of our existing products; +• establish or manage the transition of the manufacture and supply of any acquired product; +• identify and add the necessary sales, marketing, manufacturing, regulatory and other related personnel, capabilities and infrastructure that +are required to successfully integrate any acquired business, product or technology; +• manage the transition and migration of acquired personnel and all commercial, financial, legal, regulatory and other pertinent information +relating to any acquired business, product or technology; +• comply with legal, regulatory and contractual requirements applicable to any acquired business, product or technology; and +• maintain and extend intellectual property protection for any acquired product or technology. +If +we are unable to perform the above functions or otherwise effectively integrate any acquired businesses, products or technologies, our business, financial condition and operating results will +suffer. +51 +Table of Contents +Foreign +acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency +risks and the particular economic, political and regulatory risks associated with specific countries. +Also, +the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the +incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future +joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +Risks Related to Government Regulation and Diagnostic Product Reimbursement +If the FDA determines that our products are medical devices or if we seek to market our products for clinical +diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then marketed products, which could +materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +We have focused initially on the life sciences research market. This includes offering products for use by laboratories associated with academic +and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Accordingly, our products are labeled as "Research Use Only," or RUO, and are not +intended for diagnostic uses. While we have focused initially on the life sciences research market and RUO products only, our strategy is to expand our product line to encompass products that are +intended to be used for the diagnosis of disease, either alone or in collaboration with third parties. Such IVD products, once developed and offered, will be subject to regulation by the FDA as +medical devices, or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. +The +process of obtaining regulatory clearances to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely +basis, if at all. In general, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and +Cosmetic Act, or is the subject of an approved premarket approval application, or PMA unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk +medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other pre-amendment, 510(k)-exempt, 510(k) cleared products, or +PMA-approved products that have subsequently been down-classified. If the FDA determines that the device is not "substantially equivalent" to a predicate device, or if the device is automatically +classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the +de novo process. Pursuant to amendments to the statute in 2012, a manufacturer can also submit a petition for a direct de novo review if the manufacturer is unable to identify an appropriate predicate +device and the new device or new use of the device presents a moderate or low risk. +High +risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously +cleared device, require the approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. A PMA application must be supported by extensive data, +including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA's satisfaction the safety and efficacy of the device for its intended +use. +Foreign +governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products +internationally for such uses, we may be subject to rigorous international regulation in the future. In these circumstances, +52 +Table of Contents +we +would rely significantly on our foreign independent distributors to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in +foreign countries. +IVD +products are regulated as medical devices by the FDA and comparable international agencies and may require either clearance from the FDA following the 510(k) pre-market notification +process or PMA from the FDA, in each case prior to marketing. If we or our collaborators are required to obtain a PMA or 510(k) clearance for products based on our technology, we or they would be +subject to a substantial number of additional requirements for medical devices, including establishment registration, device listing, Quality Systems Regulations, or QSRs, which cover the design, +testing, production, control, quality assurance, labeling, packaging, servicing, sterilization (if required), and storage and shipping of medical devices (among other activities), product labeling, +advertising, recordkeeping, post-market surveillance, post-approval studies, adverse event reporting, and correction and removal (recall) regulations. One or more of the products we or a collaborator +may develop using our technology may also require clinical trials in order to generate the data required for PMA. Complying with these requirements may be time-consuming and expensive. We or our +collaborators may be required to expend significant resources to ensure ongoing compliance with the FDA regulations and/or take satisfactory corrective action in response to enforcement action, which +may have a material adverse effect on the ability to design, develop, and commercialize products using our technology as planned. Failure to comply with these requirements may subject us or a +collaborator to a range of enforcement actions, such as warning letters, injunctions, civil monetary penalties, criminal prosecution, recall and/or seizure of products, and revocation of marketing +authorization, as well as significant adverse publicity. If we or our collaborators fail to obtain, or experience significant delays in obtaining, regulatory approvals for IVD products, such products +may not be able to be launched or successfully commercialized in a timely manner, or at all. +Laboratory +developed tests, or LDTs, are a subset of IVD tests that are designed, manufactured and offered as services to high complexity clinical laboratories and used within a single +laboratory. The FDA maintains that LDTs are medical devices and has for the most part exercised enforcement discretion for most LDTs. A significant change in the way that the FDA regulates any LDTs +that we, our collaborators or our customers develop using our technology could affect our business. The FDA has considered the appropriate way to regulate such tests, but after publishing several +draft guidances and holding a number of public hearings and workshops, no final guidance has been issued. However, if the FDA requires laboratories to undergo premarket review and comply with other +applicable FDA requirements in the future, the cost and time required to commercialize an LDT will increase substantially, and may reduce the financial incentive for laboratories to develop LDTs, +which could reduce demand for our instruments and our other products. +Failure +to comply with applicable FDA requirements could subject us to misbranding or adulteration allegations under the Federal Food, Drug, and Cosmetic Act. We could be subject to a +range of enforcement actions, including warning letters, injunctions, civil monetary penalties, criminal +prosecution, and recall and/or seizure of products, as well as significant adverse publicity. In addition, changes to the current regulatory framework, including the imposition of additional or new +regulations, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our +products, if required. +Foreign +jurisdictions have laws and regulations similar to those described above, which may adversely affect our ability to market our products as planned in such countries. The number +and scope of these requirements are increasing. As in the United States, the cost and time required to comply with regulatory requirements may be substantial, and there is no guarantee that we will +obtain the necessary authorization(s) required to make our products commercially viable. As a result, the +53 +Table of Contents +imposition +of foreign requirements may also have a material adverse effect on the commercial viability of our operations. +Our products may in the future be subject to product recalls that could harm our reputation, business and +financial results. +The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products, including RUO +products, in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a +reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material +deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary +recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products +would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to +FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls +involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A +future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were +conducted. +U.S. legislative, FDA or global regulatory reforms may make it more difficult and costly for us to obtain +regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the +regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. Any new regulations or revisions or reinterpretations of existing regulations may impose additional +costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our +products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Moreover, +leadership, personnel and structural changes within the FDA as well as recent and future federal election outcomes could result in significant legislative and regulatory +reforms impacting the FDA's regulation of our products. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it +more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the +failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business. +In +addition, on May 25, 2017, the new Medical Devices Regulation (2017/745 or "MDR") entered into force. Following its entry into application on May 26, 2020, the MDR will +introduce substantial changes to the obligations with which medical device manufacturers must comply in the EU. High risk medical devices will be subject to additional scrutiny during the conformity +assessment procedure. Specifically, the EU Medical Devices Regulation repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the +European Economic Area ("EEA") Member States, the regulations would be directly applicable, i.e., without the +54 +Table of Contents +need +for adoption of EEA member state laws implementing them, in all EEA Member States and are intended to eliminate current differences in regulation of medical devices among EEA Member States. The +EU MDR, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices to ensure a high level of safety and +health while supporting innovation. The MDR will however only become applicable in three years after publication (in May 2020). Once applicable, the new regulations will among other +things: +• strengthen the rules on placing devices on the market and reinforce surveillance once they are available; +• establish explicit provisions on manufacturers' responsibilities for the follow-up of the quality, performance and safety of devices placed on +the market; +• improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number; +• set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in +the EU; and +• strengthen rules for the assessment of certain high-risk devices which may have to undergo an additional check by experts before they are +placed on the market. +Once +applicable, the MDR may impose increased compliance obligations for us to access the EU market. +In +order to continue to sell our products in Europe, we must maintain our CE marks and continue to comply with certain EU directives and, in the future with the MDR. Our failure to +continue to comply with applicable foreign regulatory requirements, including those administered by authorities of the EEA countries, could result in enforcement actions against us, including refusal, +suspension or withdrawal of our CE Certificates of Conformity by our Notified Body, which could impair our ability to market products in the EEA in the future. Any changes to the membership of the +European Union, such as the departure of the United Kingdom (Brexit), may impact the regulatory requirements for the impacted countries and impair our business operations and our ability to market +products in such countries. +If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be +able to continue our operations. +The operation of our Clinical Laboratory Improvement Amendments, or CLIA, certified laboratory is subject to regulation by numerous federal, +state and local governmental authorities in the United States. This laboratory holds a CLIA certificate of compliance and is licensed by the Commonwealth of Massachusetts and the State of Maryland, +and we intend to obtain other state licenses as may be required in the future. Failure to comply with federal or state regulations or changes in those regulatory requirements could result in a +substantial curtailment or even prohibition of the operations of our laboratory and could have an adverse effect on our business. CLIA is a federal law that regulates clinical laboratories that +perform testing on human specimens for the purpose of providing information for the diagnosis, prevention or treatment of disease. To maintain CLIA certification, laboratories are subject to survey +and inspection every two years. Moreover, CLIA inspectors may make unannounced inspections of these laboratories. If we were to lose our CLIA certification or any required state licenses, whether as a +result of a revocation, suspension or limitation, it could have a material adverse effect on our business. +55 +Table of Contents +We expect to rely on third parties in conducting any required future studies of diagnostic products that may +be required by the FDA or other regulatory authorities, and those third parties may not perform satisfactorily. +We do not have the ability to independently conduct clinical trials or other studies that may be required to obtain FDA and other regulatory +clearance or approval for future diagnostic products. Accordingly, we expect that we would rely on third parties, such as clinical investigators, consultants, and collaborators to conduct such studies +if needed. Our reliance on these third parties for clinical and other development activities would reduce our control over these activities. If these third parties do not successfully carry out their +contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised, we may not be +able to obtain regulatory clearance or approval. +If diagnostic procedures that are enabled by our technology are subject to unfavorable pricing regulations or +third-party coverage and reimbursement policies, our business could be harmed. +The ability of us or our customers to commercialize diagnostic tests based on our technology will depend in part on the extent to which coverage +and reimbursement for these tests will be available from government health programs, private health insurers and other third-party payors. In the United States, the principal decisions about +reimbursement for new technologies are often made by the Centers for Medicare and Medicaid Services, or CMS. Private payors often follow CMS to a substantial degree. It is difficult to predict what +CMS will decide with respect to reimbursement. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to +control costs by limiting coverage and the amount of payments for particular products and procedures. We cannot be sure that coverage will be available for any diagnostic tests based on our +technology, and, if coverage is available, the level of payments. Reimbursement may impact the demand for those tests. If reimbursement is not available or is available only to limited levels, any +tests for which marketing authorization is received may not be able to be successfully commercialized. +Current and future legislation may increase the difficulty and cost to obtain marketing approval of and +commercialize any products based on our technology and affect the prices that may be obtained. +In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, +collectively, the ACA, became law. The ACA is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and +abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Since its +enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. Both Congress and President Trump have expressed their intention to repeal or repeal and replace the +ACA, and as a result certain sections of the ACA have not been fully implemented or were effectively repealed. The uncertainty around the future of the ACA, and in particular the impact to +reimbursement levels and the number of insured individuals, may lead to uncertainty or delay in the purchasing decisions of our customers, which may in turn negatively impact our product sales. If +there are not adequate reimbursement levels, our business and results of operations could be adversely affected. +In +addition, other legislative changes have been proposed and adopted since the ACA was enacted. We expect that the ACA, as well as other healthcare reform measures that may be adopted +in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we or our collaborators will receive for any cleared or approved product. Any +reduction in payments from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare +reforms +56 +Table of Contents +may +prevent us from being able to generate revenue, attain profitability, or commercialize any of our products for which we receive marketing approval. +In +addition, sales of our tests outside of the United States will subject us to foreign regulatory requirements, which may also change over time. +We +cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business, or the +effect any future legislation or regulation will have on us. The expansion in government's effect on the United States healthcare industry may result in decreased profits to us, lower reimbursements +by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations. +Inadequate funding for the FDA, the SEC and other government agencies could hinder their ability to hire and +retain key leadership and other personnel, prevent our products from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions +on which the operation of our business rely, which could negatively impact our business. +The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding +levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years +as a result. In addition, government funding of the SEC and other government agencies on which our operations may rely, including those that fund research and development activities is subject to the +political process, which is inherently fluid and unpredictable. +Disruptions +at the FDA and other agencies may also slow the time necessary for regulatory submissions to be reviewed and/or approved by necessary government agencies, which would +adversely affect our business. For example, over the last several years, including beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory +agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could +significantly affect the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Further, in our operations as a public +company, future government shutdowns +could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations. +Risks Related to Our Operations +We depend on our information technology systems, and any failure of these systems could harm our business. +We depend on information technology and telecommunications systems to operate our business. We have installed, and expect to expand, a number of +enterprise software systems that affect a broad range of business processes and functional areas, including, for example, systems handling human resources, accounting, manufacturing, inventory +control, financial controls and reporting, sales administration, and other infrastructure operations. In addition to the aforementioned business systems, we intend to extend the capabilities of both +our preventative and detective security controls by augmenting the monitoring and alerting functions, network design, and automatic countermeasure operations of our technical systems. These +information technology and telecommunications systems support a variety of functions, including manufacturing operations, quality control, customer service support, and general administrative +activities. +Information +technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and +natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially +57 +Table of Contents +vulnerable +to physical or electronic break-ins, computer viruses, and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect +our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party suppliers could +prevent us from operating our business and managing the administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects +of our operations depend could have an adverse effect on our business. +Security breaches, loss of data and other disruptions could compromise sensitive information related to our +business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +In the ordinary course of our business, we collect and store sensitive data, intellectual property and proprietary business information owned or +controlled by ourselves or our customers. This data encompasses a wide variety of business-critical information including research and development information, commercial information, and business and +financial information. We face four primary risks relative to protecting this critical information: loss of access; inappropriate disclosure; inappropriate modification; and inadequate monitoring of +our controls over the first three risks. +The +secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to +protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to +attacks by hackers or viruses, breaches, interruptions due to employee error, malfeasance, lapses in compliance with privacy and security mandates, or other disruptions. Any such breach or +interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. +Any +such security breach or interruption, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws +and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. federal government or foreign governments, +liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the +incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could +harm our business and operations. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such +risks may be unsuccessful. +In +addition, the European Parliament and the Council of the European Union adopted a comprehensive general data privacy regulation, or GDPR, in 2016 to replace the current European Union +Data Protection Directive and related country-specific legislation. The GDPR took effect in May 2018 and governs the collection and use of personal data in the European Union. The GDPR, which is +wide-ranging in scope, will impose several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and +confidentiality of the personal data, data breach notification and the use of third party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the +transfer of personal data out of the European Union to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to +€20 million or 4% of the annual global revenues of the infringer, whichever is +greater. While we have taken steps to comply with the GDPR, including such as reviewing our security procedures and entering into data processing agreements with relevant contractors, we cannot assure +you that our efforts to remain in compliance will be fully successful. +58 +Table of Contents +Further, +unauthorized access, loss or dissemination of sensitive information could also disrupt our operations, including our ability to conduct research and development activities, +process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our reputation and +our business. In addition, there can be no assurance that we will promptly detect any such disruption or security breach, if at all. To the extent that any disruption or security breach were to result +in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our products could +be delayed. +We face risks related to handling of hazardous materials and other regulations governing environmental +safety. +Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public +officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous materials and the generation, +transportation and storage of waste. Although we have secured clearance from the EPA historically, and currently are operating in compliance with applicable EPA rules and regulations, our business +could be adversely affected if we discover that we or an acquired business is not in material compliance with these rules and regulations. In the future, we may pursue the use of other surfactant +substances that will require clearance from the EPA, and we may fail to obtain such clearance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may +become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of +accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business. +Risks Related to Intellectual Property +If we are unable to protect our intellectual property, it may reduce our ability to maintain any +technological or competitive advantage over our competitors and potential competitors, and our business may be harmed. +We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual +restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. As of +March 1, 2019, we owned or exclusively licensed 27 granted U.S. patents and approximately 18 pending U.S. patent applications. We also owned or exclusively licensed a number of pending patent +applications and granted patents in particular jurisdictions outside of the United States. If we fail to protect our intellectual property, third parties may be able to compete more effectively +against us, we may lose our technological or competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. +We +cannot assure investors that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will take for such patents to +be granted. It is possible that, for any of our patents that have granted or that may grant in the future, others will design around our patented technologies. Further, we cannot assure investors that +other parties will not challenge any patents granted to us or that courts or regulatory agencies will hold our patents to be valid or enforceable. We cannot guarantee investors that we will be +successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such +patents, or to such patents being interpreted narrowly or otherwise in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our +competitors may be diminished because of these +59 +Table of Contents +uncertainties. +For these and other reasons, our intellectual property may not provide us with any competitive advantage. For example: +• We or our licensors might not have been the first to make the inventions covered by each of our pending patent applications or granted patents; +• We or our licensors might not have been the first to file patent applications for these inventions. To determine the priority of these +inventions, we may have to participate in interference proceedings or derivation proceedings declared by the United States Patent and Trademark Office, or USPTO, that could result in substantial cost +to us. No assurance can be given that our patent applications or granted patents (or those of our licensors) will have priority over any other patent or patent application involved in such a +proceeding; +• Others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies; +• It is possible that our owned or licensed pending patent applications will not result in granted patents, and even if such pending patent +applications grant as patents, they may not provide a basis for intellectual property protection of commercially viable products, may not provide us with any competitive advantages, or may be +challenged and invalidated by third parties; +• We may not develop additional proprietary products and technologies that are patentable; +• The patents of others may have an adverse effect on our business; and +• While we apply for patents covering our products and technologies and uses thereof, as we deem appropriate, we may fail to apply for patents on +important products and technologies in a timely fashion or at all, or we may fail to apply for patents in potentially relevant jurisdictions. +To +the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our +intellectual property does not provide adequate coverage of our competitors' products, our competitive position could be adversely affected, as could our business. +Software +is a critical component of our instruments. To the extent such software is not protected by our patents, we depend on trade secret protection and non-disclosure agreements with +our employees, strategic partners and consultants, which may not provide adequate protection. +The measures that we use to protect the security of our intellectual property and other proprietary rights +may not be adequate, which could result in the loss of legal protection for, and thereby diminish the value of, such intellectual property and other rights. +In addition to pursuing patents on our technology, we also rely upon trademarks, trade secrets, copyrights and unfair competition laws, as well +as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Despite these measures, any of our intellectual property rights could be +challenged, invalidated, circumvented or misappropriated. In addition, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and +intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful +protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such +unauthorized disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be +undermined. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that +a third party had illegally obtained and was using our trade secrets, it +60 +Table of Contents +would +be expensive and time-consuming, the outcome would be unpredictable, and any remedy may be inadequate. In addition, courts outside the United States may be less willing to protect trade secrets. +In +addition, competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our +intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property +does not adequately protect our market share against competitors' products and methods, our competitive position could be adversely affected, as could our business. +Some of our owned and in-licensed intellectual property has been discovered through government funded +programs and thus is subject to federal regulations such as "march-in" rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our +exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers. +Some of the intellectual property rights we own and have in-licensed have been generated through the use of U.S. government funding and are +therefore subject to certain federal regulations. For example, all of the issued U.S. patents we own and all of the intellectual property rights licensed to us under our license agreement with Tufts +have been generated using U.S. government funds. As a result, the U.S. government has certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act +of 1980, or Bayh-Dole Act. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to +use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions +to a third party if the government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or +safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as "march-in rights"). The U.S. government also has the +right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government, elect title, and file an application to register the intellectual +property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. +Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend +substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in +the U.S. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar +terms to potential licensees that would be likely to manufacture substantially in the U.S. or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. +manufacturing may limit our ability to license the applicable patent rights on an exclusive basis under certain circumstances. +If +we enter into future arrangements involving government funding, and we make inventions as a result of such funding, intellectual property rights to such discoveries may be subject to +the applicable provisions of the Bayh-Dole Act. To the extent any of our current or future intellectual property is generated through the use of U.S. government funding, the provisions of the +Bayh-Dole Act may similarly apply. Any exercise by the government of certain of its rights could harm our competitive position, business, financial condition, results of operations and prospects. +61 +Table of Contents +We depend on technology that is licensed to us by Tufts University. Any loss of our rights to this technology +could prevent us from selling our products. +Our Simoa bead-based technology is licensed exclusively to us from Tufts University. We do not own the patents that underlie this license. Our +rights to use this technology and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of the license. Our principal obligations under +our license agreement with Tufts are as follows: +• royalty payments; +• milestone payments; +• annual maintenance fees; +• using commercially reasonable efforts to develop and sell a product using the licensed technology and developing a market for such product; +• paying and/or reimbursing fees related to prosecution, maintenance and enforcement of patent rights; and +• providing certain reports. +If +we breach any of these obligations, Tufts may have the right to terminate the license, which could result in our being unable to develop, manufacture and sell our Simoa products or a +competitor's gaining access to the Simoa technology. Termination of our license agreement with Tufts would have a material adverse effect on our business. +In +addition, we are a party to a number of other agreements that include licenses to intellectual property, including non-exclusive licenses. We expect that we may need to enter into +additional license agreements in the future. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the +licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. +We may need or may choose to obtain licenses from third parties to advance our research or allow +commercialization of our current or future products, and we cannot provide any assurances that we would be able to do so. +We may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future +products, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current or future products in the absence of such a license. We may fail to +obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same +technologies licensed to us. If we could not obtain a license, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we +may be unable to develop or commercialize the affected products, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction +prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation. +Licensing +of intellectual property involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a +license agreement, including: +• the scope of rights granted under the license agreement and other interpretation-related issues; +62 +Table of Contents +• whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the +licensing agreement; +• our right to sublicense patent and other rights to third parties under collaborative development relationships; +• our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our +products, and what activities satisfy those diligence obligations; and +• the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our +partners. +If +disputes over intellectual property that we have licensed prevent or impair our ability to maintain the licensing arrangements on acceptable terms, we may be unable to successfully +develop and commercialize the affected product, or the dispute may have an adverse effect on our results of operation. +In +addition to agreements pursuant to which we in-license intellectual property, we have in the past and expect to in the future to grant licenses under our intellectual property. Like +in-licenses, out-licenses are complex, and disputes may arise between us and our licensees, such as the types of disputes described above. Moreover, our licensees may breach their obligations, or we +may be exposed to liability due to our failure or alleged failure to satisfy our obligations. Any such occurrence could have an adverse effect on our business. +If we or any of our partners are sued for infringing intellectual property rights of third parties, it would +be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +Our success also depends on our ability to develop, manufacture, market and sell our products and perform our services without infringing upon +the proprietary rights of third parties. Numerous U.S. and foreign-issued patents and pending patent applications owned by third parties exist in the fields in which we are developing products and +services. As part of a business strategy to impede our successful commercialization and entry into new markets, competitors have claimed, and may claim in the future, that our products and/or services +infringe their intellectual property rights and have suggested, and may suggest in the future, that we enter into license agreements. +Even +if such claims are without merit, we could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against claims of +infringement made by third parties or settling such claims. Any adverse ruling by a court or administrative body, or perception of an adverse ruling, may have a material adverse impact on our ability +to conduct our business and our finances. Moreover, third parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more +products or services and could result in a substantial award of damages against us. In addition, since we sometimes indemnify customers, collaborators or licensees, we may have additional liability in +connection with any infringement or alleged infringement of third-party intellectual property. +Because +patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our products or +proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any +of our products. There is a substantial amount of litigation involving patent and other intellectual property rights in our +63 +Table of Contents +industry. +If a third party claims that we or any of our licensors, customers or collaboration partners infringe upon a third party's intellectual property rights, we may have +to: +• seek to obtain licenses that may not be available on commercially reasonable terms, if at all; +• abandon any infringing product or redesign our products or processes to avoid infringement; +• pay substantial damages including, in an exceptional case, treble damages and attorneys' fees, which we may have to pay if a court decides that +the product or proprietary technology at issue infringes upon or violates the third-party's rights; +• pay substantial royalties or fees or grant cross-licenses to our technology; or +• defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of +our financial and management resources. +We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could +be expensive, time-consuming and unsuccessful. +Competitors may infringe our patents or the patents of our licensors. In the event of infringement or unauthorized use, we may file one or more +infringement lawsuits, which can be expensive and time-consuming. An adverse result in any such litigation proceedings could put one or more of our patents at risk of being invalidated, being found to +be unenforceable or being interpreted narrowly and could put our patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with +intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. +Most +of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer +than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise any funds necessary to continue our operations, continue our +internal research programs, in-license needed technology, or enter into development partnerships that would help us bring our products to market. +In +addition, patent litigation can be very costly and time-consuming. An adverse outcome in such litigation or proceedings may expose us or any of our future development partners to loss +of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all. +Our issued patents could be found invalid or unenforceable if challenged in court, which could have a +material adverse impact on our business. +If we or any of our partners were to initiate legal proceedings against a third party to enforce a patent covering one of our products or +services, the defendant in such litigation could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity +and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or +non-enablement, or failure to claim patent eligible subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld +relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before the USPTO even outside the context of litigation. The +outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art +of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and +64 +Table of Contents +perhaps +all, of the challenged patent. Such a loss of patent protection would have a material adverse impact on our business. +We may be subject to claims that our employees, consultants or independent contractors have wrongfully used +or disclosed alleged trade secrets of their other clients or former employers to us, which could subject us to costly litigation. +As is common in the life sciences industry, we engage the services of consultants and independent contractors to assist us in the development of +our products. Many of these consultants and independent contractors were previously employed at, or may have previously or may be currently providing consulting or other services to, universities or +other technology, biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may become subject to claims that our company, a consultant or an independent +contractor inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current clients. We may similarly be subject to +claims stemming from similar actions of an employee, such as one who was previously employed by another company, including a competitor or potential competitor. Litigation may be necessary to defend +against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our +management team. If we were not successful we could lose access or exclusive access to valuable intellectual property. +We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual +property. +We generally enter into confidentiality and intellectual property assignment agreements with our employees, consultants, and contractors. These +agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, those agreements may not be honored and may not +effectively assign intellectual property rights to us. For example, even if we have a consulting agreement in place with an academic advisor pursuant to which such academic advisor is required to +assign any inventions developed in connection with providing services to us, such academic advisor may not have the right to assign such inventions to us, as it may conflict with his or her +obligations to assign all such intellectual property to his or her employing institution. +In +addition, we sometimes enter into agreements where we provide services to third parties, such as customers. Under such circumstances, our agreements may provide that certain +intellectual property that we conceive in the course of providing those services is assigned to the customer. In those cases, we would not be able to use that particular intellectual property in, for +example, our work for other customers without a license. +We may not be able to protect our intellectual property rights throughout the world, which could materially, +negatively affect our business. +Filing, prosecuting and defending patents on current and future products in all countries throughout the world would be prohibitively expensive, +and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect +intellectual property rights to the same extent as federal and state laws in the United States. Consequently, regardless of whether we are able to prevent third parties from practicing our inventions +in the United States, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our +inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own +products, and further, may export otherwise infringing products to +65 +Table of Contents +territories +where we have patent protection, but enforcement is not as strong as it is in the United States. These products may compete with our products and our patents or other intellectual property +rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property +rights may not be effective or sufficient to prevent third parties from so competing. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and +time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. +Many +companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, +particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it +difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign +jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and +our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies +awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial +advantage from the intellectual property that we develop or license and may adversely impact our business. +In +addition, we and our partners also face the risk that our products are imported or reimported into markets with relatively higher prices from markets with relatively lower prices, +which would result in a decrease of sales and any payments we receive from the affected market. Recent developments in U.S. patent law have made it more difficult to stop these and related practices +based on theories of patent infringement. +Changes in patent laws or patent jurisprudence could diminish the value of patents in general, thereby +impairing our ability to protect our products. +The America Invents Act, or the AIA, was signed into law on September 16, 2011, and many of the substantive changes became effective on +March 16, 2013. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a "first-to-file" system for deciding which party should be +granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but +before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to +be cognizant going forward of the time from invention to filing of a patent application, but circumstances could prevent us from promptly filing patent applications on our inventions. +Among +some of the other changes introduced by the AIA are changes that limit where a patent holder may file a patent infringement suit and providing additional opportunities for +third parties to challenge any issued patent in the USPTO. This applies to all of our owned and in-licensed U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary +standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding +sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party +may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. The AIA +and its implementation +66 +Table of Contents +could +increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. +Additionally, +the U.S. Supreme Court has ruled on several patent cases in recent years, such as Impression Products, Inc. v. Lexmark +International, Inc., Association for Molecular Pathology v. Myriad Genetics, Inc ., Mayo Collaborative Services v. Prometheus +Laboratories, Inc. and Alice Corporation Pty. Ltd. v. CLS Bank International , either narrowing the +scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain +patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the +USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might +obtain in the future. +Obtaining and maintaining our patent protection depends on compliance with various procedural, document +submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. +The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other +provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent +rights in the relevant +jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case. In some cases, our licensors may be responsible for, for example, these +payments, thereby decreasing our control over compliance with these requirements. +If our trademarks and trade names are not adequately protected, then we may not be able to build name +recognition in our markets of interest and our business may be adversely affected. +Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be +infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of +interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there +could be potential trade name or trademark infringement claims brought by owners of other registered trademarks. Over the long term, if we are unable to establish name recognition based on our +trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +We may use third-party open source software components in future products, and failure to comply with the +terms of the underlying open source software licenses could restrict our ability to sell such products. +While our current products do not contain any software tools licensed by third-party authors under "open source" licenses, we may choose to use +open source software in future products. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not +provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses may contain requirements that we make available source code for +modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under +certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products with less development effort +and time and ultimately could result in a loss of product sales. +67 +Table of Contents +Although +we intend to monitor any use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been +interpreted by U.S. courts, and there is a risk that any such licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our +products. Moreover, we cannot assure investors that our processes for controlling our use of open source software in our products will be effective. If we are held to have breached the terms of an +open source software license, we could be required to seek licenses from third parties to continue offering our products on terms that are not economically feasible, to re-engineer our products, to +discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could +adversely affect our business, operating results, and financial condition. +We use third-party software that may be difficult to replace or may cause errors or failures of our products +that could lead to lost customers or harm to our reputation. +We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable +terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either developed by us, or, if available, is +identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party software or other third-party software failures could result in errors, defects or +cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and +if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs. +We +will need to maintain our relationships with third-party software providers and to obtain software from such providers that does not contain any errors or defects. Any failure to do +so could adversely impact our ability to deliver reliable products to our customers and could harm our reputation and results of operations. +Numerous factors may limit any potential competitive advantage provided by our intellectual property rights. +The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, +and may not adequately protect our business, provide a barrier to entry against our competitors or potential competitors, or permit us to maintain our competitive advantage. Moreover, if a third party +has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are +illustrative: +• others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology but that is not covered +by the claims of any patents that have issued, or may issue, from our owned or in-licensed patent applications; +• we might not have been the first to make the inventions covered by a pending patent application that we own or license; +• we might not have been the first to file patent applications covering an invention; +• others may independently develop similar or alternative technologies without infringing our intellectual property rights; +• pending patent applications that we own or license may not lead to issued patents; +• patents, if issued, that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a +result of legal challenges by our competitors; +68 +Table of Contents +• third parties may compete with us in jurisdictions where we do not pursue and obtain patent protection; +• we may not be able to obtain and/or maintain necessary or useful licenses on reasonable terms or at all; +• third parties may assert an ownership interest in our intellectual property and, if successful, such disputes may preclude us from exercising +exclusive rights over that intellectual property; +• we may not be able to maintain the confidentiality of our trade secrets or other proprietary information; +• we may not develop or in-license additional proprietary technologies that are patentable; and +• the patents of others may have an adverse effect on our business. +Should +any of these events occur, they could significantly harm our business and results of operations. +Risks Related to Our Common Stock and Being a Public Company +We expect that our stock price may fluctuate significantly. +The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, +and others beyond our control, including: +• actual or anticipated fluctuations in our financial condition and operating results; +• announcements by us, our partners or our competitors of new products, significant contracts, strategic partnerships, joint ventures, +collaborations, acquisitions, commercial relationships or capital commitments; +• competition from existing products or new products that may emerge; +• failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public; +• issuance of new or updated research or reports by securities analysts or recommendations for our stock; +• adverse regulatory announcements; +• disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent +protection for our technologies; +• commencement of, or our involvement in, litigation; +• fluctuations in the valuation of companies perceived by investors to be comparable to us; +• conditions in our markets; +• manufacturing disputes or delays; +• any future sales of our common stock or other securities; +• any change to the composition of the board of directors or key personnel; +• general economic conditions and slow or negative growth of our markets; +• share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; +• announcement or expectation of additional debt or equity financing efforts; and +69 +Table of Contents +• other factors described in this Risk Factor section of this Annual Report on Form 10-K. +These +and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which +may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and +life science companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the +past, when the market price of a stock has been volatile, holders of that stock have on occasion instituted securities class action litigation against the company that issued the stock. If any of our +stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. +If securities or industry analysts do not publish research reports about our business, or if they issue an +adverse opinion about our business, our stock price and trading volume could decline. +The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or +our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases coverage of us or +fails to regularly publish reports on us, we could lose visibility in the public markets, which could cause our stock price or trading volume to decline. +Our principal stockholders and management own a significant percentage of our stock and will be able to +exercise significant influence over matters subject to stockholder approval. +As of December 31, 2018, our executive officers, directors and 5% or greater stockholders owned approximately 56.9% of our outstanding +common stock. Accordingly, our executive officers, directors and principal stockholders have significant influence over our operations. This concentration of ownership could have the effect of +delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on our stock +price and may prevent attempts by our stockholders to replace or remove the board of directors or management. +We have never paid dividends on our capital stock, and we do not anticipate paying any dividends in the +foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases. +We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund +the development and growth of our business. In addition, the terms of our indebtedness with Hercules prohibit us from paying dividends. As a result, capital appreciation, if any, of our common stock +will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from an investment in our common stock if the price of our +common stock increases. +Anti-takeover provisions contained in our restated certificate of incorporation and restated by-laws, as well +as provisions of Delaware law, could impair a takeover attempt. +Our restated certificate of incorporation, restated by-laws and Delaware law contain provisions which could have the effect of rendering more +difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions: +• authorizing our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and +conditions and with the rights, privileges and preferences as our board of directors may determine; +70 +Table of Contents +• specifying that special meetings of our stockholders can be called only by our board of directors and that our stockholders may not act by +written consent; +• establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including +proposed nominations of persons for election to our board of directors; +• providing that directors may be removed only for cause; +• providing that our board of directors may create new directorships and that vacancies on our board of directors may be filled only by a +majority of directors then in office, even though less than a quorum; +• establishing that our board of directors is divided into three classes—Class I, Class II, and +Class III—with each class serving staggered three-year terms; +• providing that our board of directors may amend our restated by-laws without stockholder approval; and +• requiring a super-majority of votes to amend certain of the above-mentioned provisions. +These +provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. +As +a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders +holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. +Any +provision of our restated certificate of incorporation, restated by-laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity +for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +We are an "emerging growth company" and are able to avail ourselves of reduced disclosure requirements +applicable to emerging growth companies, and we plan to avail ourselves of the ability to adopt new accounting standards on the timeline permitted for private companies, which could make our common +stock less attractive to investors and our financial statements less comparable to other companies who are complying with new accounting standards on public company timelines. +We are an "emerging growth company," as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting +requirements that are applicable to other public companies that are not "emerging growth companies," including not being required to comply with the auditor attestation requirements of +Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of +holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also +provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting +standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take +advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, will comply with new or revised accounting +standards not later than the relevant dates on which adoption of such standards is required for non-public companies. As a result of this election, the timeline to comply with certain accounting +standards will in many cases be delayed as compared to other public companies who +71 +Table of Contents +are +not eligible to have made or have not made this election. As a result, investors may view our financial statements as not comparable to other public companies. We cannot predict if investors will +find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our +common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company +until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (ii) December 31, 2022; (iii) the +date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under +the rules of the SEC. +We incur increased costs and devote substantial management time as a result of operating as a public company. +As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, and these expenses +may increase even more after we are no longer an "emerging growth company." We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform +and Protection Act, as well as rules adopted, and to be adopted, by the SEC and The Nasdaq Global Market. Our management and other personnel devote a substantial amount of time to these compliance +initiatives. Moreover, these rules and regulations substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly. The increased costs increase +our net loss. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur +substantial costs to maintain the sufficient coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these +requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. +In +addition, as a public company we incur additional costs and obligations in order to comply with SEC rules that implement Section 404 of the Sarbanes-Oxley Act. Under these +rules, beginning with this annual report for the year ending December 31, 2018, we are required to make a formal assessment of the effectiveness of our internal control over financial +reporting, and once we cease to be an emerging growth company, we will be required to include an attestation report on internal control over financial reporting issued by our independent registered +public accounting firm. To achieve timely compliance with Section 404, we engaged in a process to document and evaluate our internal control over financial reporting, which was both costly and +challenging. We will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our internal control over +financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are designed and operating effectively, and implement a continuous reporting and +improvement process for internal control over financial reporting. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of +confidence in the reliability of our financial statements. +Item 1B. UNRESOLVED STAFF COMMENTS +Not applicable. +Item 2. PROPERTIES +We currently lease approximately 30,655 square feet of office, laboratory, and manufacturing space at our headquarters in Lexington, +Massachusetts, under a lease that was to expire on June 30, 2020 (the "Lexington Lease"). In addition, pursuant to our acquisition of Aushon Biosystems, Inc. on +72 +Table of Contents +January 30, +2018, we currently lease approximately 21,500 square feet of office, laboratory, and manufacturing space in Billerica, Massachusetts, under a lease that was to expire on +February 28, 2021 (the "Billerica Lease"). +In +August 2018, we exercised an option to terminate the Billerica Lease effective as of September 1, 2019. In October 2018, we also notified the landlord of our intent to sublease +all of the premises subject to the Lexington Lease from June 1, 2019 until the end of the lease term. The landlord has exercised its right to "recapture" the premises during that period, and, +accordingly, the Lexington Lease will terminate as of May 31, 2019. +On +October 2, 2018, we entered into a lease for approximately 91,600 square feet of office, laboratory, and manufacturing space in the building located at 900 Middlesex Turnpike, +Billerica, Massachusetts. The premises covered by this new lease will serve as our new principal office and laboratory space beginning in the second quarter of 2019. The initial term of the lease is +11 years and five months beginning on April 1, 2019, and we have the option to extend the lease for two additional five-year periods. We believe that this office, laboratory and +manufacturing space will be sufficient to meet our needs for the foreseeable future. +Item 3. LEGAL PROCEEDINGS +We are not currently a party to any material legal proceedings. +Item 4. MINE SAFETY DISCLOSURES +Not applicable. +73 +Table of Contents +PART II +Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Market Information +Our common stock began trading on The Nasdaq Global Market on December 7, 2017 under the symbol "QTRX." +Stockholders +As of March 1, 2019, there were approximately 53 stockholders of record of the 22,461,202 outstanding shares of common stock. +Unregistered Sales of Securities +There were no unregistered sales of equity securities during the fourth quarter ended December 31, 2018. +Use of Proceeds from Initial Public Offering of Common Stock +On December 11, 2017, we completed the initial public offering of our common stock, which resulted in the sale of 4,916,480 shares, +including 641,280 shares sold by us pursuant to the exercise in full by the underwriters of their option to purchase additional shares in connection with the initial public offering, at a price to the +public of $15.00 per share. The offer and sale of all of the shares in our initial public offering was registered under the Securities Act pursuant to a registration statement on Form S-1 (File +No. 333-221475), which was declared effective by the SEC on December 6, 2017, and a registration statement on Form S-1 (File No. 333-221932) under Rule 462(b) of the +Securities Act that became effective upon its filing. Following the sale of all of the shares in connection with the closing of our initial public offering, the offering terminated. J.P. Morgan +Securities LLC, Leerink Partners LLC and Cowen and Company, LLC acted as joint book-running managers for the initial public offering. BTIG, LLC and Evercore Group L.L.C. +acted as a co-managers. +We +received approximately $65.6 million in net proceeds after deducting underwriting discounts and commissions and offering costs payable by us. As of December 31, 2018, we +had used approximately $21.1 million of the net proceeds from the offering for: operating expenses, capital investments, debt payments and the acquisition of Aushon. None of the offering +expenses consisted of direct or indirect payments made by us to directors, officers or persons owning 10% or more of our common stock or to their associates, or to our affiliates, and we have not used +any of the net proceeds from the offering to make payments, directly or indirectly, to any such persons. There has been no material change in the planned use of the net proceeds from our initial +public offering as described in our final prospectus filed with the SEC on December 7, 2017 pursuant to Rule 424(b)(4) under the Securities Act. +Issuer Purchases of Equity Securities +Not applicable. +74 +Table of Contents +Item 6. SELECTED FINANCIAL DATA +You should read the following selected financial data together with our consolidated financial statements and the related notes and the +information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. We have derived the +statement of operations data for the years ended December 31, 2018, 2017 and 2016 and the balance sheet data as of December 31, 2018 and 2017 from our audited consolidated financial +statements included elsewhere in this Annual Report on Form 10-K. Note that the results for the year ended December 31, 2018 include activity related to the acquisition of Aushon which +occurred on January 30, 2018. The statement of operations data for the year ended December 31, 2015, and the selected balance sheet data as of December 31, 2016 and 2015 is +derived from audited financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that should be expected +in the future. +Consolidated statement of operations data (in thousands, except per share data) +Year ended December 31, +2018 +2017 +2016 +2015 +Total revenue +$ +37,632 +$ +22,874 +$ +17,585 +$ +12,180 +Cost of revenue +19,684 +12,887 +9,837 +6,465 +Gross Profit +17,948 +9,987 +7,748 +5,715 +Research and development +15,805 +16,304 +16,993 +10,083 +Selling, general and administrative +33,693 +19,688 +12,466 +10,155 +Total operating expenses +49,498 +35,992 +29,459 +20,238 +Loss from operations +(31,550 +) +(26,005 +) +(21,711 +) +(14,523 +) +Interest income (expense), net +46 +(951 +) +(1,298 +) +(1,040 +) +Other income (expense), net +(7 +) +(63 +) +(164 +) +(380 +) +Loss before income taxes +(31,511 +) +(27,019 +) +(23,173 +) +(15,943 +) +Income tax provision +(25 +) +— +— +— +Net loss +(31,536 +) +(27,019 +) +(23,173 +) +(15,943 +) +Accretion and accrued dividends on redeemable convertible preferred stock +— +(4,166 +) +(4,445 +) +(4,355 +) +Net loss attributable to common stockholders +$ +(31,536 +) +$ +(31,185 +) +$ +(27,618 +) +(20,298 +) +Net loss per share attributable to common stockholders, basic and diluted +$ +(1.43 +) +$ +(8.30 +) +$ +(12.89 +) +$ +(11.19 +) +Weighted-average common shares outstanding +21,994 +3,757 +2,143 +1,813 +Consolidated balance sheet data (in thousands) +As of December 31, +2018 +2017 +2016 +2015 +Cash and cash equivalents +$ +44,429 +$ +79,682 +$ +29,671 +2,323 +Total assets +67,611 +91,779 +37,117 +7,351 +Total long term debt +7,623 +9,382 +10,243 +9,726 +Total redeemable convertible preferred stock +— +— +128,585 +73,445 +Total Stockholders' equity (deficit) +41,065 +65,866 +(115,109 +) +(88,640 +) +75 +Table of Contents +Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis of our financial condition and results of operations should be read in conjunction +with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following +discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See +"Special Note Regarding Forward-Looking Statements." Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, +particularly in "Risk Factors." +Overview +We are a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health +for life sciences research and diagnostics. Our platforms are based on our proprietary digital "Simoa" detection technology. Our Simoa bead-based and planar array platforms enable customers to +reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also +allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass +spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable +researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a +paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We are currently focusing on protein detection, which we +believe is an area of significant unmet need and where we have significant competitive advantages. However, in addition to enabling new applications and insights in protein analysis, we are also +developing our Simoa bead-based technology to detect nucleic acids in biological samples. +We +currently sell all of our products for life science research, primarily to laboratories associated with academic and governmental research institutions, as well as pharmaceutical, +biotechnology and contract research companies, through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets, +including Australia, Brazil, Czech Republic, China, India, Israel, Japan, Mexico, South Korea, Lebanon, Qatar, Singapore and Taiwan. We grew our revenue from $22.9 million in 2017 to +$37.6 million in 2018. +Our +instruments are designed to be used either with assays fully developed by us, including all antibodies and supplies required to run the tests, or with "homebrew" kits where we supply +some of the components required for testing, and the customer supplies the remaining required elements. Accordingly, our installed instruments generate a recurring revenue stream. We believe that our +recurring consumable revenue is driven by our customers' ability to extract more valuable data using our platform and to process a large number of samples quickly with little hands-on preparation. +We +commercially launched our HD-1 instrument in January 2014. The HD-1 is based on our bead-based technology, and assays run on the HD-1 are fully automated. We initiated commercial +launch of the SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-1 Analyzer in a compact benchtop form with a lower price point, more +flexible assay preparation, and a wider range of applications. While we expect the SR-X to generate lower consumables revenue per instrument than the Simoa HD-1 Analyzer due to its lower throughput, +as the installed base of the Simoa instruments increases, total consumables revenue overall is expected to increase. We believe that consumables revenue should be subject to less period-to-period +76 +Table of Contents +fluctuation +than our instrument sales revenue, and will become an increasingly important contributor to our overall revenue. +On +January 30, 2018, we acquired Aushon Biosystems, Inc. for $3.2 million in cash, with an additional payment of $0.8 million made in July 2018, six months +after the acquisition date. With the acquisition of Aushon, we acquired a CLIA certified laboratory, as well as Aushon's proprietary sensitive planar array detection technology. Leveraging our +proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to develop the SP-X instrument to provide the same Simoa sensitivity found +in our Simoa bead-based platform. We initiated an early-access program for the SP-X instrument in January 2019, with the full commercial launch planned for April 2019. +As +of December 31, 2018, we had cash and cash equivalents of $44.4 million. Since inception, we have incurred net losses. Our net loss was $31.5 million, +$27.0 million, and $23.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, we had an accumulated +deficit of $175.9 million and stockholders' equity of $41.1 million. We expect to continue to incur significant expenses and operating losses at least through the next 24 months. +We expect our expenses will increase substantially as we: +• expand our sales and marketing efforts to further commercialize our products; +• strategically acquire companies or technologies that may be complementary to our business; +• expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our +products are deemed by the United States Food and Drug Administration, or FDA, to be medical devices or otherwise subject to additional regulation by the FDA; +• seek premarket approval, or PMA, or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market +products for use in the prevention, diagnosis or treatment of a disease or other condition; +• build out our new facility as we continue to grow our employee headcount; +• hire additional personnel; +• enter into collaboration arrangements, if any, or in-license other products and technologies; +• add operational, financial and management information systems; and +• incur increased costs as a result of operating as a public company. +Financial Operations Overview +Revenue +We generate product revenue from sales of our HD-1, SR-X and SP-X instruments and related reagents and other consumables. We currently sell our +products for research use only applications and our customers are primarily laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and +contract research companies. Sales of our consumables have consistently increased due to an increasing number of instruments being installed in the field, all of which require certain of our +consumables to run customers' specific tests. Consumable revenue consists of sales of complete assays which are developed internally by us, plus sales of "homebrew" kits which contain all the elements +necessary to run tests with the exception of the specific antibodies utilized which are separately provided by the customer. +Service +and other revenue consists of testing services provided by us in our Accelerator Laboratory on behalf of certain research customers, in addition to warranty and other +service-based revenue. +77 +Table of Contents +Services +provided in our Accelerator Laboratory include sample testing, homebrew assay development and custom assay development. +Collaboration +and license revenue consists of revenue associated with licensing our technology to third parties and for related services. +The +following table presents our revenue for the periods indicated (in thousands): +Year ended December 31, +2018 +2017 +2016 +Product revenue +$ +23,365 +$ +14,124 +$ +10,601 +Service and other revenue +12,117 +7,676 +5,012 +Collaboration and license revenue +2,150 +1,074 +1,972 +Total revenue +$ +37,632 +$ +22,874 +$ +17,585 +The +following table reflects product revenue (in thousands) by geography and as a percentage of total product revenue, based on the billing address of our customers. North America +consists of the United States, Canada and Mexico; EMEA consists of Europe, the Middle East, and Africa; and Asia Pacific includes Japan, China, South Korea, Singapore, Malaysia and Australia. +Year ended December 31, +2018 +2017 +2016 +North America +$ +13,365 +57 +% +$ +7,790 +55 +% +$ +6,816 +64 +% +EMEA +7,360 +32 +% +4,435 +31 +% +2,679 +25 +% +Asia Pacific +2,640 +11 +% +1,899 +13 +% +1,106 +10 +% +Total +$ +23,365 +100 +% +$ +14,124 +100 +% +$ +10,601 +100 +% +Our +revenue is denominated primarily in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United +States. Changes in foreign currency exchange rates have not materially affected us to date; however, they may become material to us in the future as our operations outside of the United States expand. +Cost of Products, Services and Collaboration Revenue +Cost of goods sold for products consists of HD-1 and SR-X instrument cost from the manufacturer, SP-X cost based on the internal assembly of +this item, raw material parts costs and associated freight, shipping and handling costs, contract manufacturer costs, salaries and other personnel costs, royalties, stock-based compensation, overhead +and other direct costs related to those sales recognized as product revenue in the period. +Cost +of goods sold for services consists of salaries and other personnel costs, royalties, stock-based compensation and facility costs associated with operating the Accelerator +Laboratory on behalf of customers, in addition to costs related to warranties and other costs of servicing equipment at customer sites. +Cost +of collaboration revenue consists of royalty expense due to third parties from revenue generated by collaboration or license deals. +78 +Table of Contents +Research and Development Expenses +Research and development expenses consist of salaries and other personnel costs, stock-based compensation, research supplies, third-party +development costs for new products, materials for prototypes, and allocated overhead costs that include facility and other overhead costs. We have made substantial investments in research and +development since our inception, and plan to continue to make substantial investments in the future. Our research and development efforts have focused primarily on the tasks required to support +development and commercialization of new and existing products. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these +expenses to increase in future periods. +Selling, General and Administrative Expenses +Selling, general and administrative expenses consist primarily of salaries and other personnel costs, and stock-based compensation for our sales +and marketing, finance, legal, human resources and general management, as well as professional services, such as legal and accounting services. We expect selling, general and administrative expenses +to increase in future periods as the number of sales, technical support and marketing and administrative personnel grows and we continue to introduce new products, broaden our customer base and grow +our business. We also expect to incur additional expenses as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission and the +Nasdaq Stock Market, additional insurance expenses, and expenses related to investor relations activities and other administrative and professional services. +Critical Accounting Policies, Significant Judgments and Estimates +Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in +accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the +reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be +reasonable under the circumstances. Changes in accounting estimates may occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. +We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement +presentation, financial condition, results of operations and cash flows will be affected. +We +believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other significant accounting policies. Accordingly, these are the +policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. Our significant accounting policies are more fully described +in "Significant Accounting Policies" (Note 2) in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. +Revenue Recognition +We recognize revenue when (1) persuasive evidence of an arrangement exists, (2) shipment and installation, if applicable, has +occurred or services have been rendered, (3) the price to the customer is fixed or determinable and (4) collection of the related receivable is reasonably assured. We primarily generate +revenue from the sale of products and delivery of services, as well as under license and collaboration agreements. Our product revenue includes the sale of instruments as well as assay kits and other +consumables which are used to perform tests on the instrument. Our service revenue is generated from service contracts related to research services performed on behalf of customers and maintenance and +support services. +79 +Table of Contents +Product Revenue +Revenue for instrument sales is recognized upon installation at the customer's location or upon transfer of title to the customer when +installation is not required, which is generally the case with sales to distributors. In sales to end-customers, we always provide the installation service and often payment is tied to the completion +of the installation service. When installation is required, we account for the instrument and installation service as one unit of accounting and recognize revenue when installation is completed, +assuming all other revenue recognition criteria are met. Instrument transactions often have multiple elements, as discussed below. Included with the purchase of an instrument is a one-year assurance +type product warranty assuring that the instrument is free of material defects and will function according to specifications. In addition, the sale of an instrument includes an implied warranty which +is promised to the customer during the pre-sales process, at the time that the sales quote is issued to the customer. The implied warranty is provided over the same one-year period as the standard +warranty. The services included in the implied warranty are the same as those included in the extended service contracts and include two bi-annual preventative maintenance service visits, minor +hardware updates and software upgrades, additional training and troubleshooting, which is beyond the scope of the standard product warranty. The implied warranty has been identified by us as a +separate deliverable and unit of accounting. Consideration allocated to the implied one-year warranty is recognized over the one year period of performance as service and other revenue as described +below. Consideration allocated to any other elements is recognized as the goods are delivered or the services are performed. +Service and Other Revenue +Service revenue includes revenue from the implied one-year service type warranty obligation, revenue from extended service contracts, research +services performed on behalf of customers in our Accelerator Laboratory, and other services that may be performed. Revenue for extended warranty contracts is recognized ratably over the service +period. Revenue for the implied one-year service type warranty is initially deferred at the time of instrument revenue recognition and is recognized ratably over a 12-month period starting on the date +of instrument installation. Revenue for research and development services and other services is generally recognized based on proportional performance of the contract when our ability to complete +project requirements is reasonably assured. Most of these services are completed in a short period of time from the receipt of the customer's order. When significant risk exists in our ability to +fulfill project requirements, revenue is recognized upon completion of the contract. +Collaboration and License Revenue +Collaboration and license revenue relates to our agreement with bioMérieux, which was terminated in September 2018, and an +agreement with another diagnostic company. For a complete discussion of the accounting policies specific to these collaboration and license agreements, refer to "Collaborations and License +Arrangements" (Note 11) in the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. +Multiple Element Arrangements +Many of our instrument sales involve the delivery of multiple products and services. The elements of an instrument sale typically include the +instruments, installation (when required), an implied one-year service type warranty, and in some cases, assays, consumables and other services. Revenue recognition for contracts with multiple +deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the +customer on a stand-alone basis. In determining the units of accounting, management evaluates certain criteria, including whether the deliverables have standalone +80 +Table of Contents +value. +Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis. +The +consideration received is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria are applied to +each of the separate units. We determine the estimated selling price for deliverables within the arrangement using vendor-specific objective evidence (VSOE) of selling price, if available. If VSOE is +not available, we consider whether third-party evidence is available. If third-party evidence of selling price or VSOE is not available, we use our best estimate of selling price for the deliverable. +In +order to establish VSOE of selling price, we must regularly sell the product or service on a standalone basis with a substantial majority priced within a relatively narrow range. If +there are not a sufficient number of standalone sales such that VSOE of selling price cannot be determined, then we consider whether third party evidence can be used to establish selling price. Due to +the lack of similar products and services sold by other companies within the industry, we have not established selling price using third-party evidence. +For +product and service sales, we determine our best estimate of selling price for instruments, consumables, services and assays using average selling prices over a rolling 12-month +period coupled with an assessment of market conditions, as VSOE and third-party evidence cannot be established. We recognize revenue for delivered elements only when we determine there are no +uncertainties regarding customer acceptance. +Distributor Transactions +In certain markets, we sell products and provide services to customers through distributors that specialize in life science products. In cases +where the product is delivered to a distributor, revenue recognition generally occurs when title transfers to the distributor. The terms of sales transactions through distributors are generally +consistent with the terms of direct sales to customers, except the distributors do not require our services to install the instrument at the end customer and perform the services for the customer that +are beyond our standard warranty in the first year following the sale. These transactions are accounted for in accordance with our revenue recognition policy described above. +Stock-Based Compensation +We account for stock-based compensation awards in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification +(ASC) Topic 718, Compensation—Stock Compensation , or ASC 718. ASC 718 requires all stock-based payments to employees, including grants of +employee stock options, to be recognized in the statement of operations based on their fair values. Stock-based compensation awards have historically consisted of stock options and restricted stock. +Prior +to adoption of ASU 2016-09 on January 1, 2017, we recognized compensation costs related to stock options granted to employees based on the estimated fair value of the awards +on the date of grant, net of estimated forfeitures. Effective January 1, 2017, we ceased utilizing an estimated forfeiture rate and began recognizing forfeitures as they occur. We estimate the +grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on +a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. +We +recognize compensation costs related to share-based payments granted to non-employees based on the estimated fair value of the awards on the date of grant in the same manner as +options for employees; however, the fair value of the stock options granted to non-employees is re-measured each reporting period until the service is complete, and the resulting increase or decrease +in value, if any, is +81 +Table of Contents +recognized +as expense or income, respectively, during the period the related services are rendered to the same financial statement line item as any cash consideration would be recognized. There were +no material non-employee awards outstanding during the years ended December 31, 2018, 2017, and 2016. +The +fair value of stock options granted to employees and directors for their services on our board of directors is estimated on the grant date using the Black-Scholes option-pricing +model, based on the assumptions noted in the following table: +Year Ended December 31, +2018 +2017 +2016 +Risk-free interest rate +2.6% - 3.0% +1.8% - 2.1% +1.2% - 1.3% +Expected dividend yield +None +None +None +Expected term (in years) +5.9 +6.0 +6.0 +Expected volatility +32.4% - 36.8% +46.0% - 52.0% +44.9% - 49.0% +Using +the Black-Scholes option-pricing model, the weighted-average grant date fair value of options granted for the years ended December 31, 2018, 2017, and 2016 was $7.19, $4.52, +and $2.41 per share, respectively. Expected volatility was calculated based on reported volatility data for a representative group of guideline publicly traded companies for which historical +information was available. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. We estimate the +expected life of options granted to employees utilizing the simplified method which calculates the expected life of an option as the average of the time to vesting and contractual life of the options. +The expected life is applied to the stock option grant group as a whole, as we do not expect substantially different exercise or post-vesting termination behavior among its employee population. We use +the simplified method due to the lack of historical exercise data and the plain nature of the stock options. We use the remaining contractual term for the expected life of non-employee awards. The +expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on common stock. +For +the years ended December 31, 2018, 2017, and 2016 stock-based compensation expense was $4.9 million, $2.2 million, and $0.9 million respectively. +The +table below summarizes the stock-based compensation expense recognized in our statements of operation by classification (in thousands): +Year ended +December 31, +2018 +2017 +2016 +Cost of product revenue +$ +55 +$ +24 +$ +6 +Cost of service and other revenue +173 +52 +12 +Research and development +513 +180 +59 +General and administrative +4,143 +1,912 +851 +Total +$ +4,884 +$ +2,168 +$ +928 +As +of December 31, 2018, we had $11.7 million of total unrecognized stock-based compensation costs which we expect to recognize over a weighted-average period of +2.88 years. +Prior +to our IPO, the fair value of our common stock underlying our stock options was estimated on each grant date by our board of directors. In order to determine the fair value of our +common stock underlying granted stock options, our board of directors considered, among other things, the most recent valuations of our common shares prepared by an unrelated third-party valuation +firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. +82 +Table of Contents +Given +the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to +determine the best estimate of the fair value of our common stock, including (1) our business, financial condition and results of operations, including related industry trends affecting our +operations; (2) our forecasted operating performance and projected future cash flows discounted to present value using our estimated weighted average cost of capital; (3) the illiquid +nature of our common stock; (4) liquidation preferences and other rights and privileges of our preferred stock over our common stock; (5) likeliness and estimated timing of the potential +option to have our stock become publicly traded; (6) market multiples of our most comparable public peers; (7) recently completed equity financing transactions; and (8) market +conditions affecting our industry. +Since +the completion of our IPO, we have determined the fair value of each common share underlying share-based awards based on the closing price of our common shares as reported by +Nasdaq on the date of grant. +Preferred Stock Warrant Liability +As of January 1, 2015, we had outstanding warrants to purchase 64,441 shares of Series A-2 redeemable convertible preferred stock, +or Series A-2 Preferred Stock, 1,300,000 shares of Series A-3 convertible preferred stock, or Series A-3 Preferred Stock, 562,488 shares of Series B redeemable convertible +preferred stock, or Series B Preferred Stock, and 226,733 shares of Series C redeemable convertible preferred stock, or Series C Preferred Stock. On March 4, 2015, we +issued a warrant to purchase 46,248 shares of Series C Preferred Stock to a lender related to an amendment to a debt facility. The fair value of the warrant was initially accounted for as a +debt discount. On January 29, 2016, we issued a warrant to purchase 57,810 shares of Series C Preferred Stock to a lender related to a second amendment to a debt facility. The fair value +of the warrant was initially accounted for as a debt discount. On November 18, 2016, we issued a warrant to purchase 700,000 shares of Series A-3 Preferred Stock to a vendor. The fair +value of the warrant was recorded as research and development expense. On March 31, 2017, we issued a warrant to purchase 38,828 shares of Series D redeemable convertible +preferred stock (Series D Preferred Stock) to a lender as part of a third amendment to a debt facility. The fair value of the warrant was initially accounted for as a debt discount. All of the +warrants were initially recorded at fair value and marked to market on each reporting and exercise date with changes in the fair value recorded in other expense (income) on the statement of operations +and comprehensive loss. Holders of warrants to purchase shares of Series A-3 and B Preferred Stock exercised the warrants during the year ended December 31, 2016 and holders of warrants +to purchase shares of Series A-3 Preferred Stock exercised the warrants during the three months ended March 31, 2017. Upon exercise, the fair value of the warrants was reclassified to +redeemable convertible preferred stock along with any proceeds received. Upon the closing of the IPO, all warrants to purchase Preferred Stock automatically converted to warrants to purchase our +common stock. +83 +Table of Contents +The +changes in preferred stock warrant liability measured at fair value for which we have used Level 3 inputs to determine fair value are as follows (in thousands): +Warrant +liability +Balance at December 31, 2015 +$ +5,547 +Issuance of warrants related to debt facility +128 +Issuance of warrants related to a vendor +2,078 +Changes in fair value of warrants +307 +Warrant exercises +(5,258 +) +Balance at December 31, 2016 +2,802 +Issuance of warrants related to debt facility +119 +Changes in fair value of warrants +90 +Warrant exercises +(2,188 +) +Conversion to warrants in common stock in connection with IPO +(823 +) +Balance at December 31, 2017 +$ +— +The +warrants were classified as liabilities because they were exercisable into shares of redeemable convertible preferred stock. On each measurement date, we utilized a Monte Carlo +option pricing model to determine the fair value of the warrants and utilized various valuation assumptions based on available market data and other relevant but observable factors. Expected +volatility for our redeemable convertible preferred stock was determined based on an analysis of the historical volatility of a representative group of guideline public companies, because, prior to +our IPO, there was no market for our common stock and, therefore, a lack of market-based company-specific historical and implied volatility information. The expected term reflects the remaining +contractual term of the warrants. The assumed dividend yield is based upon our expectation of not paying dividends in the foreseeable future. The risk-free rate is based upon the U.S. Treasury yield +curve in effect at the valuation date, commensurate with the remaining contractual life of the warrants. The fair value of the underlying preferred shares was determined by management, with the +assistance of a third-party valuation specialist, using a hybrid valuation method, which includes a weighted analysis of two scenarios. The first scenario was based on the completion of an initial +public offering utilizing a market approach and the second scenario was based on remaining privately held utilizing either an income approach or a weighted-average of an income approach and a +backsolve to a recent financing event, depending on the proximity of the financing event to the measurement date. The assumption regarding our probability of completing an initial public offering was +the primary contributing factor to the changes in fair value of the common stock. See "Significant Accounting Policies" (Note 2) in our consolidated financial statements appearing elsewhere in this +Annual Report on Form 10-K for further details on the changes of the probability of completing an initial public offering. Because all outstanding and exercisable warrants to purchase Preferred +Stock were automatically converted to warrants to purchase shares of common stock following the IPO, they are accounted for as equity instruments as of December 31, 2018. +84 +Table of Contents +The +following assumptions were utilized to determine the fair value of each warrant to purchase preferred stock at each reporting period and as of the change from liability to equity +accounting treatment in connection with the IPO: +Balance sheet date +Value of +underlying +Series D +preferred +stock +Value of +underlying +Series C +preferred +stock +Value of +underlying +Series B +preferred +stock +Value of +underlying +Series A-3 +preferred +stock +Value of +underlying +Series A-2 +preferred +stock +Volatility +Probability +of an initial +public offering +December 7, 2017 +$4.67 +$ +4.67 +N/A +N/A +$ +4.67 +46 +% +100 +% +December 31, 2016 +N/A +$ +4.16 +N/A +$ +2.97 +$ +2.95 +52 +% +40 +% +December 31, 2015 +N/A +$ +3.92 +$3.00 +$ +3.00 +$ +1.90 +41 +% +25 +% +Results of Operations +Comparison of the Years Ended December 31, 2018 and December 31, 2017 (dollars in +thousands): +Year ended +December 31, +2018 +% of +revenue +Year ended +December 31, +2017 +% of +revenue +$ +change +% +change +Product revenue +$ +23,365 +62 +% +$ +14,124 +62 +% +$ +9,241 +65 +% +Service and other revenue +12,117 +32 +% +7,676 +34 +% +4,441 +58 +% +Collaboration and license revenue +2,150 +6 +% +1,074 +5 +% +1,076 +100 +% +Total revenue +37,632 +100 +% +22,874 +100 +% +14,758 +65 +% +Costs of Goods Sold: +Cost of product revenue +12,729 +34 +% +7,742 +34 +% +4,987 +64 +% +Cost of services and other revenue +6,955 +18 +% +5,145 +22 +% +1,810 +35 +% +Total Costs of Goods Sold and Services +19,684 +52 +% +12,887 +56 +% +6,797 +53 +% +Gross Profit +17,948 +48 +% +9,987 +44 +% +7,961 +80 +% +Operating Expense: +Research and development +15,805 +42 +% +16,304 +71 +% +(499 +) +(3 +)% +Selling, general and administrative +33,693 +90 +% +19,688 +86 +% +14,005 +71 +% +Total operating expenses +49,498 +132 +% +35,992 +157 +% +13,506 +38 +% +Loss from operations +(31,550 +) +(84 +)% +(26,005 +) +(114 +)% +(5,545 +) +(21 +)% +Interest income (expense), net +46 +0 +% +(951 +) +(4 +)% +997 +(105 +)% +Other income (expense), net +(7 +) +(0 +)% +(63 +) +(0 +)% +56 +89 +% +Loss before income taxes +(31,511 +) +(84 +)% +(27,019 +) +(118 +)% +(4,492 +) +(17 +)% +Income tax provision +(25 +) +(0 +)% +— +(0 +)% +(25 +) +100 +% +Net loss +$ +(31,536 +) +(84 +)% +$ +(27,019 +) +(118 +)% +$ +(4,517 +) +(17 +)% +Revenue +Revenue increased by $14.8 million, or 65%, to $37.6 million for the year ended December 31, 2018 as compared to +$22.9 million for the year ended December 31, 2017. Product revenue consisted of sales of instruments totaling $9.6 million and sales of consumables and other products of +$13.8 million for the year ended December 31, 2018. Product revenue consisted of sales of instruments totaling $6.5 million and sales of consumables and other products totaling +$7.6 million for the year ended December 31, 2017. Average sales prices of instruments and consumables did not change materially in the year ended December 31, 2018 as compared +with the year ended December 31, 2017. The increase in product revenue of $9.2 million was primarily due to the sale of more instruments in the 12 months ended December 31, +2018 and increased sales of consumables. The installed base of instruments +85 +Table of Contents +increased +from December 31, 2017 to December 31, 2018, and as these additional instruments were used by customers, the consumable sales increased. The increase in service and other +revenue of $4.4 million was primarily due to increased services performed in our Accelerator Laboratory; more customers are using these services, and existing customers are using these services +more frequently. In addition, an increase in purchased warranties contributed to the service and other revenue increase. Collaboration +and license revenue in the year ended December 31, 2018 included $2.1 million in revenue related to the termination of the collaboration arrangement with bioMérieux in the +third quarter of 2018. +Cost of Product, Service and License Revenue +Cost of product revenue increased by $5.0 million, or 64%, to $12.7 million for the year ended December 31, 2018 as +compared to $7.7 million for the year ended December 31, 2017. The increase was primarily due to increased sales of consumables and instruments. Cost of service revenue increased to +$7.0 million for the year ended December 31, 2018 from $5.1 million for the year ended December 31, 2017. The increase was primarily due to higher utilization of the +Accelerator Laboratory, plus increased personnel costs from the build out of our field service organization. Overall cost of goods sold as a percentage of revenue decreased to 52% of total revenue for +the year ended December 31, 2018 as compared to 56% for the year ended December 31, 2017, primarily as a result of the change in revenue mix to more consumables revenue and collaboration +revenue in 2018. +Research and Development Expense +Research and development expense decreased slightly by $0.5 million, or 3%, to $15.8 million for the year ended +December 31, 2018 as compared to $16.3 million for the year ended December 31, 2017. The decrease was primarily due to a reduction in outside development costs related to our SR-X +instrument for which development was completed and product launched commercially in the fourth quarter of 2017. The reduction in project costs for the SR-X instrument offset an increase in research +and development costs due to increased headcount in research and development and the increased use of outside development firms as we increased our new product development efforts. +Selling, General and Administrative Expense +Selling, general and administrative expense increased by $14.0 million, or 71%, to $33.7 million for the year ended +December 31, 2018 as compared to $19.7 million for the same period in 2017. The increase was primarily due to headcount additions in various departments as we build out our organization +to support future growth, public company costs, transaction fees and amortization of intangibles associated with the Aushon acquisition, and stock compensation expense. +Interest and Other Expense, Net +Interest and other expense, net decreased by $1.1 million, to a net income position of less than $0.1 million for the year ended +December 31, 2018 as compared to $1.0 million of net expense for the same period in 2017, primarily due to an increase in interest income as a result of the higher cash balances in 2018. +Tax Expense +Tax expense increased by less than $0.1 million to an amount less $0.1 million for the year ended December 31, 2018. The +increase is primarily due to certain state taxes in 2018, which we did not have in the prior year. +86 +Table of Contents +Comparison of the Years Ended December 31, 2017 and December 31, 2016 (dollars in +thousands): +Year ended +December 31, +2017 +% of +revenue +Year ended +December 31, +2016 +% of +revenue +$ +change +% +change +Product revenue +$ +14,124 +61.7 +% +$ +10,601 +60.3 +% +$ +3,523 +33.2 +% +Service and other revenue +7,676 +33.6 +% +5,012 +28.5 +% +2,664 +53.2 +% +Collaboration and license revenue +1,074 +4.7 +% +1,972 +11.2 +% +(898 +) +(45.5 +)% +Total revenue +22,874 +100.0 +% +17,585 +100.0 +% +5,289 +30.1 +% +Costs of Goods sold: +Cost of product revenue +7,742 +33.8 +% +6,299 +35.8 +% +1,443 +22.9 +% +Cost of services revenue +5,145 +22.5 +% +3,163 +18.0 +% +1,607 +30.4 +% +Cost of license revenue +— +— +% +375 +2.1 +% +(375 +) +(100 +)% +Total Costs of Goods sold and services +12,887 +56.3 +% +9,837 +55.9 +% +3,050 +57.7 +% +Gross Profit +9,987 +43.7 +% +7,748 +44.1 +% +2,239 +42.3 +% +Operating Expenses: +Research and development +16,304 +71.3 +% +16,993 +96.6 +% +(689 +) +(4.1 +)% +Selling, general and administrative +19,688 +86.1 +% +12,466 +70.9 +% +7,222 +57.9 +% +Total operating expenses +35,992 +157.6 +% +29,459 +167.5 +% +9,583 +24.4 +% +Loss from operations +(26,005 +) +(113.7 +)% +(21,711 +) +(123.5 +)% +(4,294 +) +(19.8 +)% +Interest expense, net +(951 +) +(4.2 +)% +(1,298 +) +(7.4 +)% +347 +(26.7 +)% +Other income (expense), net +(63 +) +(0.2 +)% +(164 +) +(0.9 +)% +102 +(61.6 +)% +Loss before income taxes +(27,019 +) +(118.1 +)% +(23,173 +) +(131.8 +)% +(3,846 +) +16.6 +% +Income tax provision +— +— +— +— +— +— +Net loss +$ +(27,019 +) +(118.1 +)% +$ +(23,173 +) +(131.8 +)% +$ +(3,846 +) +(16.6 +)% +Revenue +Revenue increased by $5.3 million, or 30%, to $22.9 million for the year ended December 31, 2017 as compared to +$17.6 million for the year ended December 31, 2016. Product revenue consisted of sales of instruments totaling $6.5 million and sales of consumables and other products of +$7.6 million for the year ended December 31, 2017. Product revenue consisted of sales of instruments totaling $6.2 million and sales of consumables and other products totaling +$4.4 million for the year ended December 31, 2016. Average sales prices of instruments and consumables did not change materially in the year ended December 31, 2017 as compared +with the year ended December 31, 2016. The increase in product revenue of $3.5 million was primarily due to the sale of more instruments in the twelve months ended December 31, +2017 and increased sales of consumables. The installed base of Simoa instruments increased from December 31, 2016 to December 31, 2017, and as these additional instruments were used by +customers, the consumable sales increased. The increase in service and other revenue of $2.7 million was due to increased services performed in our Simoa Accelerator Laboratory; more customers +are using these services, and existing customers are using the Accelerator Laboratory more frequently. Collaboration and license revenue in the year ended December 31, 2017 consists of revenue +related to the collaboration arrangement with bioMérieux that was modified in the fourth quarter of 2016. Collaboration and license revenue in the year ended December 31, 2016 +consists of one-time payment of $1.8 million of revenue related a licensing arrangement executed in the fourth quarter of 2016, and revenue related to the collaboration arrangement with +bioMérieux of $0.2 million. +As +part of the modification in the fourth quarter of 2016, we received $2.0 million in additional consideration. This additional consideration along with the deferred revenue on +the date of the modification is being recognized over our estimated period of performance, which was initially +87 +Table of Contents +determined +to be 36 months. The estimated performance period is evaluated each reporting period and continues to be consistent with the initial estimate. +Cost of Product, Service and License Revenue +Cost of product revenue increased by $1.4 million, or 23%, to $7.7 million for the year ended December 31, 2017 as compared +to $6.3 million for the year ended December 31, 2016. The increase was primarily due to increased sales of consumables and instruments. Cost of service revenue increased to +$5.1 million for the year ended December 31, 2017 from $3.2 million forthe year ended December 31, 2016. The increase was primarily due to higher utilization of the +Accelerator Laboratory, plus increased personnel costs from the build out of our field service organization. Overall cost of goods sold as a percentage of revenue remained consistent at 56% of total +revenue for the year ended December 31, 2017 as compared to 56% for the year ended December 31, 2016, primarily as a result of increased headcount in field service and accelerator +service groups. +Research and Development Expense +Research and development expense decreased slightly by $0.7 million, or 4%, to $16.3 million for the year ended +December 31, 2017 as compared to $17.0 million for the year ended December 31, 2016. The decrease was primarily due to a reduction in outside development costs related to our SR-X +instrument for which development was completed and product launched commercially in the fourth quarter of 2017. The reduction in project costs for the SR-X instrument offset other increase in research +and development costs as we have increased headcount in research and development and the increased use of outside development firms as we increased our new product development efforts. +Selling, General and Administrative Expense +Selling, general and administrative expense increased by $7.2 million, or 58%, to $19.7 million for the year ended +December 31, 2017 as compared to $12.5 million for the same period in 2016. The increase was primarily due to headcount additions in various departments as we build out our organization +to support future growth, and stock compensation expense. +Interest and Other Expense, Net +Interest and other expense, net decreased by $0.5 million, to $1 million for the year ended December 31, 2017 as compared +to $1.5 million for the same period in 2016, primarily due to the amortization of debt discounts from warrants we have issued to a lender. +Liquidity and Capital Resources +Since our inception, we have incurred net losses and negative cash flows from operations. We incurred net losses of $31.5 million, +$27.0 million and $23.2 million and used $28.7 million, $22.1 million and $17.7 million of cash from our operating activities for the years ended December 31, +2018, 2017 and 2016, respectively. As of December 31, 2018, we had an accumulated deficit of $175.9 million. +As +of December 2018, we had cash and cash equivalents of $44.4 million and no additional amounts were available to borrow under our debt facility. +Sources of Liquidity +To date, we have financed our operations principally through equity offerings, borrowings from credit facilities and revenue from our commercial +operations. +88 +Table of Contents +Equity Offerings +In December 2017, we completed our IPO in which we sold 4,916,480 shares of common stock at an initial public offering price of $15.00 per +share. The aggregate net proceeds received by us from the offering, net of underwriting discounts and commissions and offering expenses, were $65.6 million. Prior to the IPO, we had raised +capital through the sale of redeemable convertible preferred stock in private placement transactions. +Loan Facility with Hercules +On April 14, 2014, we executed a Loan Agreement with Hercules Capital, Inc. (formerly known as Hercules Technology Growth +Capital, Inc.). The Loan Agreement provided a total debt facility of $10.0 million, which is secured by substantially all of our assets. At closing, we borrowed $5.0 million in +principal and had the ability to draw the additional $5.0 million over the period from November 1, 2014 to March 31, 2015. The interest rate on this term loan was variable based +on a calculation of 8% plus the prime rate less 5.25%, with a minimum interest rate of 8%. Interest was to be paid monthly beginning the month following the borrowing date. Principal payments were +scheduled to begin on September 1, 2015, unless we achieved certain milestones which would have extended this date to December 1, 2015 or March 1, 2016. In connection with the +execution of the Loan Agreement, we issued Hercules a warrant to purchase up to 173,428 shares of our Series C Preferred Stock at an exercise price of $3.3299 per share. Upon closing of the +IPO, this warrant was automatically converted into a warrant to purchase up to 53,960 shares of our common stock at an exercise price of $10.70 per share. +On +March 4, 2015, we executed Amendment 1 to the Loan Agreement and drew the additional $5.0 million available under the Loan Agreement at that time. The terms of the +amendment deferred principal payments to start on December 1, 2015 or March 1, 2016 if we obtained at least $10.0 million in equity financing before December 1, 2015. This +equity financing did not occur before December 1, 2015. +In +January 2016, we executed Amendment 2 to the Loan Agreement, which increased the total facility available by $5.0 million to a total of $15.0 million and further +delaying the start of principal payments to July 1, 2016. Following the Series D Preferred Stock financing in March 2016, we could have elected to further delay the start of principal +payments until January 1, 2017, however we voluntarily began paying principal on July 1, 2016. Upon signing this amendment, we drew an additional $3.0 million under the debt +facility. The remaining $2.0 million available for borrowing expired unused in 2016, decreasing the amounts available under the debt facility to $13.0 million. +In +March 2017, we signed Amendment 3 to the Loan Agreement increasing the total facility available by $5.0 million to a total of $18.0 million. We did not draw any of this +additional amount, which was available for us to draw until February 28, 2018. Additionally, we did not request an optional term loan for an incremental $5.0 million which was available +for us to request until September 3, 2018. Principal payments were delayed to September 1, 2018 and the loan maturity date was extended to March 1, 2019. We voluntarily made +principal payments in the months of March, April, and May 2018. No principal payments were made in June, July or August 2018. The amendment did not affect the due date of the existing end of term fees +(in aggregate $0.5 million) which were due on February 1, 2018. In connection with this amendment, we issued Hercules a warrant to purchase up to 38,828 shares of our Series D +Preferred Stock at an exercise price of $3.67 per share. Upon closing of the IPO, this warrant was automatically converted into a warrant to purchase up to 12,080 shares of our common stock at an +exercise price of $11.80 per share. +In +July 2017, we signed Amendment 4 to the Loan Agreement, which capped the "Term Loan Interest Rate" with respect to the 2017 Term Loan Advance only at 10%. Amendment 4 to +the Loan +89 +Table of Contents +Agreement +did not change or affect any other element of the Loan Agreement or the Term Loan Advance. +In +August 2018, we signed Amendment 5 to the Loan Agreement, which extends the interest only payment period through March 1, 2020 and also extends the loan maturity date to +March 1, 2020. We accounted for the August 2018 amendment as a modification pursuant to ASC 470-50 and determined that no material change occurred as a result of the modification. In +addition, the amendment deferred the payment of principal until the maturity date. $0.1 million of end of term payments are due March 2020. +In +October 2018, we signed Amendment 6 to the Loan agreement, which amends the Loan Agreement's collateral clause to exclude the $1 million certificate of deposit +associated with the lease on our new headquarters in Billerica, MA. +The +Loan Agreement and amendments contain end of term payments and are recorded in the debt accounts. $0.5 million of end of term payments were paid in the year ended +December 31, 2018. +The +Loan Agreement contains negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying +dividends or making investments and certain other business transactions. There are no financial covenants associated with the Loan Agreement. The obligations under the Loan Agreement are subject to +acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations or financial or other condition, which is subjective in nature. We have +determined that the risk of subjective acceleration under the material adverse events clause is not probable and therefore have classified the outstanding principal in current and long-term +liabilities based on scheduled principal payments. +Debt +principal repayments, including the end of term fees, due as of December 31, 2018 are (in thousands): +Years ending December 31: +2019 +$ +0 +2020 +7,763 +$ +7,763 +Cash Flows +The following table presents our cash flows for each period presented (in thousands): +Year ended December 31, +2018 +2017 +2016 +Net cash used in operating activities +$ +(28,721 +) +$ +(22,106 +) +$ +(17,742 +) +Net cash used in investing activities +(5,454 +) +(1,132 +) +(826 +) +Net cash (used in) provided by financing activities +(78 +) +73,249 +45,916 +Net decrease in cash and cash equivalents +$ +(34,253 +) +$ +50,011 +$ +27,348 +Net Cash Used in Operating Activities +We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also +significantly influenced by our use of cash for operating expenses to support the growth of our business. We have historically experienced negative cash flows from operating activities as we have +developed our technology, expanded our business and built our infrastructure and this may continue in the future. +90 +Table of Contents +Net +cash used in operating activities was $28.7 million during the year ended December 31, 2018. Net cash used in operating activities primarily consisted of net loss of +$31.5 million, a decrease of $1.9 million in deferred revenue and an increase of $1.6 million in inventory, primarily offset by non-cash stock compensation expense of +$4.9 million and an increase of $1.3 million in accounts payable. +Net +cash used in operating activities was $22.1 million during the year ended December 31, 2017. Net cash used in operating activities primarily consisted of net loss of +$27.0 million and an increase of $2.0 million in inventory and an increase in accounts receivable of $1.7 million, primarily offset by non-cash stock compensation expense of +$2.2 million, an increase of $2.9 million in deferred revenue, an increase of $2.0 million in accrued expenses and an increase of $1.0 million in accounts payable. +Net +cash used in operating activities was $17.7 million during the year ended December 31, 2016. Net cash used in operating activities primarily consisted of a net loss of +$23.2 million and an increase in accounts receivable of $1.7 million, primarily offset by non-cash charges related to issuance of warrants of $2.1 million, other non-cash items +including depreciation and stock based compensation, of $1.8 million, and an increase in current liabilities of $2.3 million and an increase in deferred revenue of $0.9 million. +Net Cash Used in Investing Activities +Historically, our primary investing activities have consisted of capital expenditures for the purchase of capital equipment to support our +expanding infrastructure and work force. We expect to continue to incur additional costs for capital expenditures related to these efforts in future periods. +We +used $5.5 million of cash in investing activities during the year ended December 31, 2018 consisting of cash paid in the acquisition of Aushon, net of cash acquired, and +for purchases of capital equipment to support our infrastructure. +We +used $1.1 million of cash in investing activities during the year ended December 31, 2017 for purchases of capital equipment to support our infrastructure. +We +used $0.8 million of cash in investing activities during the year ended December 31, 2016 primarily for purchases of capital equipment to support our infrastructure, and +for a $0.3 million equity investment in another company. +Net Cash Provided by Financing Activities +Historically, we have financed our operations principally through private placements of our convertible preferred stock and borrowings from +credit facilities, the sale of shares of our common stock in our IPO and revenues from our commercial operations. +We +used $0.1 million cash in financing activities during the year ended December 31, 2018, which primarily was from payments on debt of $1.9 million offset by cash +generated by the exercise of stock options. +We +generated $73.2 million of cash in financing activities during the year ended December 31, 2017, which primarily was from the sale of 4,916,480 shares of common stock in +our IPO in December 2017 for net proceeds of $65.6 million, and the sale of 2,113,902 shares of our Series D-1 Preferred Stock in June 2017 for net proceeds of $8.4 million, which +was partially offset by payments of outstanding debt. +We +generated $45.9 million of cash from financing activities during the year ended December 31, 2016, which was primarily from the sale of our Series D Preferred +Stock in March 2016 for net proceeds of $45.4 million. +91 +Table of Contents +Capital Resources +We have not achieved profitability on a quarterly or annual basis since our inception, and we expect to continue to incur net losses in the +future. We also expect that our operating expenses will increase as we continue to increase our marketing efforts to drive adoption of our commercial products. Additionally, as a public company, we +have incurred and will continue to incur significant audit, legal and other expenses that we did not incur as a private company. Our liquidity requirements have historically consisted, and we expect +that they will continue to consist, of sales and marketing expenses, research and development expenses, working capital, debt service and general corporate expenses. +We +believe cash generated from commercial sales, our current cash and cash equivalents, and interest income we earn on these balances will be sufficient to meet our anticipated operating +cash requirements for at least into the second quarter of 2020. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our sales and marketing +activities and grow our customer base. Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and +development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of +factors, including the factors discussed in Item 1A, "Risk Factors" of this Annual Report on Form 10-K. We have based our estimates on assumptions that may prove to be wrong and we could +utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including: +• market acceptance of our products, including our SP-X instrument; +• the cost and timing of establishing additional sales, marketing and distribution capabilities; +• the cost of our research and development activities; +• our ability to enter into collaborations in the future, and the success of any such collaborations; +• the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +• the effect of competing technological and market developments. +We +cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our +stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that +we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to +relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, we may have to delay +development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. +Off-Balance Sheet Arrangements +We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC +rules. +92 +Table of Contents +Contractual Obligations, Commitments and Contingencies +The following table summarizes our contractual obligations as of December 31, 2018 (in thousands): +Payments due by period +(in thousands) +Less than +1 Year +1 to 3 +years +3 to 5 +years +More than +5 years +Total +Contractual Obligations:(1) +Operating lease obligations +$ +1,172 +$ +5,303 +$ +10,377 +$ +22,202 +$ +39,054 +Principal payments and end of term fees on the term loan +$ +0 +$ +7,763 +$ +0 +$ +0 +$ +7,763 +Total +$ +1,172 +$ +13,066 +$ +10,377 +$ +22,202 +$ +46,817 +(1) See +"—Development and Supply Agreement" for additional contractual obligations. +We +currently lease approximately 30,655 square feet of office, laboratory, and manufacturing space at our headquarters in Lexington, Massachusetts, under a lease that was to expire on +June 30, 2020 (the "Lexington Lease"); however in November 2018, the Company agreed to terminate the lease with the lessor effective May 2019. The termination of the lease was connected to the +Company signing a new lease on October 2, 2018 (see below). In addition, pursuant to our acquisition of Aushon in January 2018, we currently lease approximately 21,500 square feet of office, +laboratory, and manufacturing space in Billerica, Massachusetts, under a lease that was to expire on February 28, 2021 (the "Billerica Lease"). +In +August 2018, we exercised an option to terminate the Billerica Lease effective as of September 1, 2019. The Company is required to pay a termination fee of $75,000 no later +than July 1, 2019 in consideration for the early termination. +On +October 2, 2018, we entered into a lease for approximately 91,600 square feet of office, laboratory, and manufacturing space in the building located at 900 Middlesex Turnpike, +Billerica, Massachusetts. The premises covered by this new lease will serve as our new principal office and laboratory space beginning in the second quarter of 2019. The initial term of the lease is +11 years and five months +beginning on April 1, 2019, and we have the option to extend the lease for two additional five-year periods. We believe that this office, laboratory and manufacturing space will be sufficient +to meet our needs for the foreseeable future. +We +also have ongoing obligations related to license agreements which contain immaterial minimum annual payments that are credited against the actual royalty expense. +Purchase +orders or contracts for the purchase of supplies and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such +purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current +procurement or development needs and are fulfilled by our vendors within short time horizons. +Development and Supply Agreement +We do not have significant agreements for the purchase of supplies or other goods specifying minimum quantities or set prices that exceed our +expected requirements for the next three to six months, with the exception of the agreement with STRATEC, who manufactures our HD-1 instrument and will manufacture the HD-X that we expect to +commercialize in the second half of 2019. In 2013, we entered into a supply agreement, or the Supply Agreement, with STRATEC which requires us to purchase a minimum number of commercial units over a +seven-year period ending in May 2021. We +93 +Table of Contents +could +be obligated to pay a fee based on the shortfall of commercial units purchased compared to the required number. Based on the commercial units purchased as of December 31, 2018, assuming +no additional commercial units were purchased thereafter but prior to May 2021, this fee would equal $11.1 million. The amount we could be obligated to pay under the minimum purchase commitment +is reduced as each commercial unit is purchased. We believe that we will purchase sufficient units to meet the requirements of the minimum purchase commitment and, therefore, have not accrued for any +of the minimum purchase commitment. +Also, +if we terminate the Supply Agreement under certain circumstances and do not purchase up to a required number of commercial units, we would be required to issue warrants to purchase +93,341 +shares of common stock at $0.003214 per share. We believe that we will not issue such warrant and therefore have not recorded any amounts related to the potential equity consideration. +In +August 2011, we entered into a Strategic Development Services and Equity Participation Agreement, or the Development Agreement, with STRATEC, pursuant to which STRATEC undertook the +development of the HD-1 for manufacture and sale to us or a partner whom we designate. During the year ended December 31, 2016, the Development Agreement was amended to modify the deliverables +related to the final milestone, to agree on instrument design changes to be implemented, and to reduce the minimum purchase commitment in the Supply Agreement. Additionally, the parties agreed on +additional development services for a total fee of $1.5 million, which is payable when development is completed and of which $0.9 million was paid in 2018. The total amount includes the +final milestone payment that was due under the terms of the original agreement. +Backlog +We generally expect to ship all instrument and consumable orders received in a given period with the exception of orders received near the end +of a fiscal quarter; and as a result, our backlog at the end of any period is typically insignificant. +Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our +market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes. +Foreign Currency Exchange Risk +As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign +currency exchange rates. Historically, the substantial majority of our revenue has been denominated in U.S. dollars. Our expenses are generally +denominated in the currencies in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Canada, Europe, Japan and China. Our results of +operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. Fluctuations in currency exchange rates could harm our business in the future. The +effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables as of December 31, 2018 would not have been material. +To +date, we have not entered into any material foreign currency hedging contracts although we may do so in the future. +94 +Table of Contents +Interest Rate Sensitivity +We had cash and cash equivalents of $44.4 million as of December 31, 2018. These amounts were held primarily in cash on deposit +with banks. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in +interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had decreased by 10% during the periods presented, our interest income would not +have been materially affected. +As +of December 31, 2018, the principal amount of our term debt outstanding with Hercules was $7.8 million. If overall interest rates had increased by 10% during the periods +presented, our interest expense would have increased by approximately $0.1 million on an annualized basis. +Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K beginning on +page F-1. +Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +Item 9A. CONTROLS AND PROCEDURES +(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial +officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this +Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we +file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our +management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. +(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, +identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to +materially affect, our internal control over financial reporting. +(c) Management's Annual Report on Internal Control Over Financial Reporting. Our management is responsible for +establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as +a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management and other personnel to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our +internal control over financial reporting includes those policies and procedures that: +• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our +assets; +• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with +generally accepted accounting principles, and that our +95 +Table of Contents +receipts +and expenditures are being made only in accordance with authorizations of management and our directors; and +• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could +have a material effect on the financial statements. +Because +of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods +are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under +the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the +effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of +the Treadway Commission. Based on our evaluation under that framework, our management concluded that our internal controls over financial reporting were effective as of December 31, 2018. +Item 9B. OTHER INFORMATION +Not applicable. +96 +Table of Contents +PART III +Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by this Item 10 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2019 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 11. EXECUTIVE COMPENSATION +The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2019 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2019 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2019 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2019 Annual Meeting of Stockholders and is incorporated herein by reference. +97 +Table of Contents +PART IV +Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES +(1) Financial Statements +The +consolidated financial statements are included on pages F-1 through F-53 attached hereto and are filed as part of this Annual Report on Form 10-K. +(2) Financial Statement Schedules +Schedules +have been omitted since they are either not required or not applicable or the information is otherwise included herein. +(3) Exhibits +The following is a list of exhibits filed as part of this Annual Report on Form 10-K: +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +3.1 +Amended and Restated Certificate of Incorporation +8-K +12/15/17 +001-38319 +3.2 +Restated Bylaws +8-K +12/15/17 +001-38319 +4.1 +Form of Common Stock Certificate +S-1 +11/9/17 +333-221475 +4.2 +Form of Warrant to Purchase Series C Preferred Stock of the Registrant +S-1 +11/9/17 +333-221475 +4.3 +Warrant Agreement, dated as of April 14, 2014, by and between the Registrant and Hercules Capital, Inc. (formerly +known as Hercules Technology Group Capital, Inc.) +S-1 +11/9/17 +333-221475 +4.4 +Warrant Agreement, dated as of January 29, 2016, by and between the Registrant and Hercules Capital, Inc. (formerly +known as Hercules Technology Group Capital, Inc.) +S-1 +11/9/17 +333-221475 +4.5 +Warrant Agreement, dated as of March 31, 2017, by and between the Registrant and Hercules Capital, Inc. (formerly +known as Hercules Technology Group Capital, Inc.) +S-1 +11/9/17 +333-221475 +4.6 +Fourth Amended and Restated Stockholders Agreement, dated as of June 2, 2017, by and among the Registrant and the +stockholders named therein +S-1 +11/9/17 +333-221475 +98 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +4.7 +Fourth Amended and Restated Registration Rights Agreement, dated as of June 2, 2017, by and among the Registrant and the +investors named therein +S-1 +11/9/17 +333-221475 +4.8 +Warrant Agreement, dated as of January 30, 2018, by and between the Registrant and Azul Divinal Consultoria Unipessoal +LDA +10-K +3/19/18 +001-38319 +10.1.1 ++ +2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.1.2 ++ +Form of Incentive Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.1.3 ++ +Form of Non-qualified Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.1.4 ++ +Form of Restricted Stock Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.2.1 ++ +2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +10.2.2 ++ +Form of Stock Option Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +10.2.3 ++ +Form of Restricted Stock Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +10.2.4 ++ +Form of Restricted Stock Unit Agreement under the 2017 Employee, Director and Consultant Equity Incentive +Plan +S-1/A +11/27/17 +333-221475 +10.3 ++ +Employment Agreement, dated January 1, 2015, by and between the Registrant and E. Kevin Hrusovsky +S-1 +11/9/17 +333-221475 +10.4 ++ +Letter Agreement, dated April 8, 2017, by and between the Registrant and Joseph Driscoll +S-1 +11/9/17 +333-221475 +10.5 ++ +Letter Agreement, dated December 1, 2011, by and between the Registrant and Ernest Orticerio +S-1 +11/9/17 +333-221475 +99 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.6 ++ +Letter Agreement, dated April 6, 2016, by and between the Registrant and Bruce Bal +S-1 +11/9/17 +333-221475 +10.7 ++ +Letter Agreement, dated August 8, 2014, by and between the Registrant and Mark T. Roskey, Ph.D. +S-1 +11/9/17 +333-221475 +10.8 ++ +Letter Agreement, effective as February 5, 2018, by and betwwen the Registrant and Dawn Mattoon +10-Q +5/15/18 +001-38319 +10.9 ++ +Letter Agreement, effective as October 22, 2018, by and between the Registrant and Jackson Streeter +X +10.10 ++ +Letter Agreement, dated March 20, 2017, by and between the Registrant and Marijn Dekkers, Ph.D. +S-1 +11/9/17 +333-221475 +10.11 ++ +Letter Agreement, dated August 7, 2013, by and between the Registrant and Paul M. Meister +S-1 +11/9/17 +333-221475 +10.12 +Lease Agreement, dated as of November 22, 2011, between the Registrant and King 113 Hartwell LLC +S-1 +11/9/17 +333-221475 +10.13 +First Amendment to lease dated August 22, 2014, by and between the Registrant and King 113 +Hartwell LLC +S-1 +11/9/17 +333-221475 +10.14.1 +* +Exclusive License Agreement, dated June 18, 2007, between the Registrant and Tufts University, as amended on +April 29, 2013 +S-1 +11/9/17 +333-221475 +10.14.2 +* +Second Amendment, dated August 22, 2017, to the Exclusive License Agreement between the Registrant and Tufts +University +S-1 +11/9/17 +333-221475 +10.15.1 +* +Supply and Manufacturing Agreement, dated September 14, 2011, between the Registrant and STRATEC +Biomedical AG +S-1 +11/9/17 +333-221475 +10.15.2 +First Amendment to Supply and Manufacturing Agreement, dated October 17, 2013, between the Registrant and STRATEC +Biomedical AG +S-1 +11/9/17 +333-221475 +100 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.16.1 +* +STRATEC Development Services and Equity Participation Agreement, dated August 15, 2011, between the Registrant and +STRATEC Biomedical Systems AG +S-1 +11/9/17 +333-221475 +10.16.2 +* +First Amendment to STRATEC Development Services and Equity Participation Agreement and Second Amendment to Supply and +Manufacturing Agreement, dated November 18, 2016, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/17 +333-221475 +10.17 +* +Manufacturing Services Agreement, dated November 23, 2016, between the Registrant and Paramit +Corporation +S-1 +11/9/17 +333-221475 +10.18.1 +Loan and Security Agreement, dated April 14, 2014, by and between the Registrant and Hercules Capital, Inc. +(formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.18.2 +Amendment No. 1 to Loan and Security Agreement, dated March 4, 2015, by and between the Registrant and Hercules +Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.18.3 +Amendment No. 2 to Loan and Security Agreement, dated January 29, 2016, by and between the Registrant and +Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.18.4 +Amendment No. 3 to Loan and Security Agreement, dated March 31, 2017, by and between the Registrant and Hercules +Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.18.5 +Amendment No. 4 to Loan and Security Agreement, dated July 24, 2017, by and between the Registrant and Hercules +Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +10-Q +11/7/18 +001-38319 +101 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.18.6 +Amendment No. 5 to Loan and Security Agreement, dated August 30, 2018, by and between the Registrant and Hercules +Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +10-Q +11/7/18 +001-38319 +10.18.7 +Amendment No. 6 to Loan and Security Agreement, dated September 28, 2018, by and between the Registrant and +Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +10-Q +11/7/18 +001-38319 +10.19 ++ +Form of Indemnification Agreement +S-1/A +11/27/17 +333-221475 +10.20.1 +Lease, dated September 24, 2007, between RAR2 Boston Industrial QRS-MA, Inc. and Aushon Biosystems, +Inc. +10-K +3/19/18 +001-38319 +10.20.2 +First Amendment, dated October 28, 2009, to Lease, dated September 24, 2007, between RAR2 Boston Industrial +QRS-MA, Inc. and Aushon Biosystems, Inc. +10-K +3/19/18 +001-38319 +10.20.3 +Second Amendment, dated September 23, 2015, to Lease, dated September 24, 2007, between RAR2 Boston Industrial +QRS-MA, Inc. and Aushon Biosystems, Inc. +10-K +3/19/18 +001-38319 +10.21 +Lease Agreement between SSI 900 Middlesex MA LP and the Registrant, dated October 2, 2018. +8-K +10/5/18 +001-38319 +10.22 ++ +2018 Non-Employee Director Compensation Policy +X +21.1 +Subsidiaries of Registrant +X +23.1 +Consent of Ernst & Young LLP +X +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +102 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +32.1 +Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +X +101.INS +XBRL Instance Document. +X +101.SCH +XBRL Taxonomy Extension Schema Document. +X +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document. +X +101.DEF +XBRL Taxonomy Extension Definition. +X +101.LAB +XBRL Taxonomy Extension Label Linkbase Document. +X +101.PRE +XBRL Taxonomy Presentation Linkbase Document. +X ++ Management +contract or compensatory plan or arrangement. +* Confidential +treatment has been granted for portions of this Exhibit. Redacted portions have been filed separately with the Securities and Exchange Commission. +Item 16. FORM 10-K SUMMARY +Not applicable. +103 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to +be signed on its behalf by the undersigned, thereunto duly authorized. +QUANTERIX CORPORATION +Date: March 18, 2019 +By: +/s/ E. KEVIN HRUSOVSKY +E. Kevin Hrusovsky +Chairman, President and Chief Executive Officer +Pursuant +to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on +the dates indicated. +Signature +Title +Date +/s/ E. KEVIN HRUSOVSKY +E. Kevin Hrusovsky +Chairman, President and Chief Executive Officer and Director (principal executive officer) +March 18, 2019 +/s/ JOSEPH DRISCOLL +Joseph Driscoll +Chief Financial Officer (principal financial officer and principal accounting officer) +March 18, 2019 +/s/ DOUGLAS G. COLE, M.D. +Douglas G. Cole, M.D. +Director +March 18, 2019 +/s/ JOHN M. CONNOLLY +John M. Connolly +Director +March 18, 2019 +/s/ KEITH L. CRANDELL +Keith L. Crandell +Director +March 18, 2019 +/s/ MARIJN DEKKERS, PH.D. +Marijn Dekkers, Ph.D. +Director +March 18, 2019 +/s/ MARTIN D. MADAUS, PH. D. +Martin D. Madaus, Ph. D. +Director +March 18, 2019 +104 +Table of Contents +Signature +Title +Date +/s/ PAUL M. MEISTER +Paul M. Meister +Director +March 18, 2019 +/s/ DAVID R. WALT, PH.D. +David R. Walt, Ph.D. +Director +March 18, 2019 +105 +Table of Contents +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +QUANTERIX CORPORATION +Years ended December 31, 2018, 2017 and 2016 +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations and Comprehensive Loss +F-4 +Consolidated Statements of Cash Flows +F-5 +Consolidated Statements of Redeemable Convertible Preferred Stock and +Stockholders' (Deficit) Equity +F-6 +Notes to Consolidated Financial Statements +F-7 +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To +the Stockholders and the Board of Directors of Quanterix Corporation +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of Quanterix Corporation (the "Company") as of December 31, 2018 and 2017, +the consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' (deficit) equity and cash flows for each of the three years in the period +ended December 31, 2018, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in +all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended +December 31, 2018, in conformity with US generally accepted accounting principles. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's +financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with +respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We +conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the +financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over +financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness +of the Company's internal control over financial reporting. Accordingly, we express no such opinion. +Our +audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond +to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting +principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our +opinion. +/s/ Ernst & Young LLP +We have served as the Company's auditor since 2008. +Boston, Massachusetts +March 18, 2019 +F-2 +Table of Contents +Quanterix Corporation +Consolidated Balance Sheets +(amounts in thousands, except share and per share data) +December 31, +2018 +December 31, +2017 +Assets +Current assets: +Cash and cash equivalents +$ +44,429 +$ +79,682 +Accounts receivable (less reserve for doubtful accounts of $36; including $48 and $123 from related parties as of December 31, 2018 and 2017, +respectively) +6,792 +5,599 +Inventory +5,945 +3,571 +Prepaid expenses and other current assets +2,330 +400 +Total current assets +59,496 +89,252 +Restricted Cash +1,000 +— +Property and equipment, net +2,923 +1,874 +Intangible assets, net +2,348 +— +Goodwill +1,308 +— +Other non-current assets +536 +653 +Total assets +$ +67,611 +$ +91,779 +Liabilities and stockholders' equity +Current liabilities: +Accounts payable (including $36 and $0 to related parties as of December 31, 2018 and 2017, respectively) +$ +5,110 +$ +3,552 +Accrued compensation and benefits +4,449 +2,624 +Other accrued expenses (including $226 and $170 to related parties as of December 31, 2018 and 2017, respectively) +3,129 +3,560 +Deferred revenue (including $33 and $1,182 with related parties as of December 31, 2018 and 2017, respectively) +5,437 +4,942 +Current portion of long term debt +— +5,036 +Total current liabilities +18,125 +19,714 +Deferred revenue, net of current portion (including $0 and $1,074 with related parties as of December 31, 2018 and 2017, respectively) +520 +1,709 +Long term debt, net of current portion +7,623 +4,346 +Other non-current liabilities +278 +144 +Total liabilities +26,546 +25,913 +Commitments and contingencies (Note 9) +Stockholders' equity: +Common stock, $0.001 par value: +Authorized—120,000,000 shares as of December 31, 2018 and December 31, 2017; issued and outstanding—22,369,036 and 21,707,041 shares +as of December 31, 2018 and 2017, respectively +22 +22 +Additional paid-in capital +216,931 +210,196 +Accumulated deficit +(175,888 +) +(144,352 +) +Total stockholders' equity +41,065 +65,866 +Total liabilities and stockholders' equity +$ +67,611 +$ +91,779 +See accompanying notes. +F-3 +Table of Contents +Quanterix Corporation +Consolidated Statements of Operations and Comprehensive Loss +(amounts in thousands, except share and per share data) +Twelve Months Ended December 31, +2018 +2017 +2016 +Product revenue (including related party activity of $294, $339, and $509 for the years ended December 31, 2018, 2017, and 2016 respectively) +$ +23,365 +$ +14,124 +$ +10,601 +Service and other revenue (including related party activity of $149, $165, and $107 for the years ended December 31, 2018, 2017, and 2016 +respectively) +12,117 +7,676 +5,012 +Collaboration and license revenue (including related party activity of $2,150, $1,074, and $172 for the years ended December 31, 2018, 2017, and 2016 +respectively) +2,150 +1,074 +1,972 +Total revenue +37,632 +22,874 +17,585 +Costs of Goods Sold: +Cost of product revenue (including related party activity of $191, $235, and $322 for the years ended December 31, 2018, 2017, and 2016 respectively; +including stock compensation of $228, $76, and $18 for the years ended December 31, 2018, 2017, and 2016 respectively) +12,729 +7,742 +6,299 +Cost of services and other revenue +6,955 +5,145 +3,163 +Costs of license revenue, related party +— +— +375 +Total Costs of Goods Sold and Services +19,684 +12,887 +9,837 +Gross Profit +17,948 +9,987 +7,748 +Operating Expense: +Research and development (including stock compensation of $513, $180, and $59 for the years ended December 31, 2018, and 2017, and 2016, +respectively) +15,805 +16,304 +16,993 +Selling, general and administrative (including stock compensation of $4,143, $1,912, and $851 for the years ended December 31, 2018, 2017, and 2016, +respectively) +33,693 +19,688 +12,466 +Total operating expenses +49,498 +35,992 +29,459 +Loss from operations +(31,550 +) +(26,005 +) +(21,711 +) +Interest income (expense), net +46 +(951 +) +(1,298 +) +Other (expense) income, net +(7 +) +(63 +) +(164 +) +Loss before income taxes +(31,511 +) +(27,019 +) +(23,173 +) +Income tax provision +(25 +) +— +— +Net loss +$ +(31,536 +) +$ +(27,019 +) +$ +(23,173 +) +Reconciliation of net loss to net loss attributable to common stockholders: +Net loss +$ +(31,536 +) +$ +(27,019 +) +$ +(23,173 +) +Accretion of preferred stock to redemption value +— +(4,110 +) +(4,437 +) +Accrued dividends on preferred stock +— +(59 +) +(8 +) +Net loss attributable to common stockholders +$ +(31,536 +) +$ +(31,188 +) +$ +(27,618 +) +Net loss per share attributable to common stockholders, basic and diluted +$ +(1.43 +) +$ +(8.30 +) +$ +(12.89 +) +Weighted-average common shares outstanding, basic and diluted +21,994,317 +3,756,954 +2,142,840 +See accompanying notes. +F-4 +Table of Contents +Quanterix Corporation +Consolidated Statements of Cash Flows +(amounts in thousands) +Twelve Months Ended +December 31, +2018 +2017 +2016 +Operating activities +Net loss +$ +(31,536 +) +$ +(27,019 +) +$ +(23,173 +) +Adjustments to reconcile net loss to net cash used in operating activities: +Depreciation and amortization expense +1,352 +482 +444 +Stock-based compensation expense +4,884 +2,168 +928 +Non-cash interest expense +170 +238 +388 +Gain on disposal of fixed assets +(14 +) +— +11 +Non-cash research and development expense for issuance of warrents to a vendor +— +— +2,078 +Change in fair value of preferred stock warrants +— +90 +307 +Changes in operating assets and liabilities: +Accounts receivable +(983 +) +(1,682 +) +(1,655 +) +Deposits +— +— +200 +Prepaid expenses and other assets +(1,828 +) +(273 +) +6 +Inventory +(1,603 +) +(2,043 +) +(526 +) +Other non-current assets +267 +— +— +Accounts payable +1,318 +1,003 +1,131 +Accrued compensation and benefits, other accrued expenses and other liabilities +1,101 +2,035 +1,200 +Deferred revenue +(1,849 +) +2,895 +919 +Net cash used in operating activities +(28,721 +) +(22,106 +) +(17,742 +) +Investing activities +Purchases of property and equipment +(1,518 +) +(1,132 +) +(526 +) +Acquisitions, net of cash acquired +(3,801 +) +— +(300 +) +Purchase of Investments +(150 +) +— +— +Proceeds from sale of assets +15 +— +— +Net cash used in investing activities +$ +(5,454 +) +$ +(1,132 +) +$ +(826 +) +Financing activities +Proceeds from sale of preferred stock, net of issuance costs +— +65,575 +— +Proceeds from sale of common stock, net of issuance costs +(20 +) +8,423 +45,428 +Proceeds from exercise of stock warrants +— +29 +18 +Proceeds from stock options exercised +1,871 +202 +213 +Proceeds from the issuance of notes payable and warrants, net of issuance costs +— +(59 +) +2,954 +Payments on notes payable +(1,929 +) +(921 +) +(2,697 +) +Net cash (used in) provided by financing activities +$ +(78 +) +$ +73,249 +$ +45,916 +Net decrease in cash and cash equivalents +(34,253 +) +50,011 +27,348 +Cash, restricted cash, and cash equivalents at beginning of period +79,682 +29,671 +2,323 +Cash, restricted cash, and cash equivalents at end of period +$ +45,429 +$ +79,682 +$ +29,671 +Supplemental cash flow information +Accretion of redeemable convertible preferred stock to redemption value +$ +— +$ +4,110 +$ +4,437 +Cash paid for interest +$ +660 +$ +743 +$ +945 +Warrants issued to lenders +$ +— +$ +119 +$ +128 +Purchases of property and equipment included in accounts payable +$ +78 +$ +74 +$ +72 +Fair value of common stock warrants exercised and reclassified as shares of common stock +$ +196 +$ +2,187 +$ +5,257 +See accompanying notes. +F-5 +Table of Contents +Quanterix Corporation +Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity +Preferred A +stock +shares +Preferred A +stock +value +Preferred B +stock +shares +Preferred B +stock +value +Preferred C +stock +shares +Preferred C +stock +value +Preferred D +stock +shares +Preferred D +stock +value +Common +stock +shares +Common +stock +value +Additional +paid-in +capital +Accumulated +deficit +Total +stockholders' +equity +Balance at December 31, 2015 +14,400,001 +23,898 +5,624,106 +15,178 +8,605,944 +34,369 +— +— +1,976,992 +2 +— +(88,642 +) +(88,640 +) +Issuance of Series D preferred stock, net of issuance costs +— +— +— +— +— +— +12,420,262 +45,428 +— +— +— +— +— +Exercise of preferred stock warrants +1,300,000 +3,901 +397,530 +1,374 +— +— +— +— +— +— +— +— +— +Exercise of common stock options +— +— +— +— +— +— +— +— +90,883 +— +213 +— +213 +Vesting of restricted stock +— +— +— +— +— +— +— +— +247,621 +— +— +— +— +Accretion of preferred stock to redemption value +— +1,180 +— +907 +— +2,309 +— +41 +— +— +(1,141 +) +(3,296 +) +(4,437 +) +Stock-based compensation expense +— +— +— +— +— +— +— +— +— +— +928 +— +928 +Net loss +— +— +— +— +— +— +— +— +— +— +— +(23,173 +) +(23,173 +) +Balance at December 31, 2016 +15,700,001 +28,979 +6,021,636 +17,459 +8,605,944 +36,678 +12,420,262 +45,469 +2,315,496 +2 +— +(115,111 +) +(115,109 +) +Issuance of Series D-1 preferred stock, net of issuance costs +— +— +— +— +— +— +2,113,902 +8,423 +— +— +— +— +— +Exercise of preferred stock warrants +700,000 +2,078 +— +— +31,283 +138 +— +— +— +— +— +— +— +Exercise of common stock options and vesting restricted stock +— +— +— +— +— +— +— +— +289,321 +— +204 +— +204 +Cumulative effect of adoption of ASU No. 2016-09 +— +— +— +— +— +— +— +— +— +— +141 +(141 +) +— +Accretion of preferred stock to redemption value +— +1,080 +— +840 +— +2,140 +— +50 +— +— +(2,029 +) +(2,081 +) +(4,110 +) +Conversion of preferred stock to common stock +(16,400,001 +) +(32,137 +) +(6,021,636 +) +(18,299 +) +(8,637,227 +) +(38,956 +) +(14,534,164 +) +(53,942 +) +14,185,744 +15 +143,319 +— +143,334 +Warrant Liability reclassified to equity upon IPO +— +— +— +— +— +— +— +— +— +— +823 +— +823 +Issuance of common stock in initial public offering, net of $8,173 in offering costs +— +— +— +— +— +— +— +— +4,916,480 +5 +65,570 +— +65,575 +Stock-based compensation expense +— +— +— +— +— +— +— +— +— +— +2,168 +— +2,168 +Net loss +— +— +— +— +— +— +— +— +— +— +— +(27,019 +) +(27,019 +) +Balance at December 31, 2017 +— +— +— +— +— +— +— +— +21,707,041 +22 +210,196 +(144,352 +) +65,866 +Exercise of common stock warrants +— +— +— +— +— +— +— +— +16,718 +— +— +— +— +Exercise of common stock options and vesting of restricted stock +— +— +— +— +— +— +— +— +645,277 +— +1,871 +— +1,871 +Common stock issuance offering costs +— +— +— +— +— +— +— +— +— +— +(20 +) +— +(20 +) +Stock-based compensation expense +— +— +— +— +— +— +— +— +— +— +4,884 +— +4,884 +Net loss +— +— +— +— +— +— +— +— +— +— +— +(31,536 +) +(31,536 +) +Balance at December 31, 2018 +— +— +— +— +— +— +— +— +22,369,036 +22 +216,931 +(175,888 +) +41,065 +See +accompanying notes. +F-6 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements +1. Organization and operations +Quanterix Corporation (NASDAQ: QTRX) (the Company) is a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision +health for life sciences research and diagnostics. The Company's platforms are based on our proprietary digital "Simoa" detection technology. The Company's Simoa bead-based and planar array platforms +enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay +technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies +such as mass spectrometry. These capabilities provide the Company's customers with insight into the role of protein biomarkers in human health that has not been possible with other existing +technologies and enable researchers to unlock unique insights into the continuum between health and disease. The Company is currently focusing on protein detection, but is also developing its +bead-based technology to detect nucleic acids in biological samples. +The +Company currently markets the Simoa HD-1, a fully automated immunoassay bead-based platform with multiplexing and custom assay capability, and related assay test kits and consumable +materials. The Company launched a second bead-based immunoassay platform (SR-X) in the fourth quarter of 2017 with a more compact footprint than the Simoa HD-1 Analyzer and less automation designed +for lower volume requirements while still allowing multiplexing and custom assay capability. The Company initiated an early-access program for its third instrument (SP-X) on the new Simoa planar array +platform in January 2019, with the full commercial launch planned for April 2019. This compact +instrument has the ability to reach a 10 plex and has custom assay capability. The Company also performs research services on behalf of customers to apply the Simoa technology to specific customer +needs. The Company's primary customers are in the research use only market which includes academic and governmental research institutions, the research and development laboratories of pharmaceutical +manufacturers, contract research organizations, and specialty research laboratories. +The +Company acquired Aushon Biosystems, Inc. (Aushon) in January 2018. With the acquisition of Aushon, the Company acquired a CLIA certified laboratory, as well as Aushon's +proprietary sensitive planar array detection technology. Leveraging its proprietary sophisticated Simoa image analysis and data analysis algorithms, the Company further refined this planar array +technology to develop the SP-X instrument to provide the same Simoa sensitivity found in its bead-based platform. +Initial Public Offering +In December 2017, the Company completed its initial public offering (IPO) in which the Company sold 4,916,480 shares of its common stock at the +initial public offering price of $15.00 per share The Company's common stock began trading on The Nasdaq Global Market on December 7, 2017. The aggregate net proceeds received from the IPO, net +of underwriting discounts and commissions and offering expenses, was $65.6 million. Immediately prior to the completion of the IPO, all then outstanding shares of convertible preferred stock +were converted into 14,185,744 shares of common stock. The related carrying value of shares of preferred stock and warrants in the aggregate amount of $143.3 million was reclassified as common +stock and additional paid-in capital. Additionally, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, effective +December 11, 2017 to, among other things, change the authorized number of shares of common stock to 120,000,000 and the authorized number of shares of preferred stock to 5,000,000. +F-7 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +1. Organization and operations (Continued) +Liquidity +The Company has had recurring losses from operations since inception and has an accumulated deficit of $175.9 million at December 31, 2018 and +the Company incurred a net loss of $31.5 million, $27.0 million, and $23.2 million for the years ended December 31, 2018, 2017, and 2016, +respectively. Prior to the IPO the Company had funded its operations principally from issuances of preferred stock, debt financings, grants, product and service sales and development and license +agreements. At December 31, 2018, the Company had $44.4 million of unrestricted cash and cash equivalents. The Company expects the current cash balance will be sufficient to fund operations for a +period of at least one year from the date the consolidated financial statements are issued. There can be no assurances, however, that no additional funding will be required or that additional funding +will be available on terms acceptable to the Company, or at all. +Basis of Presentation +The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of +America ("GAAP"). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards +Codification and Accounting Standards Update of the Financial Accounting Standards Board ("FASB"). The preparation of financial statements in conformity with GAAP requires management to make estimates +and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company's management evaluates its estimates, which include, but are not +limited to, estimates related to revenue recognition, fair value of equity instruments, valuation allowances recorded against deferred tax assets, and stock-based compensation. Actual results could +differ from those estimates. +Reverse Stock Split +On December 4, 2017, the Company effected a reverse stock split of its common stock at a ratio of 1-for-3.214. The shares of common stock +subject to then outstanding stock options were adjusted accordingly to reflect the reverse stock split. All common stock and related per share amounts presented in these financial statements and +related notes have been retroactively adjusted to reflect the 1-for-3.214 reverse stock split. +2. Significant accounting policies +Principles of consolidation +The consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Quanterix Corporation, +and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. +Use of estimates +The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions +that affect the amounts reported in the consolidated financial statements and accompanying notes. In making those estimates and assumptions, the Company bases its estimates on historical experience +and on various other assumptions believed to be reasonable. The Company's significant estimates included in the preparation of the consolidated financial statements are related to revenue recognition, +fair value of equity instruments and notes receivable, fair +F-8 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +value +of assets acquired and liabilities assumed in acquisitions, valuation allowances recorded against deferred tax assets, and stock-based compensation. Actual results could differ from those +estimates. +Revenue recognition +The Company recognizes revenue when (1) persuasive evidence of an arrangement exists, (2) shipment and installation, if +applicable, has occurred or services have been rendered, (3) the price to the customer is fixed or determinable and (4) collection of the related receivable is reasonably assured. The +Company primarily generates revenue from the sale of products and delivery of services, as well as under license and collaboration agreements. The Company's product revenue includes the sale of +instruments as well as assay kits and consumables which are used to perform tests on the instrument. The Company's service revenue is generated from services performed in the Company's Simoa +Accelerator Lab under contracts to perform research services on behalf of customers and maintenance and support services. +Product revenue +Revenue for instrument sales is recognized upon installation at the customer's location or upon transfer of title to the customer when +installation is not required, which is generally the case with sales to distributors. In sales to end-customers, the Company provides the installation service and often payment is tied to the +completion of the installation service. When installation is required, the Company accounts for the instrument and installation service as one unit of accounting and recognizes revenue when +installation is completed, assuming all other revenue recognition criteria are met. Instrument transactions often have multiple elements, as discussed below. Included with the purchase of an +instrument is a one-year assurance type product warranty assuring that the instrument is free of material defects and will function according to specifications. In addition, the sale of an instrument +includes an implied warranty which is promised to the customer during the pre-sales process, at the time that the sales quote is issued to the customer. The implied warranty is provided over the same +one-year period as the standard warranty. The services included in the implied warranty are the same as those included in the extended service contracts, and include two bi-annual preventative +maintenance service visits, minor hardware updates and software upgrades, additional training and troubleshooting which is beyond the scope of the standard product warranty. The implied warranty has +been identified by the Company as a separate deliverable and unit of accounting. Consideration allocated to the implied one year service type warranty is recognized over the one year +period of performance as service and other revenue as described below. Consideration allocated to any other elements is recognized as the goods are delivered or the services are performed. +Service and other revenue +Service revenue includes revenue from the implied one-year service type warranty obligation, revenue from extended service contracts, research +services performed on behalf of a customer in the Company's Simoa Accelerator Lab, and other services that may be performed. Revenue for the implied one-year service type warranty is initially +deferred at the time of instrument revenue recognition and is recognized ratably over a 12-month period starting on the date of instrument installation. Revenue for extended warranty contracts is +recognized ratably over the service period. Revenue for research and development services and other services is generally recognized based on proportional performance of the contract, when the +Company's ability to complete project requirements is reasonably assured. Most of these services are completed in a short period of time from the receipt of the customer's order. +F-9 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +When +significant risk exists in the Company's ability to fulfill project requirements, revenue is recognized upon completion of the contract. +Collaboration and license revenue +Collaboration and license revenue relates to the Joint Development and License Agreement (JDLA) with bioMérieux SA +(bioMérieux) as amended and restated in December 2016 by the Amended and Restated License Agreement (the Amended JDLA) and the agreements with a diagnostics company. Refer to +"Collaboration and License Agreements (Note 11)" for a description of these arrangements and the Company's revenue recognition policies for these agreements. On September 6, 2018, +bioMérieux notified the Company that it was terminating the Amended JDLA, forfeiting any future IVD licensing rights to Quanterix' Simoa technology and enabling Quanterix to consolidate +and regain control of all Simoa IVD licensing and IP rights. As a result of the termination the Company recognized $1.6 million in collaboration and license revenue previously recorded in +deferred revenue. +Multiple element arrangements +Many of the Company's instrument sales involve the delivery of multiple products and services. The elements of an instrument sale typically +include the instrument installation (when required), an implied one year service type warranty, and in some cases the Company may also sell assays, consumables, or other services. Revenue recognition +for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the +delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item +on a stand-alone basis. +The +consideration received is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria are applied to +each of the separate units. The Company determines the estimated selling price for deliverables within the arrangement using vendor-specific objective evidence (VSOE) of selling price, if available. +If VSOE is not available, the Company considers if third-party evidence is available. If third-party evidence of selling price or VSOE is not available, the Company uses its best estimate of selling +price for the deliverable. +In +order to establish VSOE of selling price, the Company must regularly sell the product or service on a standalone basis with a substantial majority priced within a relatively narrow +range. If there are not a sufficient number of standalone sales such that VSOE of selling price cannot be determined, then the Company considers whether third party evidence can be used to establish +selling price. Due to the lack of similar products and services sold by other companies within the industry, the Company has not established selling price using third-party evidence. +For +product and service sales, the Company determines its best estimate of selling price for instruments, consumables, services and assays using average selling prices over a rolling +12-month period coupled with an assessment of market conditions, as VSOE and third-party evidence cannot be established. The Company recognizes revenue for delivered elements only when it determines +there are no uncertainties regarding customer acceptance. +F-10 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +Distributor transactions +In certain markets, the Company sells products and provides services to customers through distributors that specialize in life sciences +products. In cases where the product is delivered to a distributor, revenue recognition generally occurs when title transfers to the distributor. The terms of sales transactions through distributors +are generally consistent with the terms of direct sales to customers, except the distributors do not require the Company's services to install the instrument at the end customer and perform the +services for the customer that are beyond our standard warranty in the first year following the sale. These transactions are accounted for in accordance with the Company's revenue recognition policy +described herein. +Business combinations +Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed, if any, based on their fair values at the dates of +acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair +value of the net tangible and intangible assets acquired is allocated to goodwill. +The +Company typically uses the discounted cash flow method to value acquired intangible assets. This method requires significant management judgment to forecast future operating results +and establish residual growth rates and discount factors. The estimates used to value and amortize intangible assets are consistent with the plans and estimates that are used to manage the business +and are based on available historical information. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections +used to develop these values, the Company could experience impairment charges. In addition, the Company has estimated the economic lives of certain acquired assets and these lives are used to +calculate depreciation and amortization expense. If estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed. +Restricted Cash +Restricted cash represents collateral for a letter of credit issued as security for the lease for the Company's new headquarters. The restricted +cash is long term in nature as the Company will not have access to the funds until more than one year from December 31, 2018. +Cost of revenue +Cost of product revenue consists of raw materials, parts costs and associated freight, shipping and handling costs, contract manufacturer costs, +personnel costs, yield loss, in-license payments and royalties, stock-based compensation, other direct costs and overhead. +Cost +of service and other revenue consists of personnel, facility costs associated with operating the Accelerator Labs on behalf of the customers, costs related to instrument maintenance +and servicing equipment at customer sites, other direct and overhead. +Cost +of license revenue, related party consists of license fees that are the direct results of cash payments received related to license agreements. +F-11 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +Research and development expenses +Research and development expenses, including personnel costs, allocated facility costs, lab supplies, outside services, contract laboratory cost +are charged to research and development expense as incurred. The Company accounts for nonrefundable advance payments for goods and +services that will be used in future research and development activities as expense when the service has been performed or when the goods have been received. +Selling, general, and administrative expense +Selling, general, and administrative expenses are primarily composed of compensation and benefits associated with sales and marketing, finance, +human resources, and other administrative personnel, outside marketing, advertising, allocated facilities costs, legal expenses, and other general and administrative costs. +Net loss per share +Basic net loss per common share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders +by the weighted-average number of common shares. For purposes of the diluted net loss per share calculations, preferred stock, unvested restricted common stock, and common stock options are considered +to be potentially dilutive securities, but are excluded from the diluted net loss per share because their effect would be anti-dilutive and therefore basic and diluted net loss per share were the same +for all periods presented. +The +following table set forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be +anti-dilutive (in common stock equivalent shares): +Year Ended December 31, +2018 +2017 +2016 +Series A redeemable convertible preferred stock +— +— +4,884,869 +Series B redeemable convertible preferred stock +— +— +1,873,561 +Series C redeemable convertible preferred stock +— +— +2,677,649 +Series D redeemable convertible preferred stock +— +— +3,864,421 +Unvested restricted common stock +361,468 +177,192 +376,248 +Outstanding stock options +2,476,911 +2,249,843 +1,119,671 +Outstanding preferred warrants +— +— +326,374 +Outstanding common stock warrants +76,041 +86,090 +— +Total +2,914,420 +2,513,125 +15,122,793 +As +of December 31, 2018, 2017, and 2016 the Company had an obligation to issue warrants to purchase an additional 93,341 shares of common stock, 300,000 shares of +Series A-3 Preferred Stock, and 300,000 shares of Series A-3 Preferred Stock, respectively, to a vendor if a contract is terminated prior to a minimum purchase commitment being met. Upon +completion of the IPO in December 2017, the warrants to purchase shares of Preferred Stock were converted to warrants to purchase shares of common stock at a one-for-3.214 basis. No amounts are +presented in the table above for this obligation to issue a warrant as the issuance of the warrant is not considered probable. +F-12 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +The +Company's redeemable convertible preferred stock was entitled to receive dividends based on dividends declared to common stockholders, thereby giving the preferred stockholders the +right to participate in undistributed earnings of the Company above the stated dividend rate. However, +preferred stockholders did not have a contractual obligation to share in the net losses of the Company. The Company operated in a net loss position for the years ended December 31, 2018, 2017, +and 2016 and, therefore the Company's accounting for basic and diluted earnings per share was unaffected by the participation rights of the preferred stockholders. +Cash and Cash equivalents +Cash and Cash equivalents consists of cash deposits and short-term, highly liquid investments that are readily convertible into cash, with +original maturities of three months or less. Cash equivalents are carried at fair value based on quoted prices for identical assets. Cash and cash equivalents consists of the following (in thousands): +Year Ended +December 31, +2018 +2017 +Cash and Cash Equivalents +Cash +$ +1,821 +$ +1,500 +Money Market funds invested in U.S. Treasury obligations +42,608 +78,182 +Total cash and cash equivalents +$ +44,429 +$ +79,682 +Restricted cash and deposits +As of December 31, 2018 and 2017, the Company had $1.4 million and $0.4 million, respectively, in restricted cash and +deposits related to amounts held for a line of credit, amounts held as a security deposit for the Company's facility lease obligation, and a business registration application. $1.0 million of +the $1.4 million is recorded on a separate line item as restricted cash. The remaining $0.4 million is included in current and noncurrent assets. +Accounts Receivable and allowance for doubtful accounts +The Company provides credit, in the normal course of business, to customers and does not require collateral. Accounts receivable consist of +amounts due to the Company for sales to customers and are recorded net of an allowance for doubtful accounts. The Company reviews accounts receivable on a regular basis to determine if any receivable +will potentially be uncollectable and to estimate the amount of allowance for doubtful accounts necessary. Once a receivable is deemed uncollectible, such balance is written off and charged against +the allowance for doubtful accounts. The Company has not incurred material write offs in any of the periods presented. +Inventory +Inventory is stated at the lower of cost or market on a first-in, first-out (FIFO) basis. The Company analyzes its inventory levels on each +reporting date and writes down inventory that is expected to expire prior to being sold and inventory in excess of expected sales requirements. In the event that the Company identifies these +conditions exist in its inventory, the carrying value is reduced to its estimated net realizable value. +F-13 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +Property and equipment +Property and equipment, including leasehold improvements, are stated at cost and are depreciated, or amortized in the case of leasehold +improvements, over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized +as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be +recoverable and recognizes an impairment loss when it is probable that an asset's realizable value is less than the carrying value. To date, no such impairment losses have been recorded. Depreciation +is calculated based upon the following estimated useful lives of the assets: +Laboratory and manufacturing equipment +Five years +Computers and software +Three years +Office furniture and equipment +Seven years +Leasehold improvements +Shorter of the useful life of the asset or the remaining term of the lease +Software development costs +The Company develops and modifies software related to the operation of the instrument. Software development costs are expensed as incurred until +the point the Company establishes technological feasibility. Based on the Company's product development process, technological feasibility is established upon the completion of a working model. The +Company does not incur material costs between the completion of the working model and the point at which the product is ready for release. Therefore, software development costs are charged to the +statement of operations as incurred as research and development expense. +Investments +During the third quarter of 2016, the Company purchased a minority interest in preferred stock in a privately held company for +$0.3 million. In addition, in the third quarter of 2018, the Company executed a convertible note with a privately held company for $0.2 million. The investments are recorded on a cost +basis in other non-current assets on the accompanying consolidated balance sheets as the Company does not have a controlling investment, does not have the ability to exercise significant influence +over the privately held company and the fair value of these equity investments are not readily determinable. The Company performs an impairment analysis at each reporting period to determine if the +carrying value of the investment or the note must be reduced due to a decrease in the value of the investment, which includes consideration of whether an event or change in circumstances has occurred +that may have a significant adverse effect on the fair value of the investment. The Company determined there was no impairment during the years ended December 31, 2018, 2017, and 2016. +Fair value of financial instruments +ASC Topic 820, Fair Value Measurement (ASC 820), establishes a fair value hierarchy for +instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company's own assumptions (unobservable inputs). Observable inputs are +F-14 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +inputs +that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the +Company's assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. +ASC +820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly +transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes +between the following: +Level 1 +inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. +Level 2 +inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and +Level 3 +inputs are unobservable inputs that reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability. +To +the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, +the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is +based on the lowest level of any input that is significant to the fair value measurement. +The +carrying amount reflected on the balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued +liabilities approximated their fair values, due to the short-term nature of these instruments. The carrying value of the long-term debt approximates its fair value as the debt arrangement is based on +interest rates the Company believes it could obtain for borrowings with similar terms. The Company has an investment in the preferred stock of a privately held company which is recorded within other +non-current assets on a cost basis. This cost method investment's fair value has not been estimated as there are no identified events or changes in circumstances that would indicate a significant +adverse effect on the fair value of the investment and to do so would be impractical. +Fair +value measurements as of December 31, 2018 are as follows (in thousands): +Description +Total +Quoted +prices +in active +markets +(Level 1) +Significant +other +observable +inputs +(Level 2) +Significant +unobservable +inputs +(Level 3) +Financial Assets +Cash Equivalents +$ +42,608 +$ +42,608 +— +$ +— +Note receivable +150 +— +— +150 +Total +$ +42,758 +$ +42,608 +— +$ +150 +F-15 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +Fair +value measurements as of December 31, 2017 are as follows (in thousands): +Description +Total +Quoted +prices +in active +markets +(Level 1) +Significant +other +observable +inputs +(Level 2) +Significant +unobservable +inputs +(Level 3) +Financial Assets +Cash Equivalents +$ +78,182 +$ +78,182 +— +— +Total +$ +78,182 +$ +78,182 +— +— +As +of January 1, 2016, the Company had outstanding warrants to purchase 64,441 shares of Series A-2 redeemable convertible preferred stock (Series A-2 Preferred +Stock), 1,300,000 shares of Series A-3 convertible preferred stock (Series A-3 Preferred Stock), 562,488 shares of Series B redeemable convertible preferred stock (Series B +Preferred Stock), and 226,733 shares of Series C redeemable convertible preferred stock (Series C Preferred Stock). During the years ended December 31, 2017, and 2016, the Company +issued the following warrants: +• On January 29, 2016, the Company issued a warrant to purchase 57,810 shares of Series C Preferred Stock to a lender related to a +second amendment to a debt facility (Note 8) +• On November 18, 2016, the Company issued a warrant to purchase 700,000 shares of Series A-3 Preferred Stock to a vendor +(Note 7). +• On March 31, 2017, the Company issued a warrant to purchase 38,828 shares of Series D redeemable convertible preferred stock +(Series D Preferred Stock) to a lender as part of a third amendment to a debt facility (Note 8). +All +of the warrants were initially recorded as a preferred stock warrant liability on the accompanying consolidated balance sheets at fair value. Warrants issued for goods or services +are initially accounted for under ASC 505-50 and are recognized over the required performance period in the consolidated statements of operations or consolidated balance sheets at the vesting date or +reporting date fair value based on the nature of the underlying arrangement. Warrants issued in connection with a product development contract were recorded to research and development expense. +Warrants issued in connection with a revenue arrangement were recorded as a reduction in revenue. Warrants issued in connection with debt arrangements were recorded as a reduction in the carrying +value of debt. They are marked to market on each reporting and exercise date with changes in the fair value recorded in other expense (income) on the statement of operations and comprehensive loss. +Holders of warrants to purchase 700,000 shares of Series A-3 Preferred stock, and holders of warrants to purchase 111,114 shares of Series C Preferred Stock exercised the warrants during +the year ended December 31, 2017. Upon exercise, the fair value of the warrants was reclassified to redeemable convertible preferred stock along with any proceeds received. Upon completion of +the IPO, the outstanding warrants to purchase shares of preferred stock were automatically converted into warrants to purchase shares of common stock and are therefore accounted for as equity +instruments. +F-16 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +The +changes in preferred stock warrant liability measured at fair value for which the Company has used Level 3 inputs to determine fair value are as follows (in thousands): +Warrant +liability +Balance at December 31, 2015 +$ +5,547 +Issuance of warrants related to debt facility +128 +Issuance of warrants related to a vendor +2,078 +Changes in fair value of warrants +307 +Warrant exercises +(5,258 +) +Balance at December 31, 2016 +2,802 +Issuance of warrants related to debt facility +119 +Changes in fair value of warrants +90 +Warrant exercises +(2,188 +) +Conversion to warrants to purchase common stock in connection with IPO +(823 +) +Balance at December 31, 2017 +$ +— +Prior +to the completion of the IPO, the warrants were classified as liabilities because they were exercisable for shares of redeemable convertible preferred stock. On each measurement +date and immediately prior to the IPO and the resulting change in classification of the warrants to equity instruments, the Company utilized a black-scholes option pricing model to determine the fair +value of the warrants and utilized various valuation assumptions based on available market data and other relevant but unobservable factors. Expected volatility for the Company's redeemable +convertible preferred stock was determined based on an analysis of the historical volatility of a representative group of guideline public companies because, prior to the IPO, there was no market for +the Company's common stock and, therefore, a lack of market-based company-specific historical and implied volatility information. The expected term reflects the remaining contractual term of the +warrants. The assumed dividend yield is based upon the Company's expectation of not paying dividends in the foreseeable future. The risk-free rate is based upon the U.S. Treasury yield curve in effect +at the valuation date, commensurate with the remaining contractual life of the warrants. The fair value of the underlying preferred shares was determined by management, with the assistance of a third +party valuation specialist, using a hybrid valuation method, which includes a probability weighted analysis of two scenarios. The first scenario was based on the completion of an initial public +offering utilizing a market approach and the second scenario was based on the Company remaining privately held utilizing either an income approach or a weighted-average of an income approach and a +backsolve to a recent financing event, depending on the proximity of the financing event to the measurement date. The assumption regarding the Company's probability of completing an initial public +offering was the primary contributing factor to the changes in fair value of the underlying preferred stock. See "Stock-based Compensation" section of this "Significant Accounting Policies" +(Note 2) for discussion of the changes of the probability of completing an initial public offering. +F-17 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +The +following assumptions were utilized to determine the fair value of each warrant to purchase preferred stock at each reporting period and as of the change from liability to equity +accounting treatment of the warrants in connection with the IPO: +Balance sheet date +Value of +underlying +Series D +preferred +stock +Value of +underlying +Series C +preferred +stock +Value of +underlying +Series B +preferred +stock +Value of +underlying +Series A-3 +preferred +stock +Value of +underlying +Series A-2 +preferred +stock +Volatility +Probability +of an initial +public +offering +December 7, 2017 +$4.67 +$ +4.67 +N/A +$ +4.67 +$ +4.67 +46 +% +100 +% +Warranties +The Company provides a one-year warranty and maintenance service related to its instruments and sells extended warranty contracts for additional +periods. The Company defers revenue associated with these services and recognizes them on a pro-rata basis over the period of service. +Income taxes +The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the +Company's consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement +carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against +deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. +The +Company accounts for uncertain tax positions in accordance with the provisions of ASC 740 Income Taxes (ASC 740). When uncertain tax +positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more +likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2018 and 2017 the +Company did not have any significant uncertain tax positions. +Credit, product and supplier concentrations and off-balance-sheet risk +The Company has no significant off-balance-sheet risk, such as foreign exchange contracts, option contracts, or other hedging arrangements. +Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash and cash equivalents and a cost method investment. The Company places its cash and +cash equivalents principally in depository accounts with a bank. +The +Company is also subject to supply chain risks related to the outsourcing of the manufacturing of its instruments. Although there are a limited number of manufacturers for instruments +of this type, the Company believes that other suppliers could provide similar products on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of +sales, which would adversely affect operating results. In addition to outsourcing the manufacturing of its instruments, the Company also purchases antibodies through a number of different suppliers. +Although +F-18 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +a +disruption in service from any one of its antibody suppliers is possible, the Company believes that it would be able to find an adequate supply from alternative suppliers. +Customers +outside the United States represented 40% and 34% of the Company's gross trade accounts receivable balance as of December 31, 2018 and 2017 respectively. +At +December 31, 2018, no single customer represented 10% of the Company's aggregate accounts receivable, and no single customer represented 10% of the Company's revenue for the +year ended December 31, 2018. At December 31, 2017, one customer's accounts receivable balance was 16% of the Company's aggregate accounts receivable no single customer represented 10% +of the Company's revenue for the year ended December 31, 2017. At December 31, 2016, one customer's account receivable balance was 26% of the Company's aggregate accounts receivable and +represented 11% of the Company's revenue for the year ended December 31, 2016. +Segment information +Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief +operating decision-maker in deciding how to allocate resources and assess performance. The Company and the Company's chief operating decision-maker reviews the Company's operations and manages its +business as a single operating segment. +Net +revenue by product and service line are as follows (in thousands): +Year ended December 31, +2018 +2017 +2016 +Product revenue +$ +23,365 +$ +14,124 +$ +10,601 +Service and other revenue +12,117 +7,676 +5,012 +Collaboration and license revenue +2,150 +1,074 +1,972 +Total revenue +$ +37,632 +$ +22,874 +$ +17,585 +The +following table reflects total revenue (in thousands) by geography and as a percentage of total revenue, based on the billing address of our customers. North America consists of the +United States, Canada and Mexico; EMEA consists of Europe, Middle East, and Africa; and Asia Pacific includes Japan, China, South Korea, Singapore, Malaysia and Australia. +Year ended December 31, +2018 +2017 +2016 +North America +$ +22,706 +60 +% +$ +13,864 +61 +% +$ +13,018 +74 +% +EMEA +11,742 +31 +% +6,922 +30 +% +3,416 +19 +% +Asia Pacific +3,184 +8 +% +2,088 +9 +% +1,151 +7 +% +Total +$ +37,632 +100 +% +$ +22,874 +100 +% +$ +17,585 +100 +% +F-19 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +Stock-based compensation +The Company accounts for stock-based compensation awards in accordance with Financial Accounting Standards Board (FASB) Accounting Standards +Codification (ASC) Topic 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees, +including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Stock-based compensation awards have historically consisted of stock options and +restricted stock. +Prior +to adoption of ASU 2016-09 on January 1, 2017, the Company recognized compensation costs related to stock options granted to employees based on the estimated fair value of +the awards on the date of grant, net of estimated forfeitures. Effective January 1, 2017, the Company ceased utilizing an estimated forfeiture rate and began recognizing forfeitures as they +occur. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based +awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. +The +Company recognizes compensation costs related to share-based payments granted to non-employees based on the estimated fair value of the awards on the date of grant in the same manner +as options for employees; however, the fair value of the stock options granted to non-employees is re-measured each reporting period until the service is complete, and the resulting increase or +decrease in value, if any, is recognized as expense or income, respectively, during the period the related services are rendered to the same financial statement line item as any cash consideration +would be recognized. There were no material non-employee awards outstanding during the years ended December 31, 2018, 2017, and 2016. +The +fair value of stock options granted to employees and directors for their services on the Company's Board of Directors is estimated on the grant date using the Black-Scholes +option-pricing model, based on the assumptions noted in the following table: +Year Ended +December 31, +2018 +2017 +2016 +Risk-free interest rate +2.6% - 3.0% +1.8% - 2.1% +1.2% - 1.3% +Expected dividend yield +None +None +None +Expected term (in years) +5.9 +6.0 +6.0 +Expected volatility +32.4% - 36.8% +46.0% - 52.0% +44.9% - 49.0% +Using +the Black-Scholes option-pricing model, the weighted-average grant date fair value of options granted for the years ended December 31, 2018, 2017, and 2016 was $7.19, $4.52, +and $2.41 per share, respectively. Expected volatility was calculated based on reported volatility data for a representative group of guideline publicly traded companies for which historical +information was available. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. The Company estimates +the expected life of options granted to employees utilizing the simplified method which calculates the expected life of an option as the average of the time to vesting and contractual life of the +options. The expected life is applied to the stock option grant group as a whole, as the Company does not expect substantially +F-20 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +different +exercise or post-vesting termination behavior among its employee population. The Company uses the simplified method due to the lack of historical exercise data and the plain nature of the +stock options. The Company uses the remaining contractual term for the expected life of non-employee +awards. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on common stock. Prior to the completion of the IPO, the +fair value of the underlying common shares was determined by management, with the assistance of a third party valuation specialist, using a hybrid valuation method, which includes a weighted analysis +of two scenarios. The first scenario is based on the completion of an initial public offering utilizing a market approach and the second scenario is based on the Company remaining privately held +utilizing either an income approach or a weighted-average of an income approach and a backsolve to a recent financing event approach, depending on the proximity of the financing event to the +measurement date. The initial public offering scenario reflected data gathered from relevant comparable initial public offering transactions and the current value method of equity allocation was used +in determining the value of common stock. For the privately held scenario, traditional income methods of business valuation were employed, where the total equity value was then allocated using the +option pricing model (OPM). The assumption regarding the Company's probability of completing an initial public offering was the primary contributing factor to the changes in fair value of the common +stock. The probability of initial public offering was 40% at December 31, 2016. Since December 31, 2015, the Company had performed the common stock valuations on a quarterly basis. Upon +completion of the IPO in December 2017, the Company determines the fair value of the underlying common shares based on the closing price of the common stock on the option grant date. +The +probability of completing an initial public offering was based on the facts and circumstances as of each measurement date. During the three months ended December 31, 2016, the +Company began initial preparations for completing an initial public offering; including assessing quarterly financial information and holding initial discussions with prospective investment bankers, +which resulted in an increase in the probability of completing an initial public offering. Subsequent to March 31, 2017, the Company obtained approval from the Board of Directors to pursue the +transaction, selected investment bankers, held an organizational meeting, and performed other procedures necessary to complete an initial public offering. As a result, the probability of completing an +initial public offering increased subsequent to March 31, 2017. +The +Company is using the straight-line attribution method to recognize stock-based compensation expense for service based awards for employees and non-employees. However, cumulative +compensation expense recognized through the end of any period must at least equal the value of vested awards through that period, with compensation expense adjusted accordingly. For the year ended +December 31, 2016, the amount of stock-based compensation expense recognized during a period was based on the value of the portion of the awards that were ultimately expected to vest. Prior to +January 1, 2017, forfeitures were estimated at the time of grant, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. During the year ended +December 31, 2016, the Company applied an estimate of forfeitures which did not have a material effect on the consolidated financial statements. Effective January 1, 2017, the Company +adopted Accounting Standards Update (ASU) 2016-09 Stock Compensation , and has elected to account for forfeitures as incurred and therefore no forfeiture +estimate is utilized in the years ended December 31, 2018 and 2017. The effect of this adoption has been recorded as a $0.1 million cumulative effect adjustment to accumulated deficit as +of January 1, 2017. +F-21 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +The +Company applies an accelerated attribution method to recognize stock-based compensation expense when accounting for performance-based stock awards. The Company records the expense +for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. +Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. Compensation expense +for performance-based stock awards is included in total stock-based compensation expense. There were no material performance-based stock awards outstanding as of December 31, 2018, 2017, and +2016. +Recent accounting pronouncements +The Company is considered to be an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS +Act). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company +can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to avail itself of this extended transition period and, +as a result, the Company will not be required to adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies so long as +the Company remains an emerging growth company. +In +May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). The FASB has issued several +updates to the standard which clarify the (i) application of the principal versus agent guidance; (ii) guidance relating to performance obligations and licensing; (iii) assessment +of the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition; and (iv) narrows aspects of ASC 606 or +corrects unintended application of the guidance (collectively, the Revenue ASUs). The Revenue ASUs provide an accounting standard for a single comprehensive model for recognizing revenue arising from +contracts with customers. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the +entity expects to receive in exchange for those goods or services. In conjunction with the new revenue standard, the FASB also amended the guidance under ASC 340-40, Other Assets and Deferred Costs—Contracts with +Customers , related to the accounting for costs to obtain or fulfill a contract with a +customer. The Company will adopt the new revenue standard as of January 1, 2019 using the modified retrospective method. The Company is still in the process of quantifying the impact of the +standard. +In +January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets +and Financial Liabilities ("ASU 2016-01"). The standard changes how entities measure certain equity investments and present changes in the fair value of financial +liabilities measured under the fair value option that are attributable to their own credit. Under the new guidance, entities will be required to measure equity investments that do not result in +consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. +The Company's assessment is in progress and has not yet concluded on the impact of the standard. +In +February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information +about leasing +F-22 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +arrangements. +Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic +842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the +balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense +recognition in the income statement. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The new standard is +effective for us on January 1, 2020, with early adoption permitted. We expect to adopt the new standard on January 1, 2020 and use the effective date as our date of initial application. +In +August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash +Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statements of cash flows. The amendments are effective for the +Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each +period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date +practicable. As the Company avails itself to the extended transition period as an emerging growth company under the JOBS Act, the new standard is effective for fiscal years beginning after +December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. The Company's assessment is in progress and has not yet concluded on the impact of the +standard. +In +November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), requiring restricted cash and cash equivalents to be +included in the statement of cash flows. As the Company avails itself of the extended transition period as an emerging growth company under the JOBS Act, the new standard is effective for fiscal years +beginning after +December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. The Company elected to early adopt this standard in the statement of cash flows for the year +ended December 31, 2018. +In +January 2017, the FASB issued ASU No. 2017-04 Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment. This ASU +eliminates Step 2 from the goodwill impairment test. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring +the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if +it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the +quantitative impairment test is necessary. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is +permitted, for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect adoption of this ASU to be material to its financial +statements on known trends, demands, uncertainties and events in its business. +In +August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure +Requirements for Fair Value Measurement" . This ASU removed the following disclosure requirements: (1) the amount of and reasons for transfers between +F-23 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +2. Significant accounting policies (Continued) +Level 1 +and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value +measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for +recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 +fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity +determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. +ASU No. 2018-13 will be effective for fiscal years beginning after December 15, 2019 with early adoption permitted. As of December 31, 2018, the Company has not elected to early +adopt this guidance but does not expect that the adoption of this guidance will have a material effect on its consolidated financial statements. +3. Inventory +Inventory consists of the following (in thousands): +As of +December 31, +2018 +2017 +Raw materials +$ +1,546 +$ +1,032 +Work in process +2,331 +968 +Finished goods +2,068 +1,571 +Total +$ +5,945 +$ +3,571 +Inventory +comprises commercial instruments, assays, and the materials required to manufacture assays. +4. Property and equipment +Property and equipment consists of the following (in thousands): +As of +December 31, +2018 +2017 +Laboratory and manufacturing equipment +$ +4,127 +$ +2,969 +Office furniture and equipment +789 +689 +Computers and software +786 +459 +Leasehold improvements +244 +180 +5,946 +4,297 +Less: accumulated depreciation +(3,023 +) +(2,423 +) +Total +$ +2,923 +$ +1,874 +The +Company incurred depreciation expense of $0.7 million, and $0.5 million for the years ended December 31, 2018 and 2017, respectively. Included in Laboratory and +manufacturing equipment are +F-24 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +4. Property and equipment (Continued) +27 instruments, +which are internally used by the Company. The laboratory & manufacturing equipment balance includes $1.4 million of cost and $0.7 million of accumulated +depreciation related to these instruments. +5. Other accrued expenses +Other accrued expenses consist of the following (in thousands): +As of +December 31, +2018 +2017 +Accrued inventory +$ +599 +$ +835 +Accrued royalties +323 +221 +Accrued professional services +723 +346 +Accrued development costs +795 +1,559 +Accrued other +689 +599 +Total accrued expenses +$ +3,129 +$ +3,560 +6. Income Taxes +The following table presents the components of income (loss) before income taxes (in thousands): +Year Ended December 31, +2018 +2017 +2016 +United States +$ +(31,436 +) +$ +(27,019 +) +$ +(23,173 +) +Foreign +(75 +) +— +— +$ +(31,511 +) +$ +(27,019 +) +$ +(23,173 +) +F-25 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +6. Income Taxes (Continued) +The +following table summarizes the provision for (benefit from) income taxes (in thousands): +Year Ended +December 31, +2018 +2017 +2016 +Current: +United States +Federal +$ +— +$ +— +$ +— +State +18 +— +— +Foreign +— +— +— +Total current income tax provision +18 +— +— +Deferred +United States +Federal +2 +— +— +State +5 +— +— +Foreign +— +— +— +Total deferred income tax provision (benefit) +7 +— +— +Total income tax provision (benefit) +$ +25 +$ +— +$ +— +During +the years ended December 31, 2018 and 2017, the Company recorded an income tax provision of $25 and $0 thousand, respectively. During the years ended +December 31, 2018, 2017 and 2016, the Company recorded no income tax benefits for any net losses incurred and the tax credits generated in each year, due to its uncertainty of realizing a +benefit from those items. +A +reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: +Year Ended +December 31, +2018 +2017 +Federal statutory income tax rate +21.0 +% +34.0 +% +State taxes, net of federal tax benefit +6.0 +% +4.8 +% +Stock compensation +1.1 +% +0.0 +% +Permanent items +–1.2 +% +–1.6 +% +Tax Credits +2.7 +% +2.6 +% +Foreign differential +0.0 +% +0.0 +% +U.S. Tax Reform +0.0 +% +–53.2 +% +Other, net +0.2 +% +–1.1 +% +Valuation Allowance +–29.9 +% +14.5 +% +Effective income tax rate +–0.1 +% +0.0 +% +The +significant reconciling items between the reported amounts of income tax expense for the year to the amount of income tax expense that would result from applying the U.S. statutory +tax rate to pre-tax income include state taxes, non-deductible expenses, stock based compensation tax benefits, tax credits, and the valuation allowance maintained against certain of the Company's +deferred tax assets. +F-26 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +6. Income Taxes (Continued) +During +2018, the Company acquired Aushon Biosystems. The Company analyzed the transaction from an income tax perspective and adjusted the deferred tax assets and liabilities related to +the Aushon Biosystems acquisition. Of the total goodwill recorded, approximately $0.4 million is amortizable related to historical tax basis that Aushon had related to a prior acquisition. +On +December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law, making significant changes to the Internal Revenue Code. Changes included, but were not +limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to +a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative deferred foreign earnings as of December 31, 2017. On December 22, 2017, Staff +Accounting Bulletin No. 118 ("SAB 118") was issued, which directed taxpayers to consider the impact of the Act as "provisional" when a registrant did not have the necessary information +available, prepared or analyzed (including computations) in +reasonable detail to complete the accounting for certain income tax effects of the Act. During the fourth quarter of 2018 the Company completed its accounting for the tax effects of the Act and +recorded no adjustments in its consolidated financial statements. +A +valuation allowance is provided when it is more likely than not that all or a portion of the deferred tax asset will not be realized. Realization of deferred tax assets is dependent +upon future taxable income, if any, the amount and timing of which are uncertain. The Company maintains a valuation allowance against its net U.S. and foreign deferred tax assets as a result of the +negative evidence associated with its history of operating losses. +Deferred +tax assets and liabilities reflect the net tax effects of net operating loss carryovers and temporary differences between the carrying amount of assets and liabilities for +financial reporting and +F-27 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +6. Income Taxes (Continued) +the +amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities were as follows (in thousands): +December 31, +2018 +2017 +Deferred tax assets: +Net operating loss carryforwards +$ +35,623 +$ +27,952 +Research and development credits +4,678 +3,637 +Deferred revenue +1,614 +1,795 +Depreciation +86 +629 +Amortization +792 +— +Stock compensation +541 +185 +Other deferred tax assets +1,378 +614 +Total deferred tax assets +44,712 +34,812 +Valuation allowance +(44,033 +) +(34,552 +) +Subtotal +679 +260 +Section 481(a) Adjustment—Accrued Bonus +(59 +) +(118 +) +Amortization +(610 +) +— +Goodwill +(17 +) +Stock-based compensation +(142 +) +Net deferred tax assets (liability) +$ +(7 +) +$ +— +As +of December 31, 2018, the Company had federal and state net operating loss carryforwards of $136.8 million and $108.8 million, respectively. $0.9 million +of the federal net operating loss carryforwards relates to the acquisition of Aushon Biosystems and these losses have been reduced to reflect the limitations on these losses as a result of +Section 382 of the Internal Revenue Code. These carryforwards begin to expire in 2026 and 2019, respectively. As of December 31, 2018, the Company had federal and state credit +carryforwards of $3.8 million and $1.2 million, respectively. These carryforwards begin to expire in 2026 and 2019, respectively. As of December 31, 2018, the Company had foreign +net operating loss carryforwards of $75 thousand. Of this amount, carryforwards of $75 thousand expire in 2027. +The +Company recognizes a deferred tax asset for the future benefit of tax loss carryforwards, tax credit carryforwards, and other deductible temporary differences to the extent that it +is more likely than not that these assets will be realized. In evaluating the Company's ability to recover these deferred tax assets, the Company considers all available positive and negative +evidence, including its past operating results, taxable income in carryback years, the projected reversal of existing deferred tax liabilities, the availability of tax planning strategies and its +forecast of future taxable income. Based on the significant negative evidence, including the three-year cumulative loss position, the Company concluded that its net U.S. deferred tax assets as well as +the deferred tax assets in certain foreign subsidiaries were not more likely than not realizable and maintained a full valuation allowance against these deferred tax assets at December 31, +2018. +F-28 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +6. Income Taxes (Continued) +The +valuation allowance increased by $9.4 million during the year ended December 31, 2018, primarily as a result of the U.S. operating losses incurred, the research and +development tax credit carryforwards generated during the year and acquisition of Aushon Biosystems, Incorporated. +The +valuation allowance decreased by $3.9 million during the year ended December 31, 2017. The decrease in valuation allowance was primarily the result of the impact of the +U.S. corporate tax rate reduction enacted during 2017, which resulted in the Company remeasuring its deferred tax assets and liabilities at the lower 21% U.S. federal corporate tax rate and a +corresponding reduction in the valuation allowance. This reduction was partially offset by the valuation allowance established in 2017 related to U.S. and foreign operating losses incurred and tax +credits generated during the year. +Under +Sections 382 and 383 of the U.S. Internal Revenue Code, if a corporation undergoes an ownership change, the corporation's ability to use its pre-change net operating loss +carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an ownership change generally occurs if there is +a cumulative change in its ownership by 5% stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under U.S. state tax laws. The Company may +have experienced an ownership change in the past and may experience ownership changes in the future as a result of future transactions in its share capital, some of which may be outside of the control +of the Company. As a result, if the Company earns net taxable income, its ability to use its pre-change net operating loss carryforwards, or other pre-change tax attributes, to offset U.S. federal and +state taxable income and taxes may be subject to significant limitations. +In +the ordinary course of business, there is inherent uncertainty in quantifying the Company's income tax positions. The Company assesses income tax positions and records tax benefits +for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions for which it is more +likely than not that a tax benefit will be sustained, the Company recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing +authority that has full knowledge of all relevant information. For those income tax positions for which it is not more likely than not that a tax benefit will be sustained, no tax benefit has been +recognized in the consolidated financial statements. +The +Company accounted for uncertain tax positions using a more likely than not threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions +is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject +to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on an annual basis and adjusts the level of the liability to +reflect any subsequent changes in the relevant facts surrounding the uncertain positions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision +for income taxes. For the years ended December 31, 2018, 2017 and 2016, there were no accrued interest or penalties in the consolidated statements of operations and comprehensive loss. The +Company does not anticipate any significant changes in the next twelve months associated with its liability for unrecognized tax benefits. +F-29 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +6. Income Taxes (Continued) +The Company is subject to taxation in the United States as well as the Netherlands and China. At December 31, 2018, the Company is generally no longer subject to examination by +taxing authorities in the United States for years prior to 2015. However, net operating loss carryforwards and credits in the United States may be subject to adjustments by taxing authorities in +future years in which they are utilized. The Company's foreign subsidiaries remain open to examination by taxing authorities from 2018 onward. +The +Company's foreign subsidiary has incurred losses since inception, and the Company had immaterial undistributed earnings as of December 31, 2018. +7. Redeemable convertible preferred stock +The Company had authorized 47,015,449 shares of preferred stock, $0.001 par value per share, of which 3,972,415 shares were designated Series A-1 redeemable convertible preferred +stock (Series A-1 Preferred Stock), 10,492,027 shares were designated Series A-2 Preferred Stock, 2,000,000 shares were designated Series A-3 Preferred Stock, 6,186,594 shares +were designated Series B Preferred Stock, 9,247,089 shares were designated as Series C Preferred Stock, 544,332 shares were designated Series C-1 redeemable convertible preferred +stock (Series C-1 Preferred Stock), 12,459,090 shares were designated Series D Preferred Stock and 2,113,902 were designated Series D-1 redeemable convertible preferred stock +(Series D-1 Preferred Stock) as of immediately prior to the completion of the IPO. +In +February 2016, the Company issued 1,300,000 shares of Series A-3 Preferred Stock to a vendor (Note 8) upon the exercise of Series A-3 Preferred Stock warrants at +a purchase price of $0.001 per share. The fair value of the settled warrant was $3.9 million at the time of exercise which was reclassified from Preferred Stock Warrant Liability to +Series A Preferred Stock. +In +March 2016, the Company issued 12,420,262 shares of Series D Preferred Stock at a purchase price of $3.67 per share. The issuance resulted in cash proceeds of +$45.4 million, net of issuance costs. +In +June and July 2016, the Company issued 397,530 shares of Series B Preferred Stock upon exercise of Series B Preferred Stock warrants, which included 312,500 shares of +Series B Preferred Stock at a purchase price of $0.001 per share, 8,330 shares of Series B Preferred Stock at purchase price of $2.00 per share, and 76,700 shares of Series B +Preferred Stock upon a cashless exercise of a warrant. The fair value of the settled warrants was $1.4 million at the time of exercise which was reclassified from Preferred Stock Warrant +Liability to Series B Preferred Stock. +In +January 2017, the Company issued 700,000 shares of Series A-3 Preferred Stock to a vendor (Note 8) upon the exercise of Series A-3 Preferred Stock warrants at a +purchase price of $0.001 per share. The fair value of the settled warrant was $2.1 million at the time of exercise which was reclassified from Preferred Stock Warrant Liability to +Series A Preferred Stock. +In +June 2017, the Company issued 2,113,902 shares of Series D-1 Preferred Stock at a purchase price of $4.021 per share. The issuance resulted in cash proceeds of +$8.4 million, net of issuance costs. +In +November 2017, the Company issued 31,283 shares of Series C Preferred Stock upon exercise of Series C Preferred Stock warrants, which included 8,474 shares of +Series C Preferred Stock at a purchase price of $3.3299 per share, and 22,809 shares of Series C Preferred Stock upon a cashless exercise of a warrant. The fair value of the settled +warrants was $0.1 million at the time of exercise which was reclassified from Preferred Stock Warrant Liability to Series C Preferred Stock. +F-30 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +7. Redeemable convertible preferred stock (Continued) +The +Company had a Stock Purchase Agreement (SPA) with bioMérieux, a related party, which required the Company to issue additional shares of Series C Preferred Stock +if certain milestones were met in exchange for $10.0 million in gross proceeds. The milestones were related to activities under a Joint Development and License Agreement (JDLA) +(Note 12). bioMérieux also purchased Series C Preferred Stock when the JDLA was entered into in 2012. When the SPA was entered into, the Company evaluated whether the +requirement to issue additional shares ('Tranche Feature") required separate accounting. The Company determined that the Tranche Feature was not legally detachable and therefore was an embedded +feature in the Series C Preferred Stock that bioMérieux purchased. +During +the year ended December 31, 2015, the Company amended the terms of the SPA which restructured the equity milestone from one payment of $10.0 million to three +separate payments ($5.0 million; $3.0 million and $2.0 million) based on components of the initial technical milestones. No other terms of the Series C Preferred Stock +changed. The Company achieved the first milestone in January 2015 at which time bioMérieux purchased 1,501,546 shares of Series C Preferred Stock at a price of $3.3299 for total +gross proceeds of $5.0 million. The Company also achieved the second milestone in May 2015 at which time bioMérieux purchased 600,618 shares of Series C Preferred Stock at +a price of $3.3299 for total gross proceeds of $2.0 million. In December 2016, the Company further amended the JDLA and SPA which cancelled the third and final milestone (Note 12). +The +rights, preferences, and privileges of Series A-1, A-2, A-3, B, C, C-1, D, and D-1 Preferred Stock were as follows: +Conversion +Shares of Series A-1, A-2, A-3, B, C, C-1, D, and D-1 Preferred Stock were convertible into common stock on a 3.214-for-one basis, +adjustable for certain dilutive events. Conversion was at the option of the preferred stockholders, although conversion was automatic upon the earlier of the consummation of an initial public +offering, resulting in gross proceeds to the Company of at least $40.0 million and for a minimum per-share amount of $5.00 per share, or the approval of a Preferred Majority, defined as 60% of +the outstanding shares of Series A-1, A-2, B, C, D, and D-1 Preferred Stock voting as a single class. +Dividends +Holders of the Series A-1, A-2, B, C, and C-1 Preferred Stock were entitled to receive, before any cash was paid out or set aside for any +common stock, cumulative dividends in arrears at the annual rate of $0.08, $0.08, $0.16, $0.2664, and $0.2664 per share, respectively, subject to adjustment for stock splits, stock dividends, +combinations and reorganizations. Holders of Series D, and D-1 Preferred Stock were entitled to receive non-cumulative dividends at the rate of $0.2936, and $0.3217 per share, respectively, +subject to adjustment for stock splits, when and if declared by the Board of Directors of the Company. The cumulative accrued dividends as of immediately prior to the completion of the IPO were +$3.3 million, $7.8 million, $5.7 million, $9.5 million, and $0.7 million for Series A-1, A-2, B, C and C-1 Preferred Stock, respectively. Holders of +Series A-3 Preferred Stock were not entitled to receive any preferred stock dividends. Upon full payment of preferred dividends, additional dividends would have been shared among all preferred +stock holders and common stock holders on a pro rata basis. +F-31 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +7. Redeemable convertible preferred stock (Continued) +Liquidation preference +Holders of the Series A-1, A-2, A-3, B, C, C-1, D, and D-1 Preferred Stock had preference in the event of a liquidation or dissolution of +the Company equal to $1.0416667, $1.0416667, +$2.00, $2.00, $3.3299, $3.3299, $3.67, and $4.021 per share, respectively, plus any accrued but unpaid dividends. In any liquidation event, Series D and D-1 Preferred Stock holders would +receive first priority in liquidation payments. In the event that the amounts available for distribution were insufficient to pay the full amounts, the assets would be distributed ratably among +Series D, and D-1 Preferred Stock holders in proportion to their aggregate liquidation preference amounts until such amounts were paid full. Series B, C, and C-1 Preferred Stock holders +would receive next priority in liquidation payments after Series D Preferred Stock holders. In the event that the amounts available for distribution were insufficient to pay the full amounts, +the assets would be distributed ratably among B, C, and C-1 Preferred Stock holders in proportion to their aggregate liquidation preference amounts. Series A-1, A-2, and A-3 Preferred Stock +holders would receive next priority in liquidation preference after Series B, C, and C-1 Preferred Stock holders. In the event that the amounts available for distribution after payment were +insufficient to pay the full amounts, the assets would be distributed ratably among A-1, A-2, and A-3 Preferred Stock holders in proportion to their aggregate liquidation preference amounts. Any +remaining amounts would be distributed to holders of common stock on a pro rata basis. However, if the holders of any series of preferred stock would receive a greater liquidation preference if they +were converted into shares of common stock immediately prior to the liquidation event, then these shares would receive consideration equal to the amount that would be received if the shares had been +converted in common stock in lieu of the applicable liquidation preference. +Voting rights +Holders of the Series A-1, A-2, A-3, B, C, D and D-1 Preferred Stock (Voting Preferred) were entitled to vote as a single class with the +holders of common stock, and had one vote for each equivalent common share into which the preferred stock was convertible. A Preferred Majority vote was required in order to amend the Certificate of +Incorporation or By-Laws, reclassify common stock or establish another class of stock, create or authorize additional shares of preferred stock, effect a sale, liquidation, or merger of the Company, +repurchase or redeem any capital stock, or engage in any action which would adversely affect the holders of the preferred stock. +The +holders of the Series A-1, A-2 and B Preferred Stock could elect three members to the Board of Directors, voting as a single class. The holders of the Series C +Preferred Stock could elect one member to the Board of Directors. The holders of the Voting Preferred could elect one member to the Board of Directors, voting as a single class. +Holders +of Series C-1 Preferred Stock had no voting rights. +Prior +to the issuance of Series D Preferred Stock in March 2016, a majority vote of the Series B, C and C-1 Preferred Stock holders could elect to redeem all of the +outstanding shares of Series B, C and C-1 Preferred Stock at any time on or after November 14, 2016. The Series A-1 and A-2 Preferred Stockholders had the right to elect to redeem +all of the outstanding shares at any time after the +redemption of the Series B, C and C-1 Preferred Stock shares was made. The preferred stockholders were entitled to the redemption in three equal annual installments. +F-32 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +7. Redeemable convertible preferred stock (Continued) +Upon +issuance of the Series D Preferred Stock in March 2016, the redemption rights were adjusted. A majority vote of the Series D Preferred Stockholders could elect to +redeem all of the outstanding shares of Series D on or after March 18, 2019. Upon issuance of the Series D-1 Preferred Stock in June 2017 the redemption rights were adjusted. A +majority vote of the Series D and D-1 Preferred Stockholders, voting as separate classes, could elect to redeem all of the outstanding shares of Series D and D-1 Preferred Stock on or +after June 2, 2020. Holders of the Series C-1, C and B Preferred Stock could only redeem their shares following the redemption in full of all shares of Series D and D-1 Preferred +Stock and upon a Preferred Majority Vote. Holders of the Series A-1 and A-2 Preferred Stock could only redeem their shares following the redemption in full of the Series D-1, D, C-1, C +and B Preferred Stock, and upon a Preferred Majority Vote. Series A-3 Preferred Stock did not have redemption rights other than in certain deemed liquidation scenarios. +The +redemption value of the Series A-1, A-2, B, C and C-1 Preferred Stock was equal to the original issuance price of the preferred stock plus any accrued or declared but unpaid +cumulative dividends. The redemption price of the Series D and D-1 Preferred Stock was the greater of (i) the fair market value of the common stock which it was convertible into or +(ii) the original issuance price plus all declared but unpaid dividends, which were non-cumulative. As of December 31, 2016, the fair market value of the Company's common stock was less +than the original issuance price of the Series D Preferred Stock. +Preferred +stock was presented in mezzanine equity. The Series A-1, A-2, B, C, C-1, D and D-1 Preferred Stock were redeemable at the option of the holder at a fixed date and +therefore the Company was accreting the preferred stock to its redemption value through the earliest possible redemption date for all issuances where the carrying value is less than the redemption +value. The Series A-3 Preferred Stock was redeemable only upon certain deemed liquidation scenarios which were outside of the Company's control. The accretion included the accretion of issuance +costs and cumulative preferred stock dividends. Series A-3 Preferred Stock was not entitled to dividends. The Company assessed all terms and features of the preferred stock in order to identify +any potential embedded features that would require bifurcation or any beneficial conversion features. As part of this analysis, the Company assessed the economic characteristics and risks of its +preferred stock, including conversion and liquidation features, as well as dividend and voting rights. The Company determined that all features of the preferred stock were clearly and closely +associated with an equity host, and although the preferred stock included conversion features, such conversion features did not require bifurcation as a derivative liability. On the date of issuance, +the fair value of common stock into which the Series A-1, A-2, A-3, B, C, C-1, D and D-1 Preferred Stock was convertible was less than the effective conversion price of the Series A-1, +A-2, A-3, B, C, C-1, D and D-1 Preferred Stock and as such, there was no intrinsic value of the conversion option at the commitment date. +Upon +completion of the IPO on December 7, 2017 all outstanding shares of Preferred Stock were automatically converted into shares of common stock on a 3.214-for-one basis, +resulting in the issuance +F-33 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +7. Redeemable convertible preferred stock (Continued) +of +14,185,744 shares of common stock. Details of the shares of Preferred Stock converted to common stock upon the completion of the IPO by class of Preferred Stock is as follows: +Preferred Stock +Shares of +Preferred +Stock +A-1 +3,972,415 +A-2 +10,427,586 +A-3 +2,000,000 +B +6,021,636 +C +8,092,895 +C-1 +544,332 +D +12,420,262 +D-1 +2,113,902 +Total +45,593,028 +Pursuant +to the amended and restated certificate of incorporation filed in connection with the IPO in December 2017, the Company authorized 5,000,000 shares of preferred stock. The +amended and restated certificate of incorporation authorized our board of directors, without any further stockholder action or approval, to issue these shares in one or more classes or series, to +establish from time to time the number of shares to be included in each class or series and to fix the rights, preferences and privileges of the shares of each wholly unissued class or series and any +of its qualifications, limitations or restrictions. There was no preferred stock issued or outstanding as of December 31, 2017. +The +Company has a class of authorized preferred stock amounting to 5,000,000 shares as of December 31, 2018 and December 31, 2017. The authorized preferred stock was +classified under stockholders' equity at December 31, 2018 and December 31, 2017. +Prior +to the IPO in December 2017, the Company had multiple classes of preferred stock outstanding. These shares of preferred stock were converted to shares of common stock at the time +of the IPO on 1-for-3.214 shares basis. The reconciliation of net loss attributable to common shareholders in the consolidated statement of operations for the year ended December 31, 2017 +includes an adjustment for accretion of preferred stock to redemption value. +8. Common Stock, warrants, stock-based compensation, stock options, restricted stock and restricted stock units +Common stock reserved +The +Company reserved the following shares of common stock, on a common stock equivalent basis, for the conversion of shares of preferred stock, the exercise of warrants, the exercise of +common stock options, and the vesting of restricted common stock. +Year ended December 31, +2018 +2017 +Common stock warrants +76,041 +86,090 +Common stock options and unvested restricted common stock +2,838,402 +2,427,035 +Shares reserved for future awards under compensation plan +2,433,999 +3,500,620 +5,348,442 +6,013,745 +F-34 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +8. Common Stock, warrants, stock-based compensation, stock options, restricted stock and restricted stock units (Continued) +Warrants +The +following tables summarize the Company's outstanding warrants as of December 31, 2018, and 2017: +Issued and +exercisable +Weighted +Average +Exercise +Price +As of December 31, 2017 +86,090 +$ +9.14 +Issued +10,000 +4.83 +Exercised +(16,718 +) +11.73 +Cancelled +(3,331 +) +$ +11.73 +As of December 31, 2018 +76,041 +10.10 +The +Company has an agreement with a vendor (Note 7) where the Company could be obligated to issue warrants to purchase an additional 93,341 shares of common stock to the vendor if +the contract is terminated prior to a minimum purchase commitment being met. No shares have been reserved related to these potential obligations to issue warrants in the future. On Janury 30, +2018, the company issued a warrant to purchase 10,000 of common stock to a consultation company for services rendered. +Stock-based compensation +Share-based compensation expense for all stock awards consists of the following (in thousands): +Year ended +December 31, +2018 +2017 +2016 +Cost of product revenue +$ +55 +$ +24 +$ +6 +Cost of service and other revenue +173 +52 +12 +Research and development +513 +180 +59 +General and administrative +4,143 +1,912 +851 +Total +$ +4,884 +$ +2,168 +$ +928 +In +June 2007, the Company adopted the 2007 Stock Option and Grant Plan (the 2007 Plan), under which it could grant incentive stock options, non-qualified options, restricted stock, and +stock grants. At December 31, 2016, the 2007 Plan allowed for the issuance of up to 3,229,935 shares of common stock. During the three months ended March 31, 2017, the 2007 Plan was +amended to allow for the issuance of an additional 622,227 shares of common stock for a total issuance of up to 3,852,213 shares of common stock at June 30, 2017. During the three months ended +September 30, 2017 the 2007 Plan was further amended to allow for the issuance of an additional 497,822 shares of common stock for total issuance of up to 4,350,035 shares of common stock at +September 30, 2017. As of December 31, 2017, under the 2007 Plan, options to purchase 2,249,843 shares of our common stock were outstanding, 571,838 shares of our common stock had been +issued and were outstanding pursuant to the exercise of options, 1,128,975 shares of our common stock had been issued and were outstanding pursuant to +F-35 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +8. Common Stock, warrants, stock-based compensation, stock options, restricted stock and restricted stock units (Continued) +restricted +or unrestricted stock awards, and 399,379 shares of our common stock were available for future awards. In connection with the completion of the IPO, the Company terminated the 2007 Plan. +In +December 2017, the Company adopted the 2017 Employee, Director and Consultant Equity Incentive Plan (the 2017 Plan), under which it may grant incentive stock options, non-qualified +stock options, restricted stock, and other stock-based awards. As of December 31, 2017, the 2017 Plan allowed for the issuance of up to 1,042,314 shares of common stock plus up to 2,490,290 +shares of our common stock represented by awards granted under the 2007 Plan that are forfeited, expire or are cancelled without delivery of shares or which result in the forfeiture of shares of +common stock back to the Company on or after the date the 2017 Plan becomes effective. As of December 31, 2018 and 2017, there were shares available for grant under the 2017 Plan of 4,393 and +1,042,314, respectively. +In +addition, the 2017 Plan contains an "evergreen" provision, which allows for an annual increase in the number of shares of common stock available for issuance under the 2017 Plan on +the first day of each fiscal year during the period beginning in fiscal year 2019 and ending in fiscal year 2027. The annual increase in the number of shares shall be equal to the lowest of: 4% of the +number of shares of common stock outstanding as of such date; and an amount determined by the Company's Board of directors or Compensation Committee. On January 1, 2019, the number of shares of +common stock available for issuance under the 2017 plan was automatically increased by 895,169 shares. +In +December 2017, the Company adopted the 2017 Employee Stock Purchase Plan (the 2017 ESPP). As December 31, 2017, the 2017 ESPP allowed for the issuance of up to 208,463 shares +of common stock. As of December 31, 2018, 425,533 shares were available for grant under the 2017 ESPP. +In +addition, the 2017 ESPP contains an "evergreen" provision, which allows for an increase on the first day of each fiscal year beginning with fiscal year 2018. The increase in the +number of shares shall be equal to the lowest of: 1% of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or an amount determined by the +Company's Board of Directors or Compensation Committee. +The +2017 ESPP provides for six-month option periods Commencing on March 1 and ending August 31 and Commencing September 1 and ending February 28 of each +calendar year. The first offering under the 2017 ESPP began on September 1, 2018. +Stock options +Under the 2007 and 2017 Plans, stock options may not be granted with exercise prices of less than fair market value on the date of the grant. +Options generally vest ratably over a four-year period with 25% vesting on the first anniversary and the remaining 75% vesting ratably on a monthly basis over the +F-36 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +8. Common Stock, warrants, stock-based compensation, stock options, restricted stock and restricted stock units (Continued) +remaining +three years. These options expire ten years after the grant date. Activity under the 2007 and the 2017 Plans was as follows: +Options +Weighted- +average +exercise +price +Remaining +contractual +life +(in years) +Aggregate +intrinsic +value +(in thousands) +Outstanding at December 31, 2016 +1,119,671 +$ +2.99 +6.8 +5,796 +Granted +1,281,135 +$ +8.46 +Exercised +(90,265 +) +$ +2.25 +Cancelled or forfeited +(60,698 +) +$ +6.16 +Outstanding at December 31, 2017 +2,249,843 +$ +6.05 +7.8 +34,695 +Granted +729,224 +$ +18.36 +Exercised +(407,901 +) +$ +4.57 +Cancelled or forfeited +(94,255 +) +$ +13.16 +Outstanding at December 31, 2018 +2,476,911 +$ +9.65 +7.733 +$ +22,108 +Vested and expected to vest at December 31, 2018 +2,476,911 +$ +9.65 +7.733 +$ +22,108 +Exercisable at December 31, 2018 +1,143,480 +$ +5.68 +6.514 +$ +14,440 +Using +the Black-Scholes option pricing model, the weighted-average fair value of options granted to employees and directors during the years ended December 31, 2018, 2017, and +2016 was $ 7.19, $4.52, and $2.41 per share, respectively. The expense related to awards granted to employees was $2.7 million, $1.5 million, and $0.2 million for the years ended +December 31, 2018, 2017, and 2016. The intrinsic value of stock options exercised was $5.3 million, $1.1 million, and $0.4 million, for the years ended December 31, +2018, 2017, and 2016, respectively. Activity related to non-employee awards was not material to the years ended December 31, 2018, 2017, and 2016. +At +December 31, 2018, there was $6.8 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the +remaining weighted-average vesting period of 2.23 years. +Restricted Stock Awards +In December 2014, the Company issued 78,912 shares of restricted common stock to a director of the Company under the 2007 Plan. Under the terms +of the agreement, shares of common stock issued are subject to a four year vesting schedule. Vesting occurs periodically at specified time intervals and specified percentages. In January 2015, the +Company issued 781,060 shares of restricted common stock to an executive of the Company under the 2007 Plan. The majority of these shares were issued subject to a four year vesting schedule with 25% +vesting on the first anniversary and the remaining vesting 75% ratably on a monthly basis over the remaining three years, while another portion was issued subject to performance based vesting. The +vesting of performance based awards is dependent upon achievement of specified financial targets of the Company. The majority of the performance criteria were achieved during the years ended +December 31, 2016 and 2015 and the remaining unvested awards with +F-37 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +8. Common Stock, warrants, stock-based compensation, stock options, restricted stock and restricted stock units (Continued) +performance +conditions are not material. No restricted stock awards were granted during the years ended December 31, 2018 or 2017. A summary of restricted stock activity is as follows: +Shares +Weighted-average +grant date +fair value +per share +Unvested restricted common stock as of December 31, 2015 +623,869 +3.12 +Vested +(247,621 +) +3.09 +Unvested restricted common stock as of December 31, 2016 +376,248 +3.12 +Vested +(199,056 +) +3.12 +Unvested restricted common stock as of December 31, 2017 +177,192 +3.11 +Vested +(137,386 +) +3.11 +Unvested restricted common stock as of December 31, 2018 +39,806 +3.12 +The +expense related to awards granted to employees and directors was $0.4 million, $0.6 million, and $0.7 million for the years ended December 31, 2018, 2017, +and 2016, respectively. +At +December 31, 2018, there was $0 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over the +remaining weighted-average vesting period of 0 years. +The +aggregate fair value of restricted stock awards that vested during the years ended December 31, 2018, 2017, and 2016, based on estimated fair values of the stock underlying +the restricted stock awards on the day of vesting, was $2.4 million, $1.9 million and $1.1 million, respectively. +Restricted stock units +Restricted stock units represent the right to receive shares of common stock upon meeting specified vesting requirements. In the fiscal year +ended December 31, 2018, the Company issued 422,027 restricted stock units to employees of the Company under the 2017 Plan. Under the terms of the agreements, 84,637 of the restricted stock +units issued are subject to a four year vesting schedule with 25% vesting on the first anniversary and the remaining vesting 75% ratably on a monthly basis over the remaining three years, 18,200 of +the restricted stock units issued are subject to vesting with 50% vesting on December 31, 2018 and 50% vesting on December 31, 2019, 3,300 of the restricted stock units are subject to a +four year vesting schedule with 25% vesting on each anniversary, 15,890 of the restricted stock units vest on December 31, 2018, 50,000 of the restricted stock units vested on +F-38 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +8. Common Stock, warrants, stock-based compensation, stock options, restricted stock and restricted stock units (Continued) +August 31, +2018, and 250,000 of the restricted stock units vest evenly over 40 months on the last day of each month starting September 30, 2018. A summary of restricted stock unit +activity is as follows: +Shares +Weighted-average +grant date +fair value +per share +Unvested restricted stock units as of December 31, 2017 +— +Granted +422,027 +$ +15.65 +Vested +(99,990 +) +$ +15.02 +Cancelled or Forfeited +(375 +) +$ +18.40 +Unvested restricted stock units as of December 31, 2018 +321,662 +$ +15.84 +The +expense related to awards granted to employees and directors was $1.7 the fiscal year ended December 31, 2018. +At +December 31, 2018, there was $4.9 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over the +remaining weighted-average vesting period of 0.6 years. +9. Commitments and contingencies +License agreements +Tufts University +In June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University +(Tufts). Tufts is a related party to the Company due to Tuft's equity ownership in the Company and because a board member of the Company's Board of Directors was affiliated with Tufts. The License +Agreement, which was subsequently amended, is exclusive and sub licensable, and will continue in effect on a country by country basis as long as there is a valid claim of a licensed patent in a +country. The Company is committed to pay license and maintenance fees, prior to commercialization, in addition to low single digit royalties on direct sales and services and a royalty on sublicense +income. During the year ended December 31, 2016, the Company executed a license agreement with a diagnostic company and also amended the bioMérieux agreement (Note 11). +During the years ended December 31, 2018, 2017 and 2016, the Company recorded royalty expense of $0.7 million, $0.5 million and $0.3 million, respectively, in cost of +product revenue on the consolidated statements of operations and comprehensive loss. +Other licenses +During the year ended December 31, 2012, the Company entered into a license agreement for certain intellectual property with a third +party. The non-exclusive, non-sublicenseable third party's license provides the Company access to certain patents specifically for protein detection, and shall be in effect until the expiration of the +last licensed patent. In consideration for these rights, the Company committed to certain license fees, milestone payments, minimum annual royalties and a mid-single digit royalty. The Company is +required to make mid-single digit royalty payments on net sales of products +F-39 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +9. Commitments and contingencies (Continued) +and +services which utilize the licensed technology. The Company must pay the greater of calculated royalties on net sales or an annual minimum royalty of $50 thousand. During the year ended +December 31, 2018, 2017 and 2016, the Company recorded royalty expense of $0.4 million, $0.2 million, and $0.2 million, respectively, in cost of product revenue on the +consolidated statements of operations. +Lease commitments +During the year ended December 31, 2014, the Company entered into a lease agreement for the Company's current corporate headquarters with +a lease term that expires in June 2020; however, in November 2018, the Company agreed to terminate the lease with the lessor effective May 2019. The termination of the lease was connected to the +Company signing a new lease in Billerica, MA. On October 2, 2018, the Company entered into a 137 month operating lease for the Company's new headquarters in Billerica, MA. The lease is +for approximately 92,000 square feet of office and laboratory space, and will commence on or about April 1, 2019. The lease contains a period of free rent and escalating monthly rent payments. +As part of the lease, the Company was required to enter into a $1.0 million Letter of Credit drawable by the lessor under specifically outlined conditions. The amount of the Letter of Credit +will be reduced at 41 and 65 months after the commencement date of the lease to $750,000 and then $250,000, respectively. The $1 million Letter of Credit is recorded as restricted cash +on the balance sheet. +In +connection with the acquisition of Aushon in January 2018, the Company assumed the existing Aushon lease for facilities in Billerica, Massachusetts. In August 2018 the Company +terminated the +Aushon lease effective September 1, 2019. The Company is required to pay a termination fee no later than July 1, 2019 in consideration for the early termination. +Rent +expense is recognized straight-line over the course of the lease term. As of December 31, 2018, $0.3 million of deferred rent expense was recorded in other non-current +liabilities, and less than $0.1 million was recorded in other accrued expenses. The table below includes committed lease expenditures related to the new lease. +As +of December 31, 2018, the minimum future rent payments under the lease agreements are as follows (in thousands): +Years ending December 31: +2019 +$ +1,172 +2020 +2,013 +2021 +3,290 +2022 +3,372 +2023 and Forward +29,207 +$ +39,054 +The +Company recorded $1.6 million, $1.1 million and $1.1 million in rent expense for the years ended December 31, 2018, 2017 and 2016, respectively. +F-40 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +9. Commitments and contingencies (Continued) +Development and supply agreement +Through the Company's development agreement with STRATEC Biomedical, as amended in December 2016, the parties agreed on additional development +services for an additional fee, which is payable when the additional development is completed. A total of $1.5 million is payable to STRATEC upon completion of the development activities. This +amount is being recorded to research and development expense and accrued expenses as the services are performed. The services were completed during the year ending December 31, 2018. +Substantive efforts related to these additional development activities started in the first quarter of 2017. +The +Company's supply agreement with STRATEC Biomedical requires the Company to purchase a minimum number of commercial units over a seven-year period ending in May 2021. If the Company +were to fail to purchase a required number of commercial units, the Company would be obligated to pay termination costs plus a fee based on the shortfall of commercial units purchased compared to the +required minimum amount. Based on the number of commercial instruments purchased as of December 31, 2018, assuming no additional commercial units were purchased, this fee would equal +$11.1 million. The amount the Company could be obligated to pay under the minimum purchase commitment is reduced as each commercial unit is purchased. Also, if the Company terminates the Supply +Agreement under certain circumstances and has not purchased a required number of commercial units, it would be obligated to issue warrants to purchase 93,341 shares of common stock (the Supply +Warrants) at $0.003214 per share. The Company believes that it will purchase sufficient units to meet the requirements of the minimum purchase commitment and, therefore, has not accrued for any of the +potential cash consideration. The Supply Warrants are accounted for at fair value; however, the fair value of the Supply Warrants as of December 31, 2018 and December 31, 2017 was +insignificant as there was a low probability of the warrants being issued. +Legal contingencies +The Company is subject to claims in the ordinary course of business; however, the Company is not currently a party to any pending or threatened +litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results of its operations. The Company accrues for contingent liabilities to the +extent that the liability is probable and estimable. +10. Long Term Debt +Loan agreement +On April 14, 2014, the Company executed a Loan Agreement with a lender, as subsequently amended in March 2015, January 2016, March 2017, +August 2018, and October 2018. As of December 31, 2018, there were no additional amounts available to borrow under the debt facility. The interest rate on this term loan is variable based on a +calculation of the prime rate less 5.25% with a minimum interest rate of 8%. Interest is paid monthly beginning the month following the borrowing date. At loan inception and in connection with the +amendments, the Company issued the lender warrants to purchase shares of stock. The Loan Agreement also contains prepayment penalties and an end of term charge. Fees incurred in execution of the +agreements, and the fair value of warrants on the date of grant were accounted for as a reduction in the book value of debt and accreted through interest expense, using the effective interest rate +method, over the term of the debt. +F-41 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +10. Long Term Debt (Continued) +In +connection with the Loan Agreement, the Company granted the lender warrants to purchase shares of either Series C Preferred Stock or shares of preferred stock in the next +financing round. Following the completion of the IPO, these warrants became exercisable for shares of the Company's common stock. Therefore, additional warrants will be issued if the Company draws on +any of the remaining debt facility. The warrants issued in connection with the initial borrowing were initially recorded at fair value of $0.1 million as a preferred stock warrant liability in +the accompanying consolidated balance sheets +and a corresponding debt discount was recorded. The Company has not further drawn on the remaining debt facility. +The +Company also incurred debt issuance costs of $0.1 million. As a result of the debt discounts recorded related to the warrants and the debt issuance costs, the debt was +initially recorded at less than its face value. The debt, including the end of term charge, is being accreted over the life of the loan using the effective interest method. +The +Loan Agreement also provided the lender with a right to invest up to $1.0 million or, subject to Company approval and consent, to convert up to $1.0 million of +outstanding principal into shares of preferred stock in the next financing round at the same price as all other investors. The lender invested $1.0 million in March 2016 as part of the +Series D Preferred Stock financing. +Amendment 1 to loan agreement +On March 4, 2015, the Company executed Amendment 1 to the Loan Agreement (Amendment 1) and borrowed the remaining +$5.0 million that was available under the loan facility. The terms of Amendment 1 allowed the Company to defer the commencement of principal payments to December 1, 2015 and extended the +loan maturity date to February 1, 2018. If the Company obtained at least $10.0 million in equity financing before December 1, 2015, the commencement of principal payments could be +further deferred until March 1, 2016 and the loan maturity date could be extended to May 1, 2018. As the financing milestone was not achieved, the Company made the first principal +payment of $0.3 million on December 1, 2015 and the loan maturity date was February 1, 2018 under Amendment 1. +The +additional $5.0 million borrowed included an additional $0.2 million end of term charge. The end of term charge on this borrowing is being accreted over the life of the +loan as additional interest expense. The additional borrowing also resulted in the issuance of additional warrants with a grant date fair value of $0.1 million. The fair value of the additional +warrants were initially recorded at fair value as a preferred stock warrant liability in the accompanying consolidated balance sheets and a corresponding debt discount was recorded. The debt, +including the end of term charge, is being accreted over the remaining life of the loan using the effective interest method. +Amendment 2 to loan agreement +In January 2016, the Company executed Amendment 2 to the Loan Agreement (Amendment 2). Amendment 2 increased the total facility available by +$5.0 million to a total of $15.0 million and further delayed the commencement of principal payments to July 1, 2016. Under Amendment 2, following the Series D Preferred +Stock financing (Note 8), the Company could have elected to further delay the commencement of principal payments until January 1, 2017, however the Company voluntarily began paying +principal on July 1, 2016. Upon signing Amendment 2, the Company drew an additional $3.0 million under the debt facility. The remaining $2.0 million available under the facility +F-42 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +10. Long Term Debt (Continued) +expired +unexercised in April 2016, which reduced the amounts available under the facility to $13.0 million. +The +additional $3.0 million borrowed included an additional $0.1 million end of term charge. The end of term charge on this borrowing is being accreted over the life of the +loan. The additional borrowing also resulted in the issuance of additional warrants with a grant date fair value of $0.1 million. The fair value of the additional warrants were initially +recorded at fair value as a preferred stock warrant liability in the accompanying consolidated balance sheets and a corresponding debt discount was recorded. The debt, including the end of term +charge, is being accreted to over the remaining life of the loan using the effective interest method. +Amendment 3 to loan agreement +In March 2017, the Company signed Amendment 3 to the Loan Agreement (Amendment 3). Amendment 3 increased the total facility available by +$5.0 million to a total of $18.0 million. Additionally, the lender may provide an additional optional term loan, solely at the lender's discretion, for an incremental +$5.0 million, increasing the total potential facility to $23.0 million. As of December 31, 2017, the Company has not drawn any of this additional facility. The terms of Amendment +3 allowed the Company to defer the commencement of principal payments to March 1, 2018 and extended the loan maturity date to March 1, 2019. Amendment 3 did not change the due date of +the existing end of term fees of $0.05 million which remained due on February 1, 2018. Upon signing +Amendment 3, the Company did not draw any of the additional amounts available under the amended debt facility and no amounts have been subsequently drawn under the facility. The Company has until +September 3, 2018 to draw the additional amounts. +Amendment 4 to loan agreement +In July 2017, the Company signed Amendment 4 to the Loan Agreement (Amendment 4). Amendment 4 instituted a cap of 10% with respects to the "Term +Loan Interest Rate". +Amendment 5 to loan agreement +In August 2018, the Company signed Amendment 5 to the Loan Agreement (Amendment 5). Amendment 5 instituted a 2018 End of Term Charge of +$0.08 million. Additionally, the Term Loan Maturity Date was amended to be extended until March 1, 2020. Amendment 5 additionally, changed the due date of the End of Term Charge to, the +earlier of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding Secured Obligations or (iii) the date that the Secured Obligations become due and +payable. The Company incurred a cost of $0.05 million in relation to the execution of Amendment 5. In connection with the extension of the due date of the Loan, the deferral of principal +payments (Amendment 3) was further deferred until the new Term Loan Maturity Date. +Amendment 6 to loan agreement +In October 2018, we signed Amendment 6 to the Loan agreement, which amends the Loan Agreement's collateral clause to exclude the +$1 million certificate of deposit associated with the lease on our new headquarters in Billerica, MA. +F-43 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +10. Long Term Debt (Continued) +End +of term charges related to the facility of $0.5 million, and principal payments of $1.4 million were paid during the fiscal year ended December 31, 2018. Under +the terms of the August 2018 amended agreement, principal payments were delayed until March 2020. The Company accounted for the August 2018 amendment as a modification as it was determined that no +material change occurred as a result of the modification. The Company voluntarily made principal payments in the months of March, April, and May, 2018. No principal payments were made in June, July or +August, 2018. Under the amended Loan Agreement, the remaining outstanding principal will be paid upon maturity of the note in March 2020. As of December 31, 2018, the remaining loan balance is +classified as a long term liability since all principal payments are due greater than twelve months after the balance sheet date. +Debt +payment obligations due based on principal payments are as follows (in thousands): +Years ending December 31: +2019 +$ +0 +2020 +7,763 +$ +7,763 +The +balance sheet contains $0.1 million of unamortized debt issuance costs which nets the Long Term Debt balance to $7.6 million. Non-cash interest expense related to debt discount +amortization and accretion of end of term fees was $0.2 million, $ 0.2 million, and $0.4 million for the year ended December 31, 2018, 2017, and 2016, respectively. +The +Company assessed all terms and features of the Loan Agreement and the subsequent amendments in order to identify any potential embedded features that would require bifurcation. As +part of this analysis, the Company assessed the economic characteristics and risks of the debt. The Company determined that all features of the Loan Agreement and the subsequent amendments are either +clearly and closely associated with a debt host or have a de minimis fair value and, as such, do not require separate accounting as a derivative liability. The Company assessed each amendment under +ASC 470-50 and concluded that all of the amendments constituted modifications. In this analysis, consideration was given to the fact that Amendments 4, 5, and 6 were executed within one year of +each other. The Company also assessed whether the amendments represented a troubled debt restructuring and concluded they did not. The Company accounted for each of the amendments to the Loan +Agreement as a modification of its debt and the unamortized discount and issuance costs related to the prior debt are amortized over the modified term of the new debt. +The +Loan Agreement and the subsequent amendments contain negative covenants restricting the Company's activities, including limitations on dispositions, mergers or acquisitions, +incurring indebtedness or liens, paying dividends or making investments and certain other business transactions. There are no financial covenants associated with the Loan Agreement and the subsequent +amendments. The obligations under the Loan Agreement and subsequent amendments are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in +the Company's business, operations or financial or other condition. The Company has determined that the risk of subjective acceleration under the material adverse events clause is not probable and +therefore has classified the outstanding principal in current and long-term liabilities based on scheduled principal payments. +F-44 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +11. Collaboration and license arrangements +In November 2012, the Company entered into the JDLA with bioMérieux, a related party. As discussed below, the JDLA has been subsequently amended. Under the terms the JDLA, +the Company granted bioMérieux an exclusive, royalty-bearing license, without right to sublicense, to manufacture and sell instruments and assays using our Simoa technology exclusively +for in vitro diagnoses used in clinical lab applications, food quality control testing, and pharma quality control testing, and co-exclusively in certain related fields, as defined in the contract. As +part of the JDLA, the Company was also to develop and manufacture instruments to bioMérieux's specifications for bioMérieux's use or for sale by +bioMérieux. The Company retained rights to sell the instrument in the co-exclusive fields and any other fields not licensed exclusively to bioMérieux. +bioMérieux was to develop and sell diagnostic assays to be used in conjunction with the Company's instruments. +Upon +execution of the JDLA, the Company received $10.0 million in consideration and was entitled to receive two additional payments of $5.0 million each upon the +achievement of certain developmental criteria. Neither of these criteria have been achieved. The Company was also entitled to receive royalty payments on the sale of assays and payments for the +manufacture and delivery of instruments based on a contractual rate subject to future adjustments. +At +the inception of the JDLA, the Company determined that the deliverables were as follows: (1) licenses to the Company's technology and trademarks, training, completion and +delivery of a prototype instrument per contractual specifications (License and Prototype), (2) various activities to assist bioMérieux in the development of the initial assay and +an instrument that is IVD compliant (Initial Assay Assistance), (3) various activities to assist bioMérieux in the development of a benchtop instrument (Benchtop Assistance), and +(4) joint steering committee participation (JSC). Each of these +deliverables were considered separate units of accounting, and the License and Prototype unit of accounting was determined to have standalone value as the License and Prototype unit of accounting +could be utilized by bioMérieux without the related services included in the other units of accounting. +The +Company allocated the allocable arrangement consideration based on the relative selling price of each unit of accounting. For all units of accounting, the Company determined the +selling price using the best estimate of selling price (BESP). Management's best estimate of the selling price of the License and Prototype unit of accounting was based on a discounted cash flow +analysis to support the estimated selling price of the license. The Company determined the BESP of the other units of accounting based on internal estimates of the costs to perform the services, +adjusted to reflect a reasonable profit margin as well as based on market prices for similar instruments and services. +Revenue +related to the License and Prototype unit of accounting of $8.3 million was recognized in 2013 upon delivery of both the license which was delivered at inception, and the +first prototype instrument, which was required for bioMérieux to make use of the license. Prior to the effect of the 2016 Amendment described below, revenue for the other units of +accounting were recognized over an estimated period of performance. +Amendments to the JDLA +In May 2014 and January 2015, the parties executed a First and Second Amendment to the JLDA, respectively. These amendments addressed revised +timelines related to completing the development activities under the JDLA and enacted additional governance protocols to monitor those activities. +F-45 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +11. Collaboration and license arrangements (Continued) +These +amendments did not change the deliverables under the JDLA or the total arrangement consideration. The Company revised its estimates of the remaining period of performance for the +remaining undelivered units of accounting and these revisions did not have a material effect on revenue recognition. +On +December 22, 2016, the Company entered into the 2016 Amendment which ended the ongoing joint development efforts between the parties, and modified the rights and obligations of +both parties accordingly, as follows: +• For a period of not more than three years from the date of the 2016 Amendment bioMérieux has the ability to evaluate +independently whether it will develop a new, smaller in vitro diagnostic instrument using the Simoa technology for use in clinical lab applications, food quality control testing, and pharmaceutical +quality control testing benchtop (the "Feasibility Period") and has the sole right to determine whether or not to develop such a new instrument during the Feasibility Period. If +bioMérieux does elect to pursue development of such a new instrument, they will have a set number of years to complete development within a specified period, which contains various +development milestones which must be accomplished. +• bioMérieux received a license to the source and object code of the Company's Level 1 Data Reduction (L1DR) software. The +L1DR software the Company's proprietary image processing algorithms that convert images of microscopic beads associated with biomarker molecules in microwells. Also, the Company must provide to +bioMérieux access to any know how and intellectual property associated with the L1DR software, including any updates and upgrades to the L1DR software during the Feasibility Period. If +bioMéreiux exercises its right to develop an instrument independently, this right will continue throughout the development period to the end of the term of the agreement related to +independently developed instruments. +• It was clarified that the Company can engage a collaboration partner (IVD Partner), subject to restrictions as to the particular parties with +which the Company could elect to partner and the assays that can be developed, in the field of in vitro diagnostics used in Clinical Lab Applications. The Company shall pay bioMérieux a +mid-double-digit percentage of royalties received from the IVD Partner based on assays sales by the IVD Partner. +• bioMérieux's licenses include all patents and know-how owned or controlled by the Company related to the Company's Simoa +technology and upgrades thereto that are necessary for the development, manufacture, use or sale of instruments and assays or consumables on such instruments over the Feasibility Period. If +bioMérieux exercises its right to develop an instrument independently, this right will continue throughout the development period to the end of the term of the 2016 Amendment related to +independently developed instruments. +• bioMérieux retains an option (the Option) to obtain worldwide distribution rights to the HD-1 floor standing instrument in the +applicable fields. The Option is exercisable over a three year period and upon exercise, the Company and bioMérieux are required to negotiate, in good faith, a distribution agreement +that would include a specified upfront payment. +The +2016 Amendment included a cash payment of $2.0 million from bioMérieux which was paid in January 2017. +F-46 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +11. Collaboration and license arrangements (Continued) +On +September 6, 2018, bioMérieux notified the Company that it was terminating the Amended JDLA, forfeiting any future IVD licensing rights to the Company's Simoa +technology and enabling the Company to consolidate and regain control of all Simoa IVD licensing and IP rights. +Accounting assessment +Prior to the execution of the 2016 Amendment, the Company was recognizing revenue over the estimated period of performance of the ongoing units +of accounting (Initial Assay Assistance, Benchtop Assistance, and JSC). As a result, the Company recognized $0.2 million and $0.2 million in revenue for the years ended +December 31, 2015 and 2016, respectively. At the date of the execution of the 2016 Amendment, the Company had $1.2 million in deferred revenue related to the JDLA. Upon the execution of +the 2016 Amendment, all undelivered elements and contingent consideration of the JDLA were cancelled. The Company determined the 2016 Amendment should be accounted for as a modification to the JDLA +and the balance of deferred revenue prior to the 2016 Amendment should be included as allocable consideration under the 2016 Amendment resulting in total allocable consideration of +$3.2 million. The Company recorded an increase to deferred revenue upon receipt of the $2.0 million during the three months ended March 31, 2017. +The +Company has determined that the deliverables included under the 2016 Amendment are rights to the L1DR software, training and rights to future technology improvements for L1DR +Software, rights to all future technological improvements related to the Simoa technology, and participation on joint committees. +The +Company determined that the L1DR and rights to unspecified technology improvements (the "L1DR Unit of Accounting") includes the sale of software and software related elements and +therefore should be accounted for under ASC 985-605 —Software Revenue Recognition . The Company cannot demonstrate Vendor Specific Objective +Evidence (VSOE) of fair value for the ongoing obligation to provide unspecified technology improvements. Therefore, the deliverables in the L1DR Unit of Accounting cannot be separated. The Company has +applied the combined service approach and the consideration allocated to this unit of accounting is being recognized ratably over the estimated period of performance, which has initially been +determined to be estimated to be the three year Feasibility Period. This will be reevaluated each period to determine if there are any changes to the estimated period of performance. +The +Company concluded that the rights to future technology improvements for the Simoa technology and the participation on joint committees represented a second unit of accounting (the +"Instrument Know How Unit of Accounting"). The deliverables in the Instrument Know How Unit of Accounting are considered non-software deliverables that are subject to ASC 605-25 and will be delivered +over time on a when and if available basis. Revenue is being recognized on a straight line basis over the estimated period of performance, which has initially been determined to be the three year +Feasibility Period. This period will be reevaluated each period to determine if there are any changes to the period of performance. +The +Option is considered substantive as the Company is at risk with regard to whether bioMérieux will exercise the Option. In addition, the Option exercise payment payable +by bioMérieux upon exercise is not priced at a significant and incremental discount. Accordingly, the Option is not considered a deliverable at the inception of the arrangement and the +associated Option exercise payment is not included in allocable arrangement consideration. +F-47 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +11. Collaboration and license arrangements (Continued) +Under +the 2016 Agreement the Company is eligible to receive royalties on net sales of assays sold by bioMérieux in the mid to high single digits, and to receive low double +digit royalties on sales of instruments by bioMérieux based on manufactured cost. No royalties have been recognized through December 31, 2018. +Upon +termination of the agreement, the Company no longer held an obligation to bioMérieux related to the initial agreement or the amendment to the agreement. As such, the +Company immediately recognized all remaining deferred revenue related to the agreements as of the date of termination. +The +Company recognized revenue of $2.1 million and $1.1 million for the years ended December 31, 2018 and 2017, respectively, as collaboration revenue. +Evaluation and option agreements and license agreement +In 2015, the Company entered into three agreements, for three separate fields, with a diagnostic company for the evaluation of the Company's +Simoa technology. These agreements each allowed for the option to negotiate a license agreement. In return, the Company received non-refundable payments totaling $2.0 million. In December 2016, +the diagnostic company exercised one of its options and the parties entered into a license agreement in one of the fields. This agreement has a one-time non-refundable license fee of +$1.0 million and the right to receive running low single digit royalties on licensed products. The negotiation periods for the other two agreements were extended and the negotiations remain +ongoing. +For +each of the three fields, the right to evaluate the technology, the right to negotiate a license to the technology, and the undelivered license to the technology represents a +combined unit of accounting, and the licenses to each of the three fields each have standalone value. The Company has allocated the allocable arrangement consideration based on the relative selling +price of each unit of accounting. The BESP of each of the three options was determined to be representative of the contractual amount paid for each option. The Company defers the amounts allocated to +each of the three options until the corresponding license is delivered or, if no license agreement is executed and delivered, when the negotiations for each option terminates. +Upon +execution of the license in one of the fields in December 2016, the $1.0 million license fee, in addition to the $0.8 million allocated to the option for this field, +resulted in a total of $1.8 million of consideration being recognized as revenue as there were no remaining undelivered performance obligations. Because the negotiations remain ongoing with +respect to the other two fields, the consideration allocated to these options of $1.2 million has been deferred and is recorded as deferred revenue as of December 31, 2017. +In +December 2018 the Company entered into an option agreement for the rights to negotiate an exclusive agreement with the diagnostic company. In exchange for the rights to negotiate an +exclusive agreement, the Company will receive $0.5 million in consideration. As the right to negotiate with the Company has not been executed, the consideration from this agreement is deferred +until the sooner of the execution of the contract or the end of the option period. +12. Employee benefit-plans +The Company sponsors a 401(k) savings plan for our employees The Company may make discretionary contributions for each 401(k) plan year. During the year ended December 31, 2018 +the Company made contributions of $0.1 million and during the year ended December 31, 2017 and 2016 did not make any contribution. +F-48 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +13. Business combinations +On January 30, 2018, the Company completed the acquisition of Aushon pursuant to an Agreement and Plan of Merger dated January 30, 2018 (the "Aushon Acquisition"). The +Company acquired Aushon to complement its existing product line, improve its existing research and development capabilities in assay development and software engineering, and expand its customer base. +The Aushon Acquisition has been accounted for as a business combination and the Company has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition +date. +In +connection with the closing of the Aushon Acquisition, the Company paid $3.2 million at closing, and an additional $0.8 million in July 2018, the six-month anniversary +of the acquisition date. +The +following table presents the allocation of the purchase consideration for the transaction as of January 30, 2018 including the allocation of the purchase consideration (in +thousands): +Fair value of consideration transferred: +Cash +$ +3,200 +Obligation to issue cash +800 +Total acquisition consideration +$ +4,000 +Fair value of assets acquired and liabilities assumed: +Cash and cash equivalents +$ +199 +Accounts receivable +210 +Inventory +828 +Prepaid expenses +71 +Property and equipment and other non-current assets +180 +Intangible Assets +2,950 +Goodwill +1,308 +Total assets acquired +5,746 +Contractual obligations +(1,155 +) +Accounts payable and accrued liabilities +(591 +) +Net assets acquired +$ +4,000 +The +intangible assets identified in the purchase price allocation discussed above include developed technology, tradenames and customer relationships. Tradenames are amortized over the +useful life on a +straight-line basis, while developed technology and customer relationships are amortized over their respective useful lives on an accelerated basis reflecting the period of expected derived benefits +of the underlying assets. Developed technology consists of products that have reached technological feasibility and trade names represent acquired company and product names. To value the developed +technology and trade name assets, the Company utilized a relief from royalty method. Under the methodology, fair value is calculated as the discounted cash flow savings accruing to the owner for not +having to pay the royalty. Key assumptions included expected revenue attributable to the assets, royalty rates, discount rate and estimated asset lives. Customer relationships represent the underlying +relationships with certain customers to provide ongoing services and continued product sale opportunities. The Company utilized excess earnings methodology to derive the fair value of the customer +relationships. Key assumptions included expected attrition of customer's rates, operating income margins and discount +F-49 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +13. Business combinations (Continued) +rate. +The Company used a risk-adjusted discount rate of 14.4% in determining the fair value of the intangible assets. +The +goodwill recorded as a result of the Aushon Acquisition represents the strategic benefits of growing the Company's product portfolio and the expected revenue growth from increased +market penetration from future products and customers. The goodwill was recorded as an asset (Note 14). None of the goodwill recorded is tax deductible for income tax purposes. +The +Company incurred a total of $0.1 million in transaction costs in connection with the transaction, which were included in selling, general and administrative expense within the +consolidated statement of operations for the twelve months ended December 31, 2018. +14. Goodwill and Intangible Assets +As of December 31, 2018 the carrying amount of goodwill was $1.3 million. The following is a rollforward of our goodwill balance (in thousands): +Goodwill +Balance as of December 31, 2017 +$ +— +Goodwill acquired +1,308 +Balance as of December 31, 2018 +$ +1,308 +Intangible +assets consist of the following (dollars in thousands): +December 31, 2018 +Estimated Useful +Life (in years) +Gross +Carrying +Value +Accumulated +Amortization +Net +Carrying +Value +Weighted +average life +remaining +Developed technology +7 +$ +1,650 +$ +(378 +) +$ +1,272 +6.08 +Customer relationships +10 +1,250 +(208 +) +1,042 +9.08 +Tradenames +3 +50 +(15 +) +35 +2.08 +Total +$ +2,950 +$ +(601 +) +$ +2,348 +The +Company recorded amortization expense of $0.6 million for the fiscal year ended December 31, 2018. No amortization expense was recognized in the fiscal year ended +December 31, 2017 and 2016 as the intangible assets are a result of the purchase of Aushon BioSystems in January 2018. Amortization relating to developed technology is recorded within research +and development expense, amortization of customer relationships is recorded within sales and marketing expenses, and amortization of tradenames is recorded within general and administrative expenses. +F-50 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +14. Goodwill and Intangible Assets (Continued) +As +of December 31, 2018, the Company expects to record the following amortization expense (amounts in thousands): +For the Years Ended December 31, +Estimated +Amortization +Expense +2019 +$ +582 +2020 +500 +2021 +403 +2022 +320 +2023 +238 +2024 and thereafter +305 +15. Related party transactions +As described in Notes 11 and 7, bioMérieux is a customer through its Joint Development and License Agreement and also a holder of the Company's common stock. +bioMérieux formerly also had a designee on the Company's Board of Directors. They Company recognized revenue related to the JDLA with bioMérieux of $2.1 million, +$1.1 million, and $0.2 million, in the years ended December 31, 2018, 2017, and 2016 respectively, from bioMérieux. They also had no deferred revenue as of +December 31, 2018 and had deferred revenue of $2.1 million at December 31, 2017. As described in Note 8, bioMérieux purchased shares of our Series C +Preferred Stock totaling $7.0 million in the year ended December 31, 2015. +As +described in Note 7, in March 2016, the Company issued an aggregate of 12,420,262 shares of Series D Preferred Stock for an aggregate purchase price of +$45.6 million. Of the amount issued, $22.9 million was purchased by the Company's existing principal stockholders, officers and directors. +As +described in Note 7, in June 2017, the Company issued an aggregate of 2,113,902 share of Series D-1 Preferred Stock for an aggregate purchase price of +$8.5 million. Of the amount issued, $1.0 million was purchased by a director of the Company. +As +described in Note 9, in June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University (Tufts). Tufts +is a related party to the Company due to Tuft's equity ownership in the Company and because a board member of the Company's Board of Directors was affiliated with Tufts. During the years ended +December 31, 2018, 2017, and 2016 the Company recorded royalty expense of $0.7 million, $0.5 million, and $0.3 million, respectively, in cost of product revenue on the +consolidated statements of operations and comprehensive loss. During the year ended December 31, 2016, the Company recognized $0.4 million as cost of license revenue associated with a +payment made to Tufts. +During +the year ended December 31, 2017 Harvard University became a related party. Revenue recorded from sales to Harvard University were less than $0.1 million for each of +the years ended December 31, 2018 and December 31, 2017. +On +November 28 th , the Company entered into a sponsor agreement with PPH, a 501(c)6 not-for-profit entity of which an executive of the Company is a board member, +through December 31, 2018. The agreement commits a maximum of $120,000 in funds and services to be provided to PPH for the term of the agreement. The agreement is terminable by either party and +does not bind the +F-51 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +15. Related party transactions (Continued) +Company +to beyond the term of the agreement. As of the year ended December 31, 2018, the Company had a total contributed amount less than $0.1 million. +16. Restricted Cash +The Company's restricted cash consists of cash that the Company is contractually obligated to maintain in accordance the terms of the Letter of Credit in the lease agreement. The +$1.0 million Letter of Credit drawable by the lessor under specifically outlined conditions within the lease, which are primarily related to rent payments. The amount of the Letter of Credit +will be reduced at 41 and 65 months after the commencement date of the lease to $750,000 and then $250,000, respectively. +17. Quarterly Data (Unaudited) +(In thousands, except per share data) +2018 +Q1 +Q2 +Q3 +Q4 +Total Year +Product revenue +$ +4,745 +$ +5,200 +$ +5,962 +$ +7,458 +$ +23,365 +Service and other revenue +2,507 +3,174 +3,017 +3,419 +12,117 +Collaboration and license revenue +269 +269 +1,612 +— +2,150 +Total revenue +7,521 +8,643 +10,591 +10,877 +37,632 +Operating expenses: +Cost of product revenue +2,773 +2,945 +3,277 +3,734 +12,729 +Cost of services and other revenue +1,576 +1,725 +1,719 +1,935 +6,955 +Research and development +3,644 +3,705 +4,411 +4,045 +15,805 +Selling, general and administrative +6,691 +7,579 +8,846 +10,577 +33,693 +Total operating expenses +14,684 +15,954 +18,253 +20,291 +69,182 +Loss from operations +(7,163 +) +(7,311 +) +(7,662 +) +(9,414 +) +(31,550 +) +Interest expense, net +(24 +) +16 +30 +24 +46 +Other (expense) income, net +(15 +) +(48 +) +(25 +) +81 +(7 +) +Tax expense +— +— +— +(25 +) +(25 +) +Net loss +$ +(7,202 +) +$ +(7,343 +) +$ +(7,657 +) +$ +(9,334 +) +$ +(31,536 +) +Reconciliation of net loss to net loss attributable to common stockholders: +— +Net loss +(7,202 +) +(7,343 +) +(7,657 +) +(9,334 +) +(31,536 +) +Net loss attributable to common stockholders +(7,202 +) +(7,343 +) +(7,657 +) +(9,334 +) +(31,536 +) +Net loss per share attributable to common stockholders, basic and diluted +$ +(0.33 +) +$ +(0.34 +) +$ +(0.35 +) +$ +(0.42 +) +$ +(1.43 +) +Weighted-average common shares outstanding, basic and diluted +21,788,605 +21,890,978 +22,670,786 +22,221,305 +21,994,317 +F-52 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +17. Quarterly Data (Unaudited) (Continued) +2017 +Q1 +Q2 +Q3 +Q4 +Total Year +Product revenue +$ +3,425 +$ +3,337 +$ +3,293 +$ +4,069 +$ +14,124 +Service and other revenue +1,644 +1,608 +2,172 +2,252 +7,676 +Collaboration and license revenue +269 +268 +269 +268 +1,074 +Total revenue +5,338 +5,213 +5,734 +6,589 +22,874 +Operating expenses: +Cost of product revenue +1,834 +1,834 +1,905 +2,169 +7,742 +Cost of services and other revenue +1,144 +1,198 +1,264 +1,539 +5,145 +Research and development +4,250 +3,903 +4,224 +3,927 +16,304 +Selling, general and administrative +4,166 +4,747 +4,728 +6,047 +19,688 +Total operating expenses +11,394 +11,682 +12,121 +13,682 +48,879 +Loss from operations +(6,056 +) +(6,469 +) +(6,387 +) +(7,093 +) +(26,005 +) +Interest expense, net +(255 +) +(240 +) +(240 +) +(216 +) +(951 +) +Other (expense) income, net +(80 +) +77 +13 +(73 +) +(63 +) +Tax Expense +— +— +— +— +— +Net loss +$ +(6,391 +) +$ +(6,632 +) +$ +(6,614 +) +$ +(7,382 +) +$ +(27,019 +) +Reconciliation of net loss to net loss attributable to common stockholders: +Net loss +(6,391 +) +(6,632 +) +(6,614 +) +(7,382 +) +(27,019 +) +Accretion of preferred stock to redemption value +(1,090 +) +(1,099 +) +(1,112 +) +(809 +) +(4,110 +) +Accrued dividends on preferred stock +(16 +) +(16 +) +(16 +) +(11 +) +(59 +) +Net loss attributable to common stockholders +(7,497 +) +(7,747 +) +(7,742 +) +(8,202 +) +(31,188 +) +Net loss per share attributable to common stockholders, basic and diluted +$ +(3.18 +) +$ +(3.21 +) +$ +(3.13 +) +$ +(1.06 +) +$ +(8.30 +) +Weighted-average common shares outstanding, basic and diluted +2,357,503 +2,416,984 +2,475,166 +7,731,514 +3,756,954 +F-53 \ No newline at end of file diff --git a/raw/filings/0001503274/2018/0001047469-19-001374/filing_metadata.csv b/raw/filings/0001503274/2018/0001047469-19-001374/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..cee4f5b35d67e54a18b365abe1052bf6281bac28 --- /dev/null +++ b/raw/filings/0001503274/2018/0001047469-19-001374/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001503274,QTRX,Quanterix Corp,10-K,2019-03-18,2018-12-31,2019-03-18T20:07:14.000Z,0001047469-19-001374,a2237889z10-k.htm,10-K,14256081,1,0,https://www.sec.gov/Archives/edgar/data/1503274/000104746919001374/a2237889z10-k.htm,https://www.sec.gov/Archives/edgar/data/1503274/000104746919001374/,2018,2018,1 diff --git a/raw/filings/0001503274/2018/0001047469-19-001374/item1.txt b/raw/filings/0001503274/2018/0001047469-19-001374/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..ddf64357d1743573b1b4c0edc0056550b2317265 --- /dev/null +++ b/raw/filings/0001503274/2018/0001047469-19-001374/item1.txt @@ -0,0 +1,1163 @@ +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health +for life sciences research and diagnostics. Our platforms are based on our proprietary digital "Simoa" detection technology. Our Simoa bead-based and planar array platforms enable customers to +reliably detect protein biomarkers in +extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and +validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our +customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the +continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on +treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We are currently focusing on protein detection, which we believe is an area of significant unmet need and +where we have significant competitive advantages. However, in addition to enabling new applications and insights in protein analysis, we are also developing our Simoa bead-based technology to detect +nucleic acids in biological samples. +We +believe that our Simoa platforms are the most sensitive commercially available protein detection platforms and significantly advance ELISA technology, which has been the industry +standard for protein detection for over forty years. Proteins are complex molecules that are required for the structure, function and regulation of the body's tissues and organs, and are the +functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes +can produce over 100,000 different proteins, approximately 10,500 of which are known to be secreted in blood. Accordingly, while research on nucleic acids provides valuable information about the role +of genes in health and disease, proteins are more prevalent and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes +beyond genetic predisposition, reflecting the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is +happening in a person's body in real time. +Researchers +and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable using +conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low +abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa's sensitivity offers a new way to monitor healthy individuals and detect +proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical +signs and symptoms have appeared. +Our +Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited by published research in more than 400 articles in +peer-reviewed publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is +comprised of over 420 customers across our end markets, and includes 19 of the 20 largest biopharmaceutical companies. +1 +Table of Contents +Our Market Opportunities +Our Simoa platforms have applications across the life science research, diagnostics and precision health screening markets. Our initial target +market has been the life science research market, and according to estimates in the Third-Party Research Report, we believe that the life science research market, including both proteomics and +genomics research, is $3 billion per year and has the potential to reach $8 billion per year. However, as our customers continue to gain experience with our proprietary Simoa technology, +we believe the opportunity to access markets beyond research, such as diagnostics and precision health screening, will be significant. The Third-Party Research Report also estimates that the +diagnostic and precision health screening markets have the potential to reach an aggregate of $30 billion per year. +Life Science Research +Our initial target market is the large and growing life science research market. We believe our Simoa platforms are well-positioned to capture a +significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. By substantially lowering +the limit of detection of protein biomarkers, we believe that Simoa is penetrating the existing market for protein analysis and holds potential to significantly grow the life science research market +as researchers expand their research into the diseases associated with the thousands of proteins that were previously undetectable. Simoa also enables earlier detection of the proteins that are +currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. As an indication of the market's acceptance of our technology, +biopharmaceutical researchers are also integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. In addition to enabling new applications and +insights in protein analysis, our Simoa bead-based technology can be used to detect nucleic acids, which expands our market opportunity. We believe that this technology has the potential to ultimately +provide the same sensitivity as polymerase chain reaction, or PCR, which is the most commonly used technology for nucleic acid detection, without the distortion and bias issues associated with +amplification used in PCR. +Diagnostics +We believe the diagnostic market represents a significant commercial opportunity for our Simoa technology as well. We believe existing +diagnostics can be improved by Simoa's sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable +using conventional, analog immunoassay technologies but are detectable using Simoa. We also believe that the ultra-sensitive protein detection provided by Simoa can enable the development of a new +category of non-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic +methods, including spinal tap, diagnostic imaging and biopsy. +Simoa +technology also has significant potential in the emerging field of companion diagnostics. Drug developers can use Simoa to stratify patients into categories, enabling selection of +those patients for whom a drug is expected to be most effective and safe. Not only does Simoa have the potential to be used to develop companion diagnostics to stratify patients in clinical trials and +for treatment, but Simoa's sensitivity may also enable the development of companion diagnostics based on protein biomarkers that can regularly monitor whether an approved drug is having the desired +biological effect, enabling doctors to quickly and efficiently adjust the course of treatment as appropriate. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of proteins in low abundance that are undetectable using +conventional, analog immunoassay technologies may enable +2 +Table of Contents +our +technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. We believe +there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis +as part of a patient's routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance +of symptoms. +Simoa +products sold or used in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including +requirements for regulatory clearance or approval of such products before they can be marketed. To date, we have not received or applied for regulatory approvals for Simoa products. See "Risk +Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement" and "—Government Regulation" for a more detailed discussion regarding the regulatory +approvals that may be required. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme-linked immunosorbent assay, or ELISA, technology, which has been the most widely +used method of detection of proteins for over 40 years. Given our target customers' familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. +Our Simoa bead-based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times +smaller than traditional ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to our +bead-based technology's unprecedented sensitivity. In January 2018, we acquired Aushon BioSystems, Inc., or Aushon, and its proprietary sensitive planar array detection technology. Leveraging +our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to provide the same Simoa sensitivity found in our Simoa bead-based +platform. We currently offer the following three Simoa instruments, which we believe are the most sensitive protein detection platforms commercially available today: +• HD-1 : We +commercially launched our HD-1 instrument in January 2014. The HD-1 is based on our bead-based technology, and assays run on the HD-1 are fully automated. The full automation of the HD-1 provides us +with an additional significant competitive advantage with biopharmaceutical customers. +• SR-X : We +commercially launched our SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-1 in a compact benchtop form with a lower price point, more +flexible assay preparation, and a wider range of potential applications, including direct detection of nucleic acids. +• SP-X : We +initiated an early-access program for the SP-X instrument in January 2019, with the full commercial launch planned for April 2019. The SP-X is based on our planar array technology, which allows for +significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The +current menu of approximately 80 analyte-specific single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, +immunology and oncology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 50 biomarkers ranging from 1-10 analytes per assay in the areas of +immunology and oncology research. We intend to continue to increase the number of Simoa biomarker assays across our platforms. In addition, both the bead-based platform and the planar array platform +allow ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called "homebrew" assays. We intend to continue to increase the number of Simoa digital +biomarker assays. +3 +Table of Contents +We +continually seek to improve and expand our product offerings to meet the needs of our customers. To that end, we are developing the next generation HD instrument, the HD-X, which we +expect to launch in the second half of 2019. The HD-X will increase the multiplexing capability from 4-plex (current HD-1 limit) to six-plex and will include software features to facilitate compliance +with 21 CFR part 11 procedures. +We +also provide contract research services for customers through our CLIA-certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, +and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 500 projects for more than 179 customers +from all over the world using our Simoa platform. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional +instruments, as more than 45 customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We +sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America +and Europe, and through distributors or sales agents in other select markets. We have an extensive base of customers in world class academic and governmental research institutions, as well as +pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Competitive Strengths +We believe that our competitive strengths include the following: +• Proprietary ultra-sensitive digital immunoassay Simoa technology platforms, that enable +researchers and clinicians to obtain information from less invasive procedures in smaller sample sizes. We believe our Simoa platforms are the +most sensitive commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. +This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies +and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our +Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. We have also +recently implemented a research and development effort with a goal to increase the sensitivity of our Simoa technology 100-fold by 2021. +• Technology platforms that leverage and improve upon industry standard ELISA +technology. Simoa uses the basic principles of conventional bead-based ELISA. Adding digital capability to this industry standard platform has +resulted in expanded capabilities and improved performance. Given our target customers' familiarity with the core ELISA technology, our Simoa platforms are easily integrated with existing customer +workflows including data analysis. +• Leader in large and growing market for detecting proteins in low +abundance. We believe Simoa is the most sensitive commercially available protein detection technology, and our growing market acceptance is +establishing Simoa as the reference technology for detecting proteins in low abundance across sample types in our end markets. +• Deep and expanding scientific +validation. Our Simoa technology has been cited in more than 400 articles in peer-reviewed publications, including JAMA +Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. As of March 1, 2019, Simoa +technology had been +4 +Table of Contents +cited +in 409 publications, with 192 related to neurology and 88 related to oncology and inflammation. We have established relationships with key opinion leaders, and our growing base of over 420 +customers includes some of the world's leading academic and government research institutions as well as 19 of the 20 largest pharmaceutical and biotechnology companies. +• Leading position in market solidified by robust customization capabilities, assay design +flexibility and automation of our HD-1 instrument. Our technical capabilities and expertise allow our customers to design high-quality, +customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead-based and planar array +platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD-1 instrument provides fully automated analysis from +sample introduction to analytical results. Furthermore, our proprietary array approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed +provides customers high research and development productivity through greater throughput and lab efficiency. +• Highly attractive business model that leverages growing installed base of +instruments. As we continue to grow our installed base, optimize workflows and expand our assay menu, we expect to increase our revenues derived +from consumables. The integration of our technology in our customers' projects also provides ongoing sales of assays and consumables, resulting in a growing revenue stream. Our consumables revenue +increased to $13.8 million in 2018 from $7.6 million in 2017. +• Our highly experienced senior management +team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop +novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible +with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, +monitoring, prognosis and, ultimately, prevention. +Our +strategy to achieve this includes: +• Focus on the highly attractive, expanding market for protein detection and +analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on +human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to +a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including +environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person's body in real time. Our technology provides a unique bridge between understanding +the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and drug development. +• Continue to drive adoption of our Simoa technology in the life science research, diagnostics and precision health +screening markets. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in +particular by enabling researchers to perform studies on protein biomarkers that they were +5 +Table of Contents +previously +unable to perform. We believe Simoa has the capability to enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids +that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. In the precision health screening market, we believe that Simoa +technology has the potential to be used to monitor biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of +disease. +• Leverage the Simoa "ecosystem" to grow our customer base and further penetrate our existing customer +base. In an effort to enhance the productivity of our instrument base, we employ an extensive customer outreach program that we call Catalyzing Customer Engagement, or CCE. +Through CCE, we actively engage customers to optimize their workflow and better understand our instruments' and products' capabilities, resulting in increased utilization of our installed instrument +base. +• Utilize the flexibility of the Simoa platforms to expand into complementary markets, including nucleic acid +detection. We plan to utilize the flexibility of the Simoa platforms to expand our product offering to include other testing capabilities, including detection of nucleic acids. +We believe that our Simoa bead-based technology has the potential to provide the same sensitivity as PCR-based assays in detecting nucleic acids without the issues associated with amplification. We +believe the ability to integrate nucleic acid and protein testing capabilities into a full service instrument would hold significant value to our customers. +• Leverage the data generated by Simoa to drive adoption of our +technology. Technology being employed in the healthcare industry has become increasingly sophisticated, creating the need to aggregate and +digitize the significant amount of data being created in order to better achieve the goals of higher quality and more efficient care. Simoa generates digitized data for highly relevant biomarkers that +can provide a nuanced view into the continuum of health and disease. We plan to use the data generated by the Simoa technology to improve and create additional assays, with the goal of enabling more +precise research today and contributing to precision health in the future. +• Grow into new markets organically with our customers and through strategic +collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers +continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of +some of the work that our customers are doing today in the research market. For example, Simoa's unprecedented sensitivity has the potential to uncover research insights that could identify novel +biomarkers, which could help stratify patients in clinical trials potentially leading to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. +This progression with our customers will help us move into new markets organically in a cost effective manner, while also retaining significant upside. Additionally, we currently have a partnership in +place with a leading diagnostics company in the field of blood screening and plan to continue evaluating strategic collaborations that could help us access these new markets. +• Grow through strategic +acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For +example, in January 2018, we acquired Aushon and its proprietary sensitive planar array detection technology, which led to the development of our SP-X instrument for which we initiated an early-access +program in January 2019, with the full commercial launch planned for April 2019. This will continue to be an important part of our strategy to increase scale. We intend to pursue acquisitions to +expand +6 +Table of Contents +product +offerings, strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +Industry Background +We intend to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. +Our initial commercial strategy targets the large and growing life science research market, and we believe that the diagnostic market and the precision health screening market represent significant +future commercial opportunities for Simoa. +According to estimates in the Third-Party Research Report, we believe the aggregate commercial opportunity across these markets has the potential to expand to $38 billion. +Proteins +are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and +regulation of the body's tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an +organism's proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot +provide. +The +human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, +the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, approximately 10,500 +of which are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of +much of the proteome has not been practical given the limited level of sensitivity of existing technologies. To date, across our platforms, we have developed assays that address approximately 120 of +the proteins secreted in blood. We estimate that the current sensitivity of our Simoa technology has the potential to detect and measure up to one-third of the approximately 9,200 proteins secreted in +blood that are not consistently detectable using conventional immunoassay technologies. +While +genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to +understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of +environmental factors and lifestyle, such as diet and exercise, or provide insight into what is happening in a patient's body in real time. For example, identical twins have the same genotype, but may +develop different diseases over the course of their lifetime, largely due to environmental factors. +Much +like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of +which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic +research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not +detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and +well-being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, +ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +7 +Table of Contents +Existing Technologies and Their Limitations +Protein Analysis +The enzyme-linked immunosorbent assay, or ELISA, has been the most widely used method of sensitive detection of proteins for over +40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either +directly, or indirectly through use of a conjugated +secondary or "capture" antibody (sandwich ELISA). A specific "detection" antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final +step, a substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the +graphic below: +Aside +from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, +Raman-enhanced signal detection, immuno-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of what is +estimated to be approximately 10,500 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of +these approaches have limitations, including: +• dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +• narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules +and increasing sample volume requiring additional enzymes to reach detection limit; +• low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal +physiological levels; and +• limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers +aimed at more effectively detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and +then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated +during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become +8 +Table of Contents +detectable. +PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide +availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias +into the data, potentially compromising the reliability of results, particularly at low concentrations. +Due +to the complexity, susceptibility to contamination and significant costs related to PCR and other existing technologies, the genomic testing market generally remains limited to +reference laboratories, research facilities and laboratories associated with large hospitals. A typical molecular diagnostics laboratory in a hospital or research laboratory setting is a dedicated +facility that employs highly skilled technologists and is supervised by a technician with a Ph.D. or M.D./Ph.D. To guard against contamination, which is a common result of target amplification, a +typical laboratory will require at least three separate rooms, or isolation areas, to perform PCR-based assay methods for genomic testing. +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection +sensitivity. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for +capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual +molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as +the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, +enabling detection sensitivity that was not previously possible. +Our +Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to +high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead-based technology detects proteins: +Simoa Bead-Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead-based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as +depicted by the white star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of +the star in the graphic). +9 +Table of Contents +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 +microwells, each of which is large enough to accommodate only a single bead. +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is +introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our +Simoa bead-based technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. The following chart +shows examples of the levels of detection, or LoD, of certain Simoa bead-based assays and commercially available ELISA assays compared to the median lower normal plasma or clinical ranges of various +protein biomarkers. As shown below, the LoD for most of the assays from a leading manufacturer of commercial ELISA assays is above the median lower normal plasma or clinical ranges, making these +biomarkers undetectable at normal physiological levels with these assays. +10 +Table of Contents +LoD Comparison +Each +of the increments in the horizontal axis in the table above represents a 10-fold increase in sensitivity. Using the protein IL-2 as an example from the graphic above, the LoD for +the leading commercially available IL-2 assay is approximately 9 pg/mL, whereas the LoD for our Simoa assay is approximately 0.01 pg/mL, representing a 900-fold increase in sensitivity. +The +ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from +a sample, and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while +competitive platforms lose sensitivity when multiplexing is used. +Multiplexing +is achieved with our Simoa bead-based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the +array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. While we have demonstrated the +ability to identify and differentiate up to 35 different bead subpopulations on the HD-1, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of +proteins in a single sample, we believe that the ability to multiplex above a 6-plex and maintain single-plex sensitivity and precision may be limited using bead-based technology due to constraints in +the number of bead-containing wells for each plex that are imaged on the Simoa disk. In 2017, we commercially launched a Simoa neurology 4-plex (Nf-L, Tau, GFAP and UCH-L1) bead-based assay for the +study of traumatic brain injury and other neurodegenerative conditions. Simoa is the only technology with the sensitivity to detect all four of these markers in blood, whereas other assay technologies +require cerebrospinal fluid, or CSF, to detect all four of these markers due to sensitivity limitations. This is a significant advantage in terms of ease of use, patient comfort, speed and +cost-effectiveness. We plan to introduce a new 6-plex human cytokine panel using Simoa bead-based assay in the middle of 2019. +11 +Table of Contents +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA and require two antibodies: one for +capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array +reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small +spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our +Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as +translational +biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +A) Analyte-specifc +capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96-well microtiter plate. Each microspot contains +capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) Samples +are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by +washing the plate with a benchtop plate washer or manual wash manifold. +C) A +mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +D) Streptavidin-HRP +(horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a +washing step. +E) A +high-sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the +enzyme substrate causing the enzyme substrate to emit light. +F) The +plate is placed into the Quanterix SP-X imaging system. A scientific-grade CCD camera images the entire plate and all micro-spots simultaneously. The low +background of the plate +12 +Table of Contents +surface +and the high-sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The SP-X imaging software utilizes algorithms to optimize exposure time and +combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +Below +is an image of a 96-well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We +believe the Simoa planar array technology is well-suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with +ultra-sensitive +detection in a multiplex assay format. The figure below demonstrates 10-plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) +listed in femtogram per ml. +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, we are also developing our Simoa bead-based +technology to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For +example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating +and cooling cycles needed to amplify a copy of the nucleic +13 +Table of Contents +acid +being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR-based assays with the following +benefits: +• no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +• reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; +and +• the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water. +For +detection of nucleic acids with our Simoa bead-based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with +nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added +and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. This assay is pictured below: +Simoa +has been used to detect short sequences of RNA, known as microRNA, that are important in a number of biological systems, and are widely used in innovative therapeutic and gene +editing technologies. The assay was used to detect microRNA-122, or miR-122, a marker of liver toxicity, from the serum of patients who had overdosed with acetaminophen. As shown in the graph below, +these patients had elevated miR-122 levels compared to healthy controls. +This +approach suggests potential for applications for measuring drug-induced liver injury for both safety testing of drugs in development and for monitoring of approved drugs. +14 +Table of Contents +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research, diagnostics and precision health +screening markets. +Life Science Research +Our initial target market is the large and growing life science research market. We believe our Simoa platforms are well-positioned to capture a +significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, +the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how +to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we +believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, +our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of +the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the +nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset +of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +As +an indication of the market's acceptance of our Simoa technology, researchers at pharmaceutical and biotechnology companies are integrating our platforms into drug development +protocols to more efficiently and effectively develop drugs. Using Simoa's unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following +administration of a drug, drug +developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. We estimate that our Simoa technology has been utilized in over 800 +clinical trials to date. +In +addition, researchers can also use Simoa to monitor a drug candidate's unwanted effect on "off-target" biomarkers and predict side effects, addressing the significant issue of drug +toxicity, which is a leading cause of death in the United States. +According +to estimates in the Third-Party Research Report, we believe that the total life science research market, including both proteomics and genomics research, is $3 billion +per year and has the potential to reach $8 billion per year. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker +diagnostics can be improved by Simoa's sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable +using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the +development of a new category of non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient +diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +15 +Table of Contents +For +example, researchers have conducted studies using Simoa that indicate that neurological biomarkers, including tau and Nf-L, may someday be able to replace diagnostic imaging to +diagnose traumatic brain injury, or TBI. Our Simoa assays for tau and Nf-L are 3,500-fold and 840-fold more sensitive, respectively, than the leading assay platforms, and are the only assays that can +reliably detect these critical protein biomarkers in blood. Almost 90% of patients who visit U.S. hospital emergency rooms and receive a computerized tomography, or CT, scan show no structural brain +injury. In addition, CT scans have approximately 100 times more radiation than a chest x-ray, and are suspected of causing cancer in up to 29,000 people per year, underscoring the need for development +of a safe and accurate blood-based diagnostic test for TBI, which we believe may be enabled by our Simoa technology. +Simoa +technology also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a +therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients to study for whom a +drug is expected to be most effective and safe. Companion diagnostics have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only can Simoa +be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa's sensitivity also enables the development of companion diagnostics based on protein +biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This can quickly and efficiently enable doctors to adjust the course of treatment +as appropriate by increasing or decreasing dosages or even switching therapies. +There +has been significant interest from third parties to use our technology to develop applications for the diagnostic market. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using +conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and +provide earlier detection of the onset of disease. This may facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, +ultimately, prevention, enabling a "precision health" revolution. +We +believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on +a regular, ongoing basis as part of a patient's routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, +prior to the appearance of symptoms. +According +to estimates in the Third-Party Research Report, we believe that the total diagnostic and precision health screening markets addressable using Simoa technology have the +potential to reach an aggregate of $30 billion per year upon receipt of the necessary regulatory approvals, which we have not yet begun the process to obtain. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have +significant shortcomings that our technology addresses. In particular, we have focused on the following areas: neurology, oncology, cardiology, infectious disease and inflammation. +16 +Table of Contents +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally +only been detectable in cerebrospinal fluid, or CSF, has the potential to rapidly advance neurology research and drug development, and transform the way brain injuries and diseases are diagnosed and +treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that +the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these +endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of +which are costly and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse +through the blood-brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of these neural biomarkers in +the blood are so low that they are undetectable by conventional, analog immunoassay technologies. +As +one example, we have developed ultra-sensitive protein assays for the neural biomarkers A b 42 and tau that are approximately 2,000 and 3,500-fold +more sensitive, respectively, than benchmark commercial assays. Our protein assays are the only currently available assays on the market capable of precise measurement of these neural biomarkers in +blood in diseased and healthy individuals. +To +date, there have been over 190 neurology related scientific publications using our Simoa technology, and we believe that ultra-sensitive digital detection of neural related biomarkers +in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including CTE, Alzheimer's disease, dementia, Parkinson's disease, multiple +sclerosis and TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. +In +2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for the +neurological biomarker Nf-L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer's disease as currently established CSF biomarkers. The study was a major study of almost 600 +patients from the Alzheimer's Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf-L measurements compared with traditional CSF biomarkers. The +diagnostic accuracy of the plasma Simoa Nf-L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +17 +Table of Contents +In +addition, Simoa plasma Nf-L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer's disease at baseline and during follow-up. High plasma Nf-L +correlated with poor cognition and Alzheimer's disease -related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf-L may have +clinical utility as a noninvasive biomarker in Alzheimer's disease. Nf-L is becoming an increasingly important biomarker for neurology research, with over 90 Nf-L-related research publications in 2018 +alone, covering a number of neurological disorders, including multiple sclerosis, Alzheimer's disease, ALS, Parkinson's disease and others. +Traumatic +brain injuries, or TBIs, lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive +diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological +biomarkers, such as Nf-L, tau, GFAP and UCHL-1, to more adequately address diagnosis of TBIs and overall brain health. +Leading +researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural +biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic +Encephalopathy, or CTE, which currently can only be diagnosed after death via a brain autopsy. A recent publication by a National Institute of Health researcher indicates that measuring tau in the +blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling +clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +In +2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of traumatic brain injury and other neurodegenerative conditions. Whereas +other assay technologies require cerebrospinal fluid, or CSF, to detect all four of these markers, due to Simoa's sensitivity, this is the only assay that can detect all of these biomarkers directly +from blood samples. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. +In +2016, Fast Company named Quanterix one of the "World's Most Innovative Companies" for our work in concussion detection. We also were awarded two competitive grants from the NFL-GE +Head Health Challenge to advance this work in the detection and quantification of mild TBI. +We +estimate that the total addressable market for Simoa technology in neurology has the potential to reach $6 billion across research, diagnostic and precision health screening +indications. +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease +development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the +disease has progressed and the patient has become symptomatic. Simoa's highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for +patients. Additionally, Simoa technology has shown early promise as an alternative to more invasive diagnostic procedures. +Simoa +technology was used in a recent unpublished scientific study that indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low +cost, non-invasive blood test. In this retrospective study, researchers found that Simoa assays resulted in significantly fewer false positives and false negatives than mammography. Inaccurate +mammography can result in unnecessary stress, additional health care costs from follow up diagnostic mammograms, +18 +Table of Contents +unnecessary +biopsies and increased lifetime exposure to radiation. Researchers are also developing ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa technology, potentially +replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, cost effective, accurate blood-based health screens, further enabling the liquid biopsy +market, which is estimated to grow to almost $3 billion by 2026. +Cancer +immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are +not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating +(serum and plasma) protein biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor +for adverse effects. One technical challenge facing the immuno-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory +biomarkers directly in serum and plasma. We have developed a set of 38 ultra-sensitive immune modulation assays (cytokines and chemokines) that can be used to monitor the immune response. In +particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum +and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6 which is one of the +cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in +immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We +also believe residual cancer cell detection post-surgery or treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a +greater risk of reoccurrence post-surgery due to residual cancer. For example, we have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen, or PSA, that is over 1,000-fold more +sensitive than benchmark commercial PSA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following +radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this +study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels +below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated +that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, +and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +19 +Table of Contents +We +estimate that the total addressable market for Simoa in oncology has the potential to reach $25 billion across research, diagnostic and precision health screening indications. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths +in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa's highly sensitive digital measurement capabilities have +the potential to be used to predict early cardiac disease. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying +rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making +early stage detection more specific and widely available. +Today, +early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious +disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables +the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent +in amplification technologies, such as PCR. +For +example, we have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than benchmark commercial protein assays capable of detecting the HIV-specific antigen, +p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 +assay with a commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects +infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the +20 +Table of Contents +conventional +p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In +addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry +a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile +( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. +Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff +organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism +has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +We +will continue to develop Simoa assays for pathogenic antigens that are competitive in sensitivity to PCR but more specific to the pathogenicity of the offending organism. We believe +that these Simoa assays could also be invaluable tools for the development of anti-infective drugs and treatment monitoring of anti-viral and anti-bacterial drugs. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory +molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology +measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn's disease, asthma, rheumatoid arthritis and +neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our +Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to +21 +Table of Contents +monitor +therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn's disease undergoing +anti-TNF- a therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the +TNF- a levels of the patients before and after treatment. These levels were all below the limit of detection, or LoD, of traditional immunoassays. +We +believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory +drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side +effects or increase efficacy. +Our Products and Services +Our Quanterix commercial portfolio includes research use only instruments, assay kits and other consumables, and contract research services +offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD-1/HD-X +• +commercially launched the +HD-1 in January 2014 +• +expect to commercially launch the next-generation HD-X in the second half of 2019 +• +Simoa bead-based platform +technology +• +most widely referenced ultra-sensitive multiplex immunoassay platform on market +• +fully automated, floor-standing +instrument +• +wide dynamic range +• +multiplexing capability with small sample volume +• +up to 400 samples per eight-hour shift +• +homebrew capabilities +• +HD-1 supports multiplexing up to 4-plex; HD-X will support up to 6-plex +22 +Table of Contents +Product +Key attributes +SR-X +• +commercial launch in +December 2017 +• +Simoa bead-based platform technology +• +reader only, benchtop instrument with lower price point +• +same sensitivity, dynamic range and homebrew capabilities as HD-1 +• +multiplexing capability: SR-X currently has up to 6-plex +capability +• +sample prep and assay protocol flexibility +SP-X +• +early access program in +January 2019; commercial launch expected in April 2019 +• +Simoa planar array platform technology +• +reader only, benchtop instrument with lower price point +• +similar sensitivity, dynamic range and homebrew capabilities as HD-1 +• +multiplexing capability: SP-X currently has up to +10-plex capability +• +sample prep and assay protocol flexibility +Assays and other consumables +• +over 120 biomarker assays +developed for neurology, oncology, cardiology, infectious diseases and immunology research +• +homebrew kits containing reagents and supporting user guides enabling +customers to develop custom assays +• +proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead-based assays +Services +• +contract research services +provided through our Accelerator Laboratory +• +over 500 projects completed to date +• +extended warranty and service contracts +• +CLIA-certified lab available +Instruments and Consumables +HD-1/HD-X +We commercially launched the HD-1 instrument in January 2014. The HD-1 uses our Simoa bead-based technology and is the most sensitive automated +multiplex protein detection platform commercially available. Assays for the HD-1 are fully automated (i.e. sample in to result out), and results for up to 66 samples are available in +approximately one hour. We believe that this automation +23 +Table of Contents +provides +us an additional significant competitive advantage with pharmaceutical and biotechnology customers. Samples can be input into the instrument via 96-well microtiter plates or sample +tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +Specialized +software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration +of multiple biological molecules. The HD-1 software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis software is +embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to +concentrations for the different biological molecules. +We +continually seek to improve our platforms and technology and to that end, we expect to commercially launch our next-generation fully automated, bead-based Simoa instrument, the HD-X, +in the second half of 2019. The HD-X will increase the multiplexing capability from 4-plex (current HD-1 limit) to six-plex and will include software features to facilitate compliance with 21 CFR +part 11 procedures. +SR-X +We commercially launched the SR-X instrument in the fourth quarter of 2017. The SR-X utilizes the same Simoa bead-based technology and assay +kits as the HD-1 in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra-sensitive detection capabilities enabled by Simoa. +In +contrast to the fully automated workflow of the HD-1, the assay incubation and washing steps for the SR-X are performed outside of the instruments using conventional liquid handling +methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The +SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately +2.5 hours. +SP-X +We initiated an early-access program for the SP-X instrument in January 2019, with the full commercial launch planned for April 2019. The SP-X +uses the Simoa planar array technology developed initially by Aushon Biosystems for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated +Simoa image analysis and data analysis algorithms to provide the same Simoa sensitivity found in our Simoa bead-based platform. The Simoa planar array technology utilizes a 96-well microtiter plate +with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar +to the SR-X, the assay prep workflow utilized for the SP-X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid +handling methods as the SR-X. The SP-X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital +biomarker assays. The current menu +of approximately 80 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and +oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 50 biomarkers ranging from 1-10 analytes per assay in the areas of +immunology and oncology research. +24 +Table of Contents +In addition to these assays we have developed, the Simoa platform allows ease and flexibility in assay design, enabling our customers to develop their own +proprietary in-house assays, called homebrew assays, using our bead-based Homebrew Assay Development Kit. These kits include all components required for customers to run tests using their own +antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes, and disposable tips. Our +goal is to continue to add to our assay kits to extend our application base. Our consumables portfolio for our planar array platform also includes assay-specific reagent kits as well as the Simoa +Planar Array Homebrew Starter Kit which enables our customers to run tests using their own antibodies and reagents in a similar manner to the bead-based homebrew kits. +We +have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to +manufacturing and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our +aggressive menu expansion goals. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. Researchers, +academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports +multiple projects and services, including: +• Sample testing. Utilizing commercially available Simoa kits, we have run +large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer's needs and even large studies can +be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +• Homebrew assay development. Utilizing proprietary or commercially available +reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can +also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +• Custom development. After identifying the optimal assay and conditions, the +Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa +platform. +To +date, we have completed over 500 projects for over 179 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also +found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as more than 45 customers for whom we have provided contract research services have +subsequently purchased an instrument from us. +We +also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This +evaluation includes examining new assay formats and +25 +Table of Contents +instrumentation +improvements and upgrades to increase the performance of our Simoa assays and instruments. We have implemented a research and development program that aims to increase the sensitivity +of our Simoa technology 100-fold by 2021. We are also focused on expanding our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is +driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and +feedback from our sales and marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our instruments and consumables via direct field sales and support organizations located in North America and Europe and through a +combination of our own sales force and third-party distributors in additional major markets such as Australia, Brazil, Czech Republic, China, India, Israel, Japan, Mexico, South Korea, Lebanon, Qatar, +Singapore and Taiwan. Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological +advances in Simoa systems, workflows, and notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on delivering a +consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As +of March 1, 2019, we had approximately 78 people employed in sales, sales support and marketing, including technical field application scientists and field service personnel. +This staff is primarily located +in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive +distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region countries such +as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with Quanterix-employed sales and +support personnel. +Our +sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and +governmental research institutions. +In +addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness +of our technology, demonstrate its benefits relative to existing technologies and accelerate its adoption. We also seek to increase awareness of our products through participation at trade shows, +academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +To +develop a thought leadership position in the precision health arena, we have been a Platinum Sponsor of the annual Powering Precision Health Summit, or PPHS. PPHS is an annual summit +founded in 2016 by our President and Chief Executive Officer, Kevin Hrusovsky, that aims to gather many of the world's top innovators, scientists, physicians, medical professionals, patient advocates, +government officials, regulators and investors to debate and collaborate around crucial issues from neurology, oncology and cardiology to inflammation and infectious disease. At PPHS in 2016, there +were 22 cutting edge scientific talks covering neurology, cardiology, oncology and inflammation. There were over 200 registered attendees, including senior scientists, patient advocates, investors, +and potential partners. At PPHS in 2017, there were 37 scientific talks and over 425 registered attendees and at PPHS Europe in 2018, there were 20 scientific talks and over 150 registered attendees. +26 +Table of Contents +Our +systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and +demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the system including running experiments in the Accelerator Laboratory and +comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive +documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a +purchase order, can often be six to 12 months, or longer. +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource the Simoa bead-based instrument development and manufacturing with industry leaders, +and to internally develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-1 and HD-X instruments are manufactured by STRATEC Biomedical AG, based in Birkenfeld, Germany, and is manufactured and shipped from +their Birkenfeld and Beringen, Switzerland facilities. See "—Key Agreements—Development Agreement and Supply Agreement with STRATEC" for a description of this agreement. HD-1 +instruments are shipped by STRATEC to our global customers' locations. Installation of, and training on, our products is provided by our employees in the markets where we conduct direct sales, and by +distributors in those markets where we operate with distributors. The SR-X is manufactured by Paramit Corporation, based in Morgan Hill, California, and is shipped to global customers by Paramit. +We +believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-1, the HD-X +or the SR-X, we would experience additional costs, delays and difficulties in doing so, and our business would be harmed. +The +SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one +significant component is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be +available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. To mitigate this risk, we typically +carry significant inventory of critical components. +Consumables +We assemble our assay kits for our bead-based platform in our Lexington, Massachusetts facility. Reagents for our bead-based assays include all +components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of +suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, +which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we have increased the shelf life of the vast majority of +our bead-based assays from six months to 12 months or more. +Simoa +disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC +Biomedical. +27 +Table of Contents +This +agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the +relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead-based platform are commercially available. +We +assemble our assay 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components +required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a +limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for +our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to +mitigate this risk through inventory control. +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement, or the Development Agreement, with STRATEC +Biomedical Systems AG, pursuant to which STRATEC undertook the development of the Simoa HD-1 instrument. Under the Development Agreement, we were required to pay a fee and issue to STRATEC warrants to +purchase our equity securities, all of which have been exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The Development Agreement +was amended in November 2016. The Amendment reduced our obligation to satisfy a minimum purchase commitment under the Supply and Manufacturing Agreement described below. Additionally, the parties +agreed on additional development services for an additional fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with +the final milestone due under the terms of the Development Agreement. The services are expected to be completed in the second half of 2019. +The +Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations +to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In +September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC, or the Supply Agreement, pursuant to which STRATEC agreed to supply HD-1 instruments to us, and +we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC's ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the +instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The Supply Agreement was amended in November 2016 to +reduce the number of instruments we are committed to procure from STRATEC. The instrument price stipulated in the Supply Agreement was established based on certain specified assumptions and is subject +to certain adjustments. +The +Supply Agreement is terminable by either party on 12 months' notice to the other party, provided that neither party may terminate the Supply Agreement prior to the later of +the seven year anniversary of the acceptance of the first prototype instrument and the purchase of the minimum number of +instruments which we committed to procure. The Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our +company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC's insolvency or uncured material breach or termination by STRATEC for convenience, +we are granted a nonexclusive royalty free license of STRATEC intellectual +28 +Table of Contents +property +to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement, or the Paramit Agreement, with Paramit Corporation, or Paramit. Under the +terms of the Paramit Agreement, we engaged Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to +manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines +will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess +pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in +cost. +The +Paramit Agreement has an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with nine months' written notice to the other +party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months' notice to Paramit upon the occurrence of (i) a failure +of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under +the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days' notice to us in the event of a material breach after written notice and a 60-day opportunity to +cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for protein +detection, nucleic acid detection and additional applications. For example, companies such as Bio-Techne, Luminex Corporation, MesoScale Diagnostics, Singulex, Gyros Corporation, Nanostring +Technologies, Inc., and others, have products for protein detection that compete in certain segments of the market in which we sell our products. As we or our partners expand the applications +for our products to include diagnostics and precision health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. +Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging +and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research, diagnostic +and precision health screening markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The +life science instrumentation industry is highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We +believe the principal competitive factors in our target markets include: +• sensitivity; +• cost of instruments and consumables; +• assay menu; +• reputation among customers and key opinion leaders; +• innovation in product offerings; +29 +Table of Contents +• accuracy and reproducibility of results; and +• customer support infrastructure. +We +believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions +and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University, in +the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, +including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have +exclusively licensed from Tufts the relevant patent filings related to these technologies. (See "—License Agreement with Tufts University" below). In addition to licensed patents, we have +developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. We believe our proprietary platforms are a core +strength of our business and our strategy includes the continued development of our patent portfolio. +Our +patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products +and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers +embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the +invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent +strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of March 1, 2019, we had exclusively licensed 17 patents and two patent applications from Tufts. These patents and patent applications +include eight issued U.S. patents and two pending U.S patent applications, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian +patent. +A +first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes five granted U.S. patents, two pending U.S. patent +applications, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A +second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. +The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A +third patent family licensed from Tufts is directed to methods for analyzing analytes using a sensor system with cross-reactive elements. This patent family includes one granted U.S. +patent. The standard patent expiration date for the U.S. patent in this family is March 14, 2021. +30 +Table of Contents +A +fourth patent family licensed from Tufts is directed to electro-optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. +The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +As +of March 1, 2019, we owned 19 issued U.S. patents and 16 pending U.S. patent applications, three pending Patent Cooperation Treaty applications, eight granted European patents +and six pending European patent applications, eight granted Japanese patents and one pending Japanese patent applications, four granted Chinese patents and two pending Chinese patent applications, +five granted Canadian patents and two pending Canadian patent applications, and four registered Hong Kong patent applications. +A +first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for analyte capture on beads, including multiplexing. This patent family includes three granted U.S. patents and one pending U.S. patent application, two granted European patent (nationalized and +active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the +U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A +second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in +particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes four granted U.S. patents and +one pending U.S. patent application, one granted European patent (nationalized and active in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian +patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A +third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is +September 28, 2028. +A +fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods +for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent +in this family is March 24, 2030. +A +fifth patent family owned by us is directed to instruments and consumables. This patent family includes one granted U.S. patent and one pending U.S. patent application, one granted +Japanese patent +and one pending Japanese patent application, one granted Chinese patent and two pending Chinese patent applications, three registered Hong Kong patent applications and one pending patent application +in each of Europe, and Canada. The standard patent expiration date for any U.S. patents that may issue from this family is February 25, 2031, and for any non-U.S. patents is January 27, +2032. +A +sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent +application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A +seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The +standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +31 +Table of Contents +An +eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending Patent Cooperation Treaty +patent application. If we pursue protection by filing any national stage applications, the standard patent expiration date for any patents that may issue from this family will be in 2038. +We +own or co-own seven patent families directed to the measurement of particular types of analytes, including prostate specific antigen (PSA), +b -amyloid peptide, tau protein, toxin B of C. difficile , and DNA or RNA molecules. Any patents that may issue from +these patent applications would have standard expiration dates between 2032 and 2039. +With +the acquisition of Aushon in January 2017, we acquired their patent portfolio for our planar array technology. As of March 1, 2019, the acquired patent portfolio includes at +least eight issued U.S. patents and five pending U.S. patent applications, one granted Australian patent, three granted Canadian patents and one pending Canadian patent application, five granted +European patents (each nationalized and active in between eight and 14 countries) and three pending European patent applications, three granted Japanese patents, one registered Hong Kong patent +application and one pending Patent Cooperation Treaty patent application. +We +have licensed additional patents and patent applications from third parties. +In +addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and +intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +License Agreement with Tufts University +In June 2007, as amended in April 2013 and August 2017, we entered into a license agreement with Tufts University, or Tufts, pursuant to which +we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or +have sold products and services covered by patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for +all fields of use and are sublicensable for a fee. +Under +the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 +amendment, we issued Tufts shares of our Series C-1 Preferred Stock. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed +technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone +payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The +term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or +convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from +Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate +diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we +cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a +petition in bankruptcy filed for or against us that is not removed within 60 days. We may +32 +Table of Contents +terminate +the agreement at any time upon at least 60 days' written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Our products are currently intended for research use only, or RUO, applications, although our customers may use our products to develop their +own products that are subject to regulation by the FDA. Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products fall under the FDA's +jurisdiction if they are used for clinical rather than research purposes. Consequently, our products are labeled "For Research Use Only." +On +November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on "Distribution of In Vitro Diagnostic Products Labeled for Research Use +Only or Investigational Use Only," or the RUO/IUO Guidance. The purpose of an FDA guidance document is to provide the FDA's current thinking on when IVD products are properly labeled for RUO or for +IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory +requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. +Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA's 510(k) clearance, premarket approval, or other +requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may +include written or verbal marketing claims or links to articles regarding a product's performance in clinical applications, a manufacturer's provision of technical support for clinical validation or +clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance +is a statement of the FDA's thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and promotion of our products, +including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. We also +are not promoting or using our products in the development or promotion of laboratory developed test, or LDT, services. When we develop products for clinical use, we will do so in accordance with FDA +requirements applicable to those products at that time. Separately, when we become aware that accredited or licensed clinical laboratories may be using our RUO products either for research or clinical +uses, such as part of LDT services, in accordance with the regulations that apply to clinical laboratories, we will continue to review the labeling and promotion of our products for consistency with +the RUO/IUO Guidance. +When +our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, +apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, +mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising +and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The +FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as +determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated +with them, are subject to general controls. Class II devices are subject to general controls and special controls, including +33 +Table of Contents +performance +standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices and some +Class II devices are exempt from a requirement that the manufacturer submit a premarket notification, or 510(k), and receive clearance from the FDA which is otherwise a premarketing requirement +for a Class II device. Class III devices may not be commercialized until a premarket approval application, or PMA, is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent, +or SE, to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA's receipt of the 510(k), but it often +takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, +any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre-market +approval. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III +regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically +placed into Class III due to the absence of a predicate device, called the "Request for Evaluation of Automatic Class III Designation," or the de novo classification procedure. +This +procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or +Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug +Administration Safety and Innovation Act of 2012, or FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and +received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo +classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify +the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for +special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it +identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control +the risks and special controls cannot be developed. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time +consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the +FDA's satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of +the submitted information. By statute, the FDA has 180 days to review the accepted application, although, review of the application generally can take between one +34 +Table of Contents +and +three years. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts +from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory +panel decision, the panel's recommendations are important to the FDA's overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to +ensure compliance with its quality system regulations, or QSRs. New premarket approval applications or premarket approval application supplements are also required for product modifications that +affect the safety and efficacy of the device. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to +present a "significant risk," the manufacturer may not begin a clinical trial until it submits an investigational device exemption application, or IDE, and obtains approval of the IDE from the FDA. +These clinical trials are also subject to the review, approval and oversight of an institutional review board, or IRB, at each clinical trial site. The clinical trials must be conducted in accordance +with the FDA's IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that +the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to +the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other +things: +• establishment registration and device listing; +• the QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and +other quality assurance procedures during all aspects of the manufacturing process; +• labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or "off-label" uses and other +requirements related to promotional activities; +• medical device reporting regulations, which require that manufacture's report to the FDA if their device may have caused or contributed to a +death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the +malfunction were to recur; +• corrections and removal reporting regulations, which require that manufacture's report to the FDA field corrections or removals if undertaken +to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +• post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to +provide additional safety and effectiveness data for the device. +To +ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. +Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which +35 +Table of Contents +may +include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial +suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +Since our acquisition of Aushon Biosystems, Inc. in January 2018, we own and operate a CLIA certified laboratory. The Clinical Laboratory +Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and +basic research). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health +assessment and for the diagnosis, prevention, or treatment of disease. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, +personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite +to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In +addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If +a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As +a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial +survey is conducted by the Centers for Medicare & Medicaid Services ("CMS"), a CMS agent (typically a state agency), or, a CMS-approved accreditation organization. +High +complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered +by nearly all complex laboratories for the last few decades as Laboratory Developed Tests, or LDTs, which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it +has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA +regulations regarding medical devices. During 2010, the FDA publicly announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the +industry +regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the +highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced its framework and timetable for implementing +this guidance. On November 18, 2016, the FDA announced it would not release final guidance at that time and instead would continue to work with stakeholders, the new administration and Congress +to determine the right approach. On January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA +indicated that Congress should enact legislation to address improved oversight of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. We +cannot predict the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory approach by the FDA may lead to an increased regulatory burden, +including additional costs and delays in introducing new tests. While the ultimate impact of the FDA's approach is unknown, it may be extensive and may result in significant change. +In +addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, +as applicable, from +36 +Table of Contents +various +states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of +which requires out-of-state laboratories to obtain licensure. +If +a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, +limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory's CLIA certificate or state license may also result in +the inability to receive payments from state and federal health care programs as well as private third party payors. +If, +in the future, we perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as +additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries +prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be +easier or more difficult to satisfy and are subject to change. For example, the European Union, or EU, recently published new regulations that will result in greater regulation of medical devices and +IVDs. The IVD Regulation is significantly different from the IVD Directive that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member +states, include a risk-based classification system and increase the requirements for conformity assessment. The conformity assessment process results in the receipt of a CE designation which has been +sufficient to begin marketing many types of IVDs. That process will become more difficult and costly to complete. +Other Governmental Regulation +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, +transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration, or OSHA, has +established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect +workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory +supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United +States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may +use during our research. +Employees +As of December 31, 2018, we had 177 employees, of which 78 work in sales, sales support, field service, and marketing, 38 work in +engineering and research and development, 36 work in manufacturing and operations and 25 work in general and administrative. As of December 31, 2018, of our 177 employees, 160 were located in +the United States and 17 were employed outside the United +States. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. +37 +Table of Contents +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name "Digital Genomics, Inc." In August 2007, we +changed our name to "Quanterix Corporation." Our principal executive offices are located at 113 Hartwell Avenue, Lexington, Massachusetts 02421, and our telephone number is (617) 301-9400. We +expect to relocate our principal executive offices in the second quarter of 2019 to 900 Middlesex Turnpike, Billerica, Massachusetts 01821. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be +accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K +solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on +Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amdended, or the Exchange Act. We make these +reports available through the "Investors—Financial Information—SEC Filings" section of our website as soon as reasonably practicable after we electronically file such reports +with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to +Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can review our electronically filed reports and other +information that we file with the SEC on the SEC's website at http://www.sec.gov . \ No newline at end of file diff --git a/raw/filings/0001503274/2018/0001047469-19-001374/item13.txt b/raw/filings/0001503274/2018/0001047469-19-001374/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c802a593b433a49dfb6c5bb85d0c9598a010f0aa --- /dev/null +++ b/raw/filings/0001503274/2018/0001047469-19-001374/item13.txt @@ -0,0 +1,3 @@ +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our +2019 Annual Meeting of Stockholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001503274/2018/0001047469-19-001374/item9a.txt b/raw/filings/0001503274/2018/0001047469-19-001374/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..0a2e5423035ccee00a69b374c985cbec67dfeaf3 --- /dev/null +++ b/raw/filings/0001503274/2018/0001047469-19-001374/item9a.txt @@ -0,0 +1,31 @@ +Item 9A. CONTROLS AND PROCEDURES +(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial +officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this +Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we +file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our +management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. +(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, +identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to +materially affect, our internal control over financial reporting. +(c) Management's Annual Report on Internal Control Over Financial Reporting. Our management is responsible for +establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as +a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management and other personnel to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our +internal control over financial reporting includes those policies and procedures that: +• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our +assets; +• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with +generally accepted accounting principles, and that our +95 +Table of Contents +receipts +and expenditures are being made only in accordance with authorizations of management and our directors; and +• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could +have a material effect on the financial statements. +Because +of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods +are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under +the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the +effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of +the Treadway Commission. Based on our evaluation under that framework, our management concluded that our internal controls over financial reporting were effective as of December 31, 2018. \ No newline at end of file diff --git a/raw/filings/0001503274/2018/0001047469-19-001374/rp_note.txt b/raw/filings/0001503274/2018/0001047469-19-001374/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..7a78b1a01489b90c8c51328d431aacfcd5aad664 --- /dev/null +++ b/raw/filings/0001503274/2018/0001047469-19-001374/rp_note.txt @@ -0,0 +1,32 @@ +15. Related party transactions +As described in Notes 11 and 7, bioMérieux is a customer through its Joint Development and License Agreement and also a holder of the Company's common stock. +bioMérieux formerly also had a designee on the Company's Board of Directors. They Company recognized revenue related to the JDLA with bioMérieux of $2.1 million, +$1.1 million, and $0.2 million, in the years ended December 31, 2018, 2017, and 2016 respectively, from bioMérieux. They also had no deferred revenue as of +December 31, 2018 and had deferred revenue of $2.1 million at December 31, 2017. As described in Note 8, bioMérieux purchased shares of our Series C +Preferred Stock totaling $7.0 million in the year ended December 31, 2015. +As +described in Note 7, in March 2016, the Company issued an aggregate of 12,420,262 shares of Series D Preferred Stock for an aggregate purchase price of +$45.6 million. Of the amount issued, $22.9 million was purchased by the Company's existing principal stockholders, officers and directors. +As +described in Note 7, in June 2017, the Company issued an aggregate of 2,113,902 share of Series D-1 Preferred Stock for an aggregate purchase price of +$8.5 million. Of the amount issued, $1.0 million was purchased by a director of the Company. +As +described in Note 9, in June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University (Tufts). Tufts +is a related party to the Company due to Tuft's equity ownership in the Company and because a board member of the Company's Board of Directors was affiliated with Tufts. During the years ended +December 31, 2018, 2017, and 2016 the Company recorded royalty expense of $0.7 million, $0.5 million, and $0.3 million, respectively, in cost of product revenue on the +consolidated statements of operations and comprehensive loss. During the year ended December 31, 2016, the Company recognized $0.4 million as cost of license revenue associated with a +payment made to Tufts. +During +the year ended December 31, 2017 Harvard University became a related party. Revenue recorded from sales to Harvard University were less than $0.1 million for each of +the years ended December 31, 2018 and December 31, 2017. +On +November 28 th , the Company entered into a sponsor agreement with PPH, a 501(c)6 not-for-profit entity of which an executive of the Company is a board member, +through December 31, 2018. The agreement commits a maximum of $120,000 in funds and services to be provided to PPH for the term of the agreement. The agreement is terminable by either party and +does not bind the +F-51 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements (Continued) +15. Related party transactions (Continued) +Company +to beyond the term of the agreement. As of the year ended December 31, 2018, the Company had a total contributed amount less than $0.1 million. \ No newline at end of file diff --git a/raw/filings/0001503274/2018/0001047469-19-001374/rpt_disclosure.txt b/raw/filings/0001503274/2018/0001047469-19-001374/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..0944b020ea28817b61ddb99c0c2bb9a6b8421cf3 --- /dev/null +++ b/raw/filings/0001503274/2018/0001047469-19-001374/rpt_disclosure.txt @@ -0,0 +1,172 @@ +CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS +Since January 1, 2017, we have engaged in the following transactions with our directors, director nominees, executive officers and +holders of more than 5% of our common stock, which we refer to as our principal stockholders, and affiliates or immediate family members of our directors, executive officers and principal +stockholders. We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties. +Some +of our directors are or were recently affiliated with our principal stockholders as indicated below: +Director +Affiliation with principal stockholder +Keith L. Crandell +Managing Director of ARCH Venture Partners VI, LLC, the ultimate general partner of ARCH Venture Fund VI, L.P., and Managing Director of ARCH Venture Partners VIII, LLC, the general partner +of ARCH Venture Fund VIII Overage, L.P. +Douglas G. Cole, M.D. +Managing Partner of Flagship Pioneering and a member of Flagship Ventures General Partner LLC, the sole general partner of Flagship Ventures Fund 2004, L.P. +John M. Connolly +Senior Advisor to Bain Capital Ventures, the ultimate general partner of Bain Capital Venture Fund 2005, L.P., BCIP Associates III, LLC and BCIP Associates III-B, +LLC. +Participation in Our Initial Public Offering +In December 2017, we issued an aggregate of 4,916,480 shares of our common stock at a purchase price of $15.00 per share, which included 641,280 +shares of common stock issued upon exercise by the underwriters of their option to purchase additional shares. Gross proceeds from the offering were approximately $73 million, prior to +deducting underwriting discounts and commissions and offering expenses payable by the Company. +The +table below sets forth the aggregate number of shares of our common stock issued to our directors, executive officers or holders of more than 5% of our capital stock, or an affiliate +or immediate family member thereof, at the time of the transaction: +Shares +Aggregate +Purchase Price +David R. Walt, Ph.D. +200,000 +$ +3,000,000 +Marijn Dekkers, Ph.D. +40,000 +$ +600,000 +E. Kevin Hrusovsky +34,000 +$ +510,000 +Arch Venture Fund VIII Overage +266,000 +$ +3,990,000 +Cormorant Global Healthcare Fund, LP +100,000 +$ +1,500,000 +Trinitas Innovation-Q Investment Co., Ltd. +55,000 +$ +825,000 +Series D-1 Preferred Stock Financing +In June 2017, we issued an aggregate of 2,113,902 shares of our Series D-1 preferred stock at $4.021 per share for an aggregate purchase +price of approximately $8.5 million, which we refer to as the Series D-1 preferred stock financing. Each share of our Series D-1 preferred stock converted automatically into +0.3111 shares of our common stock immediately prior to the completion of our initial public offering on December 11, 2017. +29 +Table of Contents +The +following table summarizes the Series D-1 preferred stock purchased by our directors, executive officers and principal stockholders. +Name of Purchaser +Number of Shares +of Series D-1 +Preferred Stock +Purchased +Aggregate +Purchase +Price +Marijn Dekkers, Ph.D.(1) +248,694 +$ +999,999 +(1) Dr. Dekkers +is a director of the Company. +License Agreement with Tufts University +We entered into a License Agreement with Tufts University pursuant to which we obtained an exclusive, worldwide license to research, develop, +commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the +Simoa technology owned by Tufts University, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable for a fee. One of our +directors and our founding scientist, David R. Walt, Ph.D. previously served as University Professor, Professor of Biomedical Engineering, Professor of Genetics, Professor of Neuroscience, Professor +of Cell and Molecular Biology, and Professor of Oral Medicine at Tufts University. Under that agreement, we are required to pay Tufts University royalties on all net sales of products and services as +well as a portion of any sublicensing revenues. Tufts University pays a portion of the royalties received from us to Dr. Walt, the amount of which is controlled solely by Tufts University. +Registration Rights +Pursuant to our registration rights agreement to which certain of our principal stockholders, directors and their affiliates are parties, the +holders of certain shares of common stock and warrants to purchase shares of our common stock are entitled to registration rights with respect to the shares of common stock held by them. These shares +include the shares held (and shares issuable upon the exercise of warrants held) by ARCH Venture Partners and affiliated funds, Bain Capital Venture entities, Flagship Ventures Fund 2005, L.P., +and our directors Marijn Dekkers, Ph.D. and David R. Walt, Ph.D., and an affiliate of our director Paul M. Meister. See "Security Ownership of Certain Beneficial Owners and Management." +Under +our registration rights agreement, holders of registrable shares can demand that we file a registration statement or request that their shares be included on a registration +statement that we are otherwise filing, in either case, registering the resale of their shares of common stock. The registration rights will terminate at the earlier of the closing of a Change of +Control Event, as such term is defined in our restated certificate of incorporation, (b) such time as Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, or +another similar exemption under the Securities Act is available for the sale of all of such registrable shares without limitation during a three-month period without registration (and without the +requirement for us to be in compliance with the current public information required under Rule 144(c)(1)), or (3) the fifth anniversary of the completion of our initial public offering. +Demand Registration Rights. The holders of a majority of the registrable shares may require us to file a registration +statement under the +Securities Act at our expense, subject to certain exceptions, with respect to the resale of their registrable shares having an aggregate offering price (net of underwriting discounts and commissions, +if any) of at least $5 million, and we are required to use our reasonable best efforts to effect the registration. The holders of a majority of the registrable shares may require us to effect +up to two such demand registrations for the holders of registrable shares as a group. In the +30 +Table of Contents +event +we are required to effect such a demand registration, we may not effect any other registration of securities for sale for our own account (other than a registration effected solely to implement +an employee benefit plan or in certain business combination transactions) within 120 days following the effective date of the demand registration. +We +are also required to use our reasonable best efforts to qualify and remain qualified to register securities pursuant to a registration statement on Form S-3 under the +Securities Act. Any holder or holders of registrable shares anticipated to have an aggregate sale price (net of underwriting discounts and commissions, if any) in excess of $1 million will have +the right to require us to file, at our expense, an unlimited number of registration statements on Form S-3 for the registrable shares held by such requesting holder or holders, and we are +required to use our reasonable best efforts to effect such registrations. +Piggyback Registration Rights. If we propose to register any of our securities under the Securities Act for sale to the public +(except with respect +to registration statements on Form S-4, Form S-8 or another form not available for registering the registrable shares for sale to the public), the holders of registrable shares are +entitled to notice of such registration and to request that we include registrable shares for resale on such registration statement, subject to the right of any underwriter to limit the number of +shares included in such registration. The requisite holders of these "piggyback" registration rights have waived their rights in connection with the filing of our registration statement on +Form S-3 (File No. 333-230399). +We +will pay all registration expenses, other than underwriting fees, commissions or discounts, related to any demand or piggyback registration, including up to $50,000 of fees and +disbursements of counsel for the holders of registrable shares. The Registration Rights Agreement contains customary cross-indemnification provisions, pursuant to which we are obligated to indemnify +the selling stockholders in the event of misstatements or omissions in the registration statement attributable to us and they are obligated to indemnify us for misstatements or omissions attributable +to them. +Agreements with Directors +On March 20, 2017, we entered into a letter agreement with our director Marijn Dekkers, Ph.D. pursuant to which Dr. Dekkers agreed +to serve as a member of our board of directors. Pursuant to the letter agreement, we granted Dr. Dekkers an option to purchase 100,000 shares of our common stock vesting over four years. In +addition, we agreed to provide Dr. Dekkers with the opportunity to participate in any private placement financing transaction we entered into prior to completion of our initial public offering +on the same terms as other investors in such transaction. We also agreed to pay Dr. Dekkers compensation of $25,000 per year for service on our board of directors and to reimburse +Dr. Dekkers for his reasonable out-of-pocket expenses in attending board and committee meetings. We also agreed to provide indemnification of Dr. Dekkers pursuant to our certificate of +incorporation, an indemnification agreement and our director and officer insurance. This agreement terminated upon adoption of our non-employee director compensation policy in 2018. +On +August 7, 2013, we entered into a letter agreement with our director Paul M. Meister pursuant to which Mr. Meister agreed to serve as a member of our board of directors. +Pursuant to the letter agreement, we granted Mr. Meister an option to purchase 75,000 shares of our common stock vesting over four years. We also agreed to pay Mr. Meister compensation +of $25,000 per year for service on our board of directors and to reimburse Mr. Meister for his reasonable out-of-pocket expenses in attending board and committee meetings. We also agreed to +provide indemnification of Mr. Meister pursuant to our certificate of incorporation, an indemnification agreement and our director and officer insurance. This agreement terminated upon adoption +of our non-employee director compensation policy in 2018. +31 +Table of Contents +On +January 1, 2014, we entered into a letter agreement with our director David Walt, Ph.D. pursuant to which we agreed to pay Dr. Walt compensation of $25,000 per year for +service on our board of directors, commencing as of January 1, 2014 and for so long as he continues to serve as a non-employee member of our board of directors, and to reimburse Dr. Walt +for his reasonable out-of-pocket expenses in attending board and committee meetings. This agreement terminated upon adoption of our non-employee director compensation policy in 2018. +Indemnification Agreements with Officers and Directors and Directors' and Officers' Liability Insurance +We have entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements, our restated +certificate of incorporation and our restated bylaws require us to indemnify our directors to the fullest extent not prohibited by Delaware law. Subject to certain limitations, our restated bylaws +also require us to advance expenses incurred by our directors and officers. +Our +2017 Employee, Director and Consultant Equity Incentive Plan and our 2007 Stock Option and Grant Plan, as amended, also provide that our directors (and in the case of the 2017 plan, +our employees) will not be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the respective plan, and the members of our board of +directors and any committee administering the plan will be entitled to indemnification and reimbursement by us in respect of any claim, loss, damage or expense (including reasonable attorneys' fees) +arising or resulting therefrom to the fullest extent permitted by law and/or under any directors' and officers' liability insurance coverage which may be in effect from time to time. +We +also maintain a general liability insurance policy which covers certain liabilities of directors and officers of our company arising out of claims based on acts or omissions in their +capacities as directors or officers. +Policies and Procedures for Related Party Transactions +Pursuant to its charter, our audit committee is responsible for reviewing and approving, prior to our entry into any such transaction, all +transactions reportable by us under Item 404 of Regulation S-K in which we are a participant and in which any parties related to us, including our executive officers, our directors, +beneficial owners of more than 5% of our securities, immediate family members of the foregoing persons and any other persons whom our board of directors determines may be considered related persons +under Item 404 of Regulation S-K, has or is expected to have a direct or indirect material interest. +In +reviewing and approving such transactions, the audit committee will obtain, or will direct our management to obtain on its behalf, all information that the committee believes to be +relevant and important to a review of the transaction prior to its approval. Following receipt of the necessary information, a discussion will be held of the relevant factors if deemed to be necessary +by the committee prior to approval. If a discussion is not deemed to be necessary, approval may be given by +written consent of the committee. This approval authority may also be delegated to the chair of the audit committee in some circumstances. No related person transaction will be entered into prior to +the completion of these procedures. +The +audit committee or its chair, as the case may be, will approve only those related person transactions that are determined to be in, or not inconsistent with, the best interests of us +and our stockholders, taking into account all available facts and circumstances as the committee or the chair determines in good faith to be necessary in accordance with principles of Delaware law +generally applicable to directors of a Delaware corporation. These facts and circumstances will typically include, but not be limited to, the benefits of the transaction to us; the impact on a +director's independence in +32 +Table of Contents +the +event the related person is a director, an immediate family member of a director or an entity in which a director is a partner, stockholder or executive officer; the availability of other sources +for comparable products or services; the terms of the transaction; and the terms of comparable transactions that would be available to unrelated third parties or to employees generally. No member of +the audit committee will participate in any review, consideration or approval of any related person transaction with respect to which the member or any of his or her immediate family members has an +interest. +33 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001503274/2019/0001558370-20-002676/filing.txt b/raw/filings/0001503274/2019/0001558370-20-002676/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..00ccae1a97c13e77ebf23c87a11374b9d1e41a3e --- /dev/null +++ b/raw/filings/0001503274/2019/0001558370-20-002676/filing.txt @@ -0,0 +1,5302 @@ +10-K +1 +qtrx-20191231x10k.htm +10-K +qtrx_Current_Folio_10K_Taxonomy2019 +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2019 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission file number: 001‑38319 +QUANTERIX CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +20‑8957988 +(I.R.S. Employer Identification No.) +900 Middlesex Turnpike, Billerica, MA +(Address of principal executive offices) +01821 +(Zip Code) +Registrant’s telephone number, including area code: (617) 301‑9400 +Securities registered pursuant to Section 12(b) of the Exchange Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value per share +QTRX +The Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Exchange Act: None +Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☒ +Non‑accelerated filer ☐ +Smaller reporting company ☒ +Emerging growth company ☒ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒ +As of the last business day of the registrant’s most recently completed second fiscal quarter (June 28, 2019), the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last reported sales price for the registrant’s common stock, par value $0.001 per share, on The Nasdaq Global Market on such date, was approximately $547 million. +As of March 1, 2020, the registrant had 28,225,653 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive proxy statement for its 2020 Annual Meeting of Stockholders, which the registrant intends to file with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2019, are incorporated by reference into Part III of this Annual Report on Form 10‑K. +Table of Contents +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +1 +Item 1A. +Risk Factors +37 +Item 1B. +Unresolved Staff Comments +69 +Item 2. +Properties +69 +Item 3. +Legal Proceedings +69 +Item 4. +Mine Safety Disclosures +69 +PART II +Item 5. +Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +70 +Item 6. +Selected Financial Data +70 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +71 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +88 +Item 8. +Financial Statements and Supplementary Data +89 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +89 +Item 9A. +Controls and Procedures +89 +Item 9B. +Other Information +90 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +90 +Item 11. +Executive Compensation +90 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +90 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +90 +Item 14. +Principal Accountant Fees and Services +90 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +90 +Item 16. +Form 10‑K Summary +96 +Signatures +97 +Consolidated Financial Statements +F-1 +i +Table of Contents +Special Note Regarding Forward‑Looking Statements +This Annual Report on Form 10‑K contains forward‑looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10‑K are forward‑looking statements. In some cases, you can identify forward‑looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward‑looking statements include, but are not limited to, statements about: +· +the implementation of our business model and strategic plans for our business, products and services; +· +the potential size of the markets and fields addressable by our Simoa technology platforms; +· +the commercialization and adoption of our existing products and services and the success of our new product offerings; +· +our ability to develop additional assays, including multiplexed assays; +· +the accuracy of our estimates regarding expenses, future revenues, capital requirements and our needs for additional financing; +· +the ability of our Simoa technology’s sensitivity to improve existing diagnostics and to enable the development of new diagnostic tests and tools; +· +the potential of our Simoa technology in the field of companion diagnostics and its adoption by healthcare professionals; +· +the impact of our Simoa technology on proteomic research; +· +the usefulness of the data generated by our Simoa technology in the life science research, diagnostic and precision health screening fields; and +· +our financial performance. +These forward‑looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Part I, Item 1A, Risk Factors” and elsewhere in this Annual Report on Form 10‑K. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward‑looking statements we may make. In light of these risks, uncertainties and assumptions, the forward‑looking events and circumstances discussed in this Annual Report on Form 10‑K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward‑looking statements. +You should not rely upon forward‑looking statements as predictions of future events. Although we believe that the expectations reflected in the forward‑looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward‑looking statements will be achieved or occur. We undertake no obligation to update publicly any forward‑looking statements for any reason after the date of this Annual Report on Form 10‑K to conform these statements to new information, actual results or to changes in our expectations, except as required by law. +You should read this Annual Report on Form 10‑K and the documents that we reference herein and have filed with the Securities and Exchange Commission, or SEC, as exhibits to this Annual Report on Form 10‑K with the +ii +Table of Contents +understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect. +This Annual Report on Form 10‑K includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third‑party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. This Annual Report on Form 10‑K also contains estimates and other statistical data from a custom market research report by an independent third‑party research firm, which was commissioned by us and was issued in June 2017, referred to herein as the Third‑Party Research Report. Such data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the markets in which we operate and intend to operate that are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions and estimates. +Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “us” and “our” in this Annual Report on Form 10‑K refer to Quanterix Corporation. “Quanterix,” “Simoa,” “Simoa HD-X,” “Simoa HD‑1,” “SR‑X,” “SP‑X”, “HD-X Analyzer”, “HD‑1 Analyzer” and our logo are our trademarks. All other service marks, trademarks and trade names appearing in this Annual Report on Form 10‑K are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. +iii +Table of Contents +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next generation, ultra‑sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead‑based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We are currently focusing on protein detection, which we believe is an area of significant unmet need and where we have significant competitive advantages. However, in addition to enabling new applications and insights in protein analysis, our Simoa platforms have also demonstrated applicability across other testing applications, including detection of nucleic acids and small molecules. +We believe that our Simoa platforms are the most sensitive commercially available protein detection platforms and significantly advance ELISA technology, which has been the industry standard for protein detection for over 40 years. Proteins are complex molecules that are required for the structure, function and regulation of the body’s tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes can produce over 100,000 different proteins, approximately 10,500 of which are known to be secreted in blood. Accordingly, while research on nucleic acids provides valuable information about the role of genes in health and disease, proteins are more prevalent and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, reflecting the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. +Researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease‑ or injury‑elevated levels. We believe that Simoa’s sensitivity offers a new way to monitor healthy individuals and detect proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical signs and symptoms have appeared. +Our Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited in more than 675 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over 650 customers across our end markets, and includes 19 of the 20 largest biopharmaceutical companies. +Our Market Opportunities +Our Simoa platforms have applications across the life science research, diagnostics and precision health screening markets. Our initial target market has been the life science research market, in particular neurology and oncology. According to estimates in the Third‑Party Research Report, we believe that the current addressable neurology and oncology life science research market is approximately $1.1 billion per year, and the total life science research market is approximately $3 billion per year and has the potential to reach as much as $8 billion per year. However, as +1 +Table of Contents +our customers continue to gain experience with our proprietary Simoa technology, we believe the opportunity to access markets beyond research, such as diagnostics and precision health screening, will be significant. The Third‑Party Research Report also estimates that the diagnostic and precision health screening markets have the potential to reach an aggregate of more than $30 billion per year. +Life Science Research +Our initial target market has been the large and growing life science research market. We believe our Simoa platforms are well‑positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. By substantially lowering the limit of detection of protein biomarkers, we believe that Simoa is penetrating the existing market for protein analysis and holds potential to significantly grow the life science research market as researchers expand their research into the diseases associated with the thousands of proteins that were previously undetectable. Simoa also enables earlier detection of the proteins that are currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. As an indication of the market’s acceptance of our technology, biopharmaceutical researchers are also integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. In addition to enabling new applications and insights in protein analysis, our Simoa bead‑based technology can be used to detect other analytes, such as nucleic acids and small molecules, which expands our market opportunity. We believe that this technology has the potential to ultimately provide the same sensitivity as polymerase chain reaction, or PCR, which is the most commonly used technology for nucleic acid detection, without the distortion and bias issues associated with amplification used in PCR. +Diagnostics +We believe the diagnostic market represents a significant commercial opportunity for our Simoa technology as well. We believe existing diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa. We also believe that the ultra‑sensitive protein detection provided by Simoa can enable the development of a new category of non‑invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +Simoa technology also has significant potential in the emerging field of companion diagnostics. Drug developers can use Simoa to stratify patients into categories, enabling selection of those patients for whom a drug is expected to be most effective and safe. Not only does Simoa have the potential to be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity may also enable the development of companion diagnostics based on protein biomarkers that can regularly monitor whether an approved drug is having the desired biological effect, enabling doctors to quickly and efficiently adjust the course of treatment as appropriate. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of proteins in low abundance that are undetectable using conventional, analog immunoassay technologies may enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +Simoa products sold or used in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. To date, we have not received or applied for regulatory approvals for +2 +Table of Contents +Simoa products. See “Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement” and “—Government Regulation” for a more detailed discussion regarding the regulatory approvals that may be required. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme‑linked immunosorbent assay, or ELISA, technology, which has been the most widely used method of detection of proteins for over 40 years. Given our target customers’ familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. Our Simoa bead‑based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to our bead‑based technology’s unprecedented sensitivity. In January 2018, we acquired Aushon BioSystems, Inc., or Aushon, and its proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to provide the same Simoa sensitivity found in our Simoa bead‑based platform. We currently offer the following three Simoa instruments, which we believe are the most sensitive protein detection platforms commercially available today: +· +HD‑X : We commercially launched our HD‑X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD‑X is based on our bead‑based technology, and assays run on the HD‑X are fully automated. We believe the full automation of the HD‑X provides us with an additional significant competitive advantage with biopharmaceutical customers. +· +SR‑X : We commercially launched our SR‑X instrument in December 2017. The SR‑X utilizes the same Simoa bead‑based technology and assay kits as the HD‑1 in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of potential applications. +· +SP‑X : We commercially launched our SP-X instrument in April 2019. The SP‑X is based on our planar array technology, which allows for significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The current menu of approximately 80 analyte‑specific single‑plex and multi‑plex bead‑based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 100 biomarkers ranging from 1‑10 analytes per assay in the areas of immunology and oncology research. We intend to continue to increase the number of Simoa biomarker assays across our platforms. In addition, both the bead‑based platform and the planar array platform allow ease and flexibility in assay design, enabling our customers to develop their own in‑house assays, called “homebrew” assays. +We also provide contract research services for customers through our CLIA‑certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 800 projects for approximately 200 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +In addition, in August 2019, we completed the acquisition of UmanDiagnostics AB, or Uman, a company located in Umeå , Sweden, that supplies neurofilament light (Nf-L) antibodies and Nf-L ELISA kits. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Nf-L has seen a dramatic growth as a neurologicval biomarker in the last three +3 +Table of Contents +years since we developed the first assay that could reliably measure Nf-L in blood using Uman’s antibodies and our Simoa technology. This innovation allowed research, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly and has led many of the world’s foremost neurology researchers and clinicians to conclude that Nf-L may be one of the most clinically relevant brain biomarkers available today. Despite significant efforts by us and others to identify or develop an alternative source of antibodies, the Uman Nf-L antibodies remain the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. The following graphic depicts the sensitivity of the Uman antibodies to detect Nf-L in blood and CSF compared to over a dozen other antibody pairs tested by Quanterix: +The superiority of the Uman antibodies is further evidenced by the fact that, to date, in nearly 500 publications relating to the detection of Nf-L in CSF or blood, over 75% used the Uman antibodies, and in over 180 publications relating to the detection of Nf-L in blood, 100% used the Uman antibodies. +The Uman acquisition s ecures the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services, provides us with additional revenue opportunities via the sale of the Nf-L antibodies and Nf-L ELISA kits, and positions us to capitalize on significant growth opportunities with Nf-L applications in Alzheimer’s disease, multiple sclerosis, and other neurodegenerative conditions. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide (excluding certain Nordic countries). We have an extensive base of customers in world class academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Competitive Strengths +We believe that our competitive strengths include the following: +· +Proprietary ultra‑sensitive Simoa digital immunoassay technology platforms, that enable researchers and clinicians to obtain information from less invasive procedures in smaller sample sizes. We believe our Simoa platforms are the most sensitive commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our +4 +Table of Contents +Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. We believe that sensitivity is so important that we have implemented a research and development effort with a goal to increase the sensitivity of our Simoa technology 100‑fold by the end of 2021. +· +Technology platforms that leverage and improve upon industry standard ELISA technology. Simoa uses the basic principles of conventional bead‑based ELISA immunoassay technology. Adding digital capability to this industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers’ familiarity with the core ELISA technology, our Simoa platforms are easily integrated with existing customer workflows including data analysis. +· +Deep and expanding scientific validation. Our Simoa technology has been cited in more than 675 scientific publications, including JAMA Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. We have established relationships with key opinion leaders, and our growing base of over 650 customers includes some of the world’s leading academic and government research institutions as well as 19 of the 20 largest biopharmaceutical companies. +· +Leading position in market solidified by robust customization capabilities, assay design flexibility and automation of our HD‑X instrument. Our technical capabilities and expertise allow our customers to design high‑quality, customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead‑based and planar array platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD‑X instrument provides fully automated analysis from sample introduction to analytical results, and our proprietary array approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater throughput and lab efficiency. +· +Highly attractive business model that leverages growing installed base of instruments. As we continue to grow our installed instrument base, optimize workflows and expand our assay menu, we expect to increase our revenues derived from consumables. The integration of our technology in our customers’ projects also provides ongoing sales of assays and consumables, resulting in a growing revenue stream. Our consumables revenue increased to $25.6 million in 2019 from $13.8 million in 2018 and $7.6 million in 2017, and represented approximately 45% of our total revenue in 2019. +· +Our highly experienced senior management team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our strategy to achieve this includes: +· +Focus on the highly attractive, expanding market for protein detection and analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a +5 +Table of Contents +person’s body in real time. Our technology provides a unique bridge between understanding the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and drug development. +· +Continue to drive adoption of our Simoa technology in the life science research market in the near-term, and the diagnostics and precision health screening markets in the long-term. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We also believe Simoa technology has the capability to enable the development of a new category of non‑invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. In the precision health screening market, we believe that Simoa technology has the potential to someday be used to monitor biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of disease. +· +Leverage the growing importance of Nf-L as a biomarker to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of Nf-L as a neuro biomarker has increased significantly in the last three years since we developed the first assay that could reliably measure Nf-L in blood. This allowed research of neirological disorders, previously limited primarily to CSF, to expand significantly, and many of the world’s foremost neurology researchers and clinicians believe that Nf-L may be one of the most clinically relevant brain biomarkers available today. To capitalize on the growing importance of this biomarker, in mid-2019, we acquired Uman and its proprietary Nf-L antibodies, which we believe are the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. We believe that this acquisition positions us to capitalize on significant growth opportunities with Nf-L applications in neurodegenerative conditions . +· +Grow into new markets organically with our customers and through strategic collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of some of the work that our customers are doing today in the research market. For example, Simoa’s unprecedented sensitivity has the potential to uncover research insights that could identify novel biomarkers, which could help stratify patients in clinical trials potentially leading to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. We believe this progression with our customers will help us move into new markets organically in a cost effective manner, while also retaining significant upside. For example, following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary Nf-L antibodies, which will allow Siemens Healthineers to begin developing blood-based Nf-L clinical tests for future commercialization. Additionally, we currently have a partnership in place with a leading diagnostics company in the field of blood screening and plan to continue evaluating strategic collaborations that could help us access new markets . +· +Grow through strategic acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For example, in January 2018, we acquired Aushon and its proprietary sensitive planar array detection technology, which led to the development of our SP‑X instrument. In mid-2019, we also acquired Uman, securing the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services and positioning us to capitalize on the growing significance of Nf-L as a neurological biomarker. We expect that acquisitions will continue to be an important part of our strategy to increase scale, and we intend to pursue acquisitions to expand product offerings, strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +6 +Table of Contents +Industry Background +We intend to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. Our initial commercial strategy targets the large and growing life science research market, and we believe that the diagnostic market and the precision health screening market represent significant future commercial opportunities for Simoa. According to estimates in the Third‑Party Research Report, we believe the aggregate commercial opportunity across these markets has the potential to expand to up to $40 billion. +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and regulation of the body’s tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an organism’s proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot provide. +The human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, approximately 10,500 of which are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of much of the proteome has not been practical given the limited level of sensitivity of existing technologies. To date, across our platforms, we have developed assays that address approximately 145 protein biomarkers secreted or released in blood and CSF. +While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of environmental factors and lifestyle, such as diet and exercise, or provide insight into what is happening in a patient’s body in real time. For example, identical twins have the same genotype, but may develop different diseases over the course of their lifetime, largely due to environmental factors. +Much like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic research. With our ultra‑sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and well‑being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +Existing Technologies and Their Limitations +Protein Analysis +The enzyme‑linked immunosorbent assay, or ELISA, has been the most widely used method of sensitive detection of proteins for over 40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either directly, or indirectly through use of a conjugated secondary or “capture” antibody (sandwich ELISA). A specific “detection” antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final step, a +7 +Table of Contents +substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the graphic below: +Aside from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, Raman‑enhanced signal detection, immuno‑PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of what is estimated to be approximately 10,500 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of these approaches have limitations, including: +· +dilution of colored or fluorescent product molecules due to large volume of liquid in traditional‑sized wells, limiting sensitivity; +· +narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +· +low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +· +limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers aimed at more effectively detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become detectable. PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias into the data, potentially compromising the reliability of results, particularly at low concentrations. +8 +Table of Contents +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection sensitivity. +Simoa Bead‑Based Technology +Simoa bead‑based digital immunoassays utilize the basic principles of conventional bead‑based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme‑substrate reaction on all molecules in one well, Simoa bead‑based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead‑based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our Simoa bead‑based platform is highly flexible, designed to enable practical high‑sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead‑based technology detects proteins: +Simoa Bead‑Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead‑based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme‑linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white star in the graphic on the left). The enzyme associated with the enzyme‑linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the graphic). +9 +Table of Contents +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 microwells, each of which is large enough to accommodate only a single bead. +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our Simoa bead‑based technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on +10 +Table of Contents +earlier detection, monitoring, prognosis and, ultimately, prevention. We have also implemented a research and development effort with a goal to increase the sensitivity of our Simoa technology 100‑fold by the end of 2021. +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from a sample, and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while competitive platforms lose sensitivity when multiplexing is used. Multiplexing is achieved with our Simoa bead‑based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. While we have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the HD‑X, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of proteins in a single sample, we believe that the ability to multiplex above a 6‑plex and maintain single‑plex sensitivity and precision may be limited using bead‑based technology due to constraints in the number of bead‑containing wells for each plex that are imaged on the Simoa disk. In 2017, we commercially launched a Simoa neurology 4‑plex assay (Nf‑L, tau, GFAP and UCH‑L1) for the study of neurodegenerative conditions and traumatic brain injury. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost‑effectiveness. In the first quarter of 2020, we launched a new Simoa 6‑plex human cytokine Simoa bead‑based assay for the HD-X and SR-X instrument platforms. This assay is the only commercially available product supporting quantitative measurement of six key immunomodulatory cytokines (IFNg, IL-6, IL-10, IL-12p70, IL-17A and TNFa) at baseline levels in both normal healthy individuals and patient cohorts in therapeutic areas spanning cancer, autoimmune disease, neurodegeneration and infectious disease. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate‑based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme‑substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro‑spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +11 +Table of Contents +Our Simoa planar array platform is highly flexible, designed to enable practical high‑sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +A) +Analyte‑specifc capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96‑well microtiter plate. Each microspot contains capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) +Samples are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by washing the plate with a benchtop plate washer or manual wash manifold. +C) +A mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +D) +Streptavidin‑HRP (horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a washing step. +E) +A high‑sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to emit light. +F) +The plate is placed into the Quanterix SP‑X imaging system. A scientific‑grade CCD camera images the entire plate and all micro‑spots simultaneously. The low background of the plate surface and the high‑sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The SP‑X imaging software utilizes algorithms to optimize exposure time and combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +12 +Table of Contents +Below is an image of a 96‑well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We believe the Simoa planar array technology is well‑suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with ultra‑sensitive detection in a multiplex assay format. The figure below demonstrates 10‑plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) listed in femtogram per ml. +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, our Simoa bead‑based technology has also been used to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR‑based assays with the following benefits: +· +no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +13 +Table of Contents +· +reduced cross‑contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; and +· +the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water. +For detection of nucleic acids with our Simoa bead‑based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. This assay is pictured below: +Simoa has been used to detect short sequences of RNA, known as microRNA, that are important in a number of biological systems, and are widely used in innovative therapeutic and gene editing technologies. For example, the assay was used to detect microRNA‑122, or miR‑122, a marker of liver toxicity, from the serum of patients who had overdosed with acetaminophen. As shown in the graph below, these patients had elevated miR‑122 levels compared to healthy controls. +This approach suggests potential for applications for measuring drug‑induced liver injury for both safety testing of drugs in development and for monitoring of approved drugs. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. +14 +Table of Contents +Life Science Research +Our initial target market is the large and growing life science research market. We believe our Simoa platforms are well‑positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +As an indication of the market’s acceptance of our Simoa technology, researchers at pharmaceutical and biotechnology companies are integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non‑invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. In addition, researchers can also use Simoa to monitor a drug candidate’s unwanted effect on “off‑target” biomarkers and predict side effects, addressing the significant issue of drug toxicity, which is a leading cause of death in the United States. We estimate that our Simoa technology has been utilized in projects for over 800 clinical trials to date. +According to estimates in the Third‑Party Research Report, we believe that the current addressable neurology and oncology life science research market is approximately $1.1 billion per year, and the total the life science research market is approximately $3 billion per year and has the potential to reach as much as $8 billion per year. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra‑sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non‑invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +For example, researchers have conducted studies using Simoa that indicate that neurological biomarkers, including tau and Nf‑L, may someday be able to replace diagnostic imaging to diagnose traumatic brain injury, or TBI. Our Simoa assays for tau and Nf‑L are 3,500‑fold and 840‑fold more sensitive, respectively, than conventional ELISA technologies. Almost 90% of patients who visit U.S. hospital emergency rooms and receive a computerized tomography, or CT, scan show no structural brain injury. In addition, CT scans have approximately 100 times more radiation than a chest x‑ray, and are suspected of causing cancer in up to 29,000 people per year, underscoring the need for development of a safe and accurate blood‑based diagnostic test for TBI, which we believe may be enabled by our Simoa technology. +Simoa technology also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients to study for whom a drug is expected to be most effective and safe. Companion diagnostics have demonstrated the ability +15 +Table of Contents +to both improve the probability of approval and accelerate approval of new drugs. Not only could Simoa be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity can also enable the development of companion diagnostics based on protein biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This would quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing dosages or even switching therapies. +There has been significant interest from third parties to use our technology to develop applications for the diagnostic market. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention, enabling a “precision health” revolution. +We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +According to estimates in the Third‑Party Research Report, we believe that the total diagnostic and precision health screening markets addressable using Simoa technology have the potential to reach an aggregate of more than $30 billion per year upon receipt of the necessary regulatory approvals, which we have not yet begun the process to obtain. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses. In particular, we have focused on neurology and oncology, as well as cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra‑low levels, which have traditionally only been detectable in cerebrospinal fluid, or CSF, has the potential to rapidly advance neurology research and drug development, and transform the way brain injuries and diseases are diagnosed and treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood‑based diagnostic test. The challenge with developing blood‑based tests for the brain is that the blood‑brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of which are costly and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood‑brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of these neural biomarkers in the blood are so low that they are undetectable by conventional, analog immunoassay technologies. In 2017, we commercially launched a Simoa neurology 4‑plex assay (Nf‑L, tau, GFAP and UCH‑L1) for the study of neurodegenerative conditions and traumatic brain injury. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost‑effectiveness. +16 +Table of Contents +To date, there have been over 360 neurology-related scientific publications using our Simoa technologies, and we believe that ultra‑sensitive digital detection of neural related biomarkers in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including multiple sclerosis, Alzheimer’s disease, dementia, Parkinson’s disease, and TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. +Evidence of the potential clinical utility of Nf-L as a biomarker in neurological disease is progressing rapidly, in particular with respect to multiple sclerosis. At the 35 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) in September 2019, there were nearly 50 presentations in which our Simoa Nf-L assay was used. In one presentation, Novartis presented positive data from its Phase III ASCLEPIOS I and II studies of its multiple sclerosis drug candidate, ofatumumab. One of the secondary endpoints included serum levels of Nf-L as measured using our Simoa Nf-L assay. Novartis presented data that showed that, starting at three months after initiation of ofatumumab treatment, and then at 12 and 24 months timepoints, patients given ofatumumab had significantly lower blood levels of Nf-L, compared to those in the comparator arm of teriflunomide treated patients. +In another ECTRIMS presentation, Roche presented retrospective data from its Phase III OPERA I, OPERA, II AND ORATORIO trials of its approved multiple sclerosis drug OCREVUS (ocrelizumab). OCREVUS was only approved in 2017, but it has already become the multiple sclerosis market leader in its class, recording sales of $1.72 billion in the first half of 2019. By 2025, annual sales of the drug are estimated to reach $6.8 billion. In the data presented at ECTRIMS, it was shown that treatment with OCREVUS lowered blood Nf-L levels and increased proportion of patients reaching healthy donor range for Nf-L in both relapsing multiple sclerosis and primary progressive multiple sclerosis. Roche believes that this data helps advance the understanding of Nf-L as a potential biomarker of disease activity and for treatment monitoring, and may provide insight into the neuroprotective effects of the drug. +In an article published by Bjornevik et al in JAMA Neurology in September 2019, researchers presented data that showed that levels of serum Nf-L, as measured by the Simoa Nf-L assay, were increased six years before the clinical onset of multiple sclerosis. The researchers concluded that these data indicate that MS may have a prodromal phase lasting several years and that neuroaxonal damage occurs during this phase, emphasizing the importance of early diagnosis and treatment. +In 2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for the neurological biomarker Nf‑L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer’s disease as currently established CSF biomarkers. The study was a major study of almost 600 patients from the Alzheimer’s Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf‑L measurements compared with traditional CSF biomarkers. The diagnostic accuracy of the plasma Simoa Nf‑L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +17 +Table of Contents +In addition, Simoa plasma Nf‑L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer’s disease at baseline and during follow‑up. High plasma Nf‑L correlated with poor cognition and Alzheimer’s disease -related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf‑L may have clinical utility as a noninvasive biomarker in Alzheimer’s disease. +Traumatic brain injuries, or TBIs, lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as Nf‑L, tau, GFAP and UCH-L1, to more adequately address diagnosis of TBIs and overall brain health. +Leading researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high‑impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy, or CTE, which currently can only be diagnosed after death via a brain autopsy. A recent publication by a National Institute of Health researcher indicates that measuring tau in the blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +In 2016, Fast Company named Quanterix one of the “World’s Most Innovative Companies” for our work in concussion detection. We also were awarded two competitive grants from the NFL‑GE Head Health Challenge to advance this work in the detection and quantification of mild TBI. +We estimate that the total addressable market for Simoa technology in neurology has the potential to reach $5.3 billion across research, diagnostic and precision health screening indications. +Oncology +Our ultra‑sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Simoa technology was used in an unpublished scientific study that indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low cost, non‑invasive blood test. In this retrospective study, researchers found that Simoa assays resulted in significantly fewer false positives and false negatives than mammography. Inaccurate mammography can result in unnecessary stress, additional health care costs from follow up diagnostic mammograms, unnecessary biopsies and increased lifetime exposure to radiation. Researchers are also developing ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa technology, potentially replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, cost effective, accurate blood‑based health screens, further enabling the liquid biopsy market. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of immuno‑oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the immuno‑oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a set of 50 tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells +18 +Table of Contents +(T‑regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN‑gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN‑gamma assay. Additionally, we have developed an ultra‑sensitive assay for IL‑6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno‑oncology drugs and protocols. +We also believe residual cancer cell detection post‑surgery or post-treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a greater risk of reoccurrence post‑surgery due to residual cancer. For example, we have developed an ultra‑sensitive biomarker assay for Prostate Specific Antigen, or PSA, that is over 1,000‑fold more sensitive than conventional ELISA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five‑year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +We estimate that the total addressable market for Simoa in oncology has the potential to reach up to $22.7 billion across research, diagnostic and precision health screening indications. To date, there have been over 150 oncology-related scientific publications using our Simoa technologies. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti‑inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro‑inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +19 +Table of Contents +Our Simoa technology also has the potential to be used by companies developing anti‑inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn’s disease undergoing anti‑TNF‑α therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF‑α levels of the patients before and after treatment. These levels were all below the LoD of traditional immunoassays. +We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti‑inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making early stage detection more specific and widely available. +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +For example, we have developed a simple Simoa assay with more than 4,000‑fold greater sensitivity than conventional ELISA assays capable of detecting the HIV‑specific antigen, p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a commercially available nucleic acid testing method, as well as two +20 +Table of Contents +commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile ( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +We will continue to develop Simoa assays for pathogenic antigens that are competitive in sensitivity to PCR but more specific to the pathogenicity of the offending organism. We believe that these Simoa assays could also be invaluable tools for the development of anti‑infective drugs and treatment monitoring of anti‑viral and anti‑bacterial drugs. +Our Products and Services +Our Quanterix commercial portfolio includes research use only instruments, assay kits and other consumables, and contract research services offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD‑X + commercially launched the next‑generation HD‑X in the second half of 2019 +21 +Table of Contents +Product +Key attributes + Simoa bead‑based platform technology + most widely referenced ultra‑sensitive multiplex immunoassay platform on market + fully automated, floor‑standing instrument + wide dynamic range + multiplexing capability (up to 6-plex) with small sample volume + up to 400 samples per eight‑hour shift + homebrew capabilities +SR‑X + commercially launched in December 2017 + Simoa bead‑based platform technology + reader only, benchtop instrument with lower price point + same sensitivity, dynamic range and homebrew capabilities as HD‑X + multiplexing capability: SR‑X currently has up to 6‑plex capability + sample prep and assay protocol flexibility +SP‑X + commercially launched in April 2019 + Simoa planar array platform technology + reader only, benchtop instrument with lower price point + similar sensitivity, dynamic range and homebrew capabilities as HD‑1 + multiplexing capability: SP‑X currently has up to 10‑plex capability + sample prep and assay protocol flexibility +Simoa assays and other consumables + menu of approximately 80 analyte‑specific single‑plex and multi‑plex bead‑based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology + menu of Simoa planar array reagent kits includes approximately 100 biomarkers ranging from 1‑10 analytes per assay in the areas of immunology and oncology research + homebrew kits containing reagents and supporting user guides enabling customers to develop custom assays + proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead‑based assays +22 +Table of Contents +Product +Key attributes +Nf-L antibodies and Nf-L ELISA kits + sold through our wholly-owned subsidiary, Uman, which we acquired in 2019 + Nf-L capture/detection antibodies with unparalleled sensitivity and specificity + Nf-L ELISA kits for CSF; CE-certified in Europe; research use only (RUO) outside of Europe + licensing and supply arrangement with Siemens Healthineers that will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization +Services + contract research services provided through our Accelerator Laboratory + over 800 projects completed to date + extended warranty and service contracts + CLIA‑certified lab available +Instruments and Consumables +HD‑X +We commercially launched our HD‑X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1, our very first instrument, which was launched in January 2014. The HD-X was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD‑X uses our Simoa bead‑based technology and is the most sensitive automated multiplex protein detection platform commercially available. Assays for the HD‑X are fully automated (i.e. sample in to result out), and results for up to 66 samples are available in approximately one hour. We believe that this automation provides us an additional significant competitive advantage with pharmaceutical and biotechnology customers. Samples can be input into the instrument via 96‑well microtiter plates or sample tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +Specialized software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration of multiple biological molecules. The HD‑X software automates the processes for running the instrument and analyzing data from the user‑defined protocols. Proprietary image analysis software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to concentrations for the different biological molecules. +Following commercial launch of the HD-X, we initiated a trade-in program for installed HD-1 instruments that has been exceeding expectations. In the second half of 2019, we sold a total of 56 HD-X instruments, consisting of 26 new instruments and 30 based on HD-1 trade-ins. By the end of 2020, we expect that nearly 50% of the HD installed base will be HD-X instruments. +23 +Table of Contents +SR‑X +We commercially launched the SR‑X instrument in the fourth quarter of 2017. The SR‑X utilizes the same Simoa bead‑based technology and assay kits as the HD‑X in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra‑sensitive detection capabilities enabled by Simoa. +In contrast to the fully automated workflow of the HD‑X, the assay incubation and washing steps for the SR‑X are performed outside of the instruments using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The SR‑X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately 2.5 hours. +SP‑X +We commercially launched the SP‑X instrument in April 2019. The SP‑X uses the Simoa planar array technology developed initially by Aushon for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide the same Simoa sensitivity found in our Simoa bead‑based platform. The Simoa planar array technology utilizes a 96‑well microtiter plate with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar to the SR‑X, the assay prep workflow utilized for the SP‑X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid handling methods as the SR‑X. The SP‑X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 80 analyte‑specific single‑plex and multi‑plex assay kits for our bead‑based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 100 biomarkers ranging from 1‑10 analytes per assay in the areas of immunology and oncology research. +In addition to these assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in‑house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead‑based platform also includes our proprietary Simoa disks that are unique to our bead‑based platform, as well as cuvettes, and disposable tips. Our goal is to continue to add to our assay kits to extend our application base. +We have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to manufacturing and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu expansion goals. +Nf-L Antibodies and Nf-L ELISA Kits +In August 2019, we completed our acquisition of Uman. Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits for Nf-L detection in CSF. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance +24 +Table of Contents +the development of therapeutics and diagnostics for neurodegenerative conditions. Through Uman we sell proprietary Nf-L capture and detection antibodies, as well as two Nf-L ELISA kits for CSF, one of which is CE-certified in Europe. +Services +Through our Accelerator Laboratory, which includes a CLIA‑certified laboratory, we provide customers a contract research option. Researchers, academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, including: +· +Sample testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer’s needs and even large studies can be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +· +Homebrew assay development. Utilizing proprietary or commercially available reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +· +Custom development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +To date, we have completed over 800 projects for approximately 200 customers from all over the world using our Simoa platforms, including over 100 projects for clinical trials. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We also generate revenues through extended‑warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We have implemented a research and development program that aims to increase the sensitivity of our Simoa technology 100‑fold by the end of 2021. We are also focused on expanding our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third‑party distributors in additional major markets, including Australia, Brazil, China, Czech Republic, India, Israel, Japan, Lebanon, Mexico, Qatar, Saudi Arabia, Singapore, South Korea and Taiwan. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide (excluding certain Nordic countries). Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, +25 +Table of Contents +and technological advances in Simoa systems, workflows, and notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As of March 1, 2020, we had approximately 92 people employed in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia‑Pacific region countries such as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with Quanterix‑employed sales and support personnel. +Our sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and governmental research institutions. +In addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness of our technologies, demonstrate the benefits relative to existing technologies and accelerate adoption. We also seek to increase awareness of our products through participation at trade shows, academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +To develop a thought leadership position in the precision health arena, we have been a Platinum Sponsor of the annual Powering Precision Health Summit, or PPHS, since 2016. PPHS is an annual summit founded in 2016 by our President and Chief Executive Officer, Kevin Hrusovsky, that aims to gather many of the world’s top innovators, scientists, physicians, medical professionals, patient advocates, government officials, regulators and investors to debate and collaborate around crucial issues from neurology, oncology and cardiology to inflammation and infectious disease. At PPHS in 2016, there were 22 cutting edge scientific talks covering neurology, cardiology, oncology and inflammation. There were over 200 registered attendees, including senior scientists, patient advocates, investors, and potential partners. At PPHS in 2017, there were 37 scientific talks and over 425 registered attendees. At PPHS Europe in 2018, there were 18 scientific talks and over 150 registered attendees, and at PPHS Europe in 2019, there were over 40 scientific talks and over 250 registered attendees. We believe that sponsoring this event provides Quanterix significant marketing benefits. +Our systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and demonstrations with multiple people within an organization. Some potential customers conduct in‑depth evaluations of the system including running experiments in the Accelerator Laboratory and comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource the Simoa bead‑based instrument development and manufacturing with industry leaders, and to internally develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD‑X instrument is manufactured by STRATEC Biomedical AG, based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. See “—Key Agreements— +26 +Table of Contents +Development Agreement and Supply Agreement with STRATEC” for a description of our agreement with STRATEC. The SR‑X is manufactured by Paramit Corporation, based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements—Paramit Manufacturing Services Agreement” for a description of our agreement with Paramit. Installation of, and training on, our instruments is provided by our employees in the markets where we conduct direct sales, and by distributors in those markets where we operate with distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD‑X or the SR‑X, we would experience additional costs, delays and difficulties in doing so, and our business would be harmed. +The SP‑X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single‑source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. To mitigate this risk, we typically carry significant inventory of critical components. +Consumables +We assemble our assay kits for our bead‑based platform in our Billerica, Massachusetts facility. Reagents for our bead‑based assays include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single‑source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we have increased the shelf life of the vast majority of our bead‑based assays from six months to 12 months or more. +Simoa disks for our bead‑based platform are supplied through a single source supplier pursuant to a long‑term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. This agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead‑based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead‑based platform are commercially available. +We assemble our 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme‑based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single‑source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +Nf-L antibodies and Nf-L ELISA Kits +The storage of Uman’s proprietary Nf-L antibody producing hybridomas as well as the cultivation and purification of the antibodies is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s Nf-L ELISA kits. The antibody reagents are labeled and released to market after testing. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s Nf-L ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. All incoming goods are subject to receipt control and any deviations related to quality deficiencies are +27 +Table of Contents +registered. The kit components include buffers (sample diluent and wash solution), an ELISA 96-well plate coated with a capture antibody, detector antibody, streptavidine conjugate, substrate (TMB) and stop reagent. The kit components are labeled (either “RUO” or “CE”) and assembled. The final ELISA kit product is subject to quality control which include testing of human CSF quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months. +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement, or the Development Agreement, with STRATEC Biomedical Systems AG, pursuant to which STRATEC undertook the development of the Simoa HD instrument. Under the Development Agreement, we were required to pay a fee and issue to STRATEC warrants to purchase our equity securities, all of which have been exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The Development Agreement was amended in November 2016. The Amendment reduced our obligation to satisfy a minimum purchase commitment under the Supply and Manufacturing Agreement described below. Additionally, the parties agreed on additional development services for an additional fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with the final milestone due under the terms of the Development Agreement. The services were completed in and the final milestone payment was paid in the fourth quarter of 2019. +The Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC, or the Supply Agreement, pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The Supply Agreement was amended in November 2016 to reduce the number of HD instruments we are committed to procure from STRATEC. The instrument price stipulated in the Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The Supply Agreement is terminable by either party on 12 months’ notice to the other party, provided that neither party may terminate the Supply Agreement prior to the later of the seven year anniversary of the acceptance of the first prototype instrument and the purchase of the minimum number of instruments which we committed to procure. The Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement, or the Paramit Agreement, with Paramit Corporation, or Paramit. Under the terms of the Paramit Agreement, we engaged Paramit to produce and test our SR‑X instrument on an as‑ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed‑upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +28 +Table of Contents +The Paramit Agreement has an initial three‑year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then‑current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60‑day opportunity to cure the breach. +Competition +We compete with both established and development‑stage life science companies that design, manufacture and market instruments for protein detection, nucleic acid detection and additional applications. For example, companies such as Bio‑Techne, Luminex, MesoScale Diagnostics, Gyros, Nanostring, and others, have products for protein detection that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as Covance, Q2 Solutions, Myriad RBM, Monogram Biosciences, PPD Laboratories, and others, some of whom are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics and precision health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non‑invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research, diagnostic and precision health screening markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors in our target markets include: +· +sensitivity; +· +cost of instruments and consumables; +· +assay menu; +· +reputation among customers and key opinion leaders; +· +innovation in product offerings; +· +accuracy and reproducibility of results; and +· +customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead‑based technology, directed to general methods and devices for single molecule detection, originated at Tufts University, in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra‑sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from Tufts the relevant patent +29 +Table of Contents +filings related to these technologies. (See “—License Agreement with Tufts University” below). In addition to licensed patents, we have developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. We believe our proprietary platforms are a core strength of our business and our strategy includes the continued development of our patent portfolio. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of March 1, 2020, we had exclusively licensed 18 patents and one patent application from Tufts. These patents and patent applications include nine issued U.S. patents and one pending U.S patent application, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +A first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes six granted U.S. patents, one pending U.S. patent application, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non‑U.S. patents is February 20, 2027 or August 30, 2027. +A second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A third patent family licensed from Tufts is directed to methods for analyzing analytes using a sensor system with cross‑reactive elements. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 14, 2021. +A fourth patent family licensed from Tufts is directed to electro‑optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +As of March 1, 2020, we owned 21 issued U.S. patents and 14 pending U.S. patent applications, four pending Patent Cooperation Treaty applications, nine granted European patents and six pending European patent applications, nine granted Japanese patents, four granted Chinese patents and two pending Chinese patent applications, five granted Canadian patents and two pending Canadian patent applications, and four registered Hong Kong patent applications. +A first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads, including multiplexing. This patent family includes three granted U.S. patents and two pending U.S. patent applications, two granted European patent (nationalized and active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non‑U.S. patents is March 1, 2031. +A second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes four granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active +30 +Table of Contents +in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non‑U.S. patents is March 1, 2031. +A third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is September 28, 2028. +A fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 24, 2030. +A fifth patent family owned by us is directed to instruments and consumables. This patent family includes one granted U.S. patent and one pending U.S. patent application, two granted Japanese patents, one granted Chinese patent and two pending Chinese patent applications, three registered Hong Kong patent applications and one pending patent application in each of Europe, and Canada. The standard patent expiration date for any U.S. patents that may issue from this family is February 25, 2031, and for any non‑U.S. patents is January 27, 2032. +A sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending Patent Cooperation Treaty patent application. If we pursue protection by filing any national stage applications, the standard patent expiration date for any patents that may issue from this family will be in 2038. +We own or co‑own seven patent families directed to the measurement of particular types of analytes, including prostate specific antigen (PSA), β‑amyloid peptide, tau protein, toxin B of C. difficile , and DNA or RNA molecules. These families include one granted U.S. patent directed to methods for determining treatment protocols and/or a prognosis of a patient’s recovery from a brain injury based on measurements of tau protein in blood. Any patents that may issue from these patent applications would have standard expiration dates between 2032 and 2039. +With the acquisition of Aushon in January 2017, we acquired their patent portfolio for our planar array technology. As of March 1, 2020, the acquired patent portfolio includes at least nine issued U.S. patents and two pending U.S. patent applications, one granted Australian patent, three granted Canadian patents and one pending Canadian patent application, six granted European patents (each nationalized and active in between eight and 14 countries) and three pending European patent applications, three granted Japanese patents, and one registered Hong Kong patent application. +We have licensed additional patents and patent applications from third parties. +In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +31 +Table of Contents +License Agreement with Tufts University +In June 2007, as amended in April 2013 and August 2017, we entered into a license agreement with Tufts University, or Tufts, pursuant to which we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the Simoa bead‑based technology owned by Tufts, as well as a non‑exclusive license to related know‑how. The rights licensed to us are for all fields of use and are sublicensable for a fee. +Under the terms of the agreement, as amended, we paid a one‑time, non‑refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 amendment, we issued Tufts shares of our Series C‑1 Preferred Stock, which converted into shares of our common stock in connection with our initial public offering. We are required to pay Tufts low single‑digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The term of the license agreement will continue on a country‑by‑country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non‑exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non‑payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Our products are currently intended for research use only, or RUO, applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA. Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products fall under the FDA’s jurisdiction if they are used for clinical rather than research purposes. Consequently, our products are labeled “For Research Use Only.” +On November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only,” or the RUO/IUO Guidance. The purpose of an FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s 510(k) clearance, premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance is a statement of the FDA’s thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. We also +32 +Table of Contents +are not promoting or using our products in the development or promotion of laboratory developed test, or LDT, services. When we develop products for clinical use, we will do so in accordance with FDA requirements applicable to those products at that time. Separately, when we become aware that accredited or licensed clinical laboratories may be using our RUO products either for research or clinical uses, such as part of LDT services, in accordance with the regulations that apply to clinical laboratories, we will continue to review the labeling and promotion of our products for consistency with the RUO/IUO Guidance. +When our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post‑market surveillance, distribution, advertising and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification, or 510(k), and receive clearance from the FDA which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized until a premarket approval application, or PMA, is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent, or SE, to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA’s receipt of the 510(k), but it often takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre‑market approval. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. +This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down‑classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012, or FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the +33 +Table of Contents +reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in‑depth review of the submitted information. By statute, the FDA has 180 days to review the accepted application, although review of the application generally can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with its quality system regulations, or QSRs. New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and efficacy of the device. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption application, or IDE, and obtains approval of the IDE from the FDA. These clinical trials are also subject to the review, approval and oversight of an institutional review board, or IRB, at each clinical trial site. The clinical trials must be conducted in accordance with the FDA’s IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +· +establishment registration and device listing; +· +the QSR, which requires manufacturers, including third‑party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; +· +labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off‑label” uses and other requirements related to promotional activities; +· +medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur; +34 +Table of Contents +· +corrections and removal reporting regulations, which require that manufacture’s report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +· +post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device. +To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre‑scheduled and unannounced inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +Since our acquisition of Aushon in January 2018, we own and operate a CLIA certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and basic research). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health assessment and for the diagnosis, prevention, or treatment of disease. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by the Centers for Medicare & Medicaid Services (“CMS”), a CMS agent (typically a state agency), or, a CMS‑approved accreditation organization. +High complexity, CLIA‑certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered by nearly all complex laboratories for the last few decades as Laboratory Developed Tests, or LDTs, which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices. During 2010, the FDA publicly announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk‑based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced its framework and timetable for implementing this guidance. On November 18, 2016, the FDA announced it would not release final guidance at that time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach. On January 3, 2017, the FDA released a discussion paper outlining a possible risk‑based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. We cannot predict the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory approach by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of the FDA’s approach is unknown, it may be extensive and may result in significant change. +35 +Table of Contents +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out‑of‑state laboratories to obtain licensure. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third party payors. +If, in the future, we perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non‑U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, the European Union, or EU, recently published new regulations that will result in greater regulation of medical devices and IVDs. This new IVD regulation (the “new IVD Regulation”) is significantly different from the European directive for In vitro diagnostic products (the “IVD Directive”) that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member states, include a risk‑based classification system and increase the requirements for conformity assessment. +The CE registration for Uman’s Nf-L ELISA assay kit was approved in March 2014 under the IVD Directive . Under the IVD Directive the assay is classified as a general IVD product, class I and required self-certification with no involvement of a notified body/authority. Under the new IVD Regulation, which must be fully implemented by May 2022, the requirements increase and involve assessment by a notified body. Uman’s Nf-L ELISA assay kit is classified as class B product. The new requirements include an ISO 13485 certification of the quality system (which Uman received July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g. clinical evidence and post-market activities). The work to meet the new technical requirements is on-going. An internal GAP-analysis is to be performed and work to eliminate the GAPs performed. When completed, the available technical documentation will be assessed by an external consultant. When all requirements are met, a notified body will be contracted and the certification initiated +Other Governmental Regulation +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration, or OSHA, has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi‑faceted programs to protect workers from exposure to blood‑borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third‑party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +36 +Table of Contents +Employees +As of December 31, 2019, we had 248 employees, of which 92 work in sales, sales support, field service, and marketing, 45 work in engineering and research and development, 78 work in manufacturing and operations and 33 work in general and administrative. As of December 31, 2019, of our 248 employees, 219 were located in the United States and 29 were employed outside the United States. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301‑9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10‑K. We have included our website address in this Annual Report on Form 10‑K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can also review our electronically filed reports and other information that we file with the SEC on the SEC’s website at http://www.sec.gov . +Item 1A. RISK FACTORS +The following risk factors and other information included in this Annual Report on Form 10‑K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page ii of this Annual Report on Form 10‑K for a discussion of some of the forward‑looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. +Risks Related to Our Financial Condition and Need for Additional Capital +We have incurred losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +We incurred net losses of $ 40.8 million, $31.5 million and $27.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, we had an accumulated deficit of $ 216.2 million. We cannot predict if we will achieve sustained profitability in the near future or at all. We expect that our losses will continue at least through the next 24 months as we plan to invest significant additional funds toward expansion of our commercial organization and the development of our technology. In addition, as a public company, we incur significant legal, accounting, and other expenses that we did not incur as a private company. These increased expenses make it harder for us to achieve and sustain future profitability. We may incur significant losses in the future for a number of reasons, many of which are beyond our control, including the other risks described in this Annual Report on Form 10‑K, the market acceptance of our products, future product development and our market penetration and margins. +37 +Table of Contents +Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, causing the value of our common stock to decline substantially. +Numerous factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively affect our business and prospects. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others. As a result, comparing our operating results on a period‑to‑period basis might not be meaningful. You should not rely on our past results as indicative of our future performance. Moreover, our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. +Our operating results have varied in the past. In addition to other risk factors listed in this section, some of the important factors that may cause fluctuations in our quarterly and annual operating results include: +· +adoption of our Simoa technology platforms and products by customers; +· +the timing of customer orders to purchase our products and services; +· +the rate of utilization of consumables by our customers; +· +receipt and timing of revenue for services provided in our Simoa Accelerator Laboratory; +· +the timing of the introduction of new products, product enhancements and services; and +· +the receipt and timing of revenue from collaborations, if any. +In addition, a significant portion of our operating expenses is relatively fixed in nature, and planned expenditures are based in part on expectations regarding future revenue. Accordingly, unexpected revenue shortfalls might decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. If this occurs, the trading price of our common stock could fall substantially. +We are an early, commercial‑stage company and have a limited commercial history, which may make it difficult to evaluate our current business and predict our future performance. +We are an early, commercial‑stage company and have a limited commercial history. Our revenues are derived from sales of our instruments, consumables and services, which are all based on our Simoa technology platforms. We commercially launched our first Simoa instrument and consumables in 2014. Our limited commercial history may make it difficult to evaluate our current business and make predictions about our future success or viability subject to significant uncertainty. We will continue to encounter risks and difficulties frequently experienced by early, commercial‑stage companies, including scaling up our infrastructure and headcount. If we do not address these risks successfully, our business will suffer. +If we are unable to maintain adequate revenue growth or do not successfully manage such growth, our business and growth prospects will be harmed. +We have experienced significant revenue growth in a short period of time. We may not achieve similar growth rates in future periods. Investors should not rely on our operating results for any prior periods as an indication of our future operating performance. To effectively manage our anticipated future growth, we must continue to maintain and enhance our financial, accounting, manufacturing, customer support and sales administration systems, processes and controls. Failure to effectively manage our anticipated growth could lead us to over‑invest or under‑invest in development, operational, and administrative infrastructure; result in weaknesses in our infrastructure, systems, or +38 +Table of Contents +controls; give rise to operational mistakes, losses, loss of customers, productivity or business opportunities; and result in loss of employees and reduced productivity of remaining employees. +Our continued growth could require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. As additional products are commercialized, we may need to incorporate new equipment, implement new technology systems, or hire new personnel with different qualifications. Failure to manage this growth or transition could result in turnaround time delays, higher product costs, declining product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any one of these areas could make it difficult for us to meet market expectations for our products, and could damage our reputation and the prospects for our business. +If our management is unable to effectively manage our anticipated growth, our expenses may increase more than expected, our revenue could decline or grow more slowly than expected and we may be unable to implement our business strategy. In addition, the quality of our products and services may suffer, which could negatively affect our reputation and harm our ability to retain and attract customers. +Our future capital needs are uncertain and we may need to raise additional funds in the future. +We believe that our existing cash and cash equivalents as of December 31, 2019, together with our cash generated from commercial sales, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months. However, we may need to raise substantial additional capital to: +· +expand our sales and marketing efforts to further commercialize our products; +· +strategically acquire companies or technologies that may be complementary to our business; +· +expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our products are deemed by the United States Food and Drug Administration, or FDA, to be medical devices or otherwise subject to additional regulation by the FDA; +· +seek premarket approval, or PMA, or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market products for use in the prevention, diagnosis or treatment of a disease or other condition (see “Risk Factors—If the FDA determines that our products are medical devices or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time‑consuming and uncertain both in timing and in outcome.” and “Business—Government Regulation” for further information about the FDA approvals that we may be required to seek and obtain in that circumstance); +· +hire additional personnel; +· +enter into collaboration arrangements, if any, or in‑license other products and technologies; +· +add operational, financial and management information systems; and +· +incur increased costs as a result of operating as a public company. +Our future funding requirements will depend on many factors, including: +· +market acceptance of our products, including our recently launched HD‑X instrument; +· +the cost and timing of establishing additional sales, marketing and distribution capabilities; +39 +Table of Contents +· +the cost of our research and development activities; +· +our ability to enter into collaborations in the future, and the success of any such collaborations; +· +the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +· +the effect of competing technological and market developments. +We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity‑linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could have a material adverse effect on our financial condition, operating results and business. +Our ability to use net operating losses to offset future income may be subject to certain limitations. +As of December 31, 2019, we had federal net operating loss carry forwards, or NOLs, to offset future taxable income of approximately $ 174.7 million, which begin to expire in 2020, if not utilized. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We have already experienced ownership changes as defined under Section 382 of the Code. Depending on the timing of any future utilization of our NOLs, we may be limited as to the amount that can be utilized each year as a result of such previous ownership changes. In addition, future changes in our stock ownership, including changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. +U.S. taxation of international business activities or the adoption of tax reform policies could materially impact our future financial position and results of operations. +Limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of future foreign earnings. Should the scale of our international business activities expand, any changes in the U.S. taxation of such activities could increase our worldwide effective tax rate and harm our future financial position and results of operations. +Provisions of our secured term loan facility with Hercules Capital, Inc. may restrict our ability to pursue our business strategies. In addition, repayment of our outstanding debt and other obligations under our secured term loan facility with Hercules is subject to acceleration upon the occurrence of an event of default, which would have a material adverse effect on our business, financial condition and results of operations. +Our secured term loan facility with Hercules Capital, Inc., or Hercules, requires us, and any debt instruments we may enter into in the future may require us, to comply with various covenants that limit our ability to take on new indebtedness, to permit new liens, to pay dividends, to dispose of our property (including to license in certain situations), to engage in mergers or acquisitions and make certain other changes in our business. Debt instruments we may enter into in the future may also include financial covenants such as a requirement to maintain a specified minimum liquidity level or achieve a minimum annual revenue level. These restrictions could inhibit our ability to pursue our business strategies, +40 +Table of Contents +including our ability to raise additional capital and make certain dispositions or investments without the consent of our lenders. +The obligations under our secured term loan facility with Hercules are subject to acceleration upon the occurrence of specified events of default, including our failure to make payments when due, our breach or default in the performance of our covenants and obligations under the facility following a cure period, bankruptcy and similar events, and the occurrence of a circumstance that would reasonably be expected to have a material adverse effect on (i) our business, operations, properties, assets or financial condition, (ii) our ability to perform our obligations in accordance with the facility documents, (iii) the lender’s ability to enforce any of its rights or remedies with respect to our obligations, or (iv) the collateral, the liens on the collateral or the first priority of the lender’s liens. While we do not believe it is probable that the lender would accelerate the obligations under the facility, the definition of a material adverse effect is inherently subjective in nature, and we cannot assure that a material adverse effect will not occur or be deemed to have occurred by the lender. +Risks Related to Our Business +If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +Our success depends on our ability to develop and market products that are recognized and accepted as reliable, enabling and cost‑effective. Most of the potential customers for our products already use expensive research systems in their laboratories that they have used for many years and may be reluctant to replace those systems with ours. Market acceptance of our Simoa technology platforms will depend on many factors, including our ability to convince potential customers that our technology is an attractive alternative to other available technologies. Prior to adopting our technologies, some potential customers may need to devote time and effort to testing and validating our systems. Any failure of our systems to meet these customer benchmarks could result in potential customers choosing to retain their existing systems or to purchase systems other than ours. In addition, it is important that our Simoa technology be perceived as accurate and reliable by the scientific and medical research community as a whole. Historically, a significant part of our sales and marketing efforts has been directed at demonstrating the advantages of our technology to industry leaders and encouraging such leaders to publish or present the results of their evaluation of our system. If we are unable to continue to motivate leading researchers to use Simoa technology, or if such researchers are unable to achieve or unwilling to publish or present significant experimental results using our systems, acceptance and adoption of our systems may be slowed and our ability to increase our revenue would be adversely affected. +Our future success is dependent upon our ability to further penetrate our existing customer base and attract new customers. +Our current customer base is primarily composed of academic and governmental research institutions, as well as biopharmaceutical and contract research companies. Our success will depend upon our ability to respond to the evolving needs of, and increase our market share among, existing customers and adding new customers. Identifying, engaging and marketing to customers requires substantial time, expertise and expense and involves a number of risks, including: +· +our ability to attract, retain and manage the sales, marketing and service personnel necessary to expand market acceptance for our Simoa technology platforms; +· +the time and cost of maintaining and growing a specialized sales, marketing and service force; and +· +our sales, marketing and service force may be unable to execute successful commercial activities. +We have utilized third parties to assist with sales, distribution and customer support in certain regions of the world. There is no guarantee, when we enter into such arrangements, that we will be successful in attracting desirable sales and distribution partners. There is also no guarantee that we will be able to enter into such arrangements on favorable terms. Any failure of our sales and marketing efforts, or those of any third‑party sales and distribution partners, would adversely affect our business. +41 +Table of Contents +Sales of our assay for the neurological biomarker Nf‑L have become increasingly important to our business, and any significant decrease in sales of that assay could have a material adverse effect on our business. +Neurology has been one of our primary focus areas for commercialization of our Simoa technology and the services that we provide to our customers. Sales from neurological‑related biomarkers, Nf‑L in particular, have become an increasingly important part of our business. We estimate that revenue from services and sales of consumables relating to Nf‑L represented approximately 33 % of our total revenue for the fiscal year ended December 31, 2019. There can be no assurance that we will continue to derive meaningful revenues from the sale of our Nf‑L assay, from services related to that assay or from sales of instruments driven by customers desiring access to the Nf‑L assay. The adoption by our customers of competitive technologies for detecting biomarkers of neurodegenerative conditions, could negatively impact our revenues and have a material adverse effect on our business. +Epidemic diseases, such as the coronavirus, could negatively affect various aspects of our business, make it more difficult to meet our obligations to our customers, and result in reduced demand from our customers, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows. +Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus (COVID-19) first identified in Wuhan, China in late 2019. The virus has now spread to several other countries, including the United States, and on March 11, 2020, the World Health Organization updated the status of the COVID-19 outbreak from epidemic to pandemic. Potential impacts to our business include disruptions or restrictions on our employees’ and customers’ ability to travel, temporary closures of the facilities of our suppliers or customers, and delays in shipments to and from affected countries. In an effort to halt the outbreak of COVID-19, a number of countries, including the United States, have placed significant restrictions on travel and many businesses have announced extended closures. These travel restrictions and business closures could adversely impact our operations locally and worldwide, including our ability to manufacture, sell or distribute our products, as well as cause temporary closures of our foreign distributors, or the facilities of suppliers or customers. Any material disruption of our employees, distributors, suppliers or customers in impacted countries could impact our global sales and operating results. We are continuing to monitor and assess the effects of the COVID-19 pandemic on our commercial operations, including any potential impact on our revenue in 2020 . However, we cannot at this time accurately predict what effects these conditions will ultimately have on our operations due to uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and the length of the travel restrictions and business closures imposed by the governments of impacted countries. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and likely impact our operating results. +Some of the reagents used in our products are labeled for “research use only” and will have to undergo additional testing before we could use them in a product intended for clinical use. +Some of the materials that are used in our consumable products, including certain reagents, are purchased from suppliers with a restriction that they be used for research use only, or RUO. While we have focused initially on the life sciences research market, part of our future business strategy is to expand our product line, either alone or in collaboration with third parties, to encompass systems and products that can be used for clinical purposes. Whether or not we continue to use the same RUO materials that we currently use, or obtain similar materials that are not labeled with the RUO restriction, we or a collaborator will be required to demonstrate that the use of our system and products as a clinical test complies with all applicable requirements. In addition, if the supplier of any material or component used in a clinical test were changed, it would require confirmation through additional testing that the change does not adversely affect the reliability of the test. Any such additional testing may be expensive and time‑consuming and delay the introduction of new products based on our technology. +42 +Table of Contents +In the near term, our business will depend on levels of research and development spending by academic and governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results. +In the near term, we expect that our revenue will continue to be derived primarily from sales of our instruments and consumables to academic and governmental research institutions, as well as biopharmaceutical and contract research companies worldwide for research applications. The demand for our products will depend in part upon the research and development budgets of these customers, which are impacted by factors beyond our control, such as: +· +changes in government programs that provide funding to research institutions and companies; +· +macroeconomic conditions and the political climate; +· +changes in the regulatory environment; +· +differences in budgetary cycles; and +· +market acceptance of relatively new technologies, such as ours. +Any uncertainty regarding the availability of research funding for potential customers may adversely affect our operating results. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers. Any decrease in customers’ budgets or expenditures, or in the size, scope or frequency of capital or operating expenditures, could materially and adversely affect our business, operating results and financial condition. +The sales cycle for our Simoa instruments can be lengthy and variable, which makes it difficult for us to forecast revenue and other operating results. +The sales process for our Simoa instruments generally involves numerous interactions with multiple individuals within an organization, and often includes in‑depth analysis by potential customers of our technology and products and a lengthy review process. Our customers’ evaluation processes often involve a number of factors, many of which are beyond our control. As a result of these factors, the capital investment required to purchase our systems, and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly. Given the length and uncertainty of our sales cycle, we have in the past experienced, and expect to in the future experience, fluctuations in our sales on a period‑to‑period basis. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems, use existing assays not requiring capital equipment or purchase systems other than ours. +Our long‑term results depend upon our ability to improve existing products and introduce and market new products successfully. +Our business is dependent on the continued improvement of our existing Simoa products and our development of new products utilizing our Simoa or other potential future technology. As we introduce new products or refine, improve or upgrade versions of existing products, we cannot predict the level of market acceptance or the amount of market share these products will achieve, if any. We cannot assure you that we will not experience material delays in the introduction of new products in the future. In addition, introducing new products could result in a decrease in revenues from our existing products. Consistent with our strategy of offering new products and product refinements, we expect to continue to use a substantial amount of capital for product development and refinement. We may need more capital for product development and refinement than is available on terms favorable to us, if at all, which could adversely affect our business, financial condition or results of operations. +We generally sell our products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. If we do not develop new products and product enhancements +43 +Table of Contents +based on technological innovation on a timely basis, our products may become obsolete over time and our revenues, cash flow, profitability and competitive position will suffer. Our success will depend on several factors, including our ability to: +· +correctly identify customer needs and preferences and predict future needs and preferences; +· +allocate our research and development funding to products with higher growth prospects; +· +anticipate and respond to our competitors’ development of new products and technological innovations; +· +innovate and develop new technologies and applications, and acquire or obtain rights to third‑party technologies that may have valuable applications in the markets we serve; +· +successfully commercialize new technologies in a timely manner, price them competitively and manufacture and deliver sufficient volumes of new products of appropriate quality on time; and +· +convince customers to adopt new technologies. +In addition, if we fail to accurately predict future customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products that do not lead to significant revenue. Even if we successfully innovate and develop new products and product enhancements, we may incur substantial costs in doing so, and our profitability may suffer. +Our ability to develop new products based on innovation can affect our competitive position and often requires the investment of significant resources. Difficulties or delays in research, development or production of new products and services or failure to gain market acceptance of new products and technologies may reduce future revenues and adversely affect our competitive position. +If we do not successfully develop and introduce new assays for our technology, we may not generate new sources of revenue and may not be able to successfully implement our growth strategy. +Our business strategy includes the development of new assays for our Simoa instruments. New assays require significant research and development and a commitment of significant resources prior to their commercialization. Our technology is complex, and we cannot be sure that any assays we may intend to develop will be developed successfully, be proven to be effective, offer improvements over currently available tests, meet applicable standards, be produced in commercial quantities at acceptable costs or be successfully marketed. Moreover, development of particular assays may require licenses or access to third‑party intellectual property which may not be available on commercially reasonable terms, or at all. In addition, we believe that our future success will depend, in part, on our ability to develop and commercialize multiplex assays that can simultaneously measure multiple biomarkers, particularly for oncology indications. While we have developed, validated and commercialize a 10‑plex assay for the SP‑X using our Simoa planar array technology, the most robust multiplex assay that we have commercially launched to date using our Simoa bead‑based technology is a 6‑plex assay. If we do not successfully develop new assays for our Simoa instruments, including multiplex assays with the ability to detect an increased number of biomarkers in a single sample, we could lose revenue opportunities with existing or future customers. +If we do not successfully manage the development and launch of new products, our financial results could be adversely affected. +We commercially launched two new instruments in 2019: the SP-X, our first planar-based instrument, and the HD‑X, our next generation bead‑based instrument. We face risks associated with launching new products such as the SP‑X and HD‑X. If we encounter development or manufacturing challenges or discover errors during our product development cycle, the product launch dates of new products may be delayed. The expenses or losses associated with +44 +Table of Contents +unsuccessful product development or launch activities or lack of market acceptance of our new products could adversely affect our business or financial condition. +Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims. +Our Simoa products may contain undetected errors or defects when first introduced or as new versions or new products are released. Disruptions affecting the introduction or release of, or other performance problems with, our products may damage our customers’ businesses and could harm their and our reputation. If that occurs, we may incur significant costs, the attention of our key personnel could be diverted, or other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages related to errors or defects in our products. In addition, if we do not meet industry or quality standards, if applicable, our products may be subject to recall. A material liability claim, recall or other occurrence that harms our reputation or decreases market acceptance of our products could harm our business and operating results. +Although we do not, and cannot currently, promote the use of our products, or services based on our products, for diagnostic purposes, if our customers develop or use them for diagnostic purposes, someone could file a product liability claim alleging that one of our products contained a design or manufacturing defect that resulted in the failure to adequately perform, leading to death or injury. A product liability claim could result in substantial damages and be costly and time‑consuming to defend, either of which could materially harm our business or financial condition. We cannot assure you that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future. +We may seek to enter into strategic collaborations and licensing arrangements with third parties, but we may not be successful in establishing or maintaining such arrangements. +We may seek to enter into strategic collaborations and licensing agreements with third parties to develop products based on our Simoa technology, such as for certain in vitro diagnostic, or IVD, purposes. However, there is no assurance that we will be successful in doing so. Establishing collaborations and licensing arrangements is difficult and time‑consuming, and discussions may not lead to collaborations or licenses on favorable terms, if at all. Even if we establish such relationships, if our partners do not prioritize and commit sufficient resources to develop and sell products based on our Simoa technology, they may never result in the successful development or commercialization of products based on our Simoa technology. +Our reliance on distributors for sales of our products outside of the United States could limit or prevent us from selling our products and could impact our revenue. +We have established exclusive distribution agreements for our Simoa instruments and related consumable products within certain foreign countries, including Australia, Brazil, China, Czech Republic, India, Israel, Japan, Lebanon, Mexico, Qatar, Saudi Arabia, Singapore, South Korea and Taiwan. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long‑term international revenue growth. In addition, if our distributors fail to comply with applicable laws and ethical standards, including anti‑bribery laws, this could damage our reputation and could have a significant adverse effect on our business and our revenues. +45 +Table of Contents +We expect to generate a substantial portion of our revenue internationally in the future and can become further subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +For the years ended December 31, 2019, 2018 and 2017, approximately 50 %, 43% and 45%, respectively, of our product revenue was generated from customers located outside of North America. We believe that a substantial percentage of our future revenue will come from international sources as we expand our overseas operations and develop opportunities in additional areas. We have limited experience operating internationally and engaging in international business involves a number of difficulties and risks, including: +· +required compliance with existing and changing U.S. or foreign regulatory requirements and laws; +· +difficulties and costs of staffing and managing foreign operations; +· +a shortage of high-quality salespeople and distributors; +· +pricing pressure that we may experience internationally; +· +difficulties in maintaining consistency with our internal guidelines; +· +difficulties in enforcing our intellectual property rights and in defending against third-party threats and intellectual property enforcement actions against us or any of our distributors, suppliers or collaborators; +· +reduced or varied protection for intellectual property rights in some countries; +· +required compliance with anti‑bribery laws, such as the U.S. Foreign Corrupt Practices Act, data privacy requirements, labor laws and anti‑competition regulations; +· +export or import restrictions; +· +laws and business practices favoring local companies; +· +longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; +· +the imposition of restrictions on the activities of foreign agents, representatives and distributors; +· +foreign currency exchange rate fluctuations; +· +the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; and +· +political and economic instability; +· +scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; +· +the imposition of new trade restrictions; and +· +potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers. +46 +Table of Contents +Historically, most of our revenue has been denominated in U.S. dollars. In the future, we may sell our products and services in local currency outside of the United States. As our operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. If we dedicate significant resources to our international operations and are unable to manage these risks effectively, our business, operating results and financial condition will suffer. +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti‑bribery laws by us or our agents. +We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non‑U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our products internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents, and we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar antibribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. We have limited experience in complying with these laws and in developing procedures to monitor compliance with these laws by our agents. These laws are complex and far‑reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also incur severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures. +If we are unable to attract, recruit, train, retain, motivate and integrate key personnel, we may not achieve our goals. +Our future success depends on our ability to attract, recruit, train, retain, motivate and integrate key personnel, including our recently expanded senior management team, as well as our research and development, manufacturing and sales and marketing personnel. Competition for qualified personnel is intense. Our growth depends, in particular, on attracting and retaining highly‑trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers. Because of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract, recruit, train, retain, motivate and integrate qualified personnel could materially harm our operating results and growth prospects. +We have limited experience in marketing and selling our products, and if we are unable to successfully commercialize our products, our business and operating results will be adversely affected. +We have limited experience marketing and selling our products. We currently sell all our products for research use only, through our direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third‑party distributors in additional major foreign markets. The future sales of our products will depend in large part on our ability to effectively market and sell our products, successfully manage and expand our sales force, and increase the scope of our marketing efforts. We may also enter into additional distribution arrangements in the future. Because we have limited experience in marketing and selling our products, our ability to forecast demand, the infrastructure required to support such demand and the sales cycle to customers is unproven. If we do not build an efficient and effective sales force, our business and operating results will be adversely affected. +47 +Table of Contents +We rely on a single contract manufacturer to manufacture and supply our Simoa HD-X instrument and rely on a different single contract manufacturer to manufacture and supply our Simoa SR‑X instrument. If either of these manufacturers should fail or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +We currently rely on a single contract manufacturer, STRATEC Biomedical AG, or STRATEC, an analytical and diagnostic systems manufacturer located in Germany, to manufacture and supply all of our Simoa HD-X instruments. In addition, we currently rely on a single contract manufacturer, Paramit Corporation, or Paramit, a contract manufacturer located in California, to manufacture and supply all of our SR‑X instruments. Since our contract with STRATEC does not commit them to supply quantities beyond the amounts included in our forecasts and our contract with Paramit does not commit them to carry inventory or make available any particular quantities, these contract manufacturers may give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. If either of these manufacturers were not able to supply instruments, our business would be harmed. +Pursuant to our Supply Agreement with STRATEC, as amended, we are required to purchase a minimum number of commercial units of HD instruments over a seven‑year period ending in May 2021. If we fail to purchase the required minimum number of commercial units, we would be obligated to pay a fee based on the shortfall of commercial units purchased compared to the required number. If we fail to purchase the required minimum number of commercial instruments and terminate the arrangement in certain circumstances, we would also be obligated to issue a warrant to purchase shares of our common stock. Any amount we may have to pay STRATEC for failing to purchase the minimum number of commercial units of HD instruments will cause our operating results to suffer. +In the event it becomes necessary to utilize a different contract manufacturer for the HD-X instrument or the SR‑X, we would experience additional costs, delays and difficulties in doing so as a result of identifying and entering into an agreement with a new supplier as well as preparing such new supplier to meet the logistical requirements associated with manufacturing our units, and our business would suffer. We may also experience additional costs and delays in the event we need access to or rights under any intellectual property of STRATEC. +In addition, certain of the components used in our instruments are sourced from limited or sole suppliers. If we were to lose such suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our ability to sell and deliver instruments to customers could occur if we encounter delays or difficulties in securing these components, or if the quality of the components supplied do not meet specifications, or if we cannot then obtain an acceptable substitute. If any of these events occur, our business and operating results could be harmed. +We may experience manufacturing problems or delays that could limit the growth of our revenue or increase our losses. +We may encounter unforeseen situations that would result in delays or shortfalls in our production as well as delays or shortfalls caused by our outsourced manufacturing suppliers and by other third‑party suppliers who manufacture components for our products. If we are unable to keep up with demand for our products, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products. Our inability to successfully manufacture our products would have a material adverse effect on our operating results. +We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and our SP‑X instrument, and may not be able to find replacements or immediately transition to alternative suppliers, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +We rely on limited or sole suppliers for certain reagents and other materials and components that are used in our consumable products and in our SP‑X instrument. While we periodically forecast our needs for such materials and enter into standard purchase orders with them, we do not have long‑term contracts with many of these suppliers. If we were to +48 +Table of Contents +lose such suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our operations could occur if we encounter delays or difficulties in securing these materials, or if the quality of the materials supplied do not meet our requirements, or if we cannot then obtain an acceptable substitute. The time and effort required to qualify a new supplier and ensure that the new materials provide the same or better quality results could result in significant additional costs. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. +If we cannot provide quality technical and applications support, we could lose customers and our business and prospects will suffer. +The placement of our products at new customer sites, the introduction of our technology into our customers’ existing laboratory workflows and ongoing customer support can be complex. Accordingly, we need highly trained technical support personnel. Hiring technical support personnel is very competitive in our industry due to the limited number of people available with the necessary scientific and technical backgrounds and ability to understand our Simoa technology at a technical level. To effectively support potential new customers and the expanding needs of current customers, we will need to substantially expand our technical support staff. If we are unable to attract, train or retain the number of highly qualified technical services personnel that our business needs, our business and prospects will suffer. +The life sciences research and diagnostic markets are highly competitive. If we fail to effectively compete, our business, financial condition and operating results will suffer. +We face significant competition in the life sciences research and diagnostic markets. We currently compete with both established and early stage companies that design, manufacture and market systems and consumable supplies. We believe our principal competitors in the life sciences research and diagnostic markets include Bio‑Techne, Luminex Corporation, MesoScale Diagnostics, Singulex, Gyros Corporation and Nanostring Technologies, Inc. As we expand the applications for our products to include health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. In addition, there are a number of new market entrants in the process of developing novel technologies for the life sciences research, diagnostic and screening markets. +Many of our current competitors have competitive advantages over us, including: +· +greater name and brand recognition; +· +substantially greater financial and human resources; +· +broader product lines; +· +larger sales forces and more established distributor networks; +· +substantial intellectual property portfolios; +· +larger and more established customer bases and relationships; and +· +better established, larger scale, and lower cost manufacturing capabilities. +We believe that the principal competitive factors in all of our target markets include: +· +accuracy, including sensitivity and specificity, and reproducibility of results; +· +cost of instruments and consumables; +· +reputation among customers; +49 +Table of Contents +· +innovation in product offerings; +· +flexibility and ease of use; and +· +compatibility with existing laboratory processes, tools and methods. +We cannot assure you that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot assure you that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results. +Integrating any business, product or technology we acquire can be expensive and time‑consuming and can disrupt and adversely affect our ongoing business, including product sales, and distract our management. +We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in complementary businesses, such as our 2018 acquisition of Aushon and our 2019 acquisition of Uman. Our ability to successfully integrate any business, product or technology we acquire depends on a number of factors, including, but not limited to, our ability to: +· +minimize the disruption and distraction of our management and other employees, including our sales force, in connection with the integration of any acquired business, product or technology; +· +minimize disruption in relationships with customers, distributors or suppliers as a result of such a transaction; +· +avoid acquisition of unanticipated liabilities related to acquired companies; +· +maintain and increase sales of our existing products; +· +establish or manage the transition of the manufacture and supply of any acquired product; +· +identify and add the necessary sales, marketing, manufacturing, regulatory and other related personnel, capabilities and infrastructure that are required to successfully integrate any acquired business, product or technology; +· +manage the transition and migration of acquired personnel and all commercial, financial, legal, regulatory and other pertinent information relating to any acquired business, product or technology; +· +comply with legal, regulatory and contractual requirements applicable to any acquired business, product or technology; and +· +maintain and extend intellectual property protection for any acquired product or technology. +If we are unable to perform the above functions or otherwise effectively integrate any acquired businesses, products or technologies, our business, financial condition and operating results will suffer. +Foreign acquisitions (such as our acquisition of Uman) involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. +50 +Table of Contents +Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write‑offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +Risks Related to Government Regulation and Diagnostic Product Reimbursement +If the FDA determines that our products are medical devices or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time‑consuming and uncertain both in timing and in outcome. +We have focused initially on the life sciences research market. This includes offering products for use by laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Accordingly, our products are labeled as “Research Use Only,” or RUO, and are not intended for diagnostic uses. While we have focused initially on the life sciences research market and RUO products only, our future strategy includes expanding our product line to encompass products that are intended to be used for the diagnosis of disease, either alone or in collaboration with third parties. Such IVD products, once developed and offered, will be subject to regulation by the FDA, or comparable international agencies, as medical devices including requirements for regulatory clearance or approval of such products before they can be marketed. +The process of obtaining regulatory clearances to market a medical device can be costly and time consuming, and we or our collaborators may not be able to obtain these clearances or approvals on a timely basis, if at all. In general, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approved premarket approval application, or PMA, unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other pre‑amendment, 510(k)‑exempt, 510(k) cleared products, or PMA‑approved products that have subsequently been down‑classified. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo process. Pursuant to amendments to the statute in 2012, a manufacturer can also submit a petition for a direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk. +High risk devices deemed to pose the greatest risk, such as life‑sustaining, life‑supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. +Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products internationally for such uses, we may be subject to rigorous international regulation in the future. In these circumstances, we may rely significantly on our foreign independent distributors or collaborators to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries. +If we or our collaborators are required to obtain a PMA or 510(k) clearance for products based on our technology, we or they would be subject to a substantial number of additional requirements for medical devices, including establishment registration, device listing, Quality Systems Regulations, or QSRs, which cover the design, testing, production, control, quality assurance, labeling, packaging, servicing, sterilization (if required), and storage and shipping of medical devices (among other activities), product labeling, advertising, recordkeeping, post‑market +51 +Table of Contents +surveillance, post‑approval studies, adverse event reporting, and correction and removal (recall) regulations. One or more of the products we or a collaborator may develop using our technology may also require clinical trials in order to generate the data required for a PMA. Complying with these requirements may be time‑consuming and expensive. We or our collaborators may be required to expend significant resources to ensure ongoing compliance with the FDA regulations and/or take satisfactory corrective action in response to enforcement action, which may have a material adverse effect on the ability to design, develop, and commercialize products using our technology as planned. Failure to comply with these requirements may subject us or a collaborator to a range of enforcement actions, such as warning letters, injunctions, civil monetary penalties, criminal prosecution, recall and/or seizure of products, and revocation of marketing authorization, as well as significant adverse publicity. If we or our collaborators fail to obtain, or experience significant delays in obtaining, regulatory approvals for IVD products, such products may not be able to be launched or successfully commercialized in a timely manner, or at all. +Laboratory developed tests, or LDTs, are a subset of IVD tests that are designed, manufactured and offered as services by high complexity clinical laboratories and used within a single laboratory. The FDA maintains that LDTs are medical devices and has for the most part exercised enforcement discretion for most LDTs. A significant change in the way that the FDA regulates any LDTs that we, our collaborators or our customers develop using our technology could affect our business. The FDA has considered the appropriate way to regulate such tests, but after publishing several draft guidances and holding a number of public hearings and workshops, no final guidance has been issued. However, if the FDA requires laboratories to undergo premarket review and comply with other applicable FDA requirements in the future, the cost and time required to commercialize an LDT will increase substantially, and may reduce the financial incentive for laboratories to develop LDTs, which could reduce demand for our instruments and our other products. +Foreign jurisdictions have laws and regulations similar to those described above, which may adversely affect our ability to market our products as planned in such countries. The number and scope of these requirements are increasing. As in the United States, the cost and time required to comply with regulatory requirements may be substantial, and there is no guarantee that we will obtain the necessary authorization(s) required to make our products commercially viable. As a result, the imposition of foreign requirements may also have a material adverse effect on the commercial viability of our operations. +Our products may in the future be subject to product recalls that could harm our reputation, business and financial results. +The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products, including RUO products, in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government‑mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted. +U.S. legislative, FDA or global regulatory reforms may make it more difficult and costly for us to obtain any required regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or +52 +Table of Contents +lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Moreover, leadership, personnel and structural changes within the FDA as well as recent and future federal election outcomes could result in significant legislative and regulatory reforms impacting the FDA’s regulation of our products. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business. +In addition, on May 25, 2017, the new Medical Devices Regulation (2017/745 or “MDR”) entered into force. Following its entry into application on May 26, 2020, the MDR will introduce substantial changes to the obligations with which medical device manufacturers must comply in the EU. High risk medical devices will be subject to additional scrutiny during the conformity assessment procedure. Specifically, the EU Medical Devices Regulation repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the European Economic Area (“EEA”) Member States, the regulations would be directly applicable, i.e., without the need for adoption of EEA member state laws implementing them, in all EEA Member States and are intended to eliminate current differences in regulation of medical devices among EEA Member States. The EU MDR, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices to ensure a high level of safety and health while supporting innovation. The MDR will become applicable three years after publication (in May 2020). Once applicable, the new regulations will among other things: +· +strengthen the rules on placing devices on the market and reinforce surveillance once they are available; +· +establish explicit provisions on manufacturers’ responsibilities for the follow‑up of the quality, performance and safety of devices placed on the market; +· +improve the traceability of medical devices throughout the supply chain to the end‑user or patient through a unique identification number; +· +set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and +· +strengthen rules for the assessment of certain high‑risk devices which may have to undergo an additional check by experts before they are placed on the market. +Once applicable, the MDR may impose increased compliance obligations for us to access the EU market. +In order to continue to sell our products in Europe, we must maintain our CE marks and continue to comply with certain EU directives and, in the future with the MDR. Our failure to continue to comply with applicable foreign regulatory requirements, including those administered by authorities of the EEA countries, could result in enforcement actions against us, including refusal, suspension or withdrawal of our CE Certificates of Conformity by our Notified Body, which could impair our ability to market products in the EEA in the future. Any changes to the membership of the European Union, such as the departure of the United Kingdom (Brexit), may impact the regulatory requirements for the impacted countries and impair our business operations and our ability to market products in such countries. +If we do not comply with governmental regulations applicable to our CLIA‑certified laboratory, we may not be able to continue our operations. +The operation of our Clinical Laboratory Improvement Amendments, or CLIA, certified laboratory is subject to regulation by numerous federal, state and local governmental authorities in the United States. This laboratory holds a +53 +Table of Contents +CLIA certificate of compliance and is licensed by the Commonwealth of Massachusetts and the State of Maryland, and we may obtain other state licenses if required in the future. Failure to comply with federal or state regulations or changes in those regulatory requirements could result in a substantial curtailment or even prohibition of the operations of our laboratory and could have an adverse effect on our business. CLIA is a federal law that regulates clinical laboratories that perform testing on human specimens for the purpose of providing information for the diagnosis, prevention or treatment of disease. To maintain CLIA certification, laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make unannounced inspections of these laboratories. If we were to lose our CLIA certification or any required state licenses, whether as a result of a revocation, suspension or limitation, it could have a material adverse effect on our business. +We expect to rely on third parties in conducting any required future studies of diagnostic products that may be required by the FDA or other regulatory authorities, and those third parties may not perform satisfactorily. +We do not have the ability to independently conduct clinical trials or other studies that may be required to obtain FDA and other regulatory clearance or approval for future diagnostic products. Accordingly, we expect that we would rely on third parties, such as clinical investigators, consultants, and collaborators to conduct such studies if needed. Our reliance on these third parties for clinical and other development activities would reduce our control over these activities. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised, we may not be able to obtain regulatory clearance or approval. +If diagnostic procedures that are enabled by our technology are subject to unfavorable pricing regulations or third‑party coverage and reimbursement policies, our business could be harmed. +The ability of us, our customers or our collaborators to commercialize diagnostic tests based on our technology will depend in part on the extent to which coverage and reimbursement for these tests will be available from government health programs, private health insurers and other third‑party payors. In the United States, the principal decisions about reimbursement for new technologies are often made by the Centers for Medicare and Medicaid Services, or CMS. Private payors often follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third‑party payors have attempted to control costs by limiting coverage and the amount of payments for particular products and procedures. We cannot be sure that coverage will be available for any diagnostic tests based on our technology, and, if coverage is available, the level of payments. Reimbursement may impact the demand for those tests. If reimbursement is not available or is available only to limited levels, any tests for which marketing authorization is received may not be able to be successfully commercialized. +Current and future legislation may increase the difficulty and cost to obtain marketing approval of and commercialize any products based on our technology and affect the prices that may be obtained. +In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the ACA, became law. The ACA is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. Both Congress and President Trump have expressed their intention to repeal or repeal and replace the ACA, and as a result certain sections of the ACA have not been fully implemented or were effectively repealed. The uncertainty around the future of the ACA, and in particular the impact to reimbursement levels and the number of insured individuals, may lead to uncertainty or delay in the purchasing decisions of our customers, which may in turn negatively impact our product sales. If there are not adequate reimbursement levels, our business and results of operations could be adversely affected. +In addition, other legislative changes have been proposed and adopted since the ACA was enacted. We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we or our collaborators will receive for any +54 +Table of Contents +cleared or approved product. Any reduction in payments from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize any of our products for which we receive marketing approval. +In addition, sales of our tests outside of the United States will subject us to foreign regulatory requirements, which may also change over time. +We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business, or the effect any future legislation or regulation will have on us. The expansion in government’s effect on the United States healthcare industry may result in decreased profits to us, lower reimbursements by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations. +Risks Related to Our Operations +We depend on our information technology systems, and any failure of these systems could harm our business. +We depend on information technology and telecommunications systems to operate our business. We have installed, and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including, for example, systems handling human resources, accounting, manufacturing, inventory control, financial controls and reporting, sales administration, and other infrastructure operations. In addition to the aforementioned business systems, we intend to extend the capabilities of both our preventative and detective security controls by augmenting the monitoring and alerting functions, network design, and automatic countermeasure operations of our technical systems. These information technology and telecommunications systems support a variety of functions, including manufacturing operations, quality control, customer service support, and general administrative activities. +Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back‑up measures, some of our servers are potentially vulnerable to physical or electronic break‑ins, computer viruses, and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third‑party suppliers could prevent us from operating our business and managing the administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business. +Security breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +In the ordinary course of our business, we collect and store sensitive data, and intellectual property and proprietary business information owned or controlled by ourselves or our customers. This data encompasses a wide variety of business‑critical information including research and development information, commercial information, and business and financial information. We face four primary risks relative to protecting this critical information: loss of access; inappropriate disclosure; inappropriate modification; and inadequate monitoring of our controls over the first three risks. +The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses, breaches, interruptions due to employee error, malfeasance, lapses in compliance with privacy and security mandates, or other disruptions. Any such breach or +55 +Table of Contents +interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. +Any such security breach or interruption, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. federal government or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business and operations. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful. +In addition, the European Parliament and the Council of the European Union adopted a comprehensive general data privacy regulation, or GDPR, in 2016 to replace the current European Union Data Protection Directive and related country‑specific legislation. The GDPR took effect in May 2018 and governs the collection and use of personal data in the European Union. The GDPR, which is wide‑ranging in scope, will impose several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. While we have taken steps to comply with the GDPR, including such as reviewing our security procedures and entering into data processing agreements with relevant contractors, we cannot assure you that our efforts to remain in compliance will be fully successful. +Further, unauthorized access, loss or dissemination of sensitive information could also disrupt our operations, including our ability to conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our reputation and our business. In addition, there can be no assurance that we will promptly detect any such disruption or security breach, if at all. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our products could be delayed. +We face risks related to handling of hazardous materials and other regulations governing environmental safety. +Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous materials and the generation, transportation and storage of waste. Although we have secured clearance from the EPA historically, and currently are operating in compliance with applicable EPA rules and regulations, our business could be adversely affected if we discover that we or an acquired business is not in material compliance with these rules and regulations. In the future, we may pursue the use of other surfactant substances that will require clearance from the EPA, and we may fail to obtain such clearance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business. +56 +Table of Contents +Risks Related to Intellectual Property +If we are unable to protect our intellectual property, it may reduce our ability to maintain any technological or competitive advantage over our competitors and potential competitors, and our business may be harmed. +We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. As of March 1, 2020, we owned or exclusively licensed 30 granted U.S. patents and approximately 15 pending U.S. patent applications. We also owned or exclusively licensed a number of pending patent applications and granted patents in particular jurisdictions outside of the United States. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us, we may lose our technological or competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. +We cannot assure investors that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will take for such patents to be granted. It is possible that, for any of our patents that have granted or that may grant in the future, others will design around our patented technologies. Further, we cannot assure investors that other parties will not challenge any patents granted to us or that courts or regulatory agencies will hold our patents to be valid or enforceable. We cannot guarantee investors that we will be successful in defending challenges made against our patents and patent applications. Any successful third‑party challenge to our patents could result in the unenforceability or invalidity of such patents, or to such patents being interpreted narrowly or otherwise in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our competitors may be diminished because of these uncertainties. For these and other reasons, our intellectual property may not provide us with any competitive advantage. For example: +· +We or our licensors might not have been the first to make the inventions covered by each of our pending patent applications or granted patents; +· +We or our licensors might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings or derivation proceedings declared by the United States Patent and Trademark Office, or USPTO, that could result in substantial cost to us. No assurance can be given that our patent applications or granted patents (or those of our licensors) will have priority over any other patent or patent application involved in such a proceeding; +· +Others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies; +· +It is possible that our owned or licensed pending patent applications will not result in granted patents, and even if such pending patent applications grant as patents, they may not provide a basis for intellectual property protection of commercially viable products, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties; +· +We may not develop additional proprietary products and technologies that are patentable; +· +The patents of others may have an adverse effect on our business; and +· +While we apply for patents covering our products and technologies and uses thereof, as we deem appropriate, we may fail to apply for patents on important products and technologies in a timely fashion or at all, or we may fail to apply for patents in potentially relevant jurisdictions. +To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate +57 +Table of Contents +coverage over our products and protection aganinst our competitors’ products, our competitive position could be adversely affected, as could our business. +Software is a critical component of our instruments. To the extent such software is not protected by our patents, we depend on trade secret protection and non‑disclosure agreements with our employees, strategic partners and consultants, which may not provide adequate protection. +The measures that we use to protect the security of our intellectual property and other proprietary rights may not be adequate, which could result in the loss of legal protection for, and thereby diminish the value of, such intellectual property and other rights. +In addition to pursuing patents on our technology, we also rely upon trademarks, trade secrets, copyrights and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. In addition, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be undermined. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time‑consuming, the outcome would be unpredictable, and any remedy may be inadequate. In addition, courts outside the United States may be less willing to protect trade secrets. +In addition, competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect our market share against competitors’ products and methods, our competitive position could be adversely affected, as could our business. +Some of our owned and in‑licensed intellectual property has been discovered through government funded programs and thus is subject to federal regulations such as “march‑in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non‑U.S. manufacturers. +Some of the intellectual property rights we own and have in‑licensed have been generated through the use of U.S. government funding and are therefore subject to certain federal regulations. For example, all of the issued U.S. patents we own and all of the intellectual property rights licensed to us under our license agreement with Tufts have been generated using U.S. government funds. As a result, the U.S. government has certain rights to intellectual property embodied in our current or future products pursuant to the Bayh‑Dole Act of 1980, or Bayh‑Dole Act. These U.S. government rights in certain inventions developed under a government‑funded program include a non‑exclusive, non‑transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non‑exclusive licenses to any of these inventions to a third party if the government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march‑in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government, elect title, and file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or +58 +Table of Contents +produced through the use of the subject invention be manufactured substantially in the U.S. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the U.S. or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturing may limit our ability to license the applicable patent rights on an exclusive basis under certain circumstances. +If we enter into future arrangements involving government funding, and we make inventions as a result of such funding, intellectual property rights to such discoveries may be subject to the applicable provisions of the Bayh‑Dole Act. To the extent any of our current or future intellectual property is generated through the use of U.S. government funding, the provisions of the Bayh‑Dole Act may similarly apply. Any exercise by the government of certain of its rights could harm our competitive position, business, financial condition, results of operations and prospects. +Our Simoa bead-based technology is licensed to us by Tufts University. Any loss of our rights to this technology could prevent us from selling our products. +Our Simoa bead‑based technology is licensed exclusively to us from Tufts University. We do not own the patents that underlie this license. Our rights to use this technology and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of the license. Our principal obligations under our license agreement with Tufts are as follows: +· +royalty payments; +· +milestone payments; +· +annual maintenance fees; +· +using commercially reasonable efforts to develop and sell a product using the licensed technology and developing a market for such product; +· +paying and/or reimbursing fees related to prosecution, maintenance and enforcement of patent rights; and +· +providing certain reports. +If we breach any of these obligations, Tufts may have the right to terminate the license, which could result in our being unable to develop, manufacture and sell products using our Simoa bead-based technology or a competitor’s gaining access to the Simoa technology. Termination of our license agreement with Tufts would have a material adverse effect on our business. +In addition, we are a party to a number of other agreements that include licenses to intellectual property, including non‑exclusive licenses. We expect that we may need to enter into additional license agreements in the future. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. +We may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we cannot provide any assurances that we would be able to do so. +We may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we cannot provide any assurances that third‑party patents do not exist that might be enforced against our current or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non‑exclusive, thereby giving our competitors access to the same technologies licensed to us. If we could not obtain a +59 +Table of Contents +license, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected products, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation. +Licensing of intellectual property involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including: +· +the scope of rights granted under the license agreement and other interpretation‑related issues; +· +whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement; +· +our right to sublicense patent and other rights to third parties under collaborative development relationships; +· +our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our products, and what activities satisfy those diligence obligations; and +· +the ownership of inventions and know‑how resulting from the joint creation or use of intellectual property by our licensors and us and our partners. +If disputes over intellectual property that we have licensed prevent or impair our ability to maintain the licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product, or the dispute may have an adverse effect on our results of operation. +In addition to agreements pursuant to which we in‑license intellectual property, we have in the past and expect to in the future to grant licenses under our intellectual property. Like in‑licenses, out‑licenses are complex, and disputes may arise between us and our licensees, such as the types of disputes described above. Moreover, our licensees may breach their obligations, or we may be exposed to liability due to our failure or alleged failure to satisfy our obligations. Any such occurrence could have an adverse effect on our business. +If we or any of our partners are sued for infringing intellectual property rights of third parties, it would be costly and time‑consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +Our success also depends on our ability to develop, manufacture, market and sell our products and perform our services without infringing upon the proprietary rights of third parties. Numerous U.S. and foreign‑issued patents and pending patent applications owned by third parties exist in the fields in which we are developing products and services. As part of a business strategy to impede our successful commercialization and entry into new markets, competitors have claimed, and may claim in the future, that our products and/or services infringe their intellectual property rights and have suggested, and may suggest in the future, that we enter into license agreements. +Even if such claims are without merit, we could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against claims of infringement made by third parties or settling such claims. Any adverse ruling by a court or administrative body, or perception of an adverse ruling, may have a material adverse impact on our ability to conduct our business and our finances. Moreover, third parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more products or services and could result in a substantial award of damages against us. In addition, since we sometimes indemnify customers, collaborators or licensees, we may have additional liability in connection with any infringement or alleged infringement of third‑party intellectual property. +60 +Table of Contents +Because patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our products or proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any of our products. There is a substantial amount of litigation involving patent and other intellectual property rights in our industry. If a third party claims that we or any of our licensors, customers or collaboration partners infringe upon a third party’s intellectual property rights, we may have to: +· +seek to obtain licenses that may not be available on commercially reasonable terms, if at all; +· +abandon any infringing product or redesign our products or processes to avoid infringement; +· +pay substantial damages including, in an exceptional case, treble damages and attorneys’ fees, which we may have to pay if a court decides that the product or proprietary technology at issue infringes upon or violates the third‑party’s rights; +· +pay substantial royalties or fees or grant cross‑licenses to our technology; or +· +defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources. +We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time‑consuming and unsuccessful. +Competitors may infringe our patents or the patents that we license. In the event of infringement or unauthorized use, we may file one or more infringement lawsuits, which can be expensive and time‑consuming. An adverse result in any such litigation proceedings could put one or more of our patents at risk of being invalidated, being found to be unenforceable or being interpreted narrowly and could put our patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. +Many of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise any funds necessary to continue our operations, continue our internal research programs, in‑license needed technology, or enter into development partnerships that would help us bring our products to market. +In addition, patent litigation can be very costly and time‑consuming. An adverse outcome in such litigation or proceedings may expose us or any of our future development partners to loss of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all. +Our issued patents could be found invalid or unenforceable if challenged in court, which could have a material adverse impact on our business. +If we or any of our partners were to initiate legal proceedings against a third party to enforce a patent covering one of our products or services, the defendant in such litigation could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non‑enablement, or failure to claim patent eligible subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before the USPTO even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity +61 +Table of Contents +question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the challenged patent. Such a loss of patent protection would have a material adverse impact on our business. +We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed alleged trade secrets of their other clients or former employers to us, which could subject us to costly litigation. +As is common in the life sciences industry, we engage the services of consultants and independent contractors to assist us in the development of our products. Many of these consultants and independent contractors were previously employed at, or may have previously or may be currently providing consulting or other services to, universities or other technology, biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may become subject to claims that our company, a consultant or an independent contractor inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current clients. We may similarly be subject to claims stemming from similar actions of an employee, such as one who was previously employed by another company, including a competitor or potential competitor. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management team. If we were not successful we could lose access or exclusive access to valuable intellectual property. +We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property. +We generally enter into confidentiality and intellectual property assignment agreements with our employees, consultants, and contractors. These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, those agreements may not be honored and may not effectively assign intellectual property rights to us. For example, even if we have a consulting agreement in place with an academic advisor pursuant to which such academic advisor is required to assign any inventions developed in connection with providing services to us, such academic advisor may not have the right to assign such inventions to us, as it may conflict with his or her obligations to assign all such intellectual property to his or her employing institution. +In addition, we sometimes enter into agreements where we provide services to third parties, such as customers. Under such circumstances, our agreements may provide that certain intellectual property that we conceive in the course of providing those services is assigned to the customer. In those cases, we would not be able to use that particular intellectual property in, for example, our work for other customers without a license. +We may not be able to protect our intellectual property rights throughout the world, which could materially, negatively affect our business. +Filing, prosecuting and defending patents on current and future products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, regardless of whether we are able to prevent third parties from practicing our inventions in the United States, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products, and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as it is in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from competing. Patent protection must ultimately be sought on a country‑by‑country basis, which is an expensive and time‑consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. +62 +Table of Contents +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license and may adversely impact our business. +In addition, we and our partners also face the risk that our products are imported or reimported into markets with relatively higher prices from markets with relatively lower prices, which would result in a decrease of sales and any payments we receive from the affected market. Recent developments in U.S. patent law have made it more difficult to stop these and related practices based on theories of patent infringement. +Changes in patent laws or patent jurisprudence could diminish the value of patents in general, thereby impairing our ability to protect our products. +The America Invents Act, or the AIA, was signed into law on September 16, 2011, and many of the substantive changes became effective on March 16, 2013. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first‑to‑file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application, but circumstances could prevent us from promptly filing patent applications on our inventions. +Among some of the other changes introduced by the AIA are changes that limit where a patent holder may file a patent infringement suit and providing additional opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our owned and in‑licensed U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. The AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. +Additionally, the U.S. Supreme Court has ruled on several patent cases in recent years, such as Impression Products, Inc. v. Lexmark International, Inc., Association for Molecular Pathology v. Myriad Genetics, Inc. , Mayo Collaborative Services v. Prometheus Laboratories, Inc. and Alice Corporation Pty. Ltd. v. CLS Bank International , either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. +63 +Table of Contents +Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non‑compliance with these requirements. +The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case. In some cases, our licensors may be responsible for, for example, these payments, thereby decreasing our control over compliance with these requirements. +If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. +Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +We may use third‑party open source software components in future products, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell such products. +While our current products do not contain any software tools licensed by third‑party authors under “open source” licenses, we may choose to use open source software in future products. Use and distribution of open source software may entail greater risks than use of third‑party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses may contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products with less development effort and time and ultimately could result in a loss of product sales. +Although we intend to monitor any use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that any such licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure investors that our processes for controlling our use of open source software in our products will be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products on terms that are not economically feasible, to re‑engineer our products, to discontinue the sale of our products if re‑engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results, and financial condition. +We use third‑party software that may be difficult to replace or may cause errors or failures of our products that could lead to lost customers or harm to our reputation. +We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third‑party software or other third‑party software failures could result in errors, defects or cause our products to fail, which could harm our business +64 +Table of Contents +and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third‑party providers that could harm our reputation and increase our operating costs. +We will need to maintain our relationships with third‑party software providers and to obtain software from such providers that does not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver reliable products to our customers and could harm our reputation and results of operations. +Numerous factors may limit any potential competitive advantage provided by our intellectual property rights. +The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, provide a barrier to entry against our competitors or potential competitors, or permit us to maintain our competitive advantage. Moreover, if a third party has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are illustrative: +· +others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology but that is not covered by the claims of any patents that have issued, or may issue, from our owned or in‑licensed patent applications; +· +we might not have been the first to make the inventions covered by a pending patent application that we own or license; +· +we might not have been the first to file patent applications covering an invention; +· +others may independently develop similar or alternative technologies without infringing our intellectual property rights; +· +pending patent applications that we own or license may not lead to issued patents; +· +patents, if issued, that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors; +· +third parties may compete with us in jurisdictions where we do not pursue and obtain patent protection; +· +we may not be able to obtain and/or maintain necessary or useful licenses on reasonable terms or at all; +· +third parties may assert an ownership interest in our intellectual property and, if successful, such disputes may preclude us from exercising exclusive rights over that intellectual property; +· +we may not be able to maintain the confidentiality of our trade secrets or other proprietary information; +· +we may not develop or in‑license additional proprietary technologies that are patentable; and +· +the patents of others may have an adverse effect on our business. +Should any of these events occur, they could significantly harm our business and results of operations. +65 +Table of Contents +Risks Related to Our Common Stock and Being a Public Company +We expect that our stock price may fluctuate significantly. +The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including: +· +actual or anticipated fluctuations in our financial condition and operating results; +· +announcements by us, our partners or our competitors of new products, significant contracts, strategic partnerships, joint ventures, collaborations, acquisitions, commercial relationships or capital commitments; +· +competition from existing products or new products that may emerge; +· +failure to meet or exceed financial estimates and projections of the investment community or that we may provide to the public; +· +issuance of new or updated research or reports by securities analysts or recommendations for our stock; +· +adverse regulatory announcements; +· +disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies; +· +commencement of, or our involvement in, litigation; +· +fluctuations in the valuation of companies perceived by investors to be comparable to us; +· +conditions in our markets; +· +manufacturing disputes or delays; +· +any future sales of our common stock or other securities; +· +any change to the composition of our board of directors or key personnel; +· +general economic conditions and slow or negative growth of our markets; +· +share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; +· +announcement or expectation of additional debt or equity financing efforts; and +· +other factors described in this Risk Factors section of this Annual Report on Form 10‑K. +These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and life science companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have on occasion instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, +66 +Table of Contents +the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. +If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline. +The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the public markets, which could cause our stock price or trading volume to decline. +Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence over matters subject to stockholder approval. +As of December 31, 2019, our executive officers and directors, and entities affiliated with our executive officers and directors, owned or controlled approximately 31 % of our outstanding common stock. Accordingly, our executive officers, directors and principal stockholders have significant influence over our operations. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on our stock price and may prevent attempts by our stockholders to replace or remove the board of directors or management. +We have never paid dividends on our capital stock, and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases. +We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of our indebtedness with Hercules prohibit us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from an investment in our common stock if the price of our common stock increases. +Anti‑takeover provisions contained in our restated certificate of incorporation and restated by‑laws, as well as provisions of Delaware law, could impair a takeover attempt. +Our restated certificate of incorporation, restated by‑laws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions: +· +authorizing our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board of directors may determine; +· +specifying that special meetings of our stockholders can be called only by our board of directors and that our stockholders may not act by written consent; +· +establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors; +· +providing that directors may be removed only for cause; +· +providing that our board of directors may create new directorships and that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; +67 +Table of Contents +· +establishing that our board of directors is divided into three classes—Class I, Class II, and Class III—with each class serving staggered three‑year terms; +· +providing that our board of directors may amend our restated by‑laws without stockholder approval; and +· +requiring a super‑majority of votes to amend certain of the above‑mentioned provisions. +These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. +Any provision of our restated certificate of incorporation, restated by‑laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +We are an “emerging growth company” and are able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, and we plan to avail ourselves of the ability to adopt new accounting standards on the timeline permitted for private companies, which could make our common stock less attractive to investors and our financial statements less comparable to other companies who are complying with new accounting standards on public company timelines. +We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes‑Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, will comply with new or revised accounting standards not later than the relevant dates on which adoption of such standards is required for non‑public companies. As a result of this election, the timeline to comply with certain accounting standards will in many cases be delayed as compared to other public companies who are not eligible to have made or have not made this election. As a result, investors may view our financial statements as not comparable to other public companies. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (ii) December 31, 2022; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. +We incur increased costs and devote substantial management time as a result of operating as a public company. +As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, and these expenses may increase even more after we are no longer an “emerging growth company.” +68 +Table of Contents +We are subject to the reporting requirements of the Exchange Act, the Sarbanes‑Oxley Act, the Dodd‑Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and The Nasdaq Global Market. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations substantially increase our legal and financial compliance costs and make some activities more time‑consuming and costly. The increased costs increase our net loss. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the sufficient coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. +In addition, as a public company we incur additional costs and obligations in order to comply with SEC rules that implement Section 404 of the Sarbanes‑Oxley Act. Under these rules, we are required to make a formal assessment of the effectiveness of our internal control over financial reporting, and once we cease to be an emerging growth company, we will be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve timely compliance with Section 404, we engaged in a process to document and evaluate our internal control over financial reporting, which was both costly and challenging. We will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are designed and operating effectively, and implement a continuous reporting and improvement process for internal control over financial reporting. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. +Item 1B. UNRESOLVED STAFF COMMENTS +Not applicable. +Item 2. PROPERTIES +We currently lease approximately 91,600 square feet of office, laboratory, and manufacturing space at our headquarters in Billerica, Massachusetts. The premises covered by this new lease serve as our principal office and laboratory space. The initial term of the lease is 11 years and five months beginning on April 1, 2019, and we have the option to extend the lease for two additional five‑year periods. We believe that this office, laboratory and manufacturing space will be sufficient to meet our needs for the foreseeable future. +In addition, our subsidiary, Uman, leases a total of approximately 6,500 square feet of office, laboratory, manufacturing and storage space in Umeå, Sweden. These leases expire at various dates between May 31, 2020 and February 28, 2023. +Item 3. LEGAL PROCEEDINGS +We are not currently a party to any material legal proceedings. +Item 4. MINE SAFETY DISCLOSURES +Not applicable. +69 +Table of Contents +PART II +Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Market Information +Our common stock began trading on The Nasdaq Global Market on December 7, 2017 under the symbol “QTRX.” +Stockholders +As of March 1, 2020, there were approximately 47 stockholders of record of the 28,225,653 outstanding shares of common stock. +Unregistered Sales of Securities +There were no unregistered sales of equity securities during the fourth quarter ended December 31, 2019. +Use of Proceeds from Initial Public Offering of Common Stock +On December 11, 2017, we completed the initial public offering of our common stock, which resulted in the sale of 4,916,480 shares, including 641,280 shares sold by us pursuant to the exercise in full by the underwriters of their option to purchase additional shares in connection with the initial public offering, at a price to the public of $15.00 per share. The offer and sale of all of the shares in our initial public offering was registered under the Securities Act pursuant to a registration statement on Form S‑1 (File No. 333‑221475), which was declared effective by the SEC on December 6, 2017, and a registration statement on Form S‑1 (File No. 333‑221932) under Rule 462(b) of the Securities Act that became effective upon its filing. Following the sale of all of the shares in connection with the closing of our initial public offering, the offering terminated. J.P. Morgan Securities LLC, Leerink Partners LLC and Cowen and Company, LLC (Cowen) acted as joint book‑running managers for the initial public offering. BTIG, LLC and Evercore Group L.L.C. acted as co‑managers. +We received approximately $65.6 million in net proceeds after deducting underwriting discounts and commissions and offering costs payable by us. As of December 31, 2019, we had used all of the net proceeds from the offering for: operating expenses, capital investments, debt payments and the acquisition of Aushon. None of the offering expenses consisted of direct or indirect payments made by us to directors, officers or persons owning 10% or more of our common stock or to their associates, or to our affiliates, and we have not used any of the net proceeds from the offering to make payments, directly or indirectly, to any such persons. There has been no material change in the planned use of the net proceeds from our initial public offering as described in our final prospectus filed with the SEC on December 7, 2017 pursuant to Rule 424(b)(4) under the Securities Act. +Issuer Purchases of Equity Securities +Not applicable. +Item 6. SELECTED FINANCIAL DATA +You should read the following selected financial data together with our consolidated financial statements and the related notes and the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10‑K. We have derived the statement of operations data for the years ended December 31, 2019, 2018, and 2017 and the balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10‑K. Note that the results for the year ended December 31, 2018 include activity related to the acquisition of Aushon, which occurred on January 1, 2018, and the results for the year ended December 31, 2019 include activity from +70 +Table of Contents +the acquisition of Uman, which occurred on August 1, 2019. The statement of operations data for the years ended December 31, 2016 and 2015, and the selected balance sheet data as of December 31, 2017, 2016, and 2015 is derived from audited financial statements that are not included in this Annual Report on Form 10‑K. Our historical results are not necessarily indicative of the results that should be expected in the future . +Consolidated statement of operations data (in thousands, except per share data) +Year Ended December 31, +2019 +2018 +2017 +2016 +2015 +Total revenue +$ +56,734 +$ +37,632 +$ +22,874 +$ +17,585 +$ +12,180 +Cost of revenue +29,898 +19,684 +12,887 +9,837 +6,465 +Gross profit +26,836 +17,948 +9,987 +7,748 +5,715 +Research and development +16,190 +15,805 +16,304 +16,993 +10,083 +Selling, general and administrative +52,246 +33,693 +19,688 +12,466 +10,155 +Total operating expenses +68,436 +49,498 +35,992 +29,459 +20,238 +Loss from operations +(41,600) +(31,550) +(26,005) +(21,711) +(14,523) +Interest income (expense), net +627 +46 +(951) +(1,298) +(1,040) +Other income (expense), net +(10) +(7) +(63) +(164) +(380) +Loss before income taxes +(40,983) +(31,511) +(27,019) +(23,173) +(15,943) +Income tax benefit (provision) +187 +(25) +— +— +— +Net loss +(40,796) +(31,536) +(27,019) +(23,173) +(15,943) +Accretion and accrued dividends on redeemable convertible preferred stock +— +— +(4,166) +(4,445) +(4,355) +Net loss attributable to common stockholders +$ +(40,796) +$ +(31,536) +$ +(31,185) +(27,618) +(20,298) +Net loss per share attributable to common stockholders, basic and diluted +$ +(1.63) +$ +(1.43) +$ +(8.30) +$ +(12.89) +$ +(11.19) +Weighted-average common shares outstanding +25,091 +21,994 +3,757 +2,143 +1,813 +Consolidated balance sheet data (in thousands) +As of December 31, +2019 +2018 +2017 +2016 +2015 +Cash and cash equivalents +$ +109,155 +$ +44,429 +$ +79,682 +$ +29,671 +$ +2,323 +Total assets +$ +169,951 +$ +67,611 +$ +91,779 +$ +37,117 +$ +7,351 +Total long term debt +$ +7,587 +$ +7,623 +$ +9,382 +$ +10,243 +$ +9,726 +Total redeemable convertible preferred stock +$ +— +$ +— +$ +— +$ +128,585 +$ +73,445 +Total stockholders’ equity (deficit) +$ +128,658 +$ +41,065 +$ +65,866 +$ +(115,109) +$ +(88,640) +Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10‑K. In addition to historical consolidated financial information, the following discussion contains forward‑looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward‑looking statements. See “Special Note Regarding Forward‑Looking Statements.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10‑K, particularly in “Risk Factors.” +Overview +We are a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to +71 +Table of Contents +reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We are currently focusing on protein detection, which we believe is an area of significant unmet need and where we have significant competitive advantages. However, in addition to enabling new applications and insights in protein analysis, we are also developing our Simoa bead-based technology to detect nucleic acids in biological samples. +We currently sell all of our products for life science research, primarily to laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies, through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets, including Australia, Brazil, China, Czech Republic, India, Israel, Japan, Lebanon, Mexico, Qatar, Saudi Arabia, Singapore, South Korea and Taiwan . +Our instruments are designed to be used either with assays fully developed by us, including all antibodies and supplies required to run the tests, or with “homebrew” kits where we supply some of the components required for testing, and the customer supplies the remaining required elements. Accordingly, our installed instruments generate a recurring revenue stream. We believe that our recurring consumable revenue is driven by our customers’ ability to extract more valuable data using our platform and to process a large number of samples quickly with little hands-on preparation. +We commercially launched our first immunoassay platform, the Simoa HD-1, in January 2014. The HD-1 is based on our bead-based technology, and assays run on the HD-1 are fully automated. We initiated commercial launch of the SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-1 in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of applications. In July 2019, we launched the Simoa HD-X, an upgraded version of the Simoa HD-1, which replaces the HD-1. The HD-X has been designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. We began shipping and installing HD-X instruments at customer locations in the third quarter of 2019, ahead of our original fourth quarter expectation. As the installed base of the Simoa instruments increases, total consumables revenue overall is expected to increase. We believe that consumables revenue should be subject to less period-to-period fluctuation than our instrument sales revenue, and will become an increasingly important contributor to our overall revenue. +On January 30, 2018, we acquired Aushon for $3.2 million in cash, with an additional payment of $0.8 million made in July 2018, six months after the acquisition date. With the acquisition of Aushon, we acquired a CLIA certified laboratory, as well as Aushon’s proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to develop the SP-X instrument to provide the same Simoa sensitivity found in our Simoa bead-based platform. We initiated an early-access program for the SP-X instrument in January 2019, with the full commercial launch commenced in April 2019. +On August 1, 2019, we completed our acquisition of Uman for an aggregate purchase price of $21.2 million, comprised of (i) $15.7 million in cash plus (ii) 191,152 shares of our common stock (representing $5.5 million based on the closing prices of our common stock on the Nasdaq Global Market on July 1, 2019 and August 1, 2019, the dates of issuance). The acquisition closed with respect to 95% of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5% of the outstanding shares of capital stock of Uman on August 1, 2019. Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. +72 +Table of Contents +As of December 31, 2019, we had cash and cash equivalents of $109.2 million. Since inception, we have incurred net losses. Our net loss was $40.8 million, $31.5 million, and $27.0 million for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, we had an accumulated deficit of $216.2 million and stockholders' equity of $128.7 million. We expect to continue to incur significant expenses and operating losses at least through the next 24 months. We expect our expenses will increase substantially as we: +· +expand our sales and marketing efforts to further commercialize our products; +· +strategically acquire companies or technologies that may be complementary to our business; +· +expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our products are deemed by the United States Food and Drug Administration, or FDA, to be medical devices or otherwise subject to additional regulation by the FDA; +· +seek premarket approval, or PMA, or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market products for use in the prevention, diagnosis or treatment of a disease or other condition; +· +hire additional personnel and continue to grow our employee headcount; +· +enter into collaboration arrangements, if any, or in-license other products and technologies; +· +add operational, financial and management information systems; and +· +incur increased costs as a result of operating as a public company. +Financial Operations Overview +Revenue +Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. +Once a contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying license relative to the option exercise price, including assumptions about technical feasibility and the probability of developing a candidate that would be subject to the option rights. The exercise of a material right is accounted for as a contract modification for accounting purposes. +The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (“SSP”) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations. +We generate product revenue primarily from sales of our HD-X, HD‑1, SR‑X, and SP‑X instruments and related reagents and other consumables. We currently sell our products for research use only applications and our +73 +Table of Contents +customers are primarily laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Sales of our consumables have consistently increased due to an increasing number of instruments being installed in the field, all of which require certain of our consumables to run customers’ specific tests. Consumable revenue consists of sales of complete assays which are developed internally by us, plus sales of “homebrew” kits which contain all the elements necessary to run tests with the exception of the specific antibodies utilized which are separately provided by the customer. +Service and other revenue consists of testing services provided by us in our Accelerator Laboratory on behalf of certain research customers, in addition to warranty and other service‑based revenue. Services provided in our Accelerator Laboratory include sample testing, homebrew assay development and custom assay development. +Collaboration and license revenue consists of revenue associated with licensing our technology to third parties and for related services. +Cost of Products, Services and Collaboration Revenue +Cost of goods sold for products consists of HD-X, HD‑1, and SR‑X instrument costs from the manufacturer. Cost of goods sold for SP‑X consists of costs based on the internal assembly of this item. Raw material part costs, associated freight, shipping and handling costs, contract manufacturer costs, salaries, personnel costs, royalties, stock‑based compensation, overhead and other direct costs related to those sales are classified as cost of goods sold for products. +Cost of goods sold for services consists of salaries and other personnel costs, royalties, stock‑based compensation and facility costs associated with operating the Accelerator Laboratory on behalf of customers, in addition to costs related to warranties and other costs of servicing equipment at customer sites. +Cost of collaboration revenue consists of royalty expense due to third parties from revenue generated by collaboration or license deals. +Research and Development Expenses +Research and development expenses consist of salaries and other personnel costs, stock‑based compensation, research supplies, third‑party development costs for new products, materials for prototypes, and allocated overhead costs that include facility and other overhead costs. We have made substantial investments in research and development since our inception, and plan to continue to make substantial investments in the future. Our research and development efforts have focused primarily on the tasks required to support development and commercialization of new and existing products. We believe that our continued investment in research and development is essential to our long‑term competitive position and expect these expenses to increase in future periods. +Selling, General and Administrative Expenses +Selling, general and administrative expenses consist primarily of salaries and other personnel costs, and stock‑based compensation for our sales and marketing, finance, legal, human resources and general management, as well as professional services, such as legal and accounting services. We expect selling, general and administrative expenses to increase in future periods as the number of sales, technical support and marketing and administrative personnel grows and we continue to introduce new products, broaden our customer base and grow our business. We also expect to incur additional expenses as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission and the Nasdaq Stock Market, additional insurance expenses, and expenses related to investor relations activities and other administrative and professional services. +Critical Accounting Policies, Significant Judgments and Estimates +Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10‑K are prepared in accordance with accounting principles generally accepted in the United States. The +74 +Table of Contents +preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates may occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. +We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other significant accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. Our significant accounting policies are more fully described in “Significant Accounting Policies” (Note 2) in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10‑K. +Revenue Recognition +We recognize revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that we expect to be entitled to receive in exchange for these goods and services, incentives and taxes collected from customers, that are subsequently remitted to governmental authorities. +We adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers , or ASC 606, on January 1, 2019, using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2019 reflect the application of ASC 606 guidance, while the reported results for 2018 were prepared under ASC 605, Revenue Recognition +Product Revenue +Our products are composed of analyzer instruments, assay kits and other consumables such as reagents. Products are sold directly to biopharmaceutical and academic research organizations or are sold through distributors in EMEA and Asia Pacific regions. The sales of instruments are generally accompanied by an initial year of implied service-type warranties and may be bundled with assays and other consumables and may also include other items such as training and installation of the instrument and/or an extended service warranty. Revenues from the sale of products are recognized at a point in time when we transfer control of the product to the customer, which is upon installation for instruments sold to direct customers, and based upon shipping terms for assay kits and other consumables. Revenue for instruments sold to distributors is generally recognized based upon shipping terms (either upon shipment or delivery). +Service and Other Revenue +Service revenues are composed of contract research services, initial implied one-year service-type warranties, extended services contracts and other services such as training. Contract research services are provided through our Accelerator Laboratory and generally consist of fixed fee contracts. Revenues from contract research services are recognized at a point in time when we complete and deliver our research report on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. Revenues from service-type warranties are recognized ratably over the contract service period. Revenues from other services are immaterial. +Collaboration and License Revenue +We may enter into agreements to license the intellectual property and know-how associated with its instruments in exchange for license fees and future royalties (as described below). The license agreements provide the licensee with a right to use the intellectual property with the license fee revenues recognized at a point in time as the underlying license is considered functional intellectual property. We have recognized revenues from a sales- or usage based royalties related to our licensing technology and intellectual property.. +75 +Table of Contents +Payment Terms +Our payment terms vary by the type and location of customer and the products or services offered. Payment from customers is generally required in a term ranging from 30 to 45 days from date of shipment or satisfaction of the performance obligation with no discounts for early payment. Occasionally we do provide extended payment terms or financing arrangements to customers. +Disaggregated Revenue +When disaggregating revenue, we considered all of the economic factors that may affect revenues. The following tables disaggregate our revenue from contracts with customers by revenue type: +Year Ended +December 31, 2019 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues +Instruments +$ +6,250 +$ +5,243 +$ +3,393 +$ +14,886 +Consumable and other products +14,148 +9,674 +1,783 +25,605 +Totals +$ +20,398 +$ +14,917 +$ +5,176 +$ +40,491 +Service and other revenues +Service-type warranties +$ +3,139 +$ +1,323 +$ +171 +$ +4,633 +Research services +8,845 +704 +456 +10,005 +Other services +825 +565 +31 +1,421 +Totals +$ +12,809 +$ +2,592 +$ +658 +$ +16,059 +Collaboration and license revenue +Collaboration and license revenue +$ +167 +$ +17 +$ +— +$ +184 +Totals +$ +167 +$ +17 +$ +— +$ +184 +Our contracts with customers may include promises to transfer multiple products and services to a customer. In accordance with ASC 606, we combine any performance obligations that are immaterial with one or more other performance obligations that are material to the contract. For arrangements with multiple performance obligations, we allocate the contract transaction price, including discounts, to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. We determine standalone selling prices based on prices charged to customers in observable transactions, and use a range of amounts to estimate standalone selling prices for each performance obligation. We may have more than one range of standalone selling price for certain products and services based on the pricing for different customer classes. +Variable consideration in our contracts primarily relates to (i) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (ii) certain non-fixed fee research services contracts. ASC 606 provides for an exception to estimating the variable consideration for sales- and usage-based royalties related to the license of intellectual property, such that the sales- or usage-based royalty will be recognized in the period the underlying transaction occurs. We have recorded sales- or usage-based royalty revenue for the year ended December 31, 2019 related to the intellectual property licensed by Uman. We recognize revenues from sales- or usage based royalty revenue at the later of when the sales or usage occurs; and the satisfaction or partial satisfaction of the performance obligation to which the royalty has been allocated. +The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as of December 31, 2019 is $5.2 million. Of the performance obligations not yet satisfied or are partially satisfied, $4.7 million is expected to be recognized as revenue in the next 12 months, with the remainder to be recognized within the 24 months thereafter. The $5.2 million principally consists of $3.0 million billed +76 +Table of Contents +for undelivered services related to initial and extended service-type warranties and research services, as well as $1.7 million related to undelivered licenses of intellectual property for a diagnostics company (see Note 2). +We have classified the balance of capitalized costs to obtain a contract as a component of prepaid expenses and other current assets as of December 31, 2019 and classified the expense as a component of cost of goods sold and selling, general and administrative expense over the estimated life of the contract. We consider potential impairment in these amounts each period. +ASC 606 provides entities with certain practical expedients and accounting policy elections to minimize the cost and burden of adoption. +We exclude from the transaction price any amounts collected from customers related to sales and other similar taxes. +When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. We do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. None of our contracts contained a significant financing component as of December 31, 2019. +We have elected to account for the shipping and handling as an activity to fulfill the promise to transfer the product, and therefore will not evaluate whether shipping and handling activities are promised services to its customers. +Stock‑Based Compensation +We account for stock‑based compensation awards in accordance with ASC 718, Compensation—Stock Compensation . ASC 718 requires all stock‑based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Stock‑based compensation awards have historically consisted of stock options and restricted stock. +Prior to adoption of Accounting Standards Update (ASU) No. 2016-09 Compensation—Stock Compensation (ASU 2016‑09) on January 1, 2017, we recognized compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. Effective January 1, 2017, we ceased utilizing an estimated forfeiture rate and began recognizing forfeitures as they occur. We estimate the grant date fair value, and the resulting stock‑based compensation expense, using the Black‑Scholes option‑pricing model. The grant date fair value of the stock‑based awards is generally recognized on a straight‑line basis over the requisite service period, which is generally the vesting period of the respective awards. +We recognize compensation costs related to share‑based payments granted to non‑employees, which consist of directors for their services on our board of directors, based on the estimated fair value of the awards on the date of grant in the same manner as options for employees; however, the fair value of the stock options granted to non‑employees is re‑measured each reporting period until the service is complete, and the resulting increase or decrease in value, if any, is recognized as expense or income, respectively, during the period the related services are rendered to the same financial statement line item as any cash consideration would be recognized. There were no material non‑employee awards outstanding during the years ended December 31, 2019, 2018, and 2017. +77 +Table of Contents +The fair value of stock options granted to employees and non-employees is estimated on the grant date using the Black‑Scholes option‑pricing model, based on the assumptions noted in the following table: +Year Ended December 31, +2019 +2018 +2017 +Risk-free interest rate +1.4% - 2.6% +2.6% - 3.0% +1.8% - 2.1% +Expected dividend yield +None +None +None +Expected term (in years) +6.0 +5.9 +6.0 +Expected volatility +33.5% - 39.7% +32.4% - 36.8% +46.0% - 52.0% +Using the Black‑Scholes option‑pricing model, the weighted‑average grant date fair value of options granted for the years ended December 31, 2019, 2018, and 2017 was $9.09, $7.19, and $4.52 per share, respectively. Expected volatility was calculated based on reported volatility data for a representative group of guideline publicly traded companies for which historical information was available. The risk‑free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. We estimate the expected life of options granted to employees utilizing the simplified method which calculates the expected life of an option as the average of the time to vesting and contractual life of the options. The expected life is applied to the stock option grant group as a whole, as we do not expect substantially different exercise or post‑vesting termination behavior among our employee population. We use the simplified method due to the lack of historical exercise data and the plain nature of the stock options. We use the remaining contractual term for the expected life of non‑employee awards. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on common stock. +For the years ended December 31, 2019, 2018, and 2017 stock‑based compensation expense was $6.4 million, $4.9 million, and $2.2 million, respectively. +The table below summarizes the stock‑based compensation expense recognized in our statements of operations by classification (in thousands): +Year Ended December 31, +2019 +2018 +2017 +Cost of product revenue +$ +86 +$ +55 +$ +24 +Cost of service and other revenue +238 +173 +52 +Research and development +718 +513 +180 +General and administrative +5,346 +4,143 +1,912 +Total +$ +6,388 +$ +4,884 +$ +2,168 +As of December 31, 2019, we had $15.6 million of total unrecognized stock‑based compensation costs which we expect to recognize over a weighted‑average period of 2.77 years. +Prior to our initial public offering (IPO), the fair value of our common stock underlying our stock options was estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying granted stock options, our board of directors considered, among other things, the most recent valuations of our common stock prepared by an unrelated third‑party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately‑Held‑Company Equity Securities Issued as Compensation. +Given the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including (1) our business, financial condition and results of operations, including related industry trends affecting our operations; (2) our forecasted operating performance and projected future cash flows discounted to present value using our estimated weighted average cost of capital; (3) the illiquid nature of our common stock; (4) liquidation preferences and other rights and privileges of our preferred stock over our common stock; (5) likeliness and estimated timing of the potential option to have our stock become publicly traded; (6) market multiples of our most +78 +Table of Contents +comparable public peers; (7) recently completed equity financing transactions; and (8) market conditions affecting our industry. +Since the completion of our IPO, we have determined the fair value of each common share underlying share‑based awards based on the closing price of our common shares as reported by Nasdaq on the date of grant. +Results of Operations +Comparison of the Years Ended December 31, 2019 and December 31, 2018 (dollars in thousands): +Year Ended +Year Ended +December 31, +% of +December 31, +% of +$ +% +2019 +revenue +2018 +revenue +change +change +Product revenue +$ +40,491 +72 +% +$ +23,365 +62 +% +$ +17,126 +73 +% +Service and other revenue +16,059 +28 +% +12,117 +32 +% +3,942 +33 +% +Collaboration and license revenue +184 +— +% +2,150 +6 +% +(1,966) +(91) +% +Total revenue +56,734 +100 +% +37,632 +100 +% +19,102 +51 +% +Cost of goods sold: +Cost of product revenue +20,900 +37 +% +12,729 +34 +% +8,171 +64 +% +Cost of service revenue +8,998 +16 +% +6,955 +18 +% +2,043 +29 +% +Total costs of goods sold and services +29,898 +53 +% +19,684 +52 +% +10,214 +52 +% +Gross profit +26,836 +47 +% +17,948 +48 +% +8,888 +50 +% +Operating expenses: +Research and development +16,190 +29 +% +15,805 +42 +% +385 +2 +% +Selling, general and administrative +52,246 +92 +% +33,693 +90 +% +18,553 +55 +% +Total operating expense +68,436 +121 +% +49,498 +132 +% +18,938 +38 +% +Loss from operations +(41,600) +(73) +% +(31,550) +(84) +% +(10,050) +(32) +% +Interest income (expense), net +627 +1 +% +46 +— +% +` +581 +1,263 +% +Other income (expense), net +(10) +— +% +(7) +— +% +(3) +(43) +% +Loss before income taxes +(40,983) +(72) +% +(31,511) +(84) +% +(9,472) +(30) +% +Income tax benefit (provision) +187 +— +% +(25) +— +% +212 +848 +% +Net loss +$ +(40,796) +(72) +% +$ +(31,536) +(84) +% +$ +(9,260) +(29) +% +Revenue +Revenue increased by $19.1 million, or 51%, to $56.7 million for the year ended December 31, 2019 as compared to $37.6 million for the year ended December 31, 2018. Product revenue consisted of sales of instruments totaling $14.9 million and sales of consumables and other products of $25.6 million for the year ended December 31, 2019. Product revenue consisted of sales of instruments totaling $9.6 million and sales of consumables and other products totaling $13.8 million for the year ended December 31, 2018. Average sales prices of instruments and consumables did not change materially for the year ended December 31, 2019 as compared with the year ended December 31, 2018. The increase in product revenue of $17.1 million was primarily due to the sale of more instruments for the year ended December 31, 2019 and increased sales of consumables. The installed base of instruments increased from December 31, 2018 to December 31, 2019, and as these additional instruments were used by customers, the consumables sales increased. The increase in service and other revenue of $3.9 million was primarily due to increased services performed in our Accelerator Laboratory; more customers use these services, and existing customers use these services more frequently. In addition, an increase in purchased warranties contributed to the service and other revenue increase. Collaboration and license revenue for the year ended December 31, 2019 of $0.2 million was related to licensing technology and intellectual property. Collaboration and license revenue for the year ended December 31, 2018 of $2.2 million was related to the termination of the collaboration arrangement with bioMérieux. +79 +Table of Contents +Cost of Goods Sold and Services +Cost of product revenue increased by $8.2 million, or 64%, to $20.9 million for the year ended December 31, 2019 as compared to $12.7 million for the year ended December 31, 2018. The increase was primarily due to an increase in sales of consumables and instruments, along with costs incurred from the amortization of the Uman acquisition-related inventory valuation adjustment and acquired intangibles. Cost of service revenue increased to $9.0 million for the year ended December 31, 2019 from $7.0 million for the year ended December 31, 2018. The increase was primarily due to higher utilization of the Accelerator Laboratory, plus increased personnel costs from the build out of our field service and Accelerator organization. Overall cost of goods sold and services as a percentage of revenue increased slightly to 53% of total revenue for the year ended December 31, 2019 as compared to 52% for the year ended December 31, 2018, primarily as a result of the impact of the collaboration arrangement with bioMérieux during the year ended December 31, 2018 and the impact of the Uman acquisition-related charges during the year ended December 31, 2019. +Research and Development Expense +Research and development expense increased slightly by $0.4 million, or 2%, to $16.2 million for the year ended December 31, 2019 as compared to $15.8 million for the year ended December 31, 2018. The increase was primarily due to the development of the SP-X and HD-X and increased headcount in research and development. +Selling, General and Administrative Expense +Selling, general and administrative expense increased by $18.6 million, or 55%, to $52.2 million for the year ended December 31, 2019 as compared to $33.7 million for the year ended December 31, 2018. The increase was primarily due to headcount additions in various departments as we build out our organization to support future growth, public company costs, the lease for the new headquarters, and stock-based compensation expense. In addition, we incurred approximately $1.9 million in costs associated with the acquisition of Uman during the year ended December 31, 2019. +Interest Income (Expense), Net and Other Income (Expense), Net +Interest income (expense), net and other income (expense), net increased by $0.6 million for the year ended December 31, 2019 as compared to the same period in 2018, primarily due to the interest income earned on cash equivalents, which increased due to our “at-the-market” and underwritten public offerings completed during 2019. +Income Tax Benefit (Provision) +Income tax benefit was $0.2 million for the year ended December 31, 2019 as compared to a provision of less than $0.1 million for the same period in 2018. The increase is primarily due to certain state and international taxes in 2019, which we did not have in the prior year. +80 +Table of Contents +Comparison of the Years Ended December 31, 2018 and December 31, 2017 (dollars in thousands): +Year Ended +Year Ended +December 31, +% of +December 31, +% of +$ +% +2018 +revenue +2017 +revenue +change +change +Product revenue +$ +23,365 +62 +% +$ +14,124 +62 +% +$ +9,241 +65 +% +Service and other revenue +12,117 +32 +% +7,676 +34 +% +4,441 +58 +% +Collaboration and license revenue +2,150 +6 +% +1,074 +5 +% +1,076 +100 +% +Total revenue +37,632 +100 +% +22,874 +100 +% +14,758 +65 +% +Costs of goods sold: +Cost of product revenue +12,729 +34 +% +7,742 +34 +% +4,987 +64 +% +Cost of services revenue +6,955 +18 +% +5,145 +22 +% +1,810 +35 +% +Total costs of goods sold and services +19,684 +52 +% +12,887 +56 +% +6,797 +53 +% +Gross profit +17,948 +48 +% +9,987 +44 +% +7,961 +80 +% +Operating expenses: +Research and development +15,805 +42 +% +16,304 +71 +% +(499) +(3) +% +Selling, general and administrative +33,693 +90 +% +19,688 +86 +% +14,005 +71 +% +Total operating expenses +49,498 +132 +% +35,992 +157 +% +13,506 +38 +% +Loss from operations +(31,550) +(84) +% +(26,005) +(114) +% +(5,545) +(21) +% +Interest income (expense), net +46 +— +% +(951) +(4) +% +997 +105 +% +Other income (expense), net +(7) +— +% +(63) +— +% +56 +89 +% +Loss before income taxes +(31,511) +(84) +% +(27,019) +(118) +% +(4,492) +(17) +% +Income tax benefit (provision) +(25) +— +% +— +— +% +(25) +(100) +% +Net loss +$ +(31,536) +(84) +% +$ +(27,019) +(118) +% +$ +(4,517) +(17) +% +Revenue +Revenue increased by $14.8 million, or 65%, to $37.6 million for the year ended December 31, 2018 as compared to $22.9 million for the year ended December 31, 2017. Product revenue consisted of sales of instruments totaling $9.6 million and sales of consumables and other products of $13.8 million for the year ended December 31, 2018. Product revenue consisted of sales of instruments totaling $6.5 million and sales of consumables and other products totaling $7.6 million for the year ended December 31, 2017. Average sales prices of instruments and consumables did not change materially in the year ended December 31, 2018 as compared with the year ended December 31, 2017. The increase in product revenue of $9.2 million was primarily due to the sale of more instruments in the year ended December 31, 2018 and increased sales of consumables. The installed base of Simoa instruments increased from December 31, 2017 to December 31, 2018, and as these additional instruments were used by customers, the consumables sales increased. The increase in service and other revenue of $4.4 million was due to increased services performed in our Accelerator Laboratory; more customers are using these services, and existing customers are using the Accelerator Laboratory more frequently. In addition, an increase in purchased warranties contributed to the service and other revenue increase. Collaboration and license revenue in the year ended December 31, 2018 included $2.1 million in revenue related to the termination of the collaboration arrangement with bioMérieux in the third quarter of 2018. +Cost of Goods Sold and Services +Cost of product revenue increased by $5.0 million, or 64%, to $12.7 million for the year ended December 31, 2018 as compared to $7.7 million for the year ended December 31, 2017. The increase was primarily due to increased sales of consumables and instruments. Cost of service revenue increased to $7.0 million for the year ended December 31, 2018 from $5.1 million for the year ended December 31, 2017. The increase was primarily due to higher utilization of the Accelerator Laboratory, plus increased personnel costs from the build out of our field service organization. Overall cost of goods sold and services as a percentage of revenue decreased to 52% of total revenue for the year ended December 31, 2018 as compared to 56% for the year ended December 31, 2017, primarily as a result of the change in revenue mix to more consumables revenue and collaboration revenue in 2018. +81 +Table of Contents +Research and Development Expense +Research and development expense decreased slightly by $0.5 million, or 3%, to $15.8 million for the year ended December 31, 2018 as compared to $16.3 million for the year ended December 31, 2017. The decrease was primarily due to a reduction in outside development costs related to our SR‑X instrument for which development was completed and product launched commercially in the fourth quarter of 2017. The reduction in project costs for the SR‑X instrument offset an increase in research and development costs due to increased headcount in research and development and the increased use of outside development firms as we increased our new product development efforts. +Selling, General and Administrative Expense +Selling, general and administrative expense increased by $14.0 million, or 71%, to $33.7 million for the year ended December 31, 2018 as compared to $19.7 million for the same period in 2017. The increase was primarily due to headcount additions in various departments as we build out our organization to support future growth, public company costs, transaction fees, and amortization of intangibles associated with the Aushon acquisition, and stock compensation expense. +Interest Income (Expense), Net and Other Income (Expense), Net +Interest income (expense), net and other income (expense), net increased by $1.1 million, to a net income position of less than $0.1 million for the year ended December 31, 2018 as compared to $1.0 million of net expense for the same period in 2017, primarily due to an increase in the interest income as a result of the higher cash balance in 2018. +Income Tax Benefit (Provision) +Tax provision increased by less than $0.1 million to an amount less $0.1 million for the year ended December 31, 2018. The increase is primarily due to certain state taxes in 2018, which we did not have in the prior year. +Liquidity and Capital Resources +Since our inception, we have incurred net losses and negative cash flows from operations. We incurred net losses of $40.8 million, $31.5 million and $27.0 million and used $26.2 million, $28.7 million and $22.1 million of cash from our operating activities for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, we had an accumulated deficit of $216.2 million. +As of December 2019, we had cash and cash equivalents of $109.2 million and no additional amounts were available to borrow under our debt facility. +Sources of Liquidity +To date, we have financed our operations principally through equity offerings, borrowings from credit facilities and revenue from our commercial operations. +Equity Offerings +In December 2017, we completed our IPO in which we sold 4,916,480 shares of common stock at an initial public offering price of $15.00 per share. The aggregate net proceeds received by us from the offering, net of underwriting discounts and commissions and offering expenses, were $65.6 million. Prior to the IPO, we had raised capital through the sale of redeemable convertible preferred stock in private placement transactions. +On March 19, 2019, we entered into a Sales Agreement for an “at-the-market offering” arrangement with Cowen, which allows us to issue and sell shares of common stock pursuant to a shelf registration statement for total gross sales proceeds of up to $50.0 million from time to time through Cowen, acting as our agent. During the nine +82 +Table of Contents +months ended September 30, 2019, we sold an aggregate of 2,186,163 shares of common stock pursuant to this agreement resulting in $49.7 million in gross proceeds and $48.0 million in net proceeds. +On August 8, 2019, we entered into an underwriting agreement with J.P. Morgan Securities LLC and SVB Leerink LLC, as representatives of the several underwriters, relating to an underwritten public offering of 2,732,673 shares of common stock at a public offering price of $25.25 per share. We received $69.0 million in gross proceeds and $64.5 million in net proceeds. +Loan Facility with Hercules +On April 14, 2014, we executed a Loan Agreement with Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) , as subsequently amended, most recently in April 2019 . The Loan Agreement provided a total debt facility of $10.0 million, which is secured by substantially all of our assets. At closing, we borrowed $5.0 million in principal and had the ability to draw the additional $5.0 million over the period from November 1, 2014 to March 31, 2015. The interest rate on this term loan was variable based on a calculation of 8% plus the prime rate less 5.25%, with a minimum interest rate of 8%. Interest was to be paid monthly beginning the month following the borrowing date. Principal payments were scheduled to begin on September 1, 2015, unless we achieved certain milestones which would have extended this date to December 1, 2015 or March 1, 2016. In connection with the execution of the Loan Agreement, we issued Hercules a warrant to purchase up to 173,428 shares of our Series C Preferred Stock at an exercise price of $3.3299 per share. Upon closing of the IPO, this warrant was automatically converted into a warrant to purchase up to 53,960 shares of our common stock at an exercise price of $10.70 per share. +In August 2018, we signed Amendment 5 to the Loan Agreement, which extends the interest only payment period through March 1, 2020 and also extends the loan maturity date to March 1, 2020. We accounted for the August 2018 amendment as a modification pursuant to ASC 470‑50 and determined that no material change occurred as a result of the modification. In addition, the amendment deferred the payment of principal until the maturity date. $0.1 million of end of term payments are due March 2020. +In October 2018, we signed Amendment 6 to the Loan Agreement, which amends the Loan Agreement's collateral clause to exclude the $1 million certificate of deposit associated with the lease on our new headquarters in Billerica, Massachusetts. The Loan Agreement and amendments contain end of term payments and are recorded in the debt accounts. $0.5 million of end of term payments were paid during the year ended December 31, 2018. +On April 15, 2019, we entered into Amendment No. 7 to the Loan Agreement, which extends the interest only payment period through July 1, 2021 and also extends the loan maturity date to October 1, 2021. We are required to pay the loan principal in five equal installments starting July 1, 2021 with the final principal payment to be made on October 1, 2021. +On July 2, 2019, 66,041 warrants were exercised by Hercules on a net, non-cash, basis. Per the terms of the warrant agreement, we issued 45,690 shares of common stock as a result of the net exercise. The Loan Agreement and amendments contain end of term payments and are recorded in the debt accounts. No end of term payments were paid in the year ended December 31, 2019. +The Loan Agreement contains negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments and certain other business transactions. There are no financial covenants associated with the Loan Agreement. The obligations under the Loan Agreement are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations or financial or other condition, which is subjective in nature. We have determined that the risk of subjective acceleration under the material adverse events clause is not probable and therefore have classified the outstanding principal in current and long‑term liabilities based on scheduled principal payments. +83 +Table of Contents +Debt principal repayments, including the end of term fees, due as of December 31, 2019 are (in thousands): +Years ending December 31, +2020 +$ +75 +2021 +7,738 +$ +7,813 +Uman Acquisition +In August 2019, we completed the acquisition of Uman, in which we paid $15.7 million in cash to the shareholders of Uman. We funded this payment through our existing cash balances. In addition, we issued $5.5 million in stock in connection with the purchase of Uman. The acquisition closed with respect to 95% of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5% of the outstanding shares of capital stock of Uman on August 1, 2019. +Cash Flows +The following table presents our cash flows for each period presented (in thousands): +Year Ended December 31, +2019 +2018 +2017 +Net cash used in operating activities +$ +(26,187) +$ +(28,721) +$ +(22,106) +Net cash used in investing activities +(25,376) +(5,454) +(1,132) +Net cash provided by (used in) financing activities +116,197 +(78) +73,249 +Net increase (decrease) in cash and cash equivalents +$ +64,634 +$ +(34,253) +$ +50,011 +Net Cash Used in Operating Activities +We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to support the growth of our business. We have historically experienced negative cash flows from operating activities as we have developed our technology, expanded our business and built our infrastructure and this may continue in the future. +Net cash used in operating activities was $26.2 million during the year ended December 31, 2019. Net cash used in operating activities primarily consisted of net loss of $40.8 million offset by non-cash charges of $6.4 million of stock-based compensation expense, $3.0 million of depreciation and amortization expense, and $0.6 of inventory valuation adjustment amortization. Cash provided as a result of changes in operating assets and liabilities of $4.4 million was primarily due to a $9.8 million increase in other non-current liabilities related to our new lease, offset by an increase in accounts receivable of $3.4 million, and an increase in inventory of $3.4 million. +Net cash used in operating activities was $28.7 million during the year ended December 31, 2018. Net cash used in operating activities primarily consisted of net loss of $31.5 million, a decrease of $1.9 million in deferred revenue and an increase of $1.6 million in inventory, primarily offset by non‑cash stock compensation expense of $4.9 million and an increase of $1.3 million in accounts payable. +Net cash used in operating activities was $22.1 million during the year ended December 31, 2017. Net cash used in operating activities primarily consisted of net loss of $27.0 million and an increase of $2.0 million in inventory and an increase in accounts receivable of $1.7 million, primarily offset by non-cash stock compensation expense of $2.2 million, an increase of $2.9 million in deferred revenue, an increase of $2.0 million in accrued expenses and an increase of $1.0 million in accounts payable. +84 +Table of Contents +Net Cash Used in Investing Activities +Historically, our primary investing activities have consisted of capital expenditures for the purchase of capital equipment to support our expanding infrastructure and work force. We expect to continue to incur additional costs for capital expenditures related to these efforts in future periods. +We used $25.4 million of cash in investing activities during the year ended December 31, 2019. The significant increase was related to the cash portion of the Uman acquisition, as well as the leasehold improvements for new headquarters, which is a component of our lease agreement. +We used $5.5 million of cash in investing activities during the year ended December 31, 2018 consisting of cash paid in the acquisition of Aushon, net of cash acquired, and for purchases of capital equipment to support our infrastructure. +We used $1.1 million of cash in investing activities during the year ended December 31, 2017 for purchases of capital equipment to support our infrastructure. +Net Cash Provided by (Used in) Financing Activities +Historically, we have financed our operations principally through private placements of our convertible preferred stock and borrowings from credit facilities, the sale of shares of our common stock in our IPO or other offerings and revenues from our commercial operations. +Financing activities provided $116.2 million of cash during the year ended December 31, 2019, primarily from proceeds of our “at-the-market” offering during the second quarter of 2019 and our underwritten public offering during the third quarter of 2019. +We used $0.1 million cash in financing activities during the year ended December 31, 2018, which primarily was from payments on debt of $1.9 million offset by cash generated by the exercise of stock options. +We generated $73.2 million of cash in financing activities during the year ended December 31, 2017, which primarily was from the sale of 4,916,480 shares of common stock in our IPO in December 2017 for net proceeds of $65.6 million, and the sale of 2,113,902 shares of our Series D-1 Preferred Stock in June 2017 for net proceeds of $8.4 million, which was partially offset by payments of outstanding debt. +Capital Resources +We have not achieved profitability on a quarterly or annual basis since our inception, and we expect to continue to incur net losses in the future. We also expect that our operating expenses will increase as we continue to increase our marketing efforts to drive adoption of our commercial products. Additionally, as a public company, we have incurred and will continue to incur significant audit, legal and other expenses that we did not incur as a private company. Our liquidity requirements have historically consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, working capital, debt service and general corporate expenses. +We believe cash generated from commercial sales, our current cash and cash equivalents, and interest income we earn on these balances will be sufficient to meet our anticipated operating cash requirements for the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our sales and marketing activities and grow our customer base. Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward‑looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in Item 1A, “Risk Factors” of this Annual Report on Form 10‑K. We have based our estimates on assumptions that may prove to be wrong and we +85 +Table of Contents +could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including: +· +market acceptance of our products, including our SP‑X, SR-X and HD-X instruments; +· +the cost and timing of establishing additional sales, marketing and distribution capabilities; +· +the cost of our research and development activities; +· +our ability to enter into collaborations in the future, and the success of any such collaborations; +· +the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +· +the effect of competing technological and market developments. +We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity‑linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. +If the conditions for raising capital are favorable, we may seek to finance future cash needs through public or private equity or debt offerings or other financings. On March 19, 2019, we filed a universal shelf registration statement on Form S-3, which was declared effective by the SEC on May 10, 2019, and pursuant to which we registered for sale up to $200 million of any combination of our common stock, preferred stock, debt securities, warrants, rights, and/or units from time to time and at prices and on terms that we may determine. After the sales of shares of common stock in our “at-the-market” offering during June 2019, and the sale of 2,732,673 shares of common stock in our underwritten public offering in August 2019, approximately $81.3 million of securities remained available for issuance under this shelf registration statement. This registration statement will remain in effect up to May 10, 2022. +Off‑Balance Sheet Arrangements +We did not have, during the periods presented, and we do not currently have, any off‑balance sheet arrangements, as defined under applicable SEC rules. +Contractual Obligations, Commitments and Contingencies +Loan Facility with Hercules +On April 14, 2014, we executed a Loan Agreement with Hercules Capital, Inc. (formerly known as Hercules +Technology Growth Capital, Inc.), as subsequently amended, most recently in April 2019. The Loan Agreement provided a total debt facility of $10.0 million, which is secured by substantially all of our assets. At closing, we borrowed $5.0 million in principal and had the ability to draw the additional $5.0 million over the period from November 1, 2014 to March 31, 2015. The interest rate on this term loan was variable based on a calculation of 8% plus the prime rate less 5.25%, with a minimum interest rate of 8%. Interest was to be paid monthly beginning the month following the borrowing date. Principal payments were scheduled to begin on September 1, 2015, unless we achieved certain milestones which would have extended this date to December 1, 2015 or March 1, 2016. In connection with the execution of the Loan Agreement, we issued Hercules a warrant to purchase up to 173,428 shares of our Series C Preferred Stock at an exercise price of $3.3299 per share. Upon closing of the IPO, this warrant was automatically converted into a warrant to purchase up to 53,960 shares of our common stock at an exercise price of $10.70 per share. +86 +Table of Contents +The following table summarizes our contractual obligations as of December 31, 2019 (in thousands): +Payments due by period +Less than +1 to 3 +3 to 5 +More than +(in thousands) +1 Year +years +years +5 years +Total +Contractual Obligations:(1) +Operating lease obligations +$ +2,081 +$ +6,718 +$ +7,037 +$ +22,203 +$ +38,039 +Principal payments and end of term fees on the term loan +75 +7,738 +— +— +7,813 +Total +$ +2,156 +$ +14,456 +$ +7,037 +$ +22,203 +$ +45,852 +(1) +See “Development and Supply Agreement” for additional contractual obligations. +We currently lease approximately 91,600 square feet of office, laboratory, and manufacturing space at our headquarters in Billerica, Massachusetts. The premises covered by this new lease serves as our principal office and laboratory space effective the second quarter of 2019. The initial term of the lease is 11 years and five months beginning on April 1, 2019, and we have the option to extend the lease for two additional five‑year periods. +We previously leased approximately 30,655 square feet of office, laboratory, and manufacturing space as our headquarters in Lexington, Massachusetts, which was to expire on June 30, 2020; however in November 2018, we agreed to terminate the lease with the lessor effective May 2019. The termination of the lease was connected to us signing the new lease in October 2018 for our new headquarters in Billerica. In addition, pursuant to our acquisition of Aushon in January 2018, we assumed a lease of approximately 21,500 square feet of office, laboratory, and manufacturing space in Billerica, Massachusetts, under a lease that was to expire on February 28, 2021; however, in August 2018, we exercised an option to terminate the lease effective as of September 1, 2019. We paid a termination fee of $75,000 in February 2019 in consideration for the early termination. +In addition, our subsidiary, Uman, leases a total of approximately 6,500 square feet of office, laboratory, manufacturing and storage space in Umeå, Sweden. These leases expire at various dates between May 31, 2020 and February 28, 2023. +We also have ongoing obligations related to license agreements which contain immaterial minimum annual payments that are credited against the actual royalty expense. +Purchase orders or contracts for the purchase of supplies and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current procurement or development needs and are fulfilled by our vendors within short time horizons. +Development and Supply Agreement +We do not have significant agreements, with the exception of the supply agreement with STRATEC, for the purchase of supplies or other goods specifying minimum quantities or set prices that exceed our expected requirements for the next three to six months. STRATEC manufactured our HD‑1 instrument and manufactures the HD‑X that we commercialized in the second half of 2019. In 2013, we entered into the Supply Agreement with STRATEC which requires us to purchase a minimum number of commercial units over a seven‑year period ending in May 2021. We could be obligated to pay a fee based on the shortfall of commercial units purchased compared to the required number. Based on the commercial units purchased as of December 31, 2019, assuming no additional commercial units were purchased thereafter but prior to May 2021, this fee would equal $9.6 million. The amount we could be obligated to pay under the minimum purchase commitment is reduced as each commercial unit is purchased. We believe that we will purchase sufficient units to meet the requirements of the minimum purchase commitment and, therefore, have not accrued for any of the minimum purchase commitment. +87 +Table of Contents +Also, if we terminate the Supply Agreement under certain circumstances and do not purchase up to a required number of commercial units, we would be required to issue warrants to purchase 93,341 shares of common stock at $0.003214 per share. We believe that we will not issue such warrants and therefore have not recorded any amounts related to the potential equity consideration. +In August 2011, we entered into the Development Agreement with STRATEC, pursuant to which STRATEC undertook the development of the HD‑1 for manufacture and sale to us or a partner whom we designate. During the year ended December 31, 2016, the Development Agreement was amended to modify the deliverables related to the final milestone, to agree on instrument design changes to be implemented, and to reduce the minimum purchase commitment in the Supply Agreement. Additionally, the parties agreed on additional development services for a total fee of $1.5 million, which is payable when development is completed and of which $0.9 million was paid in 2018 and $0.6 million was paid in 2019. The total amount included the final milestone payment that was due under the terms of the original agreement. +Backlog +We generally expect to ship all instrument and consumable orders received in a given period with the exception of orders received near the end of a fiscal quarter; and as a result, our backlog at the end of any period is typically insignificant. +Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes. +Foreign Currency Exchange Risk +As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Historically, the substantial majority of our revenue has been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Canada, Europe, Japan and China. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. Fluctuations in currency exchange rates could harm our business in the future. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables as of December 31, 2019 would not have been material. +To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future. +Interest Rate Sensitivity +We had cash and cash equivalents of $109.2 million as of December 31, 2019. These amounts were held primarily in cash on deposit with banks. Due to the short‑term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had decreased by 10% during the periods presented, our interest income would not have been materially affected. +As of December 31, 2019, the principal amount of our term debt outstanding with Hercules was $7.7 million. If overall interest rates had increased by 10% during the periods presented, our interest expense would have increased by approximately $0.1 million on an annualized basis. +88 +Table of Contents +Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10‑K beginning on page F‑1. +Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +Item 9A. CONTROLS AND PROCEDURES +(a) +Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) as of the end of the period covered by this Form 10‑K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. +(b) +Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(c) +Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act, as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: +· +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; +· +provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and +· +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We acquired Uman in August 2019. The financial results are included in our audited consolidated financial statements and constituted total assets of $2,185,000 as of December 31, 2019 and revenues of $1,065,000 for the year ended December 31, 2019. As this acquisition occurred in the third quarter of 2019, the scope of our assessment of our internal control over financial reporting does not include Uman. This +89 +Table of Contents +exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired may be omitted from our scope in the year of acquisition. Based on our evaluation under that framework, our management concluded that our internal controls over financial reporting were effective as of December 31, 2019. +(d) +Attestation Report on Internal Control over Financial Reporting . This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial reporting due to the deferral allowed under the JOBS Act for emerging growth companies. +Item 9B. OTHER INFORMATION +Not applicable. +PART III +Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by this Item 10 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 11. EXECUTIVE COMPENSATION +The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference. +PART IV +Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES +(1) +Financial Statements +The consolidated financial statements are included beginning on page F‑1 attached hereto and are filed as part of this Annual Report on Form 10‑K. +90 +Table of Contents +(2) +Financial Statement Schedules +Schedules have been omitted since they are either not required or not applicable or the information is otherwise included herein. +(3) +Exhibits +The following is a list of exhibits filed as part of this Annual Report on Form 10‑K: +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +2.1 +Share Purchase Agreement, dated as of June 26, 2019, by and among the Registrant, Inro Biomedtek Aktiebolag, Norsun consult AB, Management och Skog I Umeå AB and Niklas Norgren +8‑K +6/26/19 +001‑38319 +3.1 +Amended and Restated Certificate of Incorporation +8‑K +12/15/17 +001‑38319 +3.2 +Restated Bylaws +8‑K +12/15/17 +001‑38319 +4.1 +Description of Securities +X +4.2 +Form of Common Stock Certificate +S‑1 +11/9/17 +333‑221475 +4.3 +Form of Warrant to Purchase Series C Preferred Stock of the Registrant +S‑1 +11/9/17 +333‑221475 +4.4 +Fourth Amended and Restated Stockholders Agreement, dated as of June 2, 2017, by and among the Registrant and the stockholders named therein +S‑1 +11/9/17 +333‑221475 +4.5 +Fourth Amended and Restated Registration Rights Agreement, dated as of June 2, 2017, by and among the Registrant and the investors named therein +S‑1 +11/9/17 +333‑221475 +4.6 +Warrant Agreement, dated as of January 30, 2018, by and between the Registrant and Azul Divinal Consultoria Unipessoal LDA +10‑K +3/19/18 +001‑38319 +10.1.1+ +2007 Stock Option and Grant Plan, as amended +S‑1 +11/9/17 +333‑221475 +91 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.1.2+ +Form of Incentive Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S‑1 +11/9/17 +333‑221475 +10.1.3+ +Form of Non‑qualified Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S‑1 +11/9/17 +333‑221475 +10.1.4+ +Form of Restricted Stock Agreement under the 2007 Stock Option and Grant Plan, as amended +S‑1 +11/9/17 +333‑221475 +10.2.1+ +2017 Employee, Director and Consultant Equity Incentive Plan +S‑1/A +11/27/17 +333‑221475 +10.2.2+ +Form of Stock Option Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S‑1/A +11/27/17 +333‑221475 +10.2.3+ +Form of Restricted Stock Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S‑1/A +11/27/17 +333‑221475 +10.2.4+ +Form of Restricted Stock Unit Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S‑1/A +11/27/17 +333‑221475 +10.3+ +Employment Agreement, dated January 1, 2015, by and between the Registrant and E. Kevin Hrusovsky +S‑1 +11/9/17 +333‑221475 +10.4+ +Letter Agreement, dated February 14, 2019, between Registrant and Amol Chaubal +10-Q +5/10/19 +001‑38319 +10.5+ +Letter Agreement, dated May 31, 2019, by and between the Registrant and John Fry +10-Q +8/6/19 +001‑38319 +10.6+ +Letter Agreement, dated August 8, 2014, by and between the Registrant and Mark T. Roskey, Ph.D. +S‑1 +11/9/17 +333‑221475 +10.7+ +Letter Agreement, effective as February 5, 2018, by and between the Registrant and Dawn Mattoon +10‑Q +5/15/18 +001‑38319 +92 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.8.1* +Exclusive License Agreement, dated June 18, 2007, between the Registrant and Tufts University, as amended on April 29, 2013 +S‑1 +11/9/17 +333‑221475 +10.8.2* +Second Amendment, dated August 22, 2017, to the Exclusive License Agreement between the Registrant and Tufts University +S‑1 +11/9/17 +333‑221475 +10.9.1* +Supply and Manufacturing Agreement, dated September 14, 2011, between the Registrant and STRATEC Biomedical AG +S‑1 +11/9/17 +333‑221475 +10.9.2 +First Amendment to Supply and Manufacturing Agreement, dated October 17, 2013, between the Registrant and STRATEC Biomedical AG +S‑1 +11/9/17 +333‑221475 +10.10.1* +STRATEC Development Services and Equity Participation Agreement, dated August 15, 2011, between the Registrant and STRATEC Biomedical Systems AG +S‑1 +11/9/17 +333‑221475 +10.10.2* +First Amendment to STRATEC Development Services and Equity Participation Agreement and Second Amendment to Supply and Manufacturing Agreement, dated November 18, 2016, between the Registrant and STRATEC Biomedical AG +S‑1 +11/9/17 +333‑221475 +10.11* +Manufacturing Services Agreement, dated November 23, 2016, between the Registrant and Paramit Corporation +S‑1 +11/9/17 +333‑221475 +93 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.12.1 +Loan and Security Agreement, dated April 14, 2014, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S‑1 +11/9/17 +333‑221475 +10.12.2 +Amendment No. 1 to Loan and Security Agreement, dated March 4, 2015, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S‑1 +11/9/17 +333‑221475 +10.12.3 +Amendment No. 2 to Loan and Security Agreement, dated January 29, 2016, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S‑1 +11/9/17 +333‑221475 +10.12.4 +Amendment No. 3 to Loan and Security Agreement, dated March 31, 2017, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S‑1 +11/9/17 +333‑221475 +10.12.5 +Amendment No. 4 to Loan and Security Agreement, dated July 24, 2017, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +10‑Q +11/7/18 +001‑38319 +10.12.6 +Amendment No. 5 to Loan and Security Agreement, dated August 30, 2018, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +10‑Q +11/7/18 +001‑38319 +94 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.12.7 +Amendment No. 6 to Loan and Security Agreement, dated September 28, 2018, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +10‑Q +11/7/18 +001‑38319 +10.12.8 +Amendment No. 7 to Loan and Security Agreement, dated April 15, 2019, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +8-K +4/15/19 +001‑38319 +10.13+ +Form of Indemnification Agreement +S‑1/A +11/27/17 +333‑221475 +10.14 +Lease Agreement between SSI 900 Middlesex MA LP and the Registrant, dated October 2, 2018. +8‑K +10/5/18 +001‑38319 +10.15 +Sales Agreement, dated as of March 19, 2019, by and between the Registrant and Cowen and Company, LLC +S-3 +3/19/19 +333-230399 +10.16+ +2018 Non‑Employee Director Compensation Policy +10-K +3/18/19 +001‑38319 +21.1 +Subsidiaries of Registrant +X +23.1 +Consent of Ernst & Young LLP +X +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002 +X +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002 +X +32.1 +Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002. +X +101.INS +XBRL Instance Document. +X +101.SCH +XBRL Taxonomy Extension Schema Document. +X +95 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document. +X +101.DEF +XBRL Taxonomy Extension Definition. +X +101.LAB +XBRL Taxonomy Extension Label Linkbase Document. +X +101.PRE +XBRL Taxonomy Presentation Linkbase Document. +X ++ Management contract or compensatory plan or arrangement. +* Confidential treatment has been granted for portions of this Exhibit. Redacted portions have been filed separately with the Securities and Exchange Commission. +Item 16. FORM 10‑K SUMMARY +Not applicable. +96 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +QUANTERIX CORPORATION +Date: March 13, 2020 +By: +/s/ E. KEVIN HRUSOVSKY +E. Kevin Hrusovsky +Chairman, President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ E. KEVIN HRUSOVSKY +Chairman, President and Chief Executive Officer and Director (principal executive officer) +March 13, 2020 +E. Kevin Hrusovsky +/s/ AMOL CHAUBAL +Chief Financial Officer +March 13, 2020 +Amol Chaubal +(principal financial officer and principal accounting officer) +/s/ JOHN M. CONNOLLY +Director +March 13, 2020 +John M. Connolly +/s/ KEITH L. CRANDELL +Director +March 13, 2020 +Keith L. Crandell +/s/MARIJN DEKKERS +Director +March 13, 2020 +Marijn Dekkers, Ph.D. +/s/ SARAH HLAVINKA +Director +March 13, 2020 +Sarah Hlavinka +/s/ MARTIN MADAUS, PH.D. +Director +March 13, 2020 +Martin Madaus, Ph. D. +/s/ PAUL MEISTER +Director +March 13, 2020 +Paul M. Meister +/s/ DAVID WALT, PH.D. +Director +March 13, 2020 +David R. Walt, Ph.D. +97 +Table of Contents +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +QUANTERIX CORPORATION +Years ended December 31, 2019, 2018 and 2017 +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolid ated Balance Sheets +F-3 +Consolidated Statements of Operations +F-4 +Consolidated Statements of Comprehensive Loss +F-5 +Consolidated Statements of Cash Flows +F-6 +Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity +F-7 +Notes to Consolidated Financial Statements +F-8 +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and the Board of Directors of Quanterix Corporation +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of Quanterix Corporation (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. +Adoption of ASU No. 2014-09 +As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the related amendments. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ Ernst & Young LLP +We have served as the Company’s auditor since 2008. +Boston, Massachusetts +March 13, 2020 +F-2 +Table of Contents +Quanterix Corporation +Consolidated Balance Sheets +(amounts in thousands, except share and per share data) +December 31, +2019 +2018 +Assets +Current assets: +Cash and cash equivalents +$ +109,155 +$ +44,429 +Accounts receivable (less reserve for doubtful accounts of $162 and $36 as of December 31, 2019 and December 31, 2018, respectively; including $186 and $48 from related parties as of December 31, 2019 and December 31, 2018, respectively) +10,906 +6,792 +Inventory +10,463 +5,945 +Prepaid expenses and other current assets +2,137 +2,330 +Total current assets +132,661 +59,496 +Restricted cash +1,026 +1,000 +Property and equipment, net +12,047 +2,923 +Intangible assets, net +14,307 +2,348 +Goodwill +9,353 +1,308 +Other non-current assets +557 +536 +Total assets +$ +169,951 +$ +67,611 +Liabilities and stockholders’ equity +Current liabilities: +Accounts payable (including $36 to related parties as of December 31, 2019 and December 31, 2018) +$ +5,777 +$ +5,110 +Accrued compensation and benefits +6,570 +4,449 +Other accrued expenses (including $0 and $226 to related parties as of December 31, 2019 and December 31, 2018, respectively) +2,498 +3,129 +Deferred revenue (including $55 and $33 with related parties as of December 31, 2019 and December 31, 2018, respectively) +4,697 +5,437 +Current portion of long term debt +75 +— +Other current liabilities +216 +— +Total current liabilities +19,833 +18,125 +Deferred revenue, net of current portion +466 +520 +Long term debt, net of current portion +7,587 +7,623 +Other non-current liabilities +13,407 +278 +Total liabilities +41,293 +26,546 +Commitments and contingencies (Note 9) +Stockholders’ equity: +Common stock, $0.001 par value: +Authorized—120,000,000 shares as of December 31, 2019 and December 31, 2018; issued and outstanding — 28,112,201 and 22,369,036 shares as of December 31, 2019 and December 31, 2018, respectively +28 +22 +Additional paid-in capital +345,027 +216,931 +Accumulated other comprehensive loss +(153) +— +Accumulated deficit +(216,244) +(175,888) +Total stockholders’ equity +128,658 +41,065 +Total liabilities and stockholders’ equity +$ +169,951 +$ +67,611 +See accompanying notes. +F-3 +Table of Contents +Quanterix Corporation +Consolidated Statements of Operations +(amounts in thousands, except share and per share data) +Years Ended +December 31, +2019 +2018 +2017 +Product revenue (including related party activity of $720, $294, and $339 for the years ended December 31, 2019, 2018, and 2017, respectively) +$ +40,491 +$ +23,365 +$ +14,124 +Service and other revenue (including related party activity of $118, $149, and $165 for the years ended December 31, 2019, 2018, and 2017, respectively) +16,059 +12,117 +7,676 +Collaboration and license revenue (including related party activity of $0, $2,150, and $1,074 for the years ended December 31, 2019, 2018, and 2017, respectively) +184 +2,150 +1,074 +Total revenue +56,734 +37,632 +22,874 +Costs of goods sold: +Cost of product revenue (including related party activity of $234, $191, and $235 for the years ended December 31, 2019, 2018, and 2017, respectively; including stock compensation of $86, $55, and $24 for the years ended December 31, 2019, 2018, and 2017, respectively) +20,900 +12,729 +7,742 +Cost of services and other revenue (including stock compensation of $238, $173, and $52 for the years ended December 31, 2019, 2018, and 2017, respectively) +8,998 +6,955 +5,145 +Total costs of goods sold and services +29,898 +19,684 +12,887 +Gross profit +26,836 +17,948 +9,987 +Operating expenses: +Research and development (including stock compensation of $718, $513, and $180 for the years ended December 31, 2019, 2018, and 2017, respectively) +16,190 +15,805 +16,304 +Selling, general and administrative (including stock compensation of $5,346, $4,143, and $1,912 for the years ended December 31, 2019, 2018, and 2017, respectively) +52,246 +33,693 +19,688 +Total operating expenses +68,436 +49,498 +35,992 +Loss from operations +(41,600) +(31,550) +(26,005) +Interest income (expense), net +627 +46 +(951) +Other income (expense), net +(10) +(7) +(63) +Loss before income taxes +(40,983) +(31,511) +(27,019) +Income tax benefit (provision) +187 +(25) +— +Net loss +$ +(40,796) +$ +(31,536) +$ +(27,019) +Reconciliation of net loss to net loss attributable to common stockholders: +Net loss +$ +(40,796) +$ +(31,536) +$ +(27,019) +Accretion of preferred stock to redemption value +— +— +(4,110) +Accrued dividends on preferred stock +— +— +(59) +Net loss attributable to common stockholders +$ +(40,796) +$ +(31,536) +$ +(31,188) +Net loss per share, basic and diluted +$ +(1.63) +$ +(1.43) +$ +(8.30) +Weighted-average common shares outstanding, basic and diluted +25,090,708 +21,994,317 +3,756,954 +See accompanying notes. +F-4 +Table of Contents +Quanterix Corporation +Consolidated Statements of Comprehensive Loss +(amounts in thousands) +Years Ended December 31, +2019 +2018 +2017 +Net loss +$ +(40,796) +$ +(31,536) +$ +(27,019) +Other comprehensive loss: +Cumulative translation adjustment +(153) +— +— +Total other comprehensive loss +(153) +— +— +Comprehensive loss +$ +(40,949) +$ +(31,536) +$ +(27,019) +See accompanying notes. +F-5 +Table of Contents +Quanterix Corporation +Consolidated Statements of C as h Flows +(amounts in thousands) +Years Ended +December 31, +2019 +2018 +2017 +Operating activities +Net loss +$ +(40,796) +$ +(31,536) +$ +(27,019) +Adjustments to reconcile net loss to net cash used in operating activities: +Depreciation and amortization expense +3,009 +1,352 +482 +Inventory valuation adjustment amortization +611 +— +— +Stock-based compensation expense +6,388 +4,884 +2,168 +Non-cash interest expense +89 +170 +238 +Loss (gain) on disposal of fixed assets +140 +(14) +— +Change in fair value of preferred stock warrants +— +— +90 +Changes in operating assets and liabilities: +Accounts receivable +(3,365) +(983) +(1,682) +Deposits +— +— +— +Prepaid expenses and other assets +289 +(1,828) +(273) +Inventory +(3,447) +(1,603) +(2,043) +Other non-current assets +(21) +267 +— +Accounts payable +621 +1,318 +1,003 +Accrued compensation and benefits, other accrued expenses and other current liabilities +822 +1,101 +2,035 +Contract acquisition costs +336 +— +— +Other non-current liabilities +9,845 +— +— +Deferred revenue +(708) +(1,849) +2,895 +Net cash used in operating activities +(26,187) +(28,721) +(22,106) +Investing activities +Purchases of property and equipment +(10,847) +(1,518) +(1,132) +Purchase of investments +— +(150) +— +Acquisitions, net of cash acquired +(14,529) +(3,801) +— +Proceeds from sale of assets +— +15 +— +Net cash used in investing activities +(25,376) +(5,454) +(1,132) +Financing activities +Proceeds from sale of preferred stock, net of issuance costs +— +— +65,575 +Proceeds from sale of common stock, net of issuance costs +— +(20) +8,423 +Proceeds from exercise of stock warrants +— +— +29 +Proceeds from stock options exercised +2,820 +1,871 +202 +Sale of common stock in at-the-market offering, net +48,019 +— +— +Sale of common stock in underwritten public offering +64,529 +— +— +Proceeds from ESPP purchase +879 +— +— +Proceeds from the issuance of notes payable and warrants, net of issuance costs +— +— +(59) +Payments on notes payable +(50) +(1,929) +(921) +Net cash provided by (used in) financing activities +116,197 +(78) +73,249 +Net increase (decrease) in cash and cash equivalents +64,634 +(34,253) +50,011 +Effect of foreign currency exchange rate on cash +118 +— +— +Cash, restricted cash, and cash equivalents at beginning of period +45,429 +79,682 +29,671 +Cash, restricted cash, and cash equivalents at end of period +$ +110,181 +$ +45,429 +$ +79,682 +Supplemental cash flow information +Accretion of redeemable convertible preferred stock to redemption value +$ +— +$ +— +$ +4,110 +Cash paid for interest +$ +656 +$ +606 +$ +743 +Warrants issued to lenders +$ +— +$ +— +$ +119 +Purchases of property and equipment included in accounts payable +$ +164 +$ +78 +— +191,152 shares of common stock issued in connection with the acquisition of UmanDiagnostics AB +$ +5,468 +$ +— +— +Purchases of property and equipment included in other non-current liabilities +$ +7,572 +$ +— +$ +74 +Fair value of common stock warrants exercised and reclassified as shares of common stock +$ +— +$ +196 +$ +2,187 +Reconciliation of cash, cash equivalents, and restricted cash: +Cash and cash equivalents +$ +109,155 +$ +44,429 +$ +79,682 +Restricted cash +1,026 +1,000 +— +Total cash, cash equivalents, and restricted cash +$ +110,181 +$ +45,429 +$ +79,682 +See accompanying notes. +F-6 +Table of Contents +Quanterix Corporation +Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity +Accumulated +Preferred A +Preferred A +Preferred B +Preferred B +Preferred C +Preferred C +Preferred D +Preferred D +Common +Common +Additional +other +Total +stock +stock +stock +stock +stock +stock +stock +stock +stock +stock +paid-in +comprehensive +Accumulated +stockholders’ +shares +value +shares +value +shares +value +shares +value +shares +value +capital +loss +deficit +(deficit) equity +Balance at December 31, 2016 +15,700,001 +28,979 +6,021,363 +17,459 +8,605,944 +36,678 +12,420,262 +45,469 +2,315,496 +$ +2 +$ +— +$ +— +$ +(115,111) +$ +(115,109) +Issuance of Series D-1 preferred stock, net of issuance costs +— +— +— +— +— +— +2,113,902 +8,423 +— +— +— +— +— +— +Exercise of preferred stock warrants +700,000 +2,078 +— +— +31,283 +138 +— +— +— +— +— +— +— +— +Exercise of common stock options and vesting restricted stock +— +— +— +— +— +— +— +— +289,321 +— +204 +— +— +204 +Cumulative effect of adoption of ASU No. 2016-09 +— +— +— +— +— +— +— +— +— +— +141 +— +(141) +— +Accretion of preferred stock to redemption value +— +1,080 +— +840 +— +2,140 +— +50 +— +— +(2,029) +— +(2,081) +(4,110) +Conversion of preferred stock to common stock +(16,400,001) +(32,137) +(6,021,363) +(18,299) +(8,637,227) +(38,956) +(14,534,164) +(53,942) +14,185,744 +15 +143,319 +— +— +143,334 +Warrant Liability reclassified to equity upon IPO +— +— +— +— +— +— +— +— +— +— +823 +— +— +823 +Issuance of common stock in initial public offering, net of $8,173 in offering costs +— +— +— +— +— +— +— +— +4,916,480 +5 +65,570 +— +— +65,575 +Stock-based compensation expense +— +— +— +— +— +— +— +— +— +— +2,168 +— +— +2,168 +Net loss +— +— +— +— +— +— +— +— +— +— +— +— +(27,019) +(27,019) +Balance at December 31, 2017 +— +— +— +— +— +— +— +— +21,707,041 +22 +210,196 +— +(144,352) +65,866 +Exercise of common stock warrants +— +— +— +— +— +— +— +— +16,718 +— +— +— +— +— +Exercise of common stock options and vesting of restricted stock +— +— +— +— +— +— +— +— +645,277 +— +1,871 +— +— +1,871 +Common stock issuance offering costs +— +— +— +— +— +— +— +— +— +— +(20) +— +— +(20) +Stock-based compensation expense +— +— +— +— +— +— +— +— +— +— +4,884 +— +— +4,884 +Net loss +— +— +— +— +— +— +— +— +— +— +— +— +(31,536) +(31,536) +Balance at December 31, 2018 +— +— +— +— +— +— +— +— +22,369,036 +22 +216,931 +— +(175,888) +41,065 +Cumulative effect of adoption of Accounting Standards Codification Topic 606 +— +— +— +— +— +— +— +— +— +— +— +— +440 +440 +Exercise of common stock warrants +— +— +— +— +— +— +— +— +45,690 +— +— +— +— +— +Exercise of common stock options and vesting of restricted stock +— +— +— +— +— +— +— +— +550,734 +— +2,820 +— +— +2,820 +Sale of common stock in "at-the-market" offering, net +— +— +— +— +— +— +— +— +2,186,163 +2 +48,017 +— +— +48,019 +Sale of common stock in underwritten public offering, net +— +— +— +— +— +— +— +— +2,732,673 +3 +64,526 +— +— +64,529 +Issuance of shares for the acquisition of Umandiagnostics AB +— +— +— +— +— +— +— +— +191,152 +1 +5,467 +— +— +5,468 +Stock-based compensation expense +— +— +— +— +— +— +— +— +— +— +6,388 +— +6,388 +Employee stock purchase plan +— +— +— +— +— +— +— +— +36,753 +— +878 +— +— +878 +Accumulated other comprehensive loss +— +— +— +— +— +— +— +— +— +— +— +(153) +— +(153) +Net loss +— +— +— +— +— +— +— +— +— +— +— +— +(40,796) +(40,796) +Balance at December 31, 2019 +— +— +— +— +— +— +— +— +28,112,201 +$ +28 +$ +345,027 +$ +(153) +$ +(216,244) +$ +128,658 +See accompanying notes. +F-7 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements +1. Organization and operations +Quanterix Corporation (NASDAQ: QTRX) (the Company) is a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. The Company’s platforms are based on its proprietary digital “Simoa” detection technology. The Company’s Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide the Company’s customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. The Company is currently focusing on protein detection, but is also developing its bead-based technology to detect nucleic acids in biological samples. +The Company launched its first immunoassay platform, the Simoa HD-1, in 2014. The HD-1 is a fully automated immunoassay bead-based platform with multiplexing and custom assay capability, and related assay test kits and consumable materials. The Company launched a second bead-based immunoassay platform (SR-X) in the fourth quarter of 2017 with a more compact footprint than the Simoa HD-1 and less automation designed for lower volume requirements while still allowing multiplexing and custom assay capability. The Company initiated an early-access program for its third instrument (SP-X) on the new Simoa planar array platform in January 2019, with the full commercial launch commencing in April 2019. In July 2019, the Company launched the Simoa HD-X, an upgraded version of the Simoa HD-1 which replaces the HD-1. The HD-X has been designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The Company began shipping and installing HD-X instruments at customer locations in the third quarter of 2019, ahead of its original fourth quarter expectation. The Company also performs research services on behalf of customers to apply the Simoa technology to specific customer needs. The Company's customers are primarily in the research use only market, which includes academic and governmental research institutions, the research and development laboratories of pharmaceutical manufacturers, contract research organizations, and specialty research laboratories. +The Company acquired Aushon Biosystems, Inc. (Aushon) in January 2018. With the acquisition of Aushon, the Company acquired a CLIA certified laboratory, as well as Aushon’s proprietary sensitive planar array detection technology. Leveraging its proprietary sophisticated Simoa image analysis and data analysis algorithms, the Company further refined this planar array technology to develop the SP-X instrument to provide the same Simoa sensitivity found in its bead-based platform. +The Company acquired UmanDiagnostics AB (Uman), a Swedish company located in Umeå , Sweden, in August 2019. The acquisition closed with respect to 95% of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5% of the outstanding shares of capital stock of Uman on August 1, 2019. Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. With the acquisition of Uman, the Company has secured a long-term source of supply for a critical technology. +Initial Public Offering +In December 2017, the Company completed its initial public offering (IPO) in which the Company sold 4,916,480 shares of its common stock at the initial public offering price of $15.00 per share The Company’s common stock began trading on The Nasdaq Global Market on December 7, 2017. The aggregate net proceeds received from the IPO, net of underwriting discounts and commissions and offering expenses, was $65.6 million. Immediately prior to the completion of the IPO, all then outstanding shares of convertible preferred stock were converted into 14,185,744 shares of common stock. The related carrying value of shares of preferred stock and warrants in the aggregate amount of $143.3 +F-8 +Table of Contents +million was reclassified as common stock and additional paid-in capital. Additionally, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, effective December 11, 2017 to, among other things, change the authorized number of shares of common stock to 120,000,000 and the authorized number of shares of preferred stock to 5,000,000. +Reverse Stock Split +On December 4, 2017, the Company effected a reverse stock split of its common stock at a ratio of 1‑for‑3.214. The shares of common stock subject to then outstanding stock options were adjusted accordingly to reflect the reverse stock split. All common stock and related per share amounts presented in these financial statements and related notes have been retroactively adjusted to reflect the 1‑for‑3.214 reverse stock split +“At-the-market offering” +On March 19, 2019, the Company entered into a Sales Agreement (the Sales Agreement) with Cowen and Company, LLC (Cowen) with respect to an “at-the-market” offering program under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, par value $0.001 per share, having an aggregate offering price of up to $50.0 million through Cowen as its sales agent. +On June 5, 2019, the Company issued approximately 2.2 million shares of common stock at an average stock price of $22.73 per share pursuant to the terms of the Sales Agreement. The “at-the-market” offering resulted in gross proceeds of $49.7 million. The Company incurred $1.7 million in issuance costs associated with the “at-the-market” offering, resulting in net proceeds to the Company of $48.0 million. +Underwritten public offering +On August 8, 2019, the Company entered into an underwriting agreement with J.P. Morgan Securities LLC and SVB Leerink LLC, as representatives of the several underwriters, relating to an underwritten public offering of approximately 2.7 million shares of the Company’s common stock, par value $0.001 per share. The underwritten public offering resulted in gross proceeds of $69.0 million. The Company incurred $4.5 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $64.5 million. +Liquidity +The Company has had recurring losses from operations since inception and has an accumulated deficit of $216.2 million at December 31, 2019 and the Company incurred a net loss of $40.8 million, $31.5 million, and $27.0 million for the years ended December 31, 2019, 2018, and 2017, respectively. Prior to the IPO the Company had funded its operations principally from issuances of preferred stock, debt financings, grants, product and service sales and development and license agreements. At December 31, 2019, the Company had $109.2 million of unrestricted cash and cash equivalents. The Company expects the current cash balance will be sufficient to fund operations for a period of at least one year from the date the consolidated financial statements are issued. There can be no assurances, however, that no additional funding will be required or that additional funding will be available on terms acceptable to the Company, or at all. +2. Significant accounting policies +Principles of consolidation +The consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Quanterix Corporation, and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. +F-9 +Table of Contents +Use of estimates +The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. In making those estimates and assumptions, the Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. The Company’s significant estimates included in the preparation of the consolidated financial statements are related to revenue recognition, fair value of equity instruments and notes receivable, fair value of assets acquired and liabilities assumed in acquisitions, valuation allowances recorded against deferred tax assets, and stock-based compensation. Actual results could differ from those estimates. +Revenue recognition +The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that the Company expects to be entitled to receive in exchange for these goods and services, incentives and taxes collected from customers, that are subsequently remitted to governmental authorities. +The Company adopted Accounting Standards Codification (ASC) Topic 606 Revenue from Contracts with Customers (ASC 606), on January 1, 2019, using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2019 reflect the application of ASC 606 guidance, while the reported results for 2018 were prepared under ASC 605, Revenue Recognition . +Customers +The Company’s customers primarily consist of entities engaged in the life sciences research market that pursue the discovery and development of new drugs for a variety of neurologic, cardiovascular, oncologic and other protein biomarkers associated with diseases. The Company’s customer base exceeds 730 customers and includes several of the largest biopharmaceutical companies, academic research organizations and distributors who serve certain geographic markets. +Product revenue +The Company’s products are composed of analyzer instruments, assay kits and other consumables such as reagents. Products are sold directly to biopharmaceutical and academic research organizations or are sold through distributors in EMEA and Asia Pacific regions. The sales of instruments are generally accompanied by an initial year of implied service-type warranties and may be bundled with assays and other consumables and may also include other items such as training and installation of the instrument and/or an extended service warranty. Revenues from the sale of products are recognized at a point in time when the Company transfers control of the product to the customer, which is upon installation for instruments sold to direct customers, and based upon shipping terms for assay kits and other consumables. Revenue for instruments sold to distributors is generally recognized based upon shipping terms (either upon shipment or delivery). +Service and other revenue +Service revenues are composed of contract research services, initial implied one-year service-type warranties, extended services contracts and other services such as training. Contract research services are provided through the Company’s Accelerator Laboratory and generally consist of fixed fee contracts. Revenues from contract research services are recognized at a point in time when the Company completes and delivers its research report on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. Revenues from service-type warranties are recognized ratably over the contract service period. Revenues from other services are immaterial. +F-10 +Table of Contents +Collaboration and license revenue +The Company may enter into agreements to license the intellectual property and know-how associated with its instruments in exchange for license fees and future royalties (as described below). The license agreements provide the licensee with a right to use the intellectual property with the license fee revenues recognized at a point in time as the underlying license is considered functional intellectual property. The Company has recognized revenues from a sales- or usage based royalties related to the Company’s licensing technology and intellectual property. +Payment terms +The Company’s payment terms vary by the type and location of customer and the products or services offered. Payment from customers is generally required in a term ranging from 30 to 45 days from date of shipment or satisfaction of the performance obligation with no discounts for early payment. Occasionally the Company provides extended payment terms or financing arrangements to customers. +Disaggregated Revenue +When disaggregating revenue, the Company considered all of the economic factors that may affect its revenues. The following tables disaggregate the Company's revenue from contracts with customers by revenue type: +Year Ended +December 31, 2019 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues +Instruments +$ +6,250 +$ +5,243 +$ +3,393 +$ +14,886 +Consumable and other products +14,148 +9,674 +1,783 +25,605 +Totals +$ +20,398 +$ +14,917 +$ +5,176 +$ +40,491 +Service and other revenues +Service-type warranties +$ +3,139 +$ +1,323 +$ +171 +$ +4,633 +Research services +8,845 +704 +456 +10,005 +Other services +825 +565 +31 +1,421 +Totals +$ +12,809 +$ +2,592 +$ +658 +$ +16,059 +Collaboration and license revenue +Collaboration and license revenue +$ +167 +$ +17 +$ +— +$ +184 +Totals +$ +167 +$ +17 +$ +— +$ +184 +The Company’s contracts with customers may include promises to transfer multiple products and services to a customer. The Company combines any performance obligations that are immaterial with one or more other performance obligations that are material to the contract. For arrangements with multiple performance obligations, the Company allocates the contract transaction price, including discounts, to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company determines standalone selling prices based on prices charged to customers in observable transactions, and uses a range of amounts to estimate standalone selling prices for each performance obligation. The Company may have more than one range of standalone selling price for certain products and services based on the pricing for different customer classes. +Variable consideration in the Company’s contracts primarily relates to (i) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (ii) certain non-fixed fee research services contracts. ASC 606 provides for an exception to estimating the variable consideration for sales- and usage-based royalties related to the license of intellectual property, such that the sales- or usage-based royalty will be recognized in the period the underlying transaction occurs. The Company has recorded sales- or usage-based royalty revenue for the year ended December 31, 2019 related to the intellectual property licensed by Uman. The Company recognizes revenues +F-11 +Table of Contents +from sales- or usage based royalty revenue at the later of when the sales or usage occurs; and the satisfaction or partial satisfaction of the performance obligation to which the royalty has been allocated. +The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as of December 31, 2019 is $5.2 million. Of the performance obligations not yet satisfied or are partially satisfied, $4.7 million is expected to be recognized as revenue in the next 12 months, with the remainder to be recognized within the 24 months thereafter. The $5.2 million principally consists of $3.0 million billed for undelivered services related to initial and extended service-type warranties and research services, as well as $1.7 million related to undelivered licenses of intellectual property for a diagnostics company. +Changes in deferred revenue from contracts with customers were as follows (in thousands): +Year Ended December 31, 2019 +Balance at December 31, 2018 +$ +5,957 +606 adoption adjustment +(86) +Deferral of revenue +3,925 +Recognition of deferred revenue +(4,633) +Balance at December 31, 2019 +$ +5,163 +Costs to obtain a contract +The Company’s sales commissions are generally based on revenues of the Company. The Company has determined that certain commissions paid under its sales incentive programs meet the requirements to be capitalized as they are incremental and would not have occurred absent a customer contract. The change in the balance of costs to obtain a contract are as follows (in thousands): +Year Ended December 31, 2019 +Balance at December 31, 2018 +$ +— +606 adoption adjustment +307 +Deferral of costs to obtain a contract +848 +Recognition of costs to obtain a contract +(820) +Balance at December 31, 2019 +$ +335 +The Company has classified the balance of capitalized costs to obtain a contract as a component of prepaid expenses and other current assets as of December 31, 2019 and classifies the expense as a component of cost of goods sold and selling, general and administrative expense over the estimated life of the contract. The Company considers potential impairment in these amounts each period. +ASC 606 provides entities with certain practical expedients and accounting policy elections to minimize the cost and burden of adoption. +The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed. +The Company will exclude from its transaction price any amounts collected from customers related to sales and other similar taxes. +When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. The Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of December 31, 2019. +F-12 +Table of Contents +The Company has elected to account for the shipping and handling as an activity to fulfill the promise to transfer the product, and therefore will not evaluate whether shipping and handling activities are promised services to its customers. +Business combinations +Under the acquisition method of accounting, the Company allocates the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. The excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, is recorded as goodwill. These valuations require significant estimates and assumptions, especially with respect to intangible assets. +The Company typically uses the discounted cash flow method to value acquired intangible assets. This method requires significant management judgment to forecast future operating results and establish residual growth rates and discount factors. The estimates used to value and amortize intangible assets are consistent with the plans and estimates that are used to manage the business and are based on available historical information. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, the Company could experience impairment charges. In addition, the Company has estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed. +Cost of revenue +Cost of product revenue consists of raw materials, parts costs and associated freight, shipping and handling costs, contract manufacturer costs, personnel costs, yield loss, in-license payments and royalties, stock-based compensation, other direct costs and overhead. +Cost of service and other revenue consists of personnel, facility costs associated with operating the Accelerator Labs on behalf of the customers, costs related to instrument maintenance and servicing equipment at customer sites, other direct and overhead. +Cost of license revenue, related party consists of license fees that are the direct results of cash payments received related to license agreements. +Research and development expenses +Research and development expenses, including personnel costs, allocated facility costs, lab supplies, outside services, contract laboratory costs are charged to research and development expense as incurred. The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expense when the service has been performed or when the goods have been received. +Selling, general, and administrative expenses +Selling, general, and administrative expenses are primarily composed of compensation and benefits associated with sales and marketing, finance, human resources, and other administrative personnel, outside marketing, advertising, allocated facilities costs, legal expenses, and other general and administrative costs. +Net loss per share +Basic net loss per common share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares. For purposes of the diluted net loss per share calculations, preferred stock, unvested restricted common stock, and common stock options are considered +F-13 +Table of Contents +to be potentially dilutive securities, but are excluded from the diluted net loss per share because their effect would be anti-dilutive and therefore basic and diluted net loss per share were the same for all periods presented. +The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive (in common stock equivalent shares): +Year Ended December 31, +2019 +2018 +2017 +Unvested restricted common stock and restricted stock units +409,929 +361,468 +177,192 +Outstanding stock options +2,507,062 +2,476,911 +2,249,843 +Outstanding common stock warrants +10,000 +76,041 +86,090 +Total +2,926,991 +2,914,420 +2,513,125 +As of December 31, 2019, 2018, and 2017 the Company had an obligation to issue warrants to purchase an additional 93,341 shares of common stock to a vendor if a contract is terminated prior to a minimum purchase commitment being met. No amounts are presented in the table above for this obligation to issue a warrant as the issuance of the warrant is not considered probable. +Cash and cash equivalents +Cash and cash equivalents consist of cash deposits and short-term, highly liquid investments that are readily convertible into cash, with original maturities of three months or less. Cash equivalents are carried at fair value based on quoted prices for identical assets. Cash and cash equivalents consist of the following (in thousands): +As of +December 31, +2019 +2018 +Cash +$ +6,406 +$ +1,821 +Money market funds invested in U.S. Treasury obligations +102,749 +42,608 +Total cash and cash equivalents +$ +109,155 +$ +44,429 +Restricted cash and deposits +Restricted cash represents collateral for a letter of credit issued as security for the lease for the Company’s new headquarters. The restricted cash is long term in nature as the Company will not have access to the funds until more than one year from December 31, 2019. +As of December 31, 2019 and 2018, the Company had $1.1 million and $1.4 million, respectively, in restricted cash and deposits related to amounts held for a line of credit, amounts held as a security deposit for the Company’s facility lease obligation, and a business registration application. As of December 31, 2019, $1.0 million of the $1.1 million was recorded on a separate line item as restricted cash. The remaining $0.1 million was included in noncurrent assets. As of December 31, 2018, $1.0 million of the $1.4 million was recorded on a separate line item as restricted cash. The remaining $0.4 million was included in current and noncurrent assets. +Accounts receivable and allowance for doubtful accounts +The Company provides credit, in the normal course of business, to customers and does not require collateral. Accounts receivable consist of amounts due to the Company for sales to customers and are recorded net of an allowance for doubtful accounts. The Company reviews accounts receivable on a regular basis to determine if any receivable will potentially be uncollectable and to estimate the amount of allowance for doubtful accounts necessary. Once a receivable is deemed uncollectible, such balance is written off and charged against the allowance for doubtful accounts. The Company has not incurred material write offs in any of the periods presented. +F-14 +Table of Contents +Inventory +Inventory is stated at the lower of cost or market on a first-in, first-out (FIFO) basis. The Company analyzes its inventory levels on each reporting date and writes down inventory that is expected to expire prior to being sold and inventory in excess of expected sales requirements. In the event that the Company identifies these conditions exist in its inventory, the carrying value is reduced to its estimated net realizable value. +Property and equipment +Property and equipment, including leasehold improvements, are stated at cost and are depreciated, or amortized in the case of leasehold improvements, over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable and recognizes an impairment loss when it is probable that an asset’s realizable value is less than the carrying value. To date, no such impairment losses have been recorded. Depreciation is calculated based upon the following estimated useful lives of the assets: +Laboratory and manufacturing equipment +Five years +Computers and software +Three years +Office furniture and equipment +Seven years +Leasehold improvements +Shorter of the useful life of the asset or the remaining term of the lease +Software development costs +The Company develops and modifies software related to the operation of the instrument. Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Based on the Company’s product development process, technological feasibility is established upon the completion of a working model. The Company does not incur material costs between the completion of the working model and the point at which the product is ready for release. Therefore, software development costs are charged to the statement of operations as incurred as research and development expense. +Investments +During 2016, the Company purchased a minority interest in preferred stock in a privately held company for $0.3 million. During 2018, the Company was issued a convertible note by a privately held company having a principal amount of $0.2 million. +The preferred stock investment is recorded on a cost basis in other non-current assets on the accompanying balance sheets as the Company does not have a controlling interest, does not have the ability to exercise significant influence over the privately held company, and the fair value of the equity investment is not readily determinable. The Company performs an impairment analysis at each reporting period to determine if there is any readily available fair value information that would indicate an impairment. The Company has determined there was no impairment during the year ended December 31, 2019 or in any prior period. +The convertible note is held as an available-for-sale investment, which is carried at fair market value, with the unrealized gains and losses included in the determination of comprehensive loss. When determining the estimated fair value of the convertible notes, the Company used a commonly accepted valuation methodology. +Equity investments that do not result in consolidation and are not accounted for under the equity method are measured at fair value, with any changes in fair value recognized in net income. For any such investments that do not have readily determinable fair values, the Company elects the measurement alternative to measure the investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. +F-15 +Table of Contents +Fair value of financial instruments +ASC Topic 820, Fair Value Measurement (ASC 820), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. +ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following: +Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. +Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and +Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. +To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. +The carrying amount reflected on the balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximated their fair values, due to the short-term nature of these instruments. The carrying value of the long-term debt approximates its fair value as the debt arrangement is based on interest rates the Company believes it could obtain for borrowings with similar terms. The Company has an investment in the preferred stock of a privately held company which is recorded within other non-current assets on a cost basis. This cost method investment’s fair value has not been estimated as there are no identified events or changes in circumstances that would indicate a significant adverse effect on the fair value of the investment and to do so would be impractical. +Fair value measurements as of December 31, 2019 are as follows (in thousands): +Quoted prices +Significant +in active +Significant other +unobservable +markets +observable +inputs +Description +Total +(Level 1) +inputs (Level 2) +(Level 3) +Financial assets +Cash equivalents +$ +109,155 +$ +109,155 +$ +— +$ +— +Note receivable +150 +— +— +150 +$ +109,305 +$ +109,155 +$ +— +$ +150 +Fair value measurements as of December 31, 2018 are as follows (in thousands): +F-16 +Table of Contents +Quoted prices +Significant +in active +Significant other +unobservable +markets +observable +inputs +Description +Total +(Level 1) +inputs (Level 2) +(Level 3) +Financial assets +Cash equivalents +$ +42,608 +$ +42,608 +$ +— +$ +— +Note receivable +150 +— +— +150 +$ +42,758 +$ +42,608 +— +$ +150 +Warranties +The Company provides a one-year warranty and maintenance service related to its instruments and sells extended warranty contracts for additional periods. The Company defers revenue associated with these services and recognizes them on a pro-rata basis over the period of service. +Income taxes +The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. +The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740 Income Taxes (ASC 740). When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2019 and 2018, the Company did not have any significant uncertain tax positions. +Credit, product and supplier concentrations and off-balance-sheet risk +The Company has no significant off-balance-sheet risk, such as foreign exchange contracts, option contracts, or other hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash and cash equivalents and a cost method investment. The Company places its cash and cash equivalents principally in depository accounts with a bank. +The Company is also subject to supply chain risks related to the outsourcing of the manufacturing of its instruments. Although there are a limited number of manufacturers for instruments of this type, the Company believes that other suppliers could provide similar products on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. In addition to outsourcing the manufacturing of its instruments, the Company also purchases antibodies through a number of different suppliers. Although a disruption in service from any one of its antibody suppliers is possible, the Company believes that it would be able to find an adequate supply from alternative suppliers. +Customers outside the United States represented 50% and 40% of the Company’s gross trade accounts receivable balance as of December 31, 2019 and 2018, respectively. +At December 31, 2019 and 2018, no single customer represented 10% of the Company’s aggregate accounts receivable, and no single customer represented 10% of the Company’s revenue for the year ended December 31, 2019 and 2018. At December 31, 2017, one customer represented 10% of the Company’s revenue for the year ended December 31, 2017. +F-17 +Table of Contents +Stock-based compensation +The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation . ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Stock-based compensation awards have historically consisted of stock options and restricted stock. +Effective January 1, 2017, the Company ceased utilizing an estimated forfeiture rate and began recognizing forfeitures as they occur. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. +The Company recognizes compensation costs related to share-based payments granted to non-employees, which consists of directors for their services on the board of directors, based on the estimated fair value of the awards on the date of grant in the same manner as options for employees. There were no material non-employee awards outstanding during the years ended December 31, 2019, 2018, and 2017. +The fair value of stock options granted to employees and non-employees is estimated on the grant date using the Black-Scholes option-pricing model, based on the assumptions noted in the following table: +Year Ended December 31, +2019 +2018 +2017 +Risk-free interest rate +1.4% - 2.6% +2.6% - 3.0% +1.8% - 2.1% +Expected dividend yield +None +None +None +Expected term (in years) +6.0 +5.9 +6.0 +Expected volatility +33.5% - 39.7% +32.4% - 36.8% +46.0% - 52.0% +Using the Black-Scholes option-pricing model, the weighted-average grant date fair value of options granted for the years ended December 31, 2019, 2018, and 2017 was $9.09, $7.19, and $4.52 per share, respectively. Expected volatility was calculated based a propotional weighting of reported volatility data for a representative group of guideline publicly traded companies for which historical information was available and the Company’s stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. The Company estimates the expected life of options granted to employees utilizing the simplified method which calculates the expected life of an option as the average of the time to vesting and contractual life of the options. The expected life is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. The Company uses the simplified method due to the lack of historical exercise data and the plain nature of the stock options. The Company uses the remaining contractual term for the expected life of non-employee awards. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on common stock. +Recent accounting pronouncements +The Company is considered to be an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS Act). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to avail itself of this extended transition period and, as a result, the Company will not be required to adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies so long as the Company remains an emerging growth company. +On January 1, 2019, the Company adopted ASC 606 using the modified retrospective method. Under ASC 606, revenue is recognized upon the transfer of control of goods or services to customers and reflects the amount of consideration to which an entity expects to be entitled in exchange for those goods or services. The adoption of ASC 606 +F-18 +Table of Contents +has been applied to customer contracts that were not completed as of January 1, 2019, and did not materially change the pattern of revenue recognition for its current customer contracts. +The Company's consolidated financial statements for the prior-year period have not been revised and are reflective of the revenue recognition requirements which were in effect for that period. +The Company recorded an adjustment to the accumulated deficit of $0.4 million as of January 1, 2019 for the cumulative effect primarily related to the deferral of sales commissions. +In accordance with the reporting requirements of ASC 606, the disclosure of the impact on the Company's consolidated balance sheet and statement of operations, as a result of adopting the provisions of ASC 606, was as follows (in thousands): +Prior to +adoption of +As +Adjusted under +As reported +ASC 606 +reported +ASC 606 +December 31, +December 31, +December 31, 2018 +Adjustments +January 1, 2019 +2019 +Adjustments +2019 +Assets: +Accounts receivable +$ +6,792 +$ +47 +$ +6,839 +$ +10,906 +$ +— +$ +10,906 +Prepaid expenses and other current assets +2,330 +288 +2,618 +2,137 +335 +1,802 +Other non-current assets +536 +19 +555 +557 +— +557 +Liabilities: +Deferred revenue +5,437 +43 +5,394 +4,697 +(209) +4,488 +Deferred revenue, net of current portion +520 +43 +477 +466 +14 +480 +Stockholders’ equity: +Accumulated deficit +$ +(175,888) +$ +(440) +$ +(175,448) +$ +(216,244) +$ +(140) +$ +(216,104) +For the Year Ended December 31, 2019 +Under ASC +Under ASC 606 +Adjustment +605 +Product revenue +$ +40,491 +$ +55 +$ +40,546 +Service revenue +16,059 +273 +16,332 +Costs of goods sold and services +29,898 +1 +29,899 +Gross profit +26,836 +327 +27,163 +Selling general and administrative expenses +52,246 +27 +52,273 +Net loss +$ +(40,796) +$ +300 +$ +(40,496) +In January of 2019, the Company adopted accounting standards update (ASU) 2016-01, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. For equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using the net asset value per share or its equivalent, the Company has elected to measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. This election is made for each investment separately and is reassessed at each reporting period as to whether the investment continues to qualify for this election. Additionally, at each reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements. +F-19 +Table of Contents +In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The new standard is effective for the Company on January 1, 2020, with early adoption permitted. The Company expects to adopt the new standard on January 1, 2020 and use the effective date as the date of initial application. +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. In April 2019 the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, in May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (ASC 326) Targeted Relief, and in November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. These recently issued ASUs do not change the core principle of the guidance in ASU 2016-13 but rather are intended to clarify and improve operability of certain topics included within ASU 2016-13. ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 have the same effective date and transition requirements as ASU 2016-13. The new guidance will become effective for the Company beginning in fiscal year 2021, with early adoption permitted. The new guidance is required to be applied on a modified-retrospective basis. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures. +In January 2017, the FASB issued ASU No. 2017‑04 Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted, for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect adoption of this ASU to be material to its financial statements on known trends, demands, uncertainties and events in its business. The Company plans to adopt ASU 2017-04 as of January 1, 2020 and does not expect that the adoption of this guidance will have a material effect on its consolidated financial statements. +In August 2018, the FASB issued ASU No. 2018‑13, “Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” . This ASU removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018‑13 will be effective for fiscal years beginning after December 15, 2019 with early adoption permitted. As of December 31, 2019, the Company has not elected to early adopt this guidance but does not expect that the adoption of this guidance will have a material effect on its consolidated financial statements. +F-20 +Table of Contents +In November 2019, the FASB issued ASU 2019-08, Compensation ‒ Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606), which requires entities to measure and classify share based payments to a customer, in accordance with the guidance in ASC 718, Compensation ‒ Stock Compensation. The amendments in that ASU expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and, in doing so, superseded guidance in Subtopic 505-50, Equity ‒ Equity-Based Payments to Non-Employees. The amount that would be recorded as a reduction in revenue would be measured based on the grant date fair value of the share based payment, in accordance with Topic 718. The grant date is the date at which a supplier and customer reach a mutual understanding of the award’s key terms and conditions. The award’s classification and subsequent measurement would be subject to ASC 718 unless the award is modified or the grantee is no longer a customer. For entities that have not yet adopted the amendments in ASU 2018-07, the amendments in this ASU are effective for (1) public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and (2) other than public business entities in fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. For entities that have adopted the amendments in ASU 2018-07, the amendments in this ASU are effective in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity may early adopt the amendments in this ASU, but not before it adopts the amendments in ASU 2018-07. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations. +In December 2019, the FASB issued ASU 2019- 12, Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various areas related to accounting for income taxes. ASU 2019- 12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019- 12 is effective for the Company beginning in fiscal year 2022, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures. +3. Inventory +Inventory consists of the following (in thousands): +As of +December 31, +2019 +2018 +Raw materials +$ +4,717 +$ +1,546 +Work in process +2,573 +2,331 +Finished goods +3,173 +2,068 +Total +$ +10,463 +$ +5,945 +Inventory comprises commercial instruments, assays, and the materials required to manufacture assays. +4. Property and equipment +Property and equipment consists of the following (in thousands): +As of +December 31, +2019 +2018 +Laboratory and manufacturing equipment +$ +5,391 +$ +4,127 +Office furniture and equipment +1,403 +789 +Computers and software +1,103 +786 +Leasehold improvements +8,489 +244 +16,386 +5,946 +Less: accumulated depreciation +(4,339) +(3,023) +Total +$ +12,047 +$ +2,923 +F-21 +Table of Contents +The Company incurred depreciation expense of $1.6 million and $0.7 million for the years ended December 31, 2019 and 2018, respectively. The Company has instruments included in laboratory and manufacturing equipment, which are used internally by the Company. The laboratory and manufacturing equipment balance includes $2.8 million of cost and $1.2 million of accumulated depreciation related to these instruments. +5. Other accrued expenses +Other accrued expenses consist of the following (in thousands): +As of December 31, +2019 +2018 +Accrued inventory +$ +459 +$ +599 +Accrued royalties +476 +323 +Accrued professional services +655 +723 +Accrued development costs +151 +795 +Accrued other +757 +689 +Total accrued expenses +$ +2,498 +$ +3,129 +Other non-current liabilities consist of the following (in thousands): +As of December 31, +2019 +2018 +Leasehold obligation incentive +$ +7,572 +$ +— +Deferred rent +3,009 +265 +Deferred tax liabilities +2,825 +7 +Other +1 +6 +Total non-current liabilities +$ +13,407 +$ +278 +6. Income taxes +The following table presents the components of loss before income taxes (in thousands): +Year Ended December 31, +2019 +2018 +2017 +United States +$ +(40,010) +$ +(31,436) +$ +(27,019) +Foreign +(973) +(75) +— +$ +(40,983) +$ +(31,511) +$ +(27,019) +F-22 +Table of Contents +The following table summarizes income tax benefit (provision) (in thousands): +Year Ended +December 31, +2019 +2018 +2017 +Current: +United States +Federal +$ +— +$ +— +$ +— +State +(20) +(18) +— +Foreign +(93) +— +— +Total current income tax provision +(113) +(18) +— +Deferred +United States +Federal +(3) +(2) +— +State +(1) +(5) +— +Foreign +304 +— +— +Total deferred income tax benefit (provision) +300 +(7) +— +Total income tax benefit (provision) +$ +187 +$ +(25) +$ +— +During the years ended December 31, 2019, 2018, and 2017, the Company recorded an income tax benefit (provision) of $0.2 million, less than $(0.1) million, and $0, respectively. +A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: +Year Ended December 31, +2019 +2018 +Federal statutory income tax rate +21.0 +% +21.0 +% +Foreign tax rate differential +— +% +— +% +State taxes, net of federal benefit +3.2 +% +6.0 +% +Tax credits +2.3 +% +2.7 +% +Share-based compensation +2.3 +% +1.1 +% +Permanent items +(0.9) +% +(1.2) +% +Defereed tax rate changes +(1.4) +% +— +% +Change in valuation allowance +(24.6) +% +(29.9) +% +Other +(1.4) +% +0.2 +% +Effective income tax rate +0.5 +% +(0.1) +% +The effective tax rate of 1% differs from the U.S. Federal statutory rate of 21% primarily as a result of the valuation allowance maintained against our worldwide net deferred tax assets. +During 2018, the Company acquired Aushon. The Company analyzed the transaction from an income tax perspective and adjusted the deferred tax assets and liabilities related to the Aushon acquisition. Of the total goodwill recorded, approximately $0.4 million is amortizable related to historical tax basis that Aushon had related to a prior acquisition. +During 2019, the Company acquired Uman, a Swedish entity. The Company analyzed the transaction from an income tax perspective and found that there was no tax deductible goodwill or other identifiable intangible assets related to the transaction. +F-23 +Table of Contents +Deferred tax assets and liabilities reflect the net tax effects of net operating loss carryovers and temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): +December 31, +2019 +2018 +Deferred tax assets: +Net operating loss carryforwards +$ +43,814 +$ +35,623 +Tax credits +5,518 +4,678 +Deferred revenue +1,247 +1,614 +Depreciation +— +86 +Amortization +928 +792 +Stock-based compensation +973 +541 +Deferred Rent +727 +— +Lease incentive obligation +1,828 +— +Other deferred tax assets +1,325 +1,378 +Total deferred tax assets +56,360 +44,712 +Less: Valuation allowances +(54,137) +(44,033) +Net deferred tax assets +2,223 +679 +Deferred tax liabilities: +Section 481(a) adjustment - accrued bonus +— +(59) +Depreciation +(1,769) +— +Amortization of acquired intangibles +(3,031) +(610) +Inventory +(212) +— +Goodwill +(31) +(17) +Other deferred tax liabitlies +(5) +— +Net deferred tax assets (liabilities) +$ +(2,825) +$ +(7) +The valuation allowance increased by $10.1 million during the year ended December 31, 2019, primarily as a result of the U.S. operating losses incurred, the research and development tax credit carryforwards generated during the year. +In determining the need for a valuation allowance, the Company has given consideration to the cumulative book income and loss positions of each of its entities as well as its worldwide cumulative book loss position. The Company has assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carryback net operating losses, the existence of reversing taxable temporary differences, the availability of tax planning strategies and forecasted future taxable income. At December 31, 2019, the Company maintains a full valuation allowance against its worldwide net deferred tax assets. +As of December 31, 2019, the Company had U.S. federal net operating loss carryforwards of approximately $174.8 million. U.S. federal net operating loss carryforwards generated through December 31, 2017 of approximately $108.5 million expire at various dates through 2037, and U.S. federal net operating loss carryforwards generated in the tax years beginning after December 31, 2017 of approximately $66.3 million do not expire. As of December 31, 2019 the Company had $111.9 million of state net operating loss carryforwards that expire at various dates through 2039. As of December 2019, the Company had U.S. federal tax carryforwards of approximately $4.3 million that expire at various dates through 2039. As of December 31, 2019, the Company had U.S. state tax credit carryforwards of approximately $1.6 million that expire at various dates through 2034. +Under Sections 382 and 383 of the U.S. Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an ownership change generally occurs if there is a cumulative change in its ownership by 5% stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under U.S. state tax laws. The Company may have experienced an ownership change in the past and may experience ownership changes in the future as a result of +F-24 +Table of Contents +future transactions in its share capital, some of which may be outside of the control of the Company. As a result, if the Company earns net taxable income, its ability to use its pre-change net operating loss carryforwards, or other pre-change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to significant limitations. +The Company accounts for uncertain tax positions using a more likely than not threshold for recognizing uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on an ongoing basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. The Company accounts for interest and penalties related to uncertain tax positions as a component of its provision for income taxes. For the years ended December 31, 2019, 2018, and 2017, the Company had no tax reserves accrued for uncertain tax positions and there are no accrued interest or penalties in the consolidated statements of operations. +The Company is subject to taxation in the United States as well as the Netherlands, Sweden, and China. At December 31, 2019, the Company is generally no longer subject to examination by taxing authorities in the United States for years prior to 2016. However, net operating loss carryforwards and credits in the United States may be subject to adjustments by taxing authorities in future years in which they are utilized. The Company’s foreign subsidiaries remain open to examination by taxing authorities from 2014 onward. +As of December 31, 2019, the Company’s foreign subsidiaries had immaterial undistributed earnings and the tax payable on the earnings that are indefinitely reinvested would be immaterial. +7. Redeemable convertible preferred stock +The Company had authorized 47,015,449 shares of preferred stock, $0.001 par value per share, of which 3,972,415 shares were designated Series A‑1 redeemable convertible preferred stock (Series A‑1 Preferred Stock), 10,492,027 shares were designated Series A‑2 Preferred Stock, 2,000,000 shares were designated Series A‑3 Preferred Stock, 6,186,594 shares were designated Series B Preferred Stock, 9,247,089 shares were designated as Series C Preferred Stock, 544,332 shares were designated Series C‑1 redeemable convertible preferred stock (Series C‑1 Preferred Stock), 12,459,090 shares were designated Series D Preferred Stock and 2,113,902 were designated Series D‑1 redeemable convertible preferred stock (Series D‑1 Preferred Stock) as of immediately prior to the completion of the IPO. +In January 2017, the Company issued 700,000 shares of Series A‑3 Preferred Stock to a vendor (Note 8) upon the exercise of Series A‑3 Preferred Stock warrants at a purchase price of $0.001 per share. The fair value of the settled warrant was $2.1 million at the time of exercise which was reclassified from Preferred Stock Warrant Liability to Series A Preferred Stock. +In June 2017, the Company issued 2,113,902 shares of Series D‑1 Preferred Stock at a purchase price of $4.021 per share. The issuance resulted in cash proceeds of $8.4 million, net of issuance costs. +In November 2017, the Company issued 31,283 shares of Series C Preferred Stock upon exercise of Series C Preferred Stock warrants, which included 8,474 shares of Series C Preferred Stock at a purchase price of $3.3299 per share, and 22,809 shares of Series C Preferred Stock upon a cashless exercise of a warrant. The fair value of the settled warrants was $0.1 million at the time of exercise which was reclassified from Preferred Stock Warrant Liability to Series C Preferred Stock. +The Company had a Stock Purchase Agreement (SPA) with bioMérieux, a related party, which required the Company to issue additional shares of Series C Preferred Stock if certain milestones were met in exchange for $10.0 million in gross proceeds. The milestones were related to activities under a Joint Development and License Agreement (JDLA) (Note 13). bioMérieux also purchased Series C Preferred Stock when the JDLA was entered into in 2012. When the SPA was entered into, the Company evaluated whether the requirement to issue additional shares (‘Tranche Feature") required separate accounting. The Company determined that the Tranche Feature was not legally +F-25 +Table of Contents +detachable and therefore was an embedded feature in the Series C Preferred Stock that bioMérieux purchased. All preferred stock automatically converted to common stock at the time of the Company’s IPO. +8. Common Stock, warrants, stock-based compensation, stock options, restricted stock and restricted stock units +Common stock reserved +The Company reserved the following shares of common stock, on a common stock equivalent basis, for the conversion of shares of preferred stock, the exercise of warrants, the exercise of common stock options, and the vesting of restricted common stock. +As of December 31, +2019 +2018 +Common stock warrants +10,000 +76,041 +Common stock options and unvested restricted common stock +2,916,991 +2,838,402 +Shares reserved for future awards under compensation plan +882,715 +2,433,999 +3,809,706 +5,348,442 +Warrants +The following table summarizes the Company’s outstanding warrants as of December 31, 2019, and 2018: +Weighted +Issued and +Average +exercisable +Exercise Price +As of December 31, 2018 +76,041 +$ +10.10 +Issued +— +Exercised +(66,041) +10.90 +Cancelled +— +As of December 31, 2019 +10,000 +$ +4.83 +The Company has an agreement with a vendor (Note 9) where the Company could be obligated to issue warrants to purchase an additional 93,341 shares of common stock to the vendor if the contract is terminated prior to a minimum purchase commitment being met. No shares have been reserved related to these potential obligations to issue warrants in the future. On January 30, 2018, the Company issued a warrant to purchase 10,000 of common stock to a consultation company for services rendered. +On July 2, 2019, 66,041 warrants were exercised by a holder on a net, non-cash, basis. Per terms of the warrant agreement, the Company issued 45,690 shares of common stock after giving effect to the holder’s net excercise. +Stock-based compensation +Share-based compensation expense for all stock awards consists of the following (in thousands): +December 31, +2019 +2018 +2017 +Cost of product revenue +$ +86 +$ +55 +$ +24 +Cost of service and other revenue +238 +173 +52 +Research and development +718 +513 +180 +Selling, general, and administrative +5,346 +4,143 +1,912 +Total +$ +6,388 +$ +4,884 +$ +2,168 +In June 2007, the Company adopted the 2007 Stock Option and Grant Plan (the 2007 Plan), under which it could grant incentive stock options, non-qualified options, restricted stock, and stock grants. At December 31, 2016, the 2007 Plan allowed for the issuance of up to 3,229,935 shares of common stock. During the three months ended +F-26 +Table of Contents +March 31, 2017, the 2007 Plan was amended to allow for the issuance of an additional 622,227 shares of common stock for a total issuance of up to 3,852,213 shares of common stock at June 30, 2017. During the three months ended September 30, 2017 the 2007 Plan was further amended to allow for the issuance of an additional 497,822 shares of common stock for total issuance of up to 4,350,035 shares of common stock at September 30, 2017. As of December 31, 2017, under the 2007 Plan, options to purchase 2,249,843 shares of the Company’s common stock were outstanding, 571,838 shares of common stock had been issued and were outstanding pursuant to the exercise of options, 1,128,975 shares of common stock had been issued and were outstanding pursuant to restricted or unrestricted stock awards, and 399,379 shares of common stock were available for future awards. In connection with the completion of the IPO, the Company terminated the 2007 Plan. As of December 31, 2019, 1,221,746 shares were outstanding and no shares were available for future grant under the 2007 Plan. +In December 2017, the Company adopted the 2017 Employee, Director and Consultant Equity Incentive Plan (the 2017 Plan), under which it may grant incentive stock options, non-qualified stock options, restricted stock, and other stock-based awards. As of December 31, 2017, the 2017 Plan allowed for the issuance of up to 1,042,314 shares of common stock plus up to 2,490,290 shares of common stock represented by awards granted under the 2007 Plan that are forfeited, expire or are cancelled without delivery of shares or which result in the forfeiture of shares of common stock back to the Company on or after the date the 2017 Plan becomes effective. As of December 31, 2019 and 2018, there were shares available for grant under the 2017 Plan of 270,14 3 and 4,393, respectively. +In addition, the 2017 Plan contains an "evergreen" provision, which allows for an annual increase in the number of shares of common stock available for issuance under the 2017 Plan on the first day of each fiscal year during the period beginning in fiscal year 2019 and ending in fiscal year 2027. The annual increase in the number of shares shall be equal to the lowest of: 4% of the number of shares of common stock outstanding as of such date; and an amount determined by the Company’s Board of Directors or Compensation Committee. On January 1, 2020, the number of shares of common stock available for issuance under the 2017 plan was automatically increased by 894,761 shares. +In December 2017, the Company adopted the 2017 Employee Stock Purchase Plan (the 2017 ESPP). As December 31, 2018, the 2017 ESPP allowed for the issuance of up to 425,533 shares of common stock. As of December 31, 2019, 612,572 shares were available for grant under the 2017 ESPP. +In addition, the 2017 ESPP contains an "evergreen" provision, which allows for an increase on the first day of each fiscal year beginning with fiscal year 2018. The increase in the number of shares shall be equal to the lowest of: 1% of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or an amount determined by the Company’s Board of Directors or Compensation Committee. +The 2017 ESPP provides for six-month option periods commencing on March 1 and ending August 31 and commencing September 1 and ending February 28 of each calendar year. The first offering under the 2017 ESPP began on September 1, 2018. +Stock options +Under the 2007 and 2017 Plans, stock options may not be granted with exercise prices of less than fair market value on the date of the grant. Options generally vest ratably over a four-year period with 25% vesting on the first +F-27 +Table of Contents +anniversary and the remaining 75% vesting ratably on a monthly basis over the remaining three years. These options expire ten years after the grant date. Activity under the 2007 Plan and the 2017 Plan were as follows: +Weighted-average +Remaining contractual +Aggregate intrinsic value +Options +exercise price +life (in years) +(in thousands) +Outstanding at December 31, 2018 +2,476,911 +$ +9.65 +7.73 +$ +22,108 +Granted +882,959 +$ +24.20 +Exercised +(414,672) +$ +6.80 +Cancelled +(438,136) +$ +14.37 +Outstanding at December 31, 2019 +2,507,062 +$ +14.41 +7.58 +$ +24,870 +Vested and expected to vest at December 31, 2019 +2,507,062 +$ +14.41 +7.58 +$ +24,870 +Exercisable at December 31, 2019 +1,284,900 +$ +8.70 +6.46 +$ +19,239 +Using the Black-Scholes option pricing model, the weighted-average fair value of options granted to employees and directors during the years ended December 31, 2019, 2018, and 2017 was $9.09, $7.19, and $4.52 per share, respectively. The expense related to stock options granted to employees was $3.7 million, $2.7 million, and $1.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. The intrinsic value of stock options exercised was $6.9 million, $5.3 million, and $1.1 million, for the years ended December 31, 2019, 2018, and 2017, respectively. Activity related to non-employee awards was not material to the years ended December 31, 2019, 2018, and 2017. +At December 31, 2019, there was $8.7 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the remaining weighted-average vesting period of 2.77 years. +Restricted stock awards +In December 2014, the Company issued 78,912 shares of restricted common stock to a director of the Company under the 2007 Plan. Under the terms of the agreement, shares of common stock issued are subject to a four year vesting schedule. Vesting occurs periodically at specified time intervals and specified percentages. In January 2015, the Company issued 781,060 shares of restricted common stock to an executive of the Company under the 2007 Plan. The majority of these shares were issued subject to a four year vesting schedule with 25% vesting on the first anniversary and the remaining vesting 75% ratably on a monthly basis over the remaining three years, while another portion was issued subject to performance based vesting. The vesting of performance based awards is dependent upon achievement of specified financial targets of the Company. The majority of the performance criteria were achieved during the years ended December 31, 2016 and 2015 and the remaining unvested awards with performance conditions are not material. No restricted stock awards were granted during the years ended December 31, 2019, 2018, or 2017. As of December 31, 2019, the Company had 39,806 shares of unvested restricted common stock with a weighted average grant date fair value of $3.12 per share. +The expense related to restricted stock awards granted to employees and non-employees was $0.0 million, $0.4 million, and $0.6 million for the years ended December 31, 2019, 2018, and 2017, respectively. +At December 31, 2019, there was no unrecognized compensation cost related to unvested restricted stock. +The aggregate fair value of restricted stock awards that vested during the years ended December 31, 2019, 2018, and 2017, based on estimated fair values of the stock underlying the restricted stock awards on the day of vesting, was $0.0 million, $2.4 million and $1.9 million, respectively. +Restricted stock units +Restricted stock units (RSUs) represent the right to receive shares of common stock upon meeting specified vesting requirements. In the fiscal year ended December 31, 2019, the Company issued 246,588 RSUs to employees of the Company under the 2017 Plan. Under the terms of the agreements, 135,058 of the RSUs issued are subject to a four year vesting schedule with 25% vesting on the first anniversary and the remaining vesting 75% ratably on a monthly +F-28 +Table of Contents +basis over the remaining three years, 40,846 of the RSUs are subject to a four year vesting schedule with 25% vesting on each anniversary, 15,890 of the RSUs vested on December 31, 2019, 10,194 of the RSUs vested with respect to 5/48th of the shares on the date of grant with the rest vesting ratably over the remaining 43 months; 31,732 of the RSUs vested with respect to 1,983 shares vesting on the grant date with the rest vesting ratably over the remaining 45 months; 4,540 of the RSUs vest equally over three years on the anniversary of the vesting start date; 3,000 of the RSUs vest upon the one year anniversary of the grant date; and 5,328 vested immediately upon grant. A summary of RSU activity is as follows: +Weighted-average +grant date +fair value +Shares +per share +Unvested RSUs as of December 31, 2018 +321,662 +$ +15.84 +Granted +246,588 +$ +24.22 +Vested +(136,062) +$ +17.11 +Cancelled +(62,065) +$ +18.82 +Unvested RSUs as of December 31, 2019 +370,123 +$ +20.48 +The expense related to RSU awards granted to employees and directors was $2.7 million for the fiscal year ended December 31, 2019. +At December 31, 2019, there was $6.9 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over the remaining weighted-average vesting period of 2.78 years. +9. Commitments and contingencies +License agreements +Tufts University +In June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University (Tufts). Tufts is a related party to the Company due to Tuft’s equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. The License Agreement, which was subsequently amended, is exclusive and sub licensable, and will continue in effect on a country by country basis as long as there is a valid claim of a licensed patent in a country. The Company is committed to pay license and maintenance fees, prior to commercialization, in addition to low single digit royalties on direct sales and services and a royalty on sublicense income. During the year ended December 31, 2016, the Company executed a license agreement with a diagnostic company and also amended the bioMérieux agreement (Note 13). During the years ended December 31, 2019, 2018 and 2017, the Company recorded royalty expense of $1.0 million, $0.7 million and $0.5 million, respectively, in cost of product revenue on the consolidated statements of operations. +Other licenses +During the year ended December 31, 2012, the Company entered into a license agreement for certain intellectual property with a third party. The non-exclusive, non-sublicenseable third party’s license provides the Company access to certain patents specifically for protein detection, and shall be in effect until the expiration of the last licensed patent. In consideration for these rights, the Company committed to certain license fees, milestone payments, minimum annual royalties and a mid-single digit royalty. The Company is required to make mid-single digit royalty payments on net sales of products and services which utilize the licensed technology. The Company must pay the greater of calculated royalties on net sales or an annual minimum royalty of $50 thousand. During the year ended December 31, 2019, 2018 and 2017, the Company recorded royalty expense of $0.8 million, $0.4 million, and $0.2 million, respectively, in cost of product revenue on the consolidated statements of operations. +F-29 +Table of Contents +Lease commitments +During the year ended December 31, 2014, the Company entered into a lease agreement for the Company’s former corporate headquarters with a lease term that expires in June 2020; however, in November 2018, the Company agreed to terminate the lease with the lessor effective May 2019. The termination of the lease was connected to the Company signing a new lease in Billerica, Massachusetts. On October 2, 2018, the Company entered into a 137-month operating lease for the Company’s new headquarters in Billerica, Massachusetts. The lease is for approximately 92,000 square feet of office and laboratory space, and commenced on or about April 1, 2019. The lease contains a period of free rent and escalating monthly rent payments. As part of the lease, the Company was required to enter into a $1.0 million Letter of Credit drawable by the lessor under specifically outlined conditions. The amount of the Letter of Credit will be reduced at 41 and 65 months after the commencement date of the lease to $750,000 and then $250,000, respectively. The $1.0 million Letter of Credit is recorded as restricted cash on the consolidated balance sheet. +In connection with the acquisition of Aushon in January 2018, the Company assumed the existing Aushon lease for facilities in Billerica, Massachusetts. In August 2018 the Company terminated the Aushon lease effective September 1, 2019. The Company paid a termination fee of $75,000 in February 2019 in consideration for the early termination. +In connection with the acquisition of Uman in August 2019, the Company assumed the existing Uman leases for the facilities in Umeå, Sweden. +Rent expense is recognized straight-line over the course of the lease term. As of December 31, 2019, $3.0 million of deferred rent expense was recorded in other non-current liabilities. The table below includes committed lease expenditures related to the new lease. +As of December 31, 2019, the minimum future rent payments under the lease agreements are as follows (in thousands): +2020 +$ +2,081 +2021 +3,322 +2022 +3,396 +2023 +3,480 +2024 and Forward +25,760 +$ +38,039 +The Company recorded $3.3 million, $1.6 million and $1.1 million in rent expense for the years ended December 31, 2019, 2018, and 2017, respectively. +Development and supply agreement +Through the Company’s development agreement with STRATEC Biomedical, as amended in December 2016, the parties agreed on additional development services for an additional fee, which is payable when the additional development is completed. A total of $11.7 million is payable to STRATEC Biomedical upon completion of the development activities. This amount is being recorded to research and development expense and accrued expenses as the services are performed. The services were completed during the year ended December 31, 2018. Substantive efforts related to these additional development activities started in the first quarter of 2019 and were completed in the third quarter of 2019. +F-30 +Table of Contents +The Company’s supply agreement with STRATEC Biomedical requires the Company to purchase a minimum number of commercial units over a seven‑year period ending in May 2021. If the Company were to fail to purchase a required number of commercial units, the Company would be obligated to pay termination costs plus a fee based on the shortfall of commercial units purchased compared to the required minimum amount. Based on the number of commercial instruments purchased as of December 31, 2019, assuming no additional commercial units were purchased, this fee would equal $9.6 million. The amount the Company could be obligated to pay under the minimum purchase commitment is reduced as each commercial unit is purchased. Also, if the Company terminates the supply agreement under certain circumstances and has not purchased a required number of commercial units, it would be obligated to issue warrants to purchase 93,341 shares of common stock (the Supply Warrants) at $0.003214 per share. The Company believes that it will purchase sufficient units to meet the requirements of the minimum purchase commitment and, therefore, has not accrued for any of the potential cash consideration. The Supply Warrants are accounted for at fair value; however, the fair value of the Supply Warrants as of December 31, 2019 and December 31, 2018 was insignificant as there was a low probability of the warrants being issued. +Legal contingencies +The Company is subject to claims in the ordinary course of business; however, the Company is not currently a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results of its operations. The Company accrues for contingent liabilities to the extent that the liability is probable and estimable. +10. Long term debt +Loan agreement +On April 14, 2014, the Company executed a Loan Agreement with a lender, as subsequently amended, most recently in April 2019. As of December 31, 2019, there were no additional amounts available to borrow under the debt facility. The interest rate on this term loan is variable based on a calculation of the prime rate less 5.25% with a minimum interest rate of 8%. Interest is paid monthly beginning the month following the borrowing date. At loan inception and in connection with the amendments, the Company issued the lender warrants to purchase shares of stock. The Loan Agreement also contains prepayment penalties and an end of term charge. Fees incurred upon execution of the agreements, and the fair value of warrants on the date of grant were accounted for as a reduction in the book value of debt and accreted through interest expense, using the effective interest rate method, over the term of the debt. +Amendment 5 to loan agreement +In August 2018, the Company signed Amendment 5 to the Loan Agreement (Amendment 5). Amendment 5 instituted a 2018 End of Term Charge of $0.08 million. Additionally, the Term Loan Maturity Date extended until March 1, 2020. Amendment 5 additionally, changed the due date of the End of Term Charge to, the earlier of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding Secured Obligations or (iii) the date that the Secured Obligations become due and payable. The Company incurred a cost of $0.05 million in relation to the execution of Amendment 5. In connection with the extension of the due date of the Loan, the deferral of principal payments (Amendment 3) was further deferred until the new Term Loan Maturity Date. +Amendment 6 to loan agreement +In October 2018, the Company signed Amendment 6 to the Loan agreement, which amended the Loan Agreement’s collateral clause to exclude the $1 million certificate of deposit associated with the lease on the Company’s new headquarters in Billerica, MA. +Amendment 7 to loan agreement +On April 15, 2019, the Company signed Amendment 7 to the Loan Agreement, which extended the interest only payment period through July 1, 2021 and also extended the maturity date until October 1, 2021. As part of this +F-31 +Table of Contents +Amendment 7, a “2019 End of Term Fee” for $50,000 was added to the Loan Agreement due on the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date that the Company prepays the outstanding Secured Obligations and (iii) the date that the Secured Obligations become due and payable. In addition, the Company is required to pay the loan principal in five equal installments starting July 1, 2021 with the final principal payment to be made on October 1, 2021. As of December 31, 2019, the remaining loan balance is classified as a long term liability since all principal payments are due greater than twelve months after the balance sheet date. +No end of term charges related to the facility or principal payments were paid during the fiscal year ended December 31, 2019. Under the terms of the April 2019 amended agreement, principal payments were delayed until July 2021. The Company accounted for the April 2019 amendment as a modification as it was determined that no material change occurred as a result of the amendment. Under the amended Loan Agreement, the remaining outstanding principal will be paid equally from July 2021 through October 2021. As of December 31, 2019, the remaining loan balance is classified as a long term liability since all principal payments are due greater than twelve months after the balance sheet date. +As of December 31, 2019, debt payment obligations due based on principal payments are as follows (in thousands): +2020 +$ +— +2021 +7,688 +$ +7,688 +Non-cash interest expense related to debt discount amortization and accretion of end of term fees was $0.1 million, $0.2 million, and $0.2 million for the year ended December 31, 2019, 2018, and 2017, respectively. +The Company assessed all terms and features of the Loan Agreement and the subsequent amendments in order to identify any potential embedded features that would require bifurcation. As part of this analysis, the Company assessed the economic characteristics and risks of the debt. The Company determined that all features of the Loan Agreement and the subsequent amendments are either clearly and closely associated with a debt host or have a de minimis fair value and, as such, do not require separate accounting as a derivative liability. The Company assessed each amendment under ASC 470‑50 Debt – Modifications and Extinguishments and concluded that all of the amendments constituted modifications. The Company also assessed whether the amendments represented a troubled debt restructuring and concluded they did not. The Company accounted for each of the amendments to the Loan Agreement as a modification of its debt and the unamortized discount and issuance costs related to the prior debt are amortized over the modified term of the new debt. +The Loan Agreement and the subsequent amendments contain negative covenants restricting the Company’s activities, including limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments and certain other business transactions. There are no financial covenants associated with the Loan Agreement and the subsequent amendments. The obligations under the Loan Agreement and subsequent amendments are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in the Company’s business, operations or financial or other condition. The Company has determined that the risk of subjective acceleration under the material adverse events clause is not probable and therefore has classified the outstanding principal in current and long-term liabilities based on scheduled principal payments. +11. “At-the-market offering” +On March 19, 2019, the Company entered into the Sales Agreement with Cowen with respect to an “at-the-market” offering program under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $50.0 million through Cowen as its sales agent. +On June 5, 2019, the Company issued approximately 2.2 million shares of common stock at an average stock price of $22.73 per share pursuant to the terms of the Sales Agreement. The “at-the-market” offering resulted in gross +F-32 +Table of Contents +proceeds of $49.7 million. The Company incurred $1.7 million in issuance costs associated with the “at-the-market” offering, resulting in net proceeds to the Company of $48.0 million. +12. Underwritten public Offering +On August 8, 2019, the Company entered into an underwriting agreement with J.P. Morgan Securities LLC and SVB Leerink LLC, as representatives of the several underwriters, relating to an underwritten public offering of approximately 2.7 million shares of the Company’s common stock, par value $0.001 per share. The underwritten public offering resulted in gross proceeds of $69.0 million. The Company incurred $4.5 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $64.5 million. +13. Collaboration and license arrangements +In November 2012, the Company entered into the JDLA with bioMérieux, a related party. As discussed below, the JDLA has been subsequently amended. Under the terms the JDLA, the Company granted bioMérieux an exclusive, royalty-bearing license, without right to sublicense, to manufacture and sell instruments and assays using the Company’s Simoa technology exclusively for in vitro diagnoses used in clinical lab applications, food quality control testing, and pharma quality control testing, and co-exclusively in certain related fields, as defined in the contract. As part of the JDLA, the Company was also to develop and manufacture instruments to bioMérieux’s specifications for bioMérieux’s use or for sale by bioMérieux. The Company retained rights to sell the instrument in the co-exclusive fields and any other fields not licensed exclusively to bioMérieux. bioMérieux was to develop and sell diagnostic assays to be used in conjunction with the Company’s instruments. +Upon execution of the JDLA, the Company received $10.0 million in consideration and was entitled to receive two additional payments of $5.0 million each upon the achievement of certain developmental criteria. Neither of these criteria have been achieved. The Company was also entitled to receive royalty payments on the sale of assays and payments for the manufacture and delivery of instruments based on a contractual rate subject to future adjustments. +At the inception of the JDLA, the Company determined that the deliverables were as follows: (1) licenses to the Company’s technology and trademarks, training, completion and delivery of a prototype instrument per contractual specifications (License and Prototype), (2) various activities to assist bioMérieux in the development of the initial assay and an instrument that is IVD compliant (Initial Assay Assistance), (3) various activities to assist bioMérieux in the development of a benchtop instrument (Benchtop Assistance), and (4) joint steering committee participation (JSC). Each of these deliverables were considered separate units of accounting, and the License and Prototype unit of accounting was determined to have standalone value as the License and Prototype unit of accounting could be utilized by bioMérieux without the related services included in the other units of accounting. +The Company allocated the allocable arrangement consideration based on the relative selling price of each unit of accounting. For all units of accounting, the Company determined the selling price using the standalone selling price (SSP). Management’s best estimate of the selling price of the License and Prototype unit of accounting was based on a discounted cash flow analysis to support the estimated selling price of the license. The Company determined the SSP of the other units of accounting based on internal estimates of the costs to perform the services, adjusted to reflect a reasonable profit margin as well as based on market prices for similar instruments and services. +Revenue related to the License and Prototype unit of accounting of $8.3 million was recognized in 2013 upon delivery of both the license which was delivered at inception, and the first prototype instrument, which was required for bioMérieux to make use of the license. Prior to the effect of the 2016 Amendment described below, revenue for the other units of accounting were recognized over an estimated period of performance. +Amendments to the JDLA +In May 2014 and January 2015, the parties executed a First and Second Amendment to the JLDA, respectively. These amendments addressed revised timelines related to completing the development activities under the JDLA and enacted additional governance protocols to monitor those activities. +F-33 +Table of Contents +These amendments did not change the deliverables under the JDLA or the total arrangement consideration. The Company revised its estimates of the remaining period of performance for the remaining undelivered units of accounting and these revisions did not have a material effect on revenue recognition. +On December 22, 2016, the Company entered into the 2016 Amendment which ended the ongoing joint development efforts between the parties, and modified the rights and obligations of both parties accordingly, as follows: +· +For a period of not more than three years from the date of the 2016 Amendment bioMérieux had the ability to evaluate independently whether it would develop a new, smaller in vitro diagnostic instrument using the Simoa technology for use in clinical lab applications, food quality control testing, and pharmaceutical quality control testing benchtop (the "Feasibility Period") and had the sole right to determine whether or not to develop such a new instrument during the Feasibility Period. If bioMérieux elected to pursue development of such a new instrument, they would have a set number of years to complete development within a specified period, which contains various development milestones which must be accomplished. +· +bioMérieux received a license to the source and object code of the Company’s Level 1 Data Reduction (L1DR) software. The L1DR software the Company’s proprietary image processing algorithms that convert images of microscopic beads associated with biomarker molecules in microwells. Also, the Company agreed to provide to bioMérieux access to any know how and intellectual property associated with the L1DR software, including any updates and upgrades to the L1DR software during the Feasibility Period. If bioMéreiux exercised its right to develop an instrument independently, this right would continue throughout the development period to the end of the term of the agreement related to independently developed instruments. +· +It was clarified that the Company can engage a collaboration partner (IVD Partner), subject to restrictions as to the particular parties with which the Company could elect to partner and the assays that can be developed, in the field of in vitro diagnostics used in Clinical Lab Applications. The Company agreed to pay bioMérieux a mid-double-digit percentage of royalties received from the IVD Partner based on assays sales by the IVD Partner. +· +bioMérieux’s licenses included all patents and know-how owned or controlled by the Company related to the Company’s Simoa technology and upgrades thereto that are necessary for the development, manufacture, use or sale of instruments and assays or consumables on such instruments over the Feasibility Period. If bioMérieux exercised its right to develop an instrument independently, this right would continue throughout the development period to the end of the term of the 2016 Amendment related to independently developed instruments. +· +bioMérieux retained an option (the Option) to obtain worldwide distribution rights to the HD‑1 floor standing instrument in the applicable fields. The Option was exercisable over a three year period and upon exercise, the Company and bioMérieux were required to negotiate, in good faith, a distribution agreement that would include a specified upfront payment. +The 2016 Amendment included a cash payment of $2.0 million from bioMérieux which was paid in January 2017. +On September 6, 2018, bioMérieux notified the Company that it was terminating the Amended JDLA, forfeiting any future IVD licensing rights to the Company’s Simoa technology and enabling the Company to consolidate and regain control of all Simoa IVD licensing and intellectual property rights. +Accounting assessment +Prior to the execution of the 2016 Amendment, the Company was recognizing revenue over the estimated period of performance of the ongoing units of accounting (Initial Assay Assistance, Benchtop Assistance, and JSC). As a +F-34 +Table of Contents +result, the Company recognized $0.2 million and $0.2 million in revenue for the years ended December 31, 2016 and 2015, respectively. At the date of the execution of the 2016 Amendment, the Company had $1.2 million in deferred revenue related to the JDLA. Upon the execution of the 2016 Amendment, all undelivered elements and contingent consideration of the JDLA were cancelled. The Company determined the 2016 Amendment should be accounted for as a modification to the JDLA and the balance of deferred revenue prior to the 2016 Amendment should be included as allocable consideration under the 2016 Amendment resulting in total allocable consideration of $3.2 million. The Company recorded an increase to deferred revenue upon receipt of the $2.0 million during the three months ended March 31, 2017. +The Company has determined that the deliverables included under the 2016 Amendment are rights to the L1DR software, training and rights to future technology improvements for L1DR Software, rights to all future technological improvements related to the Simoa technology, and participation on joint committees. +The Company determined that the L1DR and rights to unspecified technology improvements (the "L1DR Unit of Accounting") includes the sale of software and software related elements and therefore should be accounted for under ASC 985‑605 —Software Revenue Recognition . The Company cannot demonstrate Vendor Specific Objective Evidence (VSOE) of fair value for the ongoing obligation to provide unspecified technology improvements. Therefore, the deliverables in the L1DR Unit of Accounting cannot be separated. The Company has applied the combined service approach and the consideration allocated to this unit of accounting is being recognized ratably over the estimated period of performance, which has initially been determined to be estimated to be the three year Feasibility Period. This will be reevaluated each period to determine if there are any changes to the estimated period of performance. +The Company concluded that the rights to future technology improvements for the Simoa technology and the participation on joint committees represented a second unit of accounting (the "Instrument Know How Unit of Accounting"). The deliverables in the Instrument Know How Unit of Accounting are considered non-software deliverables that are subject to ASC 605‑25 and will be delivered over time on a when and if available basis. Revenue is being recognized on a straight line basis over the estimated period of performance, which has initially been determined to be the three year Feasibility Period. This period will be reevaluated each period to determine if there are any changes to the period of performance. +The Option is considered substantive as the Company is at risk with regard to whether bioMérieux will exercise the Option. In addition, the Option exercise payment payable by bioMérieux upon exercise is not priced at a significant and incremental discount. Accordingly, the Option is not considered a deliverable at the inception of the arrangement and the associated Option exercise payment is not included in allocable arrangement consideration. +Under the 2016 Agreement the Company is eligible to receive royalties on net sales of assays sold by bioMérieux in the mid to high single digits, and to receive low double digit royalties on sales of instruments by bioMérieux based on manufactured cost. No royalties have been recognized through December 31, 2019. +Upon termination of the agreement, the Company no longer held an obligation to bioMérieux related to the initial agreement or the amendment to the agreement. As such, the Company immediately recognized all remaining deferred revenue related to the agreements as of the date of termination. +Uman has entered into certain licenses with other companies for use of Uman’s technology. These licenses have royalty components from which the Company earns and recognizes royalty revenue throughout the year. The Company recognized revenue of $0.2 million and $2.1 million for the years ended December 31, 2019 and 2018, respectively, as collaboration revenue. +Evaluation and option agreements and license agreement +In 2015, the Company entered into three agreements, for three separate fields, with a diagnostic company for the evaluation of the Company’s Simoa technology. These agreements each allowed for the option to negotiate a license agreement. In return, the Company received non-refundable payments totaling $2.0 million. In December 2016, the diagnostic company exercised one of its options and the parties entered into a license agreement in one of the fields. This +F-35 +Table of Contents +agreement has a one-time non-refundable license fee of $1.0 million and the right to receive running low single digit royalties on licensed products. The negotiation periods for the other two agreements were extended and the negotiations remain ongoing. +For each of the three fields, the right to evaluate the technology, the right to negotiate a license to the technology, and the undelivered license to the technology represents a combined unit of accounting, and the licenses to each of the three fields each have standalone value. The Company has allocated the allocable arrangement consideration based on the relative selling price of each unit of accounting. The best estimated selling price of each of the three options was determined to be representative of the contractual amount paid for each option. The Company defers the amounts allocated to each of the three options until the corresponding license is delivered or, if no license agreement is executed and delivered, when the negotiations for each option terminates. +Upon execution of the license in one of the fields in December 2016, the $1.0 million license fee, in addition to the $0.8 million allocated to the option for this field, resulted in a total of $1.8 million of consideration being recognized as revenue as there were no remaining undelivered performance obligations. Because the negotiations remain ongoing with respect to the other two fields, the consideration allocated to these options of $1.2 million has been deferred and is recorded as deferred revenue as of December 31, 2019. +In December 2018 the Company entered into an option agreement for the rights to negotiate an exclusive agreement with the diagnostic company. In exchange for the rights to negotiate an exclusive agreement, the Company will receive $0.5 million in consideration. As the right to negotiate with the Company has not been executed, the consideration from this agreement is deferred until the sooner of the execution of the contract or the end of the option period. As the option has not been exercised as of December 31, 2019, the $0.5 million is recorded as deferred revenue. +As of December 31, 2019 the Company has $1.7 million of deferred revenue related to ongoing negotiations with the diagnostics company. +14. Employee benefit-plans +The Company sponsors a 401(k) savings plan for employees. The Company may make discretionary contributions for each 401(k) plan year. During the years ended December 31, 2019 and 2018 the Company made contributions of $0.5 million and $0.1 million, respectively. During the year ended December 31, 2017, the Company did not make any contributions. +15. Business combinations +Aushon BioSystems,Inc. +On January 30, 2018, the Company completed the acquisition of Aushon pursuant to an Agreement and Plan of Merger dated January 30, 2018. The Company acquired Aushon to complement its existing product line, improve its existing research and development capabilities in assay development and software engineering, and expand its customer base. The acquisition of Aushon was accounted for as a business combination and the Company has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. +In connection with the closing of the acquisition of Aushon, the Company paid $3.2 million at closing, and an additional $0.8 million in July 2018, the six-month anniversary of the acquisition date. +F-36 +Table of Contents +The following table presents the allocation of the purchase consideration for the transaction as of January 30, 2018 including the allocation of the purchase consideration (in thousands): +Fair value of consideration transferred: +Cash +$ +3,200 +Obligation to issue cash +800 +Total acquisition consideration +$ +4,000 +Fair value of assets acquired and liabilities assumed: +Cash and cash equivalents +$ +199 +Accounts receivable +210 +Inventory +828 +Prepaid expenses +71 +Property and equipment and other non-current assets +180 +Intangible Assets +2,950 +Goodwill +1,308 +Total assets acquired +5,746 +Contractual obligations +(1,155) +Accounts payable and accrued liabilities +(591) +Net assets acquired +$ +4,000 +The intangible assets identified in the purchase price allocation discussed above include developed technology, tradenames and customer relationships. Tradenames are amortized over the useful life on a straight-line basis, while developed technology and customer relationships are amortized over their respective useful lives on an accelerated basis reflecting the period of expected derived benefits of the underlying assets. Developed technology consists of products that have reached technological feasibility and trade names represent acquired company and product names. To value the developed technology and trade name assets, the Company utilized a relief from royalty method. Under the methodology, fair value is calculated as the discounted cash flow savings accruing to the owner for not having to pay the royalty. Key assumptions included expected revenue attributable to the assets, royalty rates, discount rate and estimated asset lives. Customer relationships represent the underlying relationships with certain customers to provide ongoing services and continued product sale opportunities. The Company utilized excess earnings methodology to derive the fair value of the customer relationships. Key assumptions included expected attrition of customer's rates, operating income margins and discount rate. The Company used a risk-adjusted discount rate of 14.4% in determining the fair value of the intangible assets. +The goodwill recorded as a result of the acquisition of Aushon represents the strategic benefits of growing the Company's product portfolio and the expected revenue growth from increased market penetration from future products and customers. None of the goodwill recorded is tax deductible for income tax purposes. +The Company incurred a total of $0.1 million in transaction costs in connection with the transaction, which were included in selling, general and administrative expense within the consolidated statement of operations for the year ended December 31, 2018. +UmanDiagnostics AB +On August 1, 2019, the Company completed its acquisition of Uman for an aggregate purchase price of $21.2 million, comprised of (i) $15.7 million in cash plus (ii) 191,152 shares of common stock (representing $5.5 million based on the closing prices of the Company’s common stock on the Nasdaq Global Market on July 1, 2019 and August 1, 2019, the dates of issuance). The acquisition of Uman closed with respect to 95% of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5% of the outstanding shares of capital stock of Uman on August 1, 2019. +Uman supplies Nf-L antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance +F-37 +Table of Contents +the development of therapeutics and diagnostics for neurodegenerative conditions. With the acquisition of Uman, the Company has secured a long-term source of supply for a critical technology. This acquisition was considered a business acquisition for accounting purposes. +The Company has accounted for the acquisition of Uman as a purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets and liabilities of Uman are recorded as of the acquisition date of July 1, 2019, at their respective fair values, and consolidated with those of the Company. +The Company has preliminarily allocated the purchase price to the net tangible and intangible assets based on their estimated fair values as of July 1, 2019. As such, the fair value of the assets acquired and liabilities assumed, including intangible assets, presented in the table below are provisional and will be finalized in a later period once the fair value procedures are completed. Goodwill established as a result of the Uman acquisition is not tax deductible in any taxing jurisdiction. +The following table summarizes the preliminary purchase price allocation, net of $1.2 million in cash and cash equivalents acquired (in thousands): +Purchase price: +Cash and stock paid +$ +21,217 +Cash and cash equivalents acquired +1,221 +Purchase price, net +19,996 +Assets (liabilities) acquired: +Accounts receivable +$ +638 +Inventory +1,680 +Prepaids and other current assets +114 +Property and equipment +33 +Intangibles +13,450 +Goodwill +8,111 +Accounts payable +(20) +Accrued expense and other current liabilities +(871) +Deferred tax liabilities +(3,139) +Total +$ +19,996 +Revenue and net income related to Uman’s operations were $1.1 million and less than $0.1 million, respectively, for the six months following the July 1, 2019 acquisition date, and is included in the Company’s consolidated statements of operations for the year ended December 31, 2019. +The following unaudited pro forma information presents the condensed consolidated results of operations of the Company and Uman for the years ended December 31, 2019 and 2018 as if the acquisition of Uman had been completed on January 1, 2018. These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments that reflect pro forma results of operations, such as increased amortization for the fair value of acquired intangible assets, increased cost of sales related to the inventory valuation adjustment, and adjustments relating to the tax effect of combining the Company and Uman businesses. +F-38 +Table of Contents +The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company and Uman. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of the results of operations that actually would have been achieved had the acquisition occurred as of January 1, 2018, nor are they intended to represent or be indicative of future results of operations (in thousands): +Years ended December 31, +2019 +2018 +Revenue (unaudited) +$ +57,597 +$ +38,753 +Pre-tax loss (unaudited) +$ +(38,636) +$ +(33,894) +During the year ended December 31, 2019, the Company incurred $1.9 million in costs associated with the acquisition of Uman. Costs associated with the acquisition of Uman are recorded as selling, general, and administrative expenses within the consolidated statements of operations. +16. Goodwill and intangible assets +As of December 31, 2019 the carrying amount of goodwill was $9.4 million. The following is a rollforward of the Company’s goodwill balance (in thousands): +Goodwill +Balance as of December 31, 2018 +$ +1,308 +Goodwill acquired +8,111 +Cumulative translation adjustment +(66) +Balance as of December 31, 2019 +$ +9,353 +Acquired intangible assets consist of the following (dollars in thousands): +December 31, 2019 +Gross +Cumulative +Net +Weighted +Estimated Useful +Carrying +Accumulated +Translation +Carrying +Average +Life (in years) +Value +Amortization +Adjustment +Value +Life R emaining +Know-how +8.5 +$ +13,000 +$ +(767) +$ +(99) +$ +12,134 +8.00 +Developed technology +7 +1,650 +(737) +— +913 +5.09 +Customer relationships +8.5 - 10 +1,360 +(421) +(1) +938 +8.08 +Non-compete agreements +5.5 +340 +(34) +(2) +304 +5.00 +Trade names +3 +50 +(32) +— +18 +1.09 +Total +$ +16,400 +$ +(1,991) +$ +(102) +$ +14,307 +December 31, 2018 +Gross +Cumulative +Net +Weighted +Estimated Useful +Carrying +Accumulated +Translation +Carrying +Average +Life (in years) +Value +Amortization +Adjustment +Value +Life R emaining +Developed technology +7 +$ +1,650 +$ +(378) +$ +— +$ +1,272 +6.08 +Customer relationships +10 +1,250 +(209) +— +1,041 +9.08 +Trade names +3 +50 +(15) +— +35 +2.08 +Total +$ +2,950 +$ +(602) +$ +— +$ +2,348 +The Company acquired $13.5 million of intangible assets in the Uman acquisition, of which $13.0 million was assigned to know-how, $0.4 million was assigned to non-compete agreements, and $0.1 million was assigned to customer relationships. The know-how and customer relationships intangible assets are being amortized on a straight-line basis over an 8.5 year amortization period, and the non-compete agreement intangible asset is being amortized on a straight-line basis over a 5.5 year amortization period. In total, the weighted-average amortization period for these intangible assets is 8.4 years. +F-39 +Table of Contents +The Company is currently evaluating the fair value of assets acquired and liabilities assumed from the Uman acquisition, including intangible assets and their related amortization periods. As such, the $13.5 million in intangible assets presented in the table above are provisional and will be finalized in a later period once the fair value procedures are completed. +Know-how consists of the processes and procedures to produce Uman’s products. Customer relationships represent the underlying relationships with certain customers to provide continued product sale opportunities. The Company utilized excess earnings methodology to derive the fair value of the customer relationships. The Company is currently evaluating the fair value of assets acquired and liabilities assumed from the Uman acquisition, including intangible assets and their related amortization periods. +The Company recorded amortization expense of $1.4 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively. No amortization expense was recognized in the year ended December 31, 2017 as the intangible assets are a result of the purchase of Aushon in January 2018 and Uman in July 2019. Amortization of developed technology is recorded within research and development expenses, amortization of customer relationships is recorded within selling, general, and administrative expenses, amortization of trade names is recorded within selling, general, and administrative expenses, amortization of non-compete agreements is recorded within selling, general, and administrative expenses, and amortization of know-how is recorded within cost of goods sold. +Future estimated amortization expense of acquired intangible assets as of December 31, 2019 is as follows (amounts in thousands): +For the Years Ended December 31, +Estimated Amortization Expense +2020 +$ +2,110 +2021 +2,013 +2022 +1,930 +2023 +1,848 +2024 +1,733 +Thereafter +4,673 +$ +14,307 +17. Related party transactions +bioMérieux is a customer through its Joint Development and License Agreement and also a holder of the Company’s common stock. bioMérieux formerly also had a designee on the Company’s Board of Directors. On September 6, 2018, bioMérieux notified the Company that it was terminating the Amended JDLA. The termination of the agreement resulted in the immediate recognition of the remaining deferred revenue. The Company recognized revenue from bioMérieux related to the Amended JDLA of less than $0.1 million, $2.1 million, and $1.1 million in the years ended December 31 2019, 2018, and 2017, respectively. +As described in Note 9, in June 2007, the Company entered into a license agreement for certain intellectual property with Tufts. Tufts is a related party to the Company due to Tuft’s equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. During the years ended December 31, 2019, 2018, and 2017 the Company recorded royalty expense of $1.0 million, $0.7 million, and $0.5 million, respectively, in cost of product revenue on the consolidated statements of operations. +During the year ended December 31, 2017, Harvard University became a related party because a member of the Company’s Board of Directors is affiliated with Harvard University. Revenue recorded from sales to Harvard University was $0.1 million for the year ended December 31, 2019, and less than $0.1 million for each of the years ended December 31, 2018 and December 31, 2017. +On November 28, 2018, the Company entered into a sponsor agreement with Powering Precision Health (PPH), a 501(c)6 not-for-profit entity of which an executive of the Company is a board member, through December 31, 2018. The agreement committed a maximum of $120,000 in funds and services to be provided to PPH for the term of the +F-40 +Table of Contents +agreement. On November 14, 2019, the Company entered into the first amendment to the PPH sponsorship agreement. The agreement amended the $120,000 annual committed maximum amount to $200,000 for the annual committed amount. The agreement is terminable by either party and does not bind the Company to beyond the term of the agreement. For the years ended December 31, 2019 and 2018, the Company had total contributions of $0.1 million and less than $0.1 million, respectively. +18. Restricted cash +The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance the terms of the Letter of Credit in the lease agreement. The $1.0 million Letter of Credit drawable by the lessor under specifically outlined conditions within the lease, which are primarily related to rent payments. The amount of the Letter of Credit will be reduced at 41 and 65 months after the commencement date of the lease to $750,000 and then $250,000, respectively. +The Company had $1.0 million of restricted cash as of December 31, 2019 and 2018, respectively. +19. Quarterly data (Unaudited) +(Amounts in thousands, except share and per share data) +2019 +Q1 +Q2 +Q3 +Q4 +Total Year +Product revenue +$ +9,547 +$ +8,776 +$ +10,737 +$ +11,431 +$ +40,491 +Service and other revenue +2,790 +4,760 +4,207 +4,302 +16,059 +Collaboration and license revenue +— +— +— +184 +184 +Total revenue +12,337 +13,536 +14,944 +15,917 +56,734 +Costs of goods sold: +Cost of product revenue +4,248 +4,455 +5,513 +6,684 +20,900 +Cost of services and other revenue +2,082 +2,150 +2,398 +2,368 +8,998 +Total costs of goods sold and services +6,330 +6,605 +7,911 +9,052 +29,898 +Gross profit +6,007 +6,931 +7,033 +6,865 +26,836 +Operating expenses: +Research and development +3,852 +4,016 +3,924 +4,398 +16,190 +Selling, general and administrative +11,512 +13,429 +13,352 +13,953 +52,246 +Total operating expenses +15,364 +17,445 +17,276 +18,351 +68,436 +Loss from operations +(9,357) +(10,514) +(10,243) +(11,486) +(41,600) +Interest income (expense), net +21 +42 +282 +282 +627 +Other income (expense), net +(47) +(68) +(34) +139 +(10) +Income tax benefit (provision) +(22) +(23) +125 +107 +187 +Net loss +$ +(9,405) +$ +(10,563) +$ +(9,870) +$ +(10,958) +$ +(40,796) +Net loss per share, basic and diluted +$ +(0.42) +$ +(0.46) +$ +(0.37) +$ +(0.39) +$ +(1.63) +Weighted-average common shares outstanding, basic and diluted +22,422,960 +23,213,653 +26,627,831 +28,021,957 +25,090,708 +F-41 +Table of Contents +2018 +Q1 +Q2 +Q3 +Q4 +Total Year +Product revenue +$ +4,745 +$ +5,200 +$ +5,962 +$ +7,458 +$ +23,365 +Service and other revenue +2,507 +3,174 +3,017 +3,419 +12,117 +Collaboration and license revenue +269 +269 +1,612 +— +2,150 +Total revenue +7,521 +8,643 +10,591 +10,877 +37,632 +Costs of goods sold: +Cost of product revenue +2,773 +2,945 +3,277 +3,734 +12,729 +Cost of services and other revenue +1,576 +1,725 +1,719 +1,935 +6,955 +Total costs of goods sold and services +4,349 +4,670 +4,996 +5,669 +19,684 +Gross profit +3,172 +3,973 +5,595 +5,208 +17,948 +Operating expenses: +Research and development +3,644 +3,705 +4,411 +4,045 +15,805 +Selling, general and administrative +6,691 +7,579 +8,846 +10,577 +33,693 +Total operating expenses +10,335 +11,284 +13,257 +14,622 +49,498 +Loss from operations +(7,163) +(7,311) +(7,662) +(9,414) +(31,550) +Interest income (expense), net +(24) +16 +30 +24 +46 +Other income (expense), net +(15) +(48) +(25) +81 +(7) +Income tax benefit (provision) +— +— +— +(25) +(25) +Net loss +$ +(7,202) +$ +(7,343) +$ +(7,657) +$ +(9,334) +$ +(31,536) +Net loss per share, basic and diluted +$ +(0.33) +$ +(0.34) +$ +(0.35) +$ +(0.42) +$ +(1.43) +Weighted-average common shares outstanding, basic and diluted +21,788,605 +21,890,978 +22,670,786 +22,221,305 +21,994,317 +20. Subsequent events +The Company had no significant subsequent events for the period December 31, 2019 through the filing date of this Annual Report on Form 10-K. +F-42 \ No newline at end of file diff --git a/raw/filings/0001503274/2019/0001558370-20-002676/filing_metadata.csv b/raw/filings/0001503274/2019/0001558370-20-002676/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..366dabe1fc8122d1d8a24815f84b640e2f396d26 --- /dev/null +++ b/raw/filings/0001503274/2019/0001558370-20-002676/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001503274,QTRX,Quanterix Corp,10-K,2020-03-13,2019-12-31,2020-03-13T21:04:06.000Z,0001558370-20-002676,qtrx-20191231x10k.htm,10-K,17114056,1,0,https://www.sec.gov/Archives/edgar/data/1503274/000155837020002676/qtrx-20191231x10k.htm,https://www.sec.gov/Archives/edgar/data/1503274/000155837020002676/,2019,2019,1 diff --git a/raw/filings/0001503274/2019/0001558370-20-002676/item1.txt b/raw/filings/0001503274/2019/0001558370-20-002676/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..5bb591da67e5468ac3b55fc09393c217cfd085e1 --- /dev/null +++ b/raw/filings/0001503274/2019/0001558370-20-002676/item1.txt @@ -0,0 +1,457 @@ +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next generation, ultra‑sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead‑based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We are currently focusing on protein detection, which we believe is an area of significant unmet need and where we have significant competitive advantages. However, in addition to enabling new applications and insights in protein analysis, our Simoa platforms have also demonstrated applicability across other testing applications, including detection of nucleic acids and small molecules. +We believe that our Simoa platforms are the most sensitive commercially available protein detection platforms and significantly advance ELISA technology, which has been the industry standard for protein detection for over 40 years. Proteins are complex molecules that are required for the structure, function and regulation of the body’s tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes can produce over 100,000 different proteins, approximately 10,500 of which are known to be secreted in blood. Accordingly, while research on nucleic acids provides valuable information about the role of genes in health and disease, proteins are more prevalent and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, reflecting the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. +Researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease‑ or injury‑elevated levels. We believe that Simoa’s sensitivity offers a new way to monitor healthy individuals and detect proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical signs and symptoms have appeared. +Our Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited in more than 675 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over 650 customers across our end markets, and includes 19 of the 20 largest biopharmaceutical companies. +Our Market Opportunities +Our Simoa platforms have applications across the life science research, diagnostics and precision health screening markets. Our initial target market has been the life science research market, in particular neurology and oncology. According to estimates in the Third‑Party Research Report, we believe that the current addressable neurology and oncology life science research market is approximately $1.1 billion per year, and the total life science research market is approximately $3 billion per year and has the potential to reach as much as $8 billion per year. However, as +1 +Table of Contents +our customers continue to gain experience with our proprietary Simoa technology, we believe the opportunity to access markets beyond research, such as diagnostics and precision health screening, will be significant. The Third‑Party Research Report also estimates that the diagnostic and precision health screening markets have the potential to reach an aggregate of more than $30 billion per year. +Life Science Research +Our initial target market has been the large and growing life science research market. We believe our Simoa platforms are well‑positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. By substantially lowering the limit of detection of protein biomarkers, we believe that Simoa is penetrating the existing market for protein analysis and holds potential to significantly grow the life science research market as researchers expand their research into the diseases associated with the thousands of proteins that were previously undetectable. Simoa also enables earlier detection of the proteins that are currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. As an indication of the market’s acceptance of our technology, biopharmaceutical researchers are also integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. In addition to enabling new applications and insights in protein analysis, our Simoa bead‑based technology can be used to detect other analytes, such as nucleic acids and small molecules, which expands our market opportunity. We believe that this technology has the potential to ultimately provide the same sensitivity as polymerase chain reaction, or PCR, which is the most commonly used technology for nucleic acid detection, without the distortion and bias issues associated with amplification used in PCR. +Diagnostics +We believe the diagnostic market represents a significant commercial opportunity for our Simoa technology as well. We believe existing diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa. We also believe that the ultra‑sensitive protein detection provided by Simoa can enable the development of a new category of non‑invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +Simoa technology also has significant potential in the emerging field of companion diagnostics. Drug developers can use Simoa to stratify patients into categories, enabling selection of those patients for whom a drug is expected to be most effective and safe. Not only does Simoa have the potential to be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity may also enable the development of companion diagnostics based on protein biomarkers that can regularly monitor whether an approved drug is having the desired biological effect, enabling doctors to quickly and efficiently adjust the course of treatment as appropriate. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of proteins in low abundance that are undetectable using conventional, analog immunoassay technologies may enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +Simoa products sold or used in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. To date, we have not received or applied for regulatory approvals for +2 +Table of Contents +Simoa products. See “Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement” and “—Government Regulation” for a more detailed discussion regarding the regulatory approvals that may be required. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme‑linked immunosorbent assay, or ELISA, technology, which has been the most widely used method of detection of proteins for over 40 years. Given our target customers’ familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. Our Simoa bead‑based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to our bead‑based technology’s unprecedented sensitivity. In January 2018, we acquired Aushon BioSystems, Inc., or Aushon, and its proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to provide the same Simoa sensitivity found in our Simoa bead‑based platform. We currently offer the following three Simoa instruments, which we believe are the most sensitive protein detection platforms commercially available today: +· +HD‑X : We commercially launched our HD‑X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD‑X is based on our bead‑based technology, and assays run on the HD‑X are fully automated. We believe the full automation of the HD‑X provides us with an additional significant competitive advantage with biopharmaceutical customers. +· +SR‑X : We commercially launched our SR‑X instrument in December 2017. The SR‑X utilizes the same Simoa bead‑based technology and assay kits as the HD‑1 in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of potential applications. +· +SP‑X : We commercially launched our SP-X instrument in April 2019. The SP‑X is based on our planar array technology, which allows for significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The current menu of approximately 80 analyte‑specific single‑plex and multi‑plex bead‑based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 100 biomarkers ranging from 1‑10 analytes per assay in the areas of immunology and oncology research. We intend to continue to increase the number of Simoa biomarker assays across our platforms. In addition, both the bead‑based platform and the planar array platform allow ease and flexibility in assay design, enabling our customers to develop their own in‑house assays, called “homebrew” assays. +We also provide contract research services for customers through our CLIA‑certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 800 projects for approximately 200 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +In addition, in August 2019, we completed the acquisition of UmanDiagnostics AB, or Uman, a company located in Umeå , Sweden, that supplies neurofilament light (Nf-L) antibodies and Nf-L ELISA kits. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Nf-L has seen a dramatic growth as a neurologicval biomarker in the last three +3 +Table of Contents +years since we developed the first assay that could reliably measure Nf-L in blood using Uman’s antibodies and our Simoa technology. This innovation allowed research, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly and has led many of the world’s foremost neurology researchers and clinicians to conclude that Nf-L may be one of the most clinically relevant brain biomarkers available today. Despite significant efforts by us and others to identify or develop an alternative source of antibodies, the Uman Nf-L antibodies remain the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. The following graphic depicts the sensitivity of the Uman antibodies to detect Nf-L in blood and CSF compared to over a dozen other antibody pairs tested by Quanterix: +The superiority of the Uman antibodies is further evidenced by the fact that, to date, in nearly 500 publications relating to the detection of Nf-L in CSF or blood, over 75% used the Uman antibodies, and in over 180 publications relating to the detection of Nf-L in blood, 100% used the Uman antibodies. +The Uman acquisition s ecures the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services, provides us with additional revenue opportunities via the sale of the Nf-L antibodies and Nf-L ELISA kits, and positions us to capitalize on significant growth opportunities with Nf-L applications in Alzheimer’s disease, multiple sclerosis, and other neurodegenerative conditions. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide (excluding certain Nordic countries). We have an extensive base of customers in world class academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Competitive Strengths +We believe that our competitive strengths include the following: +· +Proprietary ultra‑sensitive Simoa digital immunoassay technology platforms, that enable researchers and clinicians to obtain information from less invasive procedures in smaller sample sizes. We believe our Simoa platforms are the most sensitive commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our +4 +Table of Contents +Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. We believe that sensitivity is so important that we have implemented a research and development effort with a goal to increase the sensitivity of our Simoa technology 100‑fold by the end of 2021. +· +Technology platforms that leverage and improve upon industry standard ELISA technology. Simoa uses the basic principles of conventional bead‑based ELISA immunoassay technology. Adding digital capability to this industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers’ familiarity with the core ELISA technology, our Simoa platforms are easily integrated with existing customer workflows including data analysis. +· +Deep and expanding scientific validation. Our Simoa technology has been cited in more than 675 scientific publications, including JAMA Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. We have established relationships with key opinion leaders, and our growing base of over 650 customers includes some of the world’s leading academic and government research institutions as well as 19 of the 20 largest biopharmaceutical companies. +· +Leading position in market solidified by robust customization capabilities, assay design flexibility and automation of our HD‑X instrument. Our technical capabilities and expertise allow our customers to design high‑quality, customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead‑based and planar array platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD‑X instrument provides fully automated analysis from sample introduction to analytical results, and our proprietary array approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater throughput and lab efficiency. +· +Highly attractive business model that leverages growing installed base of instruments. As we continue to grow our installed instrument base, optimize workflows and expand our assay menu, we expect to increase our revenues derived from consumables. The integration of our technology in our customers’ projects also provides ongoing sales of assays and consumables, resulting in a growing revenue stream. Our consumables revenue increased to $25.6 million in 2019 from $13.8 million in 2018 and $7.6 million in 2017, and represented approximately 45% of our total revenue in 2019. +· +Our highly experienced senior management team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our strategy to achieve this includes: +· +Focus on the highly attractive, expanding market for protein detection and analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a +5 +Table of Contents +person’s body in real time. Our technology provides a unique bridge between understanding the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and drug development. +· +Continue to drive adoption of our Simoa technology in the life science research market in the near-term, and the diagnostics and precision health screening markets in the long-term. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We also believe Simoa technology has the capability to enable the development of a new category of non‑invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. In the precision health screening market, we believe that Simoa technology has the potential to someday be used to monitor biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of disease. +· +Leverage the growing importance of Nf-L as a biomarker to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of Nf-L as a neuro biomarker has increased significantly in the last three years since we developed the first assay that could reliably measure Nf-L in blood. This allowed research of neirological disorders, previously limited primarily to CSF, to expand significantly, and many of the world’s foremost neurology researchers and clinicians believe that Nf-L may be one of the most clinically relevant brain biomarkers available today. To capitalize on the growing importance of this biomarker, in mid-2019, we acquired Uman and its proprietary Nf-L antibodies, which we believe are the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. We believe that this acquisition positions us to capitalize on significant growth opportunities with Nf-L applications in neurodegenerative conditions . +· +Grow into new markets organically with our customers and through strategic collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of some of the work that our customers are doing today in the research market. For example, Simoa’s unprecedented sensitivity has the potential to uncover research insights that could identify novel biomarkers, which could help stratify patients in clinical trials potentially leading to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. We believe this progression with our customers will help us move into new markets organically in a cost effective manner, while also retaining significant upside. For example, following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary Nf-L antibodies, which will allow Siemens Healthineers to begin developing blood-based Nf-L clinical tests for future commercialization. Additionally, we currently have a partnership in place with a leading diagnostics company in the field of blood screening and plan to continue evaluating strategic collaborations that could help us access new markets . +· +Grow through strategic acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For example, in January 2018, we acquired Aushon and its proprietary sensitive planar array detection technology, which led to the development of our SP‑X instrument. In mid-2019, we also acquired Uman, securing the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services and positioning us to capitalize on the growing significance of Nf-L as a neurological biomarker. We expect that acquisitions will continue to be an important part of our strategy to increase scale, and we intend to pursue acquisitions to expand product offerings, strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +6 +Table of Contents +Industry Background +We intend to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. Our initial commercial strategy targets the large and growing life science research market, and we believe that the diagnostic market and the precision health screening market represent significant future commercial opportunities for Simoa. According to estimates in the Third‑Party Research Report, we believe the aggregate commercial opportunity across these markets has the potential to expand to up to $40 billion. +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and regulation of the body’s tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an organism’s proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot provide. +The human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, approximately 10,500 of which are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of much of the proteome has not been practical given the limited level of sensitivity of existing technologies. To date, across our platforms, we have developed assays that address approximately 145 protein biomarkers secreted or released in blood and CSF. +While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of environmental factors and lifestyle, such as diet and exercise, or provide insight into what is happening in a patient’s body in real time. For example, identical twins have the same genotype, but may develop different diseases over the course of their lifetime, largely due to environmental factors. +Much like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic research. With our ultra‑sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and well‑being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +Existing Technologies and Their Limitations +Protein Analysis +The enzyme‑linked immunosorbent assay, or ELISA, has been the most widely used method of sensitive detection of proteins for over 40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either directly, or indirectly through use of a conjugated secondary or “capture” antibody (sandwich ELISA). A specific “detection” antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final step, a +7 +Table of Contents +substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the graphic below: +Aside from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, Raman‑enhanced signal detection, immuno‑PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of what is estimated to be approximately 10,500 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of these approaches have limitations, including: +· +dilution of colored or fluorescent product molecules due to large volume of liquid in traditional‑sized wells, limiting sensitivity; +· +narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +· +low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +· +limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers aimed at more effectively detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become detectable. PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias into the data, potentially compromising the reliability of results, particularly at low concentrations. +8 +Table of Contents +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection sensitivity. +Simoa Bead‑Based Technology +Simoa bead‑based digital immunoassays utilize the basic principles of conventional bead‑based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme‑substrate reaction on all molecules in one well, Simoa bead‑based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead‑based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our Simoa bead‑based platform is highly flexible, designed to enable practical high‑sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead‑based technology detects proteins: +Simoa Bead‑Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead‑based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme‑linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white star in the graphic on the left). The enzyme associated with the enzyme‑linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the graphic). +9 +Table of Contents +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 microwells, each of which is large enough to accommodate only a single bead. +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our Simoa bead‑based technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on +10 +Table of Contents +earlier detection, monitoring, prognosis and, ultimately, prevention. We have also implemented a research and development effort with a goal to increase the sensitivity of our Simoa technology 100‑fold by the end of 2021. +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from a sample, and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while competitive platforms lose sensitivity when multiplexing is used. Multiplexing is achieved with our Simoa bead‑based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. While we have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the HD‑X, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of proteins in a single sample, we believe that the ability to multiplex above a 6‑plex and maintain single‑plex sensitivity and precision may be limited using bead‑based technology due to constraints in the number of bead‑containing wells for each plex that are imaged on the Simoa disk. In 2017, we commercially launched a Simoa neurology 4‑plex assay (Nf‑L, tau, GFAP and UCH‑L1) for the study of neurodegenerative conditions and traumatic brain injury. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost‑effectiveness. In the first quarter of 2020, we launched a new Simoa 6‑plex human cytokine Simoa bead‑based assay for the HD-X and SR-X instrument platforms. This assay is the only commercially available product supporting quantitative measurement of six key immunomodulatory cytokines (IFNg, IL-6, IL-10, IL-12p70, IL-17A and TNFa) at baseline levels in both normal healthy individuals and patient cohorts in therapeutic areas spanning cancer, autoimmune disease, neurodegeneration and infectious disease. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate‑based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme‑substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro‑spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +11 +Table of Contents +Our Simoa planar array platform is highly flexible, designed to enable practical high‑sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +A) +Analyte‑specifc capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96‑well microtiter plate. Each microspot contains capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) +Samples are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by washing the plate with a benchtop plate washer or manual wash manifold. +C) +A mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +D) +Streptavidin‑HRP (horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a washing step. +E) +A high‑sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to emit light. +F) +The plate is placed into the Quanterix SP‑X imaging system. A scientific‑grade CCD camera images the entire plate and all micro‑spots simultaneously. The low background of the plate surface and the high‑sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The SP‑X imaging software utilizes algorithms to optimize exposure time and combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +12 +Table of Contents +Below is an image of a 96‑well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We believe the Simoa planar array technology is well‑suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with ultra‑sensitive detection in a multiplex assay format. The figure below demonstrates 10‑plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) listed in femtogram per ml. +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, our Simoa bead‑based technology has also been used to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR‑based assays with the following benefits: +· +no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +13 +Table of Contents +· +reduced cross‑contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; and +· +the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water. +For detection of nucleic acids with our Simoa bead‑based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. This assay is pictured below: +Simoa has been used to detect short sequences of RNA, known as microRNA, that are important in a number of biological systems, and are widely used in innovative therapeutic and gene editing technologies. For example, the assay was used to detect microRNA‑122, or miR‑122, a marker of liver toxicity, from the serum of patients who had overdosed with acetaminophen. As shown in the graph below, these patients had elevated miR‑122 levels compared to healthy controls. +This approach suggests potential for applications for measuring drug‑induced liver injury for both safety testing of drugs in development and for monitoring of approved drugs. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. +14 +Table of Contents +Life Science Research +Our initial target market is the large and growing life science research market. We believe our Simoa platforms are well‑positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +As an indication of the market’s acceptance of our Simoa technology, researchers at pharmaceutical and biotechnology companies are integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non‑invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. In addition, researchers can also use Simoa to monitor a drug candidate’s unwanted effect on “off‑target” biomarkers and predict side effects, addressing the significant issue of drug toxicity, which is a leading cause of death in the United States. We estimate that our Simoa technology has been utilized in projects for over 800 clinical trials to date. +According to estimates in the Third‑Party Research Report, we believe that the current addressable neurology and oncology life science research market is approximately $1.1 billion per year, and the total the life science research market is approximately $3 billion per year and has the potential to reach as much as $8 billion per year. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra‑sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non‑invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +For example, researchers have conducted studies using Simoa that indicate that neurological biomarkers, including tau and Nf‑L, may someday be able to replace diagnostic imaging to diagnose traumatic brain injury, or TBI. Our Simoa assays for tau and Nf‑L are 3,500‑fold and 840‑fold more sensitive, respectively, than conventional ELISA technologies. Almost 90% of patients who visit U.S. hospital emergency rooms and receive a computerized tomography, or CT, scan show no structural brain injury. In addition, CT scans have approximately 100 times more radiation than a chest x‑ray, and are suspected of causing cancer in up to 29,000 people per year, underscoring the need for development of a safe and accurate blood‑based diagnostic test for TBI, which we believe may be enabled by our Simoa technology. +Simoa technology also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients to study for whom a drug is expected to be most effective and safe. Companion diagnostics have demonstrated the ability +15 +Table of Contents +to both improve the probability of approval and accelerate approval of new drugs. Not only could Simoa be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity can also enable the development of companion diagnostics based on protein biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This would quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing dosages or even switching therapies. +There has been significant interest from third parties to use our technology to develop applications for the diagnostic market. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention, enabling a “precision health” revolution. +We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +According to estimates in the Third‑Party Research Report, we believe that the total diagnostic and precision health screening markets addressable using Simoa technology have the potential to reach an aggregate of more than $30 billion per year upon receipt of the necessary regulatory approvals, which we have not yet begun the process to obtain. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses. In particular, we have focused on neurology and oncology, as well as cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra‑low levels, which have traditionally only been detectable in cerebrospinal fluid, or CSF, has the potential to rapidly advance neurology research and drug development, and transform the way brain injuries and diseases are diagnosed and treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood‑based diagnostic test. The challenge with developing blood‑based tests for the brain is that the blood‑brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of which are costly and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood‑brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of these neural biomarkers in the blood are so low that they are undetectable by conventional, analog immunoassay technologies. In 2017, we commercially launched a Simoa neurology 4‑plex assay (Nf‑L, tau, GFAP and UCH‑L1) for the study of neurodegenerative conditions and traumatic brain injury. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost‑effectiveness. +16 +Table of Contents +To date, there have been over 360 neurology-related scientific publications using our Simoa technologies, and we believe that ultra‑sensitive digital detection of neural related biomarkers in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including multiple sclerosis, Alzheimer’s disease, dementia, Parkinson’s disease, and TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. +Evidence of the potential clinical utility of Nf-L as a biomarker in neurological disease is progressing rapidly, in particular with respect to multiple sclerosis. At the 35 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) in September 2019, there were nearly 50 presentations in which our Simoa Nf-L assay was used. In one presentation, Novartis presented positive data from its Phase III ASCLEPIOS I and II studies of its multiple sclerosis drug candidate, ofatumumab. One of the secondary endpoints included serum levels of Nf-L as measured using our Simoa Nf-L assay. Novartis presented data that showed that, starting at three months after initiation of ofatumumab treatment, and then at 12 and 24 months timepoints, patients given ofatumumab had significantly lower blood levels of Nf-L, compared to those in the comparator arm of teriflunomide treated patients. +In another ECTRIMS presentation, Roche presented retrospective data from its Phase III OPERA I, OPERA, II AND ORATORIO trials of its approved multiple sclerosis drug OCREVUS (ocrelizumab). OCREVUS was only approved in 2017, but it has already become the multiple sclerosis market leader in its class, recording sales of $1.72 billion in the first half of 2019. By 2025, annual sales of the drug are estimated to reach $6.8 billion. In the data presented at ECTRIMS, it was shown that treatment with OCREVUS lowered blood Nf-L levels and increased proportion of patients reaching healthy donor range for Nf-L in both relapsing multiple sclerosis and primary progressive multiple sclerosis. Roche believes that this data helps advance the understanding of Nf-L as a potential biomarker of disease activity and for treatment monitoring, and may provide insight into the neuroprotective effects of the drug. +In an article published by Bjornevik et al in JAMA Neurology in September 2019, researchers presented data that showed that levels of serum Nf-L, as measured by the Simoa Nf-L assay, were increased six years before the clinical onset of multiple sclerosis. The researchers concluded that these data indicate that MS may have a prodromal phase lasting several years and that neuroaxonal damage occurs during this phase, emphasizing the importance of early diagnosis and treatment. +In 2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for the neurological biomarker Nf‑L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer’s disease as currently established CSF biomarkers. The study was a major study of almost 600 patients from the Alzheimer’s Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf‑L measurements compared with traditional CSF biomarkers. The diagnostic accuracy of the plasma Simoa Nf‑L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +17 +Table of Contents +In addition, Simoa plasma Nf‑L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer’s disease at baseline and during follow‑up. High plasma Nf‑L correlated with poor cognition and Alzheimer’s disease -related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf‑L may have clinical utility as a noninvasive biomarker in Alzheimer’s disease. +Traumatic brain injuries, or TBIs, lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as Nf‑L, tau, GFAP and UCH-L1, to more adequately address diagnosis of TBIs and overall brain health. +Leading researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high‑impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy, or CTE, which currently can only be diagnosed after death via a brain autopsy. A recent publication by a National Institute of Health researcher indicates that measuring tau in the blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +In 2016, Fast Company named Quanterix one of the “World’s Most Innovative Companies” for our work in concussion detection. We also were awarded two competitive grants from the NFL‑GE Head Health Challenge to advance this work in the detection and quantification of mild TBI. +We estimate that the total addressable market for Simoa technology in neurology has the potential to reach $5.3 billion across research, diagnostic and precision health screening indications. +Oncology +Our ultra‑sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Simoa technology was used in an unpublished scientific study that indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low cost, non‑invasive blood test. In this retrospective study, researchers found that Simoa assays resulted in significantly fewer false positives and false negatives than mammography. Inaccurate mammography can result in unnecessary stress, additional health care costs from follow up diagnostic mammograms, unnecessary biopsies and increased lifetime exposure to radiation. Researchers are also developing ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa technology, potentially replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, cost effective, accurate blood‑based health screens, further enabling the liquid biopsy market. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of immuno‑oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the immuno‑oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a set of 50 tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells +18 +Table of Contents +(T‑regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN‑gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN‑gamma assay. Additionally, we have developed an ultra‑sensitive assay for IL‑6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno‑oncology drugs and protocols. +We also believe residual cancer cell detection post‑surgery or post-treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a greater risk of reoccurrence post‑surgery due to residual cancer. For example, we have developed an ultra‑sensitive biomarker assay for Prostate Specific Antigen, or PSA, that is over 1,000‑fold more sensitive than conventional ELISA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five‑year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +We estimate that the total addressable market for Simoa in oncology has the potential to reach up to $22.7 billion across research, diagnostic and precision health screening indications. To date, there have been over 150 oncology-related scientific publications using our Simoa technologies. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti‑inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro‑inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +19 +Table of Contents +Our Simoa technology also has the potential to be used by companies developing anti‑inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn’s disease undergoing anti‑TNF‑α therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF‑α levels of the patients before and after treatment. These levels were all below the LoD of traditional immunoassays. +We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti‑inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making early stage detection more specific and widely available. +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +For example, we have developed a simple Simoa assay with more than 4,000‑fold greater sensitivity than conventional ELISA assays capable of detecting the HIV‑specific antigen, p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a commercially available nucleic acid testing method, as well as two +20 +Table of Contents +commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile ( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +We will continue to develop Simoa assays for pathogenic antigens that are competitive in sensitivity to PCR but more specific to the pathogenicity of the offending organism. We believe that these Simoa assays could also be invaluable tools for the development of anti‑infective drugs and treatment monitoring of anti‑viral and anti‑bacterial drugs. +Our Products and Services +Our Quanterix commercial portfolio includes research use only instruments, assay kits and other consumables, and contract research services offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD‑X + commercially launched the next‑generation HD‑X in the second half of 2019 +21 +Table of Contents +Product +Key attributes + Simoa bead‑based platform technology + most widely referenced ultra‑sensitive multiplex immunoassay platform on market + fully automated, floor‑standing instrument + wide dynamic range + multiplexing capability (up to 6-plex) with small sample volume + up to 400 samples per eight‑hour shift + homebrew capabilities +SR‑X + commercially launched in December 2017 + Simoa bead‑based platform technology + reader only, benchtop instrument with lower price point + same sensitivity, dynamic range and homebrew capabilities as HD‑X + multiplexing capability: SR‑X currently has up to 6‑plex capability + sample prep and assay protocol flexibility +SP‑X + commercially launched in April 2019 + Simoa planar array platform technology + reader only, benchtop instrument with lower price point + similar sensitivity, dynamic range and homebrew capabilities as HD‑1 + multiplexing capability: SP‑X currently has up to 10‑plex capability + sample prep and assay protocol flexibility +Simoa assays and other consumables + menu of approximately 80 analyte‑specific single‑plex and multi‑plex bead‑based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology + menu of Simoa planar array reagent kits includes approximately 100 biomarkers ranging from 1‑10 analytes per assay in the areas of immunology and oncology research + homebrew kits containing reagents and supporting user guides enabling customers to develop custom assays + proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead‑based assays +22 +Table of Contents +Product +Key attributes +Nf-L antibodies and Nf-L ELISA kits + sold through our wholly-owned subsidiary, Uman, which we acquired in 2019 + Nf-L capture/detection antibodies with unparalleled sensitivity and specificity + Nf-L ELISA kits for CSF; CE-certified in Europe; research use only (RUO) outside of Europe + licensing and supply arrangement with Siemens Healthineers that will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization +Services + contract research services provided through our Accelerator Laboratory + over 800 projects completed to date + extended warranty and service contracts + CLIA‑certified lab available +Instruments and Consumables +HD‑X +We commercially launched our HD‑X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1, our very first instrument, which was launched in January 2014. The HD-X was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD‑X uses our Simoa bead‑based technology and is the most sensitive automated multiplex protein detection platform commercially available. Assays for the HD‑X are fully automated (i.e. sample in to result out), and results for up to 66 samples are available in approximately one hour. We believe that this automation provides us an additional significant competitive advantage with pharmaceutical and biotechnology customers. Samples can be input into the instrument via 96‑well microtiter plates or sample tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +Specialized software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration of multiple biological molecules. The HD‑X software automates the processes for running the instrument and analyzing data from the user‑defined protocols. Proprietary image analysis software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to concentrations for the different biological molecules. +Following commercial launch of the HD-X, we initiated a trade-in program for installed HD-1 instruments that has been exceeding expectations. In the second half of 2019, we sold a total of 56 HD-X instruments, consisting of 26 new instruments and 30 based on HD-1 trade-ins. By the end of 2020, we expect that nearly 50% of the HD installed base will be HD-X instruments. +23 +Table of Contents +SR‑X +We commercially launched the SR‑X instrument in the fourth quarter of 2017. The SR‑X utilizes the same Simoa bead‑based technology and assay kits as the HD‑X in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra‑sensitive detection capabilities enabled by Simoa. +In contrast to the fully automated workflow of the HD‑X, the assay incubation and washing steps for the SR‑X are performed outside of the instruments using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The SR‑X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately 2.5 hours. +SP‑X +We commercially launched the SP‑X instrument in April 2019. The SP‑X uses the Simoa planar array technology developed initially by Aushon for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide the same Simoa sensitivity found in our Simoa bead‑based platform. The Simoa planar array technology utilizes a 96‑well microtiter plate with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar to the SR‑X, the assay prep workflow utilized for the SP‑X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid handling methods as the SR‑X. The SP‑X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 80 analyte‑specific single‑plex and multi‑plex assay kits for our bead‑based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 100 biomarkers ranging from 1‑10 analytes per assay in the areas of immunology and oncology research. +In addition to these assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in‑house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead‑based platform also includes our proprietary Simoa disks that are unique to our bead‑based platform, as well as cuvettes, and disposable tips. Our goal is to continue to add to our assay kits to extend our application base. +We have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to manufacturing and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu expansion goals. +Nf-L Antibodies and Nf-L ELISA Kits +In August 2019, we completed our acquisition of Uman. Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits for Nf-L detection in CSF. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance +24 +Table of Contents +the development of therapeutics and diagnostics for neurodegenerative conditions. Through Uman we sell proprietary Nf-L capture and detection antibodies, as well as two Nf-L ELISA kits for CSF, one of which is CE-certified in Europe. +Services +Through our Accelerator Laboratory, which includes a CLIA‑certified laboratory, we provide customers a contract research option. Researchers, academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, including: +· +Sample testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer’s needs and even large studies can be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +· +Homebrew assay development. Utilizing proprietary or commercially available reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +· +Custom development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +To date, we have completed over 800 projects for approximately 200 customers from all over the world using our Simoa platforms, including over 100 projects for clinical trials. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We also generate revenues through extended‑warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We have implemented a research and development program that aims to increase the sensitivity of our Simoa technology 100‑fold by the end of 2021. We are also focused on expanding our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third‑party distributors in additional major markets, including Australia, Brazil, China, Czech Republic, India, Israel, Japan, Lebanon, Mexico, Qatar, Saudi Arabia, Singapore, South Korea and Taiwan. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide (excluding certain Nordic countries). Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, +25 +Table of Contents +and technological advances in Simoa systems, workflows, and notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As of March 1, 2020, we had approximately 92 people employed in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia‑Pacific region countries such as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with Quanterix‑employed sales and support personnel. +Our sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and governmental research institutions. +In addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness of our technologies, demonstrate the benefits relative to existing technologies and accelerate adoption. We also seek to increase awareness of our products through participation at trade shows, academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +To develop a thought leadership position in the precision health arena, we have been a Platinum Sponsor of the annual Powering Precision Health Summit, or PPHS, since 2016. PPHS is an annual summit founded in 2016 by our President and Chief Executive Officer, Kevin Hrusovsky, that aims to gather many of the world’s top innovators, scientists, physicians, medical professionals, patient advocates, government officials, regulators and investors to debate and collaborate around crucial issues from neurology, oncology and cardiology to inflammation and infectious disease. At PPHS in 2016, there were 22 cutting edge scientific talks covering neurology, cardiology, oncology and inflammation. There were over 200 registered attendees, including senior scientists, patient advocates, investors, and potential partners. At PPHS in 2017, there were 37 scientific talks and over 425 registered attendees. At PPHS Europe in 2018, there were 18 scientific talks and over 150 registered attendees, and at PPHS Europe in 2019, there were over 40 scientific talks and over 250 registered attendees. We believe that sponsoring this event provides Quanterix significant marketing benefits. +Our systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and demonstrations with multiple people within an organization. Some potential customers conduct in‑depth evaluations of the system including running experiments in the Accelerator Laboratory and comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource the Simoa bead‑based instrument development and manufacturing with industry leaders, and to internally develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD‑X instrument is manufactured by STRATEC Biomedical AG, based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. See “—Key Agreements— +26 +Table of Contents +Development Agreement and Supply Agreement with STRATEC” for a description of our agreement with STRATEC. The SR‑X is manufactured by Paramit Corporation, based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements—Paramit Manufacturing Services Agreement” for a description of our agreement with Paramit. Installation of, and training on, our instruments is provided by our employees in the markets where we conduct direct sales, and by distributors in those markets where we operate with distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD‑X or the SR‑X, we would experience additional costs, delays and difficulties in doing so, and our business would be harmed. +The SP‑X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single‑source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. To mitigate this risk, we typically carry significant inventory of critical components. +Consumables +We assemble our assay kits for our bead‑based platform in our Billerica, Massachusetts facility. Reagents for our bead‑based assays include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single‑source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we have increased the shelf life of the vast majority of our bead‑based assays from six months to 12 months or more. +Simoa disks for our bead‑based platform are supplied through a single source supplier pursuant to a long‑term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. This agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead‑based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead‑based platform are commercially available. +We assemble our 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme‑based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single‑source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +Nf-L antibodies and Nf-L ELISA Kits +The storage of Uman’s proprietary Nf-L antibody producing hybridomas as well as the cultivation and purification of the antibodies is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s Nf-L ELISA kits. The antibody reagents are labeled and released to market after testing. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s Nf-L ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. All incoming goods are subject to receipt control and any deviations related to quality deficiencies are +27 +Table of Contents +registered. The kit components include buffers (sample diluent and wash solution), an ELISA 96-well plate coated with a capture antibody, detector antibody, streptavidine conjugate, substrate (TMB) and stop reagent. The kit components are labeled (either “RUO” or “CE”) and assembled. The final ELISA kit product is subject to quality control which include testing of human CSF quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months. +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement, or the Development Agreement, with STRATEC Biomedical Systems AG, pursuant to which STRATEC undertook the development of the Simoa HD instrument. Under the Development Agreement, we were required to pay a fee and issue to STRATEC warrants to purchase our equity securities, all of which have been exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The Development Agreement was amended in November 2016. The Amendment reduced our obligation to satisfy a minimum purchase commitment under the Supply and Manufacturing Agreement described below. Additionally, the parties agreed on additional development services for an additional fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with the final milestone due under the terms of the Development Agreement. The services were completed in and the final milestone payment was paid in the fourth quarter of 2019. +The Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC, or the Supply Agreement, pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The Supply Agreement was amended in November 2016 to reduce the number of HD instruments we are committed to procure from STRATEC. The instrument price stipulated in the Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The Supply Agreement is terminable by either party on 12 months’ notice to the other party, provided that neither party may terminate the Supply Agreement prior to the later of the seven year anniversary of the acceptance of the first prototype instrument and the purchase of the minimum number of instruments which we committed to procure. The Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement, or the Paramit Agreement, with Paramit Corporation, or Paramit. Under the terms of the Paramit Agreement, we engaged Paramit to produce and test our SR‑X instrument on an as‑ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed‑upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +28 +Table of Contents +The Paramit Agreement has an initial three‑year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then‑current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60‑day opportunity to cure the breach. +Competition +We compete with both established and development‑stage life science companies that design, manufacture and market instruments for protein detection, nucleic acid detection and additional applications. For example, companies such as Bio‑Techne, Luminex, MesoScale Diagnostics, Gyros, Nanostring, and others, have products for protein detection that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as Covance, Q2 Solutions, Myriad RBM, Monogram Biosciences, PPD Laboratories, and others, some of whom are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics and precision health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non‑invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research, diagnostic and precision health screening markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors in our target markets include: +· +sensitivity; +· +cost of instruments and consumables; +· +assay menu; +· +reputation among customers and key opinion leaders; +· +innovation in product offerings; +· +accuracy and reproducibility of results; and +· +customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead‑based technology, directed to general methods and devices for single molecule detection, originated at Tufts University, in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra‑sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from Tufts the relevant patent +29 +Table of Contents +filings related to these technologies. (See “—License Agreement with Tufts University” below). In addition to licensed patents, we have developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. We believe our proprietary platforms are a core strength of our business and our strategy includes the continued development of our patent portfolio. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of March 1, 2020, we had exclusively licensed 18 patents and one patent application from Tufts. These patents and patent applications include nine issued U.S. patents and one pending U.S patent application, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +A first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes six granted U.S. patents, one pending U.S. patent application, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non‑U.S. patents is February 20, 2027 or August 30, 2027. +A second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A third patent family licensed from Tufts is directed to methods for analyzing analytes using a sensor system with cross‑reactive elements. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 14, 2021. +A fourth patent family licensed from Tufts is directed to electro‑optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +As of March 1, 2020, we owned 21 issued U.S. patents and 14 pending U.S. patent applications, four pending Patent Cooperation Treaty applications, nine granted European patents and six pending European patent applications, nine granted Japanese patents, four granted Chinese patents and two pending Chinese patent applications, five granted Canadian patents and two pending Canadian patent applications, and four registered Hong Kong patent applications. +A first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads, including multiplexing. This patent family includes three granted U.S. patents and two pending U.S. patent applications, two granted European patent (nationalized and active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non‑U.S. patents is March 1, 2031. +A second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes four granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active +30 +Table of Contents +in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non‑U.S. patents is March 1, 2031. +A third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is September 28, 2028. +A fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 24, 2030. +A fifth patent family owned by us is directed to instruments and consumables. This patent family includes one granted U.S. patent and one pending U.S. patent application, two granted Japanese patents, one granted Chinese patent and two pending Chinese patent applications, three registered Hong Kong patent applications and one pending patent application in each of Europe, and Canada. The standard patent expiration date for any U.S. patents that may issue from this family is February 25, 2031, and for any non‑U.S. patents is January 27, 2032. +A sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending Patent Cooperation Treaty patent application. If we pursue protection by filing any national stage applications, the standard patent expiration date for any patents that may issue from this family will be in 2038. +We own or co‑own seven patent families directed to the measurement of particular types of analytes, including prostate specific antigen (PSA), β‑amyloid peptide, tau protein, toxin B of C. difficile , and DNA or RNA molecules. These families include one granted U.S. patent directed to methods for determining treatment protocols and/or a prognosis of a patient’s recovery from a brain injury based on measurements of tau protein in blood. Any patents that may issue from these patent applications would have standard expiration dates between 2032 and 2039. +With the acquisition of Aushon in January 2017, we acquired their patent portfolio for our planar array technology. As of March 1, 2020, the acquired patent portfolio includes at least nine issued U.S. patents and two pending U.S. patent applications, one granted Australian patent, three granted Canadian patents and one pending Canadian patent application, six granted European patents (each nationalized and active in between eight and 14 countries) and three pending European patent applications, three granted Japanese patents, and one registered Hong Kong patent application. +We have licensed additional patents and patent applications from third parties. +In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +31 +Table of Contents +License Agreement with Tufts University +In June 2007, as amended in April 2013 and August 2017, we entered into a license agreement with Tufts University, or Tufts, pursuant to which we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the Simoa bead‑based technology owned by Tufts, as well as a non‑exclusive license to related know‑how. The rights licensed to us are for all fields of use and are sublicensable for a fee. +Under the terms of the agreement, as amended, we paid a one‑time, non‑refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 amendment, we issued Tufts shares of our Series C‑1 Preferred Stock, which converted into shares of our common stock in connection with our initial public offering. We are required to pay Tufts low single‑digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The term of the license agreement will continue on a country‑by‑country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non‑exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non‑payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Our products are currently intended for research use only, or RUO, applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA. Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products fall under the FDA’s jurisdiction if they are used for clinical rather than research purposes. Consequently, our products are labeled “For Research Use Only.” +On November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only,” or the RUO/IUO Guidance. The purpose of an FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s 510(k) clearance, premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance is a statement of the FDA’s thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. We also +32 +Table of Contents +are not promoting or using our products in the development or promotion of laboratory developed test, or LDT, services. When we develop products for clinical use, we will do so in accordance with FDA requirements applicable to those products at that time. Separately, when we become aware that accredited or licensed clinical laboratories may be using our RUO products either for research or clinical uses, such as part of LDT services, in accordance with the regulations that apply to clinical laboratories, we will continue to review the labeling and promotion of our products for consistency with the RUO/IUO Guidance. +When our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post‑market surveillance, distribution, advertising and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification, or 510(k), and receive clearance from the FDA which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized until a premarket approval application, or PMA, is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent, or SE, to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA’s receipt of the 510(k), but it often takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre‑market approval. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. +This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down‑classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012, or FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the +33 +Table of Contents +reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in‑depth review of the submitted information. By statute, the FDA has 180 days to review the accepted application, although review of the application generally can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with its quality system regulations, or QSRs. New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and efficacy of the device. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption application, or IDE, and obtains approval of the IDE from the FDA. These clinical trials are also subject to the review, approval and oversight of an institutional review board, or IRB, at each clinical trial site. The clinical trials must be conducted in accordance with the FDA’s IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +· +establishment registration and device listing; +· +the QSR, which requires manufacturers, including third‑party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; +· +labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off‑label” uses and other requirements related to promotional activities; +· +medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur; +34 +Table of Contents +· +corrections and removal reporting regulations, which require that manufacture’s report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +· +post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device. +To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre‑scheduled and unannounced inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +Since our acquisition of Aushon in January 2018, we own and operate a CLIA certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and basic research). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health assessment and for the diagnosis, prevention, or treatment of disease. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by the Centers for Medicare & Medicaid Services (“CMS”), a CMS agent (typically a state agency), or, a CMS‑approved accreditation organization. +High complexity, CLIA‑certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered by nearly all complex laboratories for the last few decades as Laboratory Developed Tests, or LDTs, which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices. During 2010, the FDA publicly announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk‑based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced its framework and timetable for implementing this guidance. On November 18, 2016, the FDA announced it would not release final guidance at that time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach. On January 3, 2017, the FDA released a discussion paper outlining a possible risk‑based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. We cannot predict the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory approach by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of the FDA’s approach is unknown, it may be extensive and may result in significant change. +35 +Table of Contents +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out‑of‑state laboratories to obtain licensure. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third party payors. +If, in the future, we perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non‑U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, the European Union, or EU, recently published new regulations that will result in greater regulation of medical devices and IVDs. This new IVD regulation (the “new IVD Regulation”) is significantly different from the European directive for In vitro diagnostic products (the “IVD Directive”) that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member states, include a risk‑based classification system and increase the requirements for conformity assessment. +The CE registration for Uman’s Nf-L ELISA assay kit was approved in March 2014 under the IVD Directive . Under the IVD Directive the assay is classified as a general IVD product, class I and required self-certification with no involvement of a notified body/authority. Under the new IVD Regulation, which must be fully implemented by May 2022, the requirements increase and involve assessment by a notified body. Uman’s Nf-L ELISA assay kit is classified as class B product. The new requirements include an ISO 13485 certification of the quality system (which Uman received July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g. clinical evidence and post-market activities). The work to meet the new technical requirements is on-going. An internal GAP-analysis is to be performed and work to eliminate the GAPs performed. When completed, the available technical documentation will be assessed by an external consultant. When all requirements are met, a notified body will be contracted and the certification initiated +Other Governmental Regulation +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration, or OSHA, has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi‑faceted programs to protect workers from exposure to blood‑borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third‑party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +36 +Table of Contents +Employees +As of December 31, 2019, we had 248 employees, of which 92 work in sales, sales support, field service, and marketing, 45 work in engineering and research and development, 78 work in manufacturing and operations and 33 work in general and administrative. As of December 31, 2019, of our 248 employees, 219 were located in the United States and 29 were employed outside the United States. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301‑9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10‑K. We have included our website address in this Annual Report on Form 10‑K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can also review our electronically filed reports and other information that we file with the SEC on the SEC’s website at http://www.sec.gov . \ No newline at end of file diff --git a/raw/filings/0001503274/2019/0001558370-20-002676/item13.txt b/raw/filings/0001503274/2019/0001558370-20-002676/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..9bb8b8e745bf3c54f3e346ef374d5c83e96f6193 --- /dev/null +++ b/raw/filings/0001503274/2019/0001558370-20-002676/item13.txt @@ -0,0 +1,2 @@ +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001503274/2019/0001558370-20-002676/item9a.txt b/raw/filings/0001503274/2019/0001558370-20-002676/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e18ce074ab9e0bcf1f2b4d0b4a40b619bb7761c2 --- /dev/null +++ b/raw/filings/0001503274/2019/0001558370-20-002676/item9a.txt @@ -0,0 +1,20 @@ +Item 9A. CONTROLS AND PROCEDURES +(a) +Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) as of the end of the period covered by this Form 10‑K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. +(b) +Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(c) +Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act, as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: +· +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; +· +provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and +· +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We acquired Uman in August 2019. The financial results are included in our audited consolidated financial statements and constituted total assets of $2,185,000 as of December 31, 2019 and revenues of $1,065,000 for the year ended December 31, 2019. As this acquisition occurred in the third quarter of 2019, the scope of our assessment of our internal control over financial reporting does not include Uman. This +89 +Table of Contents +exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired may be omitted from our scope in the year of acquisition. Based on our evaluation under that framework, our management concluded that our internal controls over financial reporting were effective as of December 31, 2019. +(d) +Attestation Report on Internal Control over Financial Reporting . This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial reporting due to the deferral allowed under the JOBS Act for emerging growth companies. \ No newline at end of file diff --git a/raw/filings/0001503274/2019/0001558370-20-002676/rp_note.txt b/raw/filings/0001503274/2019/0001558370-20-002676/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..ade3e5eefb70f973f9c07c39eb7064aa6e1f74ac --- /dev/null +++ b/raw/filings/0001503274/2019/0001558370-20-002676/rp_note.txt @@ -0,0 +1,8 @@ +17. Related party transactions +bioMérieux is a customer through its Joint Development and License Agreement and also a holder of the Company’s common stock. bioMérieux formerly also had a designee on the Company’s Board of Directors. On September 6, 2018, bioMérieux notified the Company that it was terminating the Amended JDLA. The termination of the agreement resulted in the immediate recognition of the remaining deferred revenue. The Company recognized revenue from bioMérieux related to the Amended JDLA of less than $0.1 million, $2.1 million, and $1.1 million in the years ended December 31 2019, 2018, and 2017, respectively. +As described in Note 9, in June 2007, the Company entered into a license agreement for certain intellectual property with Tufts. Tufts is a related party to the Company due to Tuft’s equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. During the years ended December 31, 2019, 2018, and 2017 the Company recorded royalty expense of $1.0 million, $0.7 million, and $0.5 million, respectively, in cost of product revenue on the consolidated statements of operations. +During the year ended December 31, 2017, Harvard University became a related party because a member of the Company’s Board of Directors is affiliated with Harvard University. Revenue recorded from sales to Harvard University was $0.1 million for the year ended December 31, 2019, and less than $0.1 million for each of the years ended December 31, 2018 and December 31, 2017. +On November 28, 2018, the Company entered into a sponsor agreement with Powering Precision Health (PPH), a 501(c)6 not-for-profit entity of which an executive of the Company is a board member, through December 31, 2018. The agreement committed a maximum of $120,000 in funds and services to be provided to PPH for the term of the +F-40 +Table of Contents +agreement. On November 14, 2019, the Company entered into the first amendment to the PPH sponsorship agreement. The agreement amended the $120,000 annual committed maximum amount to $200,000 for the annual committed amount. The agreement is terminable by either party and does not bind the Company to beyond the term of the agreement. For the years ended December 31, 2019 and 2018, the Company had total contributions of $0.1 million and less than $0.1 million, respectively. \ No newline at end of file diff --git a/raw/filings/0001503274/2019/0001558370-20-002676/rpt_disclosure.txt b/raw/filings/0001503274/2019/0001558370-20-002676/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..201480a2e65e160edbdbc5b8c46765658cd9a34b --- /dev/null +++ b/raw/filings/0001503274/2019/0001558370-20-002676/rpt_disclosure.txt @@ -0,0 +1,102 @@ +CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS +Since January 1, 2018, we have engaged in the following transactions with our directors, director nominees, executive officers and +holders of more than 5% of our common stock, which we refer to as our principal stockholders, and affiliates or immediate family members of our directors, executive officers and principal +stockholders. We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties. +Certain +of our current and former directors are affiliated with our principal stockholders as indicated below: +Director +Affiliation with principal stockholder +Keith L. Crandell +Managing Director of ARCH Venture Partners VI, LLC, the ultimate general partner of ARCH Venture Fund VI, L.P., and Managing Director of ARCH Venture Partners VIII, LLC, the general partner +of ARCH Venture Fund VIII Overage, L.P. +Douglas G. Cole, M.D.(1) +Managing Partner of Flagship Pioneering and a member of Flagship Ventures General Partner LLC, the sole general partner of Flagship Ventures Fund 2004, L.P. +John M. Connolly +Senior Advisor to Bain Capital Ventures, the ultimate general partner of Bain Capital Venture Fund 2005, L.P., BCIP Associates III, LLC and BCIP Associates III-B, LLC. +(1) Dr. Cole +did not stand for re-election and ceased serving as a member of our board of directors as of our 2019 Annual Meeting on July 25, 2019. +Flagship Ventures Fund 2004, L.P. is a former principal stockholder. +We +entered into a License Agreement with Tufts University pursuant to which we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, +import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the Simoa technology owned by Tufts University, +as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable for a fee. One of our directors and our founding scientist, David R. +Walt, Ph.D. previously served as University Professor, Professor of Biomedical Engineering, Professor of Genetics, Professor of Neuroscience, Professor of Cell and Molecular Biology, and Professor of +Oral Medicine at Tufts University. Under that agreement, we are required to pay Tufts University royalties on all net sales of products and services as well as a portion of any sublicensing revenues. +During the years ended December 31, 2019 and 2018, we recorded royalty expense of $1.0 million and $0.7 million, respectively, under this agreement. Tufts University pays a +portion of the royalties received from us to Dr. Walt, the amount of which is controlled solely by Tufts University. +Stephen +Hrusovsky, the son of E. Kevin Hrusovsky, our Chairman, President and Chief Executive Officer, serves as our Director, Investor Relations and Business Development. For services +in 2019, he received an aggregate of $156,350 in salary, bonus, and equity awards. +Registration Rights +Pursuant to our registration rights agreement to which certain of our principal stockholders, directors and their affiliates are parties, the +holders of certain shares of common stock and warrants to purchase shares of our common stock are entitled to registration rights with respect to the shares of common stock held by them. These shares +include the shares held (and shares issuable upon the exercise of warrants held) by ARCH Venture Partners and affiliated funds, Bain Capital Venture +28 +Table of Contents +entities, +our directors Marijn Dekkers, Ph.D. and David R. Walt, Ph.D., an affiliate of our director Paul M. Meister, and previously included shares held by Flagship Ventures Fund 2005, L.P. +See "Security Ownership of Certain Beneficial Owners and Management." +Under +our registration rights agreement, holders of registrable shares can demand that we file a registration statement or request that their shares be included on a registration +statement that we are otherwise filing, in either case, registering the resale of their shares of common stock. The registration rights will terminate at the earlier of (a) the closing of a +Change of Control Event, as such term is defined in our restated certificate of incorporation, (b) such time as Rule 144 under the Securities Act of 1933, as amended (the "Securities +Act"), or another similar exemption under the Securities Act is available for the sale of all of such registrable shares without limitation during a three-month period without registration (and +without the requirement for us to be in compliance with the current public information required under Rule 144(c)(1)), or (c) the fifth anniversary of the completion of our initial +public offering. +Demand Registration Rights. The holders of a majority of the registrable shares may require us to file a registration +statement under the +Securities Act at our expense, subject to certain exceptions, with respect to the resale of their registrable shares having an aggregate offering price (net of underwriting discounts and commissions, +if any) of at least $5 million, and we are required to use our reasonable best efforts to effect the registration. The holders of a majority of the registrable shares may require us to effect +up to two such demand registrations for the holders of registrable shares as a group. In the event we are required to effect such a demand registration, we may not effect any other registration of +securities for sale for our own account (other than a registration effected solely to implement an employee benefit plan or in certain business combination transactions) within 120 days +following the effective date of the demand registration. +We +are also required to use our reasonable best efforts to qualify and remain qualified to register securities pursuant to a registration statement on Form S-3 under the +Securities Act. Any holder or holders of registrable shares anticipated to have an aggregate sale price (net of underwriting discounts and commissions, if any) in excess of $1 million will have +the right to require us to file, at our expense, an unlimited number of registration statements on Form S-3 for the registrable shares held by such requesting holder or holders, and we are +required to use our reasonable best efforts to effect such registrations. +Piggyback Registration Rights. If we propose to register any of our securities under the Securities Act for sale to the public +(except with respect +to registration statements on Form S-4, Form S-8 or another form not available for registering the registrable shares for sale to the public), the holders of registrable shares are +entitled to notice of such registration and to request that we include registrable shares for resale on such registration statement, subject to the right of any underwriter to limit the number of +shares included in such registration. The requisite holders of these "piggyback" registration rights have waived their rights in connection with the filing of our registration statement on +Form S-3 (File No. 333-230399). +We +will pay all registration expenses, other than underwriting fees, commissions or discounts, related to any demand or piggyback registration, including up to $50,000 of fees and +disbursements of counsel for the holders of registrable shares. The Registration Rights Agreement contains customary cross-indemnification provisions, pursuant to which we are obligated to indemnify +the selling stockholders in the event of misstatements or omissions in the registration statement attributable to us and they are obligated to indemnify us for misstatements or omissions attributable +to them. +29 +Table of Contents +Indemnification Agreements with Officers and Directors and Directors' and Officers' Liability Insurance +We have entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements, our restated +certificate of incorporation and our restated bylaws require us to indemnify our directors to the fullest extent not prohibited by Delaware law. Subject to certain limitations, our restated bylaws +also require us to advance expenses incurred by our directors and officers. +The +2017 Plan and our 2007 Stock Option and Grant Plan, as amended, also provide that our directors (and in the case of the 2017 Plan, our employees) will not be liable for any act, +omission, interpretation, construction or determination made in good faith in connection with the respective plan, and the members of our board of directors and any committee administering the plan +will be entitled to indemnification and reimbursement by us in respect of any claim, loss, damage or expense (including reasonable attorneys' fees) arising or resulting therefrom to the fullest extent +permitted by law and/or under any directors' and officers' liability insurance coverage which may be in effect from time to time. +We +also maintain a general liability insurance policy which covers certain liabilities of directors and officers of our company arising out of claims based on acts or omissions in their +capacities as directors or officers. +Policies and Procedures for Related Party Transactions +Pursuant to its charter, our audit committee is responsible for reviewing and approving, prior to our entry into any such transaction, all +transactions reportable by us under Item 404 of Regulation S-K in which we are a participant and in which any parties related to us, including our executive officers, our directors, +beneficial owners of more than 5% of our securities, immediate family members of the foregoing persons and any other persons whom our board of directors determines may be considered related persons +under Item 404 of Regulation S-K, has or is expected to have a direct or indirect material interest. +In +reviewing and approving such transactions, the audit committee will obtain, or will direct our management to obtain on its behalf, all information that the committee believes to be +relevant and important to a review of the transaction prior to its approval. Following receipt of the necessary information, a discussion will be held of the relevant factors if deemed to be necessary +by the committee prior to approval. If a discussion is not deemed to be necessary, approval may be given by written consent of the committee. This approval authority may also be delegated to the chair +of the audit committee in some circumstances. No related person transaction will be entered into prior to the completion of these procedures. +The +audit committee or its chair, as the case may be, will approve only those related person transactions that are determined to be in, or not inconsistent with, the best interests of us +and our stockholders, taking into account all available facts and circumstances as the committee or the chair determines in good faith to be necessary in accordance with principles of Delaware law +generally applicable to directors of a Delaware corporation. These facts and circumstances will typically include, but not be limited to, the benefits of the transaction to us; the impact on a +director's independence in the event the related person is a director, an immediate family member of a director or an entity in which a director is a partner, stockholder or executive officer; the +availability of other sources for comparable products or services; the terms of the transaction; and the terms of comparable transactions +that would be available to unrelated third parties or to employees generally. No member of the audit committee will participate in any review, consideration or approval of any related person +transaction with respect to which the member or any of his or her immediate family members has an interest. +30 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001503274/2020/0001558370-21-002469/filing.txt b/raw/filings/0001503274/2020/0001558370-21-002469/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..d663232eccbf065927c37374639207f13b1bfc86 --- /dev/null +++ b/raw/filings/0001503274/2020/0001558370-21-002469/filing.txt @@ -0,0 +1,5253 @@ +0001503274 --12-31 2020 FY Quanterix Corp 31796544 28112201 600000 4900000 false 0001503274 us-gaap:DomesticCountryMember qtrx:ThroughTaxYear2039Member 2020-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember qtrx:UnderwrittenPublicOfferingMember 2020-01-01 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember qtrx:UnderwrittenPublicOfferingMember 2019-01-01 2019-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember qtrx:AtMarketOfferingMember 2019-01-01 2019-12-31 0001503274 us-gaap:CommonStockMember qtrx:UnderwrittenPublicOfferingMember 2020-01-01 2020-12-31 0001503274 2019-08-08 2019-08-08 0001503274 us-gaap:CommonStockMember qtrx:UnderwrittenPublicOfferingMember 2019-01-01 2019-12-31 0001503274 us-gaap:CommonStockMember qtrx:AtMarketOfferingMember 2019-01-01 2019-12-31 0001503274 us-gaap:RetainedEarningsMember 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001503274 us-gaap:RetainedEarningsMember 2018-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001503274 us-gaap:RetainedEarningsMember 2017-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0001503274 us-gaap:CommonStockMember 2020-12-31 0001503274 us-gaap:CommonStockMember 2019-12-31 0001503274 us-gaap:CommonStockMember 2018-12-31 0001503274 us-gaap:CommonStockMember 2017-12-31 0001503274 us-gaap:EmployeeStockOptionMember qtrx:StockBasedAwards2007PlanMember 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2019-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2020-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2020-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2019-12-31 0001503274 us-gaap:EmployeeStockOptionMember qtrx:StockBasedAwards2007PlanMember 2017-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2017-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2020-01-01 2020-01-01 0001503274 2018-01-30 2018-01-30 0001503274 srt:MinimumMember 2019-01-01 2019-12-31 0001503274 srt:MaximumMember 2019-01-01 2019-12-31 0001503274 srt:MinimumMember 2018-01-01 2018-12-31 0001503274 srt:MaximumMember 2018-01-01 2018-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2019-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember qtrx:ShareBasedCompensationAwardTrancheSevenMember 2020-01-01 2020-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember qtrx:ShareBasedCompensationAwardTrancheFourMember 2020-01-01 2020-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember qtrx:ShareBasedCompensationAwardsTrancheTwelveMember 2020-01-01 2020-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2020-01-01 2020-12-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember 2015-01-01 2015-01-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2015-01-01 2015-01-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2015-01-01 2015-01-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember qtrx:ShareBasedCompensationAwardTrancheNineMember 2020-01-01 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2020-01-01 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2020-01-01 2020-12-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2015-01-01 2015-12-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember 2015-01-01 2015-12-31 0001503274 srt:DirectorMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember 2014-12-01 2014-12-31 0001503274 us-gaap:AccountingStandardsUpdate201409Member 2020-01-01 2020-12-31 0001503274 qtrx:TuftsUniversityMember us-gaap:LicenseAgreementTermsMember 2020-01-01 2020-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherLicensesMember 2020-01-01 2020-12-31 0001503274 qtrx:TuftsUniversityMember us-gaap:LicenseAgreementTermsMember 2019-01-01 2019-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherLicensesMember 2019-01-01 2019-12-31 0001503274 qtrx:TuftsUniversityMember us-gaap:LicenseAgreementTermsMember 2018-01-01 2018-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2018-01-01 2018-12-31 0001503274 qtrx:OtherLicensesMember 2018-01-01 2018-12-31 0001503274 qtrx:UndeliveredServicesRelatedToInitialAndExtendedServiceTypeWarrantiesAndResearchServicesMember 2020-12-31 0001503274 qtrx:UndeliveredLicensesOfIntellectualPropertyMember 2020-12-31 0001503274 2022-01-01 2020-12-31 0001503274 2021-01-01 2020-12-31 0001503274 qtrx:HarvardUniversityMember 2020-01-01 2020-12-31 0001503274 qtrx:HarvardUniversityMember 2019-01-01 2019-12-31 0001503274 srt:MaximumMember qtrx:HarvardUniversityMember 2018-01-01 2018-12-31 0001503274 us-gaap:LicenseAndServiceMember 2020-10-01 2020-12-31 0001503274 us-gaap:GrantMember 2020-10-01 2020-12-31 0001503274 us-gaap:GrantMember 2020-07-01 2020-09-30 0001503274 us-gaap:LicenseAndServiceMember 2020-04-01 2020-06-30 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember qtrx:AbbotLicenseAgreementMember 2020-01-01 2020-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanOneMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 us-gaap:GrantMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember 2020-01-01 2020-03-31 0001503274 us-gaap:LicenseAndServiceMember 2019-10-01 2019-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-07-01 2019-12-31 0001503274 srt:MaximumMember qtrx:JointDevelopmentAndLicenseAgreementMember 2019-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2019-01-01 2019-12-31 0001503274 qtrx:ResearchServicesMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherServicesMember 2019-01-01 2019-12-31 0001503274 qtrx:InstrumentProductsMember 2019-01-01 2019-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2019-01-01 2019-12-31 0001503274 us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2019-01-01 0001503274 us-gaap:OtherNoncurrentAssetsMember 2020-12-31 0001503274 us-gaap:OtherNoncurrentAssetsMember 2019-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-01-01 2020-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanOneMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember 2019-01-01 2019-12-31 0001503274 us-gaap:LicenseAndServiceMember 2018-01-01 2018-12-31 0001503274 us-gaap:OfficeEquipmentMember 2020-01-01 2020-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2020-01-01 2020-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2020-01-01 2020-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2020-12-31 0001503274 qtrx:OfficeFurnitureAndEquipmentMember 2020-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2020-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2020-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2019-12-31 0001503274 qtrx:OfficeFurnitureAndEquipmentMember 2019-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2019-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2019-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2019-01-01 2019-12-31 0001503274 qtrx:AtMarketOfferingMember 2019-01-01 2019-12-31 0001503274 us-gaap:SubsequentEventMember us-gaap:OverAllotmentOptionMember 2021-02-03 2021-02-03 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-08-06 2020-08-06 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-08-01 2020-08-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2019-08-08 2019-08-08 0001503274 qtrx:AtMarketOfferingMember 2019-06-05 2019-06-05 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember qtrx:UnderwrittenPublicOfferingMember 2020-01-01 2020-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-01-01 2020-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember qtrx:ThroughTaxYear2039Member 2019-12-31 0001503274 srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201602Member 2020-12-31 0001503274 srt:MaximumMember qtrx:TristeyagenUmeaLeaseMember 2020-01-01 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2020-01-01 0001503274 us-gaap:RetainedEarningsMember 2020-01-01 2020-12-31 0001503274 srt:MaximumMember qtrx:UmandiagnosticsAbAcquisitionMember 2019-07-01 2019-12-31 0001503274 us-gaap:RetainedEarningsMember 2019-01-01 2019-12-31 0001503274 us-gaap:RetainedEarningsMember 2018-01-01 2018-12-31 0001503274 qtrx:LoanAgreementMember 2020-12-31 0001503274 qtrx:LoanAgreementMember 2019-12-31 0001503274 qtrx:Amendment5LoanAgreementMember 2020-03-02 2020-03-02 0001503274 qtrx:Amendment5LoanAgreementMember 2018-08-01 2018-08-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember us-gaap:NoncompeteAgreementsMember 2020-01-01 2020-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember us-gaap:CustomerRelationshipsMember 2020-01-01 2020-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember qtrx:KnowHowMember 2020-01-01 2020-12-31 0001503274 srt:MinimumMember us-gaap:CustomerRelationshipsMember 2020-01-01 2020-12-31 0001503274 srt:MaximumMember us-gaap:CustomerRelationshipsMember 2020-01-01 2020-12-31 0001503274 srt:MinimumMember us-gaap:CustomerRelationshipsMember 2019-01-01 2019-12-31 0001503274 srt:MaximumMember us-gaap:CustomerRelationshipsMember 2019-01-01 2019-12-31 0001503274 us-gaap:TradeNamesMember 2020-01-01 2020-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2020-01-01 2020-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2020-01-01 2020-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2020-01-01 2020-12-31 0001503274 qtrx:KnowHowMember 2020-01-01 2020-12-31 0001503274 us-gaap:TradeNamesMember 2019-01-01 2019-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2019-01-01 2019-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2019-01-01 2019-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2019-01-01 2019-12-31 0001503274 qtrx:KnowHowMember 2019-01-01 2019-12-31 0001503274 us-gaap:TradeNamesMember 2020-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2020-12-31 0001503274 us-gaap:TradeNamesMember 2019-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2019-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2020-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2020-12-31 0001503274 us-gaap:RestrictedStockMember 2020-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2020-12-31 0001503274 qtrx:Amendment5LoanAgreementMember 2018-08-31 0001503274 srt:MinimumMember qtrx:LoanAgreementMember 2014-04-14 0001503274 qtrx:LoanAgreementMember us-gaap:PrimeRateMember 2014-04-14 2014-04-14 0001503274 us-gaap:RetainedEarningsMember 2019-12-31 0001503274 us-gaap:ServiceOtherMember 2020-10-01 2020-12-31 0001503274 us-gaap:ProductMember 2020-10-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember 2020-07-01 2020-09-30 0001503274 us-gaap:ProductMember 2020-07-01 2020-09-30 0001503274 us-gaap:LicenseAndServiceMember 2020-07-01 2020-09-30 0001503274 us-gaap:ServiceOtherMember 2020-04-01 2020-06-30 0001503274 us-gaap:ProductMember 2020-04-01 2020-06-30 0001503274 us-gaap:LicenseAndServiceMember qtrx:TuftsUniversityMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember 2020-01-01 2020-03-31 0001503274 us-gaap:ProductMember 2020-01-01 2020-03-31 0001503274 us-gaap:ServiceOtherMember 2019-10-01 2019-12-31 0001503274 us-gaap:ProductMember 2019-10-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember 2019-07-01 2019-09-30 0001503274 us-gaap:ProductMember 2019-07-01 2019-09-30 0001503274 us-gaap:ServiceOtherMember 2019-04-01 2019-06-30 0001503274 us-gaap:ProductMember 2019-04-01 2019-06-30 0001503274 us-gaap:ServiceOtherMember 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember 2019-01-01 2019-12-31 0001503274 us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember 2019-01-01 2019-03-31 0001503274 us-gaap:ProductMember 2019-01-01 2019-03-31 0001503274 us-gaap:ServiceOtherMember 2018-01-01 2018-12-31 0001503274 us-gaap:ProductMember 2018-01-01 2018-12-31 0001503274 us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2019-12-31 0001503274 us-gaap:SalesRevenueNetMember 2020-01-01 2020-12-31 0001503274 us-gaap:AccountsReceivableMember 2020-01-01 2020-12-31 0001503274 qtrx:OneCustomerMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0001503274 us-gaap:SalesRevenueNetMember 2019-01-01 2019-12-31 0001503274 us-gaap:AccountsReceivableMember 2019-01-01 2019-12-31 0001503274 qtrx:OneCustomerMember us-gaap:CustomerConcentrationRiskMember 2018-01-01 2018-12-31 0001503274 srt:MaximumMember qtrx:AtMarketOfferingMember 2019-03-19 0001503274 us-gaap:SubsequentEventMember us-gaap:OverAllotmentOptionMember 2021-02-03 0001503274 qtrx:AtMarketOfferingMember 2019-03-19 0001503274 us-gaap:WarrantMember 2020-12-31 0001503274 qtrx:CommonStockOptionsAndUnvestedRestrictedCommonStockMember 2020-12-31 0001503274 us-gaap:WarrantMember 2019-12-31 0001503274 qtrx:CommonStockOptionsAndUnvestedRestrictedCommonStockMember 2019-12-31 0001503274 srt:MaximumMember qtrx:PphMember 2019-11-14 0001503274 srt:MaximumMember qtrx:PphMember 2019-11-13 0001503274 srt:MaximumMember qtrx:PphMember 2018-11-28 0001503274 2017-12-31 0001503274 qtrx:AushonAcquisitionMember 2018-07-01 2018-07-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-08-01 2019-08-01 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-01-01 2019-12-31 0001503274 qtrx:AushonAcquisitionMember 2018-01-01 2018-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2020-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2019-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2020-01-01 2020-12-31 0001503274 us-gaap:CommonStockMember 2020-01-01 2020-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2020-01-01 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2019-01-01 2019-12-31 0001503274 us-gaap:CommonStockMember 2019-01-01 2019-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2019-01-01 2019-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2018-01-01 2018-12-31 0001503274 us-gaap:CommonStockMember 2018-01-01 2018-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2018-01-01 2018-12-31 0001503274 us-gaap:SellingGeneralAndAdministrativeExpensesMember 2020-01-01 2020-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2020-01-01 2020-12-31 0001503274 us-gaap:RestrictedStockMember 2020-01-01 2020-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2020-01-01 2020-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2020-01-01 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2020-01-01 2020-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2020-01-01 2020-12-31 0001503274 qtrx:CostOfProductRevenueMember 2020-01-01 2020-12-31 0001503274 us-gaap:RestrictedStockMember 2019-01-01 2019-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2019-01-01 2019-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2019-01-01 2019-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2019-01-01 2019-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2019-01-01 2019-12-31 0001503274 qtrx:CostOfProductRevenueMember 2019-01-01 2019-12-31 0001503274 us-gaap:RestrictedStockMember 2018-01-01 2018-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2018-01-01 2018-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2018-01-01 2018-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2018-01-01 2018-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2018-01-01 2018-12-31 0001503274 qtrx:CostOfProductRevenueMember 2018-01-01 2018-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001503274 qtrx:LaboratoryAndManufacturingInstrumentsMember 2020-12-31 0001503274 qtrx:LaboratoryAndManufacturingInstrumentsMember 2019-12-31 0001503274 us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member 2019-12-31 0001503274 2019-01-01 0001503274 us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2018-12-31 0001503274 2018-12-31 0001503274 2020-10-01 2020-12-31 0001503274 2020-07-01 2020-09-30 0001503274 2020-04-01 2020-06-30 0001503274 2020-01-01 2020-03-31 0001503274 2019-10-01 2019-12-31 0001503274 2019-07-01 2019-09-30 0001503274 2019-04-01 2019-06-30 0001503274 2019-01-01 2019-03-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-12-31 0001503274 us-gaap:CommonStockMember 2020-01-01 2020-12-31 0001503274 us-gaap:CommonStockMember 2019-01-01 2019-12-31 0001503274 us-gaap:CommonStockMember 2018-01-01 2018-12-31 0001503274 2019-07-02 2019-07-02 0001503274 us-gaap:WarrantMember 2020-01-01 2020-12-31 0001503274 us-gaap:WarrantMember 2019-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2021-01-01 2021-01-01 0001503274 qtrx:StockBasedAwards2007PlanMember 2020-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2019-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2020-01-01 2020-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2020-01-01 2020-12-31 0001503274 qtrx:AushonAcquisitionMember 2020-01-01 2020-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-12-31 0001503274 srt:MinimumMember 2020-01-01 2020-12-31 0001503274 srt:MaximumMember 2020-01-01 2020-12-31 0001503274 qtrx:OneCustomerMember us-gaap:SalesRevenueNetMember 2020-01-01 2020-12-31 0001503274 qtrx:OneCustomerMember us-gaap:CustomerConcentrationRiskMember 2020-01-01 2020-12-31 0001503274 us-gaap:DomesticCountryMember 2018-12-31 0001503274 us-gaap:WarrantMember 2020-12-31 0001503274 us-gaap:CommonStockMember 2020-12-31 0001503274 us-gaap:CommonStockMember 2019-12-31 0001503274 us-gaap:CommonStockMember 2018-12-31 0001503274 qtrx:OtherLicensesMember 2020-12-31 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2020-01-01 2020-12-31 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2019-04-01 2019-04-01 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-08-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-08-06 0001503274 qtrx:UnderwrittenPublicOfferingMember 2019-08-08 0001503274 qtrx:AtMarketOfferingMember 2019-06-05 0001503274 qtrx:AushonAcquisitionMember 2019-12-31 0001503274 2018-01-01 2018-12-31 0001503274 qtrx:AushonAcquisitionMember 2018-01-30 2018-01-30 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2020-12-31 0001503274 2019-04-15 2019-04-15 0001503274 us-gaap:NoncompeteAgreementsMember 2020-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2020-12-31 0001503274 qtrx:KnowHowMember 2020-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2019-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2019-12-31 0001503274 qtrx:KnowHowMember 2019-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-09-29 2020-09-29 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-01-01 2020-12-31 0001503274 qtrx:AbbotLicenseAgreementMember 2020-01-01 2020-12-31 0001503274 qtrx:Amendment6LoanAgreementMember 2018-10-31 0001503274 2019-01-01 2019-12-31 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2019-04-01 0001503274 qtrx:AushonAcquisitionMember 2018-01-30 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-08-01 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-07-01 0001503274 srt:MaximumMember qtrx:PphMember 2020-12-31 0001503274 srt:MaximumMember qtrx:PphMember 2019-12-31 0001503274 2020-12-31 0001503274 2019-12-31 0001503274 2020-06-30 0001503274 2021-03-01 0001503274 2020-01-01 2020-12-31 xbrli:shares iso4217:USD xbrli:pure utr:sqft qtrx:installment qtrx:item iso4217:USD xbrli:shares +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2020 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission file number: 001-38319 +QUANTERIX CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +20-8957988 +(I.R.S. Employer Identification No.) +900 Middlesex Turnpike , Billerica , MA +(Address of principal executive offices) +01821 +(Zip Code) +Registrant’s telephone number, including area code: ( 617 ) 301-9400 +Securities registered pursuant to Section 12(b) of the Exchange Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value per share +QTRX +The Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Exchange Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No ◻ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ◻ No ⌧ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ◻ +Accelerated filer ⌧ +Non-accelerated filer ◻ +Smaller reporting company ☒ +Emerging growth company ☒ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +As of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2020), the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last reported sales price for the registrant’s common stock, par value $0.001 per share, on The Nasdaq Global Market on such date, was approximately $ 234 million. +As of March 1, 2021, the registrant had 36,267,609 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive proxy statement for its 2021 Annual Meeting of Stockholders, which the registrant intends to file with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2020, are incorporated by reference into Part III of this Annual Report on Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +1 +Item 1A. +Risk Factors +40 +Item 1B. +Unresolved Staff Comments +74 +Item 2. +Properties +74 +Item 3. +Legal Proceedings +74 +Item 4. +Mine Safety Disclosures +74 +PART II +Item 5. +Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +74 +Item 6. +Selected Financial Data +75 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +76 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +96 +Item 8. +Financial Statements and Supplementary Data +96 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +97 +Item 9A. +Controls and Procedures +97 +Item 9B. +Other Information +98 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +98 +Item 11. +Executive Compensation +98 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +98 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +98 +Item 14. +Principal Accountant Fees and Services +98 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +98 +Item 16. +Form 10-K Summary +104 +Signatures +105 +Consolidated Financial Statements +F-1 +i +Table of Contents +Special Note Regarding Forward-Looking Statements +This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about: +● the implementation of our business model and strategic plans for our business, products and services; +● the potential size of the markets and fields addressable by our Simoa technology platforms; +● the commercialization and adoption of our existing products and services and the success of our new product offerings; +● our ability to develop additional assays, including multiplexed assays; +● the accuracy of our estimates regarding expenses, future revenues, capital requirements and our needs for additional financing; +● the ability of our Simoa technology’s sensitivity to improve existing diagnostics and to enable the development of new diagnostic tests and tools; +● the potential of our Simoa technology in the field of companion diagnostics and its adoption by healthcare professionals; +● the impact of our Simoa technology on proteomic research; +● the usefulness of the data generated by our Simoa technology in the life science research, diagnostic and precision health screening fields; and +● our financial performance. +These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those further described in “Part I, Item 1A, Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. +You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to new information, actual results or to changes in our expectations, except as required by law. +You should read this Annual Report on Form 10-K and the documents that we reference herein and have filed with the Securities and Exchange Commission (SEC) as exhibits to this Annual Report on Form 10-K with the +ii +Table of Contents +understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect. +This Annual Report on Form 10-K includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. This Annual Report on Form 10-K also contains estimates and other statistical data from a custom market research report by an independent third-party research firm, which was commissioned by us and was issued in January 2021, referred to herein as the Third-Party Research Report. Such data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the markets in which we operate and intend to operate that are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions and estimates. +Service Marks, Trademarks and Trade Names +Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “us” and “our” in this Annual Report on Form 10-K refer to Quanterix Corporation. “Quanterix,” “Simoa,” “Simoa HD-X,” “Simoa HD-1,” “SR-X,” “SP-X”, “HD-X Analyzer”, “HD-1 Analyzer” and our logo are our trademarks. All other service marks, trademarks and trade names appearing in this Annual Report on Form 10-K are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. +iii +Table of Contents +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We are currently focusing on protein detection, which we believe is an area of significant unmet need and where we have significant competitive advantages. However, in addition to enabling new applications and insights in protein analysis, our Simoa platforms have also demonstrated applicability across other testing applications, including detection of nucleic acids and small molecules. +We believe that our Simoa platforms are the most sensitive commercially available multiplex protein detection platforms and significantly advance ELISA technology, which has been the industry standard for protein detection for over 40 years. Proteins are complex molecules that are required for the structure, function and regulation of the body’s tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes can produce over 100,000 different proteins, approximately 10,500 of which are known to be secreted in blood. Accordingly, while research on nucleic acids provides valuable information about the role of genes in health and disease, proteins are more prevalent and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, reflecting the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. +Researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa’s sensitivity offers a new way to monitor healthy individuals and detect proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical signs and symptoms have appeared. +Our Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited in more than 1,100 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over 950 customers across our end markets, and includes all 20 of the 20 largest biopharmaceutical companies. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme-linked immunosorbent assay (ELISA) technology, which has been the most widely used method of detection of proteins for over 40 years. Given our target customers’ familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. Our Simoa bead-based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells, allowing for an +1 +Table of Contents +analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to our bead-based technology’s unprecedented sensitivity. In January 2018, we acquired Aushon BioSystems, Inc. (Aushon) and its proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to provide the same Simoa sensitivity found in our Simoa bead-based platform. We currently offer the following three Simoa instruments, which we believe are the most sensitive multiplex protein detection platforms commercially available today: +● HD-X : We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. We believe the full automation of the HD-X provides us with an additional significant competitive advantage with biopharmaceutical customers. +● SR-X : We commercially launched our SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of potential applications. +● SP-X : We commercially launched our SP-X instrument in April 2019. The SP-X is based on our planar array technology, which allows for significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The current menu of approximately 86 analyte-specific single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology, oncology and cardiology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 100 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. We intend to continue to increase the number of Simoa biomarker assays across our platforms. In addition, both the bead-based platform and the planar array platform allow ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called “homebrew” assays. +We also provide contract research services for customers through our CLIA-certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 1,300 projects for approximately 360 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +In addition, in August 2019, we completed the acquisition of UmanDiagnostics AB (Uman), a company located in Umeå, Sweden, that supplies neurofilament light (Nf-L) antibodies and Nf-L ELISA kits. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Nf-L has seen a dramatic growth as a neurological biomarker in the last three years since we developed the first assay that could reliably measure Nf-L in blood using Uman’s antibodies and our Simoa technology. This innovation allowed research, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly and has led many of the world’s foremost neurology researchers and clinicians to conclude that Nf-L may be one of the most clinically relevant brain biomarkers available today. Despite significant efforts by us and others to identify or develop an alternative source of antibodies, the Uman Nf-L antibodies remain the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. The following graphic depicts the sensitivity of the Uman antibodies to detect Nf-L in blood and CSF compared to over a dozen other antibody pairs tested by Quanterix: +2 +Table of Contents +The superiority of the Uman antibodies is further evidenced by the fact that, to date, in over 380 publications relating to the detection of Nf-L in serum or plasma, 100% used the Uman antibodies. +The Uman acquisition secures the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services, provides us with additional revenue opportunities via the sale of the Nf-L antibodies and Nf-L ELISA kits, and positions us to capitalize on significant growth opportunities with Nf-L applications in Alzheimer’s disease, multiple sclerosis, and other neurodegenerative conditions. +In view of the COVID-19 pandemic, in the second quarter of 2020 we adjusted our operations to expand capacity in our Accelerator Laboratory to support customers whose operations have been disrupted and to sustain their clinical trials. We also determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS-CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. In December 2020, the U.S. Food and Drug Administration (the FDA) issued an Emergency Use Authorization (EUA) for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test that is run on our HD-X instrument. This test targets IgG antibodies that are directed against the region of the novel coronavirus known as the spike protein. In January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test that is also run on our HD-X instrument. This test detects the presence of the SARS-CoV-2 virus nucleocapsid protein (N protein), which is known to be elevated in respiratory fluids during the initial acute phase of the infection. We currently intend to pursue authorization for additional sample types, including nasal swabs, saliva, and capillary dried blood obtained from a fingerstick. Preliminary clinical research studies suggest the viral antigen may be readily detectable in asymptomatic and pre-symptomatic patients, and we are exploring extending the test to screening applications, home-based sample collection and pooling to enable larger scale testing. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide (excluding certain Nordic countries). We have an extensive base of customers in world class academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Market Opportunities +Our Simoa platforms have applications across the life science research, diagnostics and precision health screening markets. Our initial target market has been the life science research market, in particular neurology and oncology. According to estimates in the Third-Party Research Report, we believe that our pre-COVID addressable neurology, immunology and oncology life science research market is approximately $1 billion per year. We believe our +3 +Table of Contents +recent EUA approvals will allow us to expand our life science research market focus into COVID-19, which we estimate has a currently addressable potential of $0.2 billion. As we further expand our life science research focus in other areas of immunology, oncology and other therapeutic areas, coupled with growing adoption of decentralized clinical trials, the life science research addressable market is expected to expand to approximately $7 billion. As our customers continue to gain experience with our proprietary Simoa technology, we believe the opportunity to access markets beyond research, such as diagnostics and precision health screening, will be significant. The Third-Party Research Report also estimates that the diagnostic and precision health screening markets have the potential to reach an aggregate of approximately $55 billion per year, with neurology diagnostics estimated at approximately $18 billion, proteomic liquid biopsy estimated at approximately $20 billion, COVID estimated at approximately $12 billion, and precision health screening estimated at approximately $5 billion. +Life Science Research +Our initial target market has been the large and growing life science research market. We believe our Simoa platforms are well-positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. By substantially lowering the limit of detection of protein biomarkers, we believe that Simoa is penetrating the existing market for protein analysis and holds potential to significantly grow the life science research market as researchers expand their research into the diseases associated with the thousands of proteins that were previously undetectable. Simoa also enables earlier detection of the proteins that are currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. As an indication of the market’s acceptance of our technology, biopharmaceutical researchers are also integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. In addition to enabling new applications and insights in protein analysis, our Simoa bead-based technology can be used to detect other analytes, such as nucleic acids and small molecules, which expands our market opportunity. We believe that this technology has the potential to ultimately provide the same sensitivity as polymerase chain reaction (PCR), which is the most commonly used technology for nucleic acid detection, without the distortion and bias issues associated with amplification used in PCR. +Diagnostics +We believe the diagnostic market represents a significant commercial opportunity for our Simoa technology as well. We believe existing diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa. We also believe that the ultra-sensitive protein detection provided by Simoa can enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +Simoa technology also has significant potential in the emerging field of companion diagnostics. Drug developers can use Simoa to stratify patients into categories, enabling selection of those patients for whom a drug is expected to be most effective and safe. Not only does Simoa have the potential to be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity may also enable the development of companion diagnostics based on protein biomarkers that can regularly monitor whether an approved drug is having the desired biological effect, enabling doctors to quickly and efficiently adjust the course of treatment as appropriate. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of proteins in low abundance that are undetectable using conventional, analog immunoassay technologies may enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared +4 +Table of Contents +periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +Simoa products sold or used in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. To date, other than our EUAs for our COVID assays, we have not received or applied for regulatory approvals for Simoa products. See “Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement” and “—Government Regulation” for a more detailed discussion regarding the regulatory approvals that may be required. +Our Competitive Strengths +We believe that our competitive strengths include the following: +● Proprietary ultra-sensitive Simoa digital immunoassay technology platforms, that enable researchers and clinicians to obtain information from less invasive procedures in smaller sample sizes. We believe our Simoa platforms are the most sensitive commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. We believe that sensitivity is so important that we have published an approach to increase the sensitivity of our Simoa technology 100-fold . +● Technology platforms that leverage and improve upon industry standard ELISA technology. Simoa uses the basic principles of conventional bead-based ELISA immunoassay technology. Adding digital capability to this industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers’ familiarity with the core 000ELISA technology, our Simoa platforms are easily integrated with existing customer workflows including data analysis. +● Deep and expanding scientific validation. Our Simoa technology has been cited in more than 1,100 scientific publications, including JAMA Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. We have established relationships with key opinion leaders, and our growing base of over 950 customers includes some of the world’s leading academic and government research institutions as well as all 20 of the 20 largest biopharmaceutical companies. +● Leading position in market solidified by robust customization capabilities, assay design flexibility and automation of our HD-X instrument. Our technical capabilities and expertise allow our customers to design high-quality, customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead-based and planar array platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD-X instrument provides fully automated analysis from sample introduction to analytical results, and our proprietary approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater throughput and lab efficiency. +● Highly attractive business model that leverages growing installed base of instruments. As we continue to grow our installed instrument base, optimize workflows and expand our assay menu, we expect to increase our revenues derived from consumables. The integration of our technology in our customers’ projects also provides ongoing sales of assays and consumables, resulting in a growing revenue stream. Our +5 +Table of Contents +consumables revenue increased to $27.4 million in 2020 from $25.6 million in 2019 and $13.8 million in 2018, and represented approximately 32% of our total revenue in 2020. +● Our highly experienced senior management team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our strategy to achieve this includes: +● Focus on the highly attractive, expanding market for protein detection and analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. Our technology provides a unique bridge between understanding the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and drug development. +● Continue to drive adoption of our Simoa technology in the life science research market in the near-term, and the diagnostics and precision health screening markets in the long-term. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We believe Simoa technology has the capability to enable the development of a new category of less-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. We have recently had two EUAs approved for our COVID assays. In the precision health screening market, we believe that Simoa technology has the potential to someday be used to monitor biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of disease. +● Leverage the growing importance of Nf-L as a biomarker to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of Nf-L as a neuro biomarker has increased significantly since we developed the first assay that could reliably measure Nf-L in blood. This allowed research of neurological disorders, previously limited primarily to CSF, to expand significantly, and many of the world’s foremost neurology researchers and clinicians believe that Nf-L may be one of the most clinically relevant brain biomarkers available today. To capitalize on the growing importance of this biomarker, in mid-2019, we acquired Uman and its proprietary Nf-L antibodies, which we believe are the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. We believe that this acquisition positions us to capitalize on significant growth opportunities with Nf-L applications in neurodegenerative conditions . +● Grow into new markets organically with our customers and through strategic collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of +6 +Table of Contents +some of the work that our customers are doing today in the research market. For example, Simoa’s unprecedented sensitivity has the potential to uncover research insights that could identify novel biomarkers, which could help stratify patients in clinical trials potentially leading to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. We believe this progression with our customers will help us move into new markets organically in a cost effective manner, while also retaining significant upside. In addition, we have entered into, and will continue to explore, partnerships that will help us access these markets. For example, following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary Nf-L antibodies, which will allow Siemens Healthineers to begin developing blood-based Nf-L clinical tests for future commercialization. Additionally, in September 2020, we entered into a Non-exclusive License Agreement (the Abbott License Agreement) with Abbott Laboratories (Abbott), pursuant to which we granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under our bead-based single molecule detection patents in the field of in vitro diagnostics (IVD). +● Grow through strategic acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For example, in January 2018, we acquired Aushon and its proprietary sensitive planar array detection technology, which led to the development of our SP-X instrument. In mid-2019, we also acquired Uman, securing the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services and positioning us to capitalize on the growing significance of Nf-L as a neurological biomarker. We expect that acquisitions will continue to be an important part of our strategy to increase scale, and we intend to pursue acquisitions to expand product offerings, strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +Industry Background +We intend to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. Our initial commercial strategy targets the large and growing life science research market, and we believe that the diagnostic market and the precision health screening market represent significant future commercial opportunities for Simoa. According to estimates in the Third-Party Research Report, we believe the aggregate commercial opportunity across these markets has the potential to expand to up to $62 billion. +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and regulation of the body’s tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an organism’s proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot provide. +The human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, approximately 10,500 of which are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of much of the proteome has not been practical given the limited level of sensitivity of existing technologies. To date, across our platforms, we have commercialized assays that address approximately 178 protein biomarkers secreted or released in blood and CSF. +While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of environmental factors and lifestyle, such as diet and exercise, or provide insight +7 +Table of Contents +into what is happening in a patient’s body in real time. For example, identical twins have the same genotype, but may develop different diseases over the course of their lifetime, largely due to environmental factors. +Much like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and well-being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +Existing Technologies and Their Limitations +Protein Analysis +ELISA has been the most widely used method of sensitive detection of proteins for over 40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either directly, or indirectly through use of a conjugated secondary or “capture” antibody (sandwich ELISA). A specific “detection” antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final step, a substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the graphic below: +Aside from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, Raman-enhanced signal detection, immuno-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of what is estimated to be approximately 10,500 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of these approaches have limitations, including: +● dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +8 +Table of Contents +● narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +● low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +● limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers aimed at more effectively detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become detectable. PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias into the data, potentially compromising the reliability of results, particularly at low concentrations. +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection sensitivity. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead-based technology detects proteins: +9 +Table of Contents +Simoa Bead-Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead-based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the graphic). +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 microwells, each of which is large enough to accommodate only a single bead. +10 +Table of Contents +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our Simoa bead-based technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We have published an approach to increase the sensitivity of our Simoa technology 100-fold. +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from a sample, and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while competitive platforms lose sensitivity when multiplexing is used. Multiplexing is achieved with our Simoa bead-based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. While we have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the HD-X, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of proteins in a single sample, we believe that the ability to multiplex above a 6-plex and maintain single-plex sensitivity and precision may be limited using bead-based technology due to constraints in the number of bead-containing wells for each plex that are imaged on the Simoa disk. In 2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of neurodegenerative conditions and traumatic brain injury. Whereas other assay technologies +11 +Table of Contents +require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. In the first quarter of 2020, we launched a new Simoa 6-plex human cytokine Simoa bead-based assay for the HD-X and SR-X instrument platforms. This assay is the only commercially available product supporting quantitative multiplex measurement of six key immunomodulatory cytokines (IFNg, IL-6, IL-10, IL-12p70, IL-17A and TNFa) at baseline levels in both normal healthy individuals and patient cohorts in therapeutic areas spanning cancer, autoimmune disease, neurodegeneration and infectious disease. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +A) Analyte-specific capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96-well microtiter plate. Each microspot contains capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) Samples are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by washing the plate with a benchtop plate washer or manual wash manifold. +C) A mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +12 +Table of Contents +D) Streptavidin-HRP (horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a washing step. +E) A high-sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to emit light. +F) The plate is placed into the Quanterix SP-X imaging system. A scientific-grade CCD camera images the entire plate and all micro-spots simultaneously. The low background of the plate surface and the high-sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The SP-X imaging software utilizes algorithms to optimize exposure time and combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +Below is an image of a 96-well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We believe the Simoa planar array technology is well-suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with ultra-sensitive detection in a multiplex assay format. The figure below demonstrates 10-plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) listed in femtogram per ml. +13 +Table of Contents +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, our Simoa bead-based technology has also been used to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR-based assays with the following benefits: +● no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +● reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; and +● the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water or serum samples. +For detection of nucleic acids with our Simoa bead-based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. This assay is pictured below: +Simoa has been used to detect short sequences of RNA, known as microRNA, that are important in a number of biological systems, and are widely used in innovative therapeutic and gene editing technologies. For example, the assay was used to detect microRNA-122 (miR-122), a marker of liver toxicity, from the serum of patients who had overdosed +14 +Table of Contents +with acetaminophen. As shown in the graph below, these patients had elevated miR-122 levels compared to healthy controls. +This approach suggests potential for applications for measuring drug-induced liver injury for both safety testing of drugs in development and for monitoring of approved drugs. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. +Life Science Research +Our initial target market is the large and growing life science research market. We believe our Simoa platforms are well-positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +As an indication of the market’s acceptance of our Simoa technology, researchers at pharmaceutical and biotechnology companies are integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. In addition, researchers can also use Simoa to monitor a drug candidate’s unwanted effect on “off-target” biomarkers and predict side effects, addressing the significant issue of drug toxicity, which is a leading cause of death in the United States. We estimate that our Simoa technology has been utilized in projects for over 800 clinical trials to date. +15 +Table of Contents +According to estimates in the Third-Party Research Report, we believe that our pre-COVID addressable neurology, immunology and oncology life science research market was approximately $1 billion per year. Our recent EUA approvals expand our life science research market focus into COVID-19, which we estimate has currently addressable potential of $0.2 billion. As we further expand our life science research focus in other areas of immunology, oncology and other therapeutic areas, coupled with growing adoption of decentralized clinical trials, the life science research addressable market is expected to expand to approximately $7 billion. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +For example, researchers have conducted studies using Simoa that indicate that neurological biomarkers, including tau and Nf-L, may someday be able to replace diagnostic imaging to diagnose traumatic brain injury (TBI). Our Simoa assays for tau and Nf-L are 3,500-fold and 840-fold more sensitive, respectively, than conventional ELISA technologies. Almost 90% of patients who visit U.S. hospital emergency rooms and receive a computerized tomography (CT) scan show no structural brain injury. In addition, CT scans have approximately 100 times more radiation than a chest x-ray, and are suspected of causing cancer in up to 29,000 people per year, underscoring the need for development of a safe and accurate blood-based diagnostic test for TBI, which we believe may be enabled by our Simoa technology. +Simoa technology also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients to study for whom a drug is expected to be most effective and safe. Companion diagnostics have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only could Simoa be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity can also enable the development of companion diagnostics based on protein biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This would quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing dosages or even switching therapies. +There has been significant interest from third parties to use our technology to develop applications for the diagnostic market. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention, enabling a “precision health” revolution. +We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +The Third-Party Research Report estimates that the diagnostic and precision health screening markets have the potential to reach an aggregate of approximately $55 billion per year, with neurology diagnostics estimated at +16 +Table of Contents +approximately $18 billion, proteomic liquid biopsy estimated at approximately $20 billion, COVID estimated at approximately $12 billion, and precision health screening estimated at approximately $5 billion, which would be addressable upon receipt of any required regulatory approvals. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses. In particular, we have focused on neurology and oncology, as well as COVID, cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally only been detectable in cerebrospinal fluid (CSF), has the potential to rapidly advance neurology research and drug development, and transform the way brain injuries and diseases are diagnosed and treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of which are costly and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood-brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of these neural biomarkers in the blood are so low that they are undetectable by conventional, analog immunoassay technologies. In 2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of neurodegenerative conditions and traumatic brain injury. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. +To date, there have been over 670 neurology-related scientific publications using our Simoa technologies, and we believe that ultra-sensitive digital detection of neural related biomarkers in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including multiple sclerosis, Alzheimer’s disease, dementia, Parkinson’s disease, and TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. +Evidence of the potential clinical utility of Nf-L as a biomarker in neurological disease is progressing rapidly, in particular with respect to multiple sclerosis. At the 35 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) in September 2019, there were nearly 50 presentations in which our Simoa Nf-L assay was used. In one presentation, Novartis presented positive data from its Phase III ASCLEPIOS I and II studies of its multiple sclerosis drug candidate, ofatumumab. One of the secondary endpoints included serum levels of Nf-L as measured using our Simoa Nf-L assay. Novartis presented data that showed that, starting at three months after initiation of ofatumumab treatment, and then at 12 and 24 months timepoints, patients given ofatumumab had significantly lower blood levels of Nf-L, compared to those in the comparator arm of teriflunomide treated patients. +In another ECTRIMS presentation, Roche presented retrospective data from its Phase III OPERA I, OPERA, II AND ORATORIO trials of its approved multiple sclerosis drug OCREVUS (ocrelizumab). OCREVUS was only approved in 2017, but it has already become the multiple sclerosis market leader in its class, recording sales of $1.72 billion in the first half of 2019. By 2025, annual sales of the drug are estimated to reach $6.8 billion. In the data presented at ECTRIMS, it was shown that treatment with OCREVUS lowered blood Nf-L levels and increased proportion of patients reaching healthy donor range for Nf-L in both relapsing multiple sclerosis and primary progressive multiple sclerosis. Roche believes that this data helps advance the understanding of Nf-L as a potential biomarker of disease activity and for treatment monitoring, and may provide insight into the neuroprotective effects of the drug. +17 +Table of Contents +In an article published by Bjornevik et al in JAMA Neurology in September 2019, researchers presented data that showed that levels of serum Nf-L, as measured by the Simoa Nf-L assay, were increased six years before the clinical onset of multiple sclerosis. The researchers concluded that these data indicate that MS may have a prodromal phase lasting several years and that neuroaxonal damage occurs during this phase, emphasizing the importance of early diagnosis and treatment. +In 2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for the neurological biomarker Nf-L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer’s disease as currently established CSF biomarkers. The study was a major study of almost 600 patients from the Alzheimer’s Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf-L measurements compared with traditional CSF biomarkers. The diagnostic accuracy of the plasma Simoa Nf-L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +In addition, Simoa plasma Nf-L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer’s disease at baseline and during follow-up. High plasma Nf-L correlated with poor cognition and Alzheimer’s disease -related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf-L may have clinical utility as a noninvasive biomarker in Alzheimer’s disease. +TBIs lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as Nf-L, tau, GFAP and UCH-L1, to more adequately address diagnosis of TBIs and overall brain health. +Leading researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy (CTE), which currently can only be diagnosed after death via a brain autopsy. A recent publication by a National Institute of Health researcher indicates that measuring tau in the blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +In 2016, Fast Company named Quanterix one of the “World’s Most Innovative Companies” for our work in concussion detection. We also were awarded two competitive grants from the NFL-GE Head Health Challenge to advance this work in the detection and quantification of mild TBI. +18 +Table of Contents +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Simoa technology was used in an unpublished scientific study that indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low cost, non-invasive blood test. In this retrospective study, researchers found that Simoa assays resulted in significantly fewer false positives and false negatives than mammography. Inaccurate mammography can result in unnecessary stress, additional health care costs from follow up diagnostic mammograms, unnecessary biopsies and increased lifetime exposure to radiation. Researchers are also developing ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa technology, potentially replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, cost effective, accurate blood-based health screens, further enabling the liquid biopsy market. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the immuno-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a set of over 100 tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We also believe residual cancer cell detection post-surgery or post-treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a greater risk of reoccurrence post-surgery due to residual cancer. For example, we have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen (PSA) that is over 1,000-fold more sensitive than conventional ELISA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +19 +Table of Contents +COVID-19 +In view of the COVID-19 pandemic, in the second quarter of 2020 we determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS-CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. +In December 2020, the FDA issued an EUA for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test that is run on our HD-X instrument. This test targets antibodies that are directed against the region of the novel coronavirus known as the spike protein. The spike protein contains multiple subunits which together mediate entry of the virus into human cells, and for this reason, many candidate and authorized COVID-19 vaccines are designed to elicit an antibody response to the spike protein. Accordingly, we believe that this test may be useful for measuring the antibody response to vaccine therapy. The assay may also be used for measurement of IgG antibodies in patients suspected of previous infection or recent SARS-CoV-2 exposure. The test provides a numerical result representing the concentration of antibodies from 0.21 to 250 mg/mL. In clinical studies, the test demonstrated a 100% positive percent agreement (sensitivity) and 99.2% negative percent agreement (specificity) 15 or more days following a positive PCR test. +In January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test that is also run on our HD-X instrument. This test detects the presence of the SARS-CoV-2 virus nucleocapsid protein (or N protein) which is known to be elevated in respiratory fluids during the initial acute phase of the infection. We believe that direct detection of antigen proteins from the virus may be a more meaningful measure of infection status than detection of RNA by rRT-PCR because genetic material can linger even after the virus has left the body, resulting in increased risk of false positives. In clinical studies, this test demonstrated a sensitivity of 97.7% and specificity of 100% up to 14 days following onset of symptoms. Under the current EUA, the test is intended for use with nasopharyngeal (NP) samples in individuals suspected of COVID-19 infection by their healthcare providers. We currently intend to pursue authorization for additional sample types, including nasal swabs, saliva, and capillary dried blood obtained from a fingerstick. Preliminary clinical research studies suggest the viral antigen may be readily detectable in asymptomatic and pre-symptomatic patients, and we are exploring extending the test to screening applications, home-based sample collection and pooling to enable larger scale testing. +20 +Table of Contents +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn’s disease undergoing anti-TNF-α therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF-α levels of the patients before and after treatment. These levels were all below the LoD of traditional immunoassays. +We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making early stage detection more specific and widely available. +21 +Table of Contents +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +For example, we have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than conventional ELISA assays capable of detecting the HIV-specific antigen, p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile ( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +We will continue to develop Simoa assays for pathogenic antigens that are competitive in sensitivity to PCR but more specific to the pathogenicity of the offending organism. We believe that these Simoa assays could also be invaluable tools for the development of anti-infective drugs and treatment monitoring of anti-viral and anti-bacterial drugs. +22 +Table of Contents +Our Products and Services +Our Quanterix commercial portfolio includes research use only (ROU) instruments, assay kits and other consumables, and contract research services offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD-X +● +commercially launched the next-generation HD-X in the second half of 2019 to replace the HD-1 launched in 2014 +● +Simoa bead-based platform technology +● +most widely referenced ultra-sensitive multiplex immunoassay platform on market +● +fully automated, floor-standing instrument +● +wide dynamic range +● +multiplexing capability (up to 6-plex) with small sample volume +● +up to 400 samples per eight-hour shift +● +homebrew capabilities +SR-X +● +commercially launched in December 2017 +● +Simoa bead-based platform technology +● +reader only, benchtop instrument with lower price point +● +same sensitivity, dynamic range and homebrew capabilities as HD-X +● +multiplexing capability: SR-X currently has up to 6-plex capability +● +sample prep and assay protocol flexibility +SP-X +● +commercially launched in April 2019 +● +Simoa planar array platform technology +● +reader only, benchtop instrument with lower price point +● +similar sensitivity, dynamic range and homebrew capabilities as HD-X +● +multiplexing capability: SP-X currently has up to 10-plex capability +● +sample prep and assay protocol flexibility +23 +Table of Contents +Product +Key attributes +Simoa assays and other consumables +● +menu of approximately 87 single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology +● +Two EUA approved SARS-CoV-2 assays +● +menu of Simoa planar array reagent kits includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research +● +homebrew kits containing reagents and supporting user guides enabling customers to develop custom assays +● +proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead-based assays +Nf-L antibodies and Nf-L ELISA kits +● +sold through our wholly-owned subsidiary, Uman, which we acquired in 2019 +● +Nf-L capture/detection antibodies with unparalleled sensitivity and specificity +● +Nf-L ELISA kits for CSF; CE-certified in Europe; RUO outside of Europe +● +licensing and supply arrangement with Siemens Healthineers that will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization +Services +● +contract research services provided through our Accelerator Laboratory +● +over 1,300 projects completed to date +● +extended warranty and service contracts +● +CLIA-certified lab available +Instruments and Consumables +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1, our very first instrument, which was launched in January 2014. The HD-X was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X uses our Simoa bead-based technology and is the most sensitive automated multiplex protein detection platform commercially available. Assays for the HD-X are fully automated (i.e. sample in to result out), and results for up to 66 samples are available in approximately one hour. We believe that this automation provides us an additional significant competitive advantage with pharmaceutical and biotechnology customers. Samples can be input into the instrument via 96-well microtiter plates or sample tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +24 +Table of Contents +Specialized software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration of multiple biological molecules. The HD-X software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to concentrations for the different biological molecules. +Following commercial launch of the HD-X, we initiated a trade-in program for installed HD-1 instruments that has been exceeding expectations. By the end of 2020, approximately 48% of the HD installed base was HD-X instruments. +SR-X +We commercially launched the SR-X instrument in the fourth quarter of 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra-sensitive detection capabilities enabled by Simoa. +In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instruments using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately 2.5 hours. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide the same Simoa sensitivity found in our Simoa bead-based platform. The Simoa planar array technology utilizes a 96-well microtiter plate with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar to the SR-X, the assay prep workflow utilized for the SP-X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid handling methods as the SR-X. The SP-X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 87 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to these assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes, and disposable tips. Our goal is to continue to add to our assay kits to extend our application base. +25 +Table of Contents +We have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to manufacturing and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu expansion goals. +Nf-L Antibodies and Nf-L ELISA Kits +In August 2019, we completed our acquisition of Uman. Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits for Nf-L detection in CSF. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Through Uman we sell proprietary Nf-L capture and detection antibodies, as well as two Nf-L ELISA kits for CSF, one of which is CE-certified in Europe. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. Researchers, academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, including: +● Sample testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer’s needs and even large studies can be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +● Homebrew assay development. Utilizing proprietary or commercially available reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +● Custom development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +To date, we have completed over 1,300 projects for approximately 360 customers from all over the world using our Simoa platforms, including over 130 projects for clinical studies. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We have published an approach to increase the sensitivity of our Simoa technology 100-fold . We are also focused on expanding our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and +26 +Table of Contents +marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional major markets, including Australia, Brazil, China, Czech Republic, India, Israel, Japan, Lebanon, Mexico, Qatar, Saudi Arabia, Singapore, South Korea and Taiwan. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide (excluding certain Nordic countries). Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological advances in Simoa systems, workflows, and notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As of December 31, 2020, we had approximately 118 people employed in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region countries such as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with Quanterix-employed sales and support personnel. +Our sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and governmental research institutions. +In addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness of our technologies, demonstrate the benefits relative to existing technologies and accelerate adoption. We also seek to increase awareness of our products through participation at trade shows, academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +To develop a thought leadership position in the precision health arena, we have been a Platinum Sponsor of the annual Powering Precision Health (PPH) Summit since 2016. PPH is an organization founded in 2016 by our President and Chief Executive Officer, Kevin Hrusovsky, that aims to gather many of the world’s top innovators, scientists, physicians, medical professionals, patient advocates, government officials, regulators and investors to debate and collaborate around crucial issues from neurology, oncology and cardiology to inflammation and infectious disease. We believe that sponsoring this event provides Quanterix significant marketing benefits. +Our systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the system including running experiments in the Accelerator Laboratory and comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +27 +Table of Contents +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource the Simoa bead-based instrument development and manufacturing with industry leaders, and to internally develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is manufactured by STRATEC Biomedical AG (STRATEC), based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. See “—Key Agreements—Development Agreement and Supply Agreement with STRATEC” for a description of our agreement with STRATEC. The SR-X is manufactured by Paramit Corporation (Paramit), based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements—Paramit Manufacturing Services Agreement” for a description of our agreement with Paramit. Installation of, and training on, our instruments is provided by our employees in the markets where we conduct direct sales, and by distributors in those markets where we operate with distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we would experience additional costs, delays and difficulties in doing so, and our business would be harmed. +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. To mitigate this risk, we typically carry significant inventory of critical components. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Reagents for our bead-based assays include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we have increased the shelf life of the vast majority of our bead-based assays from six months to 12 months or more. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. This agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead-based platform are commercially available. +We assemble our 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +28 +Table of Contents +Nf-L antibodies and Nf-L ELISA Kits +The storage of Uman’s proprietary Nf-L antibody producing hybridomas as well as the cultivation and purification of the antibodies is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s Nf-L ELISA kits. The antibody reagents are labeled and released to market after testing. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s Nf-L ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. All incoming goods are subject to receipt control and any deviations related to quality deficiencies are registered. The kit components include buffers (sample diluent and wash solution), an ELISA 96-well plate coated with a capture antibody, detector antibody, streptavidine conjugate, substrate (TMB) and stop reagent. The kit components are labeled (either “RUO” or “CE”) and assembled. The final ELISA kit product is subject to quality control which include testing of human CSF quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months. +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement (the STRATEC Development Agreement) with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. Under the STRATEC Development Agreement, we were required to pay a fee and issue to STRATEC warrants to purchase our equity securities, all of which have been exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The STRATEC Development Agreement was amended in November 2016. The Amendment reduced our obligation to satisfy a minimum purchase commitment under the STRATEC Supply Agreement described below. Additionally, the parties agreed on additional development services for an additional fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with the final milestone due under the terms of the STRATEC Development Agreement. The services were completed in and the final milestone payment was paid in the fourth quarter of 2019. The STRATEC Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC (the STRATEC Supply Agreement), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The STRATEC Supply Agreement was amended in November 2016 to reduce the number of HD instruments we are committed to procure from STRATEC, and this commitment has been met. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party, provided that neither party may terminate the STRATEC Supply Agreement prior to the later of the seven year anniversary of the acceptance of the first prototype instrument and the purchase of the minimum number of instruments which we were committed to procure. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free +29 +Table of Contents +license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the Paramit Agreement) with Paramit. Under the terms of the Paramit Agreement, we engaged Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement has an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Non-Exclusive License Agreement with Abbott Laboratories +In September 2020, we entered into a Non-Exclusive License Agreement with Abbott. Pursuant to the terms of the License Agreement, we granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under our bead-based single molecule detection patents in the field of IVD. Abbott paid us an initial license fee of $10.0 million in connection with the execution of the License Agreement. Abbott has also agreed to pay us milestone fees subject to the achievement by Abbott of certain development, regulatory and commercialization milestones and low single digit royalties on net sales of licensed products. +The License Agreement includes customary representations and warranties, covenants and indemnification obligations for a transaction of this nature. The License Agreement became effective upon signing and will continue until expiration of the last-to-expire licensed patent, or the agreement is earlier terminated. Under the terms of the License Agreement, each party has the right to terminate the agreement for uncured material breach by, or insolvency of, the other party. Abbott may also terminate the License Agreement at any time without cause upon sixty (60) days’ notice. +Contracts with the NIH under RADx +In September 2020, we entered into the Rapid Acceleration of Diagnostics (RADx) workplan 2 award (WP2) with the National Institute of Health (NIH) under the RADx program. This contract, which has a total award value of $18.2 million, is intended to accelerate the continued development, scale-up and deployment of our novel SARS-CoV-2 antigen test. Initial early feasibility of this test was funded in part through the RADx workplan 1 award (WP1) we were granted in June 2020. WP2 supports clinical validation of the test in support of the EUA submissions with the FDA, and provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Contract funding is subject to achievement of pre-defined milestones and the contract period runs through September 2021. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for protein detection, nucleic acid detection and additional applications. For example, companies such as Bio-Techne, Luminex, MesoScale Discovery, Gyros, Nanostring, and others, have products for protein detection +30 +Table of Contents +that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as Covance, Q2 Solutions, Myriad RBM, Monogram Biosciences, PPD Laboratories, and others, some of whom are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics and precision health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research, diagnostic and precision health screening markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors in our target markets include: +● sensitivity; +● cost of instruments and consumables; +● assay menu; +● reputation among customers and key opinion leaders; +● innovation in product offerings; +● accuracy and reproducibility of results; and +● customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University (Tufts), in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from Tufts the relevant patent filings related to these technologies. (See “—License Agreement with Tufts University” below). In addition to licensed patents, we have developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. Our portfolio also includes issued patents and patent applications acquired as part of our 2017 acquisition of Aushon Biosystems. We believe our proprietary platforms are a core strength of our business and our strategy includes the continued development of our patent portfolio. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core +31 +Table of Contents +technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of February 1, 2021, we had exclusively licensed 18 patents and two patent applications from Tufts. These patents and patent applications include nine issued U.S. patents and two pending U.S. patent applications, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +A first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes six granted U.S. patents, one pending U.S. patent application, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A third patent family licensed from Tufts is directed to methods for analyzing analytes using a sensor system with cross-reactive elements. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 14, 2021. +A fourth patent family licensed from Tufts is directed to electro-optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +A fifth patent family licensed from Tufts is directed to methods for detecting short nucleic acids. This patent family includes one pending U.S. patent application. The standard patent expiration date for the U.S. patent in this family is May 29, 2039. +As of February 1, 2021, we owned 24 issued U.S. patents and 22 pending U.S. patent applications, eight granted European patents and three pending European patent applications, nine granted Japanese patents, four granted Chinese patents and one pending Chinese patent application, five granted Canadian patents and one pending Canadian patent application, one granted Australian patent, and two registered Hong Kong patent applications. +A first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads, including multiplexing. This patent family includes four granted U.S. patents and two pending U.S. patent applications, two granted European patent (nationalized and active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes four granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads with or without +32 +Table of Contents +dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is September 28, 2028. +A fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 24, 2030. +A fifth patent family owned by us is directed to instruments and consumables. This patent family includes one granted U.S. patent and one pending U.S. patent application, two granted Japanese patents, one granted Chinese patent and one pending Chinese patent applications, one registered Hong Kong patent application and one pending patent application in each of Europe, and Canada. The standard patent expiration date for any U.S. patents that may issue from this family is February 25, 2031, and for any non-U.S. patents is January 27, 2032. +A sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes two pending U.S. patent applications. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is September 20, 2038. +We own or co-own nine patent families directed to the measurement of particular types of analytes, including prostate specific antigen (PSA), β-amyloid peptide, tau protein, toxin B of C. difficile , neurofilament light, glial fibrillary acidic protein, ubiquitin carboxyl-terminal hydrolase L1, and DNA or RNA molecules. These families include one granted U.S. patent directed to methods for determining treatment protocols and/or a prognosis of a patient’s recovery from a brain injury based on measurements of tau protein in blood and one granted European patent (nationalized and active in three countries) directed to detection of C. difficile . Any patents that may issue from these patent applications would have standard expiration dates between 2032 and 2039. +With the acquisition of Aushon in January 2017, we acquired their patent portfolio for our planar array technology. As of February 1, 2021, the acquired patent portfolio includes at least nine issued U.S. patents and one pending U.S. patent application, one granted Australian patent, three granted Canadian patents, four granted European patents (each nationalized and active in between eight and 14 countries) and one pending European patent application, three granted Japanese patents, and one registered Hong Kong patent. +We have licensed additional patents and patent applications from third parties. +In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable for a fee. +33 +Table of Contents +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 amendment, we issued Tufts shares of our Series C-1 Preferred Stock, which converted into shares of our common stock in connection with our initial public offering. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Other than the COVID assays for which we have received EUAs, our products are currently intended for research use only (RUO) applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or the Center for Medicare and Medicaid Services (CMS). Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products are subject to FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than research purposes. Consequently, our products (other than the COVID assays for which we have received EUAs) are labeled “For Research Use Only.” +On November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (RUO/IUO Guidance). The purpose of an FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s 510(k) clearance, premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance is a statement of the FDA’s thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. We also are not promoting or using our products in the development or promotion of laboratory developed test (LDT) services. When we develop products for clinical use, we will do so in accordance with FDA requirements applicable to those products at that time. Separately, when we become aware that accredited or licensed clinical laboratories may be using our RUO products either for research or clinical uses, such as part of LDT services, in accordance with the regulations that apply to clinical laboratories, we will continue to review the labeling and promotion of our products for consistency with the RUO/IUO Guidance. +34 +Table of Contents +When our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification (510(k)) and receive clearance from the FDA which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized until a premarket approval application (PMA) is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent (SE), to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA’s receipt of the 510(k), but it often takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre-market approval. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. +This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. +35 +Table of Contents +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the accepted application, although review of the application generally can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with its quality system regulations (QSRs). New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and efficacy of the device. +Emergency Use Authorization +In emergency situations, such as a pandemic, the FDA has the authority to allow unapproved medical products or unapproved uses of cleared or approved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by chemical, biological, radiological or nuclear warfare threat agents when there are no adequate, approved, and available alternatives. +Under this authority, the FDA may issue an EUA for an unapproved device if the following four statutory criteria have been met: (1) a serious or life-threatening condition exists; (2) evidence of effectiveness of the device exists; (3) a risk-benefit analysis shows that the benefits of the product outweigh the risks; and (4) no other alternatives exist for diagnosing, preventing or treating the disease or condition. Evidence of effectiveness includes medical devices that “may be effective” to prevent, diagnose, or treat the disease or condition identified in a declaration of emergency issued by the Secretary of the Department of Health and Human Services (HHS). The “may be effective” standard for EUAs requires a lower level of evidence than the “effectiveness” standard that FDA uses for product clearances or approvals in non-emergency situations. The FDA assesses the potential effectiveness of a possible EUA product on a case-by-case basis using a risk-benefit analysis. In determining whether the known and potential benefits of the product outweigh the known and potential risks, the FDA examines the totality of the scientific evidence to make an overall risk-benefit determination. Such evidence, which could arise from a variety of sources, may include (but is not limited to) results of domestic and foreign clinical trials, in vivo efficacy data from animal models, in vitro data, as well as the quality and quantity of the available evidence. +Once granted, an EUA will remain in effect and generally terminate on the earlier of (1) the determination by the Secretary of HHS that the public health emergency has ceased or (2) a change in the approval status of the product such that the authorized use(s) of the product are no longer unapproved. After the EUA is no longer valid, the product is no longer considered to be legally marketed and one of the FDA’s non-emergency premarket pathways would be necessary to resume or continue distribution of the subject product. +The FDA also may revise or revoke an EUA if the circumstances justifying its issuance no longer exist, the criteria for its issuance are no longer met, or other circumstances make a revision or revocation appropriate to protect the public health or safety. +On January 31, 2020, the Secretary of HHS issued a declaration of a public health emergency related to COVID-19. On February 4, 2020, HHS determined that COVID-19 represents a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and, subsequently, declared on March 24, 2020, that circumstances exist to justify the authorization of emergency use of medical devices, including alternative products used as medical devices, during the COVID-19 pandemic, subject to the terms of any authorization as issued by the FDA. On February 29, 2020, the FDA issued an immediately in effect +36 +Table of Contents +guidance with policy specific to development of IVD tests during the COVID-19 public health emergency. This guidance was updated on March 16, 2020, May 4, 2020 and May 11, 2020. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption application (IDE) and obtains approval of the IDE from the FDA. These clinical trials are also subject to the review, approval and oversight of an institutional review board (IRB) at each clinical trial site. The clinical trials must be conducted in accordance with the FDA’s IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +● establishment registration and device listing; +● the QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; +● labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to promotional activities; +● medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur; +● corrections and removal reporting regulations, which require that manufacture’s report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +● post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device. +To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +Since our acquisition of Aushon in January 2018, we own and operate a CLIA certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and basic research). A +37 +Table of Contents +clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health assessment and for the diagnosis, prevention, or treatment of disease. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by the Centers for Medicare & Medicaid Services (“CMS”), a CMS agent (typically a state agency), or, a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered by nearly all complex laboratories for the last few decades as LDTs, which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices. During 2010, the FDA publicly announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced its framework and timetable for implementing this guidance. On November 18, 2016, the FDA announced it would not release final guidance at that time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach. On January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. We cannot predict the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory approach by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of the FDA’s approach is unknown, it may be extensive and may result in significant change. +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out-of-state laboratories to obtain licensure. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third party payors. +If, in the future, we perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +38 +Table of Contents +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, the European Union (the EU) recently published new regulations that will result in greater regulation of medical devices and IVDs. This new IVD regulation (new IVD Regulation) is significantly different from the European directive for In vitro diagnostic products (IVD Directive) that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member states, include a risk-based classification system and increase the requirements for conformity assessment. +The CE registration for Uman’s Nf-L ELISA assay kit was approved in March 2014 under the IVD Directive . Under the IVD Directive the assay is classified as a general IVD product, class I and required self-certification with no involvement of a notified body/authority. Under the new IVD Regulation, which must be fully implemented by May 2022, the requirements increase and involve assessment by a notified body. Uman’s Nf-L ELISA assay kit is classified as class B product. The new requirements include an ISO 13485 certification of the quality system (which Uman received July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g. clinical evidence and post-market activities). The work to meet the new technical requirements is on-going. An internal GAP-analysis is to be performed and work to eliminate the GAPs performed. When completed, the available technical documentation will be assessed by an external consultant. When all requirements are met, a notified body will be contracted and the certification initiated. +Other Governmental Regulation +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (OSHA), has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +Employees and Human Capital +As of December 31, 2020, we had 314 full-time employees, of which 118 work in sales, sales support, field service, and marketing, 74 work in engineering and research and development, 72 work in manufacturing and operations and 50 work in general and administration. Of our 314 full-time employees, 273 were located in the United States and 41 were located in ten foreign countries. None of our employees are represented by a labor union or subject to a collective bargaining agreement. Historically, we have experienced a turnover rate that is lower than the industry average and attribute that to our unique culture that stresses the impact our work has on the eradication of human diseases including Alzheimer’s, cancer and COVID. We invest in creating a diverse, inclusive and safe work environment where our employees can deliver their workplace best every day. +Our success depends upon our ability to attract and retain highly qualified management and technical employees. Talent management is critical to our ability to execute our long-term growth strategy, including providing career growth, on-the-job learning opportunities and competitive compensation. We are committed to an inclusive culture which values equality, opportunity and respect. In support of our inclusive culture, we sponsor an internal Diversity, Equity and Inclusion Committee comprised of employees and executives, provide respectful workplace training to strengthen employee understanding and consciously strive to recruit a diverse talent pool across all levels of the organization. As of December 31, 2020, approximately 45% of our employees were women and approximately 30% +39 +Table of Contents +were non-white. We are focused on the engagement and empowerment of our employees through the demonstration of our foundational values, which we refer to as AT&T3: Accountability, Trust, Teamwork and Transparency. +Workforce Compensation and Pay Equity +We provide robust compensation and benefits programs to help meet the needs of our employees. We provide our full-time employees with highly competitive salaries, as well a bonus and/or commission plan, a matching 401(k) Plan, healthcare and insurance benefits, paid time off and family leave. We also provide all of our employees with targeted equity-based grants with vesting conditions designed to facilitate retention through the opportunity to benefit financially from our growth and profitability. +Company Culture +We expect all of our employees and contractors to observe the highest levels of business ethics, integrity, mutual respect, tolerance and inclusivity. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies reflecting these values and also provides direction for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is fundamentally connected to the physical and mental well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees and contractors. We provide our employees with a wide range of benefits, including benefits directed to their health, safety and long-term financial security. In response to the COVID-19 pandemic, we have implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes allowing our employees to work remotely as appropriate, while implementing significant safety measures designed to protect the health of all those working in and entering our facilities. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can also review our electronically filed reports and other information that we file with the SEC on the SEC’s website at http://www.sec.gov . +Item 1A. RISK FACTORS +The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and +40 +Table of Contents +uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page ii of this Annual Report on Form 10-K for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. +Risk Factor Summary +Our business is subject to numerous risks and uncertainties. The following summary highlights some of the risks you should consider with respect to our business and prospects. This summary is not complete and the risks summarized below are not the only risks we face. You should review and carefully consider the risks and uncertainties described in more detail below, which includes a more complete discussion of these risks. +● We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +● Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, causing the value of our common stock to decline substantially. +● We are an early, commercial-stage company and have a limited commercial history, which may make it difficult to evaluate our current business and predict our future performance. +● If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +● Sales of our assay for the neurological biomarker Nf-L have become increasingly important to our business, and any significant decrease in sales of that assay could have a material adverse effect on our business. +● We are subject to extensive regulatory requirements in connection with the EUAs that we have received from the FDA for our COVID-19 antibody and antigen tests. If we fail to comply with these requirements, or if the FDA otherwise determines that the conditions no longer warrant such authorization, we will be unable to market these products pursuant to this authorization and our business may be harmed. +● The termination of an EUA, the failure of our tests to gain market acceptance or our inability to match advances in competing products for COVID-19 could adversely impact our business. +● Epidemic diseases, such as COVID-19, could negatively affect various aspects of our business, make it more difficult to meet our obligations to our customers, and result in reduced demand from our customers, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows. +● Release of the remaining funding under the contract with the NIH under the RADx program is based on the achievement of certain milestones, and there is no assurance that we can meet all of the milestones on a timely basis, if at all. +● Our long-term results depend upon our ability to improve existing products and introduce and market new products successfully. +● Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims. +41 +Table of Contents +● We may seek to enter into strategic collaborations and licensing arrangements with third parties, but we may not be successful in establishing or maintaining such arrangements. +● We expect to generate a substantial portion of our revenue internationally in the future and can become further subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +● We have limited experience in marketing and selling our products, and if we are unable to successfully commercialize our products, our business and operating results will be adversely affected. +● We may experience manufacturing problems or delays , or backlogs in deliveries, that could limit the growth of our revenue or increase our losses. +● We rely on a single contract manufacturer to manufacture and supply our Simoa HD instruments and rely on a different single contract manufacturer to manufacture and supply our Simoa SR-X. If either of these manufacturers should fail or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +● If the FDA determines that our products are medical devices or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +● If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our operations. +● If we are unable to protect our intellectual property, it may reduce our ability to maintain any technological or competitive advantage over our competitors and potential competitors, and our business may be harmed. +● The measures that we use to protect the security of our intellectual property and other proprietary rights may not be adequate, which could result in the loss of legal protection for, and thereby diminish the value of, such intellectual property and other rights. +● If we or any of our partners are sued for infringing intellectual property rights of third parties, it would be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +Risks Related to Our Financial Condition +We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +We incurred net losses of $31.5 million, $40.8 million and $31.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $247.8 million. We cannot predict if we will achieve sustained profitability in the near future or at all. We expect that our losses will continue at least through the next 24 months as we plan to invest significant additional funds toward expansion of our commercial organization and the development of our technology. In addition, as a public company, we incur significant legal, accounting, and other expenses that we would not incur as a private company. These expenses make it harder for us to achieve and sustain future profitability. We may incur significant losses in the future for a number of reasons, many of which are beyond our control, including the other risks described in this Annual Report on Form 10-K, the market acceptance of our products, future product development and our market penetration and margins. +42 +Table of Contents +Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, causing the value of our common stock to decline substantially. +Numerous factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively affect our business and prospects. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others. As a result, comparing our operating results on a period-to-period basis might not be meaningful. You should not rely on our past results as indicative of our future performance. Moreover, our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. +Our operating results have varied in the past. In addition to other risk factors listed in this section, some of the important factors that may cause fluctuations in our quarterly and annual operating results include: +● adoption of our Simoa technology platforms and products by customers; +● the timing of customer orders to purchase our products and services; +● the rate of utilization of consumables by our customers; +● receipt and timing of revenue for services provided in our Simoa Accelerator Laboratory; +● the timing of the introduction of new products, product enhancements and services; and +● the receipt and timing of revenue from collaborations, if any. +In addition, a significant portion of our operating expenses is relatively fixed in nature, and planned expenditures are based in part on expectations regarding future revenue. Accordingly, unexpected revenue shortfalls might decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. If this occurs, the trading price of our common stock could fall substantially. +If we are unable to maintain adequate revenue growth or do not successfully manage such growth, our business and growth prospects will be harmed. +We have experienced significant revenue growth in a short period of time. We may not achieve similar growth rates in future periods. Investors should not rely on our operating results for any prior periods as an indication of our future operating performance. To effectively manage our anticipated future growth, we must continue to maintain and enhance our financial, accounting, manufacturing, customer support and sales administration systems, processes and controls. Failure to effectively manage our anticipated growth could lead us to over-invest or under-invest in development, operational, and administrative infrastructure; result in weaknesses in our infrastructure, systems, or controls; give rise to operational mistakes, losses, loss of customers, productivity or business opportunities; and result in loss of employees and reduced productivity of remaining employees. +Our continued growth could require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. As additional products are commercialized, we may need to incorporate new equipment, implement new technology systems, or hire new personnel with different qualifications. Failure to manage this growth or transition could result in turnaround time delays, higher product costs, declining product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any one of these areas could make it difficult for us to meet market expectations for our products, and could damage our reputation and the prospects for our business. +43 +Table of Contents +If our management is unable to effectively manage our anticipated growth, our expenses may increase more than expected, our revenue could decline or grow more slowly than expected and we may be unable to implement our business strategy. In addition, the quality of our products and services may suffer, which could negatively affect our reputation and harm our ability to retain and attract customers. +Our future capital needs are uncertain and we may need to raise additional funds in the future. +We believe that our existing cash and cash equivalents as of December 31, 2020, together with our cash generated from commercial sales, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months. However, we may need to raise substantial additional capital to: +● expand our sales and marketing efforts to further commercialize our products; +● strategically acquire companies or technologies that may be complementary to our business; +● expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our products are deemed by the FDA to be medical devices or otherwise subject to additional regulation by the FDA; +● seek PMA or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market products for use in the prevention, diagnosis or treatment of a disease or other condition (see “Risk Factors—If the FDA determines that our products are medical devices or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome.” and “Business—Government Regulation” for further information about the FDA approvals that we may be required to seek and obtain in that circumstance); +● hire additional personnel and continue to expand our employee headcount; +● enter into collaboration arrangements, if any, or in-license other products and technologies; +● add operational, financial and management information systems; and +● continue to incur increased costs as a result of operating as a public company. +Our future funding requirements will depend on many factors, including: +● market acceptance of our products; +● the cost and timing of establishing additional sales, marketing and distribution capabilities; +● the cost of our research and development activities; +● our ability to enter into collaborations in the future, and the success of any such collaborations; +● the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +● the effect of competing technological and market developments. +44 +Table of Contents +We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could have a material adverse effect on our financial condition, operating results and business. +Our ability to use net operating losses to offset future income may be subject to certain limitations. +As of December 31, 2020, we had federal net operating loss (NOLs) carryforwards to offset future taxable income of approximately $199.3 million, which begin to expire in 2021, if not utilized. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We have already experienced ownership changes as defined under Section 382 of the Code. Depending on the timing of any future utilization of our NOLs, we may be limited as to the amount that can be utilized each year as a result of such previous ownership changes. In addition, future changes in our stock ownership, including changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. +U.S. taxation of international business activities or the adoption of tax reform policies could materially impact our future financial position and results of operations. +Limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of future foreign earnings. Should the scale of our international business activities expand, any changes in the U.S. taxation of such activities could increase our worldwide effective tax rate and harm our future financial position and results of operations. +Risks Related to Our Business +If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +Our success depends on our ability to develop and market products that are recognized and accepted as reliable, enabling and cost-effective. Continued market acceptance of our Simoa technology platforms will depend on many factors, including our ability to convince potential customers that our technology is an attractive alternative to other available technologies. Historically, a significant part of our sales and marketing efforts has been directed at demonstrating the advantages of our technology to industry leaders and encouraging such leaders to publish or present the results of their evaluation of our system. If we are unable to continue to motivate leading researchers to use Simoa technology, or if such researchers are unable to achieve or unwilling to publish or present significant experimental results using our systems, acceptance and adoption of our systems may be slowed and our ability to increase our revenue would be adversely affected. +Our future success is dependent upon our ability to further penetrate our existing customer base and attract new customers. +Our current customer base is primarily composed of academic and governmental research institutions, as well as biopharmaceutical and contract research companies. Our success will depend upon our ability to respond to the evolving needs of, and increase our market share among, existing customers and adding new customers. Identifying, +45 +Table of Contents +engaging and marketing to customers requires substantial time, expertise and expense and involves a number of risks, including: +● our ability to attract, retain and manage the sales, marketing and service personnel necessary to expand market acceptance for our Simoa technology platforms; +● the time and cost of maintaining and growing a specialized sales, marketing and service force; and +● our sales, marketing and service force may be unable to execute successful commercial activities. +We have utilized third parties to assist with sales, distribution and customer support in certain regions of the world. There is no guarantee, when we enter into such arrangements, that we will be successful in attracting desirable sales and distribution partners. There is also no guarantee that we will be able to enter into such arrangements on favorable terms. Any failure of our sales and marketing efforts, or those of any third-party sales and distribution partners, would adversely affect our business. +Sales of our assay for the neurological biomarker Nf-L have become increasingly important to our business, and any significant decrease in sales of that assay could have a material adverse effect on our business. +Neurology has been one of our primary focus areas for commercialization of our Simoa technology and the services that we provide to our customers. Sales from neurological-related biomarkers, Nf-L in particular, have become an increasingly important part of our business. We estimate that revenue from services and sales of consumables relating to Nf-L represented approximately 8% of our total revenue for the fiscal year ended December 31, 2020. There can be no assurance that we will continue to derive meaningful revenues from the sale of our Nf-L assay, from services related to that assay or from sales of instruments driven by customers desiring access to the Nf-L assay. The adoption by our customers of competitive technologies for detecting biomarkers of neurodegenerative conditions, could negatively impact our revenues and have a material adverse effect on our business. +WP2 with the NIH under the RADx program could expose us to unique risks and costs. +The NIH launched the RADx program to expedite development, commercialization, and implementation of technologies for COVID-19 testing to help increase testing in the United States. On September 29, 2020, we entered into WP2 with the NIH under the RADx program. The contract, which has a total award value of $18.2 million, will accelerate the continued development, scale-up and deployment of our novel SARS-CoV-2 antigen test. Initial early feasibility of this test was funded in part through WP1, in which we were granted approximately $2.0 million in June 2020. The contract provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Release of the $18.2 million of funding under WP2 is based on the achievement of certain milestones, and there is no assurance that we can meet all the milestones on a timely basis, if at all. If we do not meet all the milestones, we will not be able access the full $18.2 million in funding under the contract. +In addition, other factors that could materially adversely affect our revenue stemming from WP2 include: +● budgetary constraints affecting U.S. government spending generally, or the NIH in particular; +● changes in U.S. government or the NIH fiscal policies or available funding, including due to Congressional appropriations; +● changes in U.S. government or the NIH programs, requirements or priorities; +● adoption of new laws or regulations; +● technological developments; +● U.S. government shutdowns, threatened shutdowns or budget delays; +● competition and consolidation in our industry; and +● general economic conditions. +46 +Table of Contents +These or other factors could cause the NIH to reduce its funding or future activities under WP2, which could have a material adverse effect on the revenue generated by this contract. +WP2 also contains certain provisions from the Federal Acquisition Regulations (FAR), some of which are customary or legally required, that give the U.S. government substantial rights and remedies, many of which are not typically found in commercial contracts. For example, WP2 contains provisions permitting unilateral termination or modification, in whole or in part, at the U.S. government’s convenience. In addition, WP2 contains additional requirements that may increase our costs of doing business, reduce our profits, and expose us to liability for failure to comply with these terms and conditions. These requirements include mandatory internal control systems and policies, mandatory socioeconomic compliance requirements, environmental compliance requirements and intellectual property provisions. If we fail to maintain compliance with these requirements, we may be subject to potential contract or False Claims Act liability and to termination of the contract. +In addition, we may be required to enter into agreements with third parties, including suppliers, consultants and other third-party contractors in order to satisfy our contractual obligations pursuant to this contract with the NIH. Negotiating and entering into such arrangements can be time-consuming and we may not be able to reach agreement with such third parties. Any such agreement must also be compliant with the terms of WP2. Any delay or inability to enter into such arrangements or entering into such arrangements in a manner that is non-compliant with the terms of our contract, may result in violations of our contract and/or delays in the release of funding. +Epidemic diseases, such as COVID-19, could negatively affect various aspects of our business, make it more difficult to meet our obligations to our customers, and result in reduced demand from our customers, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows. +Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, such as COVID-19 . Potential impacts to our business include disruptions or restrictions on our employees’ and customers’ ability to travel, temporary closures of the facilities of our suppliers or customers, delays in installation of instruments, and delays in shipments to and from affected countries. Any such travel restrictions and business closures could adversely impact our operations locally and worldwide, including our ability to manufacture, sell or distribute our products, as well as cause temporary closures of our foreign distributors, or the facilities of suppliers or customers. Any material disruption of our employees, distributors, suppliers or customers in impacted countries could impact our global sales and operating results. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and likely impact our operating results. +Some of the components used in our products are labeled for “research use only” and may have to undergo additional testing before they could be used in a product intended for clinical use. +Some of the materials that are used in our consumable products, including certain reagents, are purchased from suppliers with a restriction that they be used for RUO. While we have focused initially on the life sciences research market, part of our future business strategy is to expand our product line, either alone or in collaboration with third parties, to encompass systems and products that can be used for clinical purposes. Whether or not we continue to use the same RUO materials that we currently use, or obtain similar materials that are not labeled with the RUO restriction, we or a collaborator may be required to demonstrate that the use of our system and products as a clinical test complies with all applicable requirements. In addition, if the supplier of any material or component used in a clinical test were changed, it would require confirmation through additional testing that the change does not adversely affect the reliability of the test. Any such additional testing may be expensive and time-consuming and delay the introduction of new products based on our technology. +47 +Table of Contents +The sales cycle for our Simoa instruments can be lengthy and variable, which makes it difficult for us to forecast revenue and other operating results. +The sales process for our Simoa instruments generally involves numerous interactions with multiple individuals within an organization, and often includes in-depth analysis by potential customers of our technology and products and a lengthy review process. Our customers’ evaluation processes often involve a number of factors, many of which are beyond our control. As a result of these factors, the capital investment required to purchase our systems, and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly. Given the length and uncertainty of our sales cycle, we have in the past experienced, and expect to in the future experience, fluctuations in our sales on a period-to-period basis. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems, use existing assays not requiring capital equipment or purchase systems other than ours. +Our long-term results depend upon our ability to improve existing products and introduce and market new products successfully. +Our business is dependent on the continued improvement of our existing Simoa products and our development of new products utilizing our Simoa or other potential future technology. As we introduce new products or refine, improve or upgrade versions of existing products, we cannot predict the level of market acceptance or the amount of market share these products will achieve, if any. We cannot assure you that we will not experience material delays in the introduction of new products in the future. In addition, introducing new products could result in a decrease in revenues from our existing products. Consistent with our strategy of offering new products and product refinements, we expect to continue to use a substantial amount of capital for product development and refinement. We may need more capital for product development and refinement than is available on terms favorable to us, if at all, which could adversely affect our business, financial condition or results of operations. +We generally sell our products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. If we do not develop new products and product enhancements based on technological innovation on a timely basis, our products may become obsolete over time and our revenues, cash flow, profitability and competitive position will suffer. Our success will depend on several factors, including our ability to: +● correctly identify customer needs and preferences and predict future needs and preferences; +● allocate our research and development funding to products with higher growth prospects; +● anticipate and respond to our competitors’ development of new products and technological innovations; +● innovate and develop new technologies and applications, and acquire or obtain rights to third-party technologies that may have valuable applications in the markets we serve; +● successfully commercialize new technologies in a timely manner, price them competitively and manufacture and deliver sufficient volumes of new products of appropriate quality on time; and +● convince customers to adopt new technologies. +In addition, if we fail to accurately predict future customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products that do not lead to significant revenue. Even if we successfully innovate and develop new products and product enhancements, we may incur substantial costs in doing so, and our profitability may suffer. +Our ability to develop new products based on innovation can affect our competitive position and often requires the investment of significant resources. Difficulties or delays in research, development or production of new products +48 +Table of Contents +and services or failure to gain market acceptance of new products and technologies may reduce future revenues and adversely affect our competitive position. +If we do not successfully develop and introduce new assays for our technology, we may not generate new sources of revenue and may not be able to successfully implement our growth strategy. +Our business strategy includes the development of new assays for our Simoa instruments. New assays require significant research and development and a commitment of significant resources prior to their commercialization. Our technology is complex, and we cannot be sure that any assays we may intend to develop will be developed successfully, be proven to be effective, offer improvements over currently available tests, meet applicable standards, be produced in commercial quantities at acceptable costs or be successfully marketed. Moreover, development of particular assays may require licenses or access to third-party intellectual property which may not be available on commercially reasonable terms, or at all. In addition, we believe that our future success will depend, in part, on our ability to develop and commercialize multiplex assays that can simultaneously measure multiple biomarkers, particularly for oncology indications. While we have developed, validated and commercialize a 10-plex assay for the SP-X using our Simoa planar array technology, the most robust multiplex assay that we have commercially launched to date using our Simoa bead-based technology is a 6-plex assay. If we do not successfully develop new assays for our Simoa instruments, including multiplex assays with the ability to detect an increased number of biomarkers in a single sample, we could lose revenue opportunities with existing or future customers. +If we do not successfully manage the development and launch of new products, our financial results could be adversely affected. +We face risks associated with launching new products. If we encounter development or manufacturing challenges or discover errors during our product development cycle, the product launch dates of new products may be delayed. The expenses or losses associated with unsuccessful product development or launch activities or lack of market acceptance of our new products could adversely affect our business or financial condition. +Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims. +Our Simoa products may contain undetected errors or defects when first introduced or as new versions or new products are released. Disruptions affecting the introduction or release of, or other performance problems with, our products may damage our customers’ businesses and could harm their and our reputation. If that occurs, we may incur significant costs, the attention of our key personnel could be diverted, or other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages related to errors or defects in our products. In addition, if we do not meet industry or quality standards, if applicable, our products may be subject to recall. A material liability claim, recall or other occurrence that harms our reputation or decreases market acceptance of our products could harm our business and operating results. +Although we do not, and cannot currently, promote the use of our products, or services based on our products, for diagnostic purposes, if our customers develop or use them for diagnostic purposes, someone could file a product liability claim alleging that one of our products contained a design or manufacturing defect that resulted in the failure to adequately perform, leading to death or injury. A product liability claim could result in substantial damages and be costly and time-consuming to defend, either of which could materially harm our business or financial condition. We cannot assure you that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future. +We may seek to enter into additional strategic collaborations and licensing arrangements with third parties, but we may not be successful in establishing or maintaining such arrangements. +We may seek to enter into additional strategic collaborations and licensing agreements with third parties to develop products based on our Simoa technology, such as for certain IVD purposes. However, there is no assurance that +49 +Table of Contents +we will be successful in doing so. Establishing collaborations and licensing arrangements is difficult and time-consuming, and discussions may not lead to collaborations or licenses on favorable terms, if at all. Even if we establish such relationships, such as our license agreement with Abbott, if our partners do not prioritize and commit sufficient resources to develop and sell products based on our Simoa technology, they may never result in the successful development or commercialization of products based on our Simoa technology. +Our reliance on distributors for sales of our products outside of the United States could limit or prevent us from selling our products and could impact our revenue. +We have established exclusive distribution agreements for our Simoa instruments and related consumable products within certain foreign countries, including Australia, Brazil, China, Czech Republic, India, Israel, Japan, Lebanon, Mexico, Qatar, Saudi Arabia, Singapore, South Korea and Taiwan. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth. In addition, if our distributors fail to comply with applicable laws and ethical standards, including anti-bribery laws, this could damage our reputation and could have a significant adverse effect on our business and our revenues. +We expect to generate a substantial portion of our revenue internationally in the future and can become further subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +For the years ended December 31, 2020, 2019, and 2018, approximately 48%, 50% and 43%, respectively, of our product revenue was generated from customers located outside of North America. We believe that a substantial percentage of our future revenue will come from international sources as we expand our overseas operations and develop opportunities in additional areas. We have limited experience operating internationally and engaging in international business involves a number of difficulties and risks, including: +● required compliance with existing and changing U.S. or foreign regulatory requirements and laws; +● difficulties and costs of staffing and managing foreign operations; +● a shortage of high-quality salespeople and distributors; +● pricing pressure that we may experience internationally; +● difficulties in maintaining consistency with our internal guidelines; +● difficulties in enforcing our intellectual property rights and in defending against third-party threats and intellectual property enforcement actions against us or any of our distributors, suppliers or collaborators; +● reduced or varied protection for intellectual property rights in some countries; +● required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, data privacy requirements, such as the General Data Protection Regulation (the GDPR), labor laws and anti-competition regulations; +● export or import restrictions; +50 +Table of Contents +● laws and business practices favoring local companies; +● longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; +● the imposition of restrictions on the activities of foreign agents, representatives and distributors; +● foreign currency exchange rate fluctuations; +● the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; and +● political and economic instability; +● scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; +● the imposition of new trade restrictions; and +● potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers. +Historically, most of our revenue has been denominated in U.S. dollars. In the future, we may sell our products and services in local currency outside of the United States. As our operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. If we dedicate significant resources to our international operations and are unable to manage these risks effectively, our business, operating results and financial condition will suffer. +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws by us or our agents. +We are subject to the U.S. Foreign Corrupt Practices Act (the FCPA), which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our products internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents, and we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar antibribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. We have limited experience in complying with these laws and in developing procedures to monitor compliance with these laws by our agents. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also incur severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures. +51 +Table of Contents +If we are unable to attract, recruit, train, retain, motivate and integrate key personnel, we may not achieve our goals. +Our future success depends on our ability to attract, recruit, train, retain, motivate and integrate key personnel, including our recently expanded senior management team, as well as our research and development, manufacturing and sales and marketing personnel. Competition for qualified personnel is intense. Our growth depends, in particular, on attracting and retaining highly-trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers. Because of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract, recruit, train, retain, motivate and integrate qualified personnel could materially harm our operating results and growth prospects. +We have limited experience in marketing and selling our products, and if we are unable to successfully commercialize our products, our business and operating results will be adversely affected. +We have limited experience marketing and selling our products. We currently sell all our products for research use only, through our direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional major foreign markets. The future sales of our products will depend in large part on our ability to effectively market and sell our products, successfully manage and expand our sales force, and increase the scope of our marketing efforts. We may also enter into additional distribution arrangements in the future. Because we have limited experience in marketing and selling our products, our ability to forecast demand, the infrastructure required to support such demand and the sales cycle to customers is unproven. If we do not build an efficient and effective sales force, our business and operating results will be adversely affected. +We rely on a single contract manufacturer to manufacture and supply our Simoa HD-X instrument and rely on a different single contract manufacturer to manufacture and supply our Simoa SR-X instrument. If either of these manufacturers should fail or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +We currently rely on a single contract manufacturer, STRATEC, an analytical and diagnostic systems manufacturer located in Germany, to manufacture and supply all of our Simoa HD-X instruments. In addition, we currently rely on a single contract manufacturer, Paramit, a contract manufacturer located in California, to manufacture and supply all of our SR-X instruments. Since our contract with STRATEC does not commit them to supply quantities beyond the amounts included in our forecasts and our contract with Paramit does not commit them to carry inventory or make available any particular quantities, these contract manufacturers may give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. If either of these manufacturers were not able to supply instruments, our business would be harmed. +In the event it becomes necessary to utilize a different contract manufacturer for the HD-X instrument or the SR-X, we would experience additional costs, delays and difficulties in doing so as a result of identifying and entering into an agreement with a new supplier as well as preparing such new supplier to meet the logistical requirements associated with manufacturing our units, and our business would suffer. We may also experience additional costs and delays in the event we need access to or rights under any intellectual property of STRATEC. +In addition, certain of the components used in our instruments are sourced from limited or sole suppliers. If we were to lose such suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our ability to sell and deliver instruments to customers could occur if we encounter delays or difficulties in securing these components, or if the quality of the components supplied do not meet specifications, or if we cannot then obtain an acceptable substitute. If any of these events occur, our business and operating results could be harmed. +We may experience manufacturing problems or delays, or backlogs in deliveries, that could limit the growth of our revenue or increase our losses. +We may encounter unforeseen situations that would result in delays or shortfalls in our production, backlogs in deliveries, or delays or shortfalls caused by our outsourced manufacturing suppliers, by other third-party suppliers who +52 +Table of Contents +manufacture components for our products or because of a significant unforecasted increase in demand for our products. If we are unable to keep up with demand for our products, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products. Our inability to successfully manufacture our products would have a material adverse effect on our operating results. +We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and our SP-X instrument, and may not be able to find replacements or immediately transition to alternative suppliers, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +We rely on limited or sole suppliers for certain reagents and other materials and components that are used in our consumable products and in our SP-X instrument. While we periodically forecast our needs for such materials and enter into standard purchase orders with them, we do not have long-term contracts with many of these suppliers. If we were to lose such suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our operations could occur if we encounter delays or difficulties in securing these materials, or if the quality of the materials supplied do not meet our requirements, or if we cannot then obtain an acceptable substitute. The time and effort required to qualify a new supplier and ensure that the new materials provide the same or better quality results could result in significant additional costs. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. +If we cannot provide quality technical and applications support, we could lose customers and our business and prospects will suffer. +The placement of our products at new customer sites, the introduction of our technology into our customers’ existing laboratory workflows and ongoing customer support can be complex. Accordingly, we need highly trained technical support personnel. Hiring technical support personnel is very competitive in our industry due to the limited number of people available with the necessary scientific and technical backgrounds and ability to understand our Simoa technology at a technical level. To effectively support potential new customers and the expanding needs of current customers, we will need to substantially expand our technical support staff. If we are unable to attract, train or retain the number of highly qualified technical services personnel that our business needs, our business and prospects will suffer. +The life sciences research and diagnostic markets are highly competitive. If we fail to effectively compete, our business, financial condition and operating results will suffer. +We face significant competition in the life sciences research and diagnostic markets. We currently compete with both established and early stage companies that design, manufacture and market systems and consumable supplies. We believe our principal competitors in the life sciences research and diagnostic markets include Bio-Techne, Luminex Corporation, MesoScale Diagnostics, Singulex, Gyros Corporation and Nanostring Technologies, Inc. As we expand the applications for our products to include health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. In addition, there are a number of new market entrants in the process of developing novel technologies for the life sciences research, diagnostic and screening markets. +Many of our current competitors have competitive advantages over us, including: +● greater name and brand recognition; +● substantially greater financial and human resources; +● broader product lines; +● larger sales forces and more established distributor networks; +● substantial intellectual property portfolios; +53 +Table of Contents +● larger and more established customer bases and relationships; and +● better established, larger scale, and lower cost manufacturing capabilities. +We believe that the principal competitive factors in all of our target markets include: +● accuracy, including sensitivity and specificity, and reproducibility of results; +● cost of instruments and consumables; +● reputation among customers; +● innovation in product offerings; +● flexibility and ease of use; and +● compatibility with existing laboratory processes, tools and methods. +We cannot assure you that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot assure you that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results. +Integrating any business, product or technology we acquire can be expensive and time-consuming and can disrupt and adversely affect our ongoing business, including product sales, and distract our management. +We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in complementary businesses, such as our 2018 acquisition of Aushon and our 2019 acquisition of Uman. Our ability to successfully integrate any business, product or technology we acquire depends on a number of factors, including, but not limited to, our ability to: +● minimize the disruption and distraction of our management and other employees, including our sales force, in connection with the integration of any acquired business, product or technology; +● minimize disruption in relationships with customers, distributors or suppliers as a result of such a transaction; +● avoid acquisition of unanticipated liabilities related to acquired companies; +● maintain and increase sales of our existing products; +● establish or manage the transition of the manufacture and supply of any acquired product; +● identify and add the necessary sales, marketing, manufacturing, regulatory and other related personnel, capabilities and infrastructure that are required to successfully integrate any acquired business, product or technology; +● manage the transition and migration of acquired personnel and all commercial, financial, legal, regulatory and other pertinent information relating to any acquired business, product or technology; +54 +Table of Contents +● comply with legal, regulatory and contractual requirements applicable to any acquired business, product or technology; and +● maintain and extend intellectual property protection for any acquired product or technology. +If we are unable to perform the above functions or otherwise effectively integrate any acquired businesses, products or technologies, our business, financial condition and operating results will suffer. +Foreign acquisitions (such as our acquisition of Uman) involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. +Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +Risks Related to Government Regulation and Diagnostic Product Reimbursement +If the FDA determines that our products are medical devices or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +We have focused initially on the life sciences research market. This includes offering products for use by laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Accordingly, other than our COVID assays for which we have received EUAs, our products are labeled as “Research Use Only” and are not intended for diagnostic uses. While we have focused initially on the life sciences research market and RUO products only, our future strategy includes expanding our product line to encompass products that are intended to be used for the diagnosis of disease, either alone or in collaboration with third parties. Such IVD products, once developed and offered, will be subject to regulation by the FDA, or comparable international agencies, as medical devices including requirements for regulatory clearance or approval of such products before they can be marketed. +The process of obtaining regulatory clearances to market a medical device can be costly and time consuming, and we or our collaborators may not be able to obtain these clearances or approvals on a timely basis, if at all. In general, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approved PMA, unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other pre-amendment, 510(k)-exempt, 510(k) cleared products, or PMA-approved products that have subsequently been down-classified. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo process. Pursuant to amendments to the statute in 2012, a manufacturer can also submit a petition for a direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk. +High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. A PMA application must be +55 +Table of Contents +supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. +Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products internationally for such uses, we may be subject to rigorous international regulation in the future. In these circumstances, we may rely significantly on our foreign independent distributors or collaborators to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries. +If we or our collaborators are required to obtain a PMA or 510(k) clearance for products based on our technology, we or they would be subject to a substantial number of additional requirements for medical devices, including establishment registration, device listing, Quality Systems Regulations (QSRs), which cover the design, testing, production, control, quality assurance, labeling, packaging, servicing, sterilization (if required), and storage and shipping of medical devices (among other activities), product labeling, advertising, recordkeeping, post-market surveillance, post-approval studies, adverse event reporting, and correction and removal (recall) regulations. One or more of the products we or a collaborator may develop using our technology may also require clinical trials in order to generate the data required for a PMA. Complying with these requirements may be time-consuming and expensive. We or our collaborators may be required to expend significant resources to ensure ongoing compliance with the FDA regulations and/or take satisfactory corrective action in response to enforcement action, which may have a material adverse effect on the ability to design, develop, and commercialize products using our technology as planned. Failure to comply with these requirements may subject us or a collaborator to a range of enforcement actions, such as warning letters, injunctions, civil monetary penalties, criminal prosecution, recall and/or seizure of products, and revocation of marketing authorization, as well as significant adverse publicity. If we or our collaborators fail to obtain, or experience significant delays in obtaining, regulatory approvals for IVD products, such products may not be able to be launched or successfully commercialized in a timely manner, or at all. +LDTs are a subset of IVD tests that are designed, manufactured and offered as services by high complexity clinical laboratories and used within a single laboratory. The FDA maintains that LDTs are medical devices and has for the most part exercised enforcement discretion for most LDTs. A significant change in the way that the FDA regulates any LDTs that we, our collaborators or our customers develop using our technology could affect our business. The FDA has considered the appropriate way to regulate such tests, but after publishing several draft guidances and holding a number of public hearings and workshops, no final guidance has been issued. However, if the FDA requires laboratories to undergo premarket review and comply with other applicable FDA requirements in the future, the cost and time required to commercialize an LDT will increase substantially, and may reduce the financial incentive for laboratories to develop LDTs, which could reduce demand for our instruments and our other products. +Foreign jurisdictions have laws and regulations similar to those described above, which may adversely affect our ability to market our products as planned in such countries. The number and scope of these requirements are increasing. As in the United States, the cost and time required to comply with regulatory requirements may be substantial, and there is no guarantee that we will obtain the necessary authorization(s) required to make our products commercially viable. As a result, the imposition of foreign requirements may also have a material adverse effect on the commercial viability of our operations. +We are subject to extensive regulatory requirements in connection with the EUAs that we have received from the FDA for our COVID-19 antibody and antigen tests. If we fail to comply with these requirements, or if the FDA otherwise determines that the conditions no longer warrant such authorization, we will be unable to market these products pursuant to this authorization and our business may be harmed. +We have received EUAs from the FDA authorizing us to market our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test and our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. These EUAs allow us to market and sell these products without the need to obtain premarket clearance or approval under the FDA’s standard review pathways for the duration of the COVID-19 public health emergency. The FDA has also established certain conditions which must be met in order to maintain authorization under these EUAs. The requirements can be unclear and are subject to change. +56 +Table of Contents +The FDA has the authority to issue an EUA during a public health emergency if it determines, based on the totality of the scientific evidence, that it is reasonable to believe that the product may be effective, that the known and potential benefits of a product outweigh the known and potential risks, that there is no adequate, approved and available alternative, and if certain other regulatory criteria are met. These standards for marketing authorization are lower than if the FDA had reviewed these tests under its traditional marketing authorization pathways, and we cannot assure you that our tests would be cleared or approved under those more extensive clearance and approval standards. Moreover, the FDA’s policies regarding EUAs can change unexpectedly, and the FDA may revoke an EUA when it determines that the underlying health emergency no longer exists or warrants such authorization or if problems are identified with the authorized product. We cannot predict how long our authorizations will remain in place. FDA policies regarding diagnostic tests, therapies and other products used to diagnose, treat or mitigate COVID-19 remain in flux as the FDA responds to new and evolving public health information and clinical evidence. Changes to FDA regulations or requirements could require changes to our authorized tests, necessitate additional measures or make it impractical or impossible for us to market our tests at all. +In addition, even though we have received these EUAs, these tests may not gain broad market acceptance among customers, including physicians, healthcare payors, users and others in the medical community. The commercial success of our COVID-19 tests will initially be dependent upon physicians and healthcare providers adopting our test kits, which will be informed, in part, by the convenience and accuracy of our tests. Furthermore, the COVID-19 diagnostic testing market is susceptible to rapid technological developments and we may not be able to match new technological advances, which might render our COVID-19 test kits uncompetitive or obsolete. If we are unable to match technological improvements in competitive products or effectively respond to the needs of our customers and users, the demand for our COVID-19 test kits could be reduced. +The termination of the emergency conditions under which EUAs are permitted, the rescission of an EUA, the failure of our tests to gain market acceptance or our inability to match advances in competing products could adversely impact our business. +Our products may in the future be subject to product recalls that could harm our reputation, business and financial results. +The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products, including RUO products, in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted. +U.S. legislative, FDA or global regulatory reforms may make it more difficult and costly for us to obtain any required regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by +57 +Table of Contents +the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Moreover, leadership, personnel and structural changes within the FDA as well as recent and future federal election outcomes could result in significant legislative and regulatory reforms impacting the FDA’s regulation of our products. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business. +In addition, on May 25, 2017, the Medical Devices Regulation (2017/745 or “MDR”) entered into force. Following its entry into application on May 26, 2020, the MDR introduced substantial changes to the obligations with which medical device manufacturers must comply in the EU. High risk medical devices will be subject to additional scrutiny during the conformity assessment procedure. Specifically, the EU Medical Devices Regulation repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the European Economic Area (EEA) Member States, the regulations are directly applicable, i.e., without the need for adoption of EEA member state laws implementing them, in all EEA Member States and are intended to eliminate current differences in regulation of medical devices among EEA Member States. The EU MDR, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices to ensure a high level of safety and health while supporting innovation. The new regulations among other things: +● strengthen the rules on placing devices on the market and reinforce surveillance once they are available; +● establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the market; +● improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number; +● set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and +● strengthen rules for the assessment of certain high-risk devices which may have to undergo an additional check by experts before they are placed on the market. +The MDR may impose increased compliance obligations for us to access the EU market. +In order to continue to sell our products in Europe, we must maintain our CE marks and continue to comply with certain EU directives and, in the future with the MDR. Our failure to continue to comply with applicable foreign regulatory requirements, including those administered by authorities of the EEA countries, could result in enforcement actions against us, including refusal, suspension or withdrawal of our CE Certificates of Conformity by our Notified Body, which could impair our ability to market products in the EEA in the future. Any changes to the membership of the European Union, such as the departure of the United Kingdom (Brexit), may impact the regulatory requirements for the impacted countries and impair our business operations and our ability to market products in such countries. +If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our operations. +The operation of our Clinical Laboratory Improvement Amendments (CLIA) certified laboratory is subject to regulation by numerous federal, state and local governmental authorities in the United States. This laboratory holds a CLIA certificate of compliance and is licensed by the Commonwealth of Massachusetts and the State of Maryland, and we may obtain other state licenses if required in the future. Failure to comply with federal or state regulations or changes +58 +Table of Contents +in those regulatory requirements could result in a substantial curtailment or even prohibition of the operations of our laboratory and could have an adverse effect on our business. CLIA is a federal law that regulates clinical laboratories that perform testing on human specimens for the purpose of providing information for the diagnosis, prevention or treatment of disease. To maintain CLIA certification, laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make unannounced inspections of these laboratories. If we were to lose our CLIA certification or any required state licenses, whether as a result of a revocation, suspension or limitation, it could have a material adverse effect on our business. +We expect to rely on third parties in conducting any required future studies of diagnostic products that may be required by the FDA or other regulatory authorities, and those third parties may not perform satisfactorily. +We do not have the ability to independently conduct clinical trials or other studies that may be required to obtain FDA and other regulatory clearance or approval for future diagnostic products. Accordingly, we expect that we would rely on third parties, such as clinical investigators, consultants, and collaborators to conduct such studies if needed. Our reliance on these third parties for clinical and other development activities would reduce our control over these activities. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised, we may not be able to obtain regulatory clearance or approval. +If diagnostic procedures that are enabled by our technology are subject to unfavorable pricing regulations or third-party coverage and reimbursement policies, our business could be harmed. +The ability of us, our customers or our collaborators to commercialize diagnostic tests based on our technology will depend in part on the extent to which coverage and reimbursement for these tests will be available from government health programs, private health insurers and other third-party payors. In the United States, the principal decisions about reimbursement for new technologies are often made by the Centers for Medicare and Medicaid Services (CMS). Private payors often follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of payments for particular products and procedures. We cannot be sure that coverage will be available for any diagnostic tests based on our technology, and, if coverage is available, the level of payments. Reimbursement may impact the demand for those tests. If reimbursement is not available or is available only to limited levels, any tests for which marketing authorization is received may not be able to be successfully commercialized. +Current and future legislation may increase the difficulty and cost to obtain marketing approval of and commercialize any products based on our technology and affect the prices that may be obtained. +In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the ACA, became law. The ACA is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. Both Congress and former President Trump expressed their intention to repeal or repeal and replace the ACA, and as a result certain sections of the ACA have not been fully implemented or were effectively repealed. The uncertainty around the future of the ACA, and in particular the impact to reimbursement levels and the number of insured individuals, may lead to uncertainty or delay in the purchasing decisions of our customers, which may in turn negatively impact our product sales. If there are not adequate reimbursement levels, our business and results of operations could be adversely affected. +In addition, other legislative changes have been proposed and adopted since the ACA was enacted. We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we or our collaborators will receive for any cleared or approved product. Any reduction in payments from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare +59 +Table of Contents +reforms may prevent us from being able to generate revenue, attain profitability, or commercialize any of our products for which we receive marketing approval. +In addition, sales of our tests outside of the United States will subject us to foreign regulatory requirements, which may also change over time. +We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business, or the effect any future legislation or regulation will have on us. The expansion in government’s effect on the United States healthcare industry may result in decreased profits to us, lower reimbursements by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations. +Risks Related to Our Operations +We depend on our information technology systems, and any failure of these systems could harm our business. +We depend on information technology and telecommunications systems to operate our business. We have installed, and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including, for example, systems handling human resources, accounting, manufacturing, inventory control, financial controls and reporting, sales administration, and other infrastructure operations. In addition to the aforementioned business systems, we intend to extend the capabilities of both our preventative and detective security controls by augmenting the monitoring and alerting functions, network design, and automatic countermeasure operations of our technical systems. These information technology and telecommunications systems support a variety of functions, including manufacturing operations, quality control, customer service support, and general administrative activities. +Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses, and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party suppliers could prevent us from operating our business and managing the administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business. +Security breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +In the ordinary course of our business, we collect and store sensitive data, and intellectual property and proprietary business information owned or controlled by ourselves or our customers. This data encompasses a wide variety of business-critical information including research and development information, commercial information, and business and financial information. We face four primary risks relative to protecting this critical information: loss of access; inappropriate disclosure; inappropriate modification; and inadequate monitoring of our controls over the first three risks. +The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses, breaches, interruptions due to employee error, malfeasance, lapses in compliance with privacy and security mandates, or other disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. +60 +Table of Contents +Any such security breach or interruption, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. federal government or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business and operations. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful. +In addition, the European Parliament and the Council of the European Union adopted the GDPR in 2016 to replace the current European Union Data Protection Directive and related country-specific legislation. The GDPR took effect in May 2018 and governs the collection and use of personal data in the European Union. The GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. While we have taken steps to comply with the GDPR, including such as reviewing our security procedures and entering into data processing agreements with relevant contractors, we cannot assure you that our efforts to remain in compliance will be fully successful. +Further, unauthorized access, loss or dissemination of sensitive information could also disrupt our operations, including our ability to conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our reputation and our business. In addition, there can be no assurance that we will promptly detect any such disruption or security breach, if at all. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our products could be delayed. +We face risks related to handling of hazardous materials and other regulations governing environmental safety. +Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous materials and the generation, transportation and storage of waste. Although we have secured clearance from the EPA historically, and currently are operating in compliance with applicable EPA rules and regulations, our business could be adversely affected if we discover that we or an acquired business is not in material compliance with these rules and regulations. In the future, we may pursue the use of other surfactant substances that will require clearance from the EPA, and we may fail to obtain such clearance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business. +Risks Related to Intellectual Property +If we are unable to protect our intellectual property, it may reduce our ability to maintain any technological or competitive advantage over our competitors and potential competitors, and our business may be harmed. +We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us, we may lose our technological or +61 +Table of Contents +competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. +We cannot assure investors that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will take for such patents to be granted. It is possible that, for any of our patents that have granted or that may grant in the future, others will design around our patented technologies. Further, we cannot assure investors that other parties will not challenge any patents granted to us or that courts or regulatory agencies will hold our patents to be valid or enforceable. We cannot guarantee investors that we will be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, or to such patents being interpreted narrowly or otherwise in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our competitors may be diminished because of these uncertainties. For these and other reasons, our intellectual property may not provide us with any competitive advantage. For example: +● We or our licensors might not have been the first to make the inventions covered by each of our pending patent applications or granted patents; +● We or our licensors might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings or derivation proceedings declared by the United States Patent and Trademark Office (USPTO) that could result in substantial cost to us. No assurance can be given that our patent applications or granted patents (or those of our licensors) will have priority over any other patent or patent application involved in such a proceeding; +● Others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies; +● It is possible that our owned or licensed pending patent applications will not result in granted patents, and even if such pending patent applications grant as patents, they may not provide a basis for intellectual property protection of commercially viable products, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties; +● We may not develop additional proprietary products and technologies that are patentable; +● The patents of others may have an adverse effect on our business; and +● While we apply for patents covering our products and technologies and uses thereof, as we deem appropriate, we may fail to apply for patents on important products and technologies in a timely fashion or at all, or we may fail to apply for patents in potentially relevant jurisdictions. +To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate coverage over our products and protection against our competitors’ products, our competitive position could be adversely affected, as could our business. +Software is a critical component of our instruments. To the extent such software is not protected by our patents, we depend on trade secret protection and non-disclosure agreements with our employees, strategic partners and consultants, which may not provide adequate protection. +62 +Table of Contents +The measures that we use to protect the security of our intellectual property and other proprietary rights may not be adequate, which could result in the loss of legal protection for, and thereby diminish the value of, such intellectual property and other rights. +In addition to pursuing patents on our technology, we also rely upon trademarks, trade secrets, copyrights and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. In addition, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be undermined. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time-consuming, the outcome would be unpredictable, and any remedy may be inadequate. In addition, courts outside the United States may be less willing to protect trade secrets. +In addition, competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect our market share against competitors’ products and methods, our competitive position could be adversely affected, as could our business. +Some of our owned and in-licensed intellectual property has been discovered through government funded programs and thus is subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers. +Some of the intellectual property rights we own and have in-licensed have been generated through the use of U.S. government funding and are therefore subject to certain federal regulations. For example, some of the issued U.S. patents we own and all of the intellectual property rights licensed to us under our license agreement with Tufts have been generated using U.S. government funds. As a result, the U.S. government has certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act of 1980 (the Bayh-Dole Act). These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if the government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government, elect title, and file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the U.S. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the U.S. or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturing may limit our ability to license the applicable patent rights on an exclusive basis under certain circumstances. +63 +Table of Contents +If we enter into future arrangements involving government funding, and we make inventions as a result of such funding, intellectual property rights to such discoveries may be subject to the applicable provisions of the Bayh-Dole Act. To the extent any of our current or future intellectual property is generated through the use of U.S. government funding, the provisions of the Bayh-Dole Act may similarly apply. Any exercise by the government of certain of its rights could harm our competitive position, business, financial condition, results of operations and prospects. +Our Simoa bead-based technology is licensed to us by Tufts University. Any loss of our rights to this technology could prevent us from selling our products. +Our Simoa bead-based technology is licensed exclusively to us from Tufts University. We do not own the patents that underlie this license. Our rights to use this technology and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of the license. Our principal obligations under our license agreement with Tufts are as follows: +● royalty payments; +● milestone payments; +● annual maintenance fees; +● using commercially reasonable efforts to develop and sell a product using the licensed technology and developing a market for such product; +● paying and/or reimbursing fees related to prosecution, maintenance and enforcement of patent rights; and +● providing certain reports. +If we breach any of these obligations, Tufts may have the right to terminate the license, which could result in our being unable to develop, manufacture and sell products using our Simoa bead-based technology or a competitor’s gaining access to the Simoa technology. Termination of our license agreement with Tufts would have a material adverse effect on our business. +In addition, we are a party to a number of other agreements that include licenses to intellectual property, including non-exclusive licenses. We expect that we may need to enter into additional license agreements in the future. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. +We may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we cannot provide any assurances that we would be able to do so. +We may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. If we could not obtain a license, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected products, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation. +64 +Table of Contents +Licensing of intellectual property involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including: +● the scope of rights granted under the license agreement and other interpretation-related issues; +● whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement; +● our right to sublicense patent and other rights to third parties under collaborative development relationships; +● our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our products, and what activities satisfy those diligence obligations; and +● the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners. +If disputes over intellectual property that we have licensed prevent or impair our ability to maintain the licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product, or the dispute may have an adverse effect on our results of operation. +In addition to agreements pursuant to which we in-license intellectual property, we have in the past and expect to in the future to grant licenses under our intellectual property. Like in-licenses, out-licenses are complex, and disputes may arise between us and our licensees, such as the types of disputes described above. Moreover, our licensees may breach their obligations, or we may be exposed to liability due to our failure or alleged failure to satisfy our obligations. Any such occurrence could have an adverse effect on our business. +If we or any of our partners are sued for infringing intellectual property rights of third parties, it would be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +Our success also depends on our ability to develop, manufacture, market and sell our products and perform our services without infringing upon the proprietary rights of third parties. Numerous U.S. and foreign-issued patents and pending patent applications owned by third parties exist in the fields in which we are developing products and services. As part of a business strategy to impede our successful commercialization and entry into new markets, competitors have claimed, and may claim in the future, that our products and/or services infringe their intellectual property rights and have suggested, and may suggest in the future, that we enter into license agreements. Any such claims made to date are, we believe, without merit. +Even if such claims are without merit, we could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against claims of infringement made by third parties or settling such claims. Any adverse ruling by a court or administrative body, or perception of an adverse ruling, may have a material adverse impact on our ability to conduct our business and our finances. Moreover, third parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more products or services and could result in a substantial award of damages against us. In addition, since we sometimes indemnify customers, collaborators or licensees, we may have additional liability in connection with any infringement or alleged infringement of third-party intellectual property. +Because patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our products or proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any of our products. There is a substantial amount of litigation involving patent and +65 +Table of Contents +other intellectual property rights in our industry. If a third party claims that we or any of our licensors, customers or collaboration partners infringe upon a third party’s intellectual property rights, we may have to: +● seek to obtain licenses that may not be available on commercially reasonable terms, if at all; +● abandon any infringing product or redesign our products or processes to avoid infringement; +● pay substantial damages including, in an exceptional case, treble damages and attorneys’ fees, which we may have to pay if a court decides that the product or proprietary technology at issue infringes upon or violates the third-party’s rights; +● pay substantial royalties or fees or grant cross-licenses to our technology; or +● defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources. +We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful. +Competitors may infringe our patents or the patents that we license. In the event of infringement or unauthorized use, we may file one or more infringement lawsuits, which can be expensive and time-consuming. An adverse result in any such litigation proceedings could put one or more of our patents at risk of being invalidated, being found to be unenforceable or being interpreted narrowly and could put our patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. +Many of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise any funds necessary to continue our operations, continue our internal research programs, in-license needed technology, or enter into development partnerships that would help us bring our products to market. +In addition, patent litigation can be very costly and time-consuming. An adverse outcome in such litigation or proceedings may expose us or any of our future development partners to loss of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all. +Our issued patents could be found invalid or unenforceable if challenged in court, which could have a material adverse impact on our business. +If we or any of our partners were to initiate legal proceedings against a third party to enforce a patent covering one of our products or services, the defendant in such litigation could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement, or failure to claim patent eligible subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before the USPTO even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the challenged patent. Such a loss of patent protection would have a material adverse impact on our business. +66 +Table of Contents +We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed alleged trade secrets of their other clients or former employers to us, which could subject us to costly litigation. +As is common in the life sciences industry, we engage the services of consultants and independent contractors to assist us in the development of our products. Many of these consultants and independent contractors were previously employed at, or may have previously or may be currently providing consulting or other services to, universities or other technology, biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may become subject to claims that our company, a consultant or an independent contractor inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current clients. We may similarly be subject to claims stemming from similar actions of an employee, such as one who was previously employed by another company, including a competitor or potential competitor. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management team. If we were not successful we could lose access or exclusive access to valuable intellectual property. +We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property. +We generally enter into confidentiality and intellectual property assignment agreements with our employees, consultants, and contractors. These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, those agreements may not be honored and may not effectively assign intellectual property rights to us. For example, even if we have a consulting agreement in place with an academic advisor pursuant to which such academic advisor is required to assign any inventions developed in connection with providing services to us, such academic advisor may not have the right to assign such inventions to us, as it may conflict with his or her obligations to assign all such intellectual property to his or her employing institution. +In addition, we sometimes enter into agreements where we provide services to third parties, such as customers. Under such circumstances, our agreements may provide that certain intellectual property that we conceive in the course of providing those services is assigned to the customer. In those cases, we would not be able to use that particular intellectual property in, for example, our work for other customers without a license. +We may not be able to protect our intellectual property rights throughout the world, which could materially, negatively affect our business. +Filing, prosecuting and defending patents on current and future products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, regardless of whether we are able to prevent third parties from practicing our inventions in the United States, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products, and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as it is in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from competing. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of +67 +Table of Contents +our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license and may adversely impact our business. +In addition, we and our partners also face the risk that our products are imported or reimported into markets with relatively higher prices from markets with relatively lower prices, which would result in a decrease of sales and any payments we receive from the affected market. Recent developments in U.S. patent law have made it more difficult to stop these and related practices based on theories of patent infringement. +Changes in patent laws or patent jurisprudence could diminish the value of patents in general, thereby impairing our ability to protect our products. +The America Invents Act (the AIA) was signed into law on September 16, 2011, and many of the substantive changes became effective on March 16, 2013. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application, but circumstances could prevent us from promptly filing patent applications on our inventions. +Among some of the other changes introduced by the AIA are changes that limit where a patent holder may file a patent infringement suit and providing additional opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our owned and in-licensed U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. The AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. +Additionally, the U.S. Supreme Court has ruled on several patent cases in recent years, such as Impression Products, Inc. v. Lexmark International, Inc., Association for Molecular Pathology v. Myriad Genetics, Inc. , Mayo Collaborative Services v. Prometheus Laboratories, Inc. and Alice Corporation Pty. Ltd. v. CLS Bank International , either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. +Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. +The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than +68 +Table of Contents +would otherwise have been the case. In some cases, our licensors may be responsible for, for example, these payments, thereby decreasing our control over compliance with these requirements. +If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. +Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +We may use third-party open source software components in future products, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell such products. +While our current products do not contain any software tools licensed by third-party authors under “open source” licenses, we may choose to use open source software in future products. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses may contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products with less development effort and time and ultimately could result in a loss of product sales. +Although we intend to monitor any use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that any such licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure investors that our processes for controlling our use of open source software in our products will be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products on terms that are not economically feasible, to re-engineer our products, to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results, and financial condition. +We use third-party software that may be difficult to replace or may cause errors or failures of our products that could lead to lost customers or harm to our reputation. +We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party software or other third-party software failures could result in errors, defects or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs. +We will need to maintain our relationships with third-party software providers and to obtain software from such providers that does not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver reliable products to our customers and could harm our reputation and results of operations. +69 +Table of Contents +Numerous factors may limit any potential competitive advantage provided by our intellectual property rights. +The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, provide a barrier to entry against our competitors or potential competitors, or permit us to maintain our competitive advantage. Moreover, if a third party has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are illustrative: +● others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology but that is not covered by the claims of any patents that have issued, or may issue, from our owned or in-licensed patent applications; +● we might not have been the first to make the inventions covered by a pending patent application that we own or license; +● we might not have been the first to file patent applications covering an invention; +● others may independently develop similar or alternative technologies without infringing our intellectual property rights; +● pending patent applications that we own or license may not lead to issued patents; +● patents, if issued, that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors; +● third parties may compete with us in jurisdictions where we do not pursue and obtain patent protection; +● we may not be able to obtain and/or maintain necessary or useful licenses on reasonable terms or at all; +● third parties may assert an ownership interest in our intellectual property and, if successful, such disputes may preclude us from exercising exclusive rights over that intellectual property; +● we may not be able to maintain the confidentiality of our trade secrets or other proprietary information; +● we may not develop or in-license additional proprietary technologies that are patentable; and +● the patents of others may have an adverse effect on our business. +Should any of these events occur, they could significantly harm our business and results of operations. +Risks Related to Our Common Stock and Being a Public Company +We expect that our stock price may fluctuate significantly. +The market price of shares of our common stock has been and could continue to be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including: +● actual or anticipated fluctuations in our financial condition and operating results; +● announcements by us, our partners or our competitors of new products, significant contracts, strategic partnerships, joint ventures, collaborations, acquisitions, commercial relationships or capital commitments; +70 +Table of Contents +● competition from existing products or new products that may emerge; +● failure to meet or exceed financial estimates and projections of the investment community or that we may provide to the public; +● issuance of new or updated research or reports by securities analysts or recommendations for our stock; +● positive or adverse regulatory announcements; +● disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies; +● commencement of, or our involvement in, litigation; +● fluctuations in the valuation of companies perceived by investors to be comparable to us; +● conditions in our markets; +● manufacturing disputes or delays; +● any future sales of our common stock or other securities; +● any change to the composition of our board of directors or key personnel; +● general economic conditions and slow or negative growth of our markets; +● share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; +● announcement or expectation of additional debt or equity financing efforts; and +● other factors described in this Risk Factors section of this Annual Report on Form 10-K. +These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and life science companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have on occasion instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. +If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline. +The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the public markets, which could cause our stock price or trading volume to decline. +71 +Table of Contents +Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence over matters subject to stockholder approval. +As of December 31, 2020, our executive officers and directors, and entities affiliated with our executive officers and directors, owned or controlled approximately 17.4% of our outstanding common stock. Accordingly, our executive officers, directors and principal stockholders have significant influence over our operations. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on our stock price and may prevent attempts by our stockholders to replace or remove the board of directors or management. +We have never paid dividends on our capital stock, and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases. +We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of our indebtedness with Hercules Capital Inc. (Hercules) (formally known as Hercules Technology Growth Capital, Inc.) prohibit us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from an investment in our common stock if the price of our common stock increases. +Anti-takeover provisions contained in our restated certificate of incorporation and restated by-laws, as well as provisions of Delaware law, could impair a takeover attempt. +Our restated certificate of incorporation, restated by-laws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions: +● authorizing our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board of directors may determine; +● specifying that special meetings of our stockholders can be called only by our board of directors and that our stockholders may not act by written consent; +● establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors; +● providing that directors may be removed only for cause; +● providing that our board of directors may create new directorships and that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; +● establishing that our board of directors is divided into three classes—Class I, Class II, and Class III—with each class serving staggered three-year terms; +● providing that our board of directors may amend our restated by-laws without stockholder approval; and +● requiring a super-majority of votes to amend certain of the above-mentioned provisions. +These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. +72 +Table of Contents +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. +Any provision of our restated certificate of incorporation, restated by-laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +We are an “emerging growth company” and are able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, and we plan to avail ourselves of the ability to adopt new accounting standards on the timeline permitted for private companies, which could make our common stock less attractive to investors and our financial statements less comparable to other companies who are complying with new accounting standards on public company timelines. +We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the JOBS Act), and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, will comply with new or revised accounting standards not later than the relevant dates on which adoption of such standards is required for non-public companies. As a result of this election, the timeline to comply with certain accounting standards will in many cases be delayed as compared to other public companies who are not eligible to have made or have not made this election. As a result, investors may view our financial statements as not comparable to other public companies. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (ii) December 31, 2022; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. +We incur increased costs and devote substantial management time as a result of operating as a public company. +As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, and these expenses may increase even more after we are no longer an “emerging growth company.” We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and The Nasdaq Global Market. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly. The increased costs increase our net loss. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the sufficient coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. +73 +Table of Contents +In addition, as a public company we incur additional costs and obligations in order to comply with SEC rules that implement Section 404 of the Sarbanes-Oxley Act. Under these rules, we are required to make a formal assessment of the effectiveness of our internal control over financial reporting, and once we cease to be an emerging growth company, which we expect to occur during our current fiscal year, we will be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm, effective with our Annual Report for the fiscal year ending December 31, 2021. To achieve timely compliance with Section 404, we engaged in a process to document and evaluate our internal control over financial reporting, which was both costly and challenging. The process of obtaining the attestation report from our independent registered public accounting firm will be significantly more costly and will require the devotion of significant management attention and resources. We will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are designed and operating effectively, and implement a continuous reporting and improvement process for internal control over financial reporting. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. +Item 1B. UNRESOLVED STAFF COMMENTS +Not applicable. +Item 2. PROPERTIES +We currently lease approximately 91,600 square feet of office, laboratory, and manufacturing space at our headquarters in Billerica, Massachusetts. The premises covered by this lease serve as our principal office and laboratory space. The initial term of the lease is 11 years and five months beginning on April 1, 2019, and we have the option to extend the lease for two additional five-year periods. We believe that this office, laboratory and manufacturing space will be sufficient to meet our needs for the foreseeable future. +In addition, our subsidiary, Uman, leases a total of approximately 6,500 square feet of office, laboratory, manufacturing and storage space in Umeå, Sweden. These leases expire at various dates between May 31, 2020 and February 28, 2023. +Item 3. LEGAL PROCEEDINGS +We are not currently a party to any material legal proceedings. +Item 4. MINE SAFETY DISCLOSURES +Not applicable. +PART II +Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Market Information +Our common stock is traded on The Nasdaq Global Market under the symbol “QTRX.” +Stockholders +As of March 1, 2021, there were approximately 39 stockholders of record of the 36,267,609 outstanding shares of common stock. +74 +Table of Contents +Unregistered Sales of Securities +There were no unregistered sales of equity securities during the fourth quarter ended December 31, 2020. +Issuer Purchases of Equity Securities +Not applicable. +Item 6. SELECTED FINANCIAL DATA +You should read the following selected financial data together with our consolidated financial statements and the related notes and the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. We have derived the statement of operations data for the years ended December 31, 2020, 2019, and 2018 and the balance sheet data as of December 31, 2020 and 2019 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Note that the results for the year ended December 31, 2018 include activity related to the acquisition of Aushon, which occurred on January 1, 2018, and the results for the year ended December 31, 2019 include activity from the acquisition of Uman, which was finalized on August 1, 2019. The statement of operations data for the years ended December 31, 2017 and 2016, and the selected balance sheet data as of December 31, 2018, 2017, and 2016 is derived from audited financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that should be expected in the future . +Consolidated statement of operations data (in thousands, except per share data) +Year Ended December 31, +2020 +2019 +2018 +2017 +2016 +Total revenue +$ +86,377 +$ +56,734 +$ +37,632 +$ +22,874 +$ +17,585 +Cost of revenue +38,195 +29,898 +19,684 +12,887 +9,837 +Gross profit +48,182 +26,836 +17,948 +9,987 +7,748 +Research and development +20,174 +16,190 +15,805 +16,304 +16,993 +Selling, general and administrative +59,592 +52,246 +33,693 +19,688 +12,466 +Total operating expenses +79,766 +68,436 +49,498 +35,992 +29,459 +Loss from operations +(31,584) +(41,600) +(31,550) +(26,005) +(21,711) +Interest income (expense), net +(273) +627 +46 +(951) +(1,298) +Other expense, net +(49) +(10) +(7) +(63) +(164) +Loss before income taxes +(31,906) +(40,983) +(31,511) +(27,019) +(23,173) +Income tax benefit (provision) +376 +187 +(25) +— +— +Net loss +(31,530) +(40,796) +(31,536) +(27,019) +(23,173) +Accretion and accrued dividends on redeemable convertible preferred stock +— +— +— +(4,166) +(4,445) +Net loss attributable to common stockholders +$ +(31,530) +$ +(40,796) +$ +(31,536) +$ +(31,185) +$ +(27,618) +Net loss per share attributable to common stockholders, basic and diluted +$ +(1.07) +$ +(1.63) +$ +(1.43) +$ +(8.30) +$ +(12.89) +Weighted-average common shares outstanding +29,589 +25,091 +21,994 +3,757 +2,143 +Consolidated balance sheet data (in thousands) +As of December 31, +2020 +2019 +2018 +2017 +2016 +Cash and cash equivalents +$ +181,584 +$ +109,155 +$ +44,429 +$ +79,682 +$ +29,671 +Total assets +$ +271,045 +$ +169,951 +$ +67,611 +$ +91,779 +$ +37,117 +Total long term debt +$ +7,673 +$ +7,587 +$ +7,623 +$ +9,382 +$ +10,243 +Total redeemable convertible preferred stock +$ +— +$ +— +$ +— +$ +— +$ +128,585 +Total stockholders’ deficit +$ +206,125 +$ +128,658 +$ +41,065 +$ +65,866 +$ +(115,109) +75 +Table of Contents +Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See “Special Note Regarding Forward-Looking Statements.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.” +Overview +We are a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We are currently focusing on protein detection, which we believe is an area of significant unmet need and where we have significant competitive advantages. However, in addition to enabling new applications and insights in protein analysis, our Simoa platforms have also demonstrated applicability across other testing applications, including detection of nucleic acids and small molecules. +We currently sell most of our products for life science research, primarily to laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies, through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets, including Australia, Brazil, China, Czech Republic, India, Israel, Japan, Lebanon, Mexico, Qatar, Saudi Arabia, Singapore, South Korea and Taiwan. +Our instruments are designed to be used either with assays fully developed by us, including all antibodies and supplies required to run the tests, or with “homebrew” kits where we supply some of the components required for testing, and the customer supplies the remaining required elements. Accordingly, our installed instruments generate a recurring revenue stream. We believe that our recurring consumable revenue is driven by our customers’ ability to extract more valuable data using our platform and to process a large number of samples quickly with little hands-on preparation. +We commercially launched our first immunoassay platform, the Simoa HD-1, in January 2014. The HD-1 is based on our bead-based technology, and assays run on the HD-1 are fully automated. We initiated commercial launch of the SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-1 in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of applications. In July 2019, we launched the Simoa HD-X, an upgraded version of the Simoa HD-1, which replaces the HD-1. The HD-X has been designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. We began shipping and installing HD-X instruments at customer locations in 2019. As the installed base of the Simoa instruments increases, total consumables revenue overall is expected to increase. We believe that consumables revenue should be subject to less period-to-period fluctuation than our instrument sales revenue, and will become an increasingly important contributor to our overall revenue. +76 +Table of Contents +On January 30, 2018, we acquired Aushon for $3.2 million in cash, with an additional payment of $0.8 million made in July 2018, six months after the acquisition date. With the acquisition of Aushon, we acquired a CLIA certified laboratory, as well as Aushon’s proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to develop the SP-X instrument to provide the same Simoa sensitivity found in our Simoa bead-based platform. We initiated an early-access program for the SP-X instrument in January 2019, with the full commercial launch commenced in April 2019. +On August 1, 2019, we completed our acquisition of Uman for an aggregate purchase price of $21.2 million, comprised of (i) $15.7 million in cash plus (ii) 191,152 shares of our common stock (representing $5.5 million based on the closing prices of our common stock on the Nasdaq Global Market on July 1, 2019 and August 1, 2019, the dates of issuance). The acquisition closed with respect to 95% of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5% of the outstanding shares of capital stock of Uman on August 1, 2019. Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. +On September 29, 2020, we entered the Abbott License Agreement with Abbott. Pursuant to the terms of the Abbott License Agreement, we granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under our bead-based single molecule detection patents in the field of IVD. Abbott paid an initial license fee of $10.0 million in connection with the execution of the Abbott License Agreement, which was recognized as license revenue for the year ended December 31, 2020. Abbott has also agreed to pay us milestone fees subject to the achievement by Abbott of certain development, regulatory and commercialization milestones and low single digit royalties on net sales of licensed products. +We are subject to ongoing uncertainty concerning the COVID-19 pandemic, including its length and severity and its effect on our business. During the first and second quarters of 2020, we implemented a resiliency plan focused on the health and safety of our employees and maintaining continuity of our operations. We have seen an impact on instrument revenue due to limitations on our ability to access certain customer sites and complete instrument installations, as well as an impact on consumables revenue from interruptions in certain customer laboratories. We expect these COVID-19 related challenges to continue until these customers return to normal operations. +In view of the pandemic, we have adjusted our operations to expand capacity in our Accelerator Laboratory to support customers whose operations have been disrupted and to sustain clinical trials. We also determined that our cytokine assay technology provides researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS- CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay, and prototyping a high-definition multiplex SARS-CoV-2 serology assay. In December 2020, the FDA issued an EUA for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test, and in January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. We currently intend to pursue authorization for additional sample types, including nasal swabs, saliva, and capillary dried blood obtained from a fingerstick. Preliminary clinical research studies suggest the viral antigen may be readily detectable in asymptomatic and pre-symptomatic patients, and we are exploring extending the test to screening applications, home-based sample collection and pooling to enable larger scale testing. +In September 2020, we entered into WP2 with the NIH under the RADx program. This contract, which has a total award value of $18.2 million, is intended to accelerate the continued development, scale-up and deployment of our novel SARS-CoV-2 antigen test. Initial early feasibility of this test was funded in part through WP1 we were granted in June 2020. WP2 supports clinical validation of the test in support of the EUA submissions with the FDA, and provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Contract funding is subject to achievement of pre-defined milestones and the contract period runs through September 2021. +77 +Table of Contents +The COVID-19 situation remains dynamic and there remains significant uncertainty as to the length and severity of the pandemic, the actions that may be taken by government authorities, the impact to the business of our customers and suppliers, the long-term economic implications and other factors identified in “Part I, Item 1A, Risk Factors” of this Annual Report on Form 10-K. We will continue to evaluate the nature and extent of the impact to our business, financial condition, and operating results. +As of December 31, 2020, we had cash and cash equivalents of $181.6 million. Since inception, we have incurred annual net losses. Our net loss was $31.5 million, $40.8 million, and $31.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $247.8 million and stockholders' equity of $206.1 million. We expect to continue to incur significant expenses and operating losses at least through the next 24 months. We expect our expenses will increase substantially as we: +● expand our sales and marketing efforts to further commercialize our products; +● strategically acquire companies or technologies that may be complementary to our business; +● expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our products are deemed by the FDA to be medical devices or otherwise subject to additional regulation by the FDA; +● seek PMA or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market products for use in the prevention, diagnosis or treatment of a disease or other condition; +● hire additional personnel and continue to grow our employee headcount; +● enter into collaboration arrangements, if any, or in-license other products and technologies; +● add operational, financial and management information systems; and +● continue to incur increased costs as a result of operating as a public company. +78 +Table of Contents +Financial Operations Overview +Revenue +Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606 - Revenue from Contracts with Customers (ASC 606), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. +Once a contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying license relative to the option exercise price, including assumptions about technical feasibility and the probability of developing a candidate that would be subject to the option rights. The exercise of a material right is accounted for as a contract modification for accounting purposes. +The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (SSP) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations. +We generate product revenue primarily from sales of our HD-X, HD-1, SR-X, and SP-X instruments and related reagents and other consumables. We currently sell our products for RUO applications and our customers are primarily laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Sales of our consumables have consistently increased due to an increasing number of instruments being installed in the field, all of which require certain of our consumables to run customers’ specific tests. Consumable revenue consists of sales of complete assays which are developed internally by us, plus sales of “homebrew” kits which contain all the elements necessary to run tests with the exception of the specific antibodies utilized which are separately provided by the customer. +Service and other revenue consists of testing services provided by us in our Accelerator Laboratory on behalf of certain research customers, in addition to warranty and other service-based revenue. Services provided in our Accelerator Laboratory include sample testing, homebrew assay development and custom assay development. +Collaboration and license revenue consists of revenue associated with licensing our technology to third parties and for related services. +Grants received by us that do not require the transfer of goods or services to a customer are accounted for by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance (IAS 20). Under IAS 20, we recognize revenue as the matching expense or asset is incurred or capitalized. +79 +Table of Contents +Cost of Products, Services and Collaboration Revenue +Cost of goods sold for products consists of HD-X, HD-1, and SR-X instrument costs from the manufacturer. Cost of goods sold for SP-X consists of costs based on the internal assembly of this item. Raw material part costs, associated freight, shipping and handling costs, contract manufacturer costs, salaries, personnel costs, royalties, stock-based compensation, overhead and other direct costs related to those sales are classified as cost of goods sold for products. +Cost of goods sold for services consists of salaries and other personnel costs, royalties, stock-based compensation and facility costs associated with operating the Accelerator Laboratory on behalf of customers, in addition to costs related to warranties and other costs of servicing equipment at customer sites. Additionally, we incur costs related to cost of goods sold under the NIH RADx program. +Cost of collaboration revenue consists of royalty expense due to third parties from revenue generated by collaboration or license deals. +Research and Development Expenses +Research and development expenses consist of salaries and other personnel costs, stock-based compensation, research supplies, third-party development costs for new products, materials for prototypes, and allocated overhead costs that include facility and other overhead costs. We have made substantial investments in research and development since our inception, and plan to continue to make substantial investments in the future. Our research and development efforts have focused primarily on the tasks required to support development and commercialization of new and existing products. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to increase in future periods. Additionally, costs incurred related to grant revenue are recorded as research and development expenses. +Selling, General and Administrative Expenses +Selling, general and administrative expenses consist primarily of salaries and other personnel costs, and stock-based compensation for our sales and marketing, finance, legal, human resources and general management, as well as professional services, such as legal and accounting services. We expect selling, general and administrative expenses to increase in future periods as the number of sales, technical support and marketing and administrative personnel grows and we continue to introduce new products, broaden our customer base and grow our business. We also expect to incur additional expenses as a public company, including expenses related to compliance with the rules and regulations of the SEC and the Nasdaq Stock Market, additional insurance expenses, and expenses related to investor relations activities and other administrative and professional services. +Critical Accounting Policies, Significant Judgments and Estimates +Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates may occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. +We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other significant accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. Our significant accounting +80 +Table of Contents +policies are more fully described in “Significant Accounting Policies” (Note 2) in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. +Revenue Recognition +We recognize revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that we expect to be entitled to receive in exchange for these goods and services, incentives and taxes collected from customers, that are subsequently remitted to governmental authorities. +We adopted ASC 606 on January 1, 2019, using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2020 and 2019 reflect the application of ASC 606 guidance. +Product Revenue +Our products are composed of analyzer instruments, assay kits and other consumables such as reagents. Products are sold directly to biopharmaceutical and academic research organizations or are sold through distributors in EMEA and Asia Pacific regions. The sales of instruments are generally accompanied by an initial year of implied service-type warranties and may be bundled with assays and other consumables and may also include other items such as training and installation of the instrument and/or an extended service warranty. Revenues from the sale of products are recognized at a point in time when we transfer control of the product to the customer, which is upon installation for instruments sold to direct customers, and based upon shipping terms for assay kits and other consumables. Revenue for instruments sold to distributors is generally recognized based upon shipping terms (either upon shipment or delivery). +Service and Other Revenue +Service revenues are composed of contract research services, initial implied one-year service-type warranties, extended services contracts and other services such as training. Contract research services are provided through our Accelerator Laboratory and generally consist of fixed fee contracts. Revenues from contract research services are recognized at a point in time when we complete and deliver our research report on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. Revenues from service-type warranties are recognized ratably over the contract service period. Revenues from other services are immaterial. +Collaboration and License Revenue +We may enter into agreements to license the intellectual property and know-how associated with its instruments in exchange for license fees and future royalties (as described below). The license agreements provide the licensee with a right to use the intellectual property with the license fee revenues recognized at a point in time as the underlying license is considered functional intellectual property. We have recognized revenues from a sales- or usage based royalties related to our licensing technology and intellectual property. +Payment Terms +Our payment terms vary by the type and location of customer and the products or services offered. Payment from customers is generally required in a term ranging from 30 to 45 days from date of shipment or satisfaction of the performance obligation with no discounts for early payment. Occasionally we do provide extended payment terms or financing arrangements to customers. +Disaggregated Revenue +When disaggregating revenue, we considered all of the economic factors that may affect revenues. The following tables disaggregate our revenue from contracts with customers by revenue type: +81 +Table of Contents +Year Ended +December 31, 2020 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues +Instruments +$ +8,680 +$ +4,332 +$ +3,594 +$ +16,606 +Consumable and other products +14,305 +10,854 +2,252 +27,411 +Totals +$ +22,985 +$ +15,186 +$ +5,846 +$ +44,017 +Service and other revenues +Service-type warranties +$ +3,171 +$ +1,543 +$ +207 +$ +4,921 +Research services +15,011 +2,225 +737 +17,973 +Other services +700 +435 +100 +1,235 +Totals +$ +18,882 +$ +4,203 +$ +1,044 +$ +24,129 +Collaboration and license revenue +Collaboration and license revenue +$ +11,685 +$ +124 +$ +— +$ +11,809 +Totals +$ +11,685 +$ +124 +$ +— +$ +11,809 +Year Ended +December 31, 2019 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues +Instruments +$ +6,250 +$ +5,243 +$ +3,393 +$ +14,886 +Consumable and other products +14,148 +9,674 +1,783 +25,605 +Totals +$ +20,398 +$ +14,917 +$ +5,176 +$ +40,491 +Service and other revenues +Service-type warranties +$ +3,139 +$ +1,323 +$ +171 +$ +4,633 +Research services +8,845 +704 +456 +10,005 +Other services +825 +565 +31 +1,421 +Totals +$ +12,809 +$ +2,592 +$ +658 +$ +16,059 +Collaboration and license revenue +Collaboration and license revenue +$ +167 +$ +17 +$ +— +$ +184 +Totals +$ +167 +$ +17 +$ +— +$ +184 +Our contracts with customers may include promises to transfer multiple products and services to a customer. In accordance with ASC 606, we combine any performance obligations that are immaterial with one or more other performance obligations that are material to the contract. For arrangements with multiple performance obligations, we allocate the contract transaction price, including discounts, to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. We determine standalone selling prices based on prices charged to customers in observable transactions, and use a range of amounts to estimate standalone selling prices for each performance obligation. We may have more than one range of standalone selling price for certain products and services based on the pricing for different customer classes. +Variable consideration in our contracts primarily relates to (i) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (ii) certain non-fixed fee research services contracts. ASC 606 provides for an exception to estimating the variable consideration for sales- and usage-based royalties related to the license of intellectual property, such that the sales- or usage-based royalty will be recognized in the period the underlying transaction occurs. We have recorded sales- or usage-based royalty revenue for the year ended December 31, 2020 and 2019 related to the intellectual property licensed by Uman. We recognize revenues from sales- +82 +Table of Contents +or usage based royalty revenue at the later of when the sales or usage occurs; and the satisfaction or partial satisfaction of the performance obligation to which the royalty has been allocated. +The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as of December 31, 2020 is $6.0 million. Of the performance obligations not yet satisfied or are partially satisfied, $5.4 million is expected to be recognized as revenue in the next 12 months, with the remainder to be recognized within the 24 months thereafter. The $5.4 million principally consists of amounts billed for undelivered services related to initial and extended service-type warranties and research services, as well as $0.5 million related to undelivered licenses of intellectual property for a diagnostics company. During the year ended December 31, 2020, we recognized $1.2 million of previously deferred revenue as a result of entering into a license agreement with a diagnostics company (see Note 13). +We have classified the balance of capitalized costs to obtain a contract as a component of prepaid expenses and other current assets as of December 31, 2020 and classified the expense as a component of cost of goods sold and selling, general and administrative expense over the estimated life of the contract. We consider potential impairment in these amounts each period. +ASC 606 provides entities with certain practical expedients and accounting policy elections to minimize the cost and burden of adoption. +We exclude from the transaction price any amounts collected from customers related to sales and other similar taxes. +When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. We do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. None of our contracts contained a significant financing component for the years ended December 31, 2020 and 2019. +We have elected to account for the shipping and handling as an activity to fulfill the promise to transfer the product, and therefore will not evaluate whether shipping and handling activities are promised services to its customers. +Grant Revenue +We recognize grant revenue as we perform services under the arrangement when the funding is committed. Revenues and related research and development expenses are presented gross in the consolidated statements of operations as we have determined we are the primary obligor under the arrangement relative to the research and development services. +Accounting for grants does not fall under ASC 606, as the grantor will not benefit directly from our expansion or product development. As there is no authoritative guidance under U.S. GAAP on accounting for grants to for-profit business entities, we have accounted for grants by analogy to IAS 20. +Our grants contain both monetary amounts granted related to assets and monetary amounts granted related to income, which are grants other than those related to assets. The grants related to assets are for the expansion and increase of manufacturing capacity. The grants related to income are for additional research and development, as well as other non-asset related scale up costs. We determined it was appropriate to account for each monetary grant amount under the appropriate accounting treatment outlined in IAS 20. +Under IAS 20, grants related to assets shall be presented in the consolidated balance sheets either by recognizing the grant as deferred income (which is recognized in the consolidated statements of operations on a systematic basis over the useful life of the asset), or by deducting the grant in calculating the carrying amount of the asset (which is recognized in the consolidated statements of operations over the life of the depreciable asset as a reduced +83 +Table of Contents +depreciation expense). Both methods are acceptable under IAS 20. We have elected to record grants related to assets as a deduction in calculating the carrying value of the asset. +Under IAS 20, grants related to income are presented as part of the consolidated statements of operations, either separately or under a general heading. Both methods are acceptable under IAS 20. We have elected to record grants related to income separately on the consolidated statements of operations as grant revenue. The related expenses are recorded within operating expenses and not deducted. +On June 22, 2020, we entered into WP1 under the NIH’s RADx program to assess the feasibility of a novel SARS-CoV-2 antigen detection test using our Simoa technology. During the year ended December 31, 2020 we recognized $2.0 million of grant revenue and incurred $1.0 million in research and development expense related to WP1. WP1 is complete as of December 31, 2020. +On September 29, 2020, we entered into WP2 with the NIH under its RADx program. The contract, which has a total award value of $18.2 million, accelerates the continued development, scale-up, and deployment of the novel SARS-CoV-2 antigen detection test using our Simoa technology. The contract provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Release of the $18.2 million of funding under WP2 is based on the achievement of certain milestones, and there is no assurance that we can meet all the milestones on a timely basis, if at all. If we do not meet all the milestones, we will not be able access the full $18.2 million in funding under the contract. During the year ended December 31, 2020 we recognized $4.4 million in grant revenue and incurred $2.6 million in research and development expense related to WP2. +The following table summarizes the activity under WP2 as of December 31, 2020 (in thousands): +Total grant revenue from research and development activities +$ +4,362 +Total proceeds used for assets +826 +Total deferred proceeds for assets +2,478 +Total deferred grant revenue +304 +Total recognized +$ +7,970 +Total recognized +$ +7,970 +Total amount accrued +(2,968) +Total cash received +$ +5,002 +Total proceeds received +$ +5,002 +Total proceeds reasonably assured +13,198 +Total WP2 grant amount +$ +18,200 +Stock-Based Compensation +We account for stock-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Stock-based compensation awards have historically consisted of stock options and restricted stock. Prior to the adoption of Accounting Standards Update (ASU) No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), the measurement date for non-employee awards was generally the date the services were completed, resulting in financial reporting period adjustments to stock-based compensation during the vesting period for changes in the fair value of the awards. We adopted ASU 2018-07 on January 1, 2020. After the adoption of ASU 2018-07, the measurement date for non-employee awards is the date of grant without changes in the fair value of the award. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. There were no material non-employee awards outstanding during the years ended December 31, 2020, 2019, and 2018. +84 +Table of Contents +We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. +The fair value of stock options granted to employees and non-employees is estimated on the grant date using the Black-Scholes option-pricing model, based on the assumptions noted in the following table: +Year Ended December 31, +2020 +2019 +2018 +Risk-free interest rate +0.4% - 1.7% +1.4% - 2.6% +2.6% - 3.0% +Expected dividend yield +None +None +None +Expected term (in years) +6.0 +6.0 +5.9 +Expected volatility +43.9% - 49.2% +33.5% - 39.7% +32.4% - 36.8% +Using the Black-Scholes option-pricing model, the weighted-average grant date fair value of options granted for the years ended December 31, 2020, 2019, and 2018 was $12.66, $9.09, and $7.19 per share, respectively. Expected volatility was calculated based on proportional weighting of reported volatility data for a representative group of guideline publicly traded companies for which historical information was available, as well as our stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. We estimate the expected life of options granted to employees utilizing the simplified method which calculates the expected life of an option as the average of the time to vesting and contractual life of the options. The expected life is applied to the stock option grant group as a whole, as we do not expect substantially different exercise or post-vesting termination behavior among our employee population. We use the simplified method due to the lack of historical exercise data and the plain nature of the stock options. We use the remaining contractual term for the expected life of non-employee awards. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on common stock. +For the years ended December 31, 2020, 2019, and 2018 stock-based compensation expense was $10.1 million, $6.4 million, and $4.9 million, respectively. +The table below summarizes the stock-based compensation expense recognized in our statements of operations by classification (in thousands): +Year Ended December 31, +2020 +2019 +2018 +Cost of product revenue +$ +189 +$ +86 +$ +55 +Cost of service and other revenue +311 +238 +173 +Research and development +1,129 +718 +513 +General and administrative +8,470 +5,346 +4,143 +Total +$ +10,099 +$ +6,388 +$ +4,884 +As of December 31, 2020, we had $21.3 million of total unrecognized stock-based compensation costs which we expect to recognize over a weighted-average period of 4.7 years. +Prior to our initial public offering (IPO) in December 2017, the fair value of our common stock underlying our stock options was estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying granted stock options, our board of directors considered, among other things, the most recent valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. +Given the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including (1) our business, financial condition and results of operations, including related industry +85 +Table of Contents +trends affecting our operations; (2) our forecasted operating performance and projected future cash flows discounted to present value using our estimated weighted average cost of capital; (3) the illiquid nature of our common stock; (4) liquidation preferences and other rights and privileges of our preferred stock over our common stock; (5) likeliness and estimated timing of the potential option to have our stock become publicly traded; (6) market multiples of our most comparable public peers; (7) recently completed equity financing transactions; and (8) market conditions affecting our industry. +Since the completion of our IPO, we have determined the fair value of each common share underlying share-based awards based on the closing price of our common shares as reported by Nasdaq on the date of grant. +Results of Operations +Comparison of the Years Ended December 31, 2020 and December 31, 2019 (dollars in thousands): +Year Ended +Year Ended +December 31, +% of +December 31, +% of +$ +% +2020 +revenue +2019 +revenue +change +change +Product revenue +$ +44,017 +52 +% +$ +40,491 +72 +% +$ +3,526 +9 +% +Service and other revenue +24,129 +28 +% +16,059 +28 +% +8,070 +50 +% +Collaboration and license revenue +11,809 +14 +% +184 +— +% +11,625 +6,318 +% +Grant revenue +6,422 +6 +% +— +— +% +6,422 +100 +% +Total revenue +86,377 +100 +% +56,734 +100 +% +29,643 +52 +% +Cost of goods sold: +Cost of product revenue +25,950 +30 +% +20,900 +37 +% +5,050 +24 +% +Cost of service revenue +11,245 +13 +% +8,998 +16 +% +2,247 +25 +% +Cost of collaboration and license revenue +1,000 +1 +% +— +— +% +1,000 +100 +% +Total costs of goods sold, services, and licenses +38,195 +44 +% +29,898 +53 +% +8,297 +28 +% +Gross profit +48,182 +56 +% +26,836 +47 +% +21,346 +80 +% +Operating expenses: +Research and development +20,174 +23 +% +16,190 +29 +% +3,984 +25 +% +Selling, general, and administrative +59,592 +69 +% +52,246 +92 +% +7,346 +14 +% +Total operating expense +79,766 +92 +% +68,436 +121 +% +11,330 +17 +% +Loss from operations +(31,584) +(37) +% +(41,600) +(73) +% +10,016 +24 +% +Interest income (expense), net +(273) +— +% +627 +1 +% +` +(900) +(144) +% +Other expense, net +(49) +— +% +(10) +— +% +(39) +(390) +% +Loss before income taxes +(31,906) +(37) +% +(40,983) +(72) +% +9,077 +22 +% +Income tax benefit +376 +— +% +187 +— +% +189 +101 +% +Net loss +$ +(31,530) +(37) +% +$ +(40,796) +(72) +% +$ +9,266 +23 +% +Revenue +Revenue increased by $29.6 million, or 52%, to $86.4 million for the year ended December 31, 2020 as compared to $56.7 million for the year ended December 31, 2019. Product revenue consisted of sales of instruments totaling $16.6 million and sales of consumables and other products of $27.4 million for the year ended December 31, 2020. Product revenue consisted of sales of instruments totaling $14.9 million and sales of consumables and other products totaling $25.6 million for the year ended December 31, 2019. Average sales prices of instruments and consumables did not change materially for the year ended December 31, 2020 as compared with the year ended December 31, 2019. The increase in product revenue of $3.5 million was due to the sale of more instruments for the year ended December 31, 2020 and increased sales of consumables. The installed base of instruments increased from December 31, 2019 to December 31, 2020, and as these additional instruments were used by customers, the consumables sales increased. The increase in service and other revenue of $8.1 million was primarily due to increased services performed in our Accelerator Laboratory; more customers use these services, and existing customers use these services more frequently. In addition, an increase in purchased warranties contributed to the service and other revenue increase. Collaboration and license revenue for the year ended December 31, 2020 of $11.8 million was related to entering into +86 +Table of Contents +the Abbott License Agreement, and from existing contracts related to licensing technology and intellectual property. Collaboration and license revenue for the year ended December 31, 2019 of $0.2 million was related to licensing technology and intellectual property. Grant revenue of $6.4 million for the year ended December 31, 2020 consisted of revenue related to WP1 and WP2. We did not have any grant revenue during the year ended December 31, 2019. +Cost of Goods Sold and Services +Cost of product revenue increased by $5.1 million, or 24%, to $26.0 million for the year ended December 31, 2020 as compared to $20.9 million for the year ended December 31, 2019. The increase was primarily due to our product revenue increase, as well as a full year of costs incurred from the amortization of the Uman acquisition-related inventory valuation adjustment and acquired intangibles for the year ended December 31, 2020, as compared to only six months of these costs during the year ended December 31, 2019. Cost of service revenue increased to $11.2 million for the year ended December 31, 2020 from $9.0 million for the year ended December 31, 2019. The increase was primarily due to higher utilization of the Accelerator Laboratory, plus increased personnel costs from the build out of our field service and Accelerator organization. Cost of collaboration and license revenue of $1.0 million resulted from the licensing of certain technology and intellectual property to Abbott during the year ended December 31, 2020 . No cost of collaboration and license revenue was incurred during the year ended December 31, 2019. Overall cost of goods sold and services as a percentage of revenue decreased to 44% of total revenue for the year ended December 31, 2020 as compared to 53% for the year ended December 31, 2019, primarily as a result of the significant increase in collaboration and license revenue. +Research and Development Expense +Research and development expense increased by $4.0 million, or 25%, to $20.2 million for the year ended December 31, 2020 as compared to $16.2 million for the year ended December 31, 2019. The increase was primarily due to compensation, development, materials, and other expenses related to work under WP1 and WP2 incurred during the year ended December 31, 2020. +Selling, General and Administrative Expense +Selling, general and administrative expense increased by $7.3 million, or 14%, to $59.6 million for the year ended December 31, 2020 as compared to $52.2 million for the year ended December 31, 2019. The increase was primarily due to headcount additions in various departments as we build out our organization to support growth. +Interest Income (Expense), Net and Other Expense, Net +Interest income (expense), net and other expense, net decreased by $0.9 million for the year ended December 31, 2020 as compared to the same period in 2019, primarily due to the unfavorable impact of COVID-19 on the interest rates of our cash equivalents during the year ended December 31, 2020. +Income Tax Benefit +Income tax benefit was $0.4 million for the year ended December 31, 2020 as compared to $0.2 million for the same period in 2019. The change is primarily due to the increase in the tax benefit recorded on the operating results of our foreign subsidiaries. +87 +Table of Contents +Comparison of the Years Ended December 31, 2019 and December 31, 2018 (dollars in thousands): +Year Ended +Year Ended +December 31, +% of +December 31, +% of +$ +% +2019 +revenue +2018 +revenue +change +change +Product revenue +$ +40,491 +72 +% +$ +23,365 +62 +% +$ +17,126 +73 +% +Service and other revenue +16,059 +28 +% +12,117 +32 +% +3,942 +33 +% +Collaboration and license revenue +184 +— +% +2,150 +6 +% +(1,966) +(91) +% +Grant revenue +— +— +% +— +— +% +— +— +% +Total revenue +56,734 +100 +% +37,632 +100 +% +19,102 +51 +% +Cost of goods sold: +Cost of product revenue +20,900 +37 +% +12,729 +34 +% +8,171 +64 +% +Cost of service revenue +8,998 +16 +% +6,955 +18 +% +2,043 +29 +% +Total costs of goods sold, services, and licenses +29,898 +53 +% +19,684 +52 +% +10,214 +52 +% +Gross profit +26,836 +47 +% +17,948 +48 +% +8,888 +50 +% +Operating expenses: +Research and development +16,190 +29 +% +15,805 +42 +% +385 +2 +% +Selling, general, and administrative +52,246 +92 +% +33,693 +90 +% +18,553 +55 +% +Total operating expense +68,436 +121 +% +49,498 +132 +% +18,938 +38 +% +Loss from operations +(41,600) +(73) +% +(31,550) +(84) +% +(10,050) +(32) +% +Interest income, net +627 +— +% +46 +— +% +` +581 +1,263 +% +Other expense, net +(10) +— +% +(7) +— +% +(3) +(43) +% +Loss before income taxes +(40,983) +(72) +% +(31,511) +(84) +% +(9,472) +(30) +% +Income tax benefit (provision) +187 +— +% +(25) +— +% +212 +848 +% +Net loss +$ +(40,796) +(72) +% +$ +(31,536) +(84) +% +$ +(9,260) +(29) +% +Revenue +Revenue increased by $19.1 million, or 51%, to $56.7 million for the year ended December 31, 2019 as compared to $37.6 million for the year ended December 31, 2018. Product revenue consisted of sales of instruments totaling $14.9 million and sales of consumables and other products of $25.6 million for the year ended December 31, 2019. Product revenue consisted of sales of instruments totaling $9.6 million and sales of consumables and other products totaling $13.8 million for the year ended December 31, 2018. Average sales prices of instruments and consumables did not change materially for the year ended December 31, 2019 as compared with the year ended December 31, 2018. The increase in product revenue of $17.1 million was primarily due to the sale of more instruments for the year ended December 31, 2019 and increased sales of consumables. The installed base of instruments increased from December 31, 2018 to December 31, 2019, and as these additional instruments were used by customers, the consumables sales increased. The increase in service and other revenue of $3.9 million was primarily due to increased services performed in our Accelerator Laboratory; more customers use these services, and existing customers use these services more frequently. In addition, an increase in purchased warranties contributed to the service and other revenue increase. Collaboration and license revenue for the year ended December 31, 2019 of $0.2 million was related to licensing technology and intellectual property. Collaboration and license revenue for the year ended December 31, 2018 of $2.2 million was related to the termination of the collaboration arrangement with bioMérieux. +Cost of Goods Sold and Services +Cost of product revenue increased by $8.2 million, or 64%, to $20.9 million for the year ended December 31, 2019 as compared to $12.7 million for the year ended December 31, 2018. The increase was primarily due to an increase in sales of consumables and instruments, along with costs incurred from the amortization of the Uman acquisition-related inventory valuation adjustment and acquired intangibles. Cost of service revenue increased to $9.0 million for the year ended December 31, 2019 from $7.0 million for the year ended December 31, 2018. The increase was primarily due to higher utilization of the Accelerator Laboratory, plus increased personnel costs from the build out of our field service and Accelerator organization. Overall cost of goods sold and services as a percentage of revenue increased slightly to 53% of total revenue for the year ended December 31, 2019 as compared to 52% for the year ended +88 +Table of Contents +December 31, 2018, primarily as a result of the impact of the collaboration arrangement with bioMérieux during the year ended December 31, 2018 and the impact of the Uman acquisition-related charges during the year ended December 31, 2019. +Research and Development Expense +Research and development expense increased slightly by $0.4 million, or 2%, to $16.2 million for the year ended December 31, 2019 as compared to $15.8 million for the year ended December 31, 2018. The increase was primarily due to the development of the SP-X and HD-X and increased headcount in research and development. +Selling, General and Administrative Expense +Selling, general and administrative expense increased by $18.6 million, or 55%, to $52.2 million for the year ended December 31, 2019 as compared to $33.7 million for the year ended December 31, 2018. The increase was primarily due to headcount additions in various departments as we build out our organization to support future growth, public company costs, the lease for the new headquarters, and stock-based compensation expense. In addition, we incurred approximately $1.9 million in costs associated with the acquisition of Uman during the year ended December 31, 2019. +Interest Income, Net and Other Expense, Net +Interest income, net and other expense, net increased by $0.6 million for the year ended December 31, 2019 as compared to the same period in 2018, primarily due to the interest income earned on cash equivalents, which increased due to our “at-the-market” and underwritten public offerings completed during 2019. +Income Tax Benefit (Provision) +Income tax benefit was $0.2 million for the year ended December 31, 2019 as compared to a provision of less than $0.1 million for the same period in 2018. The increase is primarily due to certain state and international taxes in 2019, which we did not have in the prior year. +Liquidity and Capital Resources +Since our inception, we have incurred annual net losses and negative cash flows from operations. We incurred net losses of $31.5 million, $40.8 million and $31.5 million and used $23.4 million, $26.2 million and $28.7 million of cash from our operating activities for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $247.8 million. +As of December 2020, we had cash and cash equivalents of $181.6 million and no additional amounts were available to borrow under our debt facility. +On February 3, 2021, we received approximately $269.6 million in net proceeds related to an underwritten public offering. +Sources of Liquidity +To date, we have financed our operations principally through equity offerings, borrowings from credit facilities and revenue from our commercial operations. +Equity Offerings +In December 2017, we completed our IPO in which we sold 4,916,480 shares of common stock at an initial public offering price of $15.00 per share. The aggregate net proceeds received by us from the offering, net of +89 +Table of Contents +underwriting discounts and commissions and offering expenses, were $65.6 million. Prior to the IPO, we had raised capital through the sale of redeemable convertible preferred stock in private placement transactions. +On March 19, 2019, we entered into a Sales Agreement for an “at-the-market offering” arrangement with Cowen and Company, LLC (Cowen), which allowed us to issue and sell shares of common stock pursuant to a shelf registration statement for total gross sales proceeds of up to $50.0 million from time to time through Cowen, acting as our agent. During the year ended December 31, 2019, we sold an aggregate of 2,186,163 shares of common stock pursuant to this agreement resulting in $49.7 million in gross proceeds and $48.0 million in net proceeds. On August 6, 2020, we delivered written notice to Cowen to terminate the Sales Agreement, which termination the parties agreed to make immediately effective. +On August 8, 2019, we entered into an underwriting agreement with J.P. Morgan Securities LLC and SVB Leerink LLC, or Leerink, as representatives of the several underwriters, relating to an underwritten public offering of 2,732,673 shares of common stock at a public offering price of $25.25 per share. We received $69.0 million in gross proceeds and $64.5 million in net proceeds. +On August 6, 2020, we entered into an underwriting agreement with Leerink and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of 3,048,774 shares of common stock at a public offering price of $32.00 per share. We received $97.6 million in gross proceeds and $91.4 million in net proceeds. +On February 3, 2021, we entered into an underwriting agreement with Goldman Sachs & Co. LLC, Leerink and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of 4,107,142 shares of common stock at a public offering price of $70.00 per share. We received $287.5 million in gross proceeds and approximately $269.6 million in net proceeds. +Loan Facility with Hercules +On April 14, 2014, we executed a Loan Agreement with Hercules, as subsequently amended, most recently in April 2019. The Loan Agreement provided a total debt facility of $10.0 million, which is secured by substantially all of our assets. At closing, we borrowed $5.0 million in principal and had the ability to draw the additional $5.0 million over the period from November 1, 2014 to March 31, 2015. The interest rate on this term loan was variable based on a calculation of 8% plus the prime rate less 5.25%, with a minimum interest rate of 8%. Interest was to be paid monthly beginning the month following the borrowing date. Principal payments were scheduled to begin on September 1, 2015, unless we achieved certain milestones which would have extended this date to December 1, 2015 or March 1, 2016. In connection with the execution of the Loan Agreement, we issued Hercules a warrant to purchase up to 173,428 shares of our Series C Preferred Stock at an exercise price of $3.3299 per share. Upon closing of the IPO, this warrant was automatically converted into a warrant to purchase up to 53,960 shares of our common stock at an exercise price of $10.70 per share. +In August 2018, we signed Amendment 5 to the Loan Agreement, which extended the interest only payment period through March 1, 2020 and also extended the loan maturity date to March 1, 2020. We accounted for the August 2018 amendment as a modification pursuant to ASC 470-50 and determined that no material change occurred as a result of the modification. In addition, the amendment deferred the payment of principal until the maturity date. We paid $0.1 million in end of term payments related to Amendment 5 during the year ended December 31, 2020. +In October 2018, we signed Amendment 6 to the Loan Agreement, which amended the Loan Agreement's collateral clause to exclude the $1 million certificate of deposit associated with the lease on our new headquarters in Billerica, Massachusetts. The Loan Agreement and amendments contain end of term payments and are recorded in the debt accounts. We paid $0.5 million in end of term payments related to Amendment 6 during the year ended December 31, 2018. +On April 15, 2019, we entered into Amendment 7 to the Loan Agreement, which extended the interest only payment period through July 1, 2021 and also extended the loan maturity date to October 1, 2021. We are required to +90 +Table of Contents +pay the loan principal in five equal monthly installments starting July 1, 2021 with the final principal payment to be made on October 1, 2021. +On July 2, 2019, 66,041 warrants were exercised by Hercules on a net, non-cash, basis. Per the terms of the warrant agreement, we issued 45,690 shares of common stock as a result of the net exercise. The Loan Agreement and amendments contain end of term payments and are recorded in the debt accounts. No end of term payments were paid in the year ended December 31, 2019. We paid $0.1 million in end of term payments related to Amendment 5 during the year ended December 31, 2020. +The Loan Agreement contains negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments and certain other business transactions. There are no financial covenants associated with the Loan Agreement. The obligations under the Loan Agreement are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations or financial or other condition, which is subjective in nature. We have determined that the risk of subjective acceleration under the material adverse events clause is not probable and therefore have classified the outstanding principal in current and long-term liabilities based on scheduled principal payments. +Debt principal repayments, including the end of term fees, due as of December 31, 2020 are (in thousands): +Years ending December 31, +2021 +$ +7,738 +$ +7,738 +Uman Acquisition +In August 2019, we completed the acquisition of Uman, in which we paid $15.7 million in cash to the shareholders of Uman. We funded this payment through our existing cash balances. In addition, we issued $5.5 million in stock in connection with the purchase of Uman. The acquisition closed with respect to 95% of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5% of the outstanding shares of capital stock of Uman on August 1, 2019. +Cash Flows +The following table presents our cash flows for each period presented (in thousands): +Year Ended December 31, +2020 +2019 +2018 +Net cash used in operating activities +$ +(23,365) +$ +(26,187) +$ +(28,721) +Net cash used in investing activities +(626) +(25,376) +(5,454) +Net cash provided by (used in) financing activities +96,236 +116,197 +(78) +Net increase (decrease) in cash and cash equivalents +$ +72,245 +$ +64,634 +$ +(34,253) +Net Cash Used in Operating Activities +We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to support the growth of our business. We have historically experienced negative cash flows from operating activities as we have developed our technology, expanded our business and built our infrastructure and this may continue in the future. +Net cash used in operating activities was $23.4 million during the year ended December 31, 2020. Net cash used in operating activities primarily consisted of net loss of $31.5 million offset by non-cash charges of $10.1 million of stock-based compensation expense and $4.3 million of depreciation and amortization expense. Cash used as a result of changes in operating assets and liabilities of $7.5 million was primarily due to an increase in an increase in accounts +91 +Table of Contents +receivable of $6.2 million, an increase in inventory of $5.1 million, and an increase in prepaid expenses and other assets of $3.9 million, offset by a decrease in accrued compensation and benefits and other accrued expenses of $6.2 million. +Net cash used in operating activities was $26.2 million during the year ended December 31, 2019. Net cash used in operating activities primarily consisted of net loss of $40.8 million offset by non-cash charges of $6.4 million of stock-based compensation expense, $3.0 million of depreciation and amortization expense, and $0.6 of inventory valuation adjustment amortization. Cash provided as a result of changes in operating assets and liabilities of $4.4 million was primarily due to a $9.8 million increase in other non-current liabilities related to our lease, offset by an increase in accounts receivable of $3.4 million, and an increase in inventory of $3.4 million. +Net cash used in operating activities was $28.7 million during the year ended December 31, 2018. Net cash used in operating activities primarily consisted of net loss of $31.5 million, a decrease of $1.9 million in deferred revenue and an increase of $1.6 million in inventory, primarily offset by non-cash stock compensation expense of $4.9 million and an increase of $1.3 million in accounts payable. +Net Cash Used in Investing Activities +Historically, our primary investing activities have consisted of capital expenditures for the purchase of capital equipment to support our expanding infrastructure and work force. We expect to continue to incur additional costs for capital expenditures related to these efforts in future periods. +We used $0.6 million of cash in investing activities during the year ended December 31, 2020 consisting of $3.9 million in additions to property and equipment, offset by $3.3 million in grant proceeds related to assets acquired under WP2. +We used $25.4 million of cash in investing activities during the year ended December 31, 2019. The significant increase was related to the cash portion of the Uman acquisition, as well as the leasehold improvements for our headquarters, which is a component of our lease agreement. +We used $5.5 million of cash in investing activities during the year ended December 31, 2018 consisting of cash paid in the acquisition of Aushon, net of cash acquired, and for purchases of capital equipment to support our infrastructure. +Net Cash Provided by (Used in) Financing Activities +Historically, we have financed our operations principally through private placements of our convertible preferred stock and borrowings from credit facilities, the sale of shares of our common stock in our IPO or other offerings and revenues from our commercial operations. +Financing activities provided $96.2 million of cash during the year ended December 31, 2020, primarily from net proceeds of our underwritten public offering during the third quarter of 2020. +Financing activities provided $116.2 million of cash during the year ended December 31, 2019, primarily from proceeds of our “at-the-market” offering during the second quarter of 2019 and our underwritten public offering during the third quarter of 2019. +We used $0.1 million cash in financing activities during the year ended December 31, 2018, which primarily was from payments on debt of $1.9 million offset by cash generated by the exercise of stock options. +Capital Resources +We have not achieved profitability on an annual basis since our inception, and we expect to continue to incur net losses in the future. We also expect that our operating expenses will increase as we continue to increase our marketing efforts to drive adoption of our commercial products. Additionally, as a public company, we have incurred +92 +Table of Contents +and will continue to incur significant audit, legal and other expenses that we did not incur as a private company. Our liquidity requirements have historically consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, working capital, debt service and general corporate expenses. +We believe cash generated from commercial sales, our current cash and cash equivalents, and interest income we earn on these balances will be sufficient to meet our anticipated operating cash requirements for at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our sales and marketing activities and grow our customer base. Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in Item 1A, “Risk Factors” of this Annual Report on Form 10-K. We have based our estimates on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including: +● market acceptance of our products; +● the cost and timing of establishing additional sales, marketing and distribution capabilities; +● the cost of our research and development activities; +● our ability to enter into collaborations in the future, and the success of any such collaborations; +● the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +● the effect of competing technological and market developments. +We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. +If the conditions for raising capital are favorable, we may seek to finance future cash needs through public or private equity or debt offerings or other financings. On November 6, 2020, we filed an automatically effective shelf registration statement with the SEC. Each issuance of securities under the shelf registration statement will require the filing of a prospectus supplement identifying the amount and terms of securities to be issued. The registration statement does not limit the amount of securities that may be issued thereunder. Our ability to issue securities is subject to market conditions and other factors. This registration statement will expire on November 6, 2023, three years after its date of effectiveness. +Off-Balance Sheet Arrangements +We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules. +93 +Table of Contents +Contractual Obligations, Commitments and Contingencies +The following table summarizes our contractual obligations as of December 31, 2020 (in thousands): +Payments due by period +2022 +2024 +2026 +through +through +and +(in thousands) +2021 +2023 +2025 +thereafter +Total +Contractual Obligations:(1) +Operating lease obligations +$ +3,388 +$ +6,981 +$ +7,212 +$ +18,548 +$ +36,129 +Principal payments and end of term fees on the term loan +7,738 +— +— +— +7,738 +Total +$ +11,126 +$ +6,981 +$ +7,212 +$ +18,548 +$ +43,867 +(1) See “Development and Supply Agreement” for additional contractual obligations. +We also have ongoing obligations related to license agreements which contain immaterial minimum annual payments that are credited against the actual royalty expense. +Purchase orders or contracts for the purchase of supplies and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current procurement or development needs and are fulfilled by our vendors within short time horizons. +Loan Facility with Hercules +On April 14, 2014, we executed a Loan Agreement with Hercules, as subsequently amended, most recently in April 2019. The Loan Agreement provided a total debt facility of $10.0 million, which is secured by substantially all of our assets. At closing, we borrowed $5.0 million in principal and had the ability to draw the additional $5.0 million over the period from November 1, 2014 to March 31, 2015. The interest rate on this term loan was variable based on a calculation of 8% plus the prime rate less 5.25%, with a minimum interest rate of 8%. Interest was to be paid monthly beginning the month following the borrowing date. Principal payments were scheduled to begin on September 1, 2015, unless we achieved certain milestones which would have extended this date to December 1, 2015 or March 1, 2016. In connection with the execution of the Loan Agreement, we issued Hercules a warrant to purchase up to 173,428 shares of our Series C Preferred Stock at an exercise price of $3.3299 per share. Upon closing of the IPO, this warrant was automatically converted into a warrant to purchase up to 53,960 shares of our common stock at an exercise price of $10.70 per share. +Leases +On January 1, 2020, we adopted ASC Topic 842 – Leases (ASC 842) using the optional transition method allowing entities to recognize a cumulative effect adjustment to the opening balance sheet without restating comparative prior periods presented. ASC 842 requires a lessee to recognize assets and liabilities on the balance sheet for most leases and changes many key definitions, including the definition of a lease. Lessees will continue to differentiate between finance leases and operating, and classification will impact expense recognition. +We elected the following practical expedients for all lease asset classes, which must be elected as a package and applied consistently to all of its leases at the transition date: i) we did not reassess whether any expired or existing contracts are or contain leases; ii) we did not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with ASC 840, Leases (ASC 840), are classified as operating leases); and iii) we did not reassess initial direct costs for any existing leases. +At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the +94 +Table of Contents +balance sheet as right-of-use (ROU) assets and short-term and long-term lease liabilities, as applicable. We have elected the practical expedient not to recognize leases on the balance sheet with a term of twelve months or less. Our leases consist of office and lab space and office equipment. All of our leases are classified as operating, and options to renew a lease are only included in the lease term to the extent those options are reasonably certain to be exercised. Additionally, we elected to apply the practical expedient not to separate lease and nonlease components for all leases. +Operating lease liabilities and their corresponding ROU assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The rate implicit in lease contracts is typically not readily determinable and, as a result, we utilize its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments, for a similar term, in a similar economic environment. To estimate its incremental borrowing rate, a credit rating applicable to us is estimated using a synthetic credit rating analysis since we do not currently have a rating agency-based credit rating. +The adoption of ASC 842 resulted in the recognition of operating lease ROU assets and operating lease liabilities of $12.2 million and $22.8 million, respectively, on our consolidated balance sheet, with the difference between the ROU asset and lease liability primarily attributable to unamortized lease incentives and deferred rent related to the lease for our corporate headquarters at 900 Middlesex Turnpike in Billerica, Massachusetts (the 900 Middlesex Turnpike Lease). +We currently lease approximately 91,600 square feet of office, laboratory, and manufacturing space at our headquarters in Billerica, Massachusetts. The premises covered by this lease serves as our principal office and laboratory space effective the second quarter of 2019. The initial term of the lease is 11 years and five months beginning on April 1, 2019, and we have the option to extend the lease for two additional five-year periods. +We previously leased approximately 30,655 square feet of office, laboratory, and manufacturing space as our headquarters in Lexington, Massachusetts, which was to expire on June 30, 2020; however in November 2018, we agreed to terminate the lease with the lessor effective May 2019. The termination of the lease was connected to us signing the new lease in October 2018 for our new headquarters in Billerica. In addition, pursuant to our acquisition of Aushon in January 2018, we assumed a lease of approximately 21,500 square feet of office, laboratory, and manufacturing space in Billerica, Massachusetts, under a lease that was to expire on February 28, 2021; however, in August 2018, we exercised an option to terminate the lease effective as of September 1, 2019. We paid a termination fee of $75,000 in February 2019 in consideration for the early termination. +In addition, our subsidiary, Uman, leases a total of approximately 6,500 square feet of office, laboratory, manufacturing and storage space in Umeå, Sweden. These leases expire at various dates between May 31, 2020 and February 28, 2023. +Development and Supply Agreement +We do not have significant agreements, with the exception of the supply agreement with STRATEC for the purchase of supplies or other goods specifying minimum quantities or set prices that exceed our expected requirements for the next three to six months. STRATEC manufactured our HD-1 instrument and manufactures the HD-X that we commercialized in the second half of 2019. In 2013, we entered into the Supply Agreement with STRATEC which requires us to purchase a minimum number of commercial units over a seven-year period ending in May 2021. We could be obligated to pay a fee based on the shortfall of commercial units purchased compared to the required number. Based on the commercial units purchased as of December 31, 2020, we have satisfied our required minimum purchase amount per the supply agreement. +Also, if we terminate the Supply Agreement under certain circumstances and do not purchase up to a required number of commercial units, we would be required to issue warrants to purchase 93,341 shares of common stock at $0.003214 per share. We believe that we will not issue such warrants and therefore have not recorded any amounts related to the potential equity consideration. +95 +Table of Contents +In August 2011, we entered into the Development Agreement with STRATEC, pursuant to which STRATEC undertook the development of the HD-1 for manufacture and sale to us or a partner whom we designate. During the year ended December 31, 2016, the Development Agreement was amended to modify the deliverables related to the final milestone, to agree on instrument design changes to be implemented, and to reduce the minimum purchase commitment in the Supply Agreement. Additionally, the parties agreed on additional development services for a total fee of $1.5 million, which was payable when development is completed and of which $0.9 million was paid in 2018 and $0.6 million was paid in 2019. The total amount included the final milestone payment that was due under the terms of the original agreement. +Backlog +We generally expect to ship all instrument and consumable orders received in a given period with the exception of orders received near the end of a fiscal quarter; and as a result, our backlog at the end of any period is typically insignificant. +Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes. +Foreign Currency Exchange Risk +As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Historically, the substantial majority of our revenue has been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Canada, Europe, Japan and China. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. Fluctuations in currency exchange rates could harm our business in the future. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables as of December 31, 2020 would not have been material. +To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future. +Interest Rate Sensitivity +We had cash and cash equivalents of $181.6 million as of December 31, 2020. These amounts were held primarily in cash on deposit with banks. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had decreased by 10% during the periods presented, our interest income would not have been materially affected. +As of December 31, 2020, the principal amount of our term debt outstanding with Hercules was $7.7 million. If overall interest rates had increased by 10% during the periods presented, our interest expense would have increased by approximately $0.1 million on an annualized basis. +Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K beginning on page F-1. +96 +Table of Contents +Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +Item 9A. CONTROLS AND PROCEDURES +(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. +(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(c) Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: +● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; +● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and +● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework, our management concluded that our internal controls over financial reporting were effective as of December 31, 2020. +(d) Attestation Report on Internal Control over Financial Reporting . This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial reporting due to the deferral allowed under the JOBS Act for emerging growth companies. +97 +Table of Contents +Item 9B. OTHER INFORMATION +Not applicable. +PART III +Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by this Item 10 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 11. EXECUTIVE COMPENSATION +The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference. +PART IV +Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES +(1) Financial Statements +The consolidated financial statements are included beginning on page F-1 attached hereto and are filed as part of this Annual Report on Form 10-K. +(2) Financial Statement Schedules +Schedules have been omitted since they are either not required or not applicable or the information is otherwise included herein. +98 +Table of Contents +(3) Exhibits +The following is a list of exhibits filed as part of this Annual Report on Form 10-K: +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +3.1 +Amended and Restated Certificate of Incorporation +8-K +12/15/17 +001-38319 +3.2 +Restated Bylaws +8-K +12/15/17 +001-38319 +4.1 +Description of Securities +10-K +3/13/20 +001-38319 +4.2 +Form of Common Stock Certificate +S-1 +11/9/17 +333-221475 +4. +3 +Fourth Amended and Restated Stockholders Agreement, dated as of June 2, 2017, by and among the Registrant and the stockholders named therein +S-1 +11/9/17 +333-221475 +4.4 +Fourth Amended and Restated Registration Rights Agreement, dated as of June 2, 2017, by and among the Registrant and the investors named therein +S-1 +11/9/17 +333-221475 +4.5 +Warrant Agreement, dated as of January 30, 2018, by and between the Registrant and Azul Divinal Consultoria Unipessoal LDA +10-K +3/19/18 +001-38319 +10.1.1+ +2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.1.2+ +Form of Incentive Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.1.3+ +Form of Non-qualified Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.1.4+ +Form of Restricted Stock Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/17 +333-221475 +10.2.1+ +2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +99 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.2.2+ +Form of Stock Option Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +10.2.3+ +Form of Restricted Stock Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +10.2.4+ +Form of Restricted Stock Unit Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/17 +333-221475 +10.3+ +Employment Agreement, dated January 1, 2015, by and between the Registrant and E. Kevin Hrusovsky +S-1 +11/9/17 +333-221475 +10.4+ +Letter Agreement, dated February 14, 2019, between Registrant and Amol Chaubal +10-Q +5/10/19 +001-38319 +10.5+ +Letter Agreement, dated May 31, 2019, by and between the Registrant and John Fry +10-Q +8/6/19 +001-38319 +10.6+ +Letter Agreement, dated August 8, 2014, by and between the Registrant and Mark T. Roskey, Ph.D. +S-1 +11/9/17 +333-221475 +10.7+ +Letter Agreement, effective as February 5, 2018, by and between the Registrant and Dawn Mattoon +10-Q +5/15/18 +001-38319 +10.8.1* +Exclusive License Agreement, dated June 18, 2007, between the Registrant and Tufts University, as amended on April 29, 2013 +S-1 +11/9/17 +333-221475 +10.8.2* +Second Amendment, dated August 22, 2017, to the Exclusive License Agreement between the Registrant and Tufts University +S-1 +11/9/17 +333-221475 +10.8.3 +@ +Third Amendment, dated September 25, 2020, to the Exclusive License Agreement between the Registrant and Tufts University +10-Q +11/6/20 +001-38319 +100 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.9.1* +Supply and Manufacturing Agreement, dated September 14, 2011, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/17 +333-221475 +10.9.2 +First Amendment to Supply and Manufacturing Agreement, dated October 17, 2013, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/17 +333-221475 +10.10.1* +STRATEC Development Services and Equity Participation Agreement, dated August 15, 2011, between the Registrant and STRATEC Biomedical Systems AG +S-1 +11/9/17 +333-221475 +10.10.2* +First Amendment to STRATEC Development Services and Equity Participation Agreement and Second Amendment to Supply and Manufacturing Agreement, dated November 18, 2016, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/17 +333-221475 +10.11* +Manufacturing Services Agreement, dated November 23, 2016, between the Registrant and Paramit Corporation +S-1 +11/9/17 +333-221475 +10.12.1 +Loan and Security Agreement, dated April 14, 2014, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.12.2 +Amendment No. 1 to Loan and Security Agreement, dated March 4, 2015, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +101 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.12.3 +Amendment No. 2 to Loan and Security Agreement, dated January 29, 2016, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.12.4 +Amendment No. 3 to Loan and Security Agreement, dated March 31, 2017, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +S-1 +11/9/17 +333-221475 +10.12.5 +Amendment No. 4 to Loan and Security Agreement, dated July 24, 2017, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +10-Q +11/7/18 +001-38319 +10.12.6 +Amendment No. 5 to Loan and Security Agreement, dated August 30, 2018, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +10-Q +11/7/18 +001-38319 +10.12.7 +Amendment No. 6 to Loan and Security Agreement, dated September 28, 2018, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +10-Q +11/7/18 +001-38319 +10.12.8 +Amendment No. 7 to Loan and Security Agreement, dated April 15, 2019, by and between the Registrant and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.) +8-K +4/15/19 +001-38319 +10.13+ +Form of Indemnification Agreement +S-1/A +11/27/17 +333-221475 +102 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.14 +Lease Agreement between SSI 900 Middlesex MA LP and the Registrant, dated October 2, 2018. +8-K +10/5/18 +001-38319 +10.15 +@ +Non-Exclusive License Agreement, dated September 29, 2020, by and between Abbott Laboratories and Quanterix Corporation. +8-K +10/5/20 +001-38319 +10.16+ +Employment Agreement between Will Geist and the Company dated November 9, 2020. +8-K +11/18/20 +001-38319 +10.17+ +2018 Non-Employee Director Compensation Policy +10-K +3/18/19 +001-38319 +21.1 +Subsidiaries of Registrant +X +23.1 +Consent of Ernst & Young LLP +X +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +32.1 +Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +X +101.INS +Inline XBRL Instance Document. +X +101.SCH +Inline XBRL Taxonomy Extension Schema Document. +X +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document. +X +101.DEF +Inline XBRL Taxonomy Extension Definition. +X +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document. +X +103 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +101.PRE +Inline XBRL Taxonomy Presentation Linkbase Document. +X +104 +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) ++ +Management contract or compensatory plan or arrangement. +* +Confidential treatment has been granted for portions of this Exhibit. Redacted portions have been filed separately with the SEC. +@ +Certain confidential portions of this exhibit have been omitted and replaced with “[***]”. Such identified information has been excluded from this exhibit because it is (i) not material and (ii) would likely cause competitive harm to the company if disclosed +Item 16. FORM 10-K SUMMARY +Not applicable. +104 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +QUANTERIX CORPORATION +Date: March 5, 2021 +By: +/s/ E. KEVIN HRUSOVSKY +E. Kevin Hrusovsky +Chairman, President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ E. KEVIN HRUSOVSKY +Chairman, President and Chief Executive Officer and Director (principal executive officer) +March 5, 2021 +E. Kevin Hrusovsky +/s/ AMOL CHAUBAL +Chief Financial Officer +March 5, 2021 +Amol Chaubal +(principal financial officer and principal accounting officer) +/s/ KEITH L. CRANDELL +Director +March 5, 2021 +Keith L. Crandell +/s/MARIJN DEKKERS +Director +March 5, 2021 +Marijn Dekkers, Ph.D. +/s/ SARAH HLAVINKA +Director +March 5, 2021 +Sarah Hlavinka +/s/ MARTIN MADAUS, PH.D. +Director +March 5, 2021 +Martin Madaus, Ph. D. +/s/ PAUL MEISTER +Director +March 5, 2021 +Paul M. Meister +/s/ DAVID WALT, PH.D. +Director +March 5, 2021 +David R. Walt, Ph.D. +105 +Table of Contents +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +QUANTERIX CORPORATION +Years ended December 31, 2020, 2019, and 2018 +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations +F-4 +Consolidated Statements of Comprehensive Loss +F-5 +Consolidated Statements of Cash Flows +F-6 +Consolidated Statements of Stockholders’ Equity +F-7 +Notes to Consolidated Financial Statements +F-8 +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and the Board of Directors of Quanterix Corporation +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of Quanterix Corporation (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, and stockholders’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. +Adoption of ASU No. 2016-02 +As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in the year ended December 31, 2020 due to the adoption of Accounting Standards Update No. 2016-02, Leases, and the related amendments, using the modified retrospective method. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ Ernst & Young LLP +We have served as the Company’s auditor since 2008. +Boston, Massachusetts +March 5, 2021 +F-2 +Table of Contents +Quanterix Corporation +Consolidated Balance Sheets +(amounts in thousands, except share and per share data) +December 31, 2020 +December 31, 2019 +Assets +Current assets: +Cash and cash equivalents +$ +181,584 +$ +109,155 +Accounts receivable (less allowance for doubtful accounts of $ 370 and $ 162 as of December 31, 2020 and December 31, 2019, respectively; including $ 172 and $ 186 from related parties as of December 31, 2020 and December 31, 2019, respectively) +17,184 +10,906 +Inventory +14,856 +10,463 +Prepaid expenses and other current assets +5,981 +2,137 +Total current assets +219,605 +132,661 +Restricted cash +1,000 +1,026 +Property and equipment, net +13,912 +12,047 +Intangible assets, net +13,716 +14,307 +Goodwill +10,460 +9,353 +Right-of-use assets +11,995 +— +Other non-current assets +357 +557 +Total assets +$ +271,045 +$ +169,951 +Liabilities and stockholders’ equity +Current liabilities: +Accounts payable (including $ 14 and $ 36 to related parties as of December 31, 2020 and December 31, 2019, respectively) +$ +6,799 +$ +5,777 +Accrued compensation and benefits +10,777 +6,570 +Other accrued expenses (including $ 1,377 and $ 0 to related parties as of December 31, 2020 and December 31, 2019, respectively) +4,845 +2,498 +Deferred revenue (including $ 90 and $ 55 with related parties as of December 31, 2020 and December 31, 2019, respectively) +5,421 +4,697 +Current portion of long term debt +7,673 +75 +Short term lease liabilities +1,234 +— +Other current liabilities +3,054 +216 +Total current liabilities +39,803 +19,833 +Deferred revenue, net of current portion +577 +466 +Long term debt, net of current portion +— +7,587 +Long term lease liabilities +21,891 +— +Other non-current liabilities +2,649 +13,407 +Total liabilities +64,920 +41,293 +Commitments and contingencies (Note 9) +Stockholders’ equity: +Common stock, $ 0.001 par value: +Authorized— 120,000,000 shares as of December 31, 2020 and December 31, 2019; issued and outstanding — 31,796,544 and 28,112,201 shares as of December 31, 2020 and December 31, 2019, respectively +32 +28 +Additional paid-in capital +451,433 +345,027 +Accumulated other comprehensive income (loss) +2,434 +( 153 ) +Accumulated deficit +( 247,774 ) +( 216,244 ) +Total stockholders’ equity +206,125 +128,658 +Total liabilities and stockholders’ equity +$ +271,045 +$ +169,951 +See accompanying notes. +F-3 +Table of Contents +Quanterix Corporation +Consolidated Statements of Operations +(amounts in thousands, except share and per share data) +Years Ended +December 31, +2020 +2019 +2018 +Product revenue (including related party activity of $ 580 , $ 720 , and $ 294 for the years ended December 31, 2020, 2019, and 2018, respectively) +$ +44,017 +$ +40,491 +$ +23,365 +Service and other revenue (including related party activity of $ 202 , $ 118 , and $ 149 for the years ended December 31, 2020, 2019, and 2018, respectively) +24,129 +16,059 +12,117 +Collaboration and license revenue (including related party activity of $ 0 , $ 0 , and $ 2,150 for the years ended December 31, 2020, 2019, and 2018, respectively) +11,809 +184 +2,150 +Grant revenue +6,422 +— +— +Total revenue +86,377 +56,734 +37,632 +Costs of goods sold: +Cost of product revenue (including related party activity of $ 205 , $ 234 , and $ 191 for the years ended December 31, 2020, 2019, and 2018, respectively) +25,950 +20,900 +12,729 +Cost of services and other revenue (including related party activity of $ 52 , $ 0 , and $ 0 for the years ended December 31, 2020, 2019, and 2018, respectively) +11,245 +8,998 +6,955 +Cost of collaboration and license revenue (including related party activity of $ 1,000 , $ 0 , and $ 0 for the years ended December 31, 2020, 2019, and 2018, respectively) +1,000 +— +— +Total costs of goods sold, services, and licenses +38,195 +29,898 +19,684 +Gross profit +48,182 +26,836 +17,948 +Operating expenses: +Research and development (including related party activity of $ 268 , $ 0 , and $ 0 for the years ended December 31, 2020, 2019, and 2018, respectively) +20,174 +16,190 +15,805 +Selling, general, and administrative (including related party activity of $ 36 , $ 0 , and $ 0 for the years ended December 31, 2020, 2019, and 2018) +59,592 +52,246 +33,693 +Total operating expenses +79,766 +68,436 +49,498 +Loss from operations +( 31,584 ) +( 41,600 ) +( 31,550 ) +Interest income (expense), net +( 273 ) +627 +46 +Other expense, net +( 49 ) +( 10 ) +( 7 ) +Loss before income taxes +( 31,906 ) +( 40,983 ) +( 31,511 ) +Income tax benefit (provision) +376 +187 +( 25 ) +Net loss +$ +( 31,530 ) +$ +( 40,796 ) +$ +( 31,536 ) +Net loss per share, basic and diluted +$ +( 1.07 ) +$ +( 1.63 ) +$ +( 1.43 ) +Weighted-average common shares outstanding, basic and diluted +29,589,132 +25,090,708 +21,994,317 +See accompanying notes. +F-4 +Table of Contents +Quanterix Corporation +Consolidated Statements of Comprehensive Loss +(amounts in thousands) +Years Ended December 31, +2020 +2019 +2018 +Net loss +$ +( 31,530 ) +$ +( 40,796 ) +$ +( 31,536 ) +Other comprehensive income (loss): +Cumulative translation adjustment +2,587 +( 153 ) +— +Total other comprehensive income (loss) +2,587 +( 153 ) +— +Comprehensive loss +$ +( 28,943 ) +$ +( 40,949 ) +$ +( 31,536 ) +See accompanying notes. +F-5 +Table of Contents +Quanterix Corporation +Consolidated Statements of C as h Flows +(amounts in thousands) +Year Ended December 31, +2020 +2019 +2018 +Operating activities +Net loss +$ +( 31,530 ) +$ +( 40,796 ) +$ +( 31,536 ) +Adjustments to reconcile net loss to net cash used in operating activities: +Depreciation and amortization expense +4,312 +3,009 +1,352 +Inventory step-up amortization +722 +611 +— +Reduction in the carrying amounts of right-of-use assets +245 +— +— +Stock-based compensation expense +10,099 +6,388 +4,884 +Non-cash interest expense +86 +89 +170 +Loss (gain) on disposal of fixed assets +171 +140 +( 14 ) +Changes in operating assets and liabilities: +Accounts receivable +( 6,240 ) +( 3,365 ) +( 983 ) +Prepaid expenses and other assets +( 3,927 ) +289 +( 1,828 ) +Inventory +( 5,119 ) +( 3,447 ) +( 1,603 ) +Other non-current assets +198 +( 21 ) +267 +Accounts payable +649 +621 +1,318 +Accrued compensation and benefits, other accrued expenses and other current liabilities +6,219 +822 +1,101 +Contract acquisition costs +87 +336 +— +Operating lease liabilities +316 +— +— +Other non-current liabilities +( 488 ) +9,845 +— +Deferred revenue +835 +( 708 ) +( 1,849 ) +Net cash used in operating activities +( 23,365 ) +( 26,187 ) +( 28,721 ) +Investing activities +Purchases of property and equipment +( 3,930 ) +( 10,847 ) +( 1,518 ) +Acquisitions, net of cash acquired +— +( 14,529 ) +( 3,801 ) +Proceeds from RADx grant on assets purchased +3,304 +— +— +Purchase of investments +— +— +( 150 ) +Proceeds from sale of assets +— +— +15 +Net cash used in investing activities +( 626 ) +( 25,376 ) +( 5,454 ) +Financing activities +Proceeds from sale of common stock, net of issuance costs +— +— +( 20 ) +Proceeds from stock options exercised +4,019 +2,820 +1,871 +Sale of common stock in at-the-market offering, net +— +48,019 +— +Sale of common stock in underwritten public offering, net +91,404 +64,529 +— +Proceeds from ESPP purchase +888 +879 +— +Payments on notes payable +( 75 ) +( 50 ) +( 1,929 ) +Net cash provided by (used in) financing activities +96,236 +116,197 +( 78 ) +Net increase (decrease) in cash and cash equivalents +72,245 +64,634 +( 34,253 ) +Effect of foreign currency exchange rate on cash +158 +118 +— +Cash, restricted cash, and cash equivalents at beginning of period +110,181 +45,429 +79,682 +Cash, restricted cash, and cash equivalents at end of period +$ +182,584 +$ +110,181 +$ +45,429 +Supplemental cash flow information +Cash paid for interest +$ +625 +$ +656 +$ +606 +Purchases of property and equipment included in accounts payable +$ +1,029 +$ +164 +$ +78 +Purchases of property and equipment included in other non-current liabilities +$ +— +$ +7,572 +$ +— +191,152 shares of common stock issued in connection with the acquisition of UmanDiagnostics AB +$ +— +$ +5,468 +$ +— +Fair value of common stock warrants exercised and reclassified as shares of common stock +$ +— +$ +— +$ +196 +Reconciliation of cash, cash equivalents, and restricted cash: +Cash and cash equivalents +$ +181,584 +$ +109,155 +$ +44,429 +Restricted cash +$ +1,000 +$ +1,026 +$ +1,000 +Total cash, cash equivalents, and restricted cash +$ +182,584 +$ +110,181 +$ +45,429 +See accompanying notes. +F-6 +Table of Contents +Quanterix Corporation +Consolidated Statements of Stockholders’ Equity +Accumulated +Common +Common +Additional +other +Total +stock +stock +paid-in +comprehensive +Accumulated +stockholders’ +shares +value +capital +income (loss) +deficit +equity +Balance at December 31, 2017 +21,707,041 +$ +22 +$ +210,196 +$ +— +$ +( 144,352 ) +$ +65,866 +Exercise of common stock warrants +16,718 +— +— +— +— +— +Exercise of common stock options and vesting of restricted stock +645,277 +— +1,871 +— +— +1,871 +Common stock issuance offering costs +— +— +( 20 ) +— +— +( 20 ) +Stock-based compensation expense +— +— +4,884 +— +— +4,884 +Net loss +— +— +— +— +( 31,536 ) +( 31,536 ) +Balance at December 31, 2018 +22,369,036 +$ +22 +$ +216,931 +$ +— +$ +( 175,888 ) +$ +41,065 +Cumulative effect of adoption of Accounting Standards Codification Topic 606 +— +— +— +— +440 +440 +Exercise of common stock warrants +45,690 +— +— +— +— +— +Exercise of common stock options and vesting of restricted stock +550,734 +— +2,820 +— +— +2,820 +Sale of common stock in "at-the-market" offering, net +2,186,163 +2 +48,017 +— +— +48,019 +Sale of common stock in underwritten public offering, net +2,732,673 +3 +64,526 +— +— +64,529 +Issuance of shares for the acquisition of UmanDiagnostics AB +191,152 +1 +5,467 +— +— +5,468 +Stock-based compensation expense +— +— +6,388 +— +— +6,388 +Employee stock purchase plan +36,753 +— +878 +— +— +878 +Accumulated other comprehensive income +— +— +— +( 153 ) +— +( 153 ) +Net loss +— +— +— +— +( 40,796 ) +( 40,796 ) +Balance at December 31, 2019 +28,112,201 +$ +28 +$ +345,027 +$ +( 153 ) +$ +( 216,244 ) +$ +128,658 +Exercise of common stock options and vesting of restricted stock +589,723 +1 +4,018 +— +— +4,019 +Sale of common stock in underwritten public offering, net +3,048,774 +3 +91,401 +— +— +91,404 +ESPP stock purchase +45,846 +— +888 +— +— +888 +Stock-based compensation expense +— +— +10,099 +— +— +10,099 +Cumulative translation adjustment +— +— +— +2,587 +— +2,587 +Net loss +— +— +— +— +( 31,530 ) +( 31,530 ) +Balance at December 31, 2020 +31,796,544 +$ +32 +$ +451,433 +$ +2,434 +$ +( 247,774 ) +$ +206,125 +See accompanying notes. +F-7 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements +1. Organization and operations +Quanterix Corporation (NASDAQ: QTRX) (the Company) is a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. The Company’s platforms are based on its proprietary digital “Simoa” detection technology. The Company’s Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide the Company’s customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. The Company is currently focusing on protein detection, but the Company’s Simoa platforms have also demonstrated applicability across other testing applications, including detection of nucleic acids and small molecules. +The Company launched its first immunoassay platform, the Simoa HD-1, in 2014. The HD-1 is a fully automated immunoassay bead-based platform with multiplexing and custom assay capability, and related assay test kits and consumable materials. The Company launched a second bead-based immunoassay platform (SR-X) in the fourth quarter of 2017 with a more compact footprint than the Simoa HD-1 and less automation designed for lower volume requirements while still allowing multiplexing and custom assay capability. The Company initiated an early-access program for its third instrument (SP-X) on the new Simoa planar array platform in January 2019, with the full commercial launch commencing in April 2019. In July 2019, the Company launched the Simoa HD-X, an upgraded version of the Simoa HD-1 which replaces the HD-1. The HD-X has been designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The Company began shipping and installing HD-X instruments at customer locations in the third quarter of 2019. The Company also performs research services on behalf of customers to apply the Simoa technology to specific customer needs. The Company's customers are primarily in the research use only market, which includes academic and governmental research institutions, the research and development laboratories of pharmaceutical manufacturers, contract research organizations, and specialty research laboratories. +The Company acquired Aushon Biosystems, Inc. (Aushon) in January 2018. With the acquisition of Aushon, the Company acquired a CLIA certified laboratory, as well as Aushon’s proprietary sensitive planar array detection technology. Leveraging its proprietary sophisticated Simoa image analysis and data analysis algorithms, the Company further refined this planar array technology to develop the SP-X instrument to provide the same Simoa sensitivity found in its bead-based platform. +The Company acquired UmanDiagnostics AB (Uman), a Swedish company located in Umeå, Sweden, in August 2019. The acquisition closed with respect to 95 % of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5 % of the outstanding shares of capital stock of Uman on August 1, 2019. Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. With the acquisition of Uman, the Company has secured a long-term source of supply for a critical technology. +“At-the-market offering” +On March 19, 2019, the Company entered into a Sales Agreement (the Sales Agreement) with Cowen and Company, LLC (Cowen) with respect to an “at-the-market” offering program under which the Company could offer and sell, from time to time at its sole discretion, shares of its common stock, par value $ 0.001 per share, having an aggregate offering price of up to $ 50.0 million through Cowen as its sales agent. +F-8 +Table of Contents +On June 5, 2019, the Company issued approximately 2.2 million shares of common stock at an average stock price of $ 22.73 per share pursuant to the terms of the Sales Agreement. The “at-the-market” offering resulted in gross proceeds of $ 49.7 million. The Company incurred $ 1.7 million in issuance costs associated with the “at-the-market” offering, resulting in net proceeds to the Company of $ 48.0 million. On August 6, 2020, the Company delivered written notice to Cowen to terminate the Sales Agreement, which termination the parties agreed to make immediately effective. +Underwritten public offering +On August 8, 2019, the Company entered into an underwriting agreement with J.P. Morgan Securities LLC and SVB Leerink LLC (Leerink), as representatives of the several underwriters, relating to an underwritten public offering of approximately 2.7 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 69.0 million. The Company incurred $ 4.5 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 64.5 million. +On August 6, 2020, the Company entered into an underwriting agreement with Leerink and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of approximately 3.0 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 97.6 million. The Company incurred $ 6.2 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 91.4 million. +Liquidity +The Company has recognized annual losses from operations since inception and has an accumulated deficit of $ 247.8 million at December 31, 2020 and the Company incurred a net loss of $ 31.5 million, $ 40.8 million, and $ 31.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Prior to the Company’s Initial Public Offering (IPO) in December 2017, the Company had funded its operations principally from issuances of preferred stock, debt financings, grants, product and service sales and development and license agreements. At December 31, 2020, the Company had $ 181.6 million of unrestricted cash and cash equivalents. The Company expects the current cash balance will be sufficient to fund operations for a period of at least one year from the date the consolidated financial statements are issued. There can be no assurances, however, that no additional funding will be required or that additional funding will be available on terms acceptable to the Company, or at all. +2. Significant accounting policies +Principles of consolidation +The consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Quanterix Corporation, and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. +Use of estimates +The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. In making those estimates and assumptions, the Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. The Company’s significant estimates included in the preparation of the consolidated financial statements are related to revenue recognition, fair value of assets acquired and liabilities assumed in acquisitions, valuation allowances recorded against deferred tax assets, and valuation of inventory. Actual results could differ from those estimates. +Revenue recognition +The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that the Company expects to be entitled to receive in exchange for these +F-9 +Table of Contents +goods and services, incentives and taxes collected from customers, that are subsequently remitted to governmental authorities. +The Company adopted Accounting Standards Codification (ASC) Topic 606 Revenue from Contracts with Customers (ASC 606), on January 1, 2019, using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2020 and 2019 reflect the application of ASC 606 guidance, while the reported results for 2018 were prepared under ASC 605, Revenue Recognition . +Customers +The Company’s customers primarily consist of entities engaged in the life sciences research market that pursue the discovery and development of new drugs for a variety of neurologic, cardiovascular, oncologic and other protein biomarkers associated with diseases. The Company’s customer base includes several of the largest biopharmaceutical companies, academic research organizations and distributors who serve certain geographic markets. +Product revenue +The Company’s products are composed of analyzer instruments, assay kits and other consumables such as reagents. Products are sold directly to biopharmaceutical and academic research organizations or are sold through distributors in EMEA and Asia Pacific regions. The sales of instruments are generally accompanied by an initial year of implied service-type warranties and may be bundled with assays and other consumables and may also include other items such as training and installation of the instrument and/or an extended service warranty. Revenues from the sale of products are recognized at a point in time when the Company transfers control of the product to the customer, which is upon installation for instruments sold to direct customers, and based upon shipping terms for assay kits and other consumables. Revenue for instruments sold to distributors is generally recognized based upon shipping terms (either upon shipment or delivery). +Service and other revenue +Service revenues are composed of contract research services, initial implied one-year service-type warranties, extended services contracts and other services such as training. Contract research services are provided through the Company’s Accelerator Laboratory and generally consist of fixed fee contracts. Revenues from contract research services are recognized at a point in time when the Company completes and delivers its research report on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. Revenues from service-type warranties are recognized ratably over the contract service period. Revenues from other services are immaterial. +Collaboration and license revenue +The Company may enter into agreements to license the intellectual property and know-how associated with its instruments in exchange for license fees and future royalties (as described below). The license agreements provide the licensee with a right to use the intellectual property with the license fee revenues recognized at a point in time as the underlying license is considered functional intellectual property. The Company has recognized revenues from sales- or usage based royalties related to the Company’s licensing technology and intellectual property. ASC 606 provides for an exception to estimating the variable consideration for sales- and usage-based royalties related to the license of intellectual property, such that the sales- or usage-based royalty will be recognized in the period the underlying transaction occurs. The Company has recorded sales- or usage-based royalty revenue for the years ended December 31, 2020 and 2019 related to the intellectual property licensed by Uman. The Company recognizes revenues from sales- or usage based royalty revenue at the later of when the sales or usage occurs; and the satisfaction or partial satisfaction of the performance obligation to which the royalty has been allocated. +F-10 +Table of Contents +Payment terms +The Company’s payment terms vary by the type and location of customer and the products or services offered. Payment from customers is generally required in a term ranging from 30 to 45 days from date of shipment or satisfaction of the performance obligation with no discounts for early payment. Occasionally the Company provides extended payment terms or financing arrangements to customers. +Disaggregated revenue +When disaggregating revenue, the Company considered all of the economic factors that may affect its revenues. The following tables disaggregate the Company's revenue from contracts with customers by revenue type: +Year Ended +December 31, 2020 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues +Instruments +$ +8,680 +$ +4,332 +$ +3,594 +$ +16,606 +Consumable and other products +14,305 +10,854 +2,252 +27,411 +Totals +$ +22,985 +$ +15,186 +$ +5,846 +$ +44,017 +Service and other revenues +Service-type warranties +$ +3,171 +$ +1,543 +$ +207 +$ +4,921 +Research services +15,011 +2,225 +737 +17,973 +Other services +700 +435 +100 +1,235 +Totals +$ +18,882 +$ +4,203 +$ +1,044 +$ +24,129 +Collaboration and license revenue +Collaboration and license revenue +$ +11,685 +$ +124 +$ +— +$ +11,809 +Totals +$ +11,685 +$ +124 +$ +— +$ +11,809 +Year Ended +December 31, 2019 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues +Instruments +$ +6,250 +$ +5,243 +$ +3,393 +$ +14,886 +Consumable and other products +14,148 +9,674 +1,783 +25,605 +Totals +$ +20,398 +$ +14,917 +$ +5,176 +$ +40,491 +Service and other revenues +Service-type warranties +$ +3,139 +$ +1,323 +$ +171 +$ +4,633 +Research services +8,845 +704 +456 +10,005 +Other services +825 +565 +31 +1,421 +Totals +$ +12,809 +$ +2,592 +$ +658 +$ +16,059 +Collaboration and license revenue +Collaboration and license revenue +$ +167 +$ +17 +$ +— +$ +184 +Totals +$ +167 +$ +17 +$ +— +$ +184 +The Company’s contracts with customers may include promises to transfer multiple products and services to a customer. The Company combines any performance obligations that are immaterial with one or more other performance obligations that are material to the contract. For arrangements with multiple performance obligations, the Company allocates the contract transaction price, including discounts, to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company determines standalone selling prices based on prices charged to customers in observable +F-11 +Table of Contents +transactions, and uses a range of amounts to estimate standalone selling prices for each performance obligation. The Company may have more than one range of standalone selling price for certain products and services based on the pricing for different customer classes. +Variable consideration in the Company’s contracts primarily relates to (i) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (ii) certain non-fixed fee research services contracts. +The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as of December 31, 2020 is $ 6.0 million. Of the performance obligations not yet satisfied or are partially satisfied, $ 5.4 million is expected to be recognized as revenue in the next 12 months , with the remainder to be recognized within the 24 months thereafter. The $ 5.4 million principally consists of amounts billed for undelivered services related to initial and extended service-type warranties and research services, as well as $ 0.5 million related to undelivered licenses of intellectual property for a diagnostics company. During the year ended December 31, 2020, the Company recognized $ 1.2 million of previously deferred revenue as a result of entering into a license agreement with a diagnostics company (see Note 13). +Changes in deferred revenue from contracts with customers were as follows (in thousands): +Year Ended December 31, 2020 +Balance at December 31, 2019 +$ +5,163 +Deferral of revenue +6,955 +Recognition of deferred revenue +( 6,120 ) +Balance at December 31, 2020 +$ +5,998 +Costs to obtain a contract +The Company’s sales commissions are generally based on revenues of the Company. The Company has determined that certain commissions paid under its sales incentive programs meet the requirements to be capitalized as they are incremental and would not have occurred absent a customer contract. The changes in the balance of costs to obtain a contract are as follows (in thousands): +Year Ended December 31, 2020 +Balance at December 31, 2019 +$ +335 +Deferral of costs to obtain a contract +506 +Recognition of costs to obtain a contract +( 593 ) +Balance at December 31, 2020 +$ +248 +The Company has classified the balance of capitalized costs to obtain a contract as a component of prepaid expenses and other current assets as of December 31, 2020 and classifies the expense as a component of cost of goods sold and selling, general and administrative expense over the estimated life of the contract. The Company considers potential impairment in these amounts each period. +ASC 606 provides entities with certain practical expedients and accounting policy elections to minimize the cost and burden of adoption. +The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed. +The Company will exclude from its transaction price any amounts collected from customers related to sales and other similar taxes. +F-12 +Table of Contents +When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. The Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component for the years ended December 31, 2020 and 2019. +The Company has elected to account for the shipping and handling as an activity to fulfill the promise to transfer the product, and therefore will not evaluate whether shipping and handling activities are promised services to its customers. +Grant revenue +The Company recognizes grant revenue as it performs services under the arrangement when the funding is committed. Revenues and related research and development expenses are presented gross in the consolidated statements of operations as the Company has determined it is the primary obligor under the arrangement relative to the research and development services. +Accounting for grants does not fall under ASC 606, as the grantor will not benefit directly from the Company’s expansion or product development. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, the Company has accounted for grants by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance (IAS 20). +Grants to the Company contain both monetary amounts granted related to assets and monetary amounts granted related to income, which are grants other than those related to assets. The grants related to assets are for the expansion and increase of manufacturing capacity. The grants related to income are for additional research and development, as well as other non-asset related scale up costs. +Under IAS 20, grants related to assets shall be presented in the consolidated balance sheets either by recognizing the grant as deferred income (which is recognized in the consolidated statements of operations on a systematic basis over the useful life of the asset), or by deducting the grant in calculating the carrying amount of the asset (which is recognized in the consolidated statements of operations over the life of the depreciable asset as a reduced depreciation expense). Both methods are acceptable under IAS 20. The Company has elected to record grants related to assets as a deduction in calculating the carrying value of the asset. +Under IAS 20, grants related to income are presented as part of the consolidated statements of operations, either separately or under a general heading. Both methods are acceptable under IAS 20. The Company has elected to record grants related to income separately on the consolidated statements of operations as grant revenue. The related expenses are recorded within operating expenses and not deducted. +On June 22, 2020, the Company entered into a workplan 1 award (WP1) with the National Institute of Health (NIH), under the Rapid Acceleration of Diagnostics (RADx) program to assess the feasibility of a novel SARS-CoV-2 antigen detection test using the Company’s Simoa technology. During the year ended December 31, 2020, the Company recognized $ 2.0 million of grant revenue and incurred $ 1.0 million in research and development expense related to WP1. WP1 is complete as of December 31, 2020. +On September 29, 2020, the Company entered into a workplan 2 award (WP2) with the NIH under its RADx program. WP2, which has a total award value of $ 18.2 million, accelerates the continued development, scale-up, and deployment of the novel SARS-CoV-2 antigen detection test using the Company’s Simoa technology. The contract provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Release of the $ 18.2 million of funding under WP2 is based on the achievement of certain milestones, and there is no assurance that the Company can meet all the milestones on a timely basis, if at all. If the Company does not meet all of the milestones, it will not be able access the full $ 18.2 million in funding under the contract. During the year ended December 31, 2020 the Company recognized $ 4.4 million in grant revenue and incurred $ 2.6 million in research and development expense related to WP2. +F-13 +Table of Contents +The following table summarizes the activity under WP2 as of December 31, 2020 (in thousands): +Total grant revenue from research and development activities +$ +4,362 +Total proceeds used for assets +826 +Total deferred proceeds for assets +2,478 +Total deferred grant revenue +304 +Total recognized +$ +7,970 +Total recognized +$ +7,970 +Total amount accrued +( 2,968 ) +Total cash received +$ +5,002 +Total proceeds received +$ +5,002 +Total proceeds reasonably assured +13,198 +Total WP2 grant amount +$ +18,200 +Business combinations +Under the acquisition method of accounting, the Company generally recognizes the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values recognized, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. The excess consideration over the aggregate value of acquired tangible and intangible assets, net of liabilities recognized, is recorded as goodwill. These valuations require significant estimates and assumptions, especially with respect to intangible assets. +The Company typically uses the discounted cash flow method to value acquired intangible assets. This method requires significant management judgment to forecast future operating results and establish residual growth rates and discount factors. The estimates used to value and amortize intangible assets are consistent with the plans and estimates that are used to manage the business and are based on available historical information. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, the Company could experience impairment charges. In addition, the Company has estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed. +Cost of revenue +Cost of product revenue consists of raw materials, parts costs and associated freight, shipping and handling costs, contract manufacturer costs, personnel costs, yield loss, in-license payments and royalties, stock-based compensation, other direct costs and overhead. +Cost of service and other revenue consists of personnel, facility costs associated with operating the Accelerator Labs on behalf of the customers, costs related to instrument maintenance and servicing equipment at customer sites, other direct and overhead. +Cost of license revenue consists of license fees that are the direct results of cash payments received related to license agreements. +Research and development expenses +Research and development expenses, including personnel costs, allocated facility costs, lab supplies, outside services, contract laboratory costs are charged to research and development expense as incurred. The Company accounts +F-14 +Table of Contents +for nonrefundable advance payments for goods and services that will be used in future research and development activities as expense when the service has been performed or when the goods have been received. Expenses incurred related to grant funded activities are recorded in research and development expense. +Selling, general, and administrative expenses +Selling, general, and administrative expenses are primarily composed of compensation and benefits associated with sales and marketing, finance, human resources, and other administrative personnel, outside marketing, advertising, allocated facilities costs, legal expenses, and other general and administrative costs. +Net loss per share +Basic net loss per common share attributable to common stockholders is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares. For purposes of the diluted net loss per share calculations, unvested restricted common stock, common stock options, and warrants are considered to be potentially dilutive securities, but are excluded from the diluted net loss per share because their effect would be anti-dilutive and therefore basic and diluted net loss per share were the same for all periods presented. +The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive (in common stock equivalent shares): +Year Ended December 31, +2020 +2019 +2018 +Unvested restricted common stock and restricted stock units +518,387 +409,929 +361,468 +Outstanding stock options +2,494,045 +2,507,062 +2,476,911 +Outstanding common stock warrants +10,000 +10,000 +76,041 +Total +3,022,432 +2,926,991 +2,914,420 +As of December 31, 2020, 2019, and 2018 the Company had an obligation to issue warrants to purchase an additional 93,341 shares of common stock to a vendor if a contract is terminated prior to a minimum purchase commitment being met. No amounts are presented in the table above for this obligation to issue a warrant as the issuance of the warrant is not considered probable. +Cash and cash equivalents +Cash and cash equivalents consist of cash deposits and short-term, highly liquid investments that are readily convertible into cash, with original maturities of three months or less. Cash equivalents are carried at fair value based on quoted prices for identical assets. Cash and cash equivalents consist of the following (in thousands): +As of +December 31, +2020 +2019 +Cash +$ +19,535 +$ +6,406 +Money market funds invested in U.S. Treasury obligations +162,049 +102,749 +Total cash and cash equivalents +$ +181,584 +$ +109,155 +Restricted cash and deposits +Restricted cash represents collateral for a letter of credit issued as security for the lease for the Company’s new headquarters. The restricted cash is long term in nature as the Company will not have access to the funds until more than one year from December 31, 2020. +As of both December 31, 2020 and 2019, the Company had $ 1.1 million in restricted cash and deposits related to amounts held for a line of credit, amounts held as a security deposit for the Company’s facility lease obligation, and a +F-15 +Table of Contents +business registration application. As of both December 31, 2020 and 2019, $ 1.0 million of the $ 1.1 million was recorded on a separate line item as restricted cash. The remaining $ 0.1 million was included in noncurrent assets as of both December 31, 2020 and 2019. +Accounts receivable and allowance for doubtful accounts +The Company provides credit, in the normal course of business, to customers and does not require collateral. Accounts receivable consist of amounts due to the Company for sales to customers and are recorded net of an allowance for doubtful accounts. The Company reviews accounts receivable on a regular basis to determine if any receivable will potentially be uncollectable and to estimate the amount of allowance for doubtful accounts necessary. Once a receivable is deemed uncollectible, such balance is written off and charged against the allowance for doubtful accounts. The Company has not incurred material write offs in any of the periods presented. +The Company’s allowance for doubtful accounts activity for the years ended December 31, 2020, 2019, and 2018 was as follows (in thousands): +December 31, 2017 +$ +— +Additions +36 +Deductions +— +December 31, 2018 +$ +36 +Additions +160 +Deductions +( 34 ) +December 31, 2019 +$ +162 +Additions +493 +Deductions +( 285 ) +December 31, 2020 +$ +370 +Inventory +Inventory is stated at the lower of cost or market on a first-in, first-out (FIFO) basis. The Company analyzes its inventory levels on each reporting date and writes down inventory that is expected to expire prior to being sold and inventory in excess of expected sales requirements. In the event that the Company identifies these conditions exist in its inventory, the carrying value is reduced to its estimated net realizable value. +Property and equipment +Property and equipment, including leasehold improvements, are stated at cost and are depreciated, or amortized in the case of leasehold improvements, over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable and recognizes an impairment loss when it is probable that an asset’s realizable value is less than the carrying value. To date, no such impairment losses have been recorded. Depreciation is calculated based upon the following estimated useful lives of the assets: +Laboratory and manufacturing equipment +Five years +Computers and software +Three years +Office furniture and equipment +Seven years +Leasehold improvements +Shorter of the useful life of the asset or the remaining term of the lease +Software development costs +The Company develops and modifies software related to the operation of the instrument. Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Based on the +F-16 +Table of Contents +Company’s product development process, technological feasibility is established upon the completion of a working model. The Company does not incur material costs between the completion of the working model and the point at which the product is ready for release. Therefore, software development costs are charged to the statement of operations as incurred as research and development expense. +Fair value of financial instruments +ASC Topic 820, Fair Value Measurement (ASC 820), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. +ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following: +Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. +Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and +Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. +To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. +The carrying amount reflected on the balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximated their fair values, due to the short-term nature of these instruments. The carrying value of the long-term debt approximates its fair value as the debt arrangement is based on interest rates the Company believes it could obtain for borrowings with similar terms. The Company has an investment in the preferred stock of a privately held company which is recorded within other non-current assets on a cost basis. This cost method investment’s fair value has not been estimated as there are no identified events or changes in circumstances that would indicate a significant adverse effect on the fair value of the investment and to do so would be impractical. +Fair value measurements as of December 31, 2020 are as follows (in thousands): +Quoted prices +Significant +in active +Significant other +unobservable +markets +observable +inputs +Description +Total +(Level 1) +inputs (Level 2) +(Level 3) +Financial assets +Cash equivalents +$ +162,048 +$ +162,048 +$ +— +$ +— +$ +162,048 +$ +162,048 +$ +— +$ +— +Fair value measurements as of December 31, 2019 are as follows (in thousands): +F-17 +Table of Contents +Quoted prices +Significant +in active +Significant other +unobservable +markets +observable +inputs +Description +Total +(Level 1) +inputs (Level 2) +(Level 3) +Financial assets +Cash equivalents +$ +102,749 +$ +102,749 +$ +— +$ +— +$ +102,749 +$ +102,749 +$ +— +$ +— +Warranties +The Company provides a one-year warranty and maintenance service related to its instruments and sells extended warranty contracts for additional periods. The Company defers revenue associated with these services and recognizes them on a pro-rata basis over the period of service. +Income taxes +The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. +The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740 Income Taxes (ASC 740). When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2020 and 2019, the Company did not have any significant uncertain tax positions. +Credit, product and supplier concentrations and off-balance-sheet risk +The Company has no significant off-balance-sheet risk, such as foreign exchange contracts, option contracts, or other hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash and cash equivalents and a cost method investment. The Company places its cash and cash equivalents principally in depository accounts with a bank. +The Company is also subject to supply chain risks related to the outsourcing of the manufacturing of its instruments. Although there are a limited number of manufacturers for instruments of this type, the Company believes that other suppliers could provide similar products on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. In addition to outsourcing the manufacturing of its instruments, the Company also purchases antibodies through a number of different suppliers. Although a disruption in service from any one of its antibody suppliers is possible, the Company believes that it would be able to find an adequate supply from alternative suppliers. +Customers outside the United States represented 29 % and 50 % of the Company’s gross trade accounts receivable balance as of December 31, 2020 and 2019, respectively. +As of December 31, 2020, one customer represented 19 % of the Company’s aggregate accounts receivable. As of December 31, 2019, and 2018, no single customer represented 10 % of the Company’s aggregate accounts receivable. During the year ended December 31, 2020 one customer represented 13 % of the Company’s total revenue. For the years ended December 31, 2019 and 2018, no single customer represented 10 % of the Company’s total revenue. +F-18 +Table of Contents +Stock-based compensation +The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Stock-based compensation awards have historically consisted of stock options and restricted stock. Prior to the adoption of Accounting Standards Update (ASU) No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), the measurement date for non-employee awards was generally the date the services were completed, resulting in financial reporting period adjustments to stock-based compensation during the vesting period for changes in the fair value of the awards. The Company adopted ASU 2018-07 on January 1, 2020. After the adoption of ASU 2018-07, the measurement date for non-employee awards is the date of grant without changes in the fair value of the award. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. There were no material non-employee awards outstanding during the years ended December 31, 2020, 2019, and 2018. +Effective January 1, 2017, the Company ceased utilizing an estimated forfeiture rate and began recognizing forfeitures as they occur. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. +The fair value of stock options granted to employees and non-employees is estimated on the grant date using the Black-Scholes option-pricing model, based on the assumptions noted in the following table: +Year Ended December 31, +2020 +2019 +2018 +Risk-free interest rate +0.4 % - 1.7 % +1.4 % - 2.6 % +2.6 % - 3.0 % +Expected dividend yield +None +None +None +Expected term (in years) +6 +6.0 +5.9 +Expected volatility +43.9 % - 49.2 % +33.5 % - 39.7 % +32.4 % - 36.8 % +Using the Black-Scholes option-pricing model, the weighted-average grant date fair value of options granted for the years ended December 31, 2020, 2019, and 2018 was $ 12.66 , $ 9.09 , and $ 7.19 per share, respectively. Expected volatility was calculated based a proportional weighting of reported volatility data for a representative group of guideline publicly traded companies for which historical information was available, as well as the Company’s stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. The Company estimates the expected life of options granted to employees utilizing the simplified method which calculates the expected life of an option as the average of the time to vesting and contractual life of the options. The expected life is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. The Company uses the simplified method due to the lack of historical exercise data and the plain nature of the stock options. The Company uses the remaining contractual term for the expected life of non-employee awards. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on common stock. +Recent accounting pronouncements +The Company is considered to be an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS Act). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to avail itself of this extended transition period and, as a result, the Company will not be required to adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies so long as the Company remains an emerging growth company. +F-19 +Table of Contents +Recently Adopted +On January 1, 2020, the Company adopted ASC Topic 842, Leases (ASC 842) using the optional transition method allowing entities to recognize a cumulative effect adjustment to the opening balance sheet without restating comparative prior periods presented. ASC 842 requires a lessee to recognize assets and liabilities on the balance sheet for most leases and changes many key definitions, including the definition of a lease. Lessees will continue to differentiate between finance leases and operating, and classification will impact expense recognition. +The Company elected the following practical expedients for all lease asset classes, which must be elected as a package and applied consistently to all of its leases at the transition date: i) the Company did not reassess whether any expired or existing contracts are or contain leases; ii) the Company did not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with ASC 840, Leases (ASC 840), are classified as operating leases); and iii) the Company did not reassess initial direct costs for any existing leases. +At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use (ROU) assets and short-term and long-term lease liabilities, as applicable. The Company has elected the practical expedient not to recognize leases on the balance sheet with a term of twelve months or less. The Company’s leases consist of office and lab space and office equipment. All of the Company’s leases are classified as operating, and options to renew a lease are only included in the lease term to the extent those options are reasonably certain to be exercised. Additionally, the Company elected to apply the practical expedient not to separate lease and nonlease components for all leases. +Operating lease liabilities and their corresponding ROU assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The rate implicit in lease contracts is typically not readily determinable and, as a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments, for a similar term, in a similar economic environment. To estimate its incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have a rating agency-based credit rating. +The adoption of ASC 842 resulted in the recognition of operating lease ROU assets and operating lease liabilities of $ 12.2 million and $ 22.8 million, respectively, on the Company’s condensed consolidated balance sheet, with the difference between the ROU asset and lease liability primarily attributable to unamortized lease incentives and deferred rent related to its lease for its corporate headquarters at 900 Middlesex Turnpike in Billerica, Massachusetts (the 900 Middlesex Turnpike Lease). +On January 1, 2020, the Company adopted ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (ASU 2017-04). This ASU eliminates Step 2 from the goodwill impairment test. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The adoption of ASU 2017-04 resulted in no material effect to the Company’s financial statements. +On January 1, 2020 the Company adopted ASU 2018-07. This standard simplifies the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The adoption of ASU 2018-07 did not have a material effect on the Company’s consolidated financial statements. +F-20 +Table of Contents +On January 1, 2020, the Company adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” . This ASU removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements. +On January 1, 2019, the Company adopted ASC 606 using the modified retrospective method. Under ASC 606, revenue is recognized upon the transfer of control of goods or services to customers and reflects the amount of consideration to which an entity expects to be entitled in exchange for those goods or services. The adoption of ASC 606 has been applied to customer contracts that were not completed as of January 1, 2019, and did not materially change the pattern of revenue recognition for its current customer contracts. +The Company's consolidated financial statements for the prior-year period have not been revised and are reflective of the revenue recognition requirements which were in effect for that period. +The Company recorded an adjustment to the accumulated deficit of $ 0.4 million as of January 1, 2019 for the cumulative effect primarily related to the deferral of sales commissions. +In accordance with the reporting requirements of ASC 606, the disclosure of the impact on the Company's consolidated balance sheet and statement of operations, as a result of adopting the provisions of ASC 606, was as follows (in thousands): +Prior to +adoption of +As +Adjusted under +As reported +ASC 606 +reported +ASC 606 +December 31, +December 31, +December 31, 2018 +Adjustments +January 1, 2019 +2019 +Adjustments +2019 +Assets: +Accounts receivable +$ +6,792 +$ +47 +$ +6,839 +$ +10,906 +$ +— +$ +10,906 +Prepaid expenses and other current assets +2,330 +288 +2,618 +2,137 +335 +1,802 +Other non-current assets +536 +19 +555 +557 +— +557 +Liabilities: +Deferred revenue +5,437 +43 +5,394 +4,697 +( 209 ) +4,488 +Deferred revenue, net of current portion +520 +43 +477 +466 +14 +480 +Stockholders’ equity: +Accumulated deficit +$ +( 175,888 ) +$ +( 440 ) +$ +( 175,448 ) +$ +( 216,244 ) +$ +( 140 ) +$ +( 216,104 ) +F-21 +Table of Contents +For the year Ended December 31, 2019 +Under ASC +Under ASC 606 +Adjustment +605 +Product revenue +$ +40,491 +$ +55 +$ +40,546 +Service revenue +16,059 +273 +16,332 +Costs of goods sold and services +29,898 +1 +29,899 +Gross profit +26,836 +327 +27,163 +Selling general and administrative expenses +52,246 +27 +52,273 +Net loss +$ +( 40,796 ) +$ +300 +$ +( 40,496 ) +In January of 2019, the Company adopted ASU 2016-01, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. For equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using the net asset value per share or its equivalent, the Company has elected to measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. This election is made for each investment separately and is reassessed at each reporting period as to whether the investment continues to qualify for this election. Additionally, at each reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements. +Not Yet Adopted +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13) , which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The standard is effective for the Company beginning in the first quarter of 2022, with early adoption permitted. The Company does not expect impact of ASU 2016-13 to be material on its consolidated financial statements. +In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15) . This ASU addresses the accounting for implementation, setup and other upfront costs paid by a customer in a cloud computing or hosting arrangement. The guidance aligns the accounting treatment of these costs incurred in a hosting arrangement treated as a service contract with the requirements for capitalization and amortization costs to develop or obtain internal-use software. This guidance is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The guidance can be adopted either retrospectively or prospectively. The Company is currently evaluating the expected impacts of ASU 2018-15. +In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes , which is intended to simplify various areas related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning in fiscal year 2022, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures. +F-22 +Table of Contents +3. Inventory +Inventory consists of the following (in thousands): +December 31, +2020 +2019 +Raw materials +$ +5,265 +$ +4,717 +Work in process +3,306 +2,573 +Finished goods +6,285 +3,173 +Total +$ +14,856 +$ +10,463 +Inventory comprises commercial instruments, assays, and the materials required to manufacture assays. +4. Property and equipment +Property and equipment consists of the following (in thousands): +As of +December 31, +2020 +2019 +Laboratory and manufacturing equipment +$ +8,523 +$ +5,391 +Office furniture and equipment +1,556 +1,403 +Computers and software +1,504 +1,103 +Leasehold improvements +8,765 +8,489 +Total +$ +20,348 +$ +16,386 +Less: accumulated depreciation +( 6,436 ) +( 4,339 ) +Total +$ +13,912 +$ +12,047 +The Company incurred depreciation expense of $ 2.2 million and $ 1.6 million for the years ended December 31, 2020 and 2019, respectively. The Company has instruments included in laboratory and manufacturing equipment, which are used internally by the Company. As of December 31, 2020, the laboratory and manufacturing equipment balance includes $ 3.4 million of cost and $ 1.8 million of accumulated depreciation related to these instruments. As of December 31, 2019, the laboratory and manufacturing equipment balance includes $ 2.8 million of cost and $ 1.2 million of accumulated depreciation related to these instruments. +5. Other accrued expenses +Other accrued expenses consist of the following (in thousands): +December 31, +December 31, +2020 +2019 +Accrued inventory purchases +$ +527 +$ +459 +Accrued royalties +1,845 +476 +Accrued professional services +797 +655 +Accrued development costs +323 +151 +Accrued other +1,353 +757 +Total accrued expenses +$ +4,845 +$ +2,498 +F-23 +Table of Contents +Other non-current liabilities consist of the following (in thousands): +December 31, +December 31, +2020 +2019 +Leasehold obligation incentive +$ +— +$ +7,572 +Deferred rent +— +3,009 +Deferred tax liabilities +2,649 +2,825 +Other +— +1 +Total other non-current liabilities +$ +2,649 +$ +13,407 +6. Income taxes +The following table presents the components of loss before income taxes (in thousands): +Year Ended December 31, +2020 +2019 +2018 +United States +$ +( 29,896 ) +$ +( 40,010 ) +$ +( 31,436 ) +Foreign +( 2,010 ) +( 973 ) +( 75 ) +$ +( 31,906 ) +$ +( 40,983 ) +$ +( 31,511 ) +The following table summarizes income tax benefit (provision) (in thousands): +Year Ended +December 31, +2020 +2019 +2018 +Current: +United States +Federal +$ +— +$ +— +$ +— +State +( 13 ) +( 20 ) +( 18 ) +Foreign +( 102 ) +( 93 ) +— +Total current income tax provision +( 115 ) +( 113 ) +( 18 ) +Deferred +United States +Federal +( 8 ) +( 3 ) +( 2 ) +State +( 3 ) +( 1 ) +( 5 ) +Foreign +502 +304 +— +Total deferred income tax benefit (provision) +491 +300 +( 7 ) +Total income tax benefit (provision) +$ +376 +$ +187 +$ +( 25 ) +During the years ended December 31, 2020, 2019, and 2018, the Company recorded an income tax benefit (provision) of $ 0.4 million, $ 0.2 million, and $( 0.0 ) million, respectively. +F-24 +Table of Contents +A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: +Year Ended December 31, +2020 +2019 +2018 +Federal statutory income tax rate +21.0 +% +21.0 +% +21.0 +% +Foreign tax rate differential +0.3 +% +— +% +— +% +State taxes, net of federal benefit +2.5 +% +3.2 +% +6.0 +% +Tax credits +1.6 +% +2.3 +% +2.7 +% +Share-based compensation +5.2 +% +2.3 +% +1.1 +% +Permanent items +( 0.4 ) +% +( 0.9 ) +% +( 1.2 ) +% +Deferred tax rate change +0.3 +% +( 1.4 ) +% +— +% +Change in valuation allowance +( 29.7 ) +% +( 24.6 ) +% +( 29.9 ) +% +Other +0.4 +% +( 1.4 ) +% +0.2 +% +Effective income tax rate +1.2 +% +0.5 +% +( 0.1 ) +% +The effective tax rate of 1.2 % differs from the U.S. Federal statutory rate of 21.0 % primarily as a result of the valuation allowance maintained against the Company’s net deferred tax assets. +During 2018, the Company acquired Aushon. The Company analyzed the transaction from an income tax perspective and adjusted the deferred tax assets and liabilities related to the Aushon acquisition. Of the total goodwill recorded, approximately $ 0.3 million is amortizable related to historical tax basis that Aushon had related to a prior acquisition. +During 2019, the Company acquired Uman, a Swedish entity. The Company analyzed the transaction from an income tax perspective and found that there was no tax deductible goodwill or other identifiable intangible assets related to the transaction. +Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): +F-25 +Table of Contents +December 31, +2020 +2019 +Deferred tax assets: +Net operating loss carryforwards +$ +50,233 +$ +43,814 +Tax credits +5,101 +5,518 +Deferred revenue +2,167 +1,247 +Amortization +1,054 +928 +Stock-based compensation +1,956 +973 +Deferred rent +— +727 +Lease incentive obligation +— +1,828 +Lease liability +5,703 +— +Other deferred tax assets +2,533 +1,325 +Total deferred tax assets +68,747 +56,360 +Less: valuation allowances +( 63,609 ) +( 54,137 ) +Net deferred tax assets +5,138 +2,223 +Deferred tax liabilities: +Right-of-Use Assets +( 2,957 ) +— +Depreciation +( 1,775 ) +( 1,769 ) +Amortization acquired intangibles +( 2,880 ) +( 3,031 ) +Inventory +( 64 ) +( 212 ) +Goodwill +( 49 ) +( 31 ) +Other deferred tax liabilities +( 61 ) +( 5 ) +Net deferred tax liabilities +$ +( 2,648 ) +$ +( 2,825 ) +The Company’s change in its valuation allowance account with respect to the deferred tax asset is as follows (in thousands): +2020 +2019 +Balance, beginning of year +$ +54,137 +$ +44,033 +Change in valuation allowance +9,472 +10,104 +Balance, end of year +$ +63,609 +$ +54,137 +The valuation allowance increased by $ 9.5 million during the year ended December 31, 2020, primarily as a result of the U.S. operating losses incurred, and research and development tax credit carryforwards generated during the year. +In determining the need for a valuation allowance, the Company has given consideration to the cumulative book income and loss positions of each of its entities as well as its worldwide cumulative book loss position. The Company has assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carryback net operating losses (NOLs), the existence of reversing taxable temporary differences, the availability of tax planning strategies, and forecasted future taxable income. At December 31, 2020, the Company maintains a full valuation allowance against its worldwide net deferred tax assets. +As of December 31, 2020, the Company had U.S. federal NOLs of approximately $ 199.3 million. U.S. federal NOLs generated through December 31, 2017 of approximately $ 108.5 million expire at various dates through 2037, and U.S. federal NOLs generated in the tax years beginning after December 31, 2017 of approximately $ 90.8 million do not expire. As of December 31, 2020, the Company had $ 133.7 million of state NOLs, some of which are indefinite lived and some that expire at various dates through 2040. As of December 31 2020, the Company had U.S. federal tax credit carryforwards of approximately $ 4.5 million that expire at various dates through 2040. As of December 31, 2020, the Company had U.S. state tax credit carryforwards of approximately $ 0.8 million that expire at various dates through 2040. +F-26 +Table of Contents +Under Sections 382 and 383 of the U.S. Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an ownership change generally occurs if there is a cumulative change in its ownership by 5 % stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under U.S. state tax laws. Under the TCJA, the use of federal NOLs arising in taxable years beginning after December 31, 2017 is limited to 80% of current year taxable income and NOLs arising in taxable years ending after December 31, 2017 may not be carried back (though any such NOLs may be carried forward indefinitely). +The Company may have experienced an ownership change in the past and may experience ownership changes in the future as a result of future transactions in its share capital, some of which may be outside of the control of the Company. As a result, if the Company earns net taxable income, its ability to use its pre-change NOLs, or other pre-change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to significant limitations. +The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was enacted in the United States on March 27, 2020. The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides extensive tax changes in response to the COVID-19 pandemic, the provisions do not have a significant impact on the Company’s financial results. +The Company accounts for uncertain tax positions using a more likely than not threshold for recognizing uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on an ongoing basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. The Company accounts for interest and penalties related to uncertain tax positions as a component of its benefit (provision) for income taxes. For the years ended December 31, 2020, 2019, and 2018, the Company had no tax reserves accrued for uncertain tax positions and there were no accrued interest or penalties in the consolidated statements of operations. +The Company is subject to taxation in the United States as well as the Netherlands, Sweden, and China. At December 31, 2020, the Company is generally no longer subject to examination by taxing authorities in the United States for years prior to 2017. However, NOLs and credits in the United States may be subject to adjustments by taxing authorities in future years in which they are utilized. The Company’s foreign subsidiaries remain open to examination by taxing authorities from 2015 onward. +As of December 31, 2020, the Company’s foreign subsidiaries had immaterial undistributed earnings and the tax payable on the earnings that are indefinitely reinvested would be immaterial. +7. Common Stock, warrants, stock-based compensation, stock options, restricted stock and restricted stock units +Common stock reserved +The Company reserved the following shares of common stock, on a common stock equivalent basis, for the exercise of warrants, the exercise of common stock options, and the vesting of restricted common stock. +As of December 31, +2020 +2019 +Common stock warrants +10,000 +10,000 +Common stock options and unvested restricted common stock +3,012,432 +2,916,991 +Shares reserved for future awards under compensation plans +1,559,108 +882,715 +4,581,540 +3,809,706 +F-27 +Table of Contents +Warrants +The following table summarizes the Company’s outstanding warrants as of December 31, 2020, and 2019: +Weighted +Issued and +Average +exercisable +Exercise Price +As of December 31, 2019 +10,000 +$ +21.00 +Issued +— +— +Exercised +— +— +Cancelled +— +— +As of December 31, 2020 +10,000 +$ +21.00 +The Company has an agreement with a vendor (Note 9) where the Company could be obligated to issue warrants to purchase an additional 93,341 shares of common stock to the vendor if the contract is terminated prior to a minimum purchase commitment being met. No shares have been reserved related to these potential obligations to issue warrants in the future. On January 30, 2018, the Company issued a warrant to purchase 10,000 of common stock to a consultation company for services rendered. +On July 2, 2019, 66,041 warrants were exercised by a holder on a net, non-cash, basis. Per terms of the warrant agreement, the Company issued 45,690 shares of common stock after giving effect to the holder’s net exercise. +Stock-based compensation +Share-based compensation expense for all stock awards consists of the following (in thousands): +December 31, +2020 +2019 +2018 +Cost of product revenue +$ +189 +$ +86 +$ +55 +Cost of service and other revenue +311 +238 +173 +Research and development +1,129 +718 +513 +Selling, general, and administrative +8,470 +5,346 +4,143 +Total +$ +10,099 +$ +6,388 +$ +4,884 +In June 2007, the Company adopted the 2007 Stock Option and Grant Plan (the 2007 Plan), under which it could grant incentive stock options, non-qualified options, restricted stock, and stock grants. In connection with the completion of the IPO, the Company terminated the 2007 Plan. As of December 31, 2020, 926,615 shares were outstanding and no shares were available for future grant under the 2007 Plan. +In December 2017, the Company adopted the 2017 Employee, Director and Consultant Equity Incentive Plan (the 2017 Plan), under which it may grant incentive stock options, non-qualified stock options, restricted stock, and other stock-based awards. As of December 31, 2017, the 2017 Plan allowed for the issuance of up to 1,042,314 shares of common stock plus up to 2,490,290 shares of common stock represented by awards granted under the 2007 Plan that are forfeited, expire or are cancelled without delivery of shares or which result in the forfeiture of shares of common stock back to the Company on or after the date the 2017 Plan became effective. As of December 31, 2020 and 2019, there were shares available for grant under the 2017 Plan of 710,839 and 270,143 , respectively. +In addition, the 2017 Plan contains an "evergreen" provision, which allows for an annual increase in the number of shares of common stock available for issuance under the 2017 Plan on the first day of each fiscal year during the period beginning in fiscal year 2019 and ending in fiscal year 2027. The annual increase in the number of shares shall be equal to the lowest of: 4 % of the number of shares of common stock outstanding as of such date; and an amount determined by the Company’s Board of Directors or Compensation Committee. On January 1, 2021, the number of shares of common stock available for issuance under the 2017 plan was automatically increased by 1,273,501 shares. +F-28 +Table of Contents +In December 2017, the Company adopted the 2017 Employee Stock Purchase Plan (the 2017 ESPP). As December 31, 2019, the 2017 ESPP allowed for the issuance of up to 612,572 shares of common stock. As of December 31, 2020, 848,269 shares were available for grant under the 2017 ESPP. +In addition, the 2017 ESPP contains an "evergreen" provision, which allows for an increase on the first day of each fiscal year beginning with fiscal year 2018. The increase in the number of shares shall be equal to the lowest of: 1 % of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or an amount determined by the Company’s Board of Directors or Compensation Committee. The number of shares available for grant under the 2017 ESPP increased by 318,375 shares on January 1, 2021 due to this provision. +The 2017 ESPP provides for six-month option periods commencing on March 1 and ending August 31 and commencing September 1 and ending February 28 of each calendar year. The first offering under the 2017 ESPP began on September 1, 2018. +Stock options +Under the 2007 and 2017 Plans, stock options may not be granted with exercise prices of less than fair market value on the date of the grant. Options generally vest ratably over a four-year period with 25 % vesting on the first anniversary and the remaining 75 % vesting ratably on a monthly basis over the remaining three years . These options expire ten years after the grant date. Activity under the 2007 Plan and the 2017 Plan were as follows: +Weighted-average +Remaining contractual +Aggregate intrinsic value +Options +exercise price +life (in years) +(in thousands) +Outstanding at December 31, 2019 +2,507,062 +$ +14.41 +7.58 +$ +24,870 +Granted +550,290 +$ +28.39 +Exercised +( 407,687 ) +$ +9.85 +Cancelled +( 155,620 ) +$ +22.58 +Outstanding at December 31, 2020 +2,494,045 +$ +17.73 +7.27 +$ +71,760 +Vested and expected to vest at December 31, 2020 +2,494,045 +$ +17.73 +7.27 +$ +71,760 +Exercisable at December 31, 2020 +1,514,576 +$ +12.54 +6.42 +$ +51,430 +Using the Black-Scholes option pricing model, the weighted-average fair value of options granted to employees and directors during the years ended December 31, 2020, 2019, and 2018 was $ 12.64 , $ 9.09 , and $ 7.19 per share, respectively. The expense related to stock options granted to employees was $ 5.4 million, $ 3.7 million, and $ 2.7 million for the years ended December 31, 2020, 2019, and 2018, respectively. The intrinsic value of stock options exercised was $ 10.4 million, $ 6.9 million, and $ 5.3 million, for the years ended December 31, 2020, 2019, and 2018, respectively. On December 7, 2020, the Company entered into an agreement with a non-employee director related to the extension of the exercise period, resulting in $ 0.5 million of stock-based compensation expense recorded in selling, general and administrative expense during the year ended December 31, 2020. +At December 31, 2020, there was $ 9.3 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the remaining weighted-average vesting period of 7.3 years. +Restricted stock awards +In December 2014, the Company issued 78,912 shares of restricted common stock to a director of the Company under the 2007 Plan. Under the terms of the agreement, shares of common stock issued are subject to a four year vesting schedule. Vesting occurs periodically at specified time intervals and specified percentages. In January 2015, the Company issued 781,060 shares of restricted common stock to an executive of the Company under the 2007 Plan. The majority of these shares were issued subject to a four year vesting schedule with 25 % vesting on the first anniversary and the remaining vesting 75 % ratably on a monthly basis over the remaining three years , while another portion was issued subject to performance based vesting. The vesting of performance based awards is dependent upon achievement of specified financial targets of the Company. The majority of the performance criteria were achieved during the years +F-29 +Table of Contents +ended December 31, 2016 and 2015 and the remaining unvested awards with performance conditions are not material. No restricted stock awards were granted during the years ended December 31, 2020, 2019, or 2018. As of December 31, 2020, the Company had 39,806 shares of unvested restricted common stock with a weighted average grant date fair value of $ 3.12 per share. +The expense related to restricted stock awards granted to employees and non-employees was $ 0.0 million, $ 0.0 million, and $ 0.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. +At December 31, 2020, there was no unrecognized compensation cost related to unvested restricted stock. +The aggregate fair value of restricted stock awards that vested during the years ended December 31, 2020, 2019, and 2018, based on estimated fair values of the stock underlying the restricted stock awards on the day of vesting, was $ 0.0 million, $ 0.0 million and $ 2.4 million, respectively. +Restricted stock units +Restricted stock units (RSUs) represent the right to receive shares of common stock upon meeting specified vesting requirements. In the fiscal year ended December 31, 2020, the Company issued 334,665 RSUs to employees of the Company under the 2017 Plan. Under the terms of the agreements, 268,694 of the RSUs issued are subject to a four year vesting schedule with 25 % vesting on the first anniversary and the remaining vesting 75 % ratably on a monthly basis over the remaining three years , 15,890 of the RSUs vested on December 31, 2020, 40,045 of the RSUs vest equally over three years on the anniversary of the vesting start date, 8,576 vested immediately upon grant, and 1,460 RSUs vest on May 31, 2021. A summary of RSU activity is as follows: +Weighted-average +grant date +fair value +Shares +per share +Unvested RSUs as of December 31, 2019 +370,123 +$ +20.48 +Granted +334,665 +$ +31.99 +Vested +( 182,036 ) +$ +20.13 +Cancelled +( 44,171 ) +$ +26.79 +Unvested RSUs as of December 31, 2020 +478,581 +$ +28.08 +The expense related to RSU awards granted to employees and non-employee directors was $ 4.2 million for the fiscal year ended December 31, 2020. +At December 31, 2020, there was $ 12.0 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over the remaining weighted-average vesting period of 2.8 years. +8. Leases +The Company is a lessee under leases of offices, lab spaces, and certain office equipment. Some of the Company’s leases include options to extend the lease, and these options are included in the lease term to the extent they are reasonably certain to be exercised. +900 Middlesex Turnpike Lease +The Company’s primary lease is the 900 Middlesex Turnpike Lease. On October 2, 2018, the Company entered into a 137 -month operating lease for the Company’s new headquarters in Billerica, Massachusetts. The lease is for approximately 92,000 square feet of office and laboratory space and commenced on April 1, 2019. The lease contains a period of free rent and escalating monthly rent payments. As part of the lease, the Company was required to enter into a $ 1.0 million Letter of Credit drawable by the lessor under specifically outlined conditions, which will be subsequently reduced throughout the lease term. Pursuant to a work letter entered into in connection with the 900 Middlesex Turnpike Lease, the landlord contributed an aggregate of $ 8.2 million toward the cost of construction and tenant improvements for +F-30 +Table of Contents +the building. Under the lease, the Company has the option to extend the lease for two successive five-year terms, and the renewal options are not reasonably certain to be exercised. +In applying the ASC 842 transition guidance, the 900 Middlesex Turnpike Lease remained classified as an operating lease and the Company recorded ROU assets of $ 12.2 million and lease liability of $ 22.7 million on the effective date. The difference between the ROU and the lease liability was driven by the Company derecognizing deferred rent of $ 3.0 million and the lease obligation incentive of $ 7.6 million. The Company is recognizing rent expense on a straight-line basis throughout the remaining term of the leases. +48 Tvistevägen +The Company has multiple leases at 48 Tvistevägen Umeå, Sweden for laboratory spaces, manufacturing spaces, and office space (the Uman leases). All of these Uman leases have been assessed as operating leases. +In applying the ASC 842 transition guidance, the Uman leases remained classified as operating leases and the Company recorded ROU assets of less than $ 0.1 million and lease liability of less than $ 0.1 million on the effective date. The Company is recognizing rent expense on a straight-line basis throughout the remaining term of the leases. +Summary of all lease costs recognized under ASC 842 +The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating leases for the year ended December 31, 2020: +Operating leases (in thousands) +For the year ended December 31, 2020 +Lease Costs (1) +Operating lease costs +$ +2,663 +Total lease cost +$ +2,663 +Other information +Operating cash flows used for operating leases +$ +2,108 +Weighted average remaining lease term (years) +9.8 +Weighted average discount rate +9.73 % +(1) Short-term lease costs and variable lease costs incurred by the Company for the year ended December 31, 2020 were considered immaterial. +Rent expense is calculated on a straight-line basis over the term of the lease. Rent expense recognized under all leases was $ 4.8 million, $ 3.3 million, and $ 1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. Note that the Company adopted ASC 842 effective January 1, 2020 using the required modified retrospective approach and utilizing the effective date as its date of initial application. Therefore, amounts disclosed pertaining to the years ended December 31, 2019 and 2018 are presented under previous accounting guidance and are therefore not comparable to the amounts recorded in the current period under ASC 842. +F-31 +Table of Contents +As of December 31, 2020, future minimum commitments under ASC 842 under the Company’s operating leases were as follows: +Maturity of lease liabilities (in thousands) +As of December 31, 2020 +2021 +$ +3,388 +2022 +3,466 +2023 +3,515 +2024 +3,577 +2025 and thereafter +22,203 +Total lease payments +$ +36,149 +Less: imputed interest +13,024 +Total operating lease liabilities +$ +23,125 +9. Commitments and contingencies +License agreements +Tufts University +In June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University (Tufts). Tufts is a related party to the Company due to Tuft’s equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. The License Agreement, which was subsequently amended, is exclusive and sub licensable, and will continue in effect on a country by country basis as long as there is a valid claim of a licensed patent in a country. The Company is committed to pay license and maintenance fees, prior to commercialization, in addition to low single digit royalties on direct sales and services and a royalty on sublicense income. During the years ended December 31, 2020, 2019, and 2018, the Company recorded royalty expense of $ 1.1 million, $ 1.0 million and $ 0.7 million, respectively, in cost of product revenue on the consolidated statements of operations. During the year ended December 31, 2020, the Company incurred $ 1.0 million in cost of collaboration and license revenue owed to Tufts related to sublicensing certain technology and intellectual property to Abbott Laboratories (Abbott) (see Note 13). +Other licenses +During the year ended December 31, 2012, the Company entered into a license agreement for certain intellectual property with a third party. The non-exclusive, non-sublicenseable third party’s license provides the Company access to certain patents specifically for protein detection, and shall be in effect until the expiration of the last licensed patent. In consideration for these rights, the Company committed to certain license fees, milestone payments, minimum annual royalties and a mid-single digit royalty. The Company is required to make mid-single digit royalty payments on net sales of products and services which utilize the licensed technology. The Company must pay the greater of calculated royalties on net sales or an annual minimum royalty of $ 50 thousand. In September 2019, all remaining patents related to the intellectual property expired and the license agreement terminated. As this agreement was terminated in 2019, the Company recorded no royalty expense during the year ended December 31, 2020. During the year ended December 31, 2019 and 2018, the Company recorded royalty expense of $ 0.8 million, and $ 0.4 million, respectively, in cost of product revenue on the consolidated statements of operations. +Development and supply agreement +Through the Company’s development agreement with STRATEC Biomedical, as amended in December 2016, the parties agreed on additional development services for an additional fee, which is payable when the additional development is completed. A total of $ 11.7 million is payable to STRATEC Biomedical upon completion of the +F-32 +Table of Contents +development activities. This amount is being recorded to research and development expense and accrued expenses as the services are performed. The services were completed during the year ended December 31, 2018. Substantive efforts related to these additional development activities started in the first quarter of 2019 and were completed in the third quarter of 2019. +The Company’s supply agreement with STRATEC Biomedical required the Company to purchase a minimum number of commercial units over a seven-year period ending in May 2021. If the Company were to fail to purchase a required number of commercial units, the Company would be obligated to pay termination costs plus a fee based on the shortfall of commercial units purchased compared to the required minimum amount. Based on the number of commercial instruments purchased as of December 31, 2020 the Company has satisfied its required minimum purchase amount per the supply agreement. Also, if the Company terminates the supply agreement under certain circumstances and has not purchased a required number of commercial units, it would be obligated to issue warrants to purchase 93,341 shares of common stock (the Supply Warrants) at $ 0.003214 per share. The Company believes that it will purchase sufficient units to meet the requirements of the minimum purchase commitment and, therefore, has not accrued for any of the potential cash consideration. The Supply Warrants are accounted for at fair value; however, the fair value of the Supply Warrants as of December 31, 2020 and December 31, 2019 was insignificant as there was a low probability of the warrants being issued. +Legal contingencies +The Company is subject to claims in the ordinary course of business; however, the Company is not currently a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results of its operations. The Company accrues for contingent liabilities to the extent that the liability is probable and estimable. +10. Notes payable +Loan agreement +On April 14, 2014, the Company executed a Loan Agreement with a lender, as subsequently amended, most recently in April 2019. As of December 31, 2020 and 2019, there were no additional amounts available to borrow under the debt facility. The interest rate on this term loan is variable based on a calculation of the prime rate less 5.25 % with a minimum interest rate of 8 %. Interest is paid monthly beginning the month following the borrowing date. At loan inception and in connection with the amendments, the Company issued the lender warrants to purchase shares of stock. The Loan Agreement also contains prepayment penalties and an end of term charge. Fees incurred upon execution of the agreements, and the fair value of warrants on the date of grant were accounted for as a reduction in the book value of debt and accreted through interest expense, using the effective interest rate method, over the term of the debt. +Amendment 5 to loan agreement +In August 2018, the Company signed Amendment 5 to the Loan Agreement (Amendment 5). Amendment 5 instituted a 2018 End of Term Charge of $ 0.08 million. Additionally, the Term Loan Maturity Date extended until March 1, 2020. Amendment 5 additionally, changed the due date of the End of Term Charge to, the earlier of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding Secured Obligations or (iii) the date that the Secured Obligations become due and payable. The Company incurred a cost of $ 0.05 million in relation to the execution of Amendment 5. In connection with the extension of the due date of the Loan, the deferral of principal payments (Amendment 3) was further deferred until the new Term Loan Maturity Date. On March 2, 2020, the Company paid $ 0.1 million in end of term fees related to Amendment 5 of the loan agreement. +Amendment 6 to loan agreement +In October 2018, the Company signed Amendment 6 to the Loan agreement, which amended the Loan Agreement’s collateral clause to exclude the $ 1.0 million certificate of deposit associated with the lease on the Company’s new headquarters in Billerica, MA. +F-33 +Table of Contents +Amendment 7 to loan agreement +On April 15, 2019, the Company signed Amendment 7 to the loan agreement, which extends the interest only payment period through July 1, 2021 and also extends the maturity date until October 1, 2021. As part of this Amendment 7, a “2019 End of Term Charge” for $ 50,000 was added to the loan agreement due on the earliest to occur of (i) the term loan maturity date, (ii) the date that the Company prepays the outstanding secured obligations and (iii) the date that the secured obligations become due and payable. In addition, the Company is required to pay the loan principal in four equal installments starting July 1, 2021 with the final principal payment to be made on October 1, 2021. +As of December 31, 2020, debt payment obligations due based on principal payments are as follows (in thousands): +2021 +$ +7,688 +Total +$ +7,688 +Non-cash interest expense related to debt discount amortization and accretion of end of term fees was $ 0.1 million, $ 0.1 million, and $ 0.2 million for the year ended December 31, 2020, 2019, and 2018, respectively. +The Company assessed all terms and features of the Loan Agreement and the subsequent amendments in order to identify any potential embedded features that would require bifurcation. As part of this analysis, the Company assessed the economic characteristics and risks of the debt. The Company determined that all features of the Loan Agreement and the subsequent amendments are either clearly and closely associated with a debt host or have a de minimis fair value and, as such, do not require separate accounting as a derivative liability. The Company assessed each amendment under ASC 470-50 Debt – Modifications and Extinguishments and concluded that all of the amendments constituted modifications. The Company also assessed whether the amendments represented a troubled debt restructuring and concluded they did not. The Company accounted for each of the amendments to the Loan Agreement as a modification of its debt and the unamortized discount and issuance costs related to the prior debt are amortized over the modified term of the new debt. +The Loan Agreement and the subsequent amendments contain negative covenants restricting the Company’s activities, including limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments and certain other business transactions. There are no financial covenants associated with the Loan Agreement and the subsequent amendments. The obligations under the Loan Agreement and subsequent amendments are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in the Company’s business, operations or financial or other condition. The Company has determined that the risk of subjective acceleration under the material adverse events clause is not probable and therefore has classified the outstanding principal in current and long-term liabilities based on scheduled principal payments. +11. “At-the-market offering” +On March 19, 2019, the Company entered into the Sales Agreement with Cowen with respect to an “at-the-market” offering program under which the Company could offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $ 50.0 million through Cowen as its sales agent. +On June 5, 2019, the Company issued approximately 2.2 million shares of common stock at an average stock price of $ 22.73 per share pursuant to the terms of the Sales Agreement. The “at-the-market” offering resulted in gross proceeds of $ 49.7 million. The Company incurred $ 1.7 million in issuance costs associated with the “at-the-market” offering, resulting in net proceeds to the Company of $ 48.0 million. On August 6, 2020, the Company delivered written notice to Cowen to terminate the Sales Agreement, which termination the parties agreed to make immediately effective. +12. Underwritten public offerings +On August 8, 2019, the Company entered into an underwriting agreement with J.P. Morgan Securities LLC and SVB Leerink LLC, as representatives of the several underwriters, relating to an underwritten public offering of +F-34 +Table of Contents +approximately 2.7 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 69.0 million. The Company incurred $ 4.5 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 64.5 million. +On August 6, 2020, the Company entered into an underwriting agreement with Leerink and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of approximately 3.0 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 97.6 million. The Company incurred $ 6.2 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 91.4 million. +13. Collaboration and license arrangements +The Company has entered into certain licenses with other companies for use of the Company’s technology. These licenses have royalty components which the Company earns and recognizes as collaboration and license revenue throughout the year. The Company recognized revenue of less than $ 0.1 million for the years ended December 31, 2020 and 2019 associated with these licenses. +During the year ended December 31, 2020, the Company recognized $ 1.2 million of previously deferred revenue as a result of entering into a license agreement with a diagnostics company. As of December 31, 2020 and 2019, the Company had $ 0.5 million and $ 1.7 million, respectively, of deferred revenue related to ongoing negotiations with a diagnostics company. +Abbott Laboratories +On September 29, 2020, the Company entered into a Non-Exclusive License Agreement (the Abbott License Agreement) with Abbott. Pursuant to the terms of the Abbott License Agreement, the Company granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under the Company’s bead-based single molecule detection patents (Licensed Patents) in the field of in vitro diagnostics. Abbott has paid the Company an initial license fee of $ 10.0 million in connection with the execution of the Abbott License Agreement, which was recognized as license revenue for the year ended December 31, 2020. Abbott has also agreed to pay the Company milestone fees subject to the achievement by Abbott of certain development, regulatory and commercialization milestones and low single-digit royalties on net sales of licensed products. +The Abbott License Agreement includes customary representations and warranties, covenants and indemnification obligations for a transaction of this nature. The Abbot License Agreement became effective upon signing and will continue until expiration of the last-to-expire Licensed Patent, or the agreement is earlier terminated. Under the terms of the Abbott License Agreement, the Company and Abbott each have the right to terminate the agreement for uncured material breach by, or insolvency of, the other party. Abbott may also terminate the Abbott License Agreement at any time without cause upon 60 days ’ notice. +During the year ended December 31, 2020, the Company recognized $ 10.0 million within collaboration and license revenue related to the initial license fee under the Abbott License Agreement. +14. Employee benefit plans +The Company sponsors a 401(k) savings plan for employees. The Company may make discretionary contributions for each 401(k) plan year. During the years ended December 31, 2020, 2019, and 2018, the Company made contributions of $ 0.7 million, $ 0.5 million, and $ 0.1 million, respectively. +F-35 +Table of Contents +15. Business combinations +Aushon BioSystems,Inc. +On January 30, 2018, the Company completed the acquisition of Aushon pursuant to an Agreement and Plan of Merger dated January 30, 2018. The Company acquired Aushon to complement its existing product line, improve its existing research and development capabilities in assay development and software engineering, and expand its customer base. The acquisition of Aushon was accounted for as a business combination and the Company has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. +In connection with the closing of the acquisition of Aushon, the Company paid $ 3.2 million at closing, and an additional $ 0.8 million in July 2018, the six-month anniversary of the acquisition date. +The following table presents acquisition accounting as of January 30, 2018 (in thousands): +Fair value of consideration transferred: +Cash +$ +3,200 +Obligation to issue cash +800 +Total acquisition consideration +$ +4,000 +Fair value of assets acquired and liabilities assumed: +Cash and cash equivalents +$ +199 +Accounts receivable +210 +Inventory +828 +Prepaid expenses +71 +Property and equipment and other non-current assets +180 +Intangible Assets +2,950 +Goodwill +1,308 +Total assets acquired +5,746 +Contractual obligations +( 1,155 ) +Accounts payable and accrued liabilities +( 591 ) +Net assets acquired +$ +4,000 +The intangible assets identified in the purchase price allocation discussed above include developed technology, tradenames and customer relationships. Tradenames are amortized over the useful life on a straight-line basis, while developed technology and customer relationships are amortized over their respective useful lives on an accelerated basis reflecting the period of expected derived benefits of the underlying assets. Developed technology consists of products that have reached technological feasibility and trade names represent acquired company and product names. To value the developed technology and trade name assets, the Company utilized a relief from royalty method. Under the methodology, fair value is calculated as the discounted cash flow savings accruing to the owner for not having to pay the royalty. Key assumptions included expected revenue attributable to the assets, royalty rates, discount rate and estimated asset lives. Customer relationships represent the underlying relationships with certain customers to provide ongoing services and continued product sale opportunities. The Company utilized excess earnings methodology to derive the fair value of the customer relationships. Key assumptions included expected attrition of customer's rates, operating income margins and discount rate. The Company used a risk-adjusted discount rate of 14.4 % in determining the fair value of the intangible assets. +The goodwill recorded as a result of the acquisition of Aushon represents the strategic benefits of growing the Company's product portfolio and the expected revenue growth from increased market penetration from future products and customers. None of the goodwill recorded is tax deductible for income tax purposes. +The Company incurred a total of $ 0.1 million in transaction costs in connection with the transaction, which were included in selling, general and administrative expense within the consolidated statement of operations for the year ended December 31, 2018. +F-36 +Table of Contents +UmanDiagnostics AB +On August 1, 2019, the Company completed its acquisition of Uman for an aggregate purchase price of $ 21.2 million, comprised of (i) $ 15.7 million in cash plus (ii) 191,152 shares of common stock (representing $ 5.5 million based on the closing prices of the Company’s common stock on the Nasdaq Global Market on July 1, 2019 and August 1, 2019, the dates of issuance). The acquisition of Uman closed with respect to 95 % of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5 % of the outstanding shares of capital stock of Uman on August 1, 2019. +Uman supplies Nf-L antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. With the acquisition of Uman, the Company has secured a long-term source of supply for a critical technology. This acquisition was considered a business acquisition for accounting purposes. +The Company has accounted for the acquisition of Uman as a purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets and liabilities of Uman are recorded as of the acquisition date of July 1, 2019, at their respective fair values, and consolidated with those of the Company. Purchase consideration in excess of the amounts recognized for the net assets acquired was recognized as goodwill and is not expected to be tax deductible in any taxing jurisdiction. +The following table summarizes the acquisition accounting, net of $ 1.2 million in cash and cash equivalents acquired (in thousands): +Purchase price: +Cash and stock paid +$ +21,217 +Cash and cash equivalents acquired +1,221 +Purchase price, net +19,996 +Assets (liabilities) acquired: +Accounts receivable +$ +638 +Inventory +1,680 +Prepaids and other current assets +114 +Property and equipment +33 +Intangibles +13,450 +Goodwill +8,111 +Accounts payable +( 20 ) +Accrued expense and other current liabilities +( 871 ) +Deferred tax liabilities +( 3,139 ) +Total +$ +19,996 +Revenue and net loss related to Uman’s operations were $ 1.5 million and $ 0.1 million, respectively for the year ended December 31, 2020 and is included in the Company’s consolidated statement of operations. Revenue and net income related to Uman’s operations were $ 1.1 million and less than $ 0.1 million, respectively, for the six months following the July 1, 2019 acquisition date, and is included in the Company’s consolidated statements of operations for the year ended December 31, 2019. +The following unaudited pro forma information presents the condensed consolidated results of operations of the Company and Uman for the years ended December 31, 2020, 2019, and 2018 as if the acquisition of Uman had been completed on January 1, 2018. These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments that reflect pro forma results of operations, such as increased amortization for the fair value of acquired intangible assets, increased cost of sales related to the inventory valuation adjustment, and adjustments relating to the tax effect of combining the Company and Uman businesses. +F-37 +Table of Contents +The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company and Uman. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of the results of operations that actually would have been achieved had the acquisition occurred as of January 1, 2018, nor are they intended to represent or be indicative of future results of operations (in thousands): +Year Ended December 31, +Year Ended December 31, +2019 +2018 +Revenue (unaudited) +$ +57,597 +$ +38,753 +Pre-tax loss (unaudited) +$ +( 38,636 ) +$ +( 33,894 ) +During the year ended December 31, 2020, the Company incurred no costs associated with the acquisition of Uman. During the year ended December 31, 2019, the Company incurred $ 1.9 million in costs associated with the acquisition of Uman. Costs associated with the acquisition of Uman are recorded as selling, general, and administrative expenses within the consolidated statements of operations. +16. Goodwill and intangible assets +As of December 31, 2020 the carrying amount of goodwill was $ 10.5 million. The following is a rollforward of the Company’s goodwill balance (in thousands): +Goodwill +Balance as of December 31, 2019 +$ +9,353 +Cumulative translation adjustment +1,107 +Balance as of December 31, 2020 +$ +10,460 +Acquired intangible assets consist of the following (dollars in thousands): +December 31, 2020 +Gross +Cumulative +Net +Weighted +Estimated Useful +Carrying +Accumulated +Translation +Carrying +Average +Life (in years) +Value +Amortization +Adjustment +Value +Life R emaining (in years) +Know-how +8.5 +$ +13,000 +$ +( 2,296 ) +$ +1,374 +$ +12,078 +6.99 +Developed technology +7 +1,650 +( 1,036 ) +— +614 +4.09 +Customer relationships +8.5 - 10 +1,360 +( 618 ) +12 +754 +7.08 +Non-compete agreements +5.5 +340 +( 102 ) +31 +269 +3.99 +Trade names +3 +50 +( 49 ) +— +1 +0.08 +Total +$ +16,400 +$ +( 4,101 ) +$ +1,417 +$ +13,716 +December 31, 2019 +Gross +Cumulative +Net +Weighted +Estimated Useful +Carrying +Accumulated +Translation +Carrying +Average +Life (in years) +Value +Amortization +Adjustment +Value +Life R emaining (in years) +Know-how +8.5 +$ +13,000 +$ +( 767 ) +$ +( 99 ) +$ +12,134 +8.00 +Developed technology +7 +1,650 +( 737 ) +— +913 +5.09 +Customer relationships +8.5 - 10 +1,360 +( 421 ) +( 1 ) +938 +8.08 +Non-compete agreements +5.5 +340 +( 34 ) +( 2 ) +304 +5.00 +Trade names +3 +50 +( 32 ) +— +18 +1.09 +Total +$ +16,400 +$ +( 1,991 ) +$ +( 102 ) +$ +14,307 +The Company acquired $ 13.5 million of intangible assets in the Uman acquisition, of which $ 13.0 million was assigned to know-how, $ 0.4 million was assigned to non-compete agreements, and $ 0.1 million was assigned to customer relationships. The know-how and customer relationships intangible assets are being amortized on a straight-line basis over an 8.5 year amortization period, and the non-compete agreement intangible asset is being amortized on a +F-38 +Table of Contents +straight-line basis over a 5.5 year amortization period. In total, the weighted-average amortization period for these intangible assets is 8.4 years. +Know-how consists of the processes and procedures to produce Uman’s products. Customer relationships represent the underlying relationships with certain customers to provide continued product sale opportunities. The Company utilized excess earnings methodology to derive the fair value of the customer relationships. +The Company recorded amortization expense of $ 2.1 million, $ 1.4 million, and $ 0.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. Amortization of developed technology is recorded within research and development expenses, amortization of customer relationships is recorded within selling, general, and administrative expenses, amortization of trade names is recorded within selling, general, and administrative expenses, amortization of non-compete agreements is recorded within selling, general, and administrative expenses, and amortization of know-how is recorded within cost of goods sold. +Future estimated amortization expense of acquired intangible assets as of December 31, 2020 is as follows (amounts in thousands): +For the Years Ended December 31, +Estimated Amortization Expense +2021 +$ +2,013 +2022 +1,930 +2023 +1,848 +2024 +1,733 +Thereafter +6,192 +$ +13,716 +17. Related party transactions +As described in Note 9, in June 2007, the Company entered into a license agreement for certain intellectual property with Tufts. Tufts is a related party to the Company due to Tufts’ equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. During the years ended December 31, 2020, 2019, and 2018 the Company recorded royalty expense of $ 1.1 million, $ 1.0 million, and $ 0.7 million, respectively, in cost of product revenue on the consolidated statements of operations. During the year ended December 31, 2020, the Company also incurred $ 1.0 million in cost of collaboration and license revenue owed to Tufts related to sublicensing certain technology and intellectual property to Abbott. +During the year ended December 31, 2017, Harvard University became a related party because a member of the Company’s Board of Directors is affiliated with Harvard University. Revenue recorded from sales to Harvard University was $ 0.1 million, $ 0.1 million, and less than $ 0.1 million for the years ended December 31, 2020, 2019, and 2018, respectively. +On November 28, 2018, the Company entered into a sponsor agreement with Powering Precision Health (PPH), a 501(c)6 not-for-profit entity of which an executive of the Company is a board member, through December 31, 2018. The agreement committed a maximum of $ 120,000 in funds and services to be provided to PPH for the term of the agreement. On November 14, 2019, the Company entered into the first amendment to the PPH sponsorship agreement. The agreement amended the $ 120,000 annual committed maximum amount to $ 200,000 for the annual committed amount. The agreement is terminable by either party and does not bind the Company to beyond the term of the agreement. For the year ended December 31, 2020, the company did not make any contributions. For the years ended December 31, 2019, and 2018, the Company had total contributions $ 0.1 million, and less than $ 0.1 million, respectively. +18. Restricted cash +The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance the terms of the Letter of Credit in the lease agreement. The $ 1.0 million Letter of Credit drawable by the +F-39 +Table of Contents +lessor under specifically outlined conditions within the lease, which are primarily related to rent payments. The amount of the Letter of Credit will be reduced at 41 and 65 months after the commencement date of the lease to $ 750,000 and then $ 250,000 , respectively. +The Company had $ 1.0 million of restricted cash as of December 31, 2020 and 2019, respectively. +19. Quarterly data (unaudited) +(Amounts in thousands, except share and per share data) +2020 +Q1 +Q2 +Q3 +Q4 +Total Year +Product revenue +$ +9,833 +$ +6,790 +$ +11,662 +$ +15,732 +$ +44,017 +Service and other revenue +5,762 +6,317 +6,552 +5,498 +24,129 +Collaboration and license revenue +132 +23 +11,246 +408 +11,809 +Grant revenue +— +— +1,929 +4,493 +6,422 +Total revenue +15,727 +13,130 +31,389 +26,131 +86,377 +Costs of goods sold: +Cost of product revenue +6,186 +5,416 +6,387 +7,961 +25,950 +Cost of services and other revenue +2,728 +2,501 +2,896 +3,120 +11,245 +Cost of collaboration and license revenue +— +— +1,000 +— +1,000 +Total costs of goods sold and services +8,914 +7,917 +10,283 +11,081 +38,195 +Gross profit +6,813 +5,213 +21,106 +15,050 +48,182 +Operating expenses: +Research and development +4,268 +4,312 +5,377 +6,217 +20,174 +Selling, general and administrative +14,273 +13,102 +13,451 +18,766 +59,592 +Total operating expenses +18,541 +17,414 +18,828 +24,983 +79,766 +Income (loss) from operations +( 11,728 ) +( 12,201 ) +2,278 +( 9,933 ) +( 31,584 ) +Interest income (expense), net +161 +( 108 ) +( 160 ) +( 166 ) +( 273 ) +Other income (expense), net +( 167 ) +( 11 ) +( 26 ) +155 +( 49 ) +Income (loss) before income taxes +( 11,734 ) +( 12,320 ) +2,092 +( 9,944 ) +( 31,906 ) +Income tax benefit +124 +18 +111 +123 +376 +Net income (loss) +$ +( 11,610 ) +$ +( 12,302 ) +$ +2,203 +$ +( 9,821 ) +$ +( 31,530 ) +Net income (loss) per share, basic +$ +( 0.41 ) +$ +( 0.43 ) +$ +0.07 +$ +( 0.31 ) +$ +( 1.07 ) +Weighted-average common shares outstanding, basic +28,179,132 +28,312,925 +30,139,157 +31,696,002 +29,589,132 +Net income (loss) per share, diluted +$ +( 0.41 ) +$ +( 0.43 ) +$ +0.07 +$ +( 0.31 ) +$ +( 1.07 ) +Weighted-average common shares outstanding, diluted +28,179,132 +28,312,925 +31,386,439 +31,696,002 +29,589,132 +F-40 +Table of Contents +2019 +Q1 +Q2 +Q3 +Q4 +Total Year +Product revenue +$ +9,547 +$ +8,776 +$ +10,737 +$ +11,431 +$ +40,491 +Service and other revenue +2,790 +4,760 +4,207 +4,302 +16,059 +Collaboration and license revenue +— +— +— +184 +184 +Total revenue +12,337 +13,536 +14,944 +15,917 +56,734 +Costs of goods sold: +Cost of product revenue +4,248 +4,455 +5,513 +6,684 +20,900 +Cost of services and other revenue +2,082 +2,150 +2,398 +2,368 +8,998 +Total costs of goods sold and services +6,330 +6,605 +7,911 +9,052 +29,898 +Gross profit +6,007 +6,931 +7,033 +6,865 +26,836 +Operating expenses: +Research and development +3,852 +4,016 +3,924 +4,398 +16,190 +Selling, general and administrative +11,512 +13,429 +13,352 +13,953 +52,246 +Total operating expenses +15,364 +17,445 +17,276 +18,351 +68,436 +Loss from operations +( 9,357 ) +( 10,514 ) +( 10,243 ) +( 11,486 ) +( 41,600 ) +Interest income, net +21 +42 +282 +282 +627 +Other income (expense), net +( 47 ) +( 68 ) +( 34 ) +139 +( 10 ) +Loss before income taxes +( 9,383 ) +( 10,540 ) +( 9,995 ) +( 11,065 ) +( 40,983 ) +Income tax benefit (provision) +( 22 ) +( 23 ) +125 +107 +187 +Net loss +$ +( 9,405 ) +$ +( 10,563 ) +$ +( 9,870 ) +$ +( 10,958 ) +$ +( 40,796 ) +Net loss per share, basic and diluted +$ +( 0.42 ) +$ +( 0.46 ) +$ +( 0.37 ) +$ +( 0.39 ) +$ +( 1.63 ) +Weighted-average common shares outstanding, basic and diluted +22,422,960 +23,213,653 +26,627,831 +28,021,957 +25,090,708 +20. Subsequent events +On February 3, 2021, the Company entered into an underwriting agreement with Goldman Sachs & Co. LLC, Leerink and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of approximately 4,107,142 shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 287.5 million. The Company incurred $ 17.9 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 269.6 million. +F-41 \ No newline at end of file diff --git a/raw/filings/0001503274/2020/0001558370-21-002469/filing_metadata.csv b/raw/filings/0001503274/2020/0001558370-21-002469/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..4052c804df042358ad57f3fb6864c9ec77a2a7a6 --- /dev/null +++ b/raw/filings/0001503274/2020/0001558370-21-002469/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001503274,QTRX,Quanterix Corp,10-K,2021-03-05,2020-12-31,2021-03-05T21:31:04.000Z,0001558370-21-002469,tmb-20201231x10k.htm,10-K,17074145,1,1,https://www.sec.gov/Archives/edgar/data/1503274/000155837021002469/tmb-20201231x10k.htm,https://www.sec.gov/Archives/edgar/data/1503274/000155837021002469/,2020,2020,1 diff --git a/raw/filings/0001503274/2020/0001558370-21-002469/item1.txt b/raw/filings/0001503274/2020/0001558370-21-002469/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..f8ce918c5dfa7791c0c0a61cc435b499e3dcc46c --- /dev/null +++ b/raw/filings/0001503274/2020/0001558370-21-002469/item1.txt @@ -0,0 +1,472 @@ +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We are currently focusing on protein detection, which we believe is an area of significant unmet need and where we have significant competitive advantages. However, in addition to enabling new applications and insights in protein analysis, our Simoa platforms have also demonstrated applicability across other testing applications, including detection of nucleic acids and small molecules. +We believe that our Simoa platforms are the most sensitive commercially available multiplex protein detection platforms and significantly advance ELISA technology, which has been the industry standard for protein detection for over 40 years. Proteins are complex molecules that are required for the structure, function and regulation of the body’s tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes can produce over 100,000 different proteins, approximately 10,500 of which are known to be secreted in blood. Accordingly, while research on nucleic acids provides valuable information about the role of genes in health and disease, proteins are more prevalent and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, reflecting the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. +Researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa’s sensitivity offers a new way to monitor healthy individuals and detect proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical signs and symptoms have appeared. +Our Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited in more than 1,100 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over 950 customers across our end markets, and includes all 20 of the 20 largest biopharmaceutical companies. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme-linked immunosorbent assay (ELISA) technology, which has been the most widely used method of detection of proteins for over 40 years. Given our target customers’ familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. Our Simoa bead-based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells, allowing for an +1 +Table of Contents +analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to our bead-based technology’s unprecedented sensitivity. In January 2018, we acquired Aushon BioSystems, Inc. (Aushon) and its proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to provide the same Simoa sensitivity found in our Simoa bead-based platform. We currently offer the following three Simoa instruments, which we believe are the most sensitive multiplex protein detection platforms commercially available today: +● HD-X : We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. We believe the full automation of the HD-X provides us with an additional significant competitive advantage with biopharmaceutical customers. +● SR-X : We commercially launched our SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of potential applications. +● SP-X : We commercially launched our SP-X instrument in April 2019. The SP-X is based on our planar array technology, which allows for significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The current menu of approximately 86 analyte-specific single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology, oncology and cardiology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 100 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. We intend to continue to increase the number of Simoa biomarker assays across our platforms. In addition, both the bead-based platform and the planar array platform allow ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called “homebrew” assays. +We also provide contract research services for customers through our CLIA-certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 1,300 projects for approximately 360 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +In addition, in August 2019, we completed the acquisition of UmanDiagnostics AB (Uman), a company located in Umeå, Sweden, that supplies neurofilament light (Nf-L) antibodies and Nf-L ELISA kits. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Nf-L has seen a dramatic growth as a neurological biomarker in the last three years since we developed the first assay that could reliably measure Nf-L in blood using Uman’s antibodies and our Simoa technology. This innovation allowed research, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly and has led many of the world’s foremost neurology researchers and clinicians to conclude that Nf-L may be one of the most clinically relevant brain biomarkers available today. Despite significant efforts by us and others to identify or develop an alternative source of antibodies, the Uman Nf-L antibodies remain the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. The following graphic depicts the sensitivity of the Uman antibodies to detect Nf-L in blood and CSF compared to over a dozen other antibody pairs tested by Quanterix: +2 +Table of Contents +The superiority of the Uman antibodies is further evidenced by the fact that, to date, in over 380 publications relating to the detection of Nf-L in serum or plasma, 100% used the Uman antibodies. +The Uman acquisition secures the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services, provides us with additional revenue opportunities via the sale of the Nf-L antibodies and Nf-L ELISA kits, and positions us to capitalize on significant growth opportunities with Nf-L applications in Alzheimer’s disease, multiple sclerosis, and other neurodegenerative conditions. +In view of the COVID-19 pandemic, in the second quarter of 2020 we adjusted our operations to expand capacity in our Accelerator Laboratory to support customers whose operations have been disrupted and to sustain their clinical trials. We also determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS-CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. In December 2020, the U.S. Food and Drug Administration (the FDA) issued an Emergency Use Authorization (EUA) for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test that is run on our HD-X instrument. This test targets IgG antibodies that are directed against the region of the novel coronavirus known as the spike protein. In January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test that is also run on our HD-X instrument. This test detects the presence of the SARS-CoV-2 virus nucleocapsid protein (N protein), which is known to be elevated in respiratory fluids during the initial acute phase of the infection. We currently intend to pursue authorization for additional sample types, including nasal swabs, saliva, and capillary dried blood obtained from a fingerstick. Preliminary clinical research studies suggest the viral antigen may be readily detectable in asymptomatic and pre-symptomatic patients, and we are exploring extending the test to screening applications, home-based sample collection and pooling to enable larger scale testing. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide (excluding certain Nordic countries). We have an extensive base of customers in world class academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Market Opportunities +Our Simoa platforms have applications across the life science research, diagnostics and precision health screening markets. Our initial target market has been the life science research market, in particular neurology and oncology. According to estimates in the Third-Party Research Report, we believe that our pre-COVID addressable neurology, immunology and oncology life science research market is approximately $1 billion per year. We believe our +3 +Table of Contents +recent EUA approvals will allow us to expand our life science research market focus into COVID-19, which we estimate has a currently addressable potential of $0.2 billion. As we further expand our life science research focus in other areas of immunology, oncology and other therapeutic areas, coupled with growing adoption of decentralized clinical trials, the life science research addressable market is expected to expand to approximately $7 billion. As our customers continue to gain experience with our proprietary Simoa technology, we believe the opportunity to access markets beyond research, such as diagnostics and precision health screening, will be significant. The Third-Party Research Report also estimates that the diagnostic and precision health screening markets have the potential to reach an aggregate of approximately $55 billion per year, with neurology diagnostics estimated at approximately $18 billion, proteomic liquid biopsy estimated at approximately $20 billion, COVID estimated at approximately $12 billion, and precision health screening estimated at approximately $5 billion. +Life Science Research +Our initial target market has been the large and growing life science research market. We believe our Simoa platforms are well-positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. By substantially lowering the limit of detection of protein biomarkers, we believe that Simoa is penetrating the existing market for protein analysis and holds potential to significantly grow the life science research market as researchers expand their research into the diseases associated with the thousands of proteins that were previously undetectable. Simoa also enables earlier detection of the proteins that are currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. As an indication of the market’s acceptance of our technology, biopharmaceutical researchers are also integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. In addition to enabling new applications and insights in protein analysis, our Simoa bead-based technology can be used to detect other analytes, such as nucleic acids and small molecules, which expands our market opportunity. We believe that this technology has the potential to ultimately provide the same sensitivity as polymerase chain reaction (PCR), which is the most commonly used technology for nucleic acid detection, without the distortion and bias issues associated with amplification used in PCR. +Diagnostics +We believe the diagnostic market represents a significant commercial opportunity for our Simoa technology as well. We believe existing diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa. We also believe that the ultra-sensitive protein detection provided by Simoa can enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +Simoa technology also has significant potential in the emerging field of companion diagnostics. Drug developers can use Simoa to stratify patients into categories, enabling selection of those patients for whom a drug is expected to be most effective and safe. Not only does Simoa have the potential to be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity may also enable the development of companion diagnostics based on protein biomarkers that can regularly monitor whether an approved drug is having the desired biological effect, enabling doctors to quickly and efficiently adjust the course of treatment as appropriate. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of proteins in low abundance that are undetectable using conventional, analog immunoassay technologies may enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared +4 +Table of Contents +periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +Simoa products sold or used in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. To date, other than our EUAs for our COVID assays, we have not received or applied for regulatory approvals for Simoa products. See “Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement” and “—Government Regulation” for a more detailed discussion regarding the regulatory approvals that may be required. +Our Competitive Strengths +We believe that our competitive strengths include the following: +● Proprietary ultra-sensitive Simoa digital immunoassay technology platforms, that enable researchers and clinicians to obtain information from less invasive procedures in smaller sample sizes. We believe our Simoa platforms are the most sensitive commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. We believe that sensitivity is so important that we have published an approach to increase the sensitivity of our Simoa technology 100-fold . +● Technology platforms that leverage and improve upon industry standard ELISA technology. Simoa uses the basic principles of conventional bead-based ELISA immunoassay technology. Adding digital capability to this industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers’ familiarity with the core 000ELISA technology, our Simoa platforms are easily integrated with existing customer workflows including data analysis. +● Deep and expanding scientific validation. Our Simoa technology has been cited in more than 1,100 scientific publications, including JAMA Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. We have established relationships with key opinion leaders, and our growing base of over 950 customers includes some of the world’s leading academic and government research institutions as well as all 20 of the 20 largest biopharmaceutical companies. +● Leading position in market solidified by robust customization capabilities, assay design flexibility and automation of our HD-X instrument. Our technical capabilities and expertise allow our customers to design high-quality, customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead-based and planar array platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD-X instrument provides fully automated analysis from sample introduction to analytical results, and our proprietary approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater throughput and lab efficiency. +● Highly attractive business model that leverages growing installed base of instruments. As we continue to grow our installed instrument base, optimize workflows and expand our assay menu, we expect to increase our revenues derived from consumables. The integration of our technology in our customers’ projects also provides ongoing sales of assays and consumables, resulting in a growing revenue stream. Our +5 +Table of Contents +consumables revenue increased to $27.4 million in 2020 from $25.6 million in 2019 and $13.8 million in 2018, and represented approximately 32% of our total revenue in 2020. +● Our highly experienced senior management team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our strategy to achieve this includes: +● Focus on the highly attractive, expanding market for protein detection and analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. Our technology provides a unique bridge between understanding the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and drug development. +● Continue to drive adoption of our Simoa technology in the life science research market in the near-term, and the diagnostics and precision health screening markets in the long-term. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We believe Simoa technology has the capability to enable the development of a new category of less-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. We have recently had two EUAs approved for our COVID assays. In the precision health screening market, we believe that Simoa technology has the potential to someday be used to monitor biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of disease. +● Leverage the growing importance of Nf-L as a biomarker to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of Nf-L as a neuro biomarker has increased significantly since we developed the first assay that could reliably measure Nf-L in blood. This allowed research of neurological disorders, previously limited primarily to CSF, to expand significantly, and many of the world’s foremost neurology researchers and clinicians believe that Nf-L may be one of the most clinically relevant brain biomarkers available today. To capitalize on the growing importance of this biomarker, in mid-2019, we acquired Uman and its proprietary Nf-L antibodies, which we believe are the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. We believe that this acquisition positions us to capitalize on significant growth opportunities with Nf-L applications in neurodegenerative conditions . +● Grow into new markets organically with our customers and through strategic collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of +6 +Table of Contents +some of the work that our customers are doing today in the research market. For example, Simoa’s unprecedented sensitivity has the potential to uncover research insights that could identify novel biomarkers, which could help stratify patients in clinical trials potentially leading to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. We believe this progression with our customers will help us move into new markets organically in a cost effective manner, while also retaining significant upside. In addition, we have entered into, and will continue to explore, partnerships that will help us access these markets. For example, following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary Nf-L antibodies, which will allow Siemens Healthineers to begin developing blood-based Nf-L clinical tests for future commercialization. Additionally, in September 2020, we entered into a Non-exclusive License Agreement (the Abbott License Agreement) with Abbott Laboratories (Abbott), pursuant to which we granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under our bead-based single molecule detection patents in the field of in vitro diagnostics (IVD). +● Grow through strategic acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For example, in January 2018, we acquired Aushon and its proprietary sensitive planar array detection technology, which led to the development of our SP-X instrument. In mid-2019, we also acquired Uman, securing the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services and positioning us to capitalize on the growing significance of Nf-L as a neurological biomarker. We expect that acquisitions will continue to be an important part of our strategy to increase scale, and we intend to pursue acquisitions to expand product offerings, strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +Industry Background +We intend to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. Our initial commercial strategy targets the large and growing life science research market, and we believe that the diagnostic market and the precision health screening market represent significant future commercial opportunities for Simoa. According to estimates in the Third-Party Research Report, we believe the aggregate commercial opportunity across these markets has the potential to expand to up to $62 billion. +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and regulation of the body’s tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an organism’s proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot provide. +The human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, approximately 10,500 of which are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of much of the proteome has not been practical given the limited level of sensitivity of existing technologies. To date, across our platforms, we have commercialized assays that address approximately 178 protein biomarkers secreted or released in blood and CSF. +While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of environmental factors and lifestyle, such as diet and exercise, or provide insight +7 +Table of Contents +into what is happening in a patient’s body in real time. For example, identical twins have the same genotype, but may develop different diseases over the course of their lifetime, largely due to environmental factors. +Much like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and well-being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +Existing Technologies and Their Limitations +Protein Analysis +ELISA has been the most widely used method of sensitive detection of proteins for over 40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either directly, or indirectly through use of a conjugated secondary or “capture” antibody (sandwich ELISA). A specific “detection” antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final step, a substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the graphic below: +Aside from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, Raman-enhanced signal detection, immuno-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of what is estimated to be approximately 10,500 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of these approaches have limitations, including: +● dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +8 +Table of Contents +● narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +● low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +● limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers aimed at more effectively detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become detectable. PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias into the data, potentially compromising the reliability of results, particularly at low concentrations. +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection sensitivity. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead-based technology detects proteins: +9 +Table of Contents +Simoa Bead-Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead-based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the graphic). +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 microwells, each of which is large enough to accommodate only a single bead. +10 +Table of Contents +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our Simoa bead-based technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. We have published an approach to increase the sensitivity of our Simoa technology 100-fold. +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from a sample, and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while competitive platforms lose sensitivity when multiplexing is used. Multiplexing is achieved with our Simoa bead-based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. While we have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the HD-X, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of proteins in a single sample, we believe that the ability to multiplex above a 6-plex and maintain single-plex sensitivity and precision may be limited using bead-based technology due to constraints in the number of bead-containing wells for each plex that are imaged on the Simoa disk. In 2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of neurodegenerative conditions and traumatic brain injury. Whereas other assay technologies +11 +Table of Contents +require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. In the first quarter of 2020, we launched a new Simoa 6-plex human cytokine Simoa bead-based assay for the HD-X and SR-X instrument platforms. This assay is the only commercially available product supporting quantitative multiplex measurement of six key immunomodulatory cytokines (IFNg, IL-6, IL-10, IL-12p70, IL-17A and TNFa) at baseline levels in both normal healthy individuals and patient cohorts in therapeutic areas spanning cancer, autoimmune disease, neurodegeneration and infectious disease. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +A) Analyte-specific capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96-well microtiter plate. Each microspot contains capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) Samples are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by washing the plate with a benchtop plate washer or manual wash manifold. +C) A mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +12 +Table of Contents +D) Streptavidin-HRP (horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a washing step. +E) A high-sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to emit light. +F) The plate is placed into the Quanterix SP-X imaging system. A scientific-grade CCD camera images the entire plate and all micro-spots simultaneously. The low background of the plate surface and the high-sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The SP-X imaging software utilizes algorithms to optimize exposure time and combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +Below is an image of a 96-well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We believe the Simoa planar array technology is well-suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with ultra-sensitive detection in a multiplex assay format. The figure below demonstrates 10-plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) listed in femtogram per ml. +13 +Table of Contents +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, our Simoa bead-based technology has also been used to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR-based assays with the following benefits: +● no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +● reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; and +● the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water or serum samples. +For detection of nucleic acids with our Simoa bead-based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. This assay is pictured below: +Simoa has been used to detect short sequences of RNA, known as microRNA, that are important in a number of biological systems, and are widely used in innovative therapeutic and gene editing technologies. For example, the assay was used to detect microRNA-122 (miR-122), a marker of liver toxicity, from the serum of patients who had overdosed +14 +Table of Contents +with acetaminophen. As shown in the graph below, these patients had elevated miR-122 levels compared to healthy controls. +This approach suggests potential for applications for measuring drug-induced liver injury for both safety testing of drugs in development and for monitoring of approved drugs. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research, diagnostics and precision health screening markets. +Life Science Research +Our initial target market is the large and growing life science research market. We believe our Simoa platforms are well-positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +As an indication of the market’s acceptance of our Simoa technology, researchers at pharmaceutical and biotechnology companies are integrating our platforms into drug development protocols to more efficiently and effectively develop drugs. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. In addition, researchers can also use Simoa to monitor a drug candidate’s unwanted effect on “off-target” biomarkers and predict side effects, addressing the significant issue of drug toxicity, which is a leading cause of death in the United States. We estimate that our Simoa technology has been utilized in projects for over 800 clinical trials to date. +15 +Table of Contents +According to estimates in the Third-Party Research Report, we believe that our pre-COVID addressable neurology, immunology and oncology life science research market was approximately $1 billion per year. Our recent EUA approvals expand our life science research market focus into COVID-19, which we estimate has currently addressable potential of $0.2 billion. As we further expand our life science research focus in other areas of immunology, oncology and other therapeutic areas, coupled with growing adoption of decentralized clinical trials, the life science research addressable market is expected to expand to approximately $7 billion. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +For example, researchers have conducted studies using Simoa that indicate that neurological biomarkers, including tau and Nf-L, may someday be able to replace diagnostic imaging to diagnose traumatic brain injury (TBI). Our Simoa assays for tau and Nf-L are 3,500-fold and 840-fold more sensitive, respectively, than conventional ELISA technologies. Almost 90% of patients who visit U.S. hospital emergency rooms and receive a computerized tomography (CT) scan show no structural brain injury. In addition, CT scans have approximately 100 times more radiation than a chest x-ray, and are suspected of causing cancer in up to 29,000 people per year, underscoring the need for development of a safe and accurate blood-based diagnostic test for TBI, which we believe may be enabled by our Simoa technology. +Simoa technology also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients to study for whom a drug is expected to be most effective and safe. Companion diagnostics have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only could Simoa be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity can also enable the development of companion diagnostics based on protein biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This would quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing dosages or even switching therapies. +There has been significant interest from third parties to use our technology to develop applications for the diagnostic market. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention, enabling a “precision health” revolution. +We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +The Third-Party Research Report estimates that the diagnostic and precision health screening markets have the potential to reach an aggregate of approximately $55 billion per year, with neurology diagnostics estimated at +16 +Table of Contents +approximately $18 billion, proteomic liquid biopsy estimated at approximately $20 billion, COVID estimated at approximately $12 billion, and precision health screening estimated at approximately $5 billion, which would be addressable upon receipt of any required regulatory approvals. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses. In particular, we have focused on neurology and oncology, as well as COVID, cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally only been detectable in cerebrospinal fluid (CSF), has the potential to rapidly advance neurology research and drug development, and transform the way brain injuries and diseases are diagnosed and treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of which are costly and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood-brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of these neural biomarkers in the blood are so low that they are undetectable by conventional, analog immunoassay technologies. In 2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH-L1) for the study of neurodegenerative conditions and traumatic brain injury. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. +To date, there have been over 670 neurology-related scientific publications using our Simoa technologies, and we believe that ultra-sensitive digital detection of neural related biomarkers in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including multiple sclerosis, Alzheimer’s disease, dementia, Parkinson’s disease, and TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. +Evidence of the potential clinical utility of Nf-L as a biomarker in neurological disease is progressing rapidly, in particular with respect to multiple sclerosis. At the 35 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) in September 2019, there were nearly 50 presentations in which our Simoa Nf-L assay was used. In one presentation, Novartis presented positive data from its Phase III ASCLEPIOS I and II studies of its multiple sclerosis drug candidate, ofatumumab. One of the secondary endpoints included serum levels of Nf-L as measured using our Simoa Nf-L assay. Novartis presented data that showed that, starting at three months after initiation of ofatumumab treatment, and then at 12 and 24 months timepoints, patients given ofatumumab had significantly lower blood levels of Nf-L, compared to those in the comparator arm of teriflunomide treated patients. +In another ECTRIMS presentation, Roche presented retrospective data from its Phase III OPERA I, OPERA, II AND ORATORIO trials of its approved multiple sclerosis drug OCREVUS (ocrelizumab). OCREVUS was only approved in 2017, but it has already become the multiple sclerosis market leader in its class, recording sales of $1.72 billion in the first half of 2019. By 2025, annual sales of the drug are estimated to reach $6.8 billion. In the data presented at ECTRIMS, it was shown that treatment with OCREVUS lowered blood Nf-L levels and increased proportion of patients reaching healthy donor range for Nf-L in both relapsing multiple sclerosis and primary progressive multiple sclerosis. Roche believes that this data helps advance the understanding of Nf-L as a potential biomarker of disease activity and for treatment monitoring, and may provide insight into the neuroprotective effects of the drug. +17 +Table of Contents +In an article published by Bjornevik et al in JAMA Neurology in September 2019, researchers presented data that showed that levels of serum Nf-L, as measured by the Simoa Nf-L assay, were increased six years before the clinical onset of multiple sclerosis. The researchers concluded that these data indicate that MS may have a prodromal phase lasting several years and that neuroaxonal damage occurs during this phase, emphasizing the importance of early diagnosis and treatment. +In 2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for the neurological biomarker Nf-L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer’s disease as currently established CSF biomarkers. The study was a major study of almost 600 patients from the Alzheimer’s Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf-L measurements compared with traditional CSF biomarkers. The diagnostic accuracy of the plasma Simoa Nf-L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +In addition, Simoa plasma Nf-L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer’s disease at baseline and during follow-up. High plasma Nf-L correlated with poor cognition and Alzheimer’s disease -related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf-L may have clinical utility as a noninvasive biomarker in Alzheimer’s disease. +TBIs lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as Nf-L, tau, GFAP and UCH-L1, to more adequately address diagnosis of TBIs and overall brain health. +Leading researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy (CTE), which currently can only be diagnosed after death via a brain autopsy. A recent publication by a National Institute of Health researcher indicates that measuring tau in the blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +In 2016, Fast Company named Quanterix one of the “World’s Most Innovative Companies” for our work in concussion detection. We also were awarded two competitive grants from the NFL-GE Head Health Challenge to advance this work in the detection and quantification of mild TBI. +18 +Table of Contents +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Simoa technology was used in an unpublished scientific study that indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low cost, non-invasive blood test. In this retrospective study, researchers found that Simoa assays resulted in significantly fewer false positives and false negatives than mammography. Inaccurate mammography can result in unnecessary stress, additional health care costs from follow up diagnostic mammograms, unnecessary biopsies and increased lifetime exposure to radiation. Researchers are also developing ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa technology, potentially replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, cost effective, accurate blood-based health screens, further enabling the liquid biopsy market. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the immuno-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a set of over 100 tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We also believe residual cancer cell detection post-surgery or post-treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a greater risk of reoccurrence post-surgery due to residual cancer. For example, we have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen (PSA) that is over 1,000-fold more sensitive than conventional ELISA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +19 +Table of Contents +COVID-19 +In view of the COVID-19 pandemic, in the second quarter of 2020 we determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS-CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. +In December 2020, the FDA issued an EUA for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test that is run on our HD-X instrument. This test targets antibodies that are directed against the region of the novel coronavirus known as the spike protein. The spike protein contains multiple subunits which together mediate entry of the virus into human cells, and for this reason, many candidate and authorized COVID-19 vaccines are designed to elicit an antibody response to the spike protein. Accordingly, we believe that this test may be useful for measuring the antibody response to vaccine therapy. The assay may also be used for measurement of IgG antibodies in patients suspected of previous infection or recent SARS-CoV-2 exposure. The test provides a numerical result representing the concentration of antibodies from 0.21 to 250 mg/mL. In clinical studies, the test demonstrated a 100% positive percent agreement (sensitivity) and 99.2% negative percent agreement (specificity) 15 or more days following a positive PCR test. +In January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test that is also run on our HD-X instrument. This test detects the presence of the SARS-CoV-2 virus nucleocapsid protein (or N protein) which is known to be elevated in respiratory fluids during the initial acute phase of the infection. We believe that direct detection of antigen proteins from the virus may be a more meaningful measure of infection status than detection of RNA by rRT-PCR because genetic material can linger even after the virus has left the body, resulting in increased risk of false positives. In clinical studies, this test demonstrated a sensitivity of 97.7% and specificity of 100% up to 14 days following onset of symptoms. Under the current EUA, the test is intended for use with nasopharyngeal (NP) samples in individuals suspected of COVID-19 infection by their healthcare providers. We currently intend to pursue authorization for additional sample types, including nasal swabs, saliva, and capillary dried blood obtained from a fingerstick. Preliminary clinical research studies suggest the viral antigen may be readily detectable in asymptomatic and pre-symptomatic patients, and we are exploring extending the test to screening applications, home-based sample collection and pooling to enable larger scale testing. +20 +Table of Contents +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn’s disease undergoing anti-TNF-α therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF-α levels of the patients before and after treatment. These levels were all below the LoD of traditional immunoassays. +We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making early stage detection more specific and widely available. +21 +Table of Contents +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +For example, we have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than conventional ELISA assays capable of detecting the HIV-specific antigen, p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile ( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +We will continue to develop Simoa assays for pathogenic antigens that are competitive in sensitivity to PCR but more specific to the pathogenicity of the offending organism. We believe that these Simoa assays could also be invaluable tools for the development of anti-infective drugs and treatment monitoring of anti-viral and anti-bacterial drugs. +22 +Table of Contents +Our Products and Services +Our Quanterix commercial portfolio includes research use only (ROU) instruments, assay kits and other consumables, and contract research services offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD-X +● +commercially launched the next-generation HD-X in the second half of 2019 to replace the HD-1 launched in 2014 +● +Simoa bead-based platform technology +● +most widely referenced ultra-sensitive multiplex immunoassay platform on market +● +fully automated, floor-standing instrument +● +wide dynamic range +● +multiplexing capability (up to 6-plex) with small sample volume +● +up to 400 samples per eight-hour shift +● +homebrew capabilities +SR-X +● +commercially launched in December 2017 +● +Simoa bead-based platform technology +● +reader only, benchtop instrument with lower price point +● +same sensitivity, dynamic range and homebrew capabilities as HD-X +● +multiplexing capability: SR-X currently has up to 6-plex capability +● +sample prep and assay protocol flexibility +SP-X +● +commercially launched in April 2019 +● +Simoa planar array platform technology +● +reader only, benchtop instrument with lower price point +● +similar sensitivity, dynamic range and homebrew capabilities as HD-X +● +multiplexing capability: SP-X currently has up to 10-plex capability +● +sample prep and assay protocol flexibility +23 +Table of Contents +Product +Key attributes +Simoa assays and other consumables +● +menu of approximately 87 single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology +● +Two EUA approved SARS-CoV-2 assays +● +menu of Simoa planar array reagent kits includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research +● +homebrew kits containing reagents and supporting user guides enabling customers to develop custom assays +● +proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead-based assays +Nf-L antibodies and Nf-L ELISA kits +● +sold through our wholly-owned subsidiary, Uman, which we acquired in 2019 +● +Nf-L capture/detection antibodies with unparalleled sensitivity and specificity +● +Nf-L ELISA kits for CSF; CE-certified in Europe; RUO outside of Europe +● +licensing and supply arrangement with Siemens Healthineers that will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization +Services +● +contract research services provided through our Accelerator Laboratory +● +over 1,300 projects completed to date +● +extended warranty and service contracts +● +CLIA-certified lab available +Instruments and Consumables +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1, our very first instrument, which was launched in January 2014. The HD-X was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X uses our Simoa bead-based technology and is the most sensitive automated multiplex protein detection platform commercially available. Assays for the HD-X are fully automated (i.e. sample in to result out), and results for up to 66 samples are available in approximately one hour. We believe that this automation provides us an additional significant competitive advantage with pharmaceutical and biotechnology customers. Samples can be input into the instrument via 96-well microtiter plates or sample tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +24 +Table of Contents +Specialized software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration of multiple biological molecules. The HD-X software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to concentrations for the different biological molecules. +Following commercial launch of the HD-X, we initiated a trade-in program for installed HD-1 instruments that has been exceeding expectations. By the end of 2020, approximately 48% of the HD installed base was HD-X instruments. +SR-X +We commercially launched the SR-X instrument in the fourth quarter of 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra-sensitive detection capabilities enabled by Simoa. +In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instruments using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately 2.5 hours. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide the same Simoa sensitivity found in our Simoa bead-based platform. The Simoa planar array technology utilizes a 96-well microtiter plate with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar to the SR-X, the assay prep workflow utilized for the SP-X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid handling methods as the SR-X. The SP-X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 87 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to these assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes, and disposable tips. Our goal is to continue to add to our assay kits to extend our application base. +25 +Table of Contents +We have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to manufacturing and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu expansion goals. +Nf-L Antibodies and Nf-L ELISA Kits +In August 2019, we completed our acquisition of Uman. Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits for Nf-L detection in CSF. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Through Uman we sell proprietary Nf-L capture and detection antibodies, as well as two Nf-L ELISA kits for CSF, one of which is CE-certified in Europe. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. Researchers, academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, including: +● Sample testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer’s needs and even large studies can be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +● Homebrew assay development. Utilizing proprietary or commercially available reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +● Custom development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +To date, we have completed over 1,300 projects for approximately 360 customers from all over the world using our Simoa platforms, including over 130 projects for clinical studies. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We have published an approach to increase the sensitivity of our Simoa technology 100-fold . We are also focused on expanding our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and +26 +Table of Contents +marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional major markets, including Australia, Brazil, China, Czech Republic, India, Israel, Japan, Lebanon, Mexico, Qatar, Saudi Arabia, Singapore, South Korea and Taiwan. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide (excluding certain Nordic countries). Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological advances in Simoa systems, workflows, and notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As of December 31, 2020, we had approximately 118 people employed in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region countries such as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with Quanterix-employed sales and support personnel. +Our sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and governmental research institutions. +In addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness of our technologies, demonstrate the benefits relative to existing technologies and accelerate adoption. We also seek to increase awareness of our products through participation at trade shows, academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +To develop a thought leadership position in the precision health arena, we have been a Platinum Sponsor of the annual Powering Precision Health (PPH) Summit since 2016. PPH is an organization founded in 2016 by our President and Chief Executive Officer, Kevin Hrusovsky, that aims to gather many of the world’s top innovators, scientists, physicians, medical professionals, patient advocates, government officials, regulators and investors to debate and collaborate around crucial issues from neurology, oncology and cardiology to inflammation and infectious disease. We believe that sponsoring this event provides Quanterix significant marketing benefits. +Our systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the system including running experiments in the Accelerator Laboratory and comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +27 +Table of Contents +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource the Simoa bead-based instrument development and manufacturing with industry leaders, and to internally develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is manufactured by STRATEC Biomedical AG (STRATEC), based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. See “—Key Agreements—Development Agreement and Supply Agreement with STRATEC” for a description of our agreement with STRATEC. The SR-X is manufactured by Paramit Corporation (Paramit), based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements—Paramit Manufacturing Services Agreement” for a description of our agreement with Paramit. Installation of, and training on, our instruments is provided by our employees in the markets where we conduct direct sales, and by distributors in those markets where we operate with distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we would experience additional costs, delays and difficulties in doing so, and our business would be harmed. +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. To mitigate this risk, we typically carry significant inventory of critical components. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Reagents for our bead-based assays include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we have increased the shelf life of the vast majority of our bead-based assays from six months to 12 months or more. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. This agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead-based platform are commercially available. +We assemble our 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +28 +Table of Contents +Nf-L antibodies and Nf-L ELISA Kits +The storage of Uman’s proprietary Nf-L antibody producing hybridomas as well as the cultivation and purification of the antibodies is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s Nf-L ELISA kits. The antibody reagents are labeled and released to market after testing. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s Nf-L ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. All incoming goods are subject to receipt control and any deviations related to quality deficiencies are registered. The kit components include buffers (sample diluent and wash solution), an ELISA 96-well plate coated with a capture antibody, detector antibody, streptavidine conjugate, substrate (TMB) and stop reagent. The kit components are labeled (either “RUO” or “CE”) and assembled. The final ELISA kit product is subject to quality control which include testing of human CSF quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months. +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement (the STRATEC Development Agreement) with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. Under the STRATEC Development Agreement, we were required to pay a fee and issue to STRATEC warrants to purchase our equity securities, all of which have been exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The STRATEC Development Agreement was amended in November 2016. The Amendment reduced our obligation to satisfy a minimum purchase commitment under the STRATEC Supply Agreement described below. Additionally, the parties agreed on additional development services for an additional fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with the final milestone due under the terms of the STRATEC Development Agreement. The services were completed in and the final milestone payment was paid in the fourth quarter of 2019. The STRATEC Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC (the STRATEC Supply Agreement), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The STRATEC Supply Agreement was amended in November 2016 to reduce the number of HD instruments we are committed to procure from STRATEC, and this commitment has been met. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party, provided that neither party may terminate the STRATEC Supply Agreement prior to the later of the seven year anniversary of the acceptance of the first prototype instrument and the purchase of the minimum number of instruments which we were committed to procure. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free +29 +Table of Contents +license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the Paramit Agreement) with Paramit. Under the terms of the Paramit Agreement, we engaged Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement has an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Non-Exclusive License Agreement with Abbott Laboratories +In September 2020, we entered into a Non-Exclusive License Agreement with Abbott. Pursuant to the terms of the License Agreement, we granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under our bead-based single molecule detection patents in the field of IVD. Abbott paid us an initial license fee of $10.0 million in connection with the execution of the License Agreement. Abbott has also agreed to pay us milestone fees subject to the achievement by Abbott of certain development, regulatory and commercialization milestones and low single digit royalties on net sales of licensed products. +The License Agreement includes customary representations and warranties, covenants and indemnification obligations for a transaction of this nature. The License Agreement became effective upon signing and will continue until expiration of the last-to-expire licensed patent, or the agreement is earlier terminated. Under the terms of the License Agreement, each party has the right to terminate the agreement for uncured material breach by, or insolvency of, the other party. Abbott may also terminate the License Agreement at any time without cause upon sixty (60) days’ notice. +Contracts with the NIH under RADx +In September 2020, we entered into the Rapid Acceleration of Diagnostics (RADx) workplan 2 award (WP2) with the National Institute of Health (NIH) under the RADx program. This contract, which has a total award value of $18.2 million, is intended to accelerate the continued development, scale-up and deployment of our novel SARS-CoV-2 antigen test. Initial early feasibility of this test was funded in part through the RADx workplan 1 award (WP1) we were granted in June 2020. WP2 supports clinical validation of the test in support of the EUA submissions with the FDA, and provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Contract funding is subject to achievement of pre-defined milestones and the contract period runs through September 2021. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for protein detection, nucleic acid detection and additional applications. For example, companies such as Bio-Techne, Luminex, MesoScale Discovery, Gyros, Nanostring, and others, have products for protein detection +30 +Table of Contents +that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as Covance, Q2 Solutions, Myriad RBM, Monogram Biosciences, PPD Laboratories, and others, some of whom are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics and precision health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research, diagnostic and precision health screening markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors in our target markets include: +● sensitivity; +● cost of instruments and consumables; +● assay menu; +● reputation among customers and key opinion leaders; +● innovation in product offerings; +● accuracy and reproducibility of results; and +● customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University (Tufts), in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from Tufts the relevant patent filings related to these technologies. (See “—License Agreement with Tufts University” below). In addition to licensed patents, we have developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. Our portfolio also includes issued patents and patent applications acquired as part of our 2017 acquisition of Aushon Biosystems. We believe our proprietary platforms are a core strength of our business and our strategy includes the continued development of our patent portfolio. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core +31 +Table of Contents +technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of February 1, 2021, we had exclusively licensed 18 patents and two patent applications from Tufts. These patents and patent applications include nine issued U.S. patents and two pending U.S. patent applications, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +A first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes six granted U.S. patents, one pending U.S. patent application, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A third patent family licensed from Tufts is directed to methods for analyzing analytes using a sensor system with cross-reactive elements. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 14, 2021. +A fourth patent family licensed from Tufts is directed to electro-optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +A fifth patent family licensed from Tufts is directed to methods for detecting short nucleic acids. This patent family includes one pending U.S. patent application. The standard patent expiration date for the U.S. patent in this family is May 29, 2039. +As of February 1, 2021, we owned 24 issued U.S. patents and 22 pending U.S. patent applications, eight granted European patents and three pending European patent applications, nine granted Japanese patents, four granted Chinese patents and one pending Chinese patent application, five granted Canadian patents and one pending Canadian patent application, one granted Australian patent, and two registered Hong Kong patent applications. +A first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads, including multiplexing. This patent family includes four granted U.S. patents and two pending U.S. patent applications, two granted European patent (nationalized and active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes four granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads with or without +32 +Table of Contents +dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is September 28, 2028. +A fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 24, 2030. +A fifth patent family owned by us is directed to instruments and consumables. This patent family includes one granted U.S. patent and one pending U.S. patent application, two granted Japanese patents, one granted Chinese patent and one pending Chinese patent applications, one registered Hong Kong patent application and one pending patent application in each of Europe, and Canada. The standard patent expiration date for any U.S. patents that may issue from this family is February 25, 2031, and for any non-U.S. patents is January 27, 2032. +A sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes two pending U.S. patent applications. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is September 20, 2038. +We own or co-own nine patent families directed to the measurement of particular types of analytes, including prostate specific antigen (PSA), β-amyloid peptide, tau protein, toxin B of C. difficile , neurofilament light, glial fibrillary acidic protein, ubiquitin carboxyl-terminal hydrolase L1, and DNA or RNA molecules. These families include one granted U.S. patent directed to methods for determining treatment protocols and/or a prognosis of a patient’s recovery from a brain injury based on measurements of tau protein in blood and one granted European patent (nationalized and active in three countries) directed to detection of C. difficile . Any patents that may issue from these patent applications would have standard expiration dates between 2032 and 2039. +With the acquisition of Aushon in January 2017, we acquired their patent portfolio for our planar array technology. As of February 1, 2021, the acquired patent portfolio includes at least nine issued U.S. patents and one pending U.S. patent application, one granted Australian patent, three granted Canadian patents, four granted European patents (each nationalized and active in between eight and 14 countries) and one pending European patent application, three granted Japanese patents, and one registered Hong Kong patent. +We have licensed additional patents and patent applications from third parties. +In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable for a fee. +33 +Table of Contents +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 amendment, we issued Tufts shares of our Series C-1 Preferred Stock, which converted into shares of our common stock in connection with our initial public offering. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Other than the COVID assays for which we have received EUAs, our products are currently intended for research use only (RUO) applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or the Center for Medicare and Medicaid Services (CMS). Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products are subject to FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than research purposes. Consequently, our products (other than the COVID assays for which we have received EUAs) are labeled “For Research Use Only.” +On November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (RUO/IUO Guidance). The purpose of an FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s 510(k) clearance, premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance is a statement of the FDA’s thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. We also are not promoting or using our products in the development or promotion of laboratory developed test (LDT) services. When we develop products for clinical use, we will do so in accordance with FDA requirements applicable to those products at that time. Separately, when we become aware that accredited or licensed clinical laboratories may be using our RUO products either for research or clinical uses, such as part of LDT services, in accordance with the regulations that apply to clinical laboratories, we will continue to review the labeling and promotion of our products for consistency with the RUO/IUO Guidance. +34 +Table of Contents +When our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification (510(k)) and receive clearance from the FDA which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized until a premarket approval application (PMA) is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent (SE), to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA’s receipt of the 510(k), but it often takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre-market approval. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. +This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. +35 +Table of Contents +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the accepted application, although review of the application generally can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with its quality system regulations (QSRs). New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and efficacy of the device. +Emergency Use Authorization +In emergency situations, such as a pandemic, the FDA has the authority to allow unapproved medical products or unapproved uses of cleared or approved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by chemical, biological, radiological or nuclear warfare threat agents when there are no adequate, approved, and available alternatives. +Under this authority, the FDA may issue an EUA for an unapproved device if the following four statutory criteria have been met: (1) a serious or life-threatening condition exists; (2) evidence of effectiveness of the device exists; (3) a risk-benefit analysis shows that the benefits of the product outweigh the risks; and (4) no other alternatives exist for diagnosing, preventing or treating the disease or condition. Evidence of effectiveness includes medical devices that “may be effective” to prevent, diagnose, or treat the disease or condition identified in a declaration of emergency issued by the Secretary of the Department of Health and Human Services (HHS). The “may be effective” standard for EUAs requires a lower level of evidence than the “effectiveness” standard that FDA uses for product clearances or approvals in non-emergency situations. The FDA assesses the potential effectiveness of a possible EUA product on a case-by-case basis using a risk-benefit analysis. In determining whether the known and potential benefits of the product outweigh the known and potential risks, the FDA examines the totality of the scientific evidence to make an overall risk-benefit determination. Such evidence, which could arise from a variety of sources, may include (but is not limited to) results of domestic and foreign clinical trials, in vivo efficacy data from animal models, in vitro data, as well as the quality and quantity of the available evidence. +Once granted, an EUA will remain in effect and generally terminate on the earlier of (1) the determination by the Secretary of HHS that the public health emergency has ceased or (2) a change in the approval status of the product such that the authorized use(s) of the product are no longer unapproved. After the EUA is no longer valid, the product is no longer considered to be legally marketed and one of the FDA’s non-emergency premarket pathways would be necessary to resume or continue distribution of the subject product. +The FDA also may revise or revoke an EUA if the circumstances justifying its issuance no longer exist, the criteria for its issuance are no longer met, or other circumstances make a revision or revocation appropriate to protect the public health or safety. +On January 31, 2020, the Secretary of HHS issued a declaration of a public health emergency related to COVID-19. On February 4, 2020, HHS determined that COVID-19 represents a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and, subsequently, declared on March 24, 2020, that circumstances exist to justify the authorization of emergency use of medical devices, including alternative products used as medical devices, during the COVID-19 pandemic, subject to the terms of any authorization as issued by the FDA. On February 29, 2020, the FDA issued an immediately in effect +36 +Table of Contents +guidance with policy specific to development of IVD tests during the COVID-19 public health emergency. This guidance was updated on March 16, 2020, May 4, 2020 and May 11, 2020. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption application (IDE) and obtains approval of the IDE from the FDA. These clinical trials are also subject to the review, approval and oversight of an institutional review board (IRB) at each clinical trial site. The clinical trials must be conducted in accordance with the FDA’s IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +● establishment registration and device listing; +● the QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; +● labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to promotional activities; +● medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur; +● corrections and removal reporting regulations, which require that manufacture’s report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +● post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device. +To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +Since our acquisition of Aushon in January 2018, we own and operate a CLIA certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and basic research). A +37 +Table of Contents +clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health assessment and for the diagnosis, prevention, or treatment of disease. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by the Centers for Medicare & Medicaid Services (“CMS”), a CMS agent (typically a state agency), or, a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered by nearly all complex laboratories for the last few decades as LDTs, which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices. During 2010, the FDA publicly announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced its framework and timetable for implementing this guidance. On November 18, 2016, the FDA announced it would not release final guidance at that time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach. On January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. We cannot predict the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory approach by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of the FDA’s approach is unknown, it may be extensive and may result in significant change. +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out-of-state laboratories to obtain licensure. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third party payors. +If, in the future, we perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +38 +Table of Contents +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, the European Union (the EU) recently published new regulations that will result in greater regulation of medical devices and IVDs. This new IVD regulation (new IVD Regulation) is significantly different from the European directive for In vitro diagnostic products (IVD Directive) that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member states, include a risk-based classification system and increase the requirements for conformity assessment. +The CE registration for Uman’s Nf-L ELISA assay kit was approved in March 2014 under the IVD Directive . Under the IVD Directive the assay is classified as a general IVD product, class I and required self-certification with no involvement of a notified body/authority. Under the new IVD Regulation, which must be fully implemented by May 2022, the requirements increase and involve assessment by a notified body. Uman’s Nf-L ELISA assay kit is classified as class B product. The new requirements include an ISO 13485 certification of the quality system (which Uman received July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g. clinical evidence and post-market activities). The work to meet the new technical requirements is on-going. An internal GAP-analysis is to be performed and work to eliminate the GAPs performed. When completed, the available technical documentation will be assessed by an external consultant. When all requirements are met, a notified body will be contracted and the certification initiated. +Other Governmental Regulation +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (OSHA), has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +Employees and Human Capital +As of December 31, 2020, we had 314 full-time employees, of which 118 work in sales, sales support, field service, and marketing, 74 work in engineering and research and development, 72 work in manufacturing and operations and 50 work in general and administration. Of our 314 full-time employees, 273 were located in the United States and 41 were located in ten foreign countries. None of our employees are represented by a labor union or subject to a collective bargaining agreement. Historically, we have experienced a turnover rate that is lower than the industry average and attribute that to our unique culture that stresses the impact our work has on the eradication of human diseases including Alzheimer’s, cancer and COVID. We invest in creating a diverse, inclusive and safe work environment where our employees can deliver their workplace best every day. +Our success depends upon our ability to attract and retain highly qualified management and technical employees. Talent management is critical to our ability to execute our long-term growth strategy, including providing career growth, on-the-job learning opportunities and competitive compensation. We are committed to an inclusive culture which values equality, opportunity and respect. In support of our inclusive culture, we sponsor an internal Diversity, Equity and Inclusion Committee comprised of employees and executives, provide respectful workplace training to strengthen employee understanding and consciously strive to recruit a diverse talent pool across all levels of the organization. As of December 31, 2020, approximately 45% of our employees were women and approximately 30% +39 +Table of Contents +were non-white. We are focused on the engagement and empowerment of our employees through the demonstration of our foundational values, which we refer to as AT&T3: Accountability, Trust, Teamwork and Transparency. +Workforce Compensation and Pay Equity +We provide robust compensation and benefits programs to help meet the needs of our employees. We provide our full-time employees with highly competitive salaries, as well a bonus and/or commission plan, a matching 401(k) Plan, healthcare and insurance benefits, paid time off and family leave. We also provide all of our employees with targeted equity-based grants with vesting conditions designed to facilitate retention through the opportunity to benefit financially from our growth and profitability. +Company Culture +We expect all of our employees and contractors to observe the highest levels of business ethics, integrity, mutual respect, tolerance and inclusivity. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies reflecting these values and also provides direction for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is fundamentally connected to the physical and mental well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees and contractors. We provide our employees with a wide range of benefits, including benefits directed to their health, safety and long-term financial security. In response to the COVID-19 pandemic, we have implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes allowing our employees to work remotely as appropriate, while implementing significant safety measures designed to protect the health of all those working in and entering our facilities. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can also review our electronically filed reports and other information that we file with the SEC on the SEC’s website at http://www.sec.gov . \ No newline at end of file diff --git a/raw/filings/0001503274/2020/0001558370-21-002469/item13.txt b/raw/filings/0001503274/2020/0001558370-21-002469/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..2f2b8c47fbc7de4a17279c6a42608de4576980c1 --- /dev/null +++ b/raw/filings/0001503274/2020/0001558370-21-002469/item13.txt @@ -0,0 +1,2 @@ +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001503274/2020/0001558370-21-002469/item9a.txt b/raw/filings/0001503274/2020/0001558370-21-002469/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..4dcf16957f8351816119fda14608e5af2a288c94 --- /dev/null +++ b/raw/filings/0001503274/2020/0001558370-21-002469/item9a.txt @@ -0,0 +1,12 @@ +Item 9A. CONTROLS AND PROCEDURES +(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. +(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(c) Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: +● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; +● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and +● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework, our management concluded that our internal controls over financial reporting were effective as of December 31, 2020. +(d) Attestation Report on Internal Control over Financial Reporting . This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial reporting due to the deferral allowed under the JOBS Act for emerging growth companies. +97 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001503274/2020/0001558370-21-002469/rp_note.txt b/raw/filings/0001503274/2020/0001558370-21-002469/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..94d80df0d83fbcaadd07de4633b1a8dcf0fd1d44 --- /dev/null +++ b/raw/filings/0001503274/2020/0001558370-21-002469/rp_note.txt @@ -0,0 +1,4 @@ +17. Related party transactions +As described in Note 9, in June 2007, the Company entered into a license agreement for certain intellectual property with Tufts. Tufts is a related party to the Company due to Tufts’ equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. During the years ended December 31, 2020, 2019, and 2018 the Company recorded royalty expense of $ 1.1 million, $ 1.0 million, and $ 0.7 million, respectively, in cost of product revenue on the consolidated statements of operations. During the year ended December 31, 2020, the Company also incurred $ 1.0 million in cost of collaboration and license revenue owed to Tufts related to sublicensing certain technology and intellectual property to Abbott. +During the year ended December 31, 2017, Harvard University became a related party because a member of the Company’s Board of Directors is affiliated with Harvard University. Revenue recorded from sales to Harvard University was $ 0.1 million, $ 0.1 million, and less than $ 0.1 million for the years ended December 31, 2020, 2019, and 2018, respectively. +On November 28, 2018, the Company entered into a sponsor agreement with Powering Precision Health (PPH), a 501(c)6 not-for-profit entity of which an executive of the Company is a board member, through December 31, 2018. The agreement committed a maximum of $ 120,000 in funds and services to be provided to PPH for the term of the agreement. On November 14, 2019, the Company entered into the first amendment to the PPH sponsorship agreement. The agreement amended the $ 120,000 annual committed maximum amount to $ 200,000 for the annual committed amount. The agreement is terminable by either party and does not bind the Company to beyond the term of the agreement. For the year ended December 31, 2020, the company did not make any contributions. For the years ended December 31, 2019, and 2018, the Company had total contributions $ 0.1 million, and less than $ 0.1 million, respectively. \ No newline at end of file diff --git a/raw/filings/0001503274/2020/0001558370-21-002469/rpt_disclosure.txt b/raw/filings/0001503274/2020/0001558370-21-002469/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b63e6fc3be672605b8d462a6e80637fb2ee941c5 --- /dev/null +++ b/raw/filings/0001503274/2020/0001558370-21-002469/rpt_disclosure.txt @@ -0,0 +1,10 @@ +CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS +Since January 1, 2019, we have engaged in the following transactions with our directors, director nominees, executive officers and holders of more than 5% of our common stock, which we refer to as our principal stockholders, and affiliates or immediate family members of our directors, executive officers and principal stockholders. We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties. +We entered into a License Agreement with Tufts University in 2007, and as amended in 2013, 2017 and 2020, pursuant to which we obtained an exclusive, worldwide license to our core Simoa technology, and have entered into additional license agreements with Tufts to certain related technology (individually and collectively, the “Tufts Licenses”). David R. Walt, Ph.D., one of our directors, our founding scientist and an inventor of the Simoa technology, previously served as a Professor at Tufts University. Under the Tufts Licenses, we are required to pay Tufts University royalties on net sales of licensed products and services as well as a portion of our applicable sublicense revenues. During the years ended December 31, 2020 and 2019, we recorded royalty expense of $1.1 million and $1.0 million, respectively, under the Tufts Licenses. During the year ended December 31, 2020, we also incurred $1.0 million in cost of collaboration and license revenue owed to Tufts relating to sublicensing certain technology under the Tufts Licenses. Tufts University pays a portion of the royalties and license payments received from us to Dr. Walt pursuant to an arrangement between Tufts University and Dr. Walt, the amount of which is determined on a formulaic basis. Dr. Walt has indicated to us that, for the years ended December 31, 2020 and 2019, he received $199,975 and $244,562, respectively, under this arrangement with Tufts University. +Dr. Walt is currently a full Professor and a Principal Investigator at Harvard Medical School and Brigham and Women’s Hospital as well as at the Wyss Institute, institutions affiliated with Harvard University. In 2020, we entered into license agreement (the “Harvard License”) with Brigham and Women’s Hospital relating to a COVID-19 assay developed in a laboratory overseen by Dr. Walt. Dr. Walt receives no payments from Mass General Brigham, Harvard University or these affiliated entities in respect of any payments made by us under the Harvard License. During the year ended December 31, 2020, we recorded royalty expense of approximately $11,400 under the Harvard License. We also sell products and services to laboratories overseen by Dr. Walt. During the years ended December 31, 2020 and 2019, we recorded revenue from these sales of approximately $535,000 and $781,000, respectively. +Stephen Hrusovsky, the son of E. Kevin Hrusovsky, our Chairman, President and Chief Executive Officer, serves as our Director, Investor Relations and Business Development. For services in 2019, he received an aggregate of $156,350 in salary, bonus, and equity awards, and for services in 2020, he received an aggregate of $201,237 in salary, bonus, and equity awards. +Registration Rights +Pursuant to our registration rights agreement to which certain of our principal stockholders, directors and their affiliates are parties, the holders of certain shares of common stock are entitled to registration rights with respect to the shares of common stock held by them. These shares include the shares held by ARCH Venture Partners and affiliated funds, our directors Marijn Dekkers, Ph.D. and David R. Walt, Ph.D., and an affiliate of our director Paul M. Meister. See “Security Ownership of Certain Beneficial Owners and Management.” +Under our registration rights agreement, holders of registrable shares can demand that we file a registration statement or request that their shares be included on a registration statement that we are otherwise filing, in either case, registering the resale of their shares of common stock. The registration rights will terminate at the earlier of (a) the closing of a Change of Control Event, as such term is defined in our restated certificate of incorporation, (b) such time as Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), or another similar exemption under the Securities Act is available for the sale of all of such registrable shares without limitation during a three-month period without registration (and without the requirement for us to be in compliance with the current public information required under Rule 144(c)(1)), or (c) the fifth anniversary of the completion of our initial public offering. +Demand Registration Rights. The holders of a majority of the registrable shares may require us to file a registration statement under the Securities Act at our expense, subject to certain exceptions, with respect to +28 \ No newline at end of file diff --git a/raw/filings/0001503274/2021/0001558370-22-002489/filing.txt b/raw/filings/0001503274/2021/0001558370-22-002489/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..787a8461bb6aa396d9fc3e5db97d4ac9a263affc --- /dev/null +++ b/raw/filings/0001503274/2021/0001558370-22-002489/filing.txt @@ -0,0 +1,4252 @@ +35997473 29589132 25090708 0001503274 --12-31 2021 FY Quanterix Corp 36768035 31796544 1.60 1.07 1.63 P30D 1100000 7000000 false 0001503274 us-gaap:DomesticCountryMember qtrx:ThroughTaxYear2041Member 2021-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember qtrx:UnderwrittenPublicOfferingMember 2021-01-01 2021-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember qtrx:UnderwrittenPublicOfferingMember 2020-01-01 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember qtrx:UnderwrittenPublicOfferingMember 2019-01-01 2019-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember qtrx:AtMarketOfferingMember 2019-01-01 2019-12-31 0001503274 us-gaap:CommonStockMember qtrx:UnderwrittenPublicOfferingMember 2021-01-01 2021-12-31 0001503274 us-gaap:CommonStockMember qtrx:UnderwrittenPublicOfferingMember 2020-01-01 2020-12-31 0001503274 2019-08-08 2019-08-08 0001503274 us-gaap:CommonStockMember qtrx:UnderwrittenPublicOfferingMember 2019-01-01 2019-12-31 0001503274 us-gaap:CommonStockMember qtrx:AtMarketOfferingMember 2019-01-01 2019-12-31 0001503274 us-gaap:RetainedEarningsMember 2021-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-12-31 0001503274 us-gaap:RetainedEarningsMember 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-12-31 0001503274 us-gaap:RetainedEarningsMember 2019-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001503274 us-gaap:RetainedEarningsMember 2018-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001503274 us-gaap:CommonStockMember 2021-12-31 0001503274 us-gaap:CommonStockMember 2020-12-31 0001503274 us-gaap:CommonStockMember 2019-12-31 0001503274 us-gaap:CommonStockMember 2018-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2020-01-01 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember qtrx:StockBasedAwards2007PlanMember 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2021-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2021-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2019-12-31 0001503274 us-gaap:EmployeeStockOptionMember qtrx:StockBasedAwards2007PlanMember 2017-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2017-12-31 0001503274 srt:MinimumMember 2020-01-01 2020-12-31 0001503274 srt:MaximumMember 2020-01-01 2020-12-31 0001503274 srt:MinimumMember 2019-01-01 2019-12-31 0001503274 srt:MaximumMember 2019-01-01 2019-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2021-01-01 2021-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2020-01-01 2020-12-31 0001503274 us-gaap:RestrictedStockMember 2021-12-31 0001503274 us-gaap:RestrictedStockMember 2021-01-01 2021-12-31 0001503274 us-gaap:RestrictedStockMember 2020-01-01 2020-12-31 0001503274 us-gaap:RestrictedStockMember 2019-01-01 2019-12-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember 2015-01-01 2015-01-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2020-12-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2015-01-01 2015-01-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2015-01-01 2015-01-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2021-01-01 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2021-01-01 2021-12-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2015-01-01 2015-12-31 0001503274 srt:ExecutiveOfficerMember us-gaap:RestrictedStockMember qtrx:StockBasedAwards2007PlanMember 2015-01-01 2015-12-31 0001503274 us-gaap:AccountingStandardsUpdate201409Member 2021-01-01 2021-12-31 0001503274 qtrx:TuftsUniversityMember us-gaap:LicenseAgreementTermsMember 2021-01-01 2021-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherLicensesMember 2021-01-01 2021-12-31 0001503274 qtrx:TuftsUniversityMember us-gaap:LicenseAgreementTermsMember 2020-01-01 2020-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherLicensesMember 2020-01-01 2020-12-31 0001503274 qtrx:TuftsUniversityMember us-gaap:LicenseAgreementTermsMember 2019-01-01 2019-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherLicensesMember 2019-01-01 2019-12-31 0001503274 qtrx:UndeliveredServicesRelatedToInitialAndExtendedServiceTypeWarrantiesAndResearchServicesMember 2021-12-31 0001503274 qtrx:UndeliveredLicensesOfIntellectualPropertyMember 2021-12-31 0001503274 2023-01-01 2021-12-31 0001503274 2022-01-01 2021-12-31 0001503274 qtrx:HarvardUniversityMember 2021-01-01 2021-12-31 0001503274 qtrx:HarvardUniversityMember 2020-01-01 2020-12-31 0001503274 qtrx:HarvardUniversityMember 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember qtrx:AbbotLicenseAgreementMember 2021-01-01 2021-12-31 0001503274 srt:MaximumMember qtrx:JointDevelopmentAndLicenseAgreementMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 us-gaap:GrantMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2021-01-01 2021-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember qtrx:AbbotLicenseAgreementMember 2020-01-01 2020-12-31 0001503274 srt:MaximumMember qtrx:JointDevelopmentAndLicenseAgreementMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 us-gaap:GrantMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2020-01-01 2020-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-07-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 srt:MaximumMember qtrx:JointDevelopmentAndLicenseAgreementMember 2019-01-01 2019-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2019-01-01 2019-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2019-01-01 2019-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2019-01-01 2019-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2019-01-01 2019-12-31 0001503274 qtrx:ResearchServicesMember 2019-01-01 2019-12-31 0001503274 qtrx:OtherServicesMember 2019-01-01 2019-12-31 0001503274 qtrx:InstrumentProductsMember 2019-01-01 2019-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2019-01-01 2019-12-31 0001503274 us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2019-01-01 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2021-01-01 2021-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember 2019-01-01 2019-12-31 0001503274 us-gaap:OfficeEquipmentMember 2021-01-01 2021-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2021-01-01 2021-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2021-01-01 2021-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2021-12-31 0001503274 qtrx:OfficeFurnitureAndEquipmentMember 2021-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2021-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2021-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2020-12-31 0001503274 qtrx:OfficeFurnitureAndEquipmentMember 2020-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2020-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2020-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2021-01-01 2021-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-01-01 2020-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2019-01-01 2019-12-31 0001503274 qtrx:AtMarketOfferingMember 2019-01-01 2019-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2021-02-03 2021-02-03 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-08-06 2020-08-06 0001503274 qtrx:UnderwrittenPublicOfferingMember 2019-08-08 2019-08-08 0001503274 qtrx:AtMarketOfferingMember 2019-06-05 2019-06-05 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-01-01 2021-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-01 2020-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember qtrx:ThroughTaxYear2041Member 2021-12-31 0001503274 us-gaap:DomesticCountryMember 2021-12-31 0001503274 srt:MaximumMember qtrx:TristeyagenUmeaLeaseMember 2020-01-01 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2020-01-01 0001503274 us-gaap:RetainedEarningsMember 2021-01-01 2021-12-31 0001503274 us-gaap:RetainedEarningsMember 2020-01-01 2020-12-31 0001503274 srt:MaximumMember qtrx:UmandiagnosticsAbAcquisitionMember 2019-07-01 2019-12-31 0001503274 qtrx:LoanAgreementMember 2021-12-31 0001503274 us-gaap:SubsequentEventMember 2022-01-28 0001503274 srt:MinimumMember us-gaap:CustomerRelationshipsMember 2021-01-01 2021-12-31 0001503274 srt:MaximumMember us-gaap:CustomerRelationshipsMember 2021-01-01 2021-12-31 0001503274 us-gaap:TradeNamesMember 2021-01-01 2021-12-31 0001503274 srt:MinimumMember us-gaap:CustomerRelationshipsMember 2020-01-01 2020-12-31 0001503274 srt:MaximumMember us-gaap:CustomerRelationshipsMember 2020-01-01 2020-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2021-01-01 2021-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2021-01-01 2021-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2021-01-01 2021-12-31 0001503274 qtrx:KnowHowMember 2021-01-01 2021-12-31 0001503274 us-gaap:TradeNamesMember 2020-01-01 2020-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2020-01-01 2020-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2020-01-01 2020-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2020-01-01 2020-12-31 0001503274 qtrx:KnowHowMember 2020-01-01 2020-12-31 0001503274 us-gaap:TradeNamesMember 2021-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2021-12-31 0001503274 us-gaap:TradeNamesMember 2020-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2020-12-31 0001503274 qtrx:RestrictedStockUnitsAndStockOptionsMember 2021-12-31 0001503274 qtrx:RestrictedStockUnitsAndStockOptionsMember 2021-01-01 2021-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-12-31 0001503274 qtrx:LoanAgreementMember 2014-04-14 0001503274 qtrx:LoanAgreementMember us-gaap:PrimeRateMember 2014-04-14 2014-04-14 0001503274 us-gaap:ServiceOtherMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember qtrx:TuftsUniversityMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember 2019-01-01 2019-12-31 0001503274 us-gaap:ProductMember 2019-01-01 2019-12-31 0001503274 us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2019-01-01 2019-12-31 0001503274 us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member 2019-01-01 2019-12-31 0001503274 qtrx:OneCustomerMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001503274 qtrx:CustomersOutsideOfUnitedStatesMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001503274 qtrx:CustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001503274 qtrx:OneCustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2020-01-01 2020-12-31 0001503274 qtrx:OneCustomerMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2020-01-01 2020-12-31 0001503274 qtrx:CustomersOutsideOfUnitedStatesMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2020-01-01 2020-12-31 0001503274 qtrx:CustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0001503274 srt:MaximumMember qtrx:AtMarketOfferingMember 2019-03-19 0001503274 qtrx:AtMarketOfferingMember 2019-03-19 0001503274 srt:MaximumMember qtrx:PphMember 2019-11-14 0001503274 srt:MaximumMember qtrx:PphMember 2019-11-13 0001503274 srt:MaximumMember qtrx:PphMember 2018-11-28 0001503274 2018-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2020-01-01 2020-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-01-01 2019-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2021-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2021-01-01 2021-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2021-01-01 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2020-01-01 2020-12-31 0001503274 us-gaap:CommonStockMember 2020-01-01 2020-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2020-01-01 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2019-01-01 2019-12-31 0001503274 us-gaap:CommonStockMember 2019-01-01 2019-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2019-01-01 2019-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2021-01-01 2021-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2021-01-01 2021-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2021-01-01 2021-12-31 0001503274 qtrx:CostOfProductRevenueMember 2021-01-01 2021-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2020-01-01 2020-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2020-01-01 2020-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2020-01-01 2020-12-31 0001503274 qtrx:CostOfProductRevenueMember 2020-01-01 2020-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2019-01-01 2019-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2019-01-01 2019-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2019-01-01 2019-12-31 0001503274 qtrx:CostOfProductRevenueMember 2019-01-01 2019-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001503274 2019-12-31 0001503274 qtrx:LaboratoryAndManufacturingInstrumentsMember 2021-12-31 0001503274 qtrx:LaboratoryAndManufacturingInstrumentsMember 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-12-31 0001503274 us-gaap:CommonStockMember 2021-01-01 2021-12-31 0001503274 us-gaap:CommonStockMember 2020-01-01 2020-12-31 0001503274 us-gaap:CommonStockMember 2019-01-01 2019-12-31 0001503274 us-gaap:WarrantMember 2021-01-01 2021-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2021-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2021-01-01 2021-12-31 0001503274 us-gaap:WarrantMember 2021-12-31 0001503274 us-gaap:WarrantMember 2020-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2022-01-03 2022-01-03 0001503274 qtrx:StockBasedAwards2007PlanMember 2021-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2020-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2021-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2021-01-01 2021-12-31 0001503274 us-gaap:SubsequentEventMember 2022-01-28 2022-01-28 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2021-01-01 2021-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2021-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-12-31 0001503274 srt:MinimumMember 2021-01-01 2021-12-31 0001503274 srt:MaximumMember 2021-01-01 2021-12-31 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-08-01 2019-08-01 0001503274 us-gaap:DomesticCountryMember qtrx:ThroughTaxYear2037Member 2018-12-31 0001503274 qtrx:OtherLicensesMember 2021-12-31 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2021-01-01 2021-12-31 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2019-04-01 2019-04-01 0001503274 qtrx:UnderwrittenPublicOfferingMember 2021-02-03 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-08-06 0001503274 qtrx:UnderwrittenPublicOfferingMember 2019-08-08 0001503274 qtrx:AtMarketOfferingMember 2019-06-05 0001503274 qtrx:LoanAgreementMember 2021-10-01 2021-10-01 0001503274 2021-07-01 2021-07-31 0001503274 us-gaap:RetainedEarningsMember 2019-01-01 2019-12-31 0001503274 2020-01-01 2020-12-31 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2021-12-31 0001503274 qtrx:LoanAgreementMember 2021-07-01 2021-07-01 0001503274 us-gaap:NoncompeteAgreementsMember 2021-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2021-12-31 0001503274 qtrx:KnowHowMember 2021-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2020-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2020-12-31 0001503274 qtrx:KnowHowMember 2020-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2021-01-01 2021-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-09-29 2020-09-29 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-01-01 2020-12-31 0001503274 qtrx:AbbotLicenseAgreementMember 2021-01-01 2021-12-31 0001503274 2019-01-01 2019-12-31 0001503274 qtrx:OfficeSpaceInBedfordMassachusettsMember us-gaap:SubsequentEventMember 2022-01-28 0001503274 qtrx:LaboratorySpaceInBedfordMassachusettsMember us-gaap:SubsequentEventMember 2022-01-28 0001503274 qtrx:LeaseForFacilitiesInBillericaMassachusettsMember 2019-04-01 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-08-01 0001503274 qtrx:UmandiagnosticsAbAcquisitionMember 2019-07-01 0001503274 srt:MaximumMember qtrx:PphMember 2021-12-31 0001503274 2021-12-31 0001503274 2020-12-31 0001503274 2021-06-30 0001503274 2022-02-23 0001503274 2021-01-01 2021-12-31 xbrli:shares iso4217:USD xbrli:pure utr:sqft qtrx:installment qtrx:item iso4217:USD xbrli:shares +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2021 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission file number: 001-38319 +QUANTERIX CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +20-8957988 +(I.R.S. Employer Identification No.) +900 Middlesex Turnpike , Billerica , MA +(Address of principal executive offices) +01821 +(Zip Code) +Registrant’s telephone number, including area code: ( 617 ) 301-9400 +Securities registered pursuant to Section 12(b) of the Exchange Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value per share +QTRX +The Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Exchange Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No ◻ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ◻ No ⌧ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ⌧ +Accelerated filer ◻ +Non-accelerated filer ◻ +Smaller reporting company ◻ +Emerging growth company ◻ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +As of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2021), the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last reported sales price for the registrant’s common stock, par value $0.001 per share, on The Nasdaq Global Market on such date, was approximately $ 2.1 billion. +As of February 23, 2022, the registrant had 36,847,340 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, which the registrant intends to file with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +1 +Item 1A. +Risk Factors +41 +Item 1B. +Unresolved Staff Comments +68 +Item 2. +Properties +68 +Item 3. +Legal Proceedings +68 +Item 4. +Mine Safety Disclosures +68 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +68 +Item 6. +Reserved +68 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +69 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +84 +Item 8. +Financial Statements and Supplementary Data +85 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +85 +Item 9A. +Controls and Procedures +85 +Item 9B. +Other Information +86 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +87 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +87 +Item 11. +Executive Compensation +87 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +87 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +87 +Item 14. +Principal Accountant Fees and Services +87 +PART IV +Item 15. +Exhibits and Financial Statement Schedules +87 +Item 16. +Form 10-K Summary +92 +Signatures +93 +Consolidated Financial Statements +F-1 +i +Table of Contents +Special Note Regarding Forward-Looking Statements +This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about: +● the implementation of our business model and strategic plans for our business, products and services; +● the potential size of the markets and fields addressable by our Simoa technology platforms; +● the commercialization and adoption of our existing products and services and the success of our new product and service offerings; +● our ability to develop additional assays, including multiplexed assays; +● the accuracy of our estimates regarding expenses, future revenues, capital requirements and our needs for additional financing; +● the ability of our Simoa technology’s sensitivity to improve existing diagnostics and to enable the development of new diagnostic tests and tools; +● the potential of our Simoa technology in the field of companion diagnostics and its adoption by healthcare professionals; +● the impact of our Simoa technology on proteomic research; +● the usefulness of the data generated by our Simoa technology in the life science research, diagnostic and precision health screening fields; and +● our financial performance. +These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those further described in “Part I, Item 1A, Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. +You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to new information, actual results or to changes in our expectations, except as required by law. +You should read this Annual Report on Form 10-K and the documents that we reference herein and have filed with the Securities and Exchange Commission (SEC) as exhibits to this Annual Report on Form 10-K with the +ii +Table of Contents +understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect. +This Annual Report on Form 10-K includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. This Annual Report on Form 10-K also contains estimates and other statistical data from a custom market research report by an independent third-party research firm, which was commissioned by us and was issued in January 2021, referred to herein as the Third-Party Research Report. Such data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the markets in which we operate and intend to operate that are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions and estimates. +Service Marks, Trademarks and Trade Names +Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “us” and “our” in this Annual Report on Form 10-K refer to Quanterix Corporation and its subsidiaries. “Quanterix,” “Simoa,” “Simoa HD-X,” “Simoa HD-1,” “SR-X,” “SP-X”, “HD-X Analyzer”, “HD-1 Analyzer” and our logo are our trademarks. All other service marks, trademarks and trade names appearing in this Annual Report on Form 10-K are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. +iii +Table of Contents +PART I +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +We believe that our Simoa platforms are among the most sensitive commercially available multiplex protein detection platforms and significantly advance ELISA technology, which has been the industry standard for protein detection for over 40 years. Furthermore, we believe the HD-X is the most sensitive commercially available automated multiplex protein detection platform . Proteins are complex molecules that are required for the structure, function and regulation of the body’s tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes can produce over 100,000 different proteins, of which at least 10,000 are known to be secreted in blood. Researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa’s sensitivity offers a new way to monitor healthy individuals and detect proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical signs and symptoms have appeared. +Our Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited in approximately 1,600 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over 1,120 customers across our end markets and includes 22 of the 25 largest biopharmaceutical companies. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme-linked immunosorbent assay (ELISA) technology, which has been the most widely used method of detection of proteins for over 40 years. Given our target customers’ familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. Our Simoa bead-based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to our bead-based technology’s unprecedented sensitivity. In addition, in January 2018, we acquired Aushon BioSystems, Inc. (Aushon) and its proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to provide the same Simoa sensitivity found in our Simoa bead-based platform. We currently offer the +1 +Table of Contents +following three Simoa instruments, which we believe are among the most sensitive multiplex protein detection platforms commercially available today: +● HD-X : We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. +● SR-X : We commercially launched our SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of potential applications. +● SP-X : We commercially launched our SP-X instrument in April 2019. The SP-X is based on our Simoa planar array technology, which allows for significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The current menu of approximately 80 analyte-specific single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology, oncology and cardiology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. We intend to continue to increase the number of Simoa biomarker assays across our platforms. In addition, both the bead-based platform and the planar array platform allow ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called “homebrew” assays. +We also provide contract research services for customers through our CLIA-certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 1,700 projects for approximately 400 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +In view of the COVID-19 pandemic, in 2020 we adjusted our operations to expand capacity in our Accelerator Laboratory to support customers whose operations have been disrupted and to sustain clinical trials. We also determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS- CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. In December 2020, the United States Food and Drug Administration (FDA) issued an Emergency Use Authorization (EUA) for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test, and in January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. In September 2021, the FDA expanded the EUA for our Simoa SARS-CoV-2 N Protein Antigen Test to include testing with nasal swabs and saliva and for asymptomatic serial testing with nasal swab samples. We are exploring extending the test to home-based sample collection and pooling to enable larger scale testing. +In August 2019, we completed the acquisition of UmanDiagnostics AB (Uman), a company located in Umeå, Sweden, that supplies neurofilament light (Nf-L) antibodies and Nf-L ELISA kits. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Since we commercially launched the first assay that could reliably measure Nf-L in blood using Uman’s antibodies and our Simoa technology in 2017, Nf-L has seen dramatic growth as a neurological biomarker. This innovation allowed research, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly and has led many of the world’s foremost neurology researchers and clinicians to conclude that Nf-L may be one of the most clinically relevant +2 +Table of Contents +brain biomarkers available today. Despite significant efforts by us and others to identify or develop an alternative source of antibodies, we believe the Uman Nf-L antibodies remain the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. The superiority of the Uman antibodies is evidenced by the fact that, to date over 600 publications relating to the detection of Nf-L in serum or plasma have used the Uman antibodies. The Uman acquisition s ecured the Nf-L antibody supply critical to our industry-leading ultrasensitive Simoa Nf-L assays and services, provided us with additional revenue opportunities via the sale of the Nf-L antibodies and Nf-L ELISA kits, and positioned us to capitalize on significant growth opportunities with Nf-L applications in Alzheimer’s disease, multiple sclerosis, and other neurodegenerative conditions. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets. In addition, we sell Uman’s Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide. We have an extensive base of customers in world class academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research/drug trial, diagnostics and precision health screening markets. +Life Science Research/Drug Trial Markets +Our initial target market is the large and growing life science research and drug trial markets, which we sometimes refer to collectively as the translational market. We have chosen these markets to target initially because we believe there is reduced regulatory and reimbursement risk. We believe our Simoa platforms are well-positioned to capture a significant share of these markets because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. +In addition, as pharmaceutical companies look for ways to more efficiently and effectively develop and obtain regulatory approval for drugs, use of biomarkers in clinical drug trials is becoming more prevalent. With Simoa’s sensitivity and its ability to detect many biomarkers in blood, plasma and other non-invasive samples that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. +According to estimates in the Third-Party Research Report, as we further expand our focus in these markets on other areas, such as immunology, oncology and other therapeutic areas, coupled with the growing adoption of decentralized clinical trials, the life science research/drug trial addressable market is expected to expand to as much as $12 billion. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics, as well as invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy, can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries. Simoa technology also has significant potential in the emerging field of companion diagnostics. Drug developers can use companion diagnostics to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. +3 +Table of Contents +In view of the COVID-19 pandemic, as an initial foray into the diagnostics market, in 2020 we began developing a SARS- CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. We currently have EUAs for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test and our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. In addition, in 2021, our pTau-181 assay was granted Breakthrough Device Designation from the U.S. FDA as an aid in the diagnosis of Alzheimer’s disease. We believe this gives us an opportunity to further advance a potential Alzheimer’s disease diagnostic test either alone or with a partner. +There has also been significant interest from third parties to use our technology to develop applications for the diagnostic market, such as our licensing and supply arrangement with Siemens Healthineers (Siemens) for access to our Nf-L antibodies, which will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization, as well as our non-exclusive License Agreement with Abbott Laboratories, pursuant to which we granted Abbott a non-exclusive, worldwide, royalty-bearing license under our bead-based single molecule detection patents for IVD use. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention, enabling a “precision health” revolution. +Simoa products sold or used in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. To date, other than our EUAs for our COVID assays, we have not received or applied for regulatory approvals for Simoa products. See “Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement” and “—Government Regulation” for a more detailed discussion regarding the regulatory approvals that may be required. +Our Competitive Strengths +We believe that our competitive strengths include the following: +● Proprietary ultra-sensitive Simoa digital immunoassay technology platforms. We believe our Simoa platforms are among the most sensitive, commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. We believe that sensitivity is so important that we have published an approach to increase the sensitivity of our Simoa technology – in some cases as much as 100-fold - and we intend to launch a beta program using this more sensitive technology in our Accelerator Laboratory by the end of 2022 . +● Technology platforms that leverage and improve upon industry standard ELISA technology. Simoa uses the basic principles of conventional bead-based ELISA immunoassay technology, which has been the most widely used method of detection of proteins for over 40 years. Adding digital capability to this industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers’ familiarity with the core ELISA technology, our Simoa platforms are easily integrated with existing customer workflows including data analysis. +4 +Table of Contents +● Deep and expanding scientific validation and customer base. Our Simoa technology has been cited in approximately 1,600 publications to date, including JAMA Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. We have established relationships with key opinion leaders, and our growing base of over 1,120 customers includes some of the world’s leading academic and government research institutions as well as 22 of the 25 largest biopharmaceutical companies. +● Leading position in market solidified by robust customization capabilities, assay design flexibility and automation of our HD-X instrument. Our technical capabilities and expertise allow our customers to design high-quality, customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead-based and planar array platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD-X instrument provides fully automated analysis from sample introduction to analytical results, and our proprietary approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater throughput and lab efficiency. +● Highly attractive business model that leverages growing installed base of instruments. Our installed instrument base increased by 32% in 2021 to 708 instruments as of December 31, 2021. The integration of our technology into our customers’ projects provides ongoing sales of assays and consumables, and as we continue to grow our installed instrument base, optimize workflows and expand our assay menu, we expect to increase our revenues derived from consumables. Our consumables and other product revenue increased by $27.7 million to $55.1 million in 2021 from $27.4 million in 2020 and $25.6 million in 2019. Consumables and other product revenue represented approximately 50% of our total revenue in 2021. +● Our highly experienced senior management team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our strategy to achieve this includes: +● Focus on the highly attractive, expanding market for protein detection and analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. Our technology provides a unique bridge between understanding the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and diagnostic and drug development. +● Continue to drive adoption of our Simoa technology in the life science research/drug trial markets in the near-term, and the diagnostics and precision health screening markets in the long-term. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We also believe that our Simoa technology is uniquely positioned for use by pharmaceutical companies in drug trials as biomarkers are being increasingly used as an adjunct +5 +Table of Contents +to help increase the potential of regulatory approval. We have focused on these markets because we believe there is reduced regulatory and reimbursement risk for us in these markets. However, we also believe Simoa technology has the capability to enable the development of a new category of less- invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. We have had two EUAs approved for our COVID assays. In addition, in 2021 our pTau-181 assay was granted Breakthrough Device designation from the FDA as an aid in diagnostic evaluation of Alzheimer’s disease, and we are currently aiming to launch our first laboratory developed test in 2023. In the precision health screening market, we believe that Simoa technology has the potential to someday be used to monitor biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of disease. +● Leverage the growing importance of Nf-L and other neurological biomarkers to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of Nf-L and other neurological biomarkers, such as pTau-181 and pTau-217, has increased significantly in recent years, and our ultra-sensitive Simoa platforms have allowed research of neurological disorders, previously limited primarily to CSF, to expand significantly. To capitalize on the growing importance of Nf-L, in mid-2019, we acquired Uman and its proprietary Nf-L antibodies, which we believe are the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. In addition, other neuro biomarkers, such as pTau-217 and pTau-181, have shown increasing relevance in neurological research and drug development. In 2021, Lilly presented new data from its Phase 2 TRAILBLAZER-ALZ study of its Alzheimer’s disease drug candidate donanemab, which employed our ultra-sensitive Simoa technology to measure plasma pTau-217, using antibodies developed by Lilly. Lilly reported a significant reduction in blood levels of phosphorylated Tau protein after treatment with donanemab, and that a reduction in plasma pTau-217 levels correlated with the slowing of cognitive decline. In addition, following the FDA approval of its Alzheimer’s disease drug ADUHELM™, Biogen conducted Simoa biomarker studies on Phase 3 EMERGE and ENGAGE trial samples, utilizing Simoa technology to measure plasma pTau-181. Preliminary data was reported that showed a dose-dependent reduction in plasma pTau-181 levels following treatment with ADUHELM, which correlated with decreases in amyloid PET and a slowing of cognitive decline across four independent assessment tools. We believe that the use of biomarkers in clinical trials for neurological conditions is becoming increasingly important. With Simoa’s sensitivity and its ability to detect many neurological biomarkers in blood and plasma that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. +● Grow into new markets organically with our customers and through strategic collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of some of the work that our customers are doing today in the research market. For example, use of Simoa technology by pharmaceutical companies to measure biomarkers in clinical trials potentially could lead to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. We believe this progression with our customers will help us move into new markets organically in a cost-effective manner, while also retaining significant upside. In addition, we have entered into, and will continue to explore, partnerships that will help us access these markets. For example, following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary Nf-L antibodies, which will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization. Additionally, in September 2020, we granted Abbott Laboratories a non-exclusive license under our bead-based single molecule detection patents for IVD use. +● Grow through strategic acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For example, in January 2018, we acquired Aushon and its proprietary sensitive planar array detection technology, which led to the development of our SP-X instrument. In mid-2019, we also acquired Uman, securing the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services and positioning us to capitalize on the +6 +Table of Contents +growing significance of Nf-L as a neurological biomarker. We expect that acquisitions will continue to be an important part of our strategy to increase scale, and we intend to pursue acquisitions to expand product offerings, strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +● Leverage the PPH ecosystem. Powering Precision Health (PPH) is a non-profit organization founded in 2016 by our Chief Executive Officer, Kevin Hrusovsky. PPH aims to gather many of the world’s top innovators, scientists, physicians, medical professionals, patient advocates, government officials, regulators and investors to discuss the critical issues and opportunities related to advancing precision medicine in key disease areas including neurology, oncology, cardiology, inflammation and infectious disease. Quanterix is uniquely positioned to leverage this PPH ecosystem to gather and synthesize key insights and information, to collaborate on important research, to deepen our credibility and expand our business opportunities in the proteomics space, and to raise awareness of the technological innovations, such as Simoa, that are powering the latest breakthroughs in medical research and precision health. +Industry Background +We intend to pursue the application of our Simoa technology to the life science research/drug trial, diagnostics and precision health screening markets. Our initial commercial strategy targets the large and growing life science research/drug trial markets, and we believe that the diagnostic market and the precision health screening market represent significant future commercial opportunities for Simoa. According to estimates in the Third-Party Research Report, we believe the aggregate commercial opportunity across these markets has the potential to expand to over $100 billion. +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and regulation of the body’s tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an organism’s proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot provide. +The human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, of which at least 10,000 are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of much of the proteome has not been practical given the limited level of sensitivity of existing technologies. Currently, across our platforms, we commercialize assays that address approximately 154 protein biomarkers secreted or released in blood and CSF. +While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of environmental factors and lifestyle, such as diet and exercise, or provide insight into what is happening in a patient’s body in real time. For example, identical twins have the same genotype, but may develop different diseases over the course of their lifetime, largely due to environmental factors. +Much like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and well-being of +7 +Table of Contents +individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +Existing Technologies and Their Limitations +Protein Analysis +ELISA has been the most widely used method of sensitive detection of proteins for over 40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either directly, or indirectly through use of a conjugated secondary or “capture” antibody (sandwich ELISA). A specific “detection” antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final step, a substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the graphic below: +Aside from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, Raman-enhanced signal detection, immuno-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of the at least 10,000 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of these approaches have limitations, including: +● dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +● narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +● low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +● limited success in increasing sensitivity of detection due to procedural complexity and length. +8 +Table of Contents +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers aimed at detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become detectable. PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias into the data, potentially compromising the reliability of results, particularly at low concentrations. +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection sensitivity. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead-based technology detects proteins: +Simoa Bead-Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead-based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the graphic). +9 +Table of Contents +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 microwells, each of which is large enough to accommodate only a single bead. +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our Simoa bead-based technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from a sample, and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while competitive platforms lose sensitivity when multiplexing is used. Multiplexing is +10 +Table of Contents +achieved with our Simoa bead- based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. In 2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH- L1) for the study of neurodegenerative conditions and traumatic brain injury. In 2020, we introduced a Simoa 4-plex assay (Aβ40, Aβ42, GFAP, Nf-L) designed to measure key biomarkers of Alzheimer’s disease and related disorders. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. While we have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the HD-X, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of proteins in a single sample, we believe that the ability to multiplex above a 6-plex and maintain single-plex sensitivity and precision is currently limited using bead-based technology due to constraints in the number of bead- containing wells for each plex that are imaged on the Simoa disk. However, our bead-based assay technology was used by researchers to demonstrate a novel workflow to expand multiplexing through a process of sequential incubation steps. We plan to explore this and other methods to potentially expand the multiplexing capabilities of our Simoa assay technology to enable plexing of 10-20 plex over the next two years. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +11 +Table of Contents +A) Analyte-specific capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96-well microtiter plate. Each microspot contains capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) Samples are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by washing the plate with a benchtop plate washer or manual wash manifold. +C) A mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +D) Streptavidin-HRP (horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a washing step. +E) A high-sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to emit light. +F) The plate is placed into the Quanterix SP-X imaging system. A scientific-grade CCD camera images the entire plate and all micro-spots simultaneously. The low background of the plate surface and the high-sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The SP-X imaging software utilizes algorithms to optimize exposure time and combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +Below is an image of a 96-well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We believe the Simoa planar array technology is well-suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with ultra-sensitive detection in a multiplex assay format. The figure below demonstrates 10-plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) listed in femtogram per ml. +12 +Table of Contents +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, our Simoa bead-based technology has also been used to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR-based assays with the following benefits: +● no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +● reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; and +● the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water or serum samples. +For detection of nucleic acids with our Simoa bead-based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research/drug trial, diagnostics and precision health screening markets. +Life Science Research/Drug Trial Markets +Our initial target market is the large and growing life science research and drug trial markets, which we sometimes refer to collectively as the translational market. We have chosen these markets to target initially because of the reduced regulatory and reimbursement risk. We believe our Simoa platforms are well-positioned to capture a significant share of these markets because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +In addition, as pharmaceutical companies look for ways to more efficiently and effectively develop and obtain regulatory approval for drugs, use of biomarkers in clinical drug trials is becoming more prevalent. With Simoa’s sensitivity and its ability to detect many biomarkers in blood, plasma and other non-invasive samples that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. +13 +Table of Contents +Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. In addition, researchers can also use Simoa to monitor a drug candidate’s unwanted effect on “off-target” biomarkers and predict side effects, addressing the significant issue of drug toxicity, which is a leading cause of death in the United States. +According to estimates in the Third-Party Research Report, as we further expand our life science research focus in other areas of immunology, oncology and other therapeutic areas, coupled with growing adoption of decentralized clinical trials, the life science research/drug trial addressable market is expected to expand to as much as $12 billion. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +Simoa technology also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. Companion diagnostics have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only could Simoa be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity can also enable the development of companion diagnostics based on protein biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This would quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing dosages or even switching therapies. +In view of the COVID-19 pandemic, as an initial foray into the diagnostics market, in 2020 we began developing a SARS- CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. In December 2020, the FDA issued an EUA for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test, and in January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. In September 2021, the FDA expanded the EUA for our Simoa SARS-CoV-2 N Protein Antigen Test to include testing with nasal swabs and saliva and for asymptomatic serial testing with nasal swab samples. We are exploring extending the test to home-based sample collection and pooling to enable larger scale testing. +In 2021, our pTau-181 assay was granted Breakthrough Device designation from the FDA as an aid in the diagnosis of Alzheimer’s disease. We believe this gives us an opportunity to further advance a potential Alzheimer’s disease diagnostic test either alone or with a partner. +There has also been significant interest from third parties to use our technology to develop applications for the diagnostic market. Following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary Nf-L antibodies, which will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization. Additionally, in September 2020, we entered into a non-exclusive License Agreement with Abbott Laboratories, pursuant to which we granted Abbott a non-exclusive, worldwide, royalty-bearing license under our bead-based single molecule detection patents for IVD use. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be +14 +Table of Contents +used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention, enabling a “precision health” revolution. +We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses. In particular, we have focused on neurology and oncology, as well as COVID, cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally only been detectable in cerebrospinal fluid (CSF), has the potential to rapidly advance neurology research and drug development, and transform the way brain diseases and injuries are diagnosed and treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of which are costly and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood-brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of many these neural biomarkers in the blood are so low that they are undetectable by conventional, analog immunoassay technologies. +To date, there have been over 1,000 neurology-related scientific publications using our Simoa technologies, and we believe that ultra- sensitive digital detection of neural related biomarkers in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including Alzheimer’s disease, multiple sclerosis, dementia, Parkinson’s disease, and traumatic brain injury, or TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. The importance of Nf-L and other neurological biomarkers, such as pTau-181 and pTau-217, has increased significantly in recent years. In addition, biomarkers are being increasingly used as an adjunct by pharmaceutical companies in clinical trials to help increase the potential for regulatory approval, particularly in neurological indications. With Simoa’s sensitivity and its ability to detect many neurological biomarkers in blood and plasma that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity, in particular with respect to Alzheimer’s disease and multiple sclerosis. +Dementia is a collective name for brain syndromes that affect memory, thinking, behavior and emotion. According to Alzheimer’s Disease International , as of 2021, there were more than 55 million people worldwide living with dementia, a figure expected to increase to over 139 million by 2050, and the annual global cost of dementia is now above $1.3 trillion. Alzheimer’s disease is a progressive neurodegenerative disorder that affects cognition, function and behavior and is the most common cause of dementia. +In 2021, Lilly presented new data from its Phase 2 TRAILBLAZER-ALZ study of its Alzheimer’s disease drug candidate donanemab, which employed our ultra-sensitive Simoa technology to measure plasma pTau-217, using antibodies developed by Lilly. Lilly reported a significant reduction in blood levels of phosphorylated Tau protein after treatment with donanemab, and that a reduction in plasma pTau-217 levels correlated with the slowing of cognitive +15 +Table of Contents +decline. In addition, following the FDA approval of its Alzheimer’s disease drug ADUHELM™, Biogen conducted Simoa biomarker studies on Phase 3 EMERGE and ENGAGE trial samples, utilizing Simoa technology to measure plasma pTau-181. Preliminary data was reported that showed a dose-dependent reduction in plasma pTau-181 levels following treatment with ADUHELM which correlated with decreases in amyloid PET and a slowing of cognitive decline across four independent assessment tools. These results highlight the potential role for emerging biomarker measurements in the detection of Alzheimer’s disease pathology even earlier in the disease continuum, when patients are asymptomatic and not yet exhibiting brain pathology in PET imaging studies. +In 2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for Nf-L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer’s disease as currently established CSF biomarkers. The study was a major study of almost 600 patients from the Alzheimer’s Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf-L measurements compared with traditional CSF biomarkers. The diagnostic accuracy of the plasma Simoa Nf-L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +In addition, Simoa plasma Nf-L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer’s disease at baseline and during follow-up. High plasma Nf-L correlated with poor cognition and Alzheimer’s disease-related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf-L may have clinical utility as a noninvasive biomarker in Alzheimer’s disease. +In October 2021, the FDA granted our Simoa pTau-181 blood test Breakthrough Device designation as an aid in diagnostic evaluation of Alzheimer’s disease. We believe this gives us an opportunity to further advance a potential Alzheimer’s disease diagnostic test either alone or with a partner. The FDA’s Breakthrough Device designation is granted to products that have the potential to offer more effective diagnosis of life-threatening diseases with an unmet medical need. The program is designed to enable accelerated development, assessment and review processes, with the intention to provide patients with more timely access to breakthrough technologies or devices. Proposed indications under the Breakthrough Device designation include use of the test results in adult patients, aged 50 years and over, presenting with cognitive impairment who are being evaluated for Alzheimer’s disease and other causes of cognitive decline as an aid in diagnostic evaluation for Alzheimer’s disease. +Multiple sclerosis is a chronic disease affecting the central nervous system (the brain and spinal cord). Multiple sclerosis occurs when the immune system attacks nerve fibers and myelin sheathing (a fatty substance which surrounds/insulates healthy nerve fibers) in the brain and spinal cord. This attack causes inflammation, which destroys nerve cell processes and myelin, altering electrical messages in the brain. Multiple sclerosis is unpredictable and affects each patient differently – some individuals may be mildly affected, while others may lose their ability to write, speak or walk. According to the National MS Society, more than 2.3 million people have a diagnosis of multiple sclerosis globally. In the U.S. alone, the National MS Society recently completed a prevalence study estimating nearly 1 million people over the age of 18 live with a diagnosis of MS. +16 +Table of Contents +Evidence of the potential clinical utility of Nf-L as a biomarker in multiple sclerosis is progressing rapidly, and Simoa’s role in that progression has been significant. In 2021, Simoa technology supported 31 scientific presentations at the 37 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS), the world’s largest meeting dedicated to advancing research for multiple sclerosis . In 2020, Simoa supported 42 presentations at ECTRIMS, and a t ECTRIMS in 2019, there were nearly 50 presentations in which our Simoa Nf-L assay was used. +As an example, in one 2019 presentation, Novartis presented positive data from its Phase III ASCLEPIOS I and II studies of its multiple sclerosis drug candidate, ofatumumab. One of the secondary endpoints included serum levels of Nf-L as measured using our Simoa Nf-L assay. Novartis presented data that showed that, starting at three months after initiation of ofatumumab treatment, and then at 12 and 24 months timepoints, patients given ofatumumab had significantly lower blood levels of Nf-L, compared to those in the comparator arm of teriflunomide treated patients. +In another ECTRIMS presentation in 2019, Roche presented retrospective data from its Phase III OPERA I, OPERA, II AND ORATORIO trials of its approved multiple sclerosis drug OCREVUS (ocrelizumab). In the data presented at ECTRIMS, it was shown that treatment with OCREVUS lowered blood Nf-L levels and increased proportion of patients reaching healthy donor range for Nf-L in both relapsing multiple sclerosis and primary progressive multiple sclerosis. Roche believes that this data helps advance the understanding of Nf-L as a potential biomarker of disease activity and for treatment monitoring, and may provide insight into the neuroprotective effects of the drug. +In an article published by Bjornevik, et al. in JAMA Neurology in September 2019, researchers presented data that showed that levels of serum Nf-L, as measured by the Simoa Nf-L assay, were increased six years before the clinical onset of multiple sclerosis. The researchers concluded that these data indicate that multiple sclerosis may have a prodromal phase lasting several years and that neuroaxonal damage occurs during this phase, emphasizing the importance of early diagnosis and treatment. +In a study published in Science in January 2022, researchers leveraged Simoa’s ability to detect the Nf-L at ultra-low levels to show that Epstein-Barr virus (EBV) increases susceptibility toward developing multiple sclerosis. Researchers of the study tested the hypothesis that multiple sclerosis is caused by EBV in a cohort comprising more than 10 million young adults on active duty in the U.S. military, 955 of whom were diagnosed with multiple sclerosis during their period of service. Risk of multiple sclerosis increased 32-fold after infection with EBV, but was not increased after infection with other viruses, including the similarly transmitted cytomegalovirus. Serum levels of Nf-L, a biomarker of neuroaxonal degeneration, increased only after EBV seroconversion, suggesting that EBV played a role in nerve cell damage. +TBIs lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as Nf-L, tau, GFAP and UCH-L1, to more adequately address diagnosis of TBIs and overall brain health. +Leading researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy (CTE), which currently can only be diagnosed after death via a brain autopsy. A recent publication by a National Institute of Health researcher indicates that measuring tau in the blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +In 2016, Fast Company named Quanterix one of the “World’s Most Innovative Companies” for our work in concussion detection. We also were awarded two competitive grants from the NFL-GE Head Health Challenge to advance this work in the detection and quantification of mild TBI. +17 +Table of Contents +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Simoa technology was used in an unpublished scientific study that indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low cost, non-invasive blood test. In this retrospective study, researchers found that Simoa assays resulted in significantly fewer false positives and false negatives than mammography. Inaccurate mammography can result in unnecessary stress, additional health care costs from follow up diagnostic mammograms, unnecessary biopsies and increased lifetime exposure to radiation. Researchers are also developing ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa technology, potentially replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, cost effective, accurate blood-based health screens, further enabling the liquid biopsy market. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the immuno-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a set of over 100 tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We also believe residual cancer cell detection post-surgery or post-treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a greater risk of reoccurrence post-surgery due to residual cancer. For example, we have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen (PSA) that is over 1,000-fold more sensitive than conventional ELISA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +18 +Table of Contents +COVID-19 +In view of the COVID-19 pandemic, in 2020 we determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS-CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. +In December 2020, the FDA issued an EUA for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test that is run on our HD-X instrument. This test targets antibodies that are directed against the region of the novel coronavirus known as the spike protein. The spike protein contains multiple subunits which together mediate entry of the virus into human cells, and for this reason, many candidate and authorized COVID-19 vaccines are designed to elicit an antibody response to the spike protein. Accordingly, we believe that this test may be useful for measuring the antibody response to vaccine therapy. The assay may also be used for measurement of IgG antibodies in patients suspected of previous infection or recent SARS-CoV-2 exposure. The test provides a numerical result representing the concentration of antibodies from 0.21 to 250 mg/mL. In clinical studies, the test demonstrated a 100% positive percent agreement (sensitivity) and 99.2% negative percent agreement (specificity) 15 or more days following a positive PCR test. +In January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test that is also run on our HD-X instrument. This test detects the presence of the SARS-CoV-2 virus nucleocapsid protein (or N protein) which is known to be elevated in respiratory fluids during the initial acute phase of the infection. We believe that direct detection of antigen proteins from the virus may be a more meaningful measure of infection status than detection of RNA by rRT-PCR because genetic material can linger even after the virus has left the body, resulting in increased risk of false positives. In clinical studies, this test demonstrated a sensitivity of 97.7% and specificity of 100% up to 14 days following onset of symptoms. Under the current EUA, the test is intended for use with nasopharyngeal (NP) samples in individuals suspected of COVID-19 infection by their healthcare providers. In September 2021, the FDA expanded the EUA for our Simoa SARS-CoV-2 N Protein Antigen Test to include testing with nasal swabs and saliva and for asymptomatic serial testing with nasal swab samples. We are exploring extending the test to home-based sample collection and pooling to enable larger scale testing. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range +19 +Table of Contents +of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn’s disease undergoing anti-TNF-α therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF-α levels of the patients before and after treatment. These levels were all below the LoD of traditional immunoassays. +We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making early stage detection more specific and widely available. +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +20 +Table of Contents +For example, we have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than conventional ELISA assays capable of detecting the HIV-specific antigen, p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile ( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +21 +Table of Contents +Our Products and Services +Our Quanterix commercial portfolio includes research use only (RUO) instruments, assay kits and other consumables, and contract research services offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD-X +● +commercially launched the next-generation HD-X in the second half of 2019 to replace the HD-1 launched in 2014 +● +Simoa bead-based platform technology +● +most widely referenced ultra-sensitive multiplex immunoassay platform on market +● +fully automated, floor-standing instrument +● +wide dynamic range +● +multiplexing capability (up to 6-plex) with small sample volume +● +up to 400 samples per eight-hour shift +● +homebrew capabilities +SR-X +● +commercially launched in December 2017 +● +Simoa bead-based platform technology +● +reader only, benchtop instrument with lower price point +● +same sensitivity, dynamic range and homebrew capabilities as HD-X +● +multiplexing capability: SR-X currently has up to 6-plex capability +● +sample prep and assay protocol flexibility +SP-X +● +commercially launched in April 2019 +● +Simoa planar array platform technology +● +reader only, benchtop instrument with lower price point +● +similar sensitivity, dynamic range and homebrew capabilities as HD-X +● +multiplexing capability: SP-X currently has up to 10-plex capability +● +sample prep and assay protocol flexibility +22 +Table of Contents +Product +Key attributes +Simoa assays and other consumables +● +menu of approximately 80 single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology +● +Two EUA approved SARS-CoV-2 assays +● +menu of Simoa planar array reagent kits includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research +● +homebrew kits containing reagents and supporting user guides enabling customers to develop custom assays +● +proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead-based assays +Nf-L antibodies and Nf-L ELISA kits +● +sold through our wholly-owned subsidiary, Uman, which we acquired in 2019 +● +Nf-L capture/detection antibodies with unparalleled sensitivity and specificity +● +Nf-L ELISA kits for CSF (CE-certified in Europe; RUO outside of Europe) +● +Nf-L ELISA kits for serum (RUO) +● +licensing and supply arrangement with Siemens Healthineers that will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization +Services +● +contract research services provided through our Accelerator Laboratory +● +over 1,700 projects completed to date +● +extended warranty and service contracts +● +CLIA-certified lab available +23 +Table of Contents +Instruments and Consumables +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1, our very first instrument, which was launched in January 2014. The HD-X was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X uses our Simoa bead-based technology and is the most sensitive automated multiplex protein detection platform commercially available. Assays for the HD-X are fully automated (i.e., sample in to result out), and results for up to 66 samples are available in approximately one hour. Samples can be input into the instrument via 96-well microtiter plates or sample tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +Specialized software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration of multiple biological molecules. The HD-X software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to concentrations for the different biological molecules. +By the end of 2021, approximately 68% of the HD installed base were HD-X instruments. +SR-X +We commercially launched the SR-X instrument in the fourth quarter of 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra-sensitive detection capabilities enabled by Simoa. +In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instruments using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately 2.5 hours. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide the same Simoa sensitivity found in our Simoa bead-based platform. The Simoa planar array technology utilizes a 96-well microtiter plate with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar to the SR-X, the assay prep workflow utilized for the SP-X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid handling methods as the SR-X. The SP-X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 80 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the +24 +Table of Contents +planar array instrument includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to these assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes and disposable tips. Our goal is to continue to add to our assay kits to extend our application base. +We have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to manufacturing and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu expansion goals. +Nf-L Antibodies and Nf-L ELISA Kits +In August 2019, we completed our acquisition of Uman. Uman supplies Nf-L antibodies and ELISA kits for Nf-L detection. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies worldwide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Through Uman we sell proprietary Nf-L capture and detection antibodies, as well as two Nf-L ELISA kits for CSF, one of which is CE-certified in Europe, and one RUO Nf-L ELISA kit for serum. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. Researchers, academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, including: +● Sample testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer’s needs and even large studies can be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +● Homebrew assay development. Utilizing proprietary or commercially available reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +● Custom development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +To date, we have completed over 1,700 projects for approximately 400 customers from all over the world using our Simoa platforms, including over 150 projects for clinical studies. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +25 +Table of Contents +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We believe that sensitivity is so important that we have published an approach to increase the sensitivity of our Simoa technology – in some cases as much as 100-fold, and we intend to launch a beta program using this more sensitive technology in our Accelerator Laboratory by the end of 2022 . We are also focused on expanding our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional major markets, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, we sell Uman’s Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide. Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological advances in Simoa systems, workflows, and notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As of December 31, 2021, we had 135 full-time people employed in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region countries such as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with Quanterix-employed sales and support personnel. +Our sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and governmental research institutions. +In addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness of our technologies, demonstrate the benefits relative to existing technologies and accelerate adoption. We also seek to increase awareness of our products through participation at trade shows, academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +Our systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the system including running experiments in the Accelerator Laboratory and comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +26 +Table of Contents +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource the Simoa bead-based instrument development and manufacturing with industry leaders, and to internally develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is manufactured by STRATEC Biomedical AG (STRATEC), based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. See “—Key Agreements—Development Agreement and Supply Agreement with STRATEC” for a description of our agreement with STRATEC. The SR-X is manufactured by Paramit Corporation (Paramit), based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements—Paramit Manufacturing Services Agreement” for a description of our agreement with Paramit. Installation of, and training on, our instruments is provided by our employees in the markets where we conduct direct sales, and by distributors in those markets where we operate with distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we would experience additional costs, delays and difficulties in doing so, and our business could be harmed. +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Reagents for our bead-based assays include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we have increased the shelf life of the vast majority of our bead-based assays from six months to 12 months or more. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. We believe that this agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead-based platform are commercially available. +We assemble our 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +27 +Table of Contents +Nf-L antibodies and Nf-L ELISA Kits +The storage of Uman’s proprietary Nf-L antibody producing hybridomas as well as the cultivation and purification of the antibodies is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s Nf-L ELISA kits. The antibody reagents are labeled and released to market after testing. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s Nf-L ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. All incoming goods are subject to receipt control and any deviations related to quality deficiencies are registered. The kit components include buffers (sample diluent and wash solution), an ELISA 96-well plate coated with a capture antibody, detector antibody, streptavidine conjugate, substrate (TMB) and stop reagent. The kit components are labeled (either “RUO” or “CE”) and assembled. The final ELISA kit product is subject to quality control which include testing of human CSF quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months. +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement (the STRATEC Development Agreement) with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. Under the STRATEC Development Agreement, we were required to pay a fee and issue to STRATEC warrants to purchase our equity securities, all of which have been exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The STRATEC Development Agreement was amended in November 2016. The Amendment reduced our obligation to satisfy a minimum purchase commitment under the STRATEC Supply Agreement described below. Additionally, the parties agreed on additional development services for an additional fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with the final milestone due under the terms of the STRATEC Development Agreement. The services were completed in and the final milestone payment was paid in the fourth quarter of 2019. The STRATEC Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC (the STRATEC Supply Agreement), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The STRATEC Supply Agreement was amended in November 2016 to reduce the number of HD instruments we were committed to procure from STRATEC, and this commitment has been met. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party, provided that neither party may terminate the STRATEC Supply Agreement prior to the later of the seven year anniversary of the acceptance of the first prototype instrument and the purchase of the minimum number of instruments which we were committed to procure. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free +28 +Table of Contents +license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the Paramit Agreement) with Paramit. Under the terms of the Paramit Agreement, we engaged Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement has an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Non-Exclusive License Agreement with Abbott Laboratories +In September 2020, we entered into a Non-Exclusive License Agreement with Abbott. Pursuant to the terms of the License Agreement, we granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under our bead-based single molecule detection patents in the field of IVD. Abbott paid us an initial license fee of $10.0 million in connection with the execution of the License Agreement. Abbott has also agreed to pay us milestone fees subject to the achievement by Abbott of certain development, regulatory and commercialization milestones and low single digit royalties on net sales of licensed products. +The License Agreement includes customary representations and warranties, covenants and indemnification obligations for a transaction of this nature. The License Agreement became effective upon signing and will continue until expiration of the last-to-expire licensed patent, or the agreement is earlier terminated. Under the terms of the License Agreement, each party has the right to terminate the agreement for uncured material breach by, or insolvency of, the other party. Abbott may also terminate the License Agreement at any time without cause upon sixty (60) days’ notice. +Contracts with the NIH under RADx +In September 2020, we entered into the Rapid Acceleration of Diagnostics (RADx) workplan 2 award (WP2) with the National Institute of Health (NIH) under the RADx program. This contract, which has a total award value of up to $18.2 million, is intended to accelerate the continued development, scale-up and deployment of our novel SARS-CoV-2 antigen test. Initial early feasibility of this test was funded in part through the RADx workplan 1 award (WP1) we were granted in June 2020. WP2 supports clinical validation of the test in support of the EUA submissions with the FDA, and provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Contract funding was subject to achievement of pre-defined milestones and the contract period ran through September 2021, with one milestone extended to March 31, 2022. As of December 31, 2021, we had received $17.7 million out of the full $18.2 million under WP2. +29 +Table of Contents +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for protein discovery, detection, nucleic acid detection and additional applications. For example, companies such as Bio-Techne, Luminex, MesoScale Discovery, Gyros, Nanostring, O-Link, SEER, Somalogic, MilliporeSigma, Bio-Rad Laboratories, Thermo Fisher Scientific, and others, have products for protein discovery or detection that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as Covance, Q2 Solutions, Myriad RBM, Monogram Biosciences, PPD Laboratories, and others, some of whom are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics and precision health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research, diagnostic and precision health screening markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors in our target markets include: +● sensitivity; +● cost of instruments and consumables; +● assay menu; +● reputation among customers and key opinion leaders; +● innovation in product offerings; +● accuracy and reproducibility of results; and +● customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University (Tufts), in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from Tufts the relevant patent filings related to these technologies. (See “—License Agreement with Tufts University” below). In addition to licensed patents, we have developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. Our portfolio also includes issued patents and patent applications acquired as part of our 2017 acquisition of Aushon Biosystems. We believe our proprietary platforms are a core strength of our business and our strategy includes the continued development of our patent portfolio. +30 +Table of Contents +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of February 1, 2022, we had exclusively licensed 18 patents and two patent applications from Tufts. These patents and patent applications include nine issued U.S. patents and two pending U.S. patent applications, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +A first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes seven granted U.S. patents, one pending U.S. patent application, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A third patent family licensed from Tufts is directed to electro-optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +A fourth patent family licensed from Tufts is directed to methods for detecting short nucleic acids. This patent family includes one pending U.S. patent application. The standard patent expiration date for the U.S. patent in this family is May 29, 2039. +As of February 1, 2022, we owned 27 issued U.S. patents and 17 pending U.S. patent applications, six granted European patents and three pending European patent applications, six granted Japanese patents, four granted Chinese patents and one pending Chinese patent application, three granted Canadian patents and one pending Canadian patent application, two registered Hong Kong patent applications, and one Patent Cooperation Treaty Application. +A first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads, including multiplexing. This patent family includes four granted U.S. patents and two pending U.S. patent applications, three granted European patents (nationalized and active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes five granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +31 +Table of Contents +A third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is September 28, 2028. +A fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 24, 2030. +A fifth patent family owned by us is directed to instruments and consumables. This patent family includes two granted U.S. patents and one pending U.S. patent application, two granted Japanese patents, one granted Chinese patent and one pending Chinese patent applications, one registered Hong Kong patent application and one pending patent application in each of Europe and Canada. The standard patent expiration date for any U.S. patents that may issue from this family is February 25, 2031, and for any non-U.S. patents is January 27, 2032. +A sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is September 20, 2038. +A ninth patent family owned by us is directed to methods and systems for highly sensitive assays, including methods and systems for improving capture object loading efficiency and/or use of low numbers of capture objects in assays. This patent family includes one pending Patent Cooperation Treaty patent application. If we pursue protection by filing any national stage applications, the standard patent expiration date for any patents that may issue from this family will be in 2041. +We own or co-own ten patent families directed to the measurement of particular types of analytes, including β-amyloid peptide, tau protein, toxin B of C. difficile , neurofilament light, glial fibrillary acidic protein, ubiquitin carboxyl-terminal hydrolase L1, antigens from infectious organisms such as viruses (e.g., coronaviruses), and DNA or RNA molecules. These families include one granted U.S. patent directed to methods for determining treatment protocols and/or a prognosis of a patient’s recovery from a brain injury based on measurements of tau protein in blood and one granted European patent (nationalized and active in three countries) directed to detection of C. difficile . Any patents that may issue from these patent applications would have standard expiration dates between 2032 and 2041. +With the acquisition of Aushon in January 2017, we acquired their patent portfolio for our planar array technology. As of February 1, 2022, the acquired patent portfolio includes at least ten issued U.S. patents and one pending U.S. patent application, one granted Canadian patent, one granted European patent (nationalized and active in eight countries) and one pending European patent application, and one registered Hong Kong patent. +We have licensed additional patents and patent applications from third parties. +In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +32 +Table of Contents +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable for a fee. +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 amendment, we issued Tufts shares of our Series C-1 Preferred Stock, which converted into shares of our common stock in connection with our initial public offering. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Other than the COVID assays for which we have received EUAs, our products are currently intended for research use only (RUO) applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or the Center for Medicare and Medicaid Services (CMS). Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products are subject to FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than research purposes. Consequently, our products (other than the COVID assays for which we have received EUAs) are labeled “For Research Use Only.” +On November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (RUO/IUO Guidance). The purpose of an FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s 510(k) clearance, premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance is a statement of the FDA’s thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and +33 +Table of Contents +promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. We also are not promoting or using our products in the development or promotion of laboratory developed test (LDT) services. When we develop products for clinical use, we will do so in accordance with FDA requirements applicable to those products at that time. Separately, when we become aware that accredited or licensed clinical laboratories may be using our RUO products either for research or clinical uses, such as part of LDT services, in accordance with the regulations that apply to clinical laboratories, we will continue to review the labeling and promotion of our products for consistency with the RUO/IUO Guidance. +When our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification (510(k)) and receive clearance from the FDA which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized until a premarket approval application (PMA) is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent (SE), to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA’s receipt of the 510(k), but it often takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre-market approval. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. +This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks +34 +Table of Contents +reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the accepted application, although review of the application generally can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with its quality system regulations (QSRs). New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and efficacy of the device. +Emergency Use Authorization +In emergency situations, such as a pandemic, the FDA has the authority to allow unapproved medical products or unapproved uses of cleared or approved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by chemical, biological, radiological or nuclear warfare threat agents when there are no adequate, approved, and available alternatives. +Under this authority, the FDA may issue an EUA for an unapproved device if the following four statutory criteria have been met: (1) a serious or life-threatening condition exists; (2) evidence of effectiveness of the device exists; (3) a risk-benefit analysis shows that the benefits of the product outweigh the risks; and (4) no other alternatives exist for diagnosing, preventing or treating the disease or condition. Evidence of effectiveness includes medical devices that “may be effective” to prevent, diagnose, or treat the disease or condition identified in a declaration of emergency issued by the Secretary of the Department of Health and Human Services (HHS). The “may be effective” standard for EUAs requires a lower level of evidence than the “effectiveness” standard that FDA uses for product clearances or approvals in non-emergency situations. The FDA assesses the potential effectiveness of a possible EUA product on a case-by-case basis using a risk-benefit analysis. In determining whether the known and potential benefits of the product outweigh the known and potential risks, the FDA examines the totality of the scientific evidence to make an overall risk-benefit determination. Such evidence, which could arise from a variety of sources, may include (but is not limited to) results of domestic and foreign clinical trials, in vivo efficacy data from animal models, in vitro data, as well as the quality and quantity of the available evidence. +Once granted, an EUA will remain in effect and generally terminate on the earlier of (1) the determination by the Secretary of HHS that the public health emergency has ceased or (2) a change in the approval status of the product such that the authorized use(s) of the product are no longer unapproved. After the EUA is no longer valid, the product is no longer considered to be legally marketed and one of the FDA’s non-emergency premarket pathways would be necessary to resume or continue distribution of the subject product. +The FDA also may revise or revoke an EUA if the circumstances justifying its issuance no longer exist, the criteria for its issuance are no longer met, or other circumstances make a revision or revocation appropriate to protect the public health or safety. +35 +Table of Contents +On January 31, 2020, the Secretary of HHS issued a declaration of a public health emergency related to COVID-19. On February 4, 2020, HHS determined that COVID-19 represents a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and, subsequently, declared on March 24, 2020, that circumstances exist to justify the authorization of emergency use of medical devices, including alternative products used as medical devices, during the COVID-19 pandemic, subject to the terms of any authorization as issued by the FDA. On February 29, 2020, the FDA issued an immediately in effect guidance with policy specific to development of IVD tests during the COVID-19 public health emergency. This guidance was updated on March 16, 2020, May 4, 2020, and May 11, 2020. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption application (IDE) and obtains approval of the IDE from the FDA. These clinical trials are also subject to the review, approval and oversight of an institutional review board (IRB) at each clinical trial site. The clinical trials must be conducted in accordance with the FDA’s IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +Breakthrough Device Designation +FDA Breakthrough Device de signation is granted to certain medical devices and device-led combination products that provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating diseases or conditions. The goal is to give patients and doctors timely access to these medical devices by speeding up their development, assessment, and review, while preserving the statutory standards for premarket approval. The Breakthrough Devices Program offers device companies an opportunity to interact with the FDA's experts through several different program options to efficiently address topics as they arise during the premarket review phase, which can help companies receive feedback from the FDA and identify areas of agreement in a timely way. Recipients may also receive prioritized review of their submission and potential Medicare reimbursement through the Medicare Coverage of Innovative Technology payment pathway. Although Breakthrough Device designation or access to any other expedited program may expedite the development or clearance/authorization/approval process, it is not guaranteed to do so, and, more importantly, it does not change the standards for clearance/authorization/approval. Designation for any expedited review procedure does not ensure that we will ultimately obtain regulatory clearance or approval for such product. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +● establishment registration and device listing; +● the QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; +● labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to promotional activities; +● medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device +36 +Table of Contents +or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur; +● corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +● post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device. +To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +Since our acquisition of Aushon in January 2018, we own and operate a CLIA certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and basic research). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health assessment and for the diagnosis, prevention, or treatment of disease. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by the Centers for Medicare & Medicaid Services (“CMS”), a CMS agent (typically a state agency), or, a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered by nearly all complex laboratories for the last few decades as LDTs, which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices. During 2010, the FDA publicly announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced its framework and timetable for implementing this guidance. On November 18, 2016, the FDA announced it would not release final guidance at that time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach. On January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. We cannot predict the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory +37 +Table of Contents +approach by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of the FDA’s approach is unknown, it may be extensive and may result in significant change. +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out-of-state laboratories to obtain licensure. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third-party payors. +If, in the future, we perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, the European Union (the EU) recently published new regulations that will result in greater regulation of medical devices and IVDs. This new IVD regulation (new IVD Regulation) is significantly different from the European directive for In vitro diagnostic products (IVD Directive) that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member states, include a risk-based classification system and increase the requirements for conformity assessment. +The CE registration for Uman’s Nf-L ELISA assay kit was approved in March 2014 under the IVD Directive . Under the IVD Directive the assay is classified as a general IVD product, class I and required self-certification with no involvement of a notified body/authority. Under the new IVD Regulation, the requirements increase and involve assessment by a notified body for class B, C and D products. Uman’s Nf-L ELISA assay kit is classified as class B product and must fully implement the new IVD Regulation by May 2027. The new requirements include an ISO 13485 certification of the quality system (which Uman received July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g., clinical evidence and post-market activities). The work to meet the new technical requirements is on-going. An internal GAP-analysis is to be performed and work to eliminate the GAPs performed. When completed, the available technical documentation will be assessed by an external consultant. When all requirements are met, a notified body will be contacted, and the certification initiated. +Other Governmental Regulation +Data Privacy and Security Laws and Regulations +As a business with a global footprint, compliance with evolving regulations and standards in data privacy and cybersecurity has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of increased regulatory enforcement activity. Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce. +For example, in the U.S., the collection, maintenance, protection, use, transmission, disclosure and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international +38 +Table of Contents +and industry levels. U.S. federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by health care providers. Privacy and Security Rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended, and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH), govern the use, disclosure, and security of protected health information by “Covered Entities,” (which are health care providers that submit electronic claims, health plans, and health care clearinghouses) and by their “Business Associates” (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the Covered Entity’s workforce). Rules under HIPAA and HITECH include specific security standards and breach notification requirements. The U.S. Department of Health and Human Services (HHS) (through the Office of Civil Rights) has direct enforcement authority against Covered Entities and Business Associates with regard to both the Security and Privacy Rules, including civil and criminal liability. Generally Quanterix is not a Covered Entity, however, we may operate as a Business Associate to Covered Entities under certain circumstances. +In addition to the regulation of personal health information, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for other kinds of personally identifiable information, such as state laws that govern the use, disclosure and protection of sensitive personal information, such as social security numbers, or that are designed to protect credit card account data. State consumer protection laws may also establish privacy and security standards for use and management of personally identifiable information, including information related to consumers and care providers. +Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. Legal requirements in foreign countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the E.U., stringent data protection and privacy rules which substantially impact the use of patient data across the healthcare industry became effective in May 2018. The E.U. General Data Protection Regulation (GDPR) applies uniformly across the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals residing in the E.U. to comply with E.U. privacy and data protection rules. +Because the laws and regulations continue to expand, differ from jurisdiction to jurisdiction, and are subject to evolving (and at times inconsistent) governmental interpretation, compliance with these laws and regulations may require significant additional cost expenditures or changes in products or business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities. +Environmental Health and Safety Laws +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (OSHA), has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +39 +Table of Contents +Employees and Human Capital +As of December 31, 2021, we had 460 full-time employees, of which 135 work in sales, sales support, field service, and marketing, 125 work in engineering and research and development, 125 work in manufacturing and operations and 75 work in general and administration. Of our 460 full-time employees, 407 were located in the United States and 53 were located in twelve foreign countries. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We have a unique culture that stresses the impact our work has on the eradication of human diseases including Alzheimer’s, cancer and COVID-19. We invest in creating a diverse, inclusive and safe work environment where our employees can deliver their workplace best every day. Historically, we have experienced a turnover rate that is comparable to industry average. +Our success depends upon our ability to attract and retain highly qualified management and technical employees. Talent management is critical to our ability to execute our long-term growth strategy, including providing career growth, on-the-job learning opportunities and competitive compensation. We are committed to an inclusive culture which values equality, opportunity and respect. In support of our inclusive culture, we sponsor an internal Diversity, Equity and Inclusion Committee comprised of employees and executives, provide respectful workplace training to strengthen employee understanding and consciously strive to recruit a diverse talent pool across all levels of the organization. As of December 31, 2021, approximately 42% of our employees were women and approximately 30% were non-white. We are focused on the engagement and empowerment of our employees through the demonstration of our foundational values, which we refer to as AT&T3: Accountability, Trust, Teamwork and Transparency. +Workforce Compensation and Pay Equity +We provide robust compensation and benefits programs to help meet the needs of our employees. We provide our full-time employees with highly competitive salaries, as well a bonus and/or commission plan, a matching 401(k) Plan, healthcare and insurance benefits, paid time off and family leave. We also provide all of our employees with targeted equity-based grants with vesting conditions designed to facilitate retention through the opportunity to benefit financially from our growth and profitability. +Company Culture +We expect all of our employees and contractors to observe the highest levels of business ethics, integrity, mutual respect, tolerance and inclusivity. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies reflecting these values and also provide direction for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is fundamentally connected to the physical and mental well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees and contractors. We provide our employees with a wide range of benefits, including benefits directed to their health, safety and long-term financial security. In response to the COVID-19 pandemic, we have implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes allowing our employees to work remotely as appropriate, while implementing significant safety measures designed to protect the health of all those working in and entering our facilities. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +40 +Table of Contents +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can also review our electronically filed reports and other information that we file with the SEC on the SEC’s website at http://www.sec.gov . +Item 1A. RISK FACTORS +The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page ii of this Annual Report on Form 10-K for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. +Risk Factor Summary +Our business is subject to numerous risks and uncertainties. The following summary highlights some of the risks you should consider with respect to our business and prospects. This summary is not complete and the risks summarized below are not the only risks we face. You should review and carefully consider the risks and uncertainties described in more detail below, which includes a more complete discussion of these risks. +● We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +● Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, causing the value of our common stock to decline substantially. +● If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +● Sales of our assay for the neurological biomarker Nf-L and other neurological assays have become increasingly important to our business, and any significant decrease in sales of such assays could have a material adverse effect on our business. +● Epidemic diseases, such as COVID-19 and its variants, could negatively affect various aspects of our business, make it more difficult to meet our obligations to our customers, and result in reduced demand from our customers, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows. +● Our long-term results depend upon our ability to improve existing products and introduce and market new products successfully. +● Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims. +41 +Table of Contents +● We may seek to enter into strategic collaborations and licensing arrangements with third parties, but we may not be successful in establishing or maintaining such arrangements. +● We expect to generate a substantial portion of our revenue internationally in the future and can become further subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +● We rely on a single contract manufacturer to manufacture and supply our Simoa HD instruments and rely on a different single contract manufacturer to manufacture and supply our Simoa SR-X. If either of these manufacturers should fail to perform, or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +● We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and our SP-X instrument, and may not be able to find replacements or immediately transition to alternative suppliers, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +● If the FDA determines that our products are medical devices or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +● We are subject to extensive regulatory requirements in connection with the EUAs that we have received from the FDA for our COVID-19 antibody and antigen tests. If we fail to comply with these requirements, or if the FDA otherwise determines that the conditions no longer warrant such authorization, we will be unable to market these products pursuant to this authorization and our business may be harmed. +● If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our operations. +● If we are unable to protect our intellectual property, it may reduce our ability to maintain any technological or competitive advantage over our competitors and potential competitors, and our business may be harmed. +● If we or any of our partners are sued for infringing intellectual property rights of third parties, it would be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +● We may not be able to protect our intellectual property rights throughout the world, which could materially, negatively affect our business . +● Our stock price may fluctuate significantly. +Risks Related to Our Financial Condition +We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +We incurred net losses of $57.7 million, $31.5 million, and $40.8 million for the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021, we had an accumulated deficit of $305.5 million. We +42 +Table of Contents +cannot predict if we will achieve sustained profitability in the near future or at all. We expect that our losses will continue at least through the next 24 months as we plan to continue to invest significant funds toward expansion of our commercial organization and the development of our technology. In addition, as a public company, we incur significant legal, accounting, and other expenses that we would not incur as a private company. These expenses make it harder for us to achieve and sustain future profitability. We may incur significant losses in the future for a number of reasons, many of which are beyond our control, including the other risks described in this Annual Report on Form 10-K, the market acceptance of our products, competitive products, future product development and our market penetration and margins. +Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, causing the value of our common stock to decline substantially. +Numerous factors, many of which are outside of our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively affect our business and prospects. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others. As a result, comparing our operating results on a period-to-period basis might not be meaningful. You should not rely on our past results as indicative of our future performance. Moreover, our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. +If we are unable to maintain adequate revenue growth or do not successfully manage such growth, our business and growth prospects will be harmed. +We have experienced significant revenue growth in a short period of time. We may not achieve similar growth rates in future periods. Investors should not rely on our operating results for any prior periods as an indication of our future operating performance. To effectively manage our anticipated future growth, we must continue to maintain and enhance our financial, accounting, manufacturing, customer support and sales administration systems, processes and controls. Failure to effectively manage our anticipated growth could lead us to over-invest or under-invest in development, operational, and administrative infrastructure; result in weaknesses in our infrastructure, systems, or controls; give rise to operational mistakes, losses, loss of customers, productivity or business opportunities; and result in loss of employees and reduced productivity of remaining employees. +Our continued growth could require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. As we commercialize additional products , we may need to incorporate new equipment, implement new technology systems, or hire new personnel with different qualifications. Failure to manage this growth or transition could result in turnaround time delays, higher product costs, declining product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any one of these areas could make it difficult for us to meet market expectations for our products, and could damage our reputation and the prospects for our business. +If our management is unable to effectively manage our anticipated growth, our expenses may increase more than expected, our revenue could decline or grow more slowly than expected and we may be unable to implement our business strategy. In addition, the quality of our products and services may suffer, which could negatively affect our reputation and harm our ability to retain and attract customers. +Our future capital needs are uncertain and we may need to raise additional funds in the future. +We believe that our existing cash and cash equivalents as of December 31, 2021, together with our cash generated from commercial sales, will enable us to fund our operating expenses and capital expenditure requirements for the foreseeable future. However, our future funding requirements will depend on many factors, including: +● continued market acceptance of our products and the ability of our products to meet our customers’ expectations; +43 +Table of Contents +● potential opportunities to strategically acquire companies or technologies that may be complementary to our business; +● the cost and timing of establishing additional sales, marketing and distribution capabilities; +● the cost of our research and development activities; +● our ability to enter into collaborations in the future, and the success of any such collaborations; +● the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +● the effect of competing technological and market developments. +We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could have a material adverse effect on our financial condition, operating results and business. +Our ability to use net operating losses to offset future income may be subject to certain limitations. +As of December 31, 2021, we had federal net operating loss (NOLs) carryforwards to offset future taxable income of approximately $267.2 million, which begin to expire in 2026. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We have already experienced ownership changes as defined under Section 382 of the Code. Depending on the timing of any future utilization of our NOLs, we may be limited as to the amount that can be utilized each year as a result of such previous ownership changes. In addition, future changes in our stock ownership, including changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. +U.S. taxation of international business activities or the adoption of tax reform policies could materially impact our future financial position and results of operations. +Limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of future foreign earnings. Should the scale of our international business activities expand, any changes in the U.S. taxation of such activities could increase our worldwide effective tax rate and harm our future financial position and results of operations. +Risks Related to Our Business +If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +Our success depends on our ability to develop and market products that are recognized and accepted by our customers and potential customers as reliable, enabling and cost-effective. Continued market acceptance of our Simoa +44 +Table of Contents +technology platform and products will depend on many factors, including our ability to convince potential customers that our technology is an attractive alternative to other available technologies. Historically, a significant part of our sales and marketing efforts has been directed at demonstrating the advantages of our technology to industry leaders and encouraging such leaders to publish or present the results of their evaluation of our system. We also need to demonstrate to current and prospective customers that our products can help them accomplish their objectives in a cost-effective and efficient manner. If we are unable to continue to motivate leading researchers to use Simoa technology, or if such researchers are unable to achieve or unwilling to publish or present significant experimental results using our systems, acceptance and adoption of our systems may be slowed and our ability to increase our revenue would be adversely affected. +Our future success is dependent upon our ability to further penetrate our existing customer base and attract new customers. +Our success will depend upon our ability to respond to the evolving needs of, and increase our market share among, existing customers and adding new customers. Identifying, engaging and marketing to customers requires substantial time, expertise and expense and involves a number of risks, including: +● our ability to attract, retain and manage the sales, marketing and service personnel necessary to expand market acceptance for our Simoa technology platforms; +● the time and cost of maintaining and growing a specialized sales, marketing and service force; and +● our sales, marketing and service force may be unable to accomplish their goals. +We have utilized third parties to assist with sales, distribution and customer support in certain regions of the world. When we enter into such arrangements, there is no guarantee that we will be successful in attracting desirable sales and distribution partners. There is also no guarantee that we will be able to enter into such arrangements on favorable terms. Any failure of our sales and marketing efforts, or those of any third-party sales and distribution partners, would adversely affect our business. +Sales of our assay for the neurological biomarker Nf-L and other neurological assays have become increasingly important to our business, and any significant decrease in sales of such assays could have a material adverse effect on our business. +Neurology has been one of our primary focus areas for commercialization of our Simoa technology and the services that we provide to our customers. Sales from neurological-related biomarkers, Nf-L in particular, have become an increasingly important part of our business. There can be no assurance that we will continue to derive meaningful revenues from the sale of our neurological products, from services related to neurodegenerative conditions or from sales of instruments driven by customers desiring access to our technology for work relating to neurological conditions. The adoption by our customers of competitive technologies for detecting biomarkers of neurodegenerative conditions could negatively impact our revenues and have a material adverse effect on our business. +Epidemic diseases, such as COVID-19 and its variants, could negatively affect various aspects of our business, make it more difficult to meet our obligations to our customers, and result in reduced demand from our customers, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows. +Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, such as COVID-19 and its variants . Potential impacts to our business include disruptions to or restrictions on our employees’ and customers’ ability to travel, temporary closures of the facilities of our suppliers or customers, delays in installation of instruments, and delays in shipments to and from affected countries. Any such travel restrictions and business closures could adversely impact our operations locally and worldwide, including our ability to manufacture, sell or distribute our products, as well as cause temporary closures of our foreign distributors, or the facilities of suppliers or customers. Any material disruption of our employees, distributors, suppliers or customers in impacted countries could impact our global +45 +Table of Contents +sales and operating results. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and likely impact our operating results. +The sales cycle for our Simoa instruments can be lengthy and variable, which makes it difficult for us to forecast revenue and other operating results. +The sales process for our Simoa instruments generally involves numerous interactions with multiple individuals within an organization, and often includes in-depth analysis by potential customers of our technology and products and a lengthy review process. Our customers’ evaluation processes often involve a number of factors, many of which are beyond our control. As a result of these factors, the capital investment required to purchase our systems, and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly. Given the length and uncertainty of our sales cycle, we have in the past experienced, and expect in the future to experience, fluctuations in our sales on a period-to-period basis. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems, using existing assays not requiring capital equipment, or purchasing systems other than ours. +Our long-term results depend upon our ability to improve existing products and introduce and market new products successfully. +We generally sell our products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. Accordingly, our business is dependent on the continued improvement of our existing Simoa products and our development of new products utilizing Simoa or other potential future technology. As we introduce new products or refine, improve or upgrade versions of existing products, we cannot predict the level of market acceptance or the amount of market share these products will achieve, if any. We cannot assure you that we will not experience material delays in the introduction of new products in the future. In addition, introducing new products could result in a decrease in revenues from our existing products. Consistent with our strategy of offering new products and product refinements, we expect to continue to use a substantial amount of capital for product research and development. We may need more capital for product research and development than is available on terms favorable to us, if at all. If we do not develop new products and product enhancements based on technological innovation on a timely basis, our products may become obsolete over time and our revenues, cash flow, profitability and competitive position will suffer. +Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims. +Our Simoa products may contain undetected errors or defects when first introduced or as new versions or new products are released. Disruptions affecting the introduction or release of, or other performance problems with, our products may damage our customers’ businesses and could harm their and our reputation. If that occurs, we may incur significant costs, the attention of our key personnel could be diverted, or other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages related to errors or defects in our products. In addition, if we do not meet industry or quality standards, if applicable, our products may be subject to recall. A material liability claim, recall or other occurrence that harms our reputation or decreases market acceptance of our products could harm our business and operating results. +Although we do not, and cannot currently, promote the use of our products, or services based on our products, for diagnostic purposes, if our customers develop or use them for diagnostic purposes, someone could file a product liability claim alleging that one of our products contained a design or manufacturing defect that resulted in the failure to adequately perform, leading to death or injury. A product liability claim could result in substantial damages and be costly and time-consuming to defend, either of which could materially harm our business or financial condition. We cannot assure you that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future. +46 +Table of Contents +We may seek to enter into additional strategic collaborations and licensing arrangements with third parties, but we may not be successful in establishing or maintaining such arrangements. +We may seek to enter into additional strategic collaborations and licensing agreements with third parties to develop products based on our Simoa technology, such as for certain in vitro diagnostics, or IVD, purposes. However, we may not be successful in doing so. Establishing collaborations and licensing arrangements is difficult and time-consuming, and discussions may not lead to collaborations or licenses on favorable terms, if at all. Even if we establish such relationships, such as our license agreement with Abbott, if our partners do not prioritize and commit sufficient resources to develop and sell products based on our Simoa technology, they may never result in the successful development or commercialization of products based on our Simoa technology. +Our reliance on distributors for sales of our products outside of the United States could limit or prevent us from selling our products and could impact our revenue. +We have established exclusive distribution agreements for our Simoa instruments and related consumable products within certain foreign countries, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth. In addition, if our distributors fail to comply with applicable laws and ethical standards, including anti-bribery laws, this could damage our reputation and could have a significant adverse effect on our business and our revenues. +We expect to generate a substantial portion of our revenue internationally in the future and can become further subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +For the years ended December 31, 2021, 2020, and 2019, approximately 36%, 31% and 41%, respectively, of our total revenue was generated from customers located outside of North America. We believe that a substantial percentage of our future revenue will continue to come from international sources as we expand our overseas operations and develop opportunities in additional areas. We have limited experience operating internationally and engaging in international business involves a number of difficulties and risks, including: +● required compliance with existing and changing U.S. or foreign regulatory requirements and laws; +● difficulties and costs of staffing and managing foreign operations; +● a shortage of high-quality salespeople and distributors; +● pricing pressure that we may experience internationally; +● difficulties in maintaining consistency with our internal guidelines; +● difficulties in enforcing our intellectual property rights and in defending against third-party threats and intellectual property enforcement actions against us or any of our distributors, suppliers or collaborators; +● reduced or varied protection for intellectual property rights in some countries; +47 +Table of Contents +● required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, data privacy requirements, such as the GDPR, labor laws and anti-competition regulations; +● export or import restrictions and supply chain disruptions; +● laws and business practices favoring local companies; +● longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; +● the imposition of restrictions on the activities of foreign agents, representatives and distributors; +● foreign currency exchange rate fluctuations; +● the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; +● the impact of political and economic instability and conflict, such as the tension in Russia and Ukraine, which could lead to uncertainty and instability in global financial markets; +● scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; +● the imposition of new trade restrictions; and +● potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers. +Historically, most of our revenue has been denominated in U.S. dollars. In the future, we may sell our products and services in local currency outside of the United States. As our operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. If we dedicate significant resources to our international operations and are unable to manage these risks effectively, our business, operating results and financial condition will suffer. +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws by us or our agents. +We are subject to the U.S. Foreign Corrupt Practices Act (the FCPA), which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our products internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents, and we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar antibribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. We have limited experience in complying with these laws and in developing procedures to monitor compliance with these laws by our agents. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these +48 +Table of Contents +laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also incur severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures. +We rely on a single contract manufacturer to manufacture and supply our Simoa HD-X instrument and rely on a different single contract manufacturer to manufacture and supply our Simoa SR-X instrument. If either of these manufacturers should fail or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +We currently rely on a single contract manufacturer, STRATEC, an analytical and diagnostic systems manufacturer located in Germany, to manufacture and supply all of our Simoa HD-X instruments. In addition, we currently rely on a single contract manufacturer, Paramit, a contract manufacturer located in California, to manufacture and supply all of our SR-X instruments. Since our contract with STRATEC does not commit them to supply quantities beyond the amounts included in our forecasts and our contract with Paramit does not commit them to carry inventory or make available any particular quantities, these contract manufacturers may give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. If either of these manufacturers were not able to supply instruments, our business would be harmed. +In the event it becomes necessary to utilize a different contract manufacturer for the HD-X instrument or the SR-X, we would experience additional costs, delays and difficulties in doing so as a result of identifying and entering into an agreement with a new supplier as well as preparing such new supplier to meet the logistical requirements associated with manufacturing our units, and our business would suffer. We may also experience additional costs and delays in the event we need access to or rights under any intellectual property of STRATEC. +In addition, certain of the components used in our instruments are sourced by these manufacturers from limited or sole suppliers. If they were to lose such suppliers, there can be no assurance that they would be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our ability to sell and deliver instruments to customers could occur if our manufacturers encounter delays or difficulties in securing these components, or if the quality of the components supplied do not meet specifications, or if they cannot then obtain an acceptable substitute. If any of these events occur, our business and operating results could be harmed. +We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and our SP-X instrument, and may not be able to find replacements or immediately transition to alternative suppliers, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +We rely on limited or sole suppliers for certain reagents and other materials and components that are used in our consumable products and in our SP-X instrument. While we have long-term contracts with some critical suppliers, we do not have contracts with all suppliers and instead rely on periodically forecasting our needs for such materials and entering into standard purchase orders with them. In addition, our use of many of the materials used in our consumable products is limited to research use only. As we expand into diagnostic applications for our products, we will need to secure diagnostic rights to such materials. If we were to lose suppliers or were unable to secure required rights for materials from suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis and on acceptable terms, if at all. An interruption in our operations could occur if we encounter delays or difficulties in securing these materials or any required rights to these materials, if the quality of the materials supplied do not meet our requirements, or if we cannot then obtain an acceptable substitute. The time and effort required to qualify a new supplier and ensure that the new materials provide the same or better quality results could result in significant additional costs. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. +49 +Table of Contents +Increased demand may cause us to experience delays in production or backlogs in deliveries that could limit the growth of our revenue or increase our losses. +A significant unforecasted increase in demand for our products may result in delays or shortfalls in our production and backlogs in deliveries. If we are unable to keep up with demand for our products, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products. Our inability to successfully manufacture our products would have a material adverse effect on our operating results. +The life sciences research and diagnostic markets are highly competitive. If we fail to effectively compete, our business, financial condition and operating results will suffer. +We face significant competition in the life sciences research and diagnostic markets. We currently compete with both established and early-stage companies that design, manufacture and market systems and consumable supplies. Many of our current competitors have competitive advantages over us, including: +● greater name and brand recognition; +● substantially greater financial and human resources; +● broader product lines; +● larger sales forces and more established distributor networks; +● substantial intellectual property portfolios; +● larger and more established customer bases and relationships; and +● better established, larger scale, and lower cost manufacturing capabilities. +We cannot assure you that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot assure you that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results. +Integrating any business, product or technology we acquire can be expensive and time-consuming and can disrupt and adversely affect our ongoing business, including product sales, and distract our management. +We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in complementary businesses, such as our 2018 acquisition of Aushon and our 2019 acquisition of Uman. Our ability to successfully integrate any business, product or technology we acquire depends on a number of factors, including, but not limited to, our ability to: +● minimize the disruption and distraction of our management and other employees, including our sales force, in connection with the integration of any acquired business, product or technology; +● minimize disruption in relationships with customers, distributors or suppliers as a result of such a transaction; +● avoid acquisition of unanticipated liabilities related to acquired companies; +50 +Table of Contents +● maintain and increase sales of our existing products; +● establish or manage the transition of the manufacture and supply of any acquired product; +● identify and add the necessary sales, marketing, manufacturing, regulatory and other related personnel, capabilities and infrastructure that are required to successfully integrate any acquired business, product or technology; +● manage the transition and migration of acquired personnel and all commercial, financial, legal, regulatory and other pertinent information relating to any acquired business, product or technology; +● comply with legal, regulatory and contractual requirements applicable to any acquired business, product or technology; and +● maintain and extend intellectual property protection for any acquired product or technology. +If we are unable to perform the above functions or otherwise effectively integrate any acquired businesses, products or technologies, our business, financial condition and operating results will suffer. +Foreign acquisitions (such as our acquisition of Uman) involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. +Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +Risks Related to Government Regulation and Diagnostic Product Reimbursement +If the FDA determines that our products are medical devices or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +We have focused initially on the life sciences research market. This includes offering products for use by laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Accordingly, other than our COVID assays for which we have received EUAs, our products are labeled as “Research Use Only” and are not intended for diagnostic uses. While we have focused initially on the life sciences research market and RUO products only, our future strategy includes expanding our product line to encompass products that are intended to be used for the diagnosis of disease, either alone or in collaboration with third parties. Such IVD products, once developed and offered, will be subject to regulation by the FDA, or comparable international agencies, as medical devices including requirements for regulatory clearance or approval of such products before they can be marketed. +The process of obtaining regulatory clearances to market a medical device can be costly and time consuming, and we or our collaborators may not be able to obtain these clearances or approvals on a timely basis, if at all. In general, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approved PMA, unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other +51 +Table of Contents +pre-amendment, 510(k)-exempt, 510(k) cleared products, or PMA-approved products that have subsequently been down-classified. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo process. Pursuant to amendments to the statute in 2012, a manufacturer can also submit a petition for a direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk. +High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. +Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products internationally for such uses, we may be subject to rigorous international regulation in the future. In these circumstances, we may rely significantly on our foreign independent distributors or collaborators to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries. +If we or our collaborators are required to obtain a PMA or 510(k) clearance for products based on our technology, we or they would be subject to a substantial number of additional requirements for medical devices, including establishment registration, device listing, Quality Systems Regulations (QSRs), which cover the design, testing, production, control, quality assurance, labeling, packaging, servicing, sterilization (if required), and storage and shipping of medical devices (among other activities), product labeling, advertising, recordkeeping, post-market surveillance, post-approval studies, adverse event reporting, and correction and removal (recall) regulations. One or more of the products we or a collaborator may develop using our technology may also require clinical trials in order to generate the data required for a PMA. Complying with these requirements may be time-consuming and expensive. We or our collaborators may be required to expend significant resources to ensure ongoing compliance with the FDA regulations and/or take satisfactory corrective action in response to enforcement action, which may have a material adverse effect on the ability to design, develop, and commercialize products using our technology as planned. Failure to comply with these requirements may subject us or a collaborator to a range of enforcement actions, such as warning letters, injunctions, civil monetary penalties, criminal prosecution, recall and/or seizure of products, and revocation of marketing authorization, as well as significant adverse publicity. If we or our collaborators fail to obtain, or experience significant delays in obtaining, regulatory approvals for IVD products, such products may not be able to be launched or successfully commercialized in a timely manner, or at all. +LDTs are a subset of IVD tests that are designed, manufactured and offered as services by high complexity clinical laboratories and used within a single laboratory. The FDA maintains that LDTs are medical devices and has for the most part exercised enforcement discretion for most LDTs. A significant change in the way that the FDA regulates any LDTs that we, our collaborators or our customers develop using our technology could affect our business. The FDA has considered the appropriate way to regulate such tests, but after publishing several draft guidances and holding a number of public hearings and workshops, no final guidance has been issued. However, if the FDA requires laboratories to undergo premarket review and comply with other applicable FDA requirements in the future, the cost and time required to commercialize an LDT will increase substantially, and may reduce the financial incentive for laboratories to develop LDTs, which could reduce demand for our instruments and our other products. +Foreign jurisdictions have laws and regulations similar to those described above, which may adversely affect our ability to market our products as planned in such countries. The number and scope of these requirements are increasing. As in the United States, the cost and time required to comply with regulatory requirements may be substantial, and there is no guarantee that we will obtain the necessary authorization(s) required to make our products commercially viable. As a result, the imposition of foreign requirements may also have a material adverse effect on the commercial viability of our operations. +52 +Table of Contents +We are subject to extensive regulatory requirements in connection with the EUAs that we have received from the FDA for our COVID-19 antibody and antigen tests. If we fail to comply with these requirements, or if the FDA otherwise determines that the conditions no longer warrant such authorization, we will be unable to market these products pursuant to this authorization and our business may be harmed. +We have received EUAs from the FDA authorizing us to market our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test and our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. These EUAs allow us to market and sell these products without the need to obtain premarket clearance or approval under the FDA’s standard review pathways for the duration of the COVID-19 public health emergency. The FDA has also established certain conditions which must be met in order to maintain authorization under these EUAs. The requirements can be unclear and are subject to change. +The FDA has the authority to issue an EUA during a public health emergency if it determines, based on the totality of the scientific evidence, that it is reasonable to believe that the product may be effective, that the known and potential benefits of a product outweigh the known and potential risks, that there is no adequate, approved and available alternative, and if certain other regulatory criteria are met. These standards for marketing authorization are lower than if the FDA had reviewed these tests under its traditional marketing authorization pathways, and we cannot assure you that our tests would be cleared or approved under those more extensive clearance and approval standards. Moreover, the FDA’s policies regarding EUAs can change unexpectedly, and the FDA may revoke an EUA when it determines that the underlying health emergency no longer exists or warrants such authorization or if problems are identified with the authorized product. We cannot predict how long our authorizations will remain in place. FDA policies regarding diagnostic tests, therapies and other products used to diagnose, treat or mitigate COVID-19 remain in flux as the FDA responds to new and evolving public health information and clinical evidence. Changes to FDA regulations or requirements could require changes to our authorized tests, necessitate additional measures or make it impractical or impossible for us to market our tests at all. +In addition, even though we have received these EUAs, these tests may not gain broad market acceptance among customers, including physicians, healthcare payors, users and others in the medical community. The commercial success of our COVID-19 tests will initially be dependent upon physicians and healthcare providers adopting our test kits, which will be informed, in part, by the convenience and accuracy of our tests. Furthermore, the COVID-19 diagnostic testing market is susceptible to rapid technological developments and we may not be able to match new technological advances, which might render our COVID-19 test kits uncompetitive or obsolete. If we are unable to match technological improvements in competitive products or effectively respond to the needs of our customers and users, the demand for our COVID-19 test kits could be reduced. +The termination of the emergency conditions under which EUAs are permitted, the rescission of an EUA, the failure of our tests to gain market acceptance or our inability to match advances in competing products could adversely impact our business. +Our products may in the future be subject to product recalls that could harm our reputation, business and financial results. +The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products, including RUO products, in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our +53 +Table of Contents +reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted. +U.S. legislative, FDA or global regulatory reforms may make it more difficult and costly for us to obtain any required regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Moreover, leadership, personnel and structural changes within the FDA as well as recent and future federal election outcomes could result in significant legislative and regulatory reforms impacting the FDA’s regulation of our products. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business. +In addition, the EU recently published new regulations that will result in greater regulation of medical devices and IVDs. The new IVD regulation (new IVD Regulation) is significantly different from the European directive for In vitro diagnostic products (IVD Directive) that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member states, include a risk-based classification system and increase the requirements for conformity assessment. The CE registration for Uman’s Nf-L ELISA assay kit for CSF was approved in March 2014 under the IVD Directive . Under the IVD Directive the assay is classified as a general IVD product, class I and required self-certification with no involvement of a notified body/authority. Under the new IVD Regulation, the requirements increase and involve assessment by a notified body for class B, C and D products. Uman’s Nf-L ELISA assay kit for CSF is classified as class B product and must fully implement the new IVD Regulation by May 2027. The new requirements include an ISO 13485 certification of the quality system (which Uman received July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g. clinical evidence and post-market activities). The work to meet the new technical requirements is on-going. An internal GAP-analysis is to be performed and work to eliminate the GAPs performed. +In order to continue to sell our products in Europe, we must maintain our CE marks and continue to comply with certain EU directives and, in the future with the new IVD Regulation. Our failure to continue to comply with applicable foreign regulatory requirements, including those administered by authorities of the EEA countries, could result in enforcement actions against us, including refusal, suspension or withdrawal of our CE Certificates of Conformity by our notified body, which could impair our ability to market products in the EEA in the future. Any changes to the membership of the European Union, such as the departure of the United Kingdom (Brexit), may impact the regulatory requirements for the impacted countries and impair our business operations and our ability to market products in such countries. +If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our operations. +The operation of our Clinical Laboratory Improvement Amendments (CLIA) certified laboratory is subject to regulation by numerous federal, state and local governmental authorities in the United States. This laboratory holds a CLIA certificate of compliance and is licensed by the Commonwealth of Massachusetts and the State of Maryland, and we may obtain other state licenses if required in the future. Failure to comply with federal or state regulations or changes in those regulatory requirements could result in a substantial curtailment or even prohibition of the operations of our laboratory and could have an adverse effect on our business. CLIA is a federal law that regulates clinical laboratories +54 +Table of Contents +that perform testing on human specimens for the purpose of providing information for the diagnosis, prevention or treatment of disease. To maintain CLIA certification, laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make unannounced inspections of these laboratories. If we were to lose our CLIA certification or any required state licenses, whether as a result of a revocation, suspension or limitation, it could have a material adverse effect on our business. +We expect to rely on third parties in conducting any required future studies of diagnostic products that may be required by the FDA or other regulatory authorities, and those third parties may not perform satisfactorily. +We do not have the ability to independently conduct clinical trials or other studies that may be required to obtain FDA and other regulatory clearance or approval for future diagnostic products. Accordingly, we expect that we would rely on third parties, such as clinical investigators, consultants, and collaborators to conduct such studies if needed. Our reliance on these third parties for clinical and other development activities would reduce our control over these activities. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised, we may not be able to obtain regulatory clearance or approval. +If diagnostic procedures that are enabled by our technology are subject to unfavorable pricing regulations or third-party coverage and reimbursement policies, our business could be harmed. +The ability of us, our customers or our collaborators to commercialize diagnostic tests based on our technology will depend in part on the extent to which coverage and reimbursement for these tests will be available from government health programs, private health insurers and other third-party payors. In the United States, the principal decisions about reimbursement for new technologies are often made by the Centers for Medicare and Medicaid Services (CMS). Private payors often follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of payments for particular products and procedures. We cannot be sure that coverage will be available for any diagnostic tests based on our technology, and, if coverage is available, the level of payments. Reimbursement may impact the demand for those tests. If reimbursement is not available or is available only to limited levels, any tests for which marketing authorization is received may not be able to be successfully commercialized. +Current and future legislation may increase the difficulty and cost to obtain marketing approval of and commercialize any products based on our technology and affect the prices that may be obtained. +In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the ACA, became law. The ACA is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. Both Congress and former President Trump expressed their intention to repeal or repeal and replace the ACA, and as a result certain sections of the ACA have not been fully implemented or were effectively repealed. The uncertainty around the future of the ACA, and in particular the impact to reimbursement levels and the number of insured individuals, may lead to uncertainty or delay in the purchasing decisions of our customers, which may in turn negatively impact our product sales. If there are not adequate reimbursement levels, our business and results of operations could be adversely affected. +In addition, other legislative changes have been proposed and adopted since the ACA was enacted. We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we or our collaborators will receive for any cleared or approved product. Any reduction in payments from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize any of our products for which we receive marketing approval. +55 +Table of Contents +In addition, sales of our tests outside of the United States will subject us to foreign regulatory requirements, which may also change over time. +We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business, or the effect any future legislation or regulation will have on us. The expansion in government’s effect on the United States healthcare industry may result in decreased profits to us, lower reimbursements by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations. +Risks Related to Our Operations +We depend on our information technology systems, and any failure of these systems could harm our business. +We depend on information technology and telecommunications systems to operate our business. We have installed, and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including, for example, systems handling human resources, accounting, manufacturing, inventory control, financial controls and reporting, sales administration, and other infrastructure operations. In addition to the aforementioned business systems, we intend to extend the capabilities of both our preventative and detective security controls by augmenting the monitoring and alerting functions, network design, and automatic countermeasure operations of our technical systems. These information technology and telecommunications systems support a variety of functions, including manufacturing operations, quality control, customer service support, and general administrative activities. +Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses, and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party suppliers could prevent us from operating our business and managing the administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business. +Security breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +In the ordinary course of our business, we collect and store sensitive data, and intellectual property and proprietary business information owned or controlled by ourselves or our customers. This data encompasses a wide variety of business-critical information including research and development information, commercial information, and business and financial information. We face four primary risks relative to protecting this critical information: loss of access; inappropriate disclosure; inappropriate modification; and inadequate monitoring of our controls over the first three risks. +The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses, breaches, interruptions due to employee error, malfeasance, faulty password management, lapses in compliance with privacy and security mandates, or other disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. Third parties may attempt to fraudulently induce employees or other persons into disclosing usernames, passwords or other sensitive information, which may in turn be used to access our information systems, commit identity theft or carry out other unauthorized or illegal activities. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. We engage third-party vendors and service providers to store and otherwise process some of our data, +56 +Table of Contents +including sensitive and personal information. Our vendors and service providers may also be the targets of the risks described above, including cyberattacks, malicious software, phishing schemes, and fraud. Our ability to monitor our vendors and service providers’ data security is limited, and, in any event, third parties may be able to circumvent those security measures, resulting in the unauthorized access to, misuse, disclosure, loss or destruction of our data, including sensitive and personal information, and disruption of our or third-party service providers’ systems. We and our third-party service providers may face difficulties in identifying, or promptly responding to, potential security breaches and other instances of unauthorized access to, or disclosure or other loss of, information. Any hacking or other attack on our or our third-party service providers’ or vendors’ systems, and any unauthorized access to, or disclosure or other loss of, information suffered by us or our third-party service providers or vendors, or the perception that any of these have occurred, could result in legal claims or proceedings, loss of intellectual property, liability under laws that protect the privacy of personal information, negative publicity, disruption of our operations and damage to our reputation, which could divert our management’s attention from the operation of our business and materially and adversely affect our business, revenues and competitive position. Moreover, we may need to increase our efforts to train our personnel to detect and defend against cyber- or phishing-attacks, which are becoming more sophisticated and frequent, and we may need to implement additional protective measures to reduce the risk of potential security breaches, which could cause us to incur significant additional expenses. +Any such security breach or interruption, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. federal government or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business and operations. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful. +In addition, our insurance may be insufficient to cover our losses resulting from cyber-attacks, breaches, or other interruptions, and any incidents may result in loss of, or increased costs of, such insurance. The successful assertion of one or more large claims against us that exceed available insurance coverage, the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage, could have a material adverse effect on our business, including our financial condition, results of operations and reputation. +The failure to maintain our current enterprise resource planning system (ERP) could adversely impact our business and results of operations. +If our ERP system does not continue to operate as intended, the effectiveness of our internal controls over financial reporting could be adversely affected or our ability to assess those controls adequately could be delayed. Significant delays in documenting, reviewing, and testing our internal control could cause us to fail to comply with our SEC reporting obligations related to our management's assessment of our internal control over financial reporting. +We are currently subject to, and may in the future become subject to additional, U.S. federal and state laws and regulations imposing obligations on how we collect, store and process personal information. Our actual or perceived failure to comply with such obligations could harm our business. Ensuring compliance with such laws could also impair our efforts to maintain and expand our future customer base, and thereby decrease our revenue. +In the ordinary course of our business, we currently, and in the future will, collect, store, transfer, use or process sensitive data, including personally identifiable information of employees, and intellectual property and proprietary business information owned or controlled by ourselves and other parties. The secure processing, storage, maintenance, and transmission of this critical information are vital to our operations and business strategy. We are, and may increasingly become, subject to various laws and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The regulatory environment related to data privacy and security is increasingly rigorous, with new and constantly changing requirements applicable to our business, and enforcement +57 +Table of Contents +practices are likely to remain uncertain for the foreseeable future. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may have a material adverse effect on our business, financial condition, results of operations and prospects. +In the United States, various federal and state regulators, including governmental agencies like the Federal Trade Commission, have adopted, or are considering adopting, laws and regulations concerning personal information and data security. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. For example, the California Consumer Privacy Act (CCPA), which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. In November 2020, California also passed the California Privacy Rights Act, or CPRA, which significantly expands the CCPA, including by introducing additional obligations such as data minimization and storage limitations and granting additional rights to consumers. In 2021, Virginia and Colorado both passed comprehensive state data privacy laws. In addition, laws in all 50 U.S. states require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. State laws are changing rapidly and there is discussion in the U.S. Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted. These and future laws and regulations may increase our compliance costs and potential liability. +Furthermore, regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), establish privacy and security standards that limit the use and disclosure of individually identifiable health information (known as “protected health information”) and require the implementation of administrative, physical and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information. Determining whether protected health information has been handled in compliance with applicable privacy standards and our contractual obligations can require complex factual and statistical analyses and may be subject to changing interpretation. Although we take measures to protect sensitive data from unauthorized access, use or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance or other malicious or inadvertent disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, manipulated, publicly disclosed, lost or stolen. Any such access, breach or other loss of information could result in legal claims or proceedings, and liability under federal or state laws that protect the privacy of personal information, such as the HIPAA, the Health Information Technology for Economic and Clinical Health Act (HITECH), and regulatory penalties. Notice of breaches must be made to affected individuals, the Secretary of the Department of Health and Human Services, and for extensive breaches, notice may need to be made to the media or State Attorneys General. Such a notice could harm our reputation and our ability to compete. +In addition, the European Parliament and the Council of the European Union adopted the GDPR in 2016 to replace the current European Union Data Protection Directive and related country-specific legislation. The GDPR took effect in May 2018 and governs the collection and use of personal data in the European Union. The GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. While we have taken steps to comply with the GDPR, including such as reviewing our security procedures and entering into data processing agreements with relevant contractors, we cannot assure you that our efforts to remain in compliance will be fully successful. +58 +Table of Contents +Further, unauthorized access, loss or dissemination of sensitive information could also disrupt our operations, including our ability to conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our reputation and our business. In addition, there can be no assurance that we will promptly detect any such disruption or security breach, if at all. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our products could be delayed. +We face risks related to handling of hazardous materials and other regulations governing environmental safety. +Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous materials and the generation, transportation and storage of waste. Although we have secured clearance from the EPA historically, and currently are operating in compliance with applicable EPA rules and regulations, our business could be adversely affected if we discover that we or an acquired business is not in material compliance with these rules and regulations. In the future, we may pursue the use of other surfactant substances that will require clearance from the EPA, and we may fail to obtain such clearance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business. +Risks Related to Intellectual Property +If we are unable to protect our intellectual property, it may reduce our ability to maintain any technological or competitive advantage over our competitors and potential competitors, and our business may be harmed. +We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us, we may lose our technological or competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. +We cannot assure investors that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will take for such patents to be granted. It is possible that, for any of our patents that have granted or that may grant in the future, others will design around our patented technologies. Further, we cannot assure investors that other parties will not challenge any patents granted to us or that courts or regulatory agencies will hold our patents to be valid or enforceable. We cannot guarantee investors that we will be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, or to such patents being interpreted narrowly or otherwise in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our competitors may be diminished because of these uncertainties. For these and other reasons, our intellectual property may not provide us with any competitive advantage. To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate coverage over our products and protection against our competitors’ products, our competitive position could be adversely affected, as could our business. +In addition to pursuing patents on our technology, we also rely upon trademarks, trade secrets, copyrights and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. In addition, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable +59 +Table of Contents +or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be undermined. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time-consuming, the outcome would be unpredictable, and any remedy may be inadequate. In addition, courts outside of the United States may be less willing to protect trade secrets. +Some of our owned and in-licensed intellectual property has been discovered through government-funded programs and thus is subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers. +Some of the intellectual property rights we own and have in-licensed have been generated through the use of U.S. government funding and are therefore subject to certain federal regulations. For example, some of the issued U.S. patents we own and all of the intellectual property rights licensed to us under our license agreement with Tufts have been generated using U.S. government funds. As a result, the U.S. government has certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act of 1980 (the Bayh-Dole Act). These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if the government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government, elect title, and file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturing may limit our ability to license the applicable patent rights on an exclusive basis under certain circumstances. +If we enter into future arrangements involving government funding, and we make inventions as a result of such funding, intellectual property rights to such discoveries may be subject to the applicable provisions of the Bayh-Dole Act. To the extent any of our current or future intellectual property is generated through the use of U.S. government funding, the provisions of the Bayh-Dole Act may similarly apply. Any exercise by the government of certain of its rights could harm our competitive position, business, financial condition, results of operations and prospects. +Our Simoa bead-based technology is licensed to us by Tufts University. Any loss of our rights to this technology could prevent us from selling our products. +Our Simoa bead-based technology is licensed exclusively to us from Tufts University. We do not own the patents that underlie this license. Our rights to use this technology and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of the license. Our principal obligations under our license agreement with Tufts are as follows: +● royalty payments; +60 +Table of Contents +● milestone payments; +● annual maintenance fees; +● using commercially reasonable efforts to develop and sell a product using the licensed technology and developing a market for such product; +● paying and/or reimbursing fees related to prosecution, maintenance and enforcement of patent rights; and +● providing certain reports. +If we breach any of these obligations, Tufts may have the right to terminate the license, which could result in our being unable to develop, manufacture and sell products using our Simoa bead-based technology or a competitor’s gaining access to the Simoa technology. Termination of our license agreement with Tufts would have a material adverse effect on our business. +In addition, we are a party to a number of other agreements that include licenses to intellectual property, including non-exclusive licenses. We expect that we may need to enter into additional license agreements in the future. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. +We may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we cannot provide any assurances that we would be able to do so. +We may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. If we could not obtain a license, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected products, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation. +Licensing of intellectual property involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement. If disputes over intellectual property that we have licensed prevent or impair our ability to maintain the licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product, or the dispute may have an adverse effect on our results of operation. +In addition to agreements pursuant to which we in-license intellectual property, we have in the past and expect to in the future to grant licenses under our intellectual property. Like in-licenses, out-licenses are complex, and disputes may arise between us and our licensees. Moreover, our licensees may breach their obligations, or we may be exposed to liability due to our failure or alleged failure to satisfy our obligations. Any such occurrence could have an adverse effect on our business. +If we or any of our partners are sued for infringing intellectual property rights of third parties, it would be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +Our success also depends on our ability to develop, manufacture, market and sell our products and perform our services without infringing upon the proprietary rights of third parties. Numerous U.S. and foreign-issued patents and +61 +Table of Contents +pending patent applications owned by third parties exist in the fields in which we are developing products and services. As part of a business strategy to impede our successful commercialization and entry into new markets, competitors have claimed, and may claim in the future, that our products and/or services infringe their intellectual property rights and have suggested, and may suggest in the future, that we enter into license agreements. Any such claims made to date are, we believe, without merit. +Even if such claims are without merit, we could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against claims of infringement made by third parties or settling such claims. Any adverse ruling by a court or administrative body, or perception of an adverse ruling, may have a material adverse impact on our ability to conduct our business and our finances. Moreover, third parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more products or services and could result in a substantial award of damages against us. In addition, since we sometimes indemnify customers, collaborators or licensees, we may have additional liability in connection with any infringement or alleged infringement of third-party intellectual property. +Because patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our products or proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any of our products. There is a substantial amount of litigation involving patent and other intellectual property rights in our industry. If a third party claims that we or any of our licensors, customers or collaboration partners infringe upon a third party’s intellectual property rights, we may have to: +● seek to obtain licenses that may not be available on commercially reasonable terms, if at all; +● abandon any infringing product or redesign our products or processes to avoid infringement; +● pay substantial damages including, in an exceptional case, treble damages and attorneys’ fees, which we may have to pay if a court decides that the product or proprietary technology at issue infringes upon or violates the third-party’s rights; +● pay substantial royalties or fees or grant cross-licenses to our technology; or +● defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources. +We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful. +Competitors may infringe our patents or the patents that we license. In the event of infringement or unauthorized use, we may file one or more infringement lawsuits, which can be expensive and time-consuming. An adverse result in any such litigation proceedings could put one or more of our patents at risk of being invalidated, found to be unenforceable or interpreted narrowly, and it could put our patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. +Many of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise any funds necessary to continue our operations, continue our internal research programs, in-license needed technology, or enter into development partnerships that would help us bring our products to market. +62 +Table of Contents +In addition, patent litigation can be very costly and time-consuming. An adverse outcome in such litigation or proceedings may expose us or any of our future development partners to loss of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all. +Our issued patents could be found invalid or unenforceable if challenged in court, which could have a material adverse impact on our business. +If we or any of our partners were to initiate legal proceedings against a third party to enforce a patent covering one of our products or services, the defendant in such litigation could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement, or failure to claim patent eligible subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before the USPTO even outside of the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the challenged patent. Such a loss of patent protection would have a material adverse impact on our business. +We may not be able to protect our intellectual property rights throughout the world, which could materially, negatively affect our business. +Filing, prosecuting and defending patents on current and future products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside of the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent that federal and state laws do in the United States. Consequently, regardless of whether we are able to prevent third parties from practicing our inventions in the United States, we may not be able to prevent third parties from practicing our inventions in all countries outside of the United States, or from selling or importing products made by using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products, and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as it is in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from competing. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license and may adversely impact our business. +63 +Table of Contents +In addition, we and our partners also face the risk that our products are imported or reimported into markets with relatively higher prices from markets with relatively lower prices, which would result in a decrease of sales and any payments we receive from the affected market. Recent developments in U.S. patent law have made it more difficult to stop these and related practices based on theories of patent infringement. +Changes in patent laws or patent jurisprudence could diminish the value of patents in general, thereby impairing our ability to protect our products. +The America Invents Act (the AIA) was signed into law on September 16, 2011, and many of the substantive changes became effective on March 16, 2013. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant of the time from invention to the filing of a patent application, but circumstances could prevent us from promptly filing patent applications on our inventions. +Among some of the other changes introduced by the AIA are changes that limit where a patent holder may file a patent infringement suit and provide additional opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our owned and in-licensed U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings, compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. The AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. +Additionally, the U.S. Supreme Court has ruled on several patent cases in recent years, such as Impression Products, Inc. v. Lexmark International, Inc., Association for Molecular Pathology v. Myriad Genetics, Inc. , Mayo Collaborative Services v. Prometheus Laboratories, Inc. and Alice Corporation Pty. Ltd. v. CLS Bank International , either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. +If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. +Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +64 +Table of Contents +We use third-party software that may be difficult to replace or may cause errors or failures of our products that could lead to lost customers or harm to our reputation. +We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party software or other third-party software failures could result in errors, defects or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs. +We will need to maintain our relationships with third-party software providers and to obtain software from such providers that does not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver reliable products to our customers and could harm our reputation and results of operations. +Risks Related to Our Common Stock and Being a Public Company +We expect that our stock price may fluctuate significantly. +The market price of shares of our common stock has been and could continue to be subject to wide fluctuations in response to many factors listed in this section, and others beyond our control, including: +● actual or anticipated fluctuations in our financial condition and operating results; +● announcements by us, our partners or our competitors of new products, significant contracts, strategic partnerships, joint ventures, collaborations, acquisitions, commercial relationships or capital commitments; +● competition from existing products or new products that may emerge; +● failure to meet or exceed financial estimates and projections of the investment community or that we may provide to the public; +● issuance of new or updated research or reports by securities analysts or recommendations for our stock; +● positive or adverse regulatory announcements; +● disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies; +● commencement of, or our involvement in, litigation; +● fluctuations in the valuation of companies perceived by investors to be comparable to us; +● conditions in our markets; +● manufacturing disputes or delays; +● any future sales of our common stock or other securities; +● any change to the composition of our board of directors or key personnel; +● general economic conditions and slow or negative growth of our markets; +65 +Table of Contents +● share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; +● announcement or expectation of additional debt or equity financing efforts; and +● other factors described in this Risk Factors section of this Annual Report on Form 10-K. +These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and life science companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have on occasion instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. +If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline. +The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the public markets, which could cause our stock price or trading volume to decline. +We have never paid dividends on our capital stock, and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases. +We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from an investment in our common stock if the price of our common stock increases. +Anti-takeover provisions contained in our restated certificate of incorporation and restated by-laws, as well as provisions of Delaware law, could impair a takeover attempt. +Our restated certificate of incorporation, restated by-laws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions: +● authorizing our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board of directors may determine; +● specifying that special meetings of our stockholders can be called only by our board of directors and that our stockholders may not act by written consent; +● establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors; +● providing that directors may be removed only for cause; +66 +Table of Contents +● providing that our board of directors may create new directorships and that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; +● establishing that our board of directors is divided into three classes—Class I, Class II, and Class III—with each class serving staggered three-year terms; +● providing that our board of directors may amend our restated by-laws without stockholder approval; and +● requiring a super-majority of votes to amend certain of the above-mentioned provisions. +These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. +Any provision of our restated certificate of incorporation, restated by-laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +We incur increased costs and devote substantial management time as a result of operating as a public company. +As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and The Nasdaq Global Market. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly. These costs increase our net loss. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the sufficient coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. +In addition, as a public company we incur additional costs and obligations in order to comply with SEC rules that implement Section 404 of the Sarbanes-Oxley Act. Under these rules, we are required to make a formal assessment of the effectiveness of our internal control over financial reporting and to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve timely compliance with Section 404, we are engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. The process of obtaining the attestation report from our independent registered public accounting firm is costly and requires the devotion of significant management attention and resources. We have been required to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are designed and operating effectively, and implement a continuous reporting and improvement process for internal control over financial reporting. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. +67 +Table of Contents +Item 1B. UNRESOLVED STAFF COMMENTS +Not applicable. +Item 2. PROPERTIES +We currently lease approximately 91,600 square feet of office, laboratory, and manufacturing space at our headquarters in Billerica, Massachusetts. In addition, in the first quarter of 2022, we executed a lease for 85,800 square feet of office and laboratory space in Bedford, Massachusetts. The premises covered by these leases serve as our principal office and laboratory space. The initial term of the Billerica lease is eleven years and five months beginning on April 1, 2019, and we have the option to extend the lease for two additional five-year periods. The initial term of the Bedford lease is eight years and nine months beginning on the earlier of our occupancy, or May 1, 2022. We believe that these office, laboratory, and manufacturing spaces will be sufficient to meet our needs for the foreseeable future. +In addition, our subsidiary, Uman, leases a total of approximately 6,500 square feet of office, laboratory, manufacturing and storage space in Umeå, Sweden. These leases expire at various dates through February 28, 2023. +Item 3. LEGAL PROCEEDINGS +We are not currently a party to any material legal proceedings. +Item 4. MINE SAFETY DISCLOSURES +Not applicable. +PART II +Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Market Information +Our common stock is traded on The Nasdaq Global Market under the symbol “QTRX.” +Stockholders +As of February 23, 2022, there were approximately 23 stockholders of record of our common stock. +Unregistered Sales of Securities +There were no unregistered sales of equity securities during the fourth quarter ended December 31, 2021. +Issuer Purchases of Equity Securities +Not applicable. +Item 6. RESERVED +68 +Table of Contents +Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See “Special Note Regarding Forward-Looking Statements.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.” Results of operations for the fiscal year ended December 31, 2019 can be referenced on our 2020 Annual Report on Form 10-K filed with the SEC on March 5, 2021. +Overview +We are a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our instruments are designed to be used either with assays fully developed by us, including all antibodies and supplies required to run the tests, or with “homebrew” kits where we supply some of the components required for testing, and the customer supplies the remaining required elements. Accordingly, our installed instruments generate a recurring revenue stream. As the installed base of the Simoa instruments increases, total consumables revenue overall is expected to increase. We believe that consumables revenue should be subject to less period-to-period fluctuation than our instrument sales revenue, and will become an increasingly important contributor to our overall revenue. +We commercially launched our first immunoassay platform, the Simoa HD-1, in January 2014. The HD-1 is based on our bead-based technology, and assays run on the HD-1 are fully automated. We initiated commercial launch of the SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-1 in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of applications. In July 2019, we launched the Simoa HD-X, an upgraded version of the Simoa HD-1, which replaces the HD-1. The HD-X has been designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. We began shipping and installing HD-X instruments at customer locations in 2019, and by the end of 2021, approximately 68% of the HD instrument installed base was HD-X instruments. +On January 30, 2018, we acquired Aushon for $3.2 million in cash, with an additional payment of $0.8 million made in July 2018, six months after the acquisition date. With the acquisition of Aushon, we acquired a CLIA certified laboratory, as well as Aushon’s proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to develop the SP-X instrument to provide the same Simoa sensitivity found in our Simoa bead-based platform. We initiated an early-access program for the SP-X instrument in January 2019, with the full commercial launch commenced in April 2019. +On August 1, 2019, we completed our acquisition of Uman for an aggregate purchase price of $21.2 million, comprised of (i) $15.7 million in cash plus (ii) 191,152 shares of our common stock (representing $5.5 million based on the closing prices of our common stock on the Nasdaq Global Market on July 1, 2019 and August 1, 2019, the dates of issuance). Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits, which are widely recognized by +69 +Table of Contents +researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. +We also provide contract research services for customers through our CLIA-certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 1,700 projects for approximately 400 customers from all over the world using our Simoa platforms. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with us and another distributor worldwide. We have an extensive base of customers in world class academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. +On September 29, 2020, we entered the Abbott License Agreement with Abbott. Pursuant to the terms of the Abbott License Agreement, we granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under our bead-based single molecule detection patents in the field of IVD. Abbott paid an initial license fee of $10.0 million in connection with the execution of the Abbott License Agreement, which was recognized as license revenue for the year ended December 31, 2020. Abbott has also agreed to pay us milestone fees subject to the achievement by Abbott of certain development, regulatory and commercialization milestones and low single digit royalties on net sales of licensed products. +We are subject to ongoing uncertainty concerning the COVID-19 pandemic, including its length and severity and its effect on our business. During the first and second quarters of 2020, we implemented a resiliency plan focused on the health and safety of our employees and maintaining continuity of our operations. We saw an impact on instrument revenue due to limitations on our ability to access certain customer sites and complete instrument installations, as well as an impact on consumables revenue from interruptions in certain customer laboratories through the first quarter of 2021. As customers began returning to normal operations in the second quarter of 2021, we have seen less of an impact related to COVID-19 related shutdowns. However, we expect COVID-19 related challenges to continue for the foreseeable future and potentially increase if variants result in new shutdowns. +In view of the COVID-19 pandemic, in 2020, we adjusted our operations to expand capacity in our Accelerator Laboratory to support customers whose operations have been disrupted and to sustain clinical trials. We also determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS-CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay, and prototyping a high-definition multiplex SARS-CoV-2 serology assay. In December 2020, the FDA issued an EUA for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test, and in January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. In September 2021, the FDA expanded the EUA for our Simoa SARS-CoV-2 N Protein Antigen Test to include testing with nasal swabs and saliva and for asymptomatic serial testing with nasal swab samples. We are exploring extending the test to home-based sample collection and pooling to enable larger scale testing. +In September 2020, we entered into WP2 with the NIH under the RADx program. This contract, which has a total award value of up to $18.2 million, is intended to accelerate the continued development, scale-up and deployment of our novel SARS-CoV-2 antigen test. Initial early feasibility of this test was funded in part through the RADx WP1 award we were granted in June 2020. WP2 supports clinical validation of the test in support of the EUA submissions with the FDA, and provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Contract funding was subject to the achievement of pre-defined milestones and the contract period ran through September 2021, with one milestone extended to March 31, 2022. As of December 31, 2021, we had received $17.7 million out of the full $18.2 million under WP2. +70 +Table of Contents +The COVID-19 situation remains dynamic, and there remains significant uncertainty as to the length and severity of the pandemic, the actions that may be taken by government authorities, the impact to the business of our customers and suppliers, the long-term economic implications and other factors identified in “Part I, Item 1A, Risk Factors” of this Annual Report on Form 10-K. We will continue to evaluate the nature and extent of the impact to our business, financial condition, and operating results. +As of December 31, 2021, we had cash and cash equivalents of $396.5 million. Since inception, we have incurred annual net losses. Our net loss was $57.7 million, $31.5 million, and $40.8 million for the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021, we had an accumulated deficit of $305.5 million and stockholders' equity of $441.0 million. We expect to continue to incur significant expenses and operating losses at least through the next 24 months. We expect our expenses will increase substantially as we: +● expand our sales and marketing efforts to further commercialize our products; +● strategically acquire companies or technologies that may be complementary to our business; +● expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our products are deemed by the FDA to be medical devices or otherwise subject to additional regulation by the FDA; +● seek PMA or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market products for use in the prevention, diagnosis or treatment of a disease or other condition; +● hire additional personnel and continue to grow our employee headcount; +● enter into collaboration arrangements, if any, or in-license other products and technologies; +● add operational, financial and management information systems; and +● continue to incur increased costs as a result of operating as a public company. +Financial Operations Overview +Revenue +Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606 - Revenue from Contracts with Customers (ASC 606), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. +Once a contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying license relative to the option exercise price, including assumptions about technical feasibility and the probability of developing a candidate that would be subject to the option rights. The exercise of a material right is accounted for as a contract modification for accounting purposes. +71 +Table of Contents +The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (SSP) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations. +We generate product revenue primarily from sales of our HD-X, HD-1, SR-X, and SP-X instruments and related reagents and other consumables. We currently sell our products for RUO applications and our customers are primarily laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Sales of our consumables have consistently increased due to an increasing number of instruments being installed in the field, all of which require certain of our consumables to run customers’ specific tests. Consumable revenue consists of sales of complete assays which are developed internally by us, plus sales of “homebrew” kits which contain all the elements necessary to run tests with the exception of the specific antibodies utilized which are separately provided by the customer. +Service and other revenue consists of testing services provided by us in our Accelerator Laboratory on behalf of certain research customers, in addition to warranty and other service-based revenue. Services provided in our Accelerator Laboratory include sample testing, homebrew assay development and custom assay development. +Collaboration and license revenue consists of revenue associated with licensing our technology to third parties and for related services. +Grants received by us that do not require the transfer of goods or services to a customer are accounted for by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance (IAS 20). Under IAS 20, we recognize revenue as the matching expense or asset is incurred or capitalized. +Cost of Products, Services and Collaboration Revenue +Cost of goods sold for products consists of HD-X, HD-1, and SR-X instrument costs from the manufacturer. Cost of goods sold for SP-X consists of costs based on the internal assembly of this item. Raw material part costs, associated freight, shipping and handling costs, contract manufacturer costs, salaries, personnel costs, royalties, stock-based compensation, overhead and other direct costs related to those sales are classified as cost of goods sold for products. +Cost of goods sold for services consists of salaries and other personnel costs, royalties, stock-based compensation and facility costs associated with operating the Accelerator Laboratory on behalf of customers, in addition to costs related to warranties and other costs of servicing equipment at customer sites. +Cost of collaboration revenue consists of royalty expense due to third parties from revenue generated by collaboration or license deals. +Research and Development Expenses +Research and development expenses consist of salaries and other personnel costs, stock-based compensation, research supplies, third-party development costs for new products, materials for prototypes, and allocated overhead costs that include facility and other overhead costs. We have made substantial investments in research and development since our inception, and plan to continue to make substantial investments in the future. Our research and development efforts have focused primarily on the tasks required to support development and commercialization of new and existing products. We believe that our continued investment in research and development is essential to our long-term +72 +Table of Contents +competitive position and expect these expenses to increase in future periods. Additionally, costs incurred related to grant revenue are recorded as research and development expenses. +Selling, General and Administrative Expenses +Selling, general and administrative expenses consist primarily of salaries and other personnel costs, and stock-based compensation for our sales and marketing, finance, legal, human resources and general management, as well as professional services, such as legal and accounting services. We expect selling, general and administrative expenses to increase in future periods as the number of sales, technical support and marketing and administrative personnel grows and we continue to introduce new products, broaden our customer base and grow our business. We also expect to incur additional public company expenses, including expenses related to compliance with the rules and regulations of the SEC and the Nasdaq Stock Market, additional insurance expenses, and expenses related to investor relations activities and other administrative and professional services. +Critical Accounting Policies, Significant Judgments and Estimates +Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates may occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. +We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other significant accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. Our significant accounting policies are more fully described in “Significant Accounting Policies” (Note 2) in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. +Revenue Recognition +We recognize revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that we expect to be entitled to receive in exchange for these goods and services, incentives and taxes collected from customers, that are subsequently remitted to governmental authorities. +Product Revenue +Our products are composed of analyzer instruments, assay kits and other consumables such as reagents. Products are sold directly to biopharmaceutical and academic research organizations or are sold through distributors in EMEA and Asia Pacific regions. The sales of instruments are generally accompanied by an initial year of implied service-type warranties and may be bundled with assays and other consumables and may also include other items such as training and installation of the instrument and/or an extended service warranty. Revenues from the sale of products are recognized at a point in time when we transfer control of the product to the customer, which is upon installation for instruments sold to direct customers, and based upon shipping terms for assay kits and other consumables. Revenue for instruments sold to distributors is generally recognized based upon shipping terms (either upon shipment or delivery). +Service and Other Revenue +Service revenues are composed of contract research services, initial implied one-year service-type warranties, extended services contracts and other services such as training. Contract research services are provided through our Accelerator Laboratory and generally consist of fixed fee contracts. Revenues from contract research services are +73 +Table of Contents +recognized at a point in time when we complete and deliver our research report on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. Revenues from service-type warranties are recognized ratably over the contract service period. Revenues from other services are immaterial. +Collaboration and License Revenue +We may enter into agreements to license the intellectual property and know-how associated with our instruments in exchange for license fees and future royalties (as described below). The license agreements provide the licensee with a right to use the intellectual property with the license fee revenues recognized at a point in time as the underlying license is considered functional intellectual property. We have recognized revenues from a sales- or usage based royalties related to our licensing technology and intellectual property. +Payment Terms +Our payment terms vary by the type and location of customer and the products or services offered. Payment from customers is generally required in a term ranging from 30 to 45 days from date of shipment or satisfaction of the performance obligation with no discounts for early payment. Occasionally we do provide extended payment terms or financing arrangements to customers. +Disaggregated Revenue +When disaggregating revenue, we considered all of the economic factors that may affect revenues. The following tables disaggregate our revenue from contracts with customers based on their location by revenue type: +Year Ended +December 31, 2021 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +12,138 +$ +8,178 +$ +5,657 +$ +25,973 +Consumable and other products +34,997 +16,122 +3,970 +55,089 +Total +$ +47,135 +$ +24,300 +$ +9,627 +$ +81,062 +Service and other revenues: +Service-type warranties +$ +4,334 +$ +2,039 +$ +255 +$ +6,628 +Research services +12,101 +2,600 +124 +14,825 +Other services +1,372 +695 +109 +2,176 +Total +$ +17,807 +$ +5,334 +$ +488 +$ +23,629 +Collaboration and license revenue: +Collaboration and license revenue +$ +360 +$ +288 +$ +— +$ +648 +Total +$ +360 +$ +288 +$ +— +$ +648 +74 +Table of Contents +Year Ended +December 31, 2020 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +8,680 +$ +4,332 +$ +3,594 +$ +16,606 +Consumable and other products +14,305 +10,854 +2,252 +27,411 +Total +$ +22,985 +$ +15,186 +$ +5,846 +$ +44,017 +Service and other revenues: +Service-type warranties +$ +3,171 +$ +1,543 +$ +207 +$ +4,921 +Research services +15,011 +2,225 +737 +17,973 +Other services +700 +435 +100 +1,235 +Total +$ +18,882 +$ +4,203 +$ +1,044 +$ +24,129 +Collaboration and license revenue: +Collaboration and license revenue +$ +11,685 +$ +124 +$ +— +$ +11,809 +Total +$ +11,685 +$ +124 +$ +— +$ +11,809 +Our contracts with customers may include promises to transfer multiple products and services to a customer. In accordance with ASC 606, we combine any performance obligations that are immaterial with one or more other performance obligations that are material to the contract. For arrangements with multiple performance obligations, we allocate the contract transaction price, including discounts, to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. We determine standalone selling prices based on prices charged to customers in observable transactions, and use a range of amounts to estimate standalone selling prices for each performance obligation. We may have more than one range of standalone selling price for certain products and services based on the pricing for different customer classes. +Variable consideration in our contracts primarily relates to (i) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (ii) certain non-fixed fee research services contracts. ASC 606 provides for an exception to estimating the variable consideration for sales- and usage-based royalties related to the license of intellectual property, such that the sales- or usage-based royalty will be recognized in the period the underlying transaction occurs. We have recorded sales- or usage-based royalty revenue for the years ended December 31, 2021, 2020 and 2019 related to the intellectual property licensed by Uman. We recognize revenues from sales- or usage based royalty revenue at the later of when the sales or usage occurs; and the satisfaction or partial satisfaction of the performance obligation to which the royalty has been allocated. +The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as of December 31, 2021 is $7.5 million. Of the performance obligations not yet satisfied or that are partially satisfied, $6.4 million is expected to be recognized as revenue in the next 12 months, with the remainder to be recognized within the 24 months thereafter. The $7.5 million principally consists of amounts billed for undelivered services related to initial and extended service-type warranties and research services, as well as $0.5 million related to undelivered licenses of intellectual property for a diagnostics company. +We have classified the balance of capitalized costs to obtain a contract as a component of prepaid expenses and other current assets as of December 31, 2021 and classified the expense as a component of cost of goods sold and selling, general and administrative expense over the estimated life of the contract. We consider potential impairment in these amounts each period. +ASC 606 provides entities with certain practical expedients and accounting policy elections to minimize the cost and burden of adoption. We exclude from the transaction price any amounts collected from customers related to sales and other similar taxes. We have elected to account for the shipping and handling as an activity to fulfill the +75 +Table of Contents +promise to transfer the product, and therefore will not evaluate whether shipping and handling activities are promised services to its customers. +When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. We do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. None of our contracts contained a significant financing component for the years ended December 31, 2021, 2020, and 2019. +Grant Revenue +We recognize grant revenue as we perform services under the arrangement when the funding is committed. Revenues and related research and development expenses are presented gross in the consolidated statements of operations as we have determined we are the primary obligor under the arrangement relative to the research and development services. +Accounting for grants does not fall under ASC 606, as the grantor will not benefit directly from our expansion or product development. As there is no authoritative guidance under U.S. GAAP on accounting for grants to for-profit business entities, we have accounted for grants by analogy to IAS 20. +Our grants contain both monetary amounts granted related to assets and monetary amounts granted related to income, which are grants other than those related to assets. The grants related to assets are for the expansion and increase of manufacturing capacity. The grants related to income are for additional research and development, as well as other non-asset related scale up costs. We determined it was appropriate to account for each monetary grant amount under the appropriate accounting treatment outlined in IAS 20. +Under IAS 20, grants related to assets shall be presented in the consolidated balance sheets either by recognizing the grant as deferred income (which is recognized in the consolidated statements of operations on a systematic basis over the useful life of the asset), or by deducting the grant in calculating the carrying amount of the asset (which is recognized in the consolidated statements of operations over the life of the depreciable asset as a reduced depreciation expense). Both methods are acceptable under IAS 20. We have elected to record grants related to assets as a deduction in calculating the carrying value of the asset. +Under IAS 20, grants related to income are presented as part of the consolidated statements of operations, either separately or under a general heading. Both methods are acceptable under IAS 20. We have elected to record grants related to income separately on the consolidated statements of operations as grant revenue. The related expenses are recorded within operating expenses and not deducted. +On June 22, 2020, we entered into WP1 under the NIH’s RADx program to assess the feasibility of a novel SARS-CoV-2 antigen detection test using our Simoa technology. During the year ended December 31, 2020 we recognized $2.0 million of grant revenue and incurred $1.0 million in research and development expense related to WP1. WP1 was completed as of December 31, 2020. +On September 29, 2020, we entered into WP2 with the NIH under its RADx program. The contract, which has a total award value of $18.2 million, accelerates the continued development, scale-up, and deployment of the novel SARS-CoV-2 antigen detection test using our Simoa technology. The contract provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Release of the $18.2 million of funding under WP2 is based on the achievement of certain milestones. Contract funding was subject to achievement of these pre-defined milestones and the contract period ran through September 2021, with one milestone extended to March 31, 2022. As of December 31, 2021, we had received $17.7 million out of the full $18.2 million under WP2 . During the year ended December 31, 2021, we recognized $5.2 million in grant revenue and incurred $3.4 million in research and development expense related to WP2. During the year ended December 31, 2020, we recognized $4.4 million in grant revenue and incurred $2.6 million in research and development expense related to WP2. +76 +Table of Contents +The following table summarizes the cumulative activity under WP2 as of December 31, 2021 and 2020 (in thousands): +December 31, 2021 +December 31, 2020 +Total grant revenue from research and development activities +$ +9,576 +$ +4,362 +Total proceeds used for assets +8,104 +826 +Total deferred proceeds for assets +— +2,478 +Total deferred grant revenue +— +304 +Total recognized +$ +17,680 +$ +7,970 +Total recognized +$ +17,680 +$ +7,970 +Total amount accrued +— +(2,968) +Total cash received +$ +17,680 +$ +5,002 +Total proceeds received +$ +17,680 +$ +5,002 +Total proceeds reasonably assured +520 +13,198 +Total WP2 grant amount +$ +18,200 +$ +18,200 +Stock-Based Compensation +We account for stock-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Stock-based compensation awards have historically consisted of stock options and restricted stock units. Prior to the adoption of Accounting Standards Update (ASU) No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), the measurement date for non-employee awards was generally the date the services were completed, resulting in financial reporting period adjustments to stock-based compensation during the vesting period for changes in the fair value of the awards. We adopted ASU 2018-07 on January 1, 2020. After the adoption of ASU 2018-07, the measurement date for non-employee awards is the date of grant without changes in the fair value of the award. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. There were no material non-employee awards outstanding during the years ended December 31, 2021, 2020, and 2019. +We recognize forfeitures as they occur. We estimate the grant date fair value, and the resulting stock-based compensation expense, using a Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. +The fair value of stock options granted to employees and non-employees is estimated on the grant date using a Black-Scholes option-pricing model, based on the assumptions noted in the following table: +Year Ended December 31, +2021 +2020 +Risk-free interest rate +0.4% - 1.3% +0.4% - 1.7% +Expected dividend yield +None +None +Expected term (in years) +6.0 +6.0 +Expected volatility +49.2% - 55.6% +43.9% - 49.2% +Weighted-average grant date fair value +$ 29.96 +$ 12.66 +Expected volatility was calculated based on proportional weighting of reported volatility data for a representative group of guideline publicly traded companies for which historical information was available, as well as our stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. We estimate the expected life of options granted to employees utilizing the simplified method which calculates the expected life of an option as the average of the time to vesting and +77 +Table of Contents +contractual life of the options. The expected life is applied to the stock option grant group as a whole, as we do not expect substantially different exercise or post-vesting termination behavior among our employee population. We use the simplified method due to the lack of historical exercise data and the plain nature of the stock options. We use the remaining contractual term for the expected life of non-employee awards. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on common stock. +We determined the fair value of each share of common stock underlying share-based awards based on the closing price of our common stock as reported by Nasdaq on the date of grant. +The table below summarizes the stock-based compensation expense recognized in our statements of operations by classification (in thousands): +Year Ended December 31, +2021 +2020 +Cost of product revenue +$ +471 +$ +189 +Cost of service and other revenue +403 +311 +Research and development +1,807 +1,129 +General and administrative +13,294 +8,470 +Total stock-based compensation +$ +15,975 +$ +10,099 +As of December 31, 2021, we had $35.8 million of total unrecognized stock-based compensation costs which we expect to recognize over a weighted-average period of 2.9 years. +Results of Operations +Comparison of the Years Ended December 31, 2021 and December 31, 2020 (dollars in thousands): +Year Ended December 31, +2021 +2020 +Increase (Decrease) +% of +% of +revenue +revenue +Amount +% +Product revenue +$ +81,062 +73 +% +$ +44,017 +52 +% +$ +37,045 +84 +% +Service and other revenue +23,629 +21 +% +24,129 +28 +% +(500) +(2) +% +Collaboration and license revenue +648 +1 +% +11,809 +14 +% +(11,161) +(95) +% +Grant revenue +5,217 +5 +% +6,422 +6 +% +(1,205) +(19) +% +Total revenue +110,556 +100 +% +86,377 +100 +% +24,179 +28 +% +Cost of goods sold: +Cost of product revenue +34,149 +31 +% +25,950 +30 +% +8,199 +32 +% +Cost of service revenue +14,679 +13 +% +11,245 +13 +% +3,434 +31 +% +Cost of collaboration and license revenue +— +— +% +1,000 +1 +% +(1,000) +(100) +% +Total costs of goods sold, services, and licenses +48,828 +44 +% +38,195 +44 +% +10,633 +28 +% +Gross profit +61,728 +56 +% +48,182 +56 +% +13,546 +28 +% +Operating expenses: +Research and development +27,978 +25 +% +20,174 +23 +% +7,804 +39 +% +Selling, general, and administrative +92,336 +84 +% +59,592 +69 +% +32,744 +55 +% +Total operating expenses +120,314 +109 +% +79,766 +92 +% +40,548 +51 +% +Loss from operations +(58,586) +(53) +% +(31,584) +(37) +% +(27,002) +(85) +% +Interest expense, net +(403) +— +% +(273) +(0) +% +(130) +(48) +% +Other income (expense), net +1,265 +1 +% +(49) +— +% +1,314 +2,682 +% +Loss before income taxes +(57,724) +(52) +% +(31,906) +(37) +% +(25,818) +(81) +% +Income tax benefit +36 +— +% +376 +— +% +(340) +(90) +% +Net loss +$ +(57,688) +(52) +% +$ +(31,530) +(37) +% +$ +(26,158) +(83) +% +78 +Table of Contents +Revenue +Revenue increased by $24.2 million, or 28%, to $110.6 million for the year ended December 31, 2021 as compared to $86.4 million for the year ended December 31, 2020. Product revenue increased 84% to $81.1 million for the year ended December 31, 2021, as compared to $44.0 million in the same period in 2020. P roduct revenue consisted of sales of instruments totaling $26.0 million and sales of consumables and other products totaling $55.1 million for the year ended December 31, 2021. Product revenue consisted of sales of instruments totaling $16.6 million and sales of consumables and other products of $27.4 million for the year ended December 31, 2020. The increase in product revenue was primarily due to the increased ability to install instruments as customer sites reopened from COVID-19 related shutdowns that impacted results in the same period in 2020. In addition, as the installed base of instruments increased year over year, consumable sales increased. The decrease in service and other revenue of $0.5 million was primarily due to our open headcount within our services personnel. We had $0.6 million and $11.8 million in collaboration and license revenue during the year ended December 31, 2021 and 2020, respectively, related to licensing technology and intellectual property. We had $11.2 million in collaboration and license revenue during the year ended December 31, 2020, primarily related to entering into the Abbott License Agreement. Grant revenue of $5.2 million and $6.4 million consisted of revenue related to WP2 recognized during the year ended December 31, 2021, and revenue related to WP2 and WP1 recognized during the year ended December 31, 2020, respectively. +Cost of Goods Sold, Services, and Licenses +Cost of product revenue increased by $8.2 million, or 32%, to $34.1 million for the year ended December 31, 2021 as compared to $26.0 million for the year ended December 31, 2020. The increase was primarily due to our increase in volume of our product revenue. Cost of service revenue increased by $3.4 million, or 31%, to $14.7 million for the year ended December 31, 2021, as compared to $11.2 million for the year ended December 31, 2020, primarily due to increased personnel costs from the build out of our field service organization. Cost of collaboration and license revenue of $1.0 million for the year ended December 31, 2020 resulted from the licensing of certain technology and intellectual property to Abbott. Overall cost of goods sold and services as a percentage of revenue was consistent at 44% of total revenue for the years ended December 31, 2021 and 2020, respectively. +Research and Development Expense +Research and development expense increased by $7.8 million, or 39%, to $28.0 million for the year ended December 31, 2021, as compared to $20.2 million for the year ended December 31, 2020. The increase was primarily due to increased headcount as we build our organization to support growth and invest in process improvements. +Selling, General and Administrative Expense +Selling, general and administrative expense increased by $32.7 million, or 55%, to $92.3 million for the year ended December 31, 2021 as compared to $59.6 million for the year ended December 31, 2020. The increase was primarily due to higher personnel costs from increased headcount and other spending increases in various departments as we build out our organization to support growth and invest in process improvements. +Interest Expense +Interest expense, net decreased by $0.1 million for the year ended December 31, 2021 as compared to the same period in 2020, primarily due to the unfavorable impact of interest rates on our cash equivalents for the year ended December 31, 2021, as compared to the year ended December 31, 2020. +Other Income (Expense), Net +Other income (expense), net increased by $1.3 million for the year ended December 31, 2021 as compared to the same period in 2020, primarily due to other income of $2.1 million related to an employee retention tax credit established under the Coronavirus Aid, Relief and Economic Securities Act, offset by other expense due to unfavorable foreign currency exchange rates during the year ended December 31, 2021. +79 +Table of Contents +Income Tax Benefit +Income tax benefit was less than $0.1 million for the year ended December 31, 2021, as compared to $0.4 million tax for the same period in 2020. The change is primarily due to the decrease in the tax benefit recorded on the operating results of our foreign subsidiaries. +Liquidity and Capital Resources +Since our inception, we have incurred annual net losses and negative cash flows from operations. We used $47.9 million, $23.4 million and $26.2 million of cash for our operating activities for the years ended December 31, 2021, 2020, and 2019, respectively. The significant increase in our cash used for operating activities for the year ended December 31, 2021, as compared to December 31, 2020, was principally driven by our increased net loss for the 2021 period. As of December 31, 2021, we had an accumulated deficit of $305.5 million. As of December 2021, we had cash and cash equivalents of $396.5 million. +Sources of Liquidity +To date, we have financed our operations principally through equity offerings, borrowings from credit facilities and revenue from our commercial operations. +Equity Offerings +On March 19, 2019, we entered into a Sales Agreement for an “at-the-market offering” arrangement with Cowen and Company, LLC (Cowen), which allowed us to issue and sell shares of common stock pursuant to a shelf registration statement for total gross sales proceeds of up to $50.0 million from time to time through Cowen, acting as our agent. During the year ended December 31, 2019, we sold an aggregate of 2,186,163 shares of common stock pursuant to this agreement resulting in $49.7 million in gross proceeds and $48.0 million in net proceeds. On August 6, 2020, we delivered written notice to Cowen to terminate the Sales Agreement, which termination the parties agreed to make immediately effective. +On August 8, 2019, we entered into an underwriting agreement with J.P. Morgan Securities LLC and SVB Leerink LLC, or Leerink, as representatives of the several underwriters, relating to an underwritten public offering of 2,732,673 shares of common stock at a public offering price of $25.25 per share. We received $69.0 million in gross proceeds and $64.5 million in net proceeds. +On August 6, 2020, we entered into an underwriting agreement with Leerink and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of 3,048,774 shares of common stock at a public offering price of $32.00 per share. We received $97.6 million in gross proceeds and $91.4 million in net proceeds. +On February 3, 2021, we entered into an underwriting agreement with Goldman Sachs & Co. LLC, Leerink and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of 4,107,142 shares of common stock at a public offering price of $70.00 per share. We received $287.5 million in gross proceeds and approximately $269.7 million in net proceeds. +Loan Facility with Hercules +On April 14, 2014, we executed a loan agreement with Hercules Capital, Inc. (Hercules), as subsequently amended most recently in April 2019. The interest rate on this term loan was variable based on a calculation of 8% plus the prime rate less 5.25%, with a minimum interest rate of 8%. Interest was to be paid monthly beginning the month following the borrowing date. Under the amended agreement, we were required to pay the loan principal in four equal installments starting July 1, 2021, with the final principal payment and end of term charge to be made on October 1, 2021. On October 1, 2021, we made the final principal payment, including end of term fees, of $2.0 million related to the loan agreement. As of December 31, 2021, there were no additional amounts available to borrow under the loan facility. +80 +Table of Contents +Uman Acquisition +In August 2019, we completed the acquisition of Uman, in which we paid $15.7 million in cash to the shareholders of Uman. We funded this payment through our existing cash balances. In addition, we issued $5.5 million in stock in connection with the purchase of Uman. The acquisition closed with respect to 95% of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5% of the outstanding shares of capital stock of Uman on August 1, 2019. +Cash Flows +The following table presents our cash flows for each period presented (in thousands): +Year Ended December 31, +2021 +2020 +Net cash used in operating activities +$ +(47,907) +$ +(23,365) +Net cash used in investing activities +(6,338) +(626) +Net cash provided by financing activities +270,795 +96,236 +Net increase in cash and cash equivalents +$ +216,550 +$ +72,245 +Net Cash Used in Operating Activities +We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to support the growth of our business. We have historically experienced negative cash flows from operating activities as we have developed our technology, expanded our business and built our infrastructure and this may continue in the future. +Net cash used in operating activities was $47.9 million during the year ended December 31, 2021. Net cash used in operating activities primarily consisted of net loss of $57.7 million offset by non-cash charges of $16.0 million of stock-based compensation expense and $4.9 million of depreciation and amortization expense. Cash used as a result of changes in operating assets and liabilities of $12.2 million was primarily due to an increase in inventory of $8.1 million and an increase in accounts receivable of $6.9 million, offset by an increase in accounts payable, accrued compensation and benefits and other accrued expenses of $3.5 million, all driven by growth and our investments in process improvements. +Net cash used in operating activities was $23.4 million during the year ended December 31, 2020. Net cash used in operating activities primarily consisted of net loss of $31.5 million offset by non-cash charges of $10.1 million of stock-based compensation expense and $4.3 million of depreciation and amortization expense. Cash used as a result of changes in operating assets and liabilities of $8.0 million was primarily due to an increase in an increase in accounts receivable of $6.7 million, an increase in inventory of $5.1 million, and an increase in prepaid expenses and other assets of $3.9 million, offset by a decrease in accrued compensation and benefits and other accrued expenses of $6.2 million. +Net Cash Used in Investing Activities +Historically, our primary investing activities have consisted of capital expenditures for the purchase of capital equipment to support our expanding infrastructure and work force. We expect to continue to incur additional costs for capital expenditures related to these efforts in future periods. +We used $6.3 million of cash during the year ended December 31, 2021, consisting of $13.6 million for the purchase of property and equipment, offset by $7.3 million in grant proceeds related to assets acquired under WP2. +We used $0.6 million of cash in investing activities during the year ended December 31, 2020, consisting of $3.9 million in additions to property and equipment, offset by $3.3 million in grant proceeds related to assets acquired under WP2. +81 +Table of Contents +Net Cash Provided by Financing Activities +Historically, we have financed our operations principally through private placements of our convertible preferred stock and borrowings from credit facilities, the sale of shares of our common stock in our IPO or other offerings and revenues from our commercial operations. +Financing activities provided $270.8 million of cash during the year ended December 31, 2021, primarily from $269.7 million in net proceeds from our underwritten public offering during the first quarter of 2021. +Financing activities provided $96.2 million of cash during the year ended December 31, 2020, primarily from net proceeds of our underwritten public offering during the third quarter of 2020. +Capital Resources +We have not achieved profitability on an annual basis since our inception, and we expect to continue to incur net losses in the future. We also expect that our operating expenses will increase as we continue to increase our marketing efforts to drive adoption of our commercial products. Our liquidity requirements have historically consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, working capital, debt service and general corporate expenses. +We believe cash generated from commercial sales along with our current cash and cash equivalents will be sufficient to meet our anticipated operating cash requirements for at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our sales and marketing activities and grow our customer base. Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in Item 1A, “Risk Factors” of this Annual Report on Form 10-K. We have based our estimates on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including: +● market acceptance of our products and services; +● the cost and timing of establishing additional sales, marketing and distribution capabilities; +● the cost of our research and development activities; +● our ability to enter into collaborations in the future, and the success of any such collaborations; +● the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +● the effect of competing technological and market developments. +We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. +If the conditions for raising capital are favorable, we may seek to finance future cash needs through public or private equity or debt offerings or other financings. On November 6, 2020, we filed an automatically effective shelf registration statement with the SEC. Each issuance of securities under the shelf registration statement will require the filing of a prospectus supplement identifying the amount and terms of securities to be issued. The registration statement does not limit the amount of securities that may be issued thereunder. Our ability to issue securities is subject to market +82 +Table of Contents +conditions and other factors. This registration statement will expire on November 6, 2023, three years after its date of effectiveness. +Contractual Obligations, Commitments and Contingencies +Lease Obligations +We currently lease approximately 91,600 square feet of office, laboratory, and manufacturing space at our headquarters in Billerica, Massachusetts. In addition, in the first quarter of 2022, we executed a lease for 85,800 square feet of office and laboratory space in Bedford, Massachusetts. The premises covered by these leases serves as our principal office and laboratory space effective the second quarter of 2019. The initial term of the Billerica lease is eleven years and five months beginning on April 1, 2019, and we have the option to extend the lease for two additional five-year periods. The initial term of the Bedford lease is eight years and nine months beginning on the earlier of our occupancy, or May 1, 2022. +In addition, our subsidiary, Uman, leases a total of approximately 6,500 square feet of office, laboratory, manufacturing and storage space in Umeå, Sweden. These leases expire at various dates through February 28, 2023. +The following table summarizes our operating lease obligations (in thousands): +As of December 31, 2021 +2022 +$ +3,466 +2023 +3,515 +2024 +3,557 +2025 +3,655 +2026 +3,765 +thereafter +14,782 +Total +$ +32,740 +Backlog +We generally expect to ship all instrument and consumable orders received in a given period with the exception of orders received near the end of a fiscal quarter; and as a result, our backlog at the end of any period is typically insignificant. +83 +Table of Contents +Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +We are exposed to financial market risk, including foreign currency exchange risk and interest rate risk. +Concentration of Revenue and Credit Risk +Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Cash equivalents consist primarily of cash deposits and short-term, highly liquid investments that are readily convertible into cash, with original maturities of three months or less. Cash equivalents consist primarily of bank deposits and certain investments, such as government securities, with maturities less than 90 days at the date of purchase. Deposits of cash held outside the United States totaled approximately $3.4 million and $1.1 million at December 31, 2021 and 2020, respectively. +We grant credit to customers in the ordinary course of business. Credit evaluations are performed on an ongoing basis to reduce credit risk, and no collateral is required from our customers. An allowance for credit loss is provided for those accounts receivable considered to be uncollectible based upon historical experience and credit evaluation. As of December 31, 2021, one company represented 18% of our gross accounts receivable. As of December 31, 2020, one company represented 19% of our gross accounts receivable. Due to the nature of our quarterly revenue streams derived from royalty revenue, it is not unusual for our accounts receivable balances to include a few customers with large balances. Historically, we have not recorded material losses due to customers’ nonpayment. For the years ended December 31, 2021 and 2019, no customer individually accounted for more than 10% of our total revenue. For the year ended December 31, 2020, one company accounted for 13% of our total revenue. For the quarter ended December 31, 2021, one company accounted for 14% of our total revenue. +Foreign Currency Exchange Risk +As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Historically, the substantial majority of our revenue has been denominated in U.S. dollars. For the years ended December 31, 2021, 2020, and 2019, approximately 36%, 31% and 41%, respectively, of our total revenue was generated from customers located outside of North America. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Canada, Europe, Japan and China. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. Fluctuations in currency exchange rates could harm our business in the future. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables as of December 31, 2021 would not have been material. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables as of December 31, 2022 would not be material. +To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future. +Interest Rate Risk +We had cash and cash equivalents of $396.5 million as of December 31, 2021. These amounts were held primarily in cash on deposit with banks. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had decreased by 10% during the periods presented, our interest income would not have been materially affected. If overall interest rates decrease by 10% during the year ending December 31, 2022, our interest income would not be materially affected. We do not hold or issue financial instruments for trading purposes. +84 +Table of Contents +Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K beginning on page F-1. +Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +Item 9A. CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2021. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2021. +Management’s Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the framework set forth in Internal Control-Integrated Framework , our management concluded that our internal control over financial reporting was effective at the reasonable assurance level as of December 31, 2021. +The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal controls over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. +Changes in Internal Control over Financial Reporting +An evaluation was also performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of any change in our internal controls over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to affect, our internal controls over financial reporting. +There has been no change in our internal controls over financial reporting during the fiscal quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. +85 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on Internal Control over Financial Reporting +We have audited Quanterix Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Quanterix Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Quanterix Corporation as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, cash flows and stockholders’ equity for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(2) and our report dated March 1, 2022 expressed an unqualified opinion thereon. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Ernst & Young LLP +Boston, Massachusetts +March 1, 2022 +Item 9B. OTHER INFORMATION +Not applicable. +86 +Table of Contents +Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +PART III +Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by this Item 10 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 11. EXECUTIVE COMPENSATION +The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. +PART IV +Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(1) Financial Statements +The consolidated financial statements are included beginning on page F-1 attached hereto and are filed as part of this Annual Report on Form 10-K. +87 +Table of Contents +(2) Financial Statement Schedules +Schedule II – Valuations and Qualifying Accounts +Balance at +Charged +Balance at +Description +Beginning of Period +(in thousands) +to Costs and Expenses +(in thousands) +Deductions +(in thousands) +End of Period +(in thousands) +Allowance for credit losses: +Year ended December 31, 2021 +$ +370 +$ +213 +$ +(164) +$ +419 +Year ended December 31, 2020 +$ +162 +$ +493 +$ +(285) +$ +370 +Year ended December 31, 2019 +$ +36 +$ +160 +$ +(34) +$ +162 +(3) Exhibits +The following is a list of exhibits filed as part of this Annual Report on Form 10-K: +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +3.1 +Amended and Restated Certificate of Incorporation +8-K +12/15/2017 +001-38319 +3.2 +Restated Bylaws +8-K +12/15/2017 +001-38319 +4.1 +Description of Securities +10-K +3/13/2020 +001-38319 +4.2 +Form of Common Stock Certificate +S-1 +11/9/2017 +333-221475 +4.3 +Fourth Amended and Restated Registration Rights Agreement, dated as of June 2, 2017, by and among the Registrant and the investors named therein +S-1 +11/9/2017 +333-221475 +10.1.1+ +2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.1.2+ +Form of Incentive Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.1.3+ +Form of Non-qualified Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.1.4+ +Form of Restricted Stock Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.2.1+ +2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +88 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.2.2+ +Form of Stock Option Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +10.2.3+ +Form of Restricted Stock Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +10.2.4+ +Form of Restricted Stock Unit Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +10.3+ +Employment Agreement, dated January 1, 2015, by and between the Registrant and E. Kevin Hrusovsky +S-1 +11/9/2017 +333-221475 +10.4+ +Employment Agreement, dated June 22, 2021, between the Registrant and Michael Doyle +8-K +6/28/2021 +001-38319 +10.5+ +Employment Agreement, dated May 10, 2021, between the Registrant and Dr. Masoud Toloue +8-K +5/11/2021 +001-38319 +10.6+ +Letter Agreement, dated May 31, 2019, by and between the Registrant and John Fry +10-Q +8/6/2019 +001-38319 +10.7+ +Letter Agreement, dated August 8, 2014, by and between the Registrant and Mark T. Roskey, Ph.D. +S-1 +11/9/2017 +333-221475 +10.8+ +Letter Agreement, effective as February 5, 2018, by and between the Registrant and Dawn Mattoon +10-Q +5/15/2018 +001-38319 +10.9.1* +Exclusive License Agreement, dated June 18, 2007, between the Registrant and Tufts University, as amended on April 29, 2013 +S-1 +11/9/2017 +333-221475 +10.9.2* +Second Amendment, dated August 22, 2017, to the Exclusive License Agreement between the Registrant and Tufts University +S-1 +11/9/2017 +333-221475 +89 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.9.3 +@ +Third Amendment, dated September 25, 2020, to the Exclusive License Agreement between the Registrant and Tufts University +10-Q +11/6/2020 +001-38319 +10.10.1* +Supply and Manufacturing Agreement, dated September 14, 2011, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/2017 +333-221475 +10.10.2 +First Amendment to Supply and Manufacturing Agreement, dated October 17, 2013, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/2017 +333-221475 +10.11.1* +STRATEC Development Services and Equity Participation Agreement, dated August 15, 2011, between the Registrant and STRATEC Biomedical Systems AG +S-1 +11/9/2017 +333-221475 +10.11.2* +First Amendment to STRATEC Development Services and Equity Participation Agreement and Second Amendment to Supply and Manufacturing Agreement, dated November 18, 2016, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/2017 +333-221475 +10.12* +Manufacturing Services Agreement, dated November 23, 2016, between the Registrant and Paramit Corporation +S-1 +11/9/2017 +333-221475 +10.13+ +Form of Indemnification Agreement +S-1/A +11/27/2017 +333-221475 +10.14 +Lease Agreement by and between SSI 900 Middlesex MA LP and the Registrant, dated October 2, 2018. +8-K +10/5/2018 +001-38319 +10.15 +Lease Agreement by and between the Registrant and XChange Owner LLC, dated January 28, 2022 . +8-K +1/31/2022 +001-38319 +90 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.16 +@ +Non-Exclusive License Agreement, dated September 29, 2020, by and between Abbott Laboratories and the Registrant. +8-K +10/5/2020 +001-38319 +10.17+ +Separation Agreement dated November 11, 2021 by and between the Registrant and William Geist. +8-K +11/12/2021 +001-38319 +10.18+ +Amended and Restated 2018 Non-Employee Director Compensation Policy +X +21.1 +Subsidiaries of Registrant +10-K +3/5/2021 +001-38319 +23.1 +Consent of Ernst & Young LLP +X +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +32.1 +Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +X +101.INS +Inline XBRL Instance Document. +X +101.SCH +Inline XBRL Taxonomy Extension Schema Document. +X +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document. +X +101.DEF +Inline XBRL Taxonomy Extension Definition. +X +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document. +X +101.PRE +Inline XBRL Taxonomy Presentation Linkbase Document. +X +104 +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +91 +Table of Contents ++ +Management contract or compensatory plan or arrangement. +* +Confidential treatment has been granted for portions of this Exhibit. Redacted portions have been filed separately with the SEC. +@ +Certain confidential portions of this exhibit have been omitted and replaced with “[***]”. Such identified information has been excluded from this exhibit because it is (i) not material and (ii) would likely cause competitive harm to the company if disclosed. +Item 16. FORM 10-K SUMMARY +Not applicable. +92 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +QUANTERIX CORPORATION +Date: March 1, 2022 +By: +/s/ E. KEVIN HRUSOVSKY +E. Kevin Hrusovsky +Chairman and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ E. KEVIN HRUSOVSKY +Chairman and Chief Executive Officer and Director (principal executive officer) +March 1, 2022 +E. Kevin Hrusovsky +/s/ MICHAEL A. DOYLE +Chief Financial Officer +March 1, 2022 +Michael A. Doyle +(principal financial officer and principal accounting officer) +/s/ KEITH L. CRANDELL +Director +March 1, 2022 +Keith L. Crandell +/s/ SARAH E. HLAVINKA +Director +March 1, 2022 +Sarah E. Hlavinka +/s/ MARTIN D. MADAUS, PH.D. +Director +March 1, 2022 +Martin D. Madaus, Ph. D. +/s/ PAUL M. MEISTER +Director +March 1, 2022 +Paul M. Meister +/s/ LAURIE J. OLSON +Director +March 1, 2022 +Laurie J. Olson +/s/ DAVID R. WALT, PH.D. +Director +March 1, 2022 +David R. Walt, Ph.D. +93 +Table of Contents +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +QUANTERIX CORPORATION +Years ended December 31, 2021, 2020, and 2019 +Page +Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) +F-2 +Consolidated Balance Sheets +F-4 +Consolidated Statements of Operations +F-5 +Consolidated Statements of Comprehensive Loss +F-6 +Consolidated Statements of Cash Flows +F-7 +Consolidated Statements of Stockholders’ Equity +F-8 +Notes to Consolidated Financial Statements +F-9 +F-1 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of Quanterix Corporation (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2022 expressed an unqualified opinion thereon. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. +Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. +Excess Inventory +Description of the Matter +As discussed in Note 2 to the consolidated financial statements, the Company analyzes its inventory levels at each reporting date to identify inventory that is in excess of expected future demand. In the event that the Company identifies excess inventory, the Company recognizes a reduction in the carrying value of inventory. +Auditing management’s valuation of inventory involved judgement in evaluating management’s analysis and significant assumptions related to projections of future demand which is dependent on market factors. +F-2 +Table of Contents +How We Addressed the Matter in Our Audit +To audit the Company’s valuation of inventory, we performed audit procedures that included, among others, performing inquiries of management and testing the completeness and accuracy of the underlying data used in the estimation of future demand. To evaluate the Company’s estimate of future demand, we independently assessed the sensitivity and impact of reasonably possible changes in forecasted demand and the impact on the Company’s calculation of excess inventory. We also evaluated management's ability to accurately forecast demand by comparing actual demand to management's prior estimates. +/s/ Ernst & Young LLP +We have served as the Company’s auditor since 2008. +Boston, Massachusetts +March 1, 2022 +F-3 +Table of Contents +Quanterix Corporation +Consolidated Balance Sheets +(amounts in thousands, except share and per share data) +December 31, 2021 +December 31, 2020 +Assets +Current assets: +Cash and cash equivalents +$ +396,465 +$ +181,584 +Accounts receivable (less allowance for credit losses of $ 419 and $ 370 as of December 31, 2021 and December 31, 2020, respectively; including $ 200 and $ 172 due from related parties as of December 31, 2021 and December 31, 2020, respectively) +23,786 +17,184 +Inventory +22,190 +14,856 +Prepaid expenses and other current assets +6,514 +5,981 +Total current assets +448,955 +219,605 +Restricted cash +2,577 +1,000 +Property and equipment, net +17,960 +13,912 +Intangible assets, net +10,534 +13,716 +Goodwill +9,632 +10,460 +Right-of-use assets +11,491 +11,995 +Other non-current assets +378 +357 +Total assets +$ +501,527 +$ +271,045 +Liabilities and stockholders’ equity +Current liabilities: +Accounts payable (including $ 42 and $ 14 to related parties as of December 31, 2021 and December 31, 2020, respectively) +$ +9,209 +$ +6,799 +Accrued compensation and benefits +13,252 +10,777 +Other accrued expenses (including $ 0 and $ 1,377 to related parties as of December 31, 2021 and December 31, 2020, respectively) +6,486 +4,845 +Deferred revenue (including $ 54 and $ 90 with related parties as of December 31, 2021 and December 31, 2020, respectively) +6,361 +5,421 +Current portion of long term debt +— +7,673 +Short term lease liabilities +1,428 +1,234 +Other current liabilities +241 +3,054 +Total current liabilities +36,977 +39,803 +Deferred revenue, net of current portion +1,099 +577 +Long term lease liabilities +20,464 +21,891 +Deferred tax liabilities +2,035 +2,649 +Total liabilities +60,575 +64,920 +Commitments and contingencies (Note 9) +Stockholders’ equity: +Common stock, $ 0.001 par value: +Authorized— 120,000,000 shares as of December 31, 2021 and December 31, 2020; issued and outstanding — 36,768,035 and 31,796,544 shares as of December 31, 2021 and December 31, 2020, respectively +37 +32 +Additional paid-in capital +745,936 +451,433 +Accumulated other comprehensive income +441 +2,434 +Accumulated deficit +( 305,462 ) +( 247,774 ) +Total stockholders’ equity +440,952 +206,125 +Total liabilities and stockholders’ equity +$ +501,527 +$ +271,045 +See accompanying notes. +F-4 +Table of Contents +Quanterix Corporation +Consolidated Statements of Operations +(amounts in thousands, except share and per share data) +Years Ended +December 31, +2021 +2020 +2019 +Product revenue (including related party activity of $ 505 , $ 580 , and $ 720 for the years ended December 31, 2021, 2020, and 2019, respectively) +$ +81,062 +$ +44,017 +$ +40,491 +Service and other revenue (including related party activity of $ 114 , $ 202 , and $ 118 for the years ended December 31, 2021, 2020, and 2019, respectively) +23,629 +24,129 +16,059 +Collaboration revenue +648 +11,809 +184 +Grant revenue +5,217 +6,422 +— +Total revenue +110,556 +86,377 +56,734 +Costs of goods sold: +Cost of product revenue (including related party activity of $ 1,936 , $ 205 , and $ 234 for the years ended December 31, 2021, 2020, and 2019, respectively) +34,149 +25,950 +20,900 +Cost of service and other revenue (including related party activity of $ 74 , $ 52 , and $ 0 for the years ended December 31, 2021, 2020, and 2019, respectively) +14,679 +11,245 +8,998 +Cost of collaboration and license revenue (including related party activity of $ 0 , $ 1,000 , and $ 0 for the years ended December 31, 2021, 2020, and 2019, respectively) +— +1,000 +— +Total costs of goods sold, services, and licenses +48,828 +38,195 +29,898 +Gross profit +61,728 +48,182 +26,836 +Operating expenses: +Research and development (including related party activity of $ 565 , $ 235 , and $ 152 for the years ended December 31, 2021, 2020, and 2019, respectively) +27,978 +20,174 +16,190 +Selling, general and administrative (including related party activity of $ 89 , $ 37 , and $ 180 for the years ended December 31, 2021, 2020, and 2019, respectively) +92,336 +59,592 +52,246 +Total operating expenses +120,314 +79,766 +68,436 +Loss from operations +( 58,586 ) +( 31,584 ) +( 41,600 ) +Interest (expense) income, net +( 403 ) +( 273 ) +627 +Other income (expense), net +1,265 +( 49 ) +( 10 ) +Loss before income taxes +( 57,724 ) +( 31,906 ) +( 40,983 ) +Income tax benefit +36 +376 +187 +Net loss +$ +( 57,688 ) +$ +( 31,530 ) +$ +( 40,796 ) +Net loss per share, basic and diluted +$ +( 1.60 ) +$ +( 1.07 ) +$ +( 1.63 ) +Weighted-average common shares outstanding, basic and diluted +35,997,473 +29,589,132 +25,090,708 +See accompanying notes. +F-5 +Table of Contents +Quanterix Corporation +Consolidated Statements of Comprehensive Loss +(amounts in thousands) +Years Ended December 31, +2021 +2020 +2019 +Net loss +$ +( 57,688 ) +$ +( 31,530 ) +$ +( 40,796 ) +Other comprehensive (loss) income: +Cumulative translation adjustment +( 1,993 ) +2,587 +( 153 ) +Total other comprehensive (loss) income +( 1,993 ) +2,587 +( 153 ) +Comprehensive loss +$ +( 59,681 ) +$ +( 28,943 ) +$ +( 40,949 ) +See accompanying notes. +F-6 +Table of Contents +Quanterix Corporation +Consolidated Statements of C as h Flows +(amounts in thousands) +Year Ended December 31, +2021 +2020 +2019 +Operating activities +Net loss +$ +( 57,688 ) +$ +( 31,530 ) +$ +( 40,796 ) +Adjustments to reconcile net loss to net cash used in operating activities: +Depreciation and amortization expense +4,851 +4,312 +3,009 +Inventory step-up amortization +275 +722 +611 +Credit loss expense on accounts receivable +213 +493 +160 +Reduction in the carrying amounts of right-of-use assets +499 +245 +— +Stock-based compensation expense +15,975 +10,099 +6,388 +Non-cash interest expense +65 +86 +89 +Loss on disposal of fixed assets +89 +171 +140 +Changes in operating assets and liabilities: +Accounts receivable +( 6,853 ) +( 6,733 ) +( 3,525 ) +Prepaid expenses and other assets +( 393 ) +( 3,927 ) +289 +Inventory +( 8,090 ) +( 5,119 ) +( 3,447 ) +Other non-current assets +( 2 ) +198 +( 21 ) +Accounts payable +2,414 +649 +621 +Accrued compensation and benefits, other accrued expenses and other current liabilities +1,061 +6,219 +822 +Contract acquisition costs +( 192 ) +87 +336 +Operating lease liabilities +( 1,230 ) +316 +— +Other non-current liabilities +( 363 ) +( 488 ) +9,845 +Deferred revenue +1,462 +835 +( 708 ) +Net cash used in operating activities +( 47,907 ) +( 23,365 ) +( 26,187 ) +Investing activities +Purchases of property and equipment +( 13,616 ) +( 3,930 ) +( 10,847 ) +Acquisitions, net of cash acquired +— +— +( 14,529 ) +Proceeds from RADx grant on assets purchased +7,278 +3,304 +— +Net cash used in investing activities +( 6,338 ) +( 626 ) +( 25,376 ) +Financing activities +— +— +Proceeds from stock options exercised +7,750 +4,019 +2,820 +Sale of common stock in at-the-market offering, net +— +— +48,019 +Sale of common stock in underwritten public offering, net +269,718 +91,404 +64,529 +Proceeds from ESPP purchase +1,065 +888 +879 +Payments on notes payable +( 7,738 ) +( 75 ) +( 50 ) +Net cash provided by financing activities +270,795 +96,236 +116,197 +Net increase in cash and cash equivalents +216,550 +72,245 +64,634 +Effect of foreign currency exchange rate on cash +( 92 ) +158 +118 +Cash, restricted cash, and cash equivalents at beginning of period +182,584 +110,181 +45,429 +Cash, restricted cash, and cash equivalents at end of period +$ +399,042 +$ +182,584 +$ +110,181 +Supplemental cash flow information +Cash paid for interest +$ +389 +$ +625 +$ +656 +Purchases of property and equipment included in accounts payable and other accrued expenses +$ +229 +$ +1,029 +$ +164 +Purchase of property and equipment included in other non-current liabilities +$ +— +$ +— +$ +7,572 +Common stock issued in connection with the acquisition of UmanDiagnostics AB +$ +— +$ +— +$ +5,468 +Reconciliation of cash, cash equivalents, and restricted cash: +Cash and cash equivalents +$ +396,465 +$ +181,584 +$ +109,155 +Restricted cash +$ +2,577 +$ +1,000 +$ +1,026 +Total cash, cash equivalents, and restricted cash +$ +399,042 +$ +182,584 +$ +110,181 +See accompanying notes. +F-7 +Table of Contents +Quanterix Corporation +Consolidated Statements of Stockholders’ Equity +Accumulated +Common +Common +Additional +other +Total +stock +stock +paid-in +comprehensive +Accumulated +stockholders’ +shares +value +capital +income (loss) +deficit +equity +Balance at December 31, 2018 +22,369,036 +$ +22 +$ +216,931 +$ +— +$ +( 175,888 ) +$ +41,065 +Cumulative effect of adoption of Accounting Standards Codification Topic 606 +— +— +— +— +440 +440 +Exercise of common stock warrants +45,690 +— +— +— +— +— +Exercise of common stock options and vesting of restricted stock +550,734 +— +2,820 +— +— +2,820 +Sale of common stock in "at-the-market" offering, net +2,186,163 +2 +48,017 +— +— +48,019 +Sale of common stock in underwritten public offering, net +2,732,673 +3 +64,526 +— +— +64,529 +Issuance of shares for the acquisition of UmanDiagnostics AB +191,152 +1 +5,467 +— +— +5,468 +Stock-based compensation expense +— +— +6,388 +— +— +6,388 +Employee stock purchase plan +36,753 +— +878 +— +— +878 +Accumulated other comprehensive income +— +— +— +( 153 ) +— +( 153 ) +Net loss +— +— +— +— +( 40,796 ) +( 40,796 ) +Balance at December 31, 2019 +28,112,201 +$ +28 +$ +345,027 +$ +( 153 ) +$ +( 216,244 ) +$ +128,658 +Exercise of common stock options and vesting of restricted stock +589,723 +1 +4,018 +— +— +4,019 +Sale of common stock in underwritten public offering, net +3,048,774 +3 +91,401 +— +— +91,404 +ESPP stock purchase +45,846 +— +888 +— +— +888 +Stock-based compensation expense +— +— +10,099 +— +— +10,099 +Cumulative translation adjustment +— +— +— +2,587 +— +2,587 +Net loss +— +— +— +— +( 31,530 ) +( 31,530 ) +Balance at December 31, 2020 +31,796,544 +$ +32 +$ +451,433 +$ +2,434 +$ +( 247,774 ) +$ +206,125 +Exercise of common stock warrants +7,347 +— +— +— +— +— +Exercise of common stock options and vesting of restricted stock +823,796 +1 +7,749 +— +— +7,750 +Issuance of common stock +4,169 +Sale of common stock in underwritten public offering, net +4,107,142 +4 +269,714 +— +— +269,718 +ESPP stock purchase +29,037 +— +1,065 +— +— +1,065 +Stock-based compensation expense +— +— +15,975 +— +— +15,975 +Cumulative translation adjustment +— +— +— +( 1,993 ) +— +( 1,993 ) +Net loss +— +— +— +— +( 57,688 ) +( 57,688 ) +Balance at December 31, 2021 +36,768,035 +$ +37 +$ +745,936 +$ +441 +$ +( 305,462 ) +$ +440,952 +See accompanying notes. +F-8 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements +1. Organization and operations +Quanterix Corporation (Nasdaq: QTRX) (the Company) is a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. The Company’s platforms are based on its proprietary digital “Simoa” detection technology. The Company’s Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide the Company’s customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. The Company is currently focusing on protein detection, but the Company’s Simoa platforms have also demonstrated applicability across other testing applications, including detection of nucleic acids and small molecules. +The Company launched its first immunoassay platform, the Simoa HD-1, in 2014. The HD-1 is a fully automated immunoassay bead-based platform with multiplexing and custom assay capability, and related assay test kits and consumable materials. The Company launched a second bead-based immunoassay platform (SR-X) in the fourth quarter of 2017 with a more compact footprint than the Simoa HD-1 and less automation designed for lower volume requirements while still allowing multiplexing and custom assay capability. The Company initiated an early-access program for its third instrument (SP-X) on the new Simoa planar array platform in January 2019, with the full commercial launch commencing in April 2019. In July 2019, the Company launched the Simoa HD-X, an upgraded version of the Simoa HD-1 which replaces the HD-1. The HD-X has been designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The Company began shipping and installing HD-X instruments at customer locations in the third quarter of 2019. The Company also performs research services on behalf of customers to apply the Simoa technology to specific customer needs. The Company's customers are primarily in the research use only market, which includes academic and governmental research institutions, the research and development laboratories of pharmaceutical manufacturers, contract research organizations, and specialty research laboratories. +The Company acquired UmanDiagnostics AB (Uman), a Swedish company located in Umeå, Sweden, in August 2019. The acquisition closed with respect to 95 % of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5 % of the outstanding shares of capital stock of Uman on August 1, 2019. Uman supplies neurofilament light (Nf-L) antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. With the acquisition of Uman, the Company has secured a long-term source of supply for a critical technology. +“At-the-market offering” +On March 19, 2019, the Company entered into a Sales Agreement (the Sales Agreement) with Cowen and Company, LLC (Cowen) with respect to an “at-the-market” offering program under which the Company could offer and sell, from time to time at its sole discretion, shares of its common stock, par value $ 0.001 per share, having an aggregate offering price of up to $ 50.0 million through Cowen as its sales agent. +On June 5, 2019, the Company issued approximately 2.2 million shares of common stock at an average stock price of $ 22.73 per share pursuant to the terms of the Sales Agreement. The “at-the-market” offering resulted in gross proceeds of $ 49.7 million. The Company incurred $ 1.7 million in issuance costs associated with the “at-the-market” offering, resulting in net proceeds to the Company of $ 48.0 million. On August 6, 2020, the Company delivered written notice to Cowen to terminate the Sales Agreement, which termination the parties agreed to make immediately effective. +F-9 +Table of Contents +Underwritten public offering +On August 8, 2019, the Company entered into an underwriting agreement with J.P. Morgan Securities LLC (J.P. Morgan) and SVB Securities LLC (f/k/a SVB Leerink) (Leerink), as representatives of the several underwriters, relating to an underwritten public offering of approximately 2.7 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 69.0 million. The Company incurred $ 4.5 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 64.5 million. +On August 6, 2020, the Company entered into an underwriting agreement with Leerink and Cowen and Company, LLC (Cowen), as representatives of the several underwriters, relating to an underwritten public offering of approximately 3.0 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 97.6 million. The Company incurred $ 6.2 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 91.4 million. +On February 3, 2021, the Company entered into an underwriting agreement with Goldman Sachs & Co. LLC (Goldman Sachs), Leerink, and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of approximately 4.1 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 287.5 million. The Company incurred $ 17.8 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 269.7 million. +Liquidity +The Company has recognized annual losses from operations since inception and has an accumulated deficit of $ 305.5 million at December 31, 2021 and the Company incurred a net loss of $ 57.7 million, $31.5 million, and $40.8 million for the years ended December 31, 2021, 2020, and 2019, respectively. At December 31, 2021, the Company had $ 396.5 million of unrestricted cash and cash equivalents. The Company expects the current cash balance will be sufficient to fund operations for a period of at least one year from the date the consolidated financial statements are issued. There can be no assurances, however, that no additional funding will be required or that additional funding will be available on terms acceptable to the Company, or at all. +2. Significant accounting policies +Principles of consolidation +The consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Quanterix Corporation, and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. +Use of estimates +The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. In making those estimates and assumptions, the Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. The Company’s significant estimates included in the preparation of the consolidated financial statements are related to revenue recognition, fair value of assets acquired and liabilities assumed in acquisitions, and valuation of inventory. Actual results could differ from those estimates. +Reclassifications +Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the current year’s presentation. +F-10 +Table of Contents +Segment information +Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker, the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company and the Company's chief operating decision-maker reviews the Company's operations and manages its business as a single operating segment. +Revenue recognition +The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that the Company expects to be entitled to receive in exchange for these goods and services, incentives, and taxes collected from customers that are subsequently remitted to governmental authorities. +The Company adopted Accounting Standards Codification (ASC) Topic 606 Revenue from Contracts with Customers (ASC 606), on January 1, 2019, using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2021, 2020, and 2019 reflect the application of ASC 606 guidance. The Company recorded an adjustment to the accumulated deficit of $ 0.4 million as of January 1, 2019 for the cumulative effect primarily related to the deferral of sales commissions. In accordance with the reporting requirements of ASC 606, the disclosure of the impact on the Company’s consolidated statement of operations, as a result of adopting the provisions of ASC 606, was as follows (in thousands): +For the Year Ended December 31, 2019 +Under ASC +Under ASC 606 +Adjustment +605 +Product revenue +$ +40,491 +$ +55 +$ +40,546 +Service revenue +16,059 +273 +16,332 +Costs of goods sold and services +29,898 +1 +29,899 +Gross profit +26,836 +327 +27,163 +Selling general and administrative expenses +52,246 +27 +52,273 +Net loss +$ +( 40,796 ) +$ +300 +$ +( 40,496 ) +Customers +The Company’s customers primarily consist of entities engaged in the life sciences research market that pursue the discovery and development of new drugs for a variety of neurologic, cardiovascular, oncologic and other protein biomarkers associated with diseases. The Company’s customer base includes several of the largest biopharmaceutical companies, academic research organizations and distributors who serve certain geographic markets. +Product revenue +The Company’s products are composed of analyzer instruments, assay kits and other consumables such as reagents. Products are sold directly to biopharmaceutical and academic research organizations or are sold through distributors in EMEA and Asia Pacific regions. The sales of instruments are generally accompanied by an initial year of implied service-type warranties and may be bundled with assays and other consumables and may also include other items such as training and installation of the instrument and/or an extended service warranty. Revenues from the sale of products are recognized at a point in time when the Company transfers control of the product to the customer, which is upon installation for instruments sold to direct customers, and based upon shipping terms for assay kits and other consumables. Revenue for instruments sold to distributors is generally recognized based upon shipping terms (either upon shipment or delivery). +F-11 +Table of Contents +Service and other revenue +Service revenues are composed of contract research services, initial implied one-year service-type warranties, extended services contracts and other services such as training. Contract research services are provided through the Company’s Accelerator Laboratory and generally consist of fixed fee contracts. Revenues from contract research services are recognized at a point in time when the Company completes and delivers its research report on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. Revenues from service-type warranties are recognized ratably over the contract service period. Revenues from other services are immaterial. +Collaboration and license revenue +The Company may enter into agreements to license the intellectual property and know-how associated with its instruments in exchange for license fees and future royalties (as described below). The license agreements provide the licensee with a right to use the intellectual property with the license fee revenues recognized at a point in time as the underlying license is considered functional intellectual property. The Company has recognized revenues from sales- or usage based royalties related to the Company’s licensing technology and intellectual property. ASC 606 provides for an exception to estimating the variable consideration for sales- and usage-based royalties related to the license of intellectual property, such that the sales- or usage-based royalty will be recognized in the period the underlying transaction occurs. The Company has recorded sales- or usage-based royalty revenue for the years ended December 31, 2021, 2020, and 2019 related to the intellectual property licensed by Uman. The Company recognizes revenues from sales- or usage based royalty revenue at the later of when the sales or usage occurs; and the satisfaction or partial satisfaction of the performance obligation to which the royalty has been allocated. +Payment terms +The Company’s payment terms vary by the type and location of customer and the products or services offered. Payment from customers is generally required in a term ranging from 30 to 45 days from date of shipment or satisfaction of the performance obligation with no discounts for early payment. Occasionally the Company provides extended payment terms or financing arrangements to customers. +F-12 +Table of Contents +Disaggregated revenue +When disaggregating revenue, the Company considered all of the economic factors that may affect its revenues. The following tables disaggregate the Company's revenue from contracts with customers based on their location by revenue type: +Year Ended +December 31, 2021 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +12,138 +$ +8,178 +$ +5,657 +$ +25,973 +Consumable and other products +34,997 +16,122 +3,970 +55,089 +Total +$ +47,135 +$ +24,300 +$ +9,627 +$ +81,062 +Service and other revenues: +Service-type warranties +$ +4,334 +$ +2,039 +$ +255 +$ +6,628 +Research services +12,101 +2,600 +124 +14,825 +Other services +1,372 +695 +109 +2,176 +Total +$ +17,807 +$ +5,334 +$ +488 +$ +23,629 +Collaboration and license revenue: +Collaboration and license revenue +$ +360 +$ +288 +$ +— +$ +648 +Total +$ +360 +$ +288 +$ +— +$ +648 +Year Ended +December 31, 2020 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +8,680 +$ +4,332 +$ +3,594 +$ +16,606 +Consumable and other products +14,305 +10,854 +2,252 +27,411 +Total +$ +22,985 +$ +15,186 +$ +5,846 +$ +44,017 +Service and other revenues: +Service-type warranties +$ +3,171 +$ +1,543 +$ +207 +$ +4,921 +Research services +15,011 +2,225 +737 +17,973 +Other services +700 +435 +100 +1,235 +Total +$ +18,882 +$ +4,203 +$ +1,044 +$ +24,129 +Collaboration and license revenue: +Collaboration and license revenue +$ +11,685 +$ +124 +$ +— +$ +11,809 +Total +$ +11,685 +$ +124 +$ +— +$ +11,809 +F-13 +Table of Contents +Year Ended +December 31, 2019 +(in thousands) +NA +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +6,250 +$ +5,243 +$ +3,393 +$ +14,886 +Consumable and other products +14,148 +9,674 +1,783 +25,605 +Total +$ +20,398 +$ +14,917 +$ +5,176 +$ +40,491 +Service and other revenues: +Service-type warranties +$ +3,139 +$ +1,323 +$ +171 +$ +4,633 +Research services +8,845 +704 +456 +10,005 +Other services +825 +565 +31 +1,421 +Total +$ +12,809 +$ +2,592 +$ +658 +$ +16,059 +Collaboration and license revenue: +Collaboration and license revenue +$ +167 +$ +17 +$ +— +$ +184 +Total +$ +167 +$ +17 +$ +— +$ +184 +The Company’s contracts with customers may include promises to transfer multiple products and services to a customer. The Company combines any performance obligations that are immaterial with one or more other performance obligations that are material to the contract. For arrangements with multiple performance obligations, the Company allocates the contract transaction price, including discounts, to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company determines standalone selling prices based on prices charged to customers in observable transactions, and uses a range of amounts to estimate standalone selling prices for each performance obligation. The Company may have more than one range of standalone selling price for certain products and services based on the pricing for different customer classes. +Variable consideration in the Company’s contracts primarily relates to (i) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (ii) certain non-fixed fee research services contracts. +The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or that are partially satisfied as of December 31, 2021 is $ 7.5 million. Of the performance obligations not yet satisfied or that are partially satisfied, $ 6.4 million is expected to be recognized as revenue in the next 12 months , with the remainder to be recognized within the 24 months thereafter. The $ 7.5 million principally consists of amounts billed for undelivered services related to initial and extended service-type warranties and research services, as well as $ 0.5 million related to undelivered licenses of intellectual property for a diagnostics company. +Changes in deferred revenue from contracts with customers were as follows (in thousands): +Year Ended December 31, 2021 +Balance at December 31, 2020 +$ +5,998 +Deferral of revenue +8,090 +Recognition of deferred revenue +( 6,628 ) +Balance at December 31, 2021 +$ +7,460 +Costs to obtain a contract +The Company’s sales commissions are generally based on revenues of the Company. The Company has determined that certain commissions paid under its sales incentive programs meet the requirements to be capitalized as they are incremental and would not have occurred absent a customer contract. The changes in the balance of costs to obtain a contract are as follows (in thousands): +F-14 +Table of Contents +Year Ended December 31, 2021 +Balance at December 31, 2020 +$ +248 +Deferral of costs to obtain a contract +905 +Recognition of costs to obtain a contract +( 713 ) +Balance at December 31, 2021 +$ +440 +The Company has classified the balance of capitalized costs to obtain a contract as a component of prepaid expenses and other current assets as of December 31, 2021 and classifies the expense as a component of cost of goods sold and selling, general and administrative expense over the estimated life of the contract. The Company considers potential impairment in these amounts each period. +ASC 606 provides entities with certain practical expedients and accounting policy elections to minimize the cost and burden of adoption. The Company will exclude from its transaction price any amounts collected from customers related to sales and other similar taxes. The Company has elected to account for shipping and handling as an activity to fulfill the promise to transfer the product, and therefore will not evaluate whether shipping and handling activities are promised services to its customers. +The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed. +When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. The Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component for the years ended December 31, 2021, 2020 and 2019. +Grant revenue +The Company recognizes grant revenue as it performs services under the arrangement when the funding is committed. Revenues and related research and development expenses are presented gross in the consolidated statements of operations as the Company has determined it is the primary obligor under the arrangement relative to the research and development services. +Accounting for grants does not fall under ASC 606, as the grantor will not benefit directly from the Company’s expansion or product development. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, the Company has accounted for grants by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance (IAS 20). +Grants to the Company contain both monetary amounts granted related to assets and monetary amounts granted related to income, which are grants other than those related to assets. The grants related to assets are for the expansion and increase of manufacturing capacity. The grants related to income are for additional research and development, as well as other non-asset related scale up costs. +Under IAS 20, grants related to assets shall be presented in the consolidated balance sheets either by recognizing the grant as deferred income (which is recognized in the consolidated statements of operations on a systematic basis over the useful life of the asset), or by deducting the grant in calculating the carrying amount of the asset (which is recognized in the consolidated statements of operations over the life of the depreciable asset as a reduced depreciation expense). Both methods are acceptable under IAS 20. The Company has elected to record grants related to assets as a deduction in calculating the carrying value of the asset. +Under IAS 20, grants related to income are presented as part of the consolidated statements of operations, either separately or under a general heading. Both methods are acceptable under IAS 20. The Company has elected to record +F-15 +Table of Contents +grants related to income separately on the consolidated statements of operations as grant revenue. The related expenses are recorded within operating expenses. +On June 22, 2020, the Company entered into a workplan 1 award (WP1) with the National Institute of Health (NIH), under the Rapid Acceleration of Diagnostics (RADx) program to assess the feasibility of a novel SARS-CoV-2 antigen detection test using the Company’s Simoa technology. WP1 was complete as of December 31, 2020. +On September 29, 2020, the Company entered into WP2 with the NIH under its RADx program. The contract, which has a total award value of $ 18.2 million, accelerates the continued development, scale-up, and deployment of the novel SARS-CoV-2 antigen detection test using the Company’s Simoa technology. The contract provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Release of the $ 18.2 million of funding under WP2 is based on the achievement of certain milestones. Contract funding was subject to achievement of these pre-defined milestones and the contract period ran through September 2021, with one milestone extended to March 31, 2022. As of December 31, 2021, the Company had received $ 17.7 million out of the full $ 18.2 million under WP2 . During the year ended December 31, 2021, the Company recognized $ 5.2 million in grant revenue and incurred $ 3.4 million in research and development expense related to WP2. During the year ended December 31, 2020, the Company recognized $ 4.4 million in grant revenue and incurred $ 2.6 million in research and development expense related to WP2. +The following table summarizes the cumulative activity under WP2 as of December 31, 2021 and December 31, 2020 (in thousands): +December 31, 2021 +December 31, 2020 +Total grant revenue from research and development activities +$ +9,576 +$ +4,362 +Total proceeds used for assets +8,104 +826 +Total deferred proceeds for assets +— +2,478 +Total deferred grant revenue +— +304 +Total recognized +$ +17,680 +$ +7,970 +Total recognized +$ +17,680 +$ +7,970 +Total amount accrued +— +( 2,968 ) +Total cash received +$ +17,680 +$ +5,002 +Total proceeds received +$ +17,680 +$ +5,002 +Total proceeds reasonably assured +520 +13,198 +Total WP2 grant amount +$ +18,200 +$ +18,200 +Business combinations +Under the acquisition method of accounting, the Company generally recognizes the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values recognized, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. The excess consideration over the aggregate value of acquired tangible and intangible assets, net of liabilities recognized, is recorded as goodwill. These valuations require significant estimates and assumptions, especially with respect to intangible assets. +The Company typically uses the discounted cash flow method to value acquired intangible assets. This method requires significant management judgment to forecast future operating results and establish residual growth rates and discount factors. The estimates used to value and amortize intangible assets are consistent with the plans and estimates that are used to manage the business and are based on available historical information. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, the Company could experience impairment charges. In addition, the Company has estimated the +F-16 +Table of Contents +economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed. +Cost of revenue +Cost of product revenue consists of raw materials, parts costs and associated freight, shipping and handling costs, contract manufacturer costs, personnel costs, yield loss, in-license payments and royalties, stock-based compensation, other direct costs and overhead. +Cost of service and other revenue consists of personnel, facility costs associated with operating the Accelerator Laboratory on behalf of the customers, costs related to instrument maintenance and servicing equipment at customer sites, other direct and overhead. +Cost of license revenue consists of license fees that are the direct results of cash payments received related to license agreements. +Research and development expenses +Research and development expenses, including personnel costs, allocated facility costs, lab supplies, outside services, contract laboratory costs are charged to research and development expense as incurred. The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expense when the service has been performed or when the goods have been received. Expenses incurred related to grant funded activities are recorded in research and development expense. +Selling, general, and administrative expenses +Selling, general, and administrative expenses are primarily composed of compensation and benefits associated with sales and marketing, finance, human resources, and other administrative personnel, outside marketing, advertising, allocated facilities costs, legal expenses, and other general and administrative costs. +Net loss per share +Basic net loss per common share attributable to common stockholders is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares. For purposes of the diluted net loss per share calculations, unvested restricted common stock, restricted stock units, common stock options, and warrants are considered to be potentially dilutive securities, but are excluded from the diluted net loss per share because their effect would be anti-dilutive and therefore basic and diluted net loss per share were the same for all periods presented. +The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive (in common stock equivalent shares): +Year Ended December 31, +2021 +2020 +2019 +Unvested restricted common stock and restricted stock units +531,473 +518,387 +409,929 +Outstanding stock options +2,304,543 +2,494,045 +2,507,062 +Outstanding common stock warrants +— +10,000 +10,000 +F-17 +Table of Contents +Cash and cash equivalents +Cash and cash equivalents consist of cash deposits and short-term, highly liquid investments that are readily convertible into cash, with original maturities of three months or less. Cash equivalents are carried at fair value based on quoted prices for identical assets. Cash and cash equivalents consist of the following (in thousands): +As of +December 31, +2021 +2020 +Cash +$ +64,372 +$ +19,535 +Money market funds invested in U.S. Treasury obligations +332,093 +162,049 +Total cash and cash equivalents +$ +396,465 +$ +181,584 +Restricted cash and deposits +Restricted cash primarily represents collateral for a letter of credit issued as security for the lease for the Company’s headquarters in Billerica, Massachusetts, and additional space in Bedford, Massachusetts, and to secure the Company’s corporate credit card program. The restricted cash is long term in nature as the Company will not have access to the funds until more than one year from December 31, 2021. +Allowance for credit losses +The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers’ trade accounts receivable. Due to the short-term nature of such receivables, the estimated accounts receivable that may not be collected is based on aging of the accounts receivable balances. +Customers are assessed for credit worthiness upfront through a credit review, which includes assessment based on the Company’s analysis of customers’ financial statements when a credit rating is not available. The Company evaluates contract terms and conditions, country, and political risk, and may require prepayment to mitigate risk of loss. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company monitors changes to the receivables balance on a timely basis, and balances are written off as they are determined to be uncollectable after all collection efforts have been exhausted. +Inventory +Inventory is stated at the lower of cost or market on a first-in, first-out (FIFO) basis. The Company analyzes its inventory levels on each reporting date and writes down inventory that is expected to expire prior to being sold and inventory in excess of expected sales requirements. In the event that the Company identifies these conditions exist in its inventory, the carrying value is reduced to its estimated net realizable value. +Property and equipment +Property and equipment, including leasehold improvements, are stated at cost and are depreciated, or amortized in the case of leasehold improvements, over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable and recognizes an impairment +F-18 +Table of Contents +loss when it is probable that an asset’s realizable value is less than the carrying value. To date, no such impairment losses have been recorded. Depreciation is calculated based upon the following estimated useful lives of the assets: +Laboratory and manufacturing equipment +Five years +Computers and software +Three years +Office furniture and equipment +Seven years +Leasehold improvements +Shorter of the useful life of the asset or the remaining term of the lease +Leases +The Company accounts for leases in accordance with ASC Topic 842, Leases (ASC 842), which was adopted on January 1, 2020, using the optional transition method allowing entities to recognize a cumulative effect adjustment to the opening balance sheet without restating comparative prior periods presented. At adoption the Company elected the package of practical expedients which was applied consistently to all of its leases at the transition date: i) the Company did not reassess whether any expired or existing contracts are or contain leases; ii) the Company did not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with ASC 840, Leases (ASC 840), are classified as operating leases); and iii) the Company did not reassess initial direct costs for any existing leases. +ASC 842 requires a lessee to recognize assets and liabilities on the balance sheet for most leases and changes many key definitions, including the definition of a lease. Lessees are differentiated between finance leases and operating leases, and classification impacts expense recognition. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use (ROU) assets and short-term and long-term lease liabilities, as applicable. The Company does not recognize leases on the balance sheet with a term of twelve months or less. The Company’s leases consist of office and lab space and office equipment. All of the Company’s leases are classified as operating, and options to renew a lease are only included in the lease term to the extent those options are reasonably certain to be exercised. Additionally, the Company does not separate lease and non-lease components for all leases. +Operating lease liabilities and their corresponding ROU assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The rate implicit in lease contracts is typically not readily determinable and, as a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments, for a similar term, in a similar economic environment. To estimate its incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have a rating agency-based credit rating. +Software development costs +The Company develops and modifies software related to the operation of the instrument. Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Based on the Company’s product development process, technological feasibility is established upon the completion of a working model. The Company does not incur material costs between the completion of the working model and the point at which the product is ready for release. Therefore, software development costs are charged to the statement of operations as incurred as research and development expense. +Fair value of financial instruments +ASC Topic 820, Fair Value Measurement (ASC 820), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable +F-19 +Table of Contents +inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. +ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following: +Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. +Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and +Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. +To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. +The carrying amount reflected on the balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximated their fair values, due to the short-term nature of these instruments. The carrying value of the long-term debt approximates its fair value as the debt arrangement is based on interest rates the Company believes it could obtain for borrowings with similar terms. +Fair value measurements are as follows (in thousands): +Quoted prices +Significant +in active +Significant other +unobservable +markets +observable +inputs +December 31, 2021 +Total +(Level 1) +inputs (Level 2) +(Level 3) +Financial assets +Cash equivalents +$ +332,093 +$ +332,093 +$ +— +$ +— +$ +332,093 +$ +332,093 +$ +— +$ +— +Quoted prices +Significant +Significant +in active +other +unobservable +markets +observable +inputs +December 31, 2020 +Total +(Level 1) +inputs (Level 2) +(Level 3) +Financial assets +Cash equivalents +$ +162,049 +$ +162,049 +$ +— +$ +— +$ +162,049 +$ +162,049 +$ +— +$ +— +Warranties +The Company provides a one-year warranty and maintenance service related to its instruments and sells extended warranty contracts for additional periods. The Company defers revenue associated with these services and recognizes them on a pro-rata basis over the period of service. +Income taxes +The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Under this method, +F-20 +Table of Contents +deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. +The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740 Income Taxes (ASC 740). When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2021 and 2020, the Company did not have any significant uncertain tax positions. +Credit, product, and supplier concentrations and off-balance-sheet risk +The Company has no significant off-balance-sheet risk, such as foreign exchange contracts, option contracts, or other hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash and cash equivalents and a cost method investment. The Company places its cash and cash equivalents principally in depository accounts with a bank. +The Company is also subject to supply chain risks related to the outsourcing of the manufacturing of its instruments. Although there are a limited number of manufacturers for instruments of this type, the Company believes that other suppliers could provide similar products on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. In addition to outsourcing the manufacturing of its instruments, the Company also purchases antibodies through a number of different suppliers. Although a disruption in service from any one of its antibody suppliers is possible, the Company believes that it would be able to find an adequate supply from alternative suppliers. +Customers outside the United States represented 39 % and 29 % of the Company’s gross trade accounts receivable balance as of December 31, 2021 and 2020, respectively. +As of December 31, 2021, one customer represented 18 % of the Company’s aggregate accounts receivable. As of December 31, 2020, one customer represented 19 % of the Company’s aggregate accounts receivable. During the years ended December 31, 2021 and 2019, no individual customer represented 10 % of the Company’s total revenue. During the year ended December 31, 2020, one company represented 13 % of the Company’s total revenue. +Stock-based compensation +The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Stock-based compensation awards have historically consisted of stock options and restricted stock. Prior to the adoption of Accounting Standards Update (ASU) No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), the measurement date for non-employee awards was generally the date the services were completed, resulting in financial reporting period adjustments to stock-based compensation during the vesting period for changes in the fair value of the awards. The Company adopted ASU 2018-07 on January 1, 2020. After the adoption of ASU 2018-07, the measurement date for non-employee awards is the date of grant without changes in the fair value of the award. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. There were no material non-employee awards outstanding during the years ended December 31, 2021, 2020, and 2019. +The Company recognizes forfeitures as they occur. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. +F-21 +Table of Contents +The fair value of stock options granted to employees and non-employees is estimated on the grant date using the Black-Scholes option-pricing model, based on the assumptions noted in the following table: +Year Ended December 31, +2021 +2020 +2019 +Risk-free interest rate +0.4 % - 1.3 % +0.4 % - 1.7 % +1.4 % - 2.6 % +Expected dividend yield +None +None +None +Expected term (in years) +6.0 +6.0 +6.0 +Expected volatility +49.2 % - 55.6 % +43.9 % - 49.2 % +33.5 % - 39.7 % +Weighted-average grant date fair value +$ 29.96 +$ 12.66 +$ 9.09 +Expected volatility was calculated based a proportional weighting of reported volatility data for a representative group of guideline publicly traded companies for which historical information was available, as well as the Company’s stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected term assumption. The Company estimates the expected term of options granted to employees utilizing the simplified method which calculates the expected term of an option as the average of the time to vesting and contractual life of the options. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. The Company uses the simplified method due to the lack of historical exercise data and the plain nature of the stock options. The Company uses the remaining contractual term for the expected term of non-employee awards. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on common stock. +Recent accounting pronouncements +Adopted +In June 2016, the Financial Accounting Standards Board (FASB) established Topic 326 , Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (ASC 326) by issuing ASU No. 2016-13 (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The Company early adopted ASU 2016-13 on January 1, 2021 using the modified retrospective approach. The Company’s consolidated financial statements for prior-year periods have not been revised and are reflective of the credit loss requirements which were in effect for that period. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements. +In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15) . This ASU addresses the accounting for implementation, setup and other upfront costs paid by a customer in a cloud computing or hosting arrangement. The guidance aligns the accounting treatment of these costs incurred in a hosting arrangement treated as a service contract with the requirements for capitalization and amortization costs to develop or obtain internal-use software. The Company adopted ASU 2018-15 on January 1, 2021 using the prospective method. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial statements. +In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which is intended to simplify various areas related to ASC 740, Income Taxes (ASC 740). ASU 2019-12 removes certain exceptions for performing intra period tax allocations and calculating income taxes in interim periods. The guidance also simplifies the accounting for transactions that result in a step-up in the tax basis of goodwill and the effect of enacted changes in tax laws or rates in interim periods. The Company early adopted ASU 2019-12 on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements. +F-22 +Table of Contents +3. Inventory +Inventory consists of the following (in thousands): +As of December 31, +2021 +2020 +Raw materials +$ +7,892 +$ +5,265 +Work in process +4,923 +3,306 +Finished goods +9,375 +6,285 +Total +$ +22,190 +$ +14,856 +Inventory comprises commercial instruments, assays, and the materials required to manufacture assays. +4. Property and equipment +Property and equipment consists of the following (in thousands): +As of December 31, +2021 +2020 +Laboratory and manufacturing equipment +$ +9,742 +$ +8,523 +Office furniture and equipment +1,617 +1,556 +Computers and software +3,893 +1,504 +Leasehold improvements +10,413 +8,765 +Total cost +$ +25,665 +$ +20,348 +Less: accumulated depreciation +( 7,705 ) +( 6,436 ) +Property and equipment, net +$ +17,960 +$ +13,912 +The Company incurred depreciation expense of $ 2.8 million, $ 2.2 million and $ 1.6 million for the years ended December 31, 2021 2020, and 2019, respectively. The Company has instruments included in laboratory and manufacturing equipment, which are used internally by the Company. As of December 31, 2021, the laboratory and manufacturing equipment balance includes $ 3.9 million of cost and $ 1.5 million of accumulated depreciation related to these instruments. As of December 31, 2020, the laboratory and manufacturing equipment balance includes $ 3.4 million of cost and $ 1.8 million of accumulated depreciation related to these instruments. +5. Other accrued expenses +Other accrued expenses consist of the following (in thousands): +As of December 31, +2021 +2020 +Accrued inventory purchases +$ +568 +$ +527 +Accrued property and equipment purchases +229 +670 +Accrued royalties +1,250 +1,845 +Accrued professional services +2,126 +797 +Accrued development costs +566 +323 +Accrued tax liabilities +430 +156 +Accrued other +1,317 +527 +Total accrued expenses +$ +6,486 +$ +4,845 +F-23 +Table of Contents +6. Income taxes +The following table presents the components of loss before income taxes (in thousands): +Year Ended December 31, +2021 +2020 +2019 +United States +$ +( 56,554 ) +$ +( 29,896 ) +$ +( 40,010 ) +Foreign +( 1,170 ) +( 2,010 ) +( 973 ) +Total loss before income taxes +$ +( 57,724 ) +$ +( 31,906 ) +$ +( 40,983 ) +The following table summarizes income tax benefit (in thousands): +Year Ended December 31, +2021 +2020 +2019 +Current: +United States +Federal +$ +— +$ +— +$ +— +State +( 30 ) +( 13 ) +( 20 ) +Foreign +( 342 ) +( 102 ) +( 93 ) +Total current income tax provision +( 372 ) +( 115 ) +( 113 ) +Deferred +United States +Federal +5 +( 8 ) +( 3 ) +State +( 6 ) +( 3 ) +( 1 ) +Foreign +409 +502 +304 +Total deferred income tax benefit +408 +491 +300 +Total income tax benefit +$ +36 +$ +376 +$ +187 +A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: +Year Ended December 31, +2021 +2020 +2019 +Federal statutory income tax rate +21.0 +% +21.0 +% +21.0 +% +Foreign tax rate differential +— +% +0.30 +% +— +% +State taxes, net of federal benefit +6.5 +% +2.5 +% +3.2 +% +Tax credits +2.0 +% +1.6 +% +2.3 +% +Share-based compensation +7.4 +% +5.2 +% +2.3 +% +Permanent items +( 1.8 ) +% +( 0.4 ) +% +( 0.9 ) +% +Deferred tax rate change +0.2 +% +0.3 +% +( 1.4 ) +% +Change in valuation allowance +( 34.8 ) +% +( 29.7 ) +% +( 24.6 ) +% +Other +( 0.4 ) +% +0.4 +% +( 1.4 ) +% +Effective income tax rate +0.1 +% +1.2 +% +0.5 +% +The effective income tax rate of differs from the U.S. Federal statutory rate of 21.0 % primarily as a result of the valuation allowance maintained against the Company’s net deferred tax assets. +During 2019, the Company acquired Uman, a Swedish entity. The Company analyzed the transaction from an income tax perspective and found that there was no tax deductible goodwill or other identifiable intangible assets related to the transaction. +F-24 +Table of Contents +Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): +December 31, +2021 +2020 +Deferred tax assets: +Net operating loss carryforwards +$ +67,543 +$ +50,233 +Tax credits +6,113 +5,101 +Deferred revenue +1,862 +2,167 +Amortization +962 +1,054 +Stock-based compensation +3,138 +1,956 +Inventory +686 +— +Lease liability +5,464 +5,703 +Other deferred tax assets +2,340 +2,533 +Total deferred tax assets +88,108 +68,747 +Less: valuation allowances +( 83,121 ) +( 63,609 ) +Net deferred tax assets +4,987 +5,138 +Deferred tax liabilities: +Right-of-Use Assets +( 2,867 ) +( 2,957 ) +Depreciation +( 1,752 ) +( 1,775 ) +Amortization acquired intangibles +( 2,208 ) +( 2,880 ) +Inventory +— +( 64 ) +Goodwill +( 66 ) +( 49 ) +Other deferred tax liabilities +( 129 ) +( 61 ) +Net deferred tax liabilities +$ +( 2,035 ) +$ +( 2,648 ) +The Company’s change in its valuation allowance account with respect to the deferred tax asset is as follows (in thousands): +2021 +2020 +Balance, beginning of year +$ +63,609 +$ +54,137 +Change in valuation allowance +19,512 +9,472 +Balance, end of year +$ +83,121 +$ +63,609 +The valuation allowance increased during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily as a result of the U.S. operating losses incurred, stock-based compensation windfall benefits and research and development tax credit carryforwards generated during the year. +In determining the need for a valuation allowance, the Company has given consideration to the cumulative book income and loss positions of each of its entities as well as its worldwide cumulative book loss position. The Company has assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carryback net operating losses (NOLs), the existence of reversing taxable temporary differences, the availability of tax planning strategies, and forecasted future taxable income. At December 31, 2021, the Company maintains a full valuation allowance against its worldwide net deferred tax assets. +As of December 31, 2021, the Company had U.S. federal NOLs of approximately $ 267.2 million. U.S. federal NOLs generated through December 31, 2017, of approximately $ 108.5 million expire at various dates through 2037, and U.S. federal NOLs generated in the tax years beginning after December 31, 2017 of approximately $ 158.7 million do not expire. As of December 31, 2021, the Company had $ 17 8.8 million of state NOLs, approximately $168.8 million expire at various dates through 2041, and certain state NOLs of approximately $10.0 million do not expire. As of December 31, 2021, the Company had U.S. federal tax credit carryforwards of approximately $ 5.1 million that expire at various dates +F-25 +Table of Contents +through 2041. As of December 31, 2021, the Company had U.S. state tax credit carryforwards of approximately $ 1.3 million that expire at various dates through 2036. +Under Sections 382 and 383 of the U.S. Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an ownership change generally occurs if there is a cumulative change in its ownership by 5 % stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under U.S. state tax laws. Under the Tax Cuts and Jobs Act of 2017 (TCJA), the use of federal NOLs arising in taxable years beginning after December 31, 2017 is limited to 80% of current year taxable income and NOLs arising in taxable years ending after December 31, 2017 may not be carried back (though any such NOLs may be carried forward indefinitely). +The Company may have experienced an ownership change in the past and may experience ownership changes in the future as a result of future transactions in its share capital, some of which may be outside of the control of the Company. As a result, if the Company earns net taxable income, its ability to use its pre-change NOLs, or other pre-change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to significant limitations. +The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was enacted in the United States on March 27, 2020. The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides extensive tax changes in response to the COVID-19 pandemic, the provisions do not have a significant impact on the Company’s financial results. In July 2021, the Company filed for a $ 2.1 million refund under the CARES Act relating to an employee retention credit (ERC). The ERC is a refundable payroll tax credit. The Company expects receipt of the ERC refund during the first half of 2022, and this amount is included in prepaid expenses and other current assets on the consolidated balance sheet as of December 31, 2021. +The Company accounts for uncertain tax positions using a more likely than not threshold for recognizing uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on an ongoing basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. The Company accounts for interest and penalties related to uncertain tax positions as a component of its benefit (provision) for income taxes. For the years ended December 31, 2021, 2020, and 2019, the Company had no tax reserves accrued for uncertain tax positions and there were no accrued interest or penalties in the consolidated statements of operations. +The Company is subject to taxation in the United States as well as the Netherlands, Sweden, and China. At December 31, 2021, the Company is generally no longer subject to examination by taxing authorities in the United States for years prior to 2018. However, NOLs and credits in the United States may be subject to adjustments by taxing authorities in future years in which they are utilized. The Company’s foreign subsidiaries remain open to examination by taxing authorities from 2016 onward. +As of December 31, 2021, the Company’s foreign subsidiaries had immaterial undistributed earnings and the tax payable on the earnings that are indefinitely reinvested would be immaterial. +F-26 +Table of Contents +7. Stockholders’ equity +Stock-based compensation +Stock-based compensation expense for all stock awards consists of the following (in thousands): +December 31, +2021 +2020 +2019 +Cost of product revenue +$ +471 +$ +189 +$ +86 +Cost of service and other revenue +403 +311 +238 +Research and development +1,807 +1,129 +718 +Selling, general, and administrative +13,294 +8,470 +5,346 +Total stock-based compensation +$ +15,975 +$ +10,099 +$ +6,388 +At December 31, 2021, there was $ 35.8 million of total unrecognized compensation cost related to unvested stock options and restricted stock units which is expected to be recognized over the remaining weighted-average vesting period of 2.9 years. +Stock-based compensation plans +In June 2007, the Company adopted the 2007 Stock Option and Grant Plan (the 2007 Plan), under which it could grant incentive stock options, non-qualified options, restricted stock, and stock grants. In connection with the completion of the IPO, the Company terminated the 2007 Plan. As of December 31, 2021, 709,772 shares were outstanding. No shares were available for future grant under the 2007 Plan. +In December 2017, the Company adopted the 2017 Employee, Director and Consultant Equity Incentive Plan (the 2017 Plan), under which it may grant incentive stock options, non-qualified stock options, restricted stock, and other stock-based awards. As of December 31, 2017, the 2017 Plan allowed for the issuance of up to 1,042,314 shares of common stock plus up to 2,490,290 shares of common stock represented by awards granted under the 2007 Plan that are forfeited, expired, or are cancelled without delivery of shares or which result in the forfeiture of shares of common stock back to the Company on or after the date the 2017 Plan became effective. As of December 31, 2021, 2,026,021 shares were outstanding and there were 1,434,072 shares available for grant under the 2017 Plan. +In addition, the 2017 Plan contains an "evergreen" provision, which allows for an annual increase in the number of shares of common stock available for issuance under the 2017 Plan on the first day of each fiscal year during the period beginning in fiscal year 2019 and ending in fiscal year 2027. The annual increase in the number of shares shall be equal to the lowest of: 4 % of the number of shares of common stock outstanding as of such date; and an amount determined by the Company’s Board of Directors or Compensation Committee. On January 3, 2022, the number of shares of common stock available for issuance under the 2017 plan was automatically increased by 1,469,428 shares. +In December 2017, the Company adopted the 2017 Employee Stock Purchase Plan (the 2017 ESPP). As December 31, 2019, the 2017 ESPP allowed for the issuance of up to 612,572 shares of common stock. As of December 31, 2021, 1,137,595 shares were available for grant under the 2017 ESPP. +In addition, the 2017 ESPP contains an "evergreen" provision, which allows for an increase on the first day of each fiscal year beginning with fiscal year 2018. The increase in the number of shares shall be equal to the lowest of: 1 % of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or an amount determined by the Company’s Board of Directors or Compensation Committee. The number of shares available for grant under the 2017 ESPP increased by 367,357 shares on January 3, 2022 due to this provision. +The 2017 ESPP provides for six-month option periods commencing on March 1 and ending August 31 and commencing September 1 and ending February 28 of each calendar year. +F-27 +Table of Contents +Warrants +The following table summarizes the Company’s outstanding warrants: +Weighted +Issued and +Average +exercisable +Exercise Price +As of December 31, 2020 +10,000 +$ +21.00 +Issued +— +— +Exercised +( 10,000 ) +21.00 +Cancelled +— +— +As of December 31, 2021 +— +$ +— +Stock options +Under the 2007 and 2017 Plans, stock options may not be granted with exercise prices of less than fair market value on the date of the grant. Options generally vest ratably over a four-year period with 25 % vesting on the first anniversary and the remaining 75 % vesting ratably on a monthly basis over the remaining three years . These options expire ten years after the grant date. Option activity is as follows: +Weighted-average +Remaining contractual +intrinsic value +Options +exercise price +life (in years) +(in thousands) +Outstanding at December 31, 2020 +2,494,045 +$ +17.73 +7.27 +$ +71,760 +Granted +439,209 +$ +62.06 +Exercised +( 516,804 ) +$ +15.24 +Cancelled +( 211,637 ) +$ +36.32 +Outstanding at December 31, 2021 +2,204,813 +$ +25.36 +6.76 +$ +44,813 +Exercisable at December 31, 2021 +1,493,289 +$ +16.34 +5.90 +$ +39,191 +Vested and expected to vest at December 31, 2021 +2,204,813 +$ +25.36 +6.76 +$ +44,813 +Restricted stock awards +In January 2015, the Company issued 781,060 shares of restricted common stock to an executive of the Company under the 2007 Plan. The majority of these shares were issued subject to a four-year vesting schedule with 25 % vesting on the first anniversary and the remaining vesting 75 % ratably on a monthly basis over the remaining three years , while another portion was issued subject to performance-based vesting. The vesting of performance-based awards is dependent upon achievement of specified financial targets of the Company. The majority of the performance criteria were achieved during the years ended December 31, 2016 and 2015 and the remaining unvested awards with performance conditions are not material. No restricted stock awards were granted during the years ended December 31, 2021, 2020, or 2019. As of December 31, 2021, the Company had 39,803 shares of unvested restricted common stock with a weighted average grant date fair value of $ 3.12 per share. +Restricted stock units +Restricted stock units (RSUs) represent the right to receive shares of common stock upon meeting specified vesting requirements. A summary of RSU activity is as follows: +Weighted-average +Weighted-average +Aggregate +grant date fair +remaining contractual +intrinsic value +Shares +value per share +life (in years) +(in thousands) +Unvested RSUs as of December 31, 2020 +478,581 +$ +28.08 +8.83 +$ +22,254 +Granted +428,235 +$ +58.20 +Vested +( 267,189 ) +$ +27.31 +Cancelled +( 109,756 ) +$ +44.64 +Unvested RSUs as of December 31, 2021 +529,871 +49.32 +9.68 +$ +22,467 +Expected to convert at December 31, 2021 +529,871 +$ +49.32 +$ +22,467 +F-28 +Table of Contents +8. Leases +The Company is a lessee under leases of offices, lab spaces, and certain office equipment. Some of the Company’s leases include options to extend the lease, and these options are included in the lease term to the extent they are reasonably certain to be exercised. +900 Middlesex Turnpike Lease +The Company’s primary lease is the 900 Middlesex Turnpike Lease. On October 2, 2018, the Company entered into a 137 -month operating lease for the Company’s new headquarters in Billerica, Massachusetts. The lease is for approximately 92,000 square feet of office and laboratory space and commenced on April 1, 2019. The lease contains a period of free rent and escalating monthly rent payments. As part of the lease, the Company was required to enter into a $ 1.0 million Letter of Credit drawable by the lessor under specifically outlined conditions, which will be subsequently reduced throughout the lease term. Pursuant to a work letter entered into in connection with the 900 Middlesex Turnpike Lease, the landlord contributed an aggregate of $ 8.2 million toward the cost of construction and tenant improvements for the building. Under the lease, the Company has the option to extend the lease for two successive five-year terms, and the renewal options are not reasonably certain to be exercised. +In applying the ASC 842 transition guidance, the 900 Middlesex Turnpike Lease remained classified as an operating lease and the Company recorded ROU assets of $ 12.2 million and lease liability of $ 22.7 million on the effective date. The difference between the ROU and the lease liability was driven by the Company derecognizing deferred rent of $ 3.0 million and the lease obligation incentive of $ 7.6 million. The Company is recognizing rent expense on a straight-line basis throughout the remaining term of the leases. +48 Tvistevägen +The Company has multiple leases at 48 Tvistevägen Umeå, Sweden for laboratory spaces, manufacturing spaces, and office space (the Uman leases). All of these Uman leases have been assessed as operating leases. +In applying the ASC 842 transition guidance, the Uman leases remained classified as operating leases and the Company recorded ROU assets of less than $ 0.1 million and lease liability of less than $ 0.1 million on the effective date. The Company is recognizing rent expense on a straight-line basis throughout the remaining term of the leases. +Summary of all lease costs recognized under ASC 842 +The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating leases: +Year Ended December 31, +Operating leases (in thousands) +2021 +2020 +Lease costs (1) +Operating lease costs +$ +2,660 +$ +2,663 +Total lease cost +$ +2,660 +$ +2,663 +Other information +Operating cash flows used for operating leases +$ +3,388 +$ +2,108 +Weighted average remaining lease term (years) +8.6 +9.8 +Weighted average discount rate +9.73 % +9.73 % +(1) Short-term lease costs and variable lease costs incurred by the Company for the year ended December 31, 2021 were considered immaterial. +F-29 +Table of Contents +Rent expense is calculated on a straight-line basis over the term of the lease. Rent expense recognized under all leases was $ 5.4 million, $ 4.8 million, and $ 3.3 million for the years ended December 31, 2021, 2020, and 2019, respectively. Note that the Company adopted ASC 842 effective January 1, 2020 using the required modified retrospective approach and utilizing the effective date as its date of initial application. Therefore, the amount disclosed pertaining to the year ended December 31, 2019 is presented under previous accounting guidance and is not comparable to the amounts recorded in the 2021 and 2020 periods under ASC 842. +Future minimum commitments under ASC 842 under the Company’s operating leases in effect at December 31, 2021 were as follows: +Maturity of lease liabilities (in thousands) +As of December 31, 2021 +2022 +$ +3,466 +2023 +3,515 +2024 +3,557 +2025 +3,655 +2026 +3,765 +thereafter +14,782 +Total lease payments +$ +32,740 +Less: imputed interest +10,850 +Total operating lease liabilities +$ +21,890 +9. Commitments and contingencies +License agreements +Tufts University +In June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University (Tufts). Tufts is a related party to the Company due to Tufts’ equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. The License Agreement, which was subsequently amended, is exclusive and sub licensable, and will continue in effect on a country by country basis as long as there is a valid claim of a licensed patent in a country. The Company is committed to pay license and maintenance fees, prior to commercialization, in addition to low single digit royalties on direct sales and services and a royalty on sublicense income. During the years ended December 31, 2021, 2020, and 2019, the Company recorded royalty expense of $ 1.6 million, $ 1.1 million and $ 1.0 million, respectively, in cost of product revenue on the consolidated statements of operations. During the year ended December 31, 2020, the Company incurred $ 1.0 million in cost of collaboration and license revenue owed to Tufts related to sublicensing certain technology and intellectual property to Abbott Laboratories (Abbott) (see Note 13). +Other licenses +During the year ended December 31, 2012, the Company entered into a license agreement for certain intellectual property with a third party. The non-exclusive, non-sublicensable third party’s license provides the Company access to certain patents specifically for protein detection and shall be in effect until the expiration of the last licensed patent. In consideration for these rights, the Company committed to certain license fees, milestone payments, minimum annual royalties and a mid-single digit royalty. The Company is required to make mid-single digit royalty payments on net sales of products and services which utilize the licensed technology. The Company must pay the greater of calculated royalties on net sales or an annual minimum royalty of $ 50 thousand. In September 2019, all remaining patents related to the intellectual property expired and the license agreement terminated. As this agreement was terminated in 2019, the Company recorded no royalty expense during the years ended December 31, 2021 and 2020. During the year ended December 31, 2019, the Company recorded royalty expense of $ 0.8 million in cost of product revenue on the consolidated statements of operations. +F-30 +Table of Contents +Legal contingencies +The Company is subject to claims in the ordinary course of business; however, the Company is not currently a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results of its operations. The Company accrues for contingent liabilities to the extent that the liability is probable and estimable. +10. Notes payable +Loan agreement +On April 14, 2014, the Company executed a loan agreement with a lender, as subsequently amended. As of December 31, 2021, there were no additional amounts available to borrow under the debt facility. The interest rate on this term loan is variable based on the greater of 8 % or 8 % plus the prime rate less 5.25 %. Interest is paid monthly beginning the month following the borrowing date. At loan inception and in connection with the amendments, the Company issued the lender warrants to purchase shares of stock. The loan agreement also contains prepayment penalties and an end of term charge. Fees incurred upon execution of the agreements, and the fair value of warrants on the date of grant were accounted for as a reduction in the book value of debt and accreted through interest expense, using the effective interest rate method, over the term of the debt. Under the amended agreement, the Company was required to pay the loan principal in four equal installments starting July 1, 2021, with the final payment and end of term charge to be made on October 1, 2021. On October 1, 2021, the Company made the final principal payment, including end of term fees, of $ 2.0 million related to the loan agreement. +11. “At-the-market offering” +On March 19, 2019, the Company entered into the Sales Agreement with Cowen with respect to an “at-the-market” offering program under which the Company could offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $ 50.0 million through Cowen as its sales agent. +On June 5, 2019, the Company issued approximately 2.2 million shares of common stock at an average stock price of $ 22.73 per share pursuant to the terms of the Sales Agreement. The “at-the-market” offering resulted in gross proceeds of $ 49.7 million. The Company incurred $ 1.7 million in issuance costs associated with the “at-the-market” offering, resulting in net proceeds to the Company of $ 48.0 million. On August 6, 2020, the Company delivered written notice to Cowen to terminate the Sales Agreement, which termination the parties agreed to make immediately effective. +12. Underwritten public offerings +On August 8, 2019, the Company entered into an underwriting agreement with J.P. Morgan and Leerink, as representatives of the several underwriters, relating to an underwritten public offering of approximately 2.7 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 69.0 million. The Company incurred $ 4.5 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 64.5 million. +On August 6, 2020, the Company entered into an underwriting agreement with Leerink and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of approximately 3.0 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 97.6 million. The Company incurred $ 6.2 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 91.4 million. +On February 3, 2021, the Company entered into an underwriting agreement with Goldman Sachs, Leerink, and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of approximately 4.1 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public +F-31 +Table of Contents +offering resulted in gross proceeds of $ 287.5 million. The Company incurred $ 17.8 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 269.7 million. +13. Collaboration and license arrangements +The Company has entered into certain licenses with other companies for use of the Company’s technology. These licenses have royalty components which the Company earns and recognizes as collaboration and license revenue throughout the year. The Company recognized revenue of less than $ 0.1 million for the years ended December 31, 2021, 2020, and 2019 associated with these licenses. +During the year ended December 31, 2020, the Company recognized $ 1.2 million of previously deferred revenue as a result of entering into a license agreement with a diagnostics company. As of December 31, 2021 and 2020, the Company had $ 0.5 million of deferred revenue related to ongoing negotiations with a diagnostics company. +Abbott Laboratories +On September 29, 2020, the Company entered into a Non-Exclusive License Agreement (the Abbott License Agreement) with Abbott. Pursuant to the terms of the Abbott License Agreement, the Company granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under the Company’s bead-based single molecule detection patents (Licensed Patents) in the field of in vitro diagnostics. Abbott has paid the Company an initial license fee of $ 10.0 million in connection with the execution of the Abbott License Agreement, which was recognized as license revenue for the year ended December 31, 2020. Abbott has also agreed to pay the Company milestone fees subject to the achievement by Abbott of certain development, regulatory and commercialization milestones and low single-digit royalties on net sales of licensed products. +The Abbott License Agreement includes customary representations and warranties, covenants and indemnification obligations for a transaction of this nature. The Abbot License Agreement became effective upon signing and will continue until expiration of the last-to-expire Licensed Patent, or the agreement is earlier terminated. Under the terms of the Abbott License Agreement, the Company and Abbott each have the right to terminate the agreement for uncured material breach by, or insolvency of, the other party. Abbott may also terminate the Abbott License Agreement at any time without cause upon 60 days ’ notice. +During the year ended December 31, 2021 and 2020, the Company recognized no revenue and $ 10.0 million, respectively, within collaboration and license revenue related to the initial license fee under the Abbott License Agreement. +14. Employee benefit plans +The Company sponsors a 401(k) savings plan for employees. The Company may make discretionary contributions for each 401(k) plan year. During the years ended December 31, 2021, 2020, and 2019, the Company made contributions of $ 1.1 million, $ 0.7 million, and $ 0.5 million, respectively. +15. Business combinations +UmanDiagnostics AB +On August 1, 2019, the Company completed its acquisition of Uman for an aggregate purchase price of $ 21.2 million, comprised of (i) $ 15.7 million in cash plus (ii) 191,152 shares of common stock (representing $ 5.5 million based on the closing prices of the Company’s common stock on the Nasdaq Global Market on July 1, 2019 and August 1, 2019, the dates of issuance). The acquisition of Uman closed with respect to 95 % of the outstanding shares of capital stock of Uman on July 1, 2019 and with respect to the remaining 5 % of the outstanding shares of capital stock of Uman on August 1, 2019. +F-32 +Table of Contents +Uman supplies Nf-L antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. With the acquisition of Uman, the Company has secured a long-term source of supply for a critical technology. This acquisition was considered a business acquisition for accounting purposes. +The Company has accounted for the acquisition of Uman as a purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets and liabilities of Uman are recorded as of the acquisition date of July 1, 2019, at their respective fair values, and consolidated with those of the Company. Purchase consideration in excess of the amounts recognized for the net assets acquired was recognized as goodwill and is not expected to be tax deductible in any taxing jurisdiction. +The following table summarizes the acquisition accounting, net of $ 1.2 million in cash and cash equivalents acquired (in thousands): +Purchase price: +Cash and stock paid +$ +21,217 +Cash and cash equivalents acquired +1,221 +Purchase price, net +19,996 +Assets (liabilities) acquired: +Accounts receivable +$ +638 +Inventory +1,680 +Prepaids and other current assets +114 +Property and equipment +33 +Intangibles +13,450 +Goodwill +8,111 +Accounts payable +( 20 ) +Accrued expense and other current liabilities +( 871 ) +Deferred tax liabilities +( 3,139 ) +Total +$ +19,996 +Revenue and net income related to Uman’s operations were $ 1.8 million and $ 0.1 million, respectively for the year ended December 31, 2021, and is included in the Company’s consolidated statement of operations. Revenue and net loss related to Uman’s operations were $ 1.5 million and $ 0.1 million, respectively, for the year ended December 31, 2020, and is included in the Company’s consolidated statement of operations. Revenue and net income related to Uman’s operations were $ 1.1 million and less than $ 0.1 million, respectively, for the six months following the July 1, 2019 acquisition date, and is included in the Company’s consolidated statements of operations for the year ended December 31, 2019. +The following unaudited pro forma information presents the condensed consolidated results of operations of the Company and Uman for the year ended December 31, 2019, as if the acquisition of Uman had been completed on January 1, 2018. These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments that reflect pro forma results of operations, such as increased amortization for the fair value of acquired intangible assets, increased cost of sales related to the inventory valuation adjustment, and adjustments relating to the tax effect of combining the Company and Uman businesses. +F-33 +Table of Contents +The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company and Uman. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of the results of operations that actually would have been achieved had the acquisition occurred as of January 1, 2018, nor are they intended to represent or be indicative of future results of operations (in thousands): +Year Ended +December 31, 2019 +Revenue (unaudited) +$ +57,597 +Pre-tax loss (unaudited) +$ +( 38,636 ) +During the year ended December 31, 2021 and 2020, the Company incurred no costs associated with the acquisition of Uman. During the year ended December 31, 2019, the Company incurred $ 1.9 million in costs associated with the acquisition of Uman. Costs associated with the acquisition of Uman are recorded as selling, general, and administrative expenses within the consolidated statements of operations. +16. Goodwill and intangible assets +The changes in the carrying amount of goodwill are as follows (in thousands): +Goodwill +Balance as of December 31, 2020 +$ +10,460 +Cumulative translation adjustment +( 828 ) +Balance as of December 31, 2021 +$ +9,632 +Acquired intangible assets consist of the following (dollars in thousands): +December 31, 2021 +Estimated +Cumulative +Useful +Gross Carrying +Accumulated +Translation +Net Carrying +Weighted Average +Life (in years) +Value +Amortization +Adjustment +Value +Life R emaining (in years) +Know-how +8.5 +$ +13,000 +$ +( 3,825 ) +$ +241 +$ +9,416 +6.0 +Developed technology +7 +1,650 +( 1,277 ) +— +373 +3.1 +Customer relationships +8.5 - 10 +1,360 +( 792 ) +2 +570 +6.1 +Non-compete agreements +5.5 +340 +( 170 ) +5 +175 +3.0 +Trade names +3 +50 +( 50 ) +— +— +— +Total +$ +16,400 +$ +( 6,114 ) +$ +248 +$ +10,534 +December 31, 2020 +Estimated +Cumulative +Useful +Gross Carrying +Accumulated +Translation +Net Carrying +Weighted Average +Life (in years) +Value +Amortization +Adjustment +Value +Life R emaining (in years) +Know-how +8.5 +$ +13,000 +$ +( 2,296 ) +$ +1,374 +$ +12,078 +7.0 +Developed technology +7 +1,650 +( 1,036 ) +— +614 +4.1 +Customer relationships +8.5 - 10 +1,360 +( 618 ) +12 +754 +7.1 +Non-compete agreements +5.5 +340 +( 102 ) +31 +269 +4.0 +Trade names +3 +50 +( 49 ) +— +1 +0.1 +Total +$ +16,400 +$ +( 4,101 ) +$ +1,417 +$ +13,716 +The Company recorded amortization expense of $ 2.0 million, $ 2.1 million, and $ 1.4 million for the years ended December 31, 2021, 2020, and 2019, respectively. Amortization of developed technology is recorded within research and development expenses, amortization of customer relationships is recorded within selling, general, and administrative expenses, amortization of trade names is recorded within selling, general, and administrative expenses, amortization of non-compete agreements is recorded within selling, general, and administrative expenses, and amortization of know-how is recorded within cost of goods sold. +F-34 +Table of Contents +Future estimated amortization expense of acquired intangible assets as of December 31, 2021 is as follows (amounts in thousands): +As of December 31, 2021 +2022 +$ +1,930 +2023 +1,848 +2024 +1,733 +2025 +1,618 +2026 +1,589 +Thereafter +1,816 +Total amortization expense +$ +10,534 +17. Related party transactions +As described in Note 9, in June 2007, the Company entered into a license agreement for certain intellectual property with Tufts. Tufts is a related party to the Company due to Tufts’ equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. During the years ended December 31, 2021, 2020, and 2019, the Company recorded royalty expense of $ 1.6 million, $ 1.1 million, and $ 1.0 million, respectively, in cost of product revenue on the consolidated statements of operations. During the year ended December 31, 2020, the Company also incurred $ 1.0 million in cost of collaboration and license revenue owed to Tufts related to sublicensing certain technology and intellectual property to Abbott. +During the year ended December 31, 2017, Harvard University became a related party because a member of the Company’s Board of Directors is affiliated with Harvard University. Revenue recorded from sales to Harvard University was $ 0.2 million, $ 0.1 million, and $ 0.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. +On November 28, 2018, the Company entered into a sponsor agreement with Powering Precision Health (PPH), a 501(c)(6) not-for-profit entity of which an executive of the Company is a board member, through December 31, 2018. The agreement committed a maximum of $ 120,000 in funds and services to be provided to PPH for the term of the agreement. On November 14, 2019, the Company entered into the first amendment to the PPH sponsorship agreement. The agreement amended the $ 120,000 annual committed maximum amount to $ 200,000 for the annual committed amount. The agreement is terminable by either party and does not bind the Company to beyond the term of the agreement. For the years ended December 31, 2021 and 2020, the Company did not make any contributions. For the year ended December 31, 2019, the Company had total contributions of $ 0.1 million. +18. Subsequent events +On January 28, 2022, the Company entered into a multi-year lease agreement for approximately 53,000 square feet of new principal office space and approximately 32,770 square feet of new laboratory space in Bedford, Massachusetts. The initial lease term is eight years and nine months beginning on the earlier of the Company occupancy, or May 1, 2022. The Company was required to provide an initial security deposit of $ 0.9 million, which was provided in a form of a letter of credit to the landlord during 2021, and is included in the Company’s restricted cash balance as of December 31, 2021. The security deposit is scheduled to be reduced to $ 0.5 million after 60 months . +F-35 \ No newline at end of file diff --git a/raw/filings/0001503274/2021/0001558370-22-002489/filing_metadata.csv b/raw/filings/0001503274/2021/0001558370-22-002489/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..d2dfd7d2000b49157de5b09e61e38b28ffa7e835 --- /dev/null +++ b/raw/filings/0001503274/2021/0001558370-22-002489/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001503274,QTRX,Quanterix Corp,10-K,2022-03-01,2021-12-31,2022-03-01T15:46:29.000Z,0001558370-22-002489,tmb-20211231x10k.htm,10-K,13737618,1,1,https://www.sec.gov/Archives/edgar/data/1503274/000155837022002489/tmb-20211231x10k.htm,https://www.sec.gov/Archives/edgar/data/1503274/000155837022002489/,2021,2021,1 diff --git a/raw/filings/0001503274/2021/0001558370-22-002489/item1.txt b/raw/filings/0001503274/2021/0001558370-22-002489/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..61349c23f1e6c2497676cacb74bc2a2314f62203 --- /dev/null +++ b/raw/filings/0001503274/2021/0001558370-22-002489/item1.txt @@ -0,0 +1,488 @@ +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +We believe that our Simoa platforms are among the most sensitive commercially available multiplex protein detection platforms and significantly advance ELISA technology, which has been the industry standard for protein detection for over 40 years. Furthermore, we believe the HD-X is the most sensitive commercially available automated multiplex protein detection platform . Proteins are complex molecules that are required for the structure, function and regulation of the body’s tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes can produce over 100,000 different proteins, of which at least 10,000 are known to be secreted in blood. Researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa’s sensitivity offers a new way to monitor healthy individuals and detect proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical signs and symptoms have appeared. +Our Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited in approximately 1,600 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over 1,120 customers across our end markets and includes 22 of the 25 largest biopharmaceutical companies. +Our Products and Services +Our proprietary Simoa technology is based on traditional enzyme-linked immunosorbent assay (ELISA) technology, which has been the most widely used method of detection of proteins for over 40 years. Given our target customers’ familiarity with the core ELISA technology, we believe this offers us a significant competitive advantage. Our Simoa bead-based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. This ability is the key to our bead-based technology’s unprecedented sensitivity. In addition, in January 2018, we acquired Aushon BioSystems, Inc. (Aushon) and its proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined this planar array technology to provide the same Simoa sensitivity found in our Simoa bead-based platform. We currently offer the +1 +Table of Contents +following three Simoa instruments, which we believe are among the most sensitive multiplex protein detection platforms commercially available today: +● HD-X : We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. +● SR-X : We commercially launched our SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of potential applications. +● SP-X : We commercially launched our SP-X instrument in April 2019. The SP-X is based on our Simoa planar array technology, which allows for significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The current menu of approximately 80 analyte-specific single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology, oncology and cardiology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. We intend to continue to increase the number of Simoa biomarker assays across our platforms. In addition, both the bead-based platform and the planar array platform allow ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called “homebrew” assays. +We also provide contract research services for customers through our CLIA-certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 1,700 projects for approximately 400 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +In view of the COVID-19 pandemic, in 2020 we adjusted our operations to expand capacity in our Accelerator Laboratory to support customers whose operations have been disrupted and to sustain clinical trials. We also determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS- CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. In December 2020, the United States Food and Drug Administration (FDA) issued an Emergency Use Authorization (EUA) for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test, and in January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. In September 2021, the FDA expanded the EUA for our Simoa SARS-CoV-2 N Protein Antigen Test to include testing with nasal swabs and saliva and for asymptomatic serial testing with nasal swab samples. We are exploring extending the test to home-based sample collection and pooling to enable larger scale testing. +In August 2019, we completed the acquisition of UmanDiagnostics AB (Uman), a company located in Umeå, Sweden, that supplies neurofilament light (Nf-L) antibodies and Nf-L ELISA kits. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Since we commercially launched the first assay that could reliably measure Nf-L in blood using Uman’s antibodies and our Simoa technology in 2017, Nf-L has seen dramatic growth as a neurological biomarker. This innovation allowed research, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly and has led many of the world’s foremost neurology researchers and clinicians to conclude that Nf-L may be one of the most clinically relevant +2 +Table of Contents +brain biomarkers available today. Despite significant efforts by us and others to identify or develop an alternative source of antibodies, we believe the Uman Nf-L antibodies remain the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. The superiority of the Uman antibodies is evidenced by the fact that, to date over 600 publications relating to the detection of Nf-L in serum or plasma have used the Uman antibodies. The Uman acquisition s ecured the Nf-L antibody supply critical to our industry-leading ultrasensitive Simoa Nf-L assays and services, provided us with additional revenue opportunities via the sale of the Nf-L antibodies and Nf-L ELISA kits, and positioned us to capitalize on significant growth opportunities with Nf-L applications in Alzheimer’s disease, multiple sclerosis, and other neurodegenerative conditions. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in other select markets. In addition, we sell Uman’s Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide. We have an extensive base of customers in world class academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research/drug trial, diagnostics and precision health screening markets. +Life Science Research/Drug Trial Markets +Our initial target market is the large and growing life science research and drug trial markets, which we sometimes refer to collectively as the translational market. We have chosen these markets to target initially because we believe there is reduced regulatory and reimbursement risk. We believe our Simoa platforms are well-positioned to capture a significant share of these markets because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. +In addition, as pharmaceutical companies look for ways to more efficiently and effectively develop and obtain regulatory approval for drugs, use of biomarkers in clinical drug trials is becoming more prevalent. With Simoa’s sensitivity and its ability to detect many biomarkers in blood, plasma and other non-invasive samples that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. +According to estimates in the Third-Party Research Report, as we further expand our focus in these markets on other areas, such as immunology, oncology and other therapeutic areas, coupled with the growing adoption of decentralized clinical trials, the life science research/drug trial addressable market is expected to expand to as much as $12 billion. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics, as well as invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy, can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries. Simoa technology also has significant potential in the emerging field of companion diagnostics. Drug developers can use companion diagnostics to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. +3 +Table of Contents +In view of the COVID-19 pandemic, as an initial foray into the diagnostics market, in 2020 we began developing a SARS- CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. We currently have EUAs for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test and our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. In addition, in 2021, our pTau-181 assay was granted Breakthrough Device Designation from the U.S. FDA as an aid in the diagnosis of Alzheimer’s disease. We believe this gives us an opportunity to further advance a potential Alzheimer’s disease diagnostic test either alone or with a partner. +There has also been significant interest from third parties to use our technology to develop applications for the diagnostic market, such as our licensing and supply arrangement with Siemens Healthineers (Siemens) for access to our Nf-L antibodies, which will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization, as well as our non-exclusive License Agreement with Abbott Laboratories, pursuant to which we granted Abbott a non-exclusive, worldwide, royalty-bearing license under our bead-based single molecule detection patents for IVD use. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention, enabling a “precision health” revolution. +Simoa products sold or used in the diagnostics and precision health screening markets will be subject to regulation by the FDA or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. To date, other than our EUAs for our COVID assays, we have not received or applied for regulatory approvals for Simoa products. See “Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement” and “—Government Regulation” for a more detailed discussion regarding the regulatory approvals that may be required. +Our Competitive Strengths +We believe that our competitive strengths include the following: +● Proprietary ultra-sensitive Simoa digital immunoassay technology platforms. We believe our Simoa platforms are among the most sensitive, commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. We believe that sensitivity is so important that we have published an approach to increase the sensitivity of our Simoa technology – in some cases as much as 100-fold - and we intend to launch a beta program using this more sensitive technology in our Accelerator Laboratory by the end of 2022 . +● Technology platforms that leverage and improve upon industry standard ELISA technology. Simoa uses the basic principles of conventional bead-based ELISA immunoassay technology, which has been the most widely used method of detection of proteins for over 40 years. Adding digital capability to this industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers’ familiarity with the core ELISA technology, our Simoa platforms are easily integrated with existing customer workflows including data analysis. +4 +Table of Contents +● Deep and expanding scientific validation and customer base. Our Simoa technology has been cited in approximately 1,600 publications to date, including JAMA Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. We have established relationships with key opinion leaders, and our growing base of over 1,120 customers includes some of the world’s leading academic and government research institutions as well as 22 of the 25 largest biopharmaceutical companies. +● Leading position in market solidified by robust customization capabilities, assay design flexibility and automation of our HD-X instrument. Our technical capabilities and expertise allow our customers to design high-quality, customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead-based and planar array platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD-X instrument provides fully automated analysis from sample introduction to analytical results, and our proprietary approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater throughput and lab efficiency. +● Highly attractive business model that leverages growing installed base of instruments. Our installed instrument base increased by 32% in 2021 to 708 instruments as of December 31, 2021. The integration of our technology into our customers’ projects provides ongoing sales of assays and consumables, and as we continue to grow our installed instrument base, optimize workflows and expand our assay menu, we expect to increase our revenues derived from consumables. Our consumables and other product revenue increased by $27.7 million to $55.1 million in 2021 from $27.4 million in 2020 and $25.6 million in 2019. Consumables and other product revenue represented approximately 50% of our total revenue in 2021. +● Our highly experienced senior management team. We are led by a dedicated and highly experienced senior management team with significant industry experience and proven ability to develop novel solutions. Each of the members of our senior management has more than 20 years of relevant experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible with any other current research and diagnostic technology. We believe this greater insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our strategy to achieve this includes: +● Focus on the highly attractive, expanding market for protein detection and analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. Our technology provides a unique bridge between understanding the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and diagnostic and drug development. +● Continue to drive adoption of our Simoa technology in the life science research/drug trial markets in the near-term, and the diagnostics and precision health screening markets in the long-term. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We also believe that our Simoa technology is uniquely positioned for use by pharmaceutical companies in drug trials as biomarkers are being increasingly used as an adjunct +5 +Table of Contents +to help increase the potential of regulatory approval. We have focused on these markets because we believe there is reduced regulatory and reimbursement risk for us in these markets. However, we also believe Simoa technology has the capability to enable the development of a new category of less- invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. We have had two EUAs approved for our COVID assays. In addition, in 2021 our pTau-181 assay was granted Breakthrough Device designation from the FDA as an aid in diagnostic evaluation of Alzheimer’s disease, and we are currently aiming to launch our first laboratory developed test in 2023. In the precision health screening market, we believe that Simoa technology has the potential to someday be used to monitor biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection and monitoring of the onset of disease. +● Leverage the growing importance of Nf-L and other neurological biomarkers to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of Nf-L and other neurological biomarkers, such as pTau-181 and pTau-217, has increased significantly in recent years, and our ultra-sensitive Simoa platforms have allowed research of neurological disorders, previously limited primarily to CSF, to expand significantly. To capitalize on the growing importance of Nf-L, in mid-2019, we acquired Uman and its proprietary Nf-L antibodies, which we believe are the best-in-class for highly sensitive and specific Nf-L detection in serum or plasma. In addition, other neuro biomarkers, such as pTau-217 and pTau-181, have shown increasing relevance in neurological research and drug development. In 2021, Lilly presented new data from its Phase 2 TRAILBLAZER-ALZ study of its Alzheimer’s disease drug candidate donanemab, which employed our ultra-sensitive Simoa technology to measure plasma pTau-217, using antibodies developed by Lilly. Lilly reported a significant reduction in blood levels of phosphorylated Tau protein after treatment with donanemab, and that a reduction in plasma pTau-217 levels correlated with the slowing of cognitive decline. In addition, following the FDA approval of its Alzheimer’s disease drug ADUHELM™, Biogen conducted Simoa biomarker studies on Phase 3 EMERGE and ENGAGE trial samples, utilizing Simoa technology to measure plasma pTau-181. Preliminary data was reported that showed a dose-dependent reduction in plasma pTau-181 levels following treatment with ADUHELM, which correlated with decreases in amyloid PET and a slowing of cognitive decline across four independent assessment tools. We believe that the use of biomarkers in clinical trials for neurological conditions is becoming increasingly important. With Simoa’s sensitivity and its ability to detect many neurological biomarkers in blood and plasma that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. +● Grow into new markets organically with our customers and through strategic collaborations. Our customers have access to a large breadth of diverse markets, spanning research and clinical settings. As these customers continue to gain experience with our proprietary Simoa technology and further appreciate its potential, we believe moving into diagnostics and ultimately precision health is a natural extension of some of the work that our customers are doing today in the research market. For example, use of Simoa technology by pharmaceutical companies to measure biomarkers in clinical trials potentially could lead to a companion diagnostic, and ultimately a precision health test that could monitor and identify early disease. We believe this progression with our customers will help us move into new markets organically in a cost-effective manner, while also retaining significant upside. In addition, we have entered into, and will continue to explore, partnerships that will help us access these markets. For example, following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary Nf-L antibodies, which will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization. Additionally, in September 2020, we granted Abbott Laboratories a non-exclusive license under our bead-based single molecule detection patents for IVD use. +● Grow through strategic acquisitions. We intend to strategically acquire businesses and technologies to expand our operations and strengthen our market position. For example, in January 2018, we acquired Aushon and its proprietary sensitive planar array detection technology, which led to the development of our SP-X instrument. In mid-2019, we also acquired Uman, securing the Nf-L antibody supply critical to our industry leading ultrasensitive Simoa Nf-L assays and services and positioning us to capitalize on the +6 +Table of Contents +growing significance of Nf-L as a neurological biomarker. We expect that acquisitions will continue to be an important part of our strategy to increase scale, and we intend to pursue acquisitions to expand product offerings, strengthen domestic or international distribution, add technologies, and/or provide access to complementary or strategic growth areas. +● Leverage the PPH ecosystem. Powering Precision Health (PPH) is a non-profit organization founded in 2016 by our Chief Executive Officer, Kevin Hrusovsky. PPH aims to gather many of the world’s top innovators, scientists, physicians, medical professionals, patient advocates, government officials, regulators and investors to discuss the critical issues and opportunities related to advancing precision medicine in key disease areas including neurology, oncology, cardiology, inflammation and infectious disease. Quanterix is uniquely positioned to leverage this PPH ecosystem to gather and synthesize key insights and information, to collaborate on important research, to deepen our credibility and expand our business opportunities in the proteomics space, and to raise awareness of the technological innovations, such as Simoa, that are powering the latest breakthroughs in medical research and precision health. +Industry Background +We intend to pursue the application of our Simoa technology to the life science research/drug trial, diagnostics and precision health screening markets. Our initial commercial strategy targets the large and growing life science research/drug trial markets, and we believe that the diagnostic market and the precision health screening market represent significant future commercial opportunities for Simoa. According to estimates in the Third-Party Research Report, we believe the aggregate commercial opportunity across these markets has the potential to expand to over $100 billion. +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and regulation of the body’s tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an organism’s proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot provide. +The human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, of which at least 10,000 are known to be secreted in blood, and fewer than 1,300 of which can be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of much of the proteome has not been practical given the limited level of sensitivity of existing technologies. Currently, across our platforms, we commercialize assays that address approximately 154 protein biomarkers secreted or released in blood and CSF. +While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to understand precisely the nuanced continuum between health and disease. Genes may indicate the risk of developing a certain disease later in life, but they are not able to account for the impact of environmental factors and lifestyle, such as diet and exercise, or provide insight into what is happening in a patient’s body in real time. For example, identical twins have the same genotype, but may develop different diseases over the course of their lifetime, largely due to environmental factors. +Much like the sequencing of the human genome with the Human Genome Project and the development of both PCR and next generation sequencing technologies to detect nucleic acids, both of which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and well-being of +7 +Table of Contents +individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, ultimately, prevention, by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +Existing Technologies and Their Limitations +Protein Analysis +ELISA has been the most widely used method of sensitive detection of proteins for over 40 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either directly, or indirectly through use of a conjugated secondary or “capture” antibody (sandwich ELISA). A specific “detection” antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final step, a substance called an enzyme substrate is added, and the enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the graphic below: +Aside from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, Raman-enhanced signal detection, immuno-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of the at least 10,000 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of these approaches have limitations, including: +● dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +● narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +● low detection limit of readers restrict sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +● limited success in increasing sensitivity of detection due to procedural complexity and length. +8 +Table of Contents +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers aimed at detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become detectable. PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias into the data, potentially compromising the reliability of results, particularly at low concentrations. +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection sensitivity. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead-based technology detects proteins: +Simoa Bead-Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead-based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the graphic). +9 +Table of Contents +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 microwells, each of which is large enough to accommodate only a single bead. +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +Our Simoa bead-based technology offers unprecedented protein detection sensitivity and enables detection of low abundance and previously undetectable biomarkers. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from a sample, and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while competitive platforms lose sensitivity when multiplexing is used. Multiplexing is +10 +Table of Contents +achieved with our Simoa bead- based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. In 2017, we commercially launched a Simoa neurology 4-plex assay (Nf-L, tau, GFAP and UCH- L1) for the study of neurodegenerative conditions and traumatic brain injury. In 2020, we introduced a Simoa 4-plex assay (Aβ40, Aβ42, GFAP, Nf-L) designed to measure key biomarkers of Alzheimer’s disease and related disorders. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. While we have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the HD-X, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of proteins in a single sample, we believe that the ability to multiplex above a 6-plex and maintain single-plex sensitivity and precision is currently limited using bead-based technology due to constraints in the number of bead- containing wells for each plex that are imaged on the Simoa disk. However, our bead-based assay technology was used by researchers to demonstrate a novel workflow to expand multiplexing through a process of sequential incubation steps. We plan to explore this and other methods to potentially expand the multiplexing capabilities of our Simoa assay technology to enable plexing of 10-20 plex over the next two years. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +11 +Table of Contents +A) Analyte-specific capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96-well microtiter plate. Each microspot contains capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) Samples are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by washing the plate with a benchtop plate washer or manual wash manifold. +C) A mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +D) Streptavidin-HRP (horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a washing step. +E) A high-sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to emit light. +F) The plate is placed into the Quanterix SP-X imaging system. A scientific-grade CCD camera images the entire plate and all micro-spots simultaneously. The low background of the plate surface and the high-sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The SP-X imaging software utilizes algorithms to optimize exposure time and combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +Below is an image of a 96-well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We believe the Simoa planar array technology is well-suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with ultra-sensitive detection in a multiplex assay format. The figure below demonstrates 10-plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) listed in femtogram per ml. +12 +Table of Contents +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, our Simoa bead-based technology has also been used to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR-based assays with the following benefits: +● no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +● reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; and +● the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water or serum samples. +For detection of nucleic acids with our Simoa bead-based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research/drug trial, diagnostics and precision health screening markets. +Life Science Research/Drug Trial Markets +Our initial target market is the large and growing life science research and drug trial markets, which we sometimes refer to collectively as the translational market. We have chosen these markets to target initially because of the reduced regulatory and reimbursement risk. We believe our Simoa platforms are well-positioned to capture a significant share of these markets because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +In addition, as pharmaceutical companies look for ways to more efficiently and effectively develop and obtain regulatory approval for drugs, use of biomarkers in clinical drug trials is becoming more prevalent. With Simoa’s sensitivity and its ability to detect many biomarkers in blood, plasma and other non-invasive samples that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. +13 +Table of Contents +Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. In addition, researchers can also use Simoa to monitor a drug candidate’s unwanted effect on “off-target” biomarkers and predict side effects, addressing the significant issue of drug toxicity, which is a leading cause of death in the United States. +According to estimates in the Third-Party Research Report, as we further expand our life science research focus in other areas of immunology, oncology and other therapeutic areas, coupled with growing adoption of decentralized clinical trials, the life science research/drug trial addressable market is expected to expand to as much as $12 billion. +Diagnostics +The diagnostic market represents a significant future commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +Simoa technology also has significant potential in the emerging field of companion diagnostics. A companion diagnostic test is a biomarker test that is specifically linked to a therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use companion diagnostics to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. Companion diagnostics have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only could Simoa be used to develop companion diagnostics to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity can also enable the development of companion diagnostics based on protein biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This would quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing dosages or even switching therapies. +In view of the COVID-19 pandemic, as an initial foray into the diagnostics market, in 2020 we began developing a SARS- CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. In December 2020, the FDA issued an EUA for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test, and in January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test, each of which is run on our HD-X instrument. In September 2021, the FDA expanded the EUA for our Simoa SARS-CoV-2 N Protein Antigen Test to include testing with nasal swabs and saliva and for asymptomatic serial testing with nasal swab samples. We are exploring extending the test to home-based sample collection and pooling to enable larger scale testing. +In 2021, our pTau-181 assay was granted Breakthrough Device designation from the FDA as an aid in the diagnosis of Alzheimer’s disease. We believe this gives us an opportunity to further advance a potential Alzheimer’s disease diagnostic test either alone or with a partner. +There has also been significant interest from third parties to use our technology to develop applications for the diagnostic market. Following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary Nf-L antibodies, which will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization. Additionally, in September 2020, we entered into a non-exclusive License Agreement with Abbott Laboratories, pursuant to which we granted Abbott a non-exclusive, worldwide, royalty-bearing license under our bead-based single molecule detection patents for IVD use. +Precision Health Screening +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be +14 +Table of Contents +used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention, enabling a “precision health” revolution. +We believe there is the potential for a number of neurological, cardiovascular, oncologic and other protein biomarkers associated with disease to be measured with a simple blood draw on a regular, ongoing basis as part of a patient’s routine health screening, and for those results to be compared periodically with baseline measurements to predict or detect the early onset of disease, prior to the appearance of symptoms. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses. In particular, we have focused on neurology and oncology, as well as COVID, cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally only been detectable in cerebrospinal fluid (CSF), has the potential to rapidly advance neurology research and drug development, and transform the way brain diseases and injuries are diagnosed and treated. To our knowledge, the brain is the only organ in the body for which there is not currently a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either an MRI scan of the brain or a spinal tap to collect CSF, both of which are costly and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood-brain barrier, and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of many these neural biomarkers in the blood are so low that they are undetectable by conventional, analog immunoassay technologies. +To date, there have been over 1,000 neurology-related scientific publications using our Simoa technologies, and we believe that ultra- sensitive digital detection of neural related biomarkers in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including Alzheimer’s disease, multiple sclerosis, dementia, Parkinson’s disease, and traumatic brain injury, or TBI. The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. The importance of Nf-L and other neurological biomarkers, such as pTau-181 and pTau-217, has increased significantly in recent years. In addition, biomarkers are being increasingly used as an adjunct by pharmaceutical companies in clinical trials to help increase the potential for regulatory approval, particularly in neurological indications. With Simoa’s sensitivity and its ability to detect many neurological biomarkers in blood and plasma that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity, in particular with respect to Alzheimer’s disease and multiple sclerosis. +Dementia is a collective name for brain syndromes that affect memory, thinking, behavior and emotion. According to Alzheimer’s Disease International , as of 2021, there were more than 55 million people worldwide living with dementia, a figure expected to increase to over 139 million by 2050, and the annual global cost of dementia is now above $1.3 trillion. Alzheimer’s disease is a progressive neurodegenerative disorder that affects cognition, function and behavior and is the most common cause of dementia. +In 2021, Lilly presented new data from its Phase 2 TRAILBLAZER-ALZ study of its Alzheimer’s disease drug candidate donanemab, which employed our ultra-sensitive Simoa technology to measure plasma pTau-217, using antibodies developed by Lilly. Lilly reported a significant reduction in blood levels of phosphorylated Tau protein after treatment with donanemab, and that a reduction in plasma pTau-217 levels correlated with the slowing of cognitive +15 +Table of Contents +decline. In addition, following the FDA approval of its Alzheimer’s disease drug ADUHELM™, Biogen conducted Simoa biomarker studies on Phase 3 EMERGE and ENGAGE trial samples, utilizing Simoa technology to measure plasma pTau-181. Preliminary data was reported that showed a dose-dependent reduction in plasma pTau-181 levels following treatment with ADUHELM which correlated with decreases in amyloid PET and a slowing of cognitive decline across four independent assessment tools. These results highlight the potential role for emerging biomarker measurements in the detection of Alzheimer’s disease pathology even earlier in the disease continuum, when patients are asymptomatic and not yet exhibiting brain pathology in PET imaging studies. +In 2017, researchers using Simoa technology published a paper in JAMA Neurology demonstrating that a simple blood test for Nf-L exhibited the same level of diagnostic accuracy for diagnosing Alzheimer’s disease as currently established CSF biomarkers. The study was a major study of almost 600 patients from the Alzheimer’s Disease Neuroimaging Initiative. The graph below depicts the diagnostic accuracy of plasma Simoa Nf-L measurements compared with traditional CSF biomarkers. The diagnostic accuracy of the plasma Simoa Nf-L results approached 90%, in line with the CSF biomarkers on the same patients. +Diagnostic Accuracy +In addition, Simoa plasma Nf-L values were associated with cognitive deficits and neuroimaging hallmarks of Alzheimer’s disease at baseline and during follow-up. High plasma Nf-L correlated with poor cognition and Alzheimer’s disease-related brain atrophy and with brain hypometabolism (lower neural energy). These data suggest a simple Simoa blood test for Nf-L may have clinical utility as a noninvasive biomarker in Alzheimer’s disease. +In October 2021, the FDA granted our Simoa pTau-181 blood test Breakthrough Device designation as an aid in diagnostic evaluation of Alzheimer’s disease. We believe this gives us an opportunity to further advance a potential Alzheimer’s disease diagnostic test either alone or with a partner. The FDA’s Breakthrough Device designation is granted to products that have the potential to offer more effective diagnosis of life-threatening diseases with an unmet medical need. The program is designed to enable accelerated development, assessment and review processes, with the intention to provide patients with more timely access to breakthrough technologies or devices. Proposed indications under the Breakthrough Device designation include use of the test results in adult patients, aged 50 years and over, presenting with cognitive impairment who are being evaluated for Alzheimer’s disease and other causes of cognitive decline as an aid in diagnostic evaluation for Alzheimer’s disease. +Multiple sclerosis is a chronic disease affecting the central nervous system (the brain and spinal cord). Multiple sclerosis occurs when the immune system attacks nerve fibers and myelin sheathing (a fatty substance which surrounds/insulates healthy nerve fibers) in the brain and spinal cord. This attack causes inflammation, which destroys nerve cell processes and myelin, altering electrical messages in the brain. Multiple sclerosis is unpredictable and affects each patient differently – some individuals may be mildly affected, while others may lose their ability to write, speak or walk. According to the National MS Society, more than 2.3 million people have a diagnosis of multiple sclerosis globally. In the U.S. alone, the National MS Society recently completed a prevalence study estimating nearly 1 million people over the age of 18 live with a diagnosis of MS. +16 +Table of Contents +Evidence of the potential clinical utility of Nf-L as a biomarker in multiple sclerosis is progressing rapidly, and Simoa’s role in that progression has been significant. In 2021, Simoa technology supported 31 scientific presentations at the 37 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS), the world’s largest meeting dedicated to advancing research for multiple sclerosis . In 2020, Simoa supported 42 presentations at ECTRIMS, and a t ECTRIMS in 2019, there were nearly 50 presentations in which our Simoa Nf-L assay was used. +As an example, in one 2019 presentation, Novartis presented positive data from its Phase III ASCLEPIOS I and II studies of its multiple sclerosis drug candidate, ofatumumab. One of the secondary endpoints included serum levels of Nf-L as measured using our Simoa Nf-L assay. Novartis presented data that showed that, starting at three months after initiation of ofatumumab treatment, and then at 12 and 24 months timepoints, patients given ofatumumab had significantly lower blood levels of Nf-L, compared to those in the comparator arm of teriflunomide treated patients. +In another ECTRIMS presentation in 2019, Roche presented retrospective data from its Phase III OPERA I, OPERA, II AND ORATORIO trials of its approved multiple sclerosis drug OCREVUS (ocrelizumab). In the data presented at ECTRIMS, it was shown that treatment with OCREVUS lowered blood Nf-L levels and increased proportion of patients reaching healthy donor range for Nf-L in both relapsing multiple sclerosis and primary progressive multiple sclerosis. Roche believes that this data helps advance the understanding of Nf-L as a potential biomarker of disease activity and for treatment monitoring, and may provide insight into the neuroprotective effects of the drug. +In an article published by Bjornevik, et al. in JAMA Neurology in September 2019, researchers presented data that showed that levels of serum Nf-L, as measured by the Simoa Nf-L assay, were increased six years before the clinical onset of multiple sclerosis. The researchers concluded that these data indicate that multiple sclerosis may have a prodromal phase lasting several years and that neuroaxonal damage occurs during this phase, emphasizing the importance of early diagnosis and treatment. +In a study published in Science in January 2022, researchers leveraged Simoa’s ability to detect the Nf-L at ultra-low levels to show that Epstein-Barr virus (EBV) increases susceptibility toward developing multiple sclerosis. Researchers of the study tested the hypothesis that multiple sclerosis is caused by EBV in a cohort comprising more than 10 million young adults on active duty in the U.S. military, 955 of whom were diagnosed with multiple sclerosis during their period of service. Risk of multiple sclerosis increased 32-fold after infection with EBV, but was not increased after infection with other viruses, including the similarly transmitted cytomegalovirus. Serum levels of Nf-L, a biomarker of neuroaxonal degeneration, increased only after EBV seroconversion, suggesting that EBV played a role in nerve cell damage. +TBIs lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as Nf-L, tau, GFAP and UCH-L1, to more adequately address diagnosis of TBIs and overall brain health. +Leading researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy (CTE), which currently can only be diagnosed after death via a brain autopsy. A recent publication by a National Institute of Health researcher indicates that measuring tau in the blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. Eventually, we believe it may be possible to develop a mobile screen enabling clinicians to quickly and accurately determine whether it is safe for concussed athletes to return to play. +In 2016, Fast Company named Quanterix one of the “World’s Most Innovative Companies” for our work in concussion detection. We also were awarded two competitive grants from the NFL-GE Head Health Challenge to advance this work in the detection and quantification of mild TBI. +17 +Table of Contents +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Simoa technology was used in an unpublished scientific study that indicates it may be possible to eventually replace routine mammograms with a very sensitive, more accurate, low cost, non-invasive blood test. In this retrospective study, researchers found that Simoa assays resulted in significantly fewer false positives and false negatives than mammography. Inaccurate mammography can result in unnecessary stress, additional health care costs from follow up diagnostic mammograms, unnecessary biopsies and increased lifetime exposure to radiation. Researchers are also developing ultrasensitive assays for lung and pancreatic cancer biomarkers using Simoa technology, potentially replacing the need for imaging and biopsy. We believe our Simoa technology has the potential to lead to rapid, cost effective, accurate blood-based health screens, further enabling the liquid biopsy market. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the immuno-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a set of over 100 tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We also believe residual cancer cell detection post-surgery or post-treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a greater risk of reoccurrence post-surgery due to residual cancer. For example, we have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen (PSA) that is over 1,000-fold more sensitive than conventional ELISA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +18 +Table of Contents +COVID-19 +In view of the COVID-19 pandemic, in 2020 we determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19, and began developing a SARS-CoV-2 semi-quantitative IgG assay and a SARS-CoV-2 antigen detection assay and prototyping a high-definition multiplex SARS-CoV-2 serology assay. +In December 2020, the FDA issued an EUA for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test that is run on our HD-X instrument. This test targets antibodies that are directed against the region of the novel coronavirus known as the spike protein. The spike protein contains multiple subunits which together mediate entry of the virus into human cells, and for this reason, many candidate and authorized COVID-19 vaccines are designed to elicit an antibody response to the spike protein. Accordingly, we believe that this test may be useful for measuring the antibody response to vaccine therapy. The assay may also be used for measurement of IgG antibodies in patients suspected of previous infection or recent SARS-CoV-2 exposure. The test provides a numerical result representing the concentration of antibodies from 0.21 to 250 mg/mL. In clinical studies, the test demonstrated a 100% positive percent agreement (sensitivity) and 99.2% negative percent agreement (specificity) 15 or more days following a positive PCR test. +In January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test that is also run on our HD-X instrument. This test detects the presence of the SARS-CoV-2 virus nucleocapsid protein (or N protein) which is known to be elevated in respiratory fluids during the initial acute phase of the infection. We believe that direct detection of antigen proteins from the virus may be a more meaningful measure of infection status than detection of RNA by rRT-PCR because genetic material can linger even after the virus has left the body, resulting in increased risk of false positives. In clinical studies, this test demonstrated a sensitivity of 97.7% and specificity of 100% up to 14 days following onset of symptoms. Under the current EUA, the test is intended for use with nasopharyngeal (NP) samples in individuals suspected of COVID-19 infection by their healthcare providers. In September 2021, the FDA expanded the EUA for our Simoa SARS-CoV-2 N Protein Antigen Test to include testing with nasal swabs and saliva and for asymptomatic serial testing with nasal swab samples. We are exploring extending the test to home-based sample collection and pooling to enable larger scale testing. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range +19 +Table of Contents +of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn’s disease undergoing anti-TNF-α therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF-α levels of the patients before and after treatment. These levels were all below the LoD of traditional immunoassays. +We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly 1 in 4 deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making early stage detection more specific and widely available. +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +20 +Table of Contents +For example, we have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than conventional ELISA assays capable of detecting the HIV-specific antigen, p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +In addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile ( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +21 +Table of Contents +Our Products and Services +Our Quanterix commercial portfolio includes research use only (RUO) instruments, assay kits and other consumables, and contract research services offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD-X +● +commercially launched the next-generation HD-X in the second half of 2019 to replace the HD-1 launched in 2014 +● +Simoa bead-based platform technology +● +most widely referenced ultra-sensitive multiplex immunoassay platform on market +● +fully automated, floor-standing instrument +● +wide dynamic range +● +multiplexing capability (up to 6-plex) with small sample volume +● +up to 400 samples per eight-hour shift +● +homebrew capabilities +SR-X +● +commercially launched in December 2017 +● +Simoa bead-based platform technology +● +reader only, benchtop instrument with lower price point +● +same sensitivity, dynamic range and homebrew capabilities as HD-X +● +multiplexing capability: SR-X currently has up to 6-plex capability +● +sample prep and assay protocol flexibility +SP-X +● +commercially launched in April 2019 +● +Simoa planar array platform technology +● +reader only, benchtop instrument with lower price point +● +similar sensitivity, dynamic range and homebrew capabilities as HD-X +● +multiplexing capability: SP-X currently has up to 10-plex capability +● +sample prep and assay protocol flexibility +22 +Table of Contents +Product +Key attributes +Simoa assays and other consumables +● +menu of approximately 80 single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology +● +Two EUA approved SARS-CoV-2 assays +● +menu of Simoa planar array reagent kits includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research +● +homebrew kits containing reagents and supporting user guides enabling customers to develop custom assays +● +proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead-based assays +Nf-L antibodies and Nf-L ELISA kits +● +sold through our wholly-owned subsidiary, Uman, which we acquired in 2019 +● +Nf-L capture/detection antibodies with unparalleled sensitivity and specificity +● +Nf-L ELISA kits for CSF (CE-certified in Europe; RUO outside of Europe) +● +Nf-L ELISA kits for serum (RUO) +● +licensing and supply arrangement with Siemens Healthineers that will allow Siemens to begin developing blood-based Nf-L clinical tests for future commercialization +Services +● +contract research services provided through our Accelerator Laboratory +● +over 1,700 projects completed to date +● +extended warranty and service contracts +● +CLIA-certified lab available +23 +Table of Contents +Instruments and Consumables +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1, our very first instrument, which was launched in January 2014. The HD-X was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X uses our Simoa bead-based technology and is the most sensitive automated multiplex protein detection platform commercially available. Assays for the HD-X are fully automated (i.e., sample in to result out), and results for up to 66 samples are available in approximately one hour. Samples can be input into the instrument via 96-well microtiter plates or sample tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +Specialized software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration of multiple biological molecules. The HD-X software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to concentrations for the different biological molecules. +By the end of 2021, approximately 68% of the HD installed base were HD-X instruments. +SR-X +We commercially launched the SR-X instrument in the fourth quarter of 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra-sensitive detection capabilities enabled by Simoa. +In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instruments using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately 2.5 hours. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide the same Simoa sensitivity found in our Simoa bead-based platform. The Simoa planar array technology utilizes a 96-well microtiter plate with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar to the SR-X, the assay prep workflow utilized for the SP-X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid handling methods as the SR-X. The SP-X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments, and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 80 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the +24 +Table of Contents +planar array instrument includes approximately 120 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to these assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes and disposable tips. Our goal is to continue to add to our assay kits to extend our application base. +We have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to manufacturing and final documentation. We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu expansion goals. +Nf-L Antibodies and Nf-L ELISA Kits +In August 2019, we completed our acquisition of Uman. Uman supplies Nf-L antibodies and ELISA kits for Nf-L detection. Uman’s Nf-L antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies worldwide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Through Uman we sell proprietary Nf-L capture and detection antibodies, as well as two Nf-L ELISA kits for CSF, one of which is CE-certified in Europe, and one RUO Nf-L ELISA kit for serum. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. Researchers, academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, including: +● Sample testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer’s needs and even large studies can be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +● Homebrew assay development. Utilizing proprietary or commercially available reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +● Custom development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +To date, we have completed over 1,700 projects for approximately 400 customers from all over the world using our Simoa platforms, including over 150 projects for clinical studies. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a significant catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +25 +Table of Contents +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We believe that sensitivity is so important that we have published an approach to increase the sensitivity of our Simoa technology – in some cases as much as 100-fold, and we intend to launch a beta program using this more sensitive technology in our Accelerator Laboratory by the end of 2022 . We are also focused on expanding our assay menu to extend the scope of applications for our platform and grow our customer base. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional major markets, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, we sell Uman’s Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with a distributor worldwide. Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological advances in Simoa systems, workflows, and notable research being performed by our customers or ourselves. As our primary point of contact in the marketplace, our sales force focuses on delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As of December 31, 2021, we had 135 full-time people employed in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We intend to significantly expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region countries such as South Korea and Australia as well as in South America. We plan to expand into these regions via initial penetration with distributors and then subsequent support with Quanterix-employed sales and support personnel. +Our sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and governmental research institutions. +In addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness of our technologies, demonstrate the benefits relative to existing technologies and accelerate adoption. We also seek to increase awareness of our products through participation at trade shows, academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +Our systems are relatively new to the life science marketplace and require a capital investment by our customers. The sales process typically involves numerous interactions and demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the system including running experiments in the Accelerator Laboratory and comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +26 +Table of Contents +Manufacturing and Supply +Our manufacturing strategy has two components: to outsource the Simoa bead-based instrument development and manufacturing with industry leaders, and to internally develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is manufactured by STRATEC Biomedical AG (STRATEC), based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. See “—Key Agreements—Development Agreement and Supply Agreement with STRATEC” for a description of our agreement with STRATEC. The SR-X is manufactured by Paramit Corporation (Paramit), based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements—Paramit Manufacturing Services Agreement” for a description of our agreement with Paramit. Installation of, and training on, our instruments is provided by our employees in the markets where we conduct direct sales, and by distributors in those markets where we operate with distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we would experience additional costs, delays and difficulties in doing so, and our business could be harmed. +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Reagents for our bead-based assays include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we have increased the shelf life of the vast majority of our bead-based assays from six months to 12 months or more. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. We believe that this agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead-based platform are commercially available. +We assemble our 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +27 +Table of Contents +Nf-L antibodies and Nf-L ELISA Kits +The storage of Uman’s proprietary Nf-L antibody producing hybridomas as well as the cultivation and purification of the antibodies is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s Nf-L ELISA kits. The antibody reagents are labeled and released to market after testing. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s Nf-L ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. All incoming goods are subject to receipt control and any deviations related to quality deficiencies are registered. The kit components include buffers (sample diluent and wash solution), an ELISA 96-well plate coated with a capture antibody, detector antibody, streptavidine conjugate, substrate (TMB) and stop reagent. The kit components are labeled (either “RUO” or “CE”) and assembled. The final ELISA kit product is subject to quality control which include testing of human CSF quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months. +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement (the STRATEC Development Agreement) with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. Under the STRATEC Development Agreement, we were required to pay a fee and issue to STRATEC warrants to purchase our equity securities, all of which have been exercised as of December 31, 2017. These fees and warrants were subject to a milestone based payment schedule. The STRATEC Development Agreement was amended in November 2016. The Amendment reduced our obligation to satisfy a minimum purchase commitment under the STRATEC Supply Agreement described below. Additionally, the parties agreed on additional development services for an additional fee, which is payable when the additional development is completed. This fee includes the final milestone payment that was associated with the final milestone due under the terms of the STRATEC Development Agreement. The services were completed in and the final milestone payment was paid in the fourth quarter of 2019. The STRATEC Development Agreement may be terminated on the insolvency of a party, for an uncured material breach, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination) or if we and STRATEC are unable to agree on pricing of the instrument, within certain parameters. +In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC (the STRATEC Supply Agreement), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The STRATEC Supply Agreement was amended in November 2016 to reduce the number of HD instruments we were committed to procure from STRATEC, and this commitment has been met. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party, provided that neither party may terminate the STRATEC Supply Agreement prior to the later of the seven year anniversary of the acceptance of the first prototype instrument and the purchase of the minimum number of instruments which we were committed to procure. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free +28 +Table of Contents +license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the Paramit Agreement) with Paramit. Under the terms of the Paramit Agreement, we engaged Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts. Paramit has no obligation to manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement has an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Non-Exclusive License Agreement with Abbott Laboratories +In September 2020, we entered into a Non-Exclusive License Agreement with Abbott. Pursuant to the terms of the License Agreement, we granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under our bead-based single molecule detection patents in the field of IVD. Abbott paid us an initial license fee of $10.0 million in connection with the execution of the License Agreement. Abbott has also agreed to pay us milestone fees subject to the achievement by Abbott of certain development, regulatory and commercialization milestones and low single digit royalties on net sales of licensed products. +The License Agreement includes customary representations and warranties, covenants and indemnification obligations for a transaction of this nature. The License Agreement became effective upon signing and will continue until expiration of the last-to-expire licensed patent, or the agreement is earlier terminated. Under the terms of the License Agreement, each party has the right to terminate the agreement for uncured material breach by, or insolvency of, the other party. Abbott may also terminate the License Agreement at any time without cause upon sixty (60) days’ notice. +Contracts with the NIH under RADx +In September 2020, we entered into the Rapid Acceleration of Diagnostics (RADx) workplan 2 award (WP2) with the National Institute of Health (NIH) under the RADx program. This contract, which has a total award value of up to $18.2 million, is intended to accelerate the continued development, scale-up and deployment of our novel SARS-CoV-2 antigen test. Initial early feasibility of this test was funded in part through the RADx workplan 1 award (WP1) we were granted in June 2020. WP2 supports clinical validation of the test in support of the EUA submissions with the FDA, and provides funding to expand assay kit manufacturing capacity and commercial deployment readiness. Contract funding was subject to achievement of pre-defined milestones and the contract period ran through September 2021, with one milestone extended to March 31, 2022. As of December 31, 2021, we had received $17.7 million out of the full $18.2 million under WP2. +29 +Table of Contents +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for protein discovery, detection, nucleic acid detection and additional applications. For example, companies such as Bio-Techne, Luminex, MesoScale Discovery, Gyros, Nanostring, O-Link, SEER, Somalogic, MilliporeSigma, Bio-Rad Laboratories, Thermo Fisher Scientific, and others, have products for protein discovery or detection that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as Covance, Q2 Solutions, Myriad RBM, Monogram Biosciences, PPD Laboratories, and others, some of whom are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics and precision health screening, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research, diagnostic and precision health screening markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors in our target markets include: +● sensitivity; +● cost of instruments and consumables; +● assay menu; +● reputation among customers and key opinion leaders; +● innovation in product offerings; +● accuracy and reproducibility of results; and +● customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University (Tufts), in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from Tufts the relevant patent filings related to these technologies. (See “—License Agreement with Tufts University” below). In addition to licensed patents, we have developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. Our portfolio also includes issued patents and patent applications acquired as part of our 2017 acquisition of Aushon Biosystems. We believe our proprietary platforms are a core strength of our business and our strategy includes the continued development of our patent portfolio. +30 +Table of Contents +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature; seeking to protect not only technology we currently practice but also alternative, related embodiments. +Simoa and Related Technology +As of February 1, 2022, we had exclusively licensed 18 patents and two patent applications from Tufts. These patents and patent applications include nine issued U.S. patents and two pending U.S. patent applications, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +A first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes seven granted U.S. patents, one pending U.S. patent application, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A third patent family licensed from Tufts is directed to electro-optical systems including an array and a plurality of electrodes. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is February 14, 2023. +A fourth patent family licensed from Tufts is directed to methods for detecting short nucleic acids. This patent family includes one pending U.S. patent application. The standard patent expiration date for the U.S. patent in this family is May 29, 2039. +As of February 1, 2022, we owned 27 issued U.S. patents and 17 pending U.S. patent applications, six granted European patents and three pending European patent applications, six granted Japanese patents, four granted Chinese patents and one pending Chinese patent application, three granted Canadian patents and one pending Canadian patent application, two registered Hong Kong patent applications, and one Patent Cooperation Treaty Application. +A first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads, including multiplexing. This patent family includes four granted U.S. patents and two pending U.S. patent applications, three granted European patents (nationalized and active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes five granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +31 +Table of Contents +A third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is September 28, 2028. +A fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 24, 2030. +A fifth patent family owned by us is directed to instruments and consumables. This patent family includes two granted U.S. patents and one pending U.S. patent application, two granted Japanese patents, one granted Chinese patent and one pending Chinese patent applications, one registered Hong Kong patent application and one pending patent application in each of Europe and Canada. The standard patent expiration date for any U.S. patents that may issue from this family is February 25, 2031, and for any non-U.S. patents is January 27, 2032. +A sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is September 20, 2038. +A ninth patent family owned by us is directed to methods and systems for highly sensitive assays, including methods and systems for improving capture object loading efficiency and/or use of low numbers of capture objects in assays. This patent family includes one pending Patent Cooperation Treaty patent application. If we pursue protection by filing any national stage applications, the standard patent expiration date for any patents that may issue from this family will be in 2041. +We own or co-own ten patent families directed to the measurement of particular types of analytes, including β-amyloid peptide, tau protein, toxin B of C. difficile , neurofilament light, glial fibrillary acidic protein, ubiquitin carboxyl-terminal hydrolase L1, antigens from infectious organisms such as viruses (e.g., coronaviruses), and DNA or RNA molecules. These families include one granted U.S. patent directed to methods for determining treatment protocols and/or a prognosis of a patient’s recovery from a brain injury based on measurements of tau protein in blood and one granted European patent (nationalized and active in three countries) directed to detection of C. difficile . Any patents that may issue from these patent applications would have standard expiration dates between 2032 and 2041. +With the acquisition of Aushon in January 2017, we acquired their patent portfolio for our planar array technology. As of February 1, 2022, the acquired patent portfolio includes at least ten issued U.S. patents and one pending U.S. patent application, one granted Canadian patent, one granted European patent (nationalized and active in eight countries) and one pending European patent application, and one registered Hong Kong patent. +We have licensed additional patents and patent applications from third parties. +In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +32 +Table of Contents +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable for a fee. +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 amendment, we issued Tufts shares of our Series C-1 Preferred Stock, which converted into shares of our common stock in connection with our initial public offering. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +Other than the COVID assays for which we have received EUAs, our products are currently intended for research use only (RUO) applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or the Center for Medicare and Medicaid Services (CMS). Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products are subject to FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than research purposes. Consequently, our products (other than the COVID assays for which we have received EUAs) are labeled “For Research Use Only.” +On November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (RUO/IUO Guidance). The purpose of an FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for IUO, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s 510(k) clearance, premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance is a statement of the FDA’s thinking with respect to certain RUOs and IUOs in 2013 and was not intended as a compliance requirement, we believe that our labeling and +33 +Table of Contents +promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. We also are not promoting or using our products in the development or promotion of laboratory developed test (LDT) services. When we develop products for clinical use, we will do so in accordance with FDA requirements applicable to those products at that time. Separately, when we become aware that accredited or licensed clinical laboratories may be using our RUO products either for research or clinical uses, such as part of LDT services, in accordance with the regulations that apply to clinical laboratories, we will continue to review the labeling and promotion of our products for consistency with the RUO/IUO Guidance. +When our products are marketed for clinical diagnostic use, our products will be regulated by the FDA as medical devices. The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising and labeling of our clinical products and we will be required to register as a medical device manufacturer and list our marketed products. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification (510(k)) and receive clearance from the FDA which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized until a premarket approval application (PMA) is submitted to and approved by the FDA. +510(k) Clearance Pathway +To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent (SE), to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA’s receipt of the 510(k), but it often takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre-market approval. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. +This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks +34 +Table of Contents +reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the accepted application, although review of the application generally can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with its quality system regulations (QSRs). New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and efficacy of the device. +Emergency Use Authorization +In emergency situations, such as a pandemic, the FDA has the authority to allow unapproved medical products or unapproved uses of cleared or approved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by chemical, biological, radiological or nuclear warfare threat agents when there are no adequate, approved, and available alternatives. +Under this authority, the FDA may issue an EUA for an unapproved device if the following four statutory criteria have been met: (1) a serious or life-threatening condition exists; (2) evidence of effectiveness of the device exists; (3) a risk-benefit analysis shows that the benefits of the product outweigh the risks; and (4) no other alternatives exist for diagnosing, preventing or treating the disease or condition. Evidence of effectiveness includes medical devices that “may be effective” to prevent, diagnose, or treat the disease or condition identified in a declaration of emergency issued by the Secretary of the Department of Health and Human Services (HHS). The “may be effective” standard for EUAs requires a lower level of evidence than the “effectiveness” standard that FDA uses for product clearances or approvals in non-emergency situations. The FDA assesses the potential effectiveness of a possible EUA product on a case-by-case basis using a risk-benefit analysis. In determining whether the known and potential benefits of the product outweigh the known and potential risks, the FDA examines the totality of the scientific evidence to make an overall risk-benefit determination. Such evidence, which could arise from a variety of sources, may include (but is not limited to) results of domestic and foreign clinical trials, in vivo efficacy data from animal models, in vitro data, as well as the quality and quantity of the available evidence. +Once granted, an EUA will remain in effect and generally terminate on the earlier of (1) the determination by the Secretary of HHS that the public health emergency has ceased or (2) a change in the approval status of the product such that the authorized use(s) of the product are no longer unapproved. After the EUA is no longer valid, the product is no longer considered to be legally marketed and one of the FDA’s non-emergency premarket pathways would be necessary to resume or continue distribution of the subject product. +The FDA also may revise or revoke an EUA if the circumstances justifying its issuance no longer exist, the criteria for its issuance are no longer met, or other circumstances make a revision or revocation appropriate to protect the public health or safety. +35 +Table of Contents +On January 31, 2020, the Secretary of HHS issued a declaration of a public health emergency related to COVID-19. On February 4, 2020, HHS determined that COVID-19 represents a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and, subsequently, declared on March 24, 2020, that circumstances exist to justify the authorization of emergency use of medical devices, including alternative products used as medical devices, during the COVID-19 pandemic, subject to the terms of any authorization as issued by the FDA. On February 29, 2020, the FDA issued an immediately in effect guidance with policy specific to development of IVD tests during the COVID-19 public health emergency. This guidance was updated on March 16, 2020, May 4, 2020, and May 11, 2020. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption application (IDE) and obtains approval of the IDE from the FDA. These clinical trials are also subject to the review, approval and oversight of an institutional review board (IRB) at each clinical trial site. The clinical trials must be conducted in accordance with the FDA’s IDE regulations and good clinical practices. A clinical trial may be suspended by FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. +Breakthrough Device Designation +FDA Breakthrough Device de signation is granted to certain medical devices and device-led combination products that provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating diseases or conditions. The goal is to give patients and doctors timely access to these medical devices by speeding up their development, assessment, and review, while preserving the statutory standards for premarket approval. The Breakthrough Devices Program offers device companies an opportunity to interact with the FDA's experts through several different program options to efficiently address topics as they arise during the premarket review phase, which can help companies receive feedback from the FDA and identify areas of agreement in a timely way. Recipients may also receive prioritized review of their submission and potential Medicare reimbursement through the Medicare Coverage of Innovative Technology payment pathway. Although Breakthrough Device designation or access to any other expedited program may expedite the development or clearance/authorization/approval process, it is not guaranteed to do so, and, more importantly, it does not change the standards for clearance/authorization/approval. Designation for any expedited review procedure does not ensure that we will ultimately obtain regulatory clearance or approval for such product. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +● establishment registration and device listing; +● the QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; +● labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to promotional activities; +● medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device +36 +Table of Contents +or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur; +● corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +● post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device. +To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +Since our acquisition of Aushon in January 2018, we own and operate a CLIA certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and basic research). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health assessment and for the diagnosis, prevention, or treatment of disease. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program if performing testing in any category for which proficiency testing is required. If a laboratory fails to achieve a passing score on a proficiency test, then it loses its right to perform testing. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by the Centers for Medicare & Medicaid Services (“CMS”), a CMS agent (typically a state agency), or, a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered by nearly all complex laboratories for the last few decades as LDTs, which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices. During 2010, the FDA publicly announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced its framework and timetable for implementing this guidance. On November 18, 2016, the FDA announced it would not release final guidance at that time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach. On January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. We cannot predict the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory +37 +Table of Contents +approach by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of the FDA’s approach is unknown, it may be extensive and may result in significant change. +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out-of-state laboratories to obtain licensure. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third-party payors. +If, in the future, we perform clinical diagnostic testing, we would also become subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, the European Union (the EU) recently published new regulations that will result in greater regulation of medical devices and IVDs. This new IVD regulation (new IVD Regulation) is significantly different from the European directive for In vitro diagnostic products (IVD Directive) that it replaces in that it will ensure that the new requirements apply uniformly and on the same schedule across the member states, include a risk-based classification system and increase the requirements for conformity assessment. +The CE registration for Uman’s Nf-L ELISA assay kit was approved in March 2014 under the IVD Directive . Under the IVD Directive the assay is classified as a general IVD product, class I and required self-certification with no involvement of a notified body/authority. Under the new IVD Regulation, the requirements increase and involve assessment by a notified body for class B, C and D products. Uman’s Nf-L ELISA assay kit is classified as class B product and must fully implement the new IVD Regulation by May 2027. The new requirements include an ISO 13485 certification of the quality system (which Uman received July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g., clinical evidence and post-market activities). The work to meet the new technical requirements is on-going. An internal GAP-analysis is to be performed and work to eliminate the GAPs performed. When completed, the available technical documentation will be assessed by an external consultant. When all requirements are met, a notified body will be contacted, and the certification initiated. +Other Governmental Regulation +Data Privacy and Security Laws and Regulations +As a business with a global footprint, compliance with evolving regulations and standards in data privacy and cybersecurity has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of increased regulatory enforcement activity. Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce. +For example, in the U.S., the collection, maintenance, protection, use, transmission, disclosure and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international +38 +Table of Contents +and industry levels. U.S. federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by health care providers. Privacy and Security Rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended, and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH), govern the use, disclosure, and security of protected health information by “Covered Entities,” (which are health care providers that submit electronic claims, health plans, and health care clearinghouses) and by their “Business Associates” (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the Covered Entity’s workforce). Rules under HIPAA and HITECH include specific security standards and breach notification requirements. The U.S. Department of Health and Human Services (HHS) (through the Office of Civil Rights) has direct enforcement authority against Covered Entities and Business Associates with regard to both the Security and Privacy Rules, including civil and criminal liability. Generally Quanterix is not a Covered Entity, however, we may operate as a Business Associate to Covered Entities under certain circumstances. +In addition to the regulation of personal health information, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for other kinds of personally identifiable information, such as state laws that govern the use, disclosure and protection of sensitive personal information, such as social security numbers, or that are designed to protect credit card account data. State consumer protection laws may also establish privacy and security standards for use and management of personally identifiable information, including information related to consumers and care providers. +Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. Legal requirements in foreign countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the E.U., stringent data protection and privacy rules which substantially impact the use of patient data across the healthcare industry became effective in May 2018. The E.U. General Data Protection Regulation (GDPR) applies uniformly across the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals residing in the E.U. to comply with E.U. privacy and data protection rules. +Because the laws and regulations continue to expand, differ from jurisdiction to jurisdiction, and are subject to evolving (and at times inconsistent) governmental interpretation, compliance with these laws and regulations may require significant additional cost expenditures or changes in products or business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities. +Environmental Health and Safety Laws +We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (OSHA), has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +39 +Table of Contents +Employees and Human Capital +As of December 31, 2021, we had 460 full-time employees, of which 135 work in sales, sales support, field service, and marketing, 125 work in engineering and research and development, 125 work in manufacturing and operations and 75 work in general and administration. Of our 460 full-time employees, 407 were located in the United States and 53 were located in twelve foreign countries. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We have a unique culture that stresses the impact our work has on the eradication of human diseases including Alzheimer’s, cancer and COVID-19. We invest in creating a diverse, inclusive and safe work environment where our employees can deliver their workplace best every day. Historically, we have experienced a turnover rate that is comparable to industry average. +Our success depends upon our ability to attract and retain highly qualified management and technical employees. Talent management is critical to our ability to execute our long-term growth strategy, including providing career growth, on-the-job learning opportunities and competitive compensation. We are committed to an inclusive culture which values equality, opportunity and respect. In support of our inclusive culture, we sponsor an internal Diversity, Equity and Inclusion Committee comprised of employees and executives, provide respectful workplace training to strengthen employee understanding and consciously strive to recruit a diverse talent pool across all levels of the organization. As of December 31, 2021, approximately 42% of our employees were women and approximately 30% were non-white. We are focused on the engagement and empowerment of our employees through the demonstration of our foundational values, which we refer to as AT&T3: Accountability, Trust, Teamwork and Transparency. +Workforce Compensation and Pay Equity +We provide robust compensation and benefits programs to help meet the needs of our employees. We provide our full-time employees with highly competitive salaries, as well a bonus and/or commission plan, a matching 401(k) Plan, healthcare and insurance benefits, paid time off and family leave. We also provide all of our employees with targeted equity-based grants with vesting conditions designed to facilitate retention through the opportunity to benefit financially from our growth and profitability. +Company Culture +We expect all of our employees and contractors to observe the highest levels of business ethics, integrity, mutual respect, tolerance and inclusivity. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies reflecting these values and also provide direction for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is fundamentally connected to the physical and mental well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees and contractors. We provide our employees with a wide range of benefits, including benefits directed to their health, safety and long-term financial security. In response to the COVID-19 pandemic, we have implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes allowing our employees to work remotely as appropriate, while implementing significant safety measures designed to protect the health of all those working in and entering our facilities. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +40 +Table of Contents +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. You can also review our electronically filed reports and other information that we file with the SEC on the SEC’s website at http://www.sec.gov . \ No newline at end of file diff --git a/raw/filings/0001503274/2021/0001558370-22-002489/item13.txt b/raw/filings/0001503274/2021/0001558370-22-002489/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..69086a81ba7f82d3a95513e640ee684a01a1976c --- /dev/null +++ b/raw/filings/0001503274/2021/0001558370-22-002489/item13.txt @@ -0,0 +1,2 @@ +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001503274/2021/0001558370-22-002489/item9a.txt b/raw/filings/0001503274/2021/0001558370-22-002489/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..21612a6940447b4273a2de8a522632fdb429ae23 --- /dev/null +++ b/raw/filings/0001503274/2021/0001558370-22-002489/item9a.txt @@ -0,0 +1,27 @@ +Item 9A. CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2021. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2021. +Management’s Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the framework set forth in Internal Control-Integrated Framework , our management concluded that our internal control over financial reporting was effective at the reasonable assurance level as of December 31, 2021. +The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal controls over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. +Changes in Internal Control over Financial Reporting +An evaluation was also performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of any change in our internal controls over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to affect, our internal controls over financial reporting. +There has been no change in our internal controls over financial reporting during the fiscal quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. +85 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on Internal Control over Financial Reporting +We have audited Quanterix Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Quanterix Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Quanterix Corporation as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, cash flows and stockholders’ equity for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(2) and our report dated March 1, 2022 expressed an unqualified opinion thereon. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Ernst & Young LLP +Boston, Massachusetts +March 1, 2022 \ No newline at end of file diff --git a/raw/filings/0001503274/2021/0001558370-22-002489/rp_note.txt b/raw/filings/0001503274/2021/0001558370-22-002489/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..35204ed0feb622601a887060706918a53a5a75d6 --- /dev/null +++ b/raw/filings/0001503274/2021/0001558370-22-002489/rp_note.txt @@ -0,0 +1,4 @@ +17. Related party transactions +As described in Note 9, in June 2007, the Company entered into a license agreement for certain intellectual property with Tufts. Tufts is a related party to the Company due to Tufts’ equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. During the years ended December 31, 2021, 2020, and 2019, the Company recorded royalty expense of $ 1.6 million, $ 1.1 million, and $ 1.0 million, respectively, in cost of product revenue on the consolidated statements of operations. During the year ended December 31, 2020, the Company also incurred $ 1.0 million in cost of collaboration and license revenue owed to Tufts related to sublicensing certain technology and intellectual property to Abbott. +During the year ended December 31, 2017, Harvard University became a related party because a member of the Company’s Board of Directors is affiliated with Harvard University. Revenue recorded from sales to Harvard University was $ 0.2 million, $ 0.1 million, and $ 0.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. +On November 28, 2018, the Company entered into a sponsor agreement with Powering Precision Health (PPH), a 501(c)(6) not-for-profit entity of which an executive of the Company is a board member, through December 31, 2018. The agreement committed a maximum of $ 120,000 in funds and services to be provided to PPH for the term of the agreement. On November 14, 2019, the Company entered into the first amendment to the PPH sponsorship agreement. The agreement amended the $ 120,000 annual committed maximum amount to $ 200,000 for the annual committed amount. The agreement is terminable by either party and does not bind the Company to beyond the term of the agreement. For the years ended December 31, 2021 and 2020, the Company did not make any contributions. For the year ended December 31, 2019, the Company had total contributions of $ 0.1 million. \ No newline at end of file diff --git a/raw/filings/0001503274/2021/0001558370-22-002489/rpt_disclosure.txt b/raw/filings/0001503274/2021/0001558370-22-002489/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..cdba709438bf07704371f1dd309f664f1cc194dc --- /dev/null +++ b/raw/filings/0001503274/2021/0001558370-22-002489/rpt_disclosure.txt @@ -0,0 +1,11 @@ +CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS +Since January 1, 2022, we have engaged in the following transactions with our directors, director nominees, executive officers and holders of more than 5% of our common stock, which we refer to as our principal stockholders, and affiliates or immediate family members of our directors, executive officers and principal stockholders. We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties. +We entered into a License Agreement with Tufts University in 2007, as amended in 2013, 2017 and 2020, pursuant to which we obtained an exclusive, worldwide license to our core SIMOA technology, and entered into additional license agreements with Tufts to certain related technology. David R. Walt, Ph.D., one of our directors, founding scientist and an inventor of the SIMOA technology, previously served as a professor at Tufts University. Under these licenses, we are required to pay Tufts University royalties on net sales of licensed products and services as well as a portion of our applicable sublicense revenues. During the year ended December 31, 2022, we recorded royalty expense of $1.4 million under these licenses. Tufts University pays a portion of the royalties and license payments received from us to Dr. Walt pursuant to an arrangement between Tufts University and Dr. Walt, the amount of which is determined on a formulaic basis. +In August 2022, we also entered into a license agreement with Harvard related to immunoassay technology developed by Dr. Walt at Harvard and Brigham and Women’s Hospital. In connection with entering into this agreement, we paid Harvard an upfront fee of $625,000 in 2022. Under this license, we are required to pay Harvard royalties on net sales of licensed products and services as well as a portion of our applicable sublicense revenues. During the year ended December 31, 2022, we recorded no royalty expense under this license. Harvard is obligated to pay a portion of the payments received from us to Dr. Walt pursuant to an arrangement between Harvard and Dr. Walt. +We also sell products and services to laboratories affiliated with Harvard and Brigham and Women’s Hospital that are overseen by Dr. Walt. During the year ended December 31, 2022, we recorded revenue from these sales of approximately $703,000. +In May 2022, we entered into an agreement with UltraDx Limited (“UltraDx”), a company formed by ARCH Venture Partners (“ARCH”). Keith Crandell, one of our directors, is a managing director of ARCH and is a founder of UltraDx. Under this agreement, we agreed to supply HD-X instruments (both fully assembled and disassembled) as well as assays and assay components to UltraDx, and UltraDx has the non-exclusive right to seek Chinese regulatory approval of and to commercialize the HD-X instrument and related assays in the Chinese neurological in the vitro diagnostic market. Under the terms of the agreement, we sold a total of ten fully assembled and disassembled HD-X instruments to UltraDx in June 2022 at a purchase price of approximately $1.9 million. +Stephen Hrusovsky, the son of Kevin Hrusovsky, our former Executive Chairman and former Chief Executive Officer, served as our Director, Investor Relations and Business Development until September 20, 2022. For services in 2022, he received an aggregate of $158,633 in salary, bonus, and equity awards, and upon his separation from Quanterix, he received an aggregate of $37,724 in severance. +Indemnification Agreements with Officers and Directors and Directors’ and Officers’ Liability Insurance +We have entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements, our restated certificate of incorporation and our restated bylaws require us to indemnify our directors to the fullest extent not prohibited by Delaware law. Subject to certain limitations, our restated bylaws also require us to advance expenses incurred by our directors and officers. +The 2007 Plan and the 2017 Plan also provide that our directors (and in the case of the 2017 Plan, our employees) will not be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the respective plan, and the members of our Board and any committee administering the plan will be entitled to indemnification and reimbursement by us in respect of any claim, loss, damage or expense (including reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors’ and officers’ liability insurance coverage which may be in effect from time to time. +46 \ No newline at end of file diff --git a/raw/filings/0001503274/2022/0001558370-23-002855/filing.txt b/raw/filings/0001503274/2022/0001558370-23-002855/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..14903fc48bf4b1921f1ee4c301a7aa05ed3a5636 --- /dev/null +++ b/raw/filings/0001503274/2022/0001558370-23-002855/filing.txt @@ -0,0 +1,4256 @@ +36990965 35997473 29589132 0001503274 --12-31 2022 FY Quanterix Corp 37279994 36768035 1500000 9600000 P8Y9M false 0001503274 us-gaap:DomesticCountryMember qtrx:ThroughTaxYear2042Member 2022-12-31 0001503274 us-gaap:CommonStockMember 2022-01-01 2022-12-31 0001503274 us-gaap:RetainedEarningsMember 2022-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2022-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-12-31 0001503274 us-gaap:RetainedEarningsMember 2021-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-12-31 0001503274 us-gaap:RetainedEarningsMember 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-12-31 0001503274 us-gaap:RetainedEarningsMember 2019-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001503274 us-gaap:CommonStockMember 2022-12-31 0001503274 us-gaap:CommonStockMember 2021-12-31 0001503274 us-gaap:CommonStockMember 2020-12-31 0001503274 us-gaap:CommonStockMember 2019-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2021-01-01 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember qtrx:StockBasedAwards2007PlanMember 2022-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2022-12-31 0001503274 qtrx:StockBasedAwards2007PlanMember 2022-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2022-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2019-12-31 0001503274 us-gaap:EmployeeStockOptionMember qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2017-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2017-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2023-01-03 2023-01-03 0001503274 srt:MinimumMember 2021-01-01 2021-12-31 0001503274 srt:MaximumMember 2021-01-01 2021-12-31 0001503274 srt:MinimumMember 2020-01-01 2020-12-31 0001503274 srt:MaximumMember 2020-01-01 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2022-01-01 2022-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2021-01-01 2021-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2022-01-01 2022-12-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2022-01-01 2022-12-31 0001503274 qtrx:TuftsUniversityMember us-gaap:LicenseAgreementTermsMember 2022-01-01 2022-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2022-01-01 2022-12-31 0001503274 qtrx:TuftsUniversityMember us-gaap:LicenseAgreementTermsMember 2021-01-01 2021-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2021-01-01 2021-12-31 0001503274 qtrx:TuftsUniversityMember us-gaap:LicenseAgreementTermsMember 2020-01-01 2020-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2020-01-01 2020-12-31 0001503274 qtrx:UndeliveredServicesRelatedToInitialAndExtendedServiceTypeWarrantiesAndResearchServicesMember 2022-12-31 0001503274 qtrx:UndeliveredLicensesOfIntellectualPropertyMember 2022-12-31 0001503274 2024-01-01 2022-12-31 0001503274 2023-01-01 2022-12-31 0001503274 qtrx:HarvardUniversityMember 2021-01-01 2021-12-31 0001503274 qtrx:HarvardUniversityMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceOtherMember qtrx:CollaborationAgreementMember 2022-01-01 2022-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember qtrx:AbbotLicenseAgreementMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 us-gaap:GrantMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2022-01-01 2022-12-31 0001503274 qtrx:ResearchServicesMember 2022-01-01 2022-12-31 0001503274 qtrx:OtherServicesMember 2022-01-01 2022-12-31 0001503274 qtrx:InstrumentProductsMember 2022-01-01 2022-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember qtrx:AbbotLicenseAgreementMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 us-gaap:GrantMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2021-01-01 2021-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2020-01-01 2020-12-31 0001503274 us-gaap:GrantMember 2020-01-01 2020-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2020-01-01 2020-12-31 0001503274 qtrx:ResearchServicesMember 2020-01-01 2020-12-31 0001503274 qtrx:OtherServicesMember 2020-01-01 2020-12-31 0001503274 qtrx:InstrumentProductsMember 2020-01-01 2020-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2020-01-01 2020-12-31 0001503274 us-gaap:EmployeeSeveranceMember 2022-12-31 0001503274 us-gaap:EMEAMember us-gaap:SellingGeneralAndAdministrativeExpensesMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember us-gaap:ResearchAndDevelopmentExpenseMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember us-gaap:SellingGeneralAndAdministrativeExpensesMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember us-gaap:ResearchAndDevelopmentExpenseMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember us-gaap:CostOfSalesMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember us-gaap:SellingGeneralAndAdministrativeExpensesMember 2022-01-01 2022-12-31 0001503274 us-gaap:SellingGeneralAndAdministrativeExpensesMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 us-gaap:CostOfSalesMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 us-gaap:GrantMember qtrx:AlzheimerSDiseaseDiagnosticFundMember 2022-01-01 2022-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2021-01-01 2021-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-01-01 2020-12-31 0001503274 qtrx:UltradxLimitedCompanyMember 2022-06-30 2022-06-30 0001503274 us-gaap:LicenseAndServiceMember 2022-01-01 2022-12-31 0001503274 qtrx:HarvardUniversityMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember 2021-01-01 2021-12-31 0001503274 us-gaap:OfficeEquipmentMember 2022-01-01 2022-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2022-01-01 2022-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2022-12-31 0001503274 qtrx:OfficeFurnitureAndEquipmentMember 2022-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2022-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2022-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2021-12-31 0001503274 qtrx:OfficeFurnitureAndEquipmentMember 2021-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2021-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2021-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2021-01-01 2021-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-01-01 2020-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2021-02-03 2021-02-03 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-08-06 2020-08-06 0001503274 us-gaap:OtherRestructuringMember 2022-01-01 2022-12-31 0001503274 us-gaap:EmployeeSeveranceMember 2022-01-01 2022-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-01-01 2022-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-01-01 2021-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-01 2020-12-31 0001503274 qtrx:StratecSupplyAgreementMember 2022-12-31 0001503274 us-gaap:DomesticCountryMember 2022-12-31 0001503274 qtrx:OfficeAndLaboratorySpaceInBedfordMassachusettsMember 2020-01-01 0001503274 us-gaap:RetainedEarningsMember 2022-01-01 2022-12-31 0001503274 us-gaap:RetainedEarningsMember 2021-01-01 2021-12-31 0001503274 us-gaap:RetainedEarningsMember 2020-01-01 2020-12-31 0001503274 qtrx:LoanAgreementMember 2021-12-31 0001503274 qtrx:OfficeAndLaboratorySpaceInBedfordMassachusettsMember 2022-02-01 0001503274 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2022-01-01 2022-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2022-01-01 2022-12-31 0001503274 qtrx:PropertyAndEquipmentMember 2022-01-01 2022-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2022-01-01 2022-12-31 0001503274 qtrx:OfficeAndLaboratorySpaceInBedfordMassachusettsMember 2022-01-01 2022-12-31 0001503274 srt:MinimumMember us-gaap:CustomerRelationshipsMember 2022-01-01 2022-12-31 0001503274 srt:MaximumMember us-gaap:CustomerRelationshipsMember 2022-01-01 2022-12-31 0001503274 us-gaap:TradeNamesMember 2022-01-01 2022-12-31 0001503274 srt:MinimumMember us-gaap:CustomerRelationshipsMember 2021-01-01 2021-12-31 0001503274 srt:MaximumMember us-gaap:CustomerRelationshipsMember 2021-01-01 2021-12-31 0001503274 us-gaap:TradeNamesMember 2021-01-01 2021-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2022-01-01 2022-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2022-01-01 2022-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2022-01-01 2022-12-31 0001503274 qtrx:KnowHowMember 2022-01-01 2022-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2021-01-01 2021-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2021-01-01 2021-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2021-01-01 2021-12-31 0001503274 qtrx:KnowHowMember 2021-01-01 2021-12-31 0001503274 us-gaap:TradeNamesMember 2022-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2022-12-31 0001503274 us-gaap:TradeNamesMember 2021-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2021-12-31 0001503274 qtrx:RestrictedStockUnitsAndStockOptionsMember 2022-12-31 0001503274 qtrx:RestrictedStockUnitsAndStockOptionsMember 2022-01-01 2022-12-31 0001503274 qtrx:LoanAgreementMember 2014-04-14 0001503274 qtrx:LoanAgreementMember 2022-12-31 0001503274 qtrx:LoanAgreementMember us-gaap:PrimeRateMember 2014-04-14 2014-04-14 0001503274 us-gaap:ServiceOtherMember 2022-01-01 2022-12-31 0001503274 us-gaap:ProductMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceOtherMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember qtrx:TuftsUniversityMember 2020-01-01 2020-12-31 0001503274 us-gaap:ServiceOtherMember 2020-01-01 2020-12-31 0001503274 us-gaap:ProductMember 2020-01-01 2020-12-31 0001503274 us-gaap:LicenseAndServiceMember 2020-01-01 2020-12-31 0001503274 qtrx:OneCustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2022-01-01 2022-12-31 0001503274 qtrx:CustomersOutsideOfUnitedStatesMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2022-01-01 2022-12-31 0001503274 qtrx:CustomersOutsideOfUnitedStatesMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001503274 qtrx:CustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2022-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2022-01-01 2022-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2022-01-01 2022-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2021-01-01 2021-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2021-01-01 2021-12-31 0001503274 us-gaap:WarrantMember 2020-01-01 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2020-01-01 2020-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2020-01-01 2020-12-31 0001503274 2020-12-31 0001503274 2019-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2022-01-01 2022-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2022-01-01 2022-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2022-01-01 2022-12-31 0001503274 qtrx:CostOfProductRevenueMember 2022-01-01 2022-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2021-01-01 2021-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2021-01-01 2021-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2021-01-01 2021-12-31 0001503274 qtrx:CostOfProductRevenueMember 2021-01-01 2021-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2020-01-01 2020-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2020-01-01 2020-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2020-01-01 2020-12-31 0001503274 qtrx:CostOfProductRevenueMember 2020-01-01 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-12-31 0001503274 qtrx:LaboratoryAndManufacturingInstrumentsMember 2022-12-31 0001503274 qtrx:LaboratoryAndManufacturingInstrumentsMember 2021-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2022-01-01 2022-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2023-01-03 2023-01-03 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2022-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2021-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2022-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2022-01-01 2022-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-12-31 0001503274 us-gaap:CommonStockMember 2021-01-01 2021-12-31 0001503274 us-gaap:CommonStockMember 2020-01-01 2020-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2022-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2021-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-12-31 0001503274 srt:MinimumMember 2022-01-01 2022-12-31 0001503274 srt:MaximumMember 2022-01-01 2022-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember 2022-12-31 0001503274 us-gaap:DomesticCountryMember 2018-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember qtrx:ThroughTaxYear2042Member 2022-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember qtrx:ThroughTaxYear2037Member 2022-12-31 0001503274 us-gaap:DomesticCountryMember qtrx:ThroughTaxYear2037Member 2017-12-31 0001503274 qtrx:UltradxLimitedCompanyMember 2022-06-30 0001503274 srt:ScenarioForecastMember qtrx:StratecSupplyAgreementMember 2024-01-01 2024-12-31 0001503274 srt:ScenarioForecastMember qtrx:StratecSupplyAgreementMember 2023-01-01 2023-12-31 0001503274 qtrx:StratecSupplyAgreementMember 2022-01-01 2022-12-31 0001503274 qtrx:EliLillyMember qtrx:CollaborationAgreementMember 2022-01-01 2022-03-31 0001503274 qtrx:AbbotLicenseAgreementMember 2022-01-01 2022-12-31 0001503274 qtrx:OfficeAndLaboratorySpaceInBedfordMassachusettsMember 2022-12-31 0001503274 qtrx:OfficeAndLaboratorySpaceInBedfordMassachusettsMember 2022-02-01 2022-02-01 0001503274 qtrx:UnderwrittenPublicOfferingMember 2021-02-03 0001503274 qtrx:UnderwrittenPublicOfferingMember 2020-08-06 0001503274 qtrx:LoanAgreementMember 2021-10-01 2021-10-01 0001503274 2021-01-01 2021-12-31 0001503274 2020-01-01 2020-12-31 0001503274 qtrx:HarvardUniversityMember 2022-12-31 0001503274 qtrx:HarvardUniversityMember 2021-12-31 0001503274 qtrx:LoanAgreementMember 2021-07-01 2021-07-01 0001503274 us-gaap:NoncompeteAgreementsMember 2022-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2022-12-31 0001503274 qtrx:KnowHowMember 2022-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2021-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2021-12-31 0001503274 qtrx:KnowHowMember 2021-12-31 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2022-03-24 2022-03-24 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2022-01-01 2022-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2022-01-01 2022-12-31 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2022-01-01 2022-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2021-01-01 2021-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-09-29 2020-09-29 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-01-01 2020-12-31 0001503274 qtrx:EliLillyMember qtrx:MasterCollaborationAgreementMember 2022-01-01 2022-03-31 0001503274 qtrx:EliLillyMember qtrx:CollaborationAgreementMember 2022-12-31 0001503274 qtrx:EliLillyMember qtrx:StatementOfWorksAgreementMember 2022-01-01 2022-12-31 0001503274 qtrx:AbbotLicenseAgreementMember 2020-01-01 2020-12-31 0001503274 qtrx:OfficeAndLaboratorySpaceInBedfordMassachusettsMember 2022-01-28 0001503274 2022-12-31 0001503274 2021-12-31 0001503274 2022-06-30 0001503274 2023-02-28 0001503274 2022-01-01 2022-12-31 xbrli:shares iso4217:USD xbrli:pure qtrx:installment qtrx:item iso4217:USD xbrli:shares qtrx:position +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2022 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission file number: 001-38319 +QUANTERIX CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +20-8957988 +(I.R.S. Employer Identification No.) +900 Middlesex Turnpike , Billerica , MA +(Address of principal executive offices) +01821 +(Zip Code) +Registrant’s telephone number, including area code: ( 617 ) 301-9400 +Securities registered pursuant to Section 12(b) of the Exchange Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value per share +QTRX +The Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Exchange Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻ No ⌧ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ◻ No ⌧ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ◻ +Accelerated filer ⌧ +Non-accelerated filer ◻ +Smaller reporting company ◻ +Emerging growth company ◻ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +As of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2022), the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last reported sales price for the registrant’s common stock, par value $0.001 per share, on The Nasdaq Global Market on such date, was approximately $ 558 million. +As of February 28, 2023, the registrant had 37,248,605 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive proxy statement for its 2023 Annual Meeting of Stockholders, which the registrant intends to file with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2022, are incorporated by reference into Part III of this Annual Report on Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +1 +Item 1A. +Risk Factors +37 +Item 1B. +Unresolved Staff Comments +64 +Item 2. +Properties +64 +Item 3. +Legal Proceedings +65 +Item 4. +Mine Safety Disclosures +65 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +65 +Item 6. +Reserved +65 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +65 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +83 +Item 8. +Financial Statements and Supplementary Data +83 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +84 +Item 9A. +Controls and Procedures +84 +Item 9B. +Other Information +87 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +87 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +87 +Item 11. +Executive Compensation +87 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +87 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +87 +Item 14. +Principal Accountant Fees and Services +87 +PART IV +Item 15. +Exhibits and Financial Statement Schedules +88 +Item 16. +Form 10-K Summary +91 +Signatures +92 +Consolidated Financial Statements +F-1 +i +Table of Contents +Special Note Regarding Forward-Looking Statements +This Annual Report on Form 10-K contains forward-looking statements (within the meaning of the U.S. Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, forward-looking statements can be identified by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about: +● the implementation of our business model and strategic plans for our business, products and services, especially following the restructuring and strategic realignment we commenced in the third quarter of 2022; +● the potential size of the markets and fields addressable by our Simoa technology platforms; +● the commercialization and adoption of our existing products and services and the success of our new product and service offerings; +● the accuracy of our estimates regarding expenses, future revenues, capital requirements and our needs for additional financing; +● the ability of our Simoa technology’s sensitivity to improve existing diagnostics and to enable the development of new diagnostic tests and tools; +● the potential of our Simoa technology in the field of screening/diagnostic tests linked to therapeutic drugs and adoption by healthcare professionals; +● the impact of our Simoa technology on proteomic research; +● our ability to implement and realize the intended benefits of our restructuring and assay improvement program; +● our ability to retain and expand our customer base and achieve sufficient market acceptance of our products; +● the ability of our contract manufacturers to reliably and consistently manufacture and supply our Simoa HD-X instrument and our Simoa SR-X instrument; +● the usefulness of the data generated by our Simoa technology in the life science research and diagnostics fields; and +● our financial performance. +These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those further described in “Part I, Item 1A, Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. +ii +Table of Contents +Readers should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to new information, actual results or to changes in our expectations, except as required by law. +Readers should read this Annual Report on Form 10-K and the documents that we reference herein and have filed with the Securities and Exchange Commission (SEC) as exhibits to this Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect. +This Annual Report on Form 10-K includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Such data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the markets in which we operate and intend to operate that are subject to a high degree of uncertainty. We caution not to give undue weight to such projections, assumptions and estimates. +Service Marks, Trademarks and Trade Names +Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “us” and “our” in this Annual Report on Form 10-K refer to Quanterix Corporation and its subsidiaries. “Quanterix,” “Simoa,” “Simoa HD-X,” “Simoa HD-1,” “SR-X,” “SP-X”, “HD-X”, “NF-light” and our logo are our trademarks. All other service marks, trademarks and trade names appearing in this Annual Report on Form 10-K are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. +iii +Table of Contents +PART I +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +We believe that our Simoa platforms are among the most sensitive commercially available multiplex protein detection platforms and significantly advance enzyme-linked immunosorbent assay (ELISA) technology, which has been the industry standard for protein detection for over 45 years. Proteins are complex molecules that are required for the structure, function and regulation of the body’s tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes can produce over 100,000 different proteins, of which 10,000 – 15,000 are estimated to be secreted in blood. Proteins are considered to be the best analytes – providing the most real-time picture of disease, and researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa’s sensitivity offers a new way to monitor healthy individuals and detect proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical signs and symptoms have appeared. +Our Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited in over 2,000 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over 1,300 customers across our end markets. +Restructuring and Strategic Re-Alignment +Following a strategic review and assessment of our operations and cost structure, in the third quarter of 2022 we announced a plan of restructuring and strategic re-alignment (the Restructuring Plan). As part of this plan, we began an assay redevelopment program with the ultimate objective of improving our ability to manufacture and deliver high-quality assays at scale. The Restructuring Plan aligns our investments to best serve the needs of customers, focuses innovation efforts on key platforms and provides the foundation for our entry into translational pharma and clinical markets, which we believe will be required to access new growth categories. The Restructuring Plan included the elimination of 119 positions and other cost-saving measures. The workforce reduction was substantially completed by the end of the third quarter of 2022. +Our Products and Services +Our proprietary Simoa technology is based on traditional ELISA technology, which has been the most widely used method of detection of proteins for over 45 years. Given our target customers’ familiarity with the core ELISA +1 +Table of Contents +technology, we believe this offers us a significant competitive advantage. Our Simoa bead-based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we have also developed a planar array technology to provide sensitivity similar to that found in our Simoa bead-based platform. We currently offer the following three Simoa instruments, which we believe are among the most sensitive multiplex protein detection platforms commercially available today: +● HD-X : We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument, which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. +● SR-X : We commercially launched our SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of potential applications. +● SP-X : We commercially launched our SP-X instrument in April 2019. The SP-X is based on our Simoa planar array technology, which allows for significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The current menu of approximately 36 analyte-specific single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology, oncology and cardiology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 115 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. In addition, both the bead-based platform and the planar array platform allow ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called “homebrew” assays. +We also provide contract research services for customers through our CLIA- certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 1,900 projects for more than 400 customers from all over the world using our Simoa platforms. We have recently begun offering laboratory developed tests (LDTs) through the Accelerator Laboratory. LDTs are diagnostic tests that are developed, validated and performed by a single laboratory. In July 2022, we launched an LDT to quantitatively measure phospho-Tau 181 (pTau-181) in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure neurofilament light chain (NfL) in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +In August 2019, we acquired UmanDiagnostics AB (Uman), a company located in Umeå, Sweden, that commercializes proprietary NfL antibodies and NfL ELISA kits. Uman’s NfL antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of NfL to advance the development of therapeutics and diagnostics for certain neurodegenerative conditions. Since we commercially launched the first assay that could reliably measure NfL in blood using Uman’s antibodies and our Simoa technology in 2017, NfL has seen dramatic growth as a neurological biomarker. The Uman acquisition secured the NfL antibody supply critical to our industry-leading ultrasensitive Simoa NfL assays and services and provides us with additional revenue via the sale of the NfL antibodies and NfL ELISA kits. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe and through distributors or sales agents in select markets. In addition, we sell Uman’s NfL antibodies and NfL ELISA kits directly and in conjunction with a distributor worldwide. We have an extensive base of customers in world class academic and governmental +2 +Table of Contents +research institutions, as well as pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Competitive Strengths +We believe that our competitive strengths include the following: +● Proprietary ultra-sensitive Simoa digital immunoassay technology platforms. We believe our Simoa platforms are among the most sensitive, commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. +● Technology platforms that leverage and improve upon industry standard ELISA technology. Simoa uses the basic principles of conventional bead-based ELISA immunoassay technology, which has been the most widely used method of detection of proteins for over 45 years. Adding digital capability to this industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers’ familiarity with the core ELISA technology, our Simoa platforms are easily integrated with existing customer workflows including data analysis. +● Deep and expanding scientific validation and customer base. Our Simoa technology has been cited in over 2,000 publications to date, including JAMA Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. We have established relationships with key opinion leaders, and our growing base of over 1,300 customers includes some of the world’s leading academic and government research institutions and many of the world’s largest biopharmaceutical companies. +● Leading position in market solidified by robust customization capabilities, assay design flexibility and automation of our HD-X instrument. Our technical capabilities and expertise allow our customers to design high-quality, customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead-based and planar array platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD-X instrument provides fully automated analysis from sample introduction to analytical results, and our proprietary approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater throughput and lab efficiency. +● Business model that leverages growing installed base of instruments. Our installed instrument base increased to 876 instruments as of December 31, 2022. The integration of our technology into our customers’ projects provides ongoing sales of assays and consumables, and as we continue to grow our installed instrument base, optimize workflows and expand our assay menu, we expect to increase our revenues derived from consumables. +● Our highly experienced senior management team. We are led by a dedicated and highly experienced senior management team with significant industry experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible with any other current research and diagnostic technology. We believe this greater +3 +Table of Contents +insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our strategy to achieve this includes: +● Focus on the highly attractive, expanding market for protein detection and analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. Our technology provides a unique bridge between understanding the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and diagnostic and drug development. +● Continue to drive adoption of our Simoa technology in the life science research/pharma market. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We also believe that our Simoa technology is uniquely positioned for use by pharmaceutical companies in drug trials as biomarkers are being increasingly used as an adjunct to help increase the potential of regulatory approval. We have focused initially on these markets because we believe there is reduced regulatory and reimbursement risk for us in these markets. +● Expand our presence in the diagnostics market. We believe Simoa technology has the capability to enable the development of a new category of less-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. In July 2022, we launched an LDT to quantitatively measure pTau-181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure neurofilament light chain (NfL) in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +● Leverage the growing importance of neurological biomarkers to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of neurological biomarkers, such as NfL, pTau-181 and pTau-217, has increased significantly in recent years, and our ultra-sensitive Simoa platforms have allowed research of neurological disorders, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly. Neuro biomarkers, such as NfL, pTau-217 and pTau-181, have shown increasing relevance in neurological research and drug development. In 2021, Eli Lilly and Company (Lilly) presented new data from its Phase 2 TRAILBLAZER-ALZ study of its Alzheimer’s disease drug candidate donanemab, which employed our ultra-sensitive Simoa technology to measure plasma pTau-217, using antibodies developed by Lilly. Lilly reported a significant reduction in blood levels of phosphorylated Tau protein after treatment with donanemab, and that a reduction in plasma pTau-217 levels correlated with the slowing of cognitive decline. In November 2022, Eisai Co., Ltd. and Biogen Corporation presented results from the Phase 3 clinical trial (Clarity AD) of lecanemab, an investigational drug aimed at slowing the progression of cognitive decline caused by Alzheimer’s disease. Target engagement and activity of the drug in downstream processes was explored with a panel of fluid biomarkers, including plasma pTau-181, glial fibrillary acidic protein (GFAP) and NfL using Quanterix’s ultrasensitive Simoa assay kits We believe that the use of biomarkers in clinical trials for neurological conditions is becoming increasingly important. With Simoa’s sensitivity and its ability to detect many neurological biomarkers in blood and plasma that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. +4 +Table of Contents +● Expand further into indications beyond neurology. Because the blood-brain barrier severely restricts the movement of proteins and other substances into blood circulation, we believe that our ultra-sensitive Simoa platforms are particularly well suited for neurology indications. We also believe, however, that the ability of our Simoa technology to detect and quantify low abundance proteins is a distinct advantage in detecting disease earlier in other indications, including oncology, cardiology, infectious disease and inflammation, and there are nearly 700 scientific publications using our Simoa technologies in these non-neurology indications. We intend to expand further into these markets, with a particular focus on oncology. +Industry Background +We intend to pursue the application of our Simoa technology to the life science research/pharma and diagnostics markets. Our initial commercial strategy has targeted the large and growing life science research/pharma markets, and we believe that the diagnostics market represents a significant commercial opportunity for Simoa. Based on industry estimates, we believe the aggregate commercial opportunity across these markets is approximately $75 billion. +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and regulation of the body’s tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an organism’s proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot provide. +The human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, of which 10,000 – 15,000 are estimated to be secreted in blood, the majority of which cannot be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of much of the proteome has not been practical given the limited level of sensitivity of existing technologies. +Much like the sequencing of the human genome with the Human Genome Project and the development of both polymerase chain reaction (PCR) and next generation sequencing technologies to detect nucleic acids, both of which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and well-being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, ultimately, prevention by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +Existing Technologies and Their Limitations +Protein Analysis +ELISA has been the most widely used method of sensitive detection of proteins for over 45 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either directly, or indirectly through use of a conjugated secondary or “capture” antibody (sandwich ELISA). A specific “detection” antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final step, a substance called an enzyme substrate is added, and the +5 +Table of Contents +enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the graphic below: +Aside from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, Raman-enhanced signal detection, immuno-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of the 10,000-15,000 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of these approaches have limitations, including: +● dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +● narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +● low detection limit of readers restricts sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +● limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers aimed at detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become detectable. PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias into the data, potentially compromising the reliability of results, particularly at low concentrations. +6 +Table of Contents +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection sensitivity. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead-based technology detects proteins: +Simoa Bead-Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead-based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the graphic). +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 microwells, each of which is large enough to accommodate only a single bead. +7 +Table of Contents +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from a sample and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while competitive platforms lose sensitivity when multiplexing is used. Multiplexing is achieved with our Simoa bead- based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. In 2017, we commercially launched a Simoa neurology 4-plex assay (NfL, tau, GFAP and UCH- L1) for the study of neurodegenerative conditions and traumatic brain injury. In 2020, we introduced a Simoa 4-plex assay (Aβ40, Aβ42, GFAP, NfL) designed to measure key biomarkers of Alzheimer’s disease and related disorders. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, we believe this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. While we have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the HD-X, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of proteins in a single sample, we believe that the ability to multiplex at high levels and maintain single-plex sensitivity and precision is currently limited using bead-based technology due to constraints in the number of bead- containing wells for each plex that are imaged on the Simoa disk. However, our bead-based assay technology was used by researchers to demonstrate a novel workflow to expand multiplexing through a process of sequential incubation steps. We plan to explore this and other methods to potentially expand the multiplexing capabilities of our Simoa assay technology to enable plexing of 10-20 plex over the next several years. +8 +Table of Contents +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +A) Analyte-specific capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96-well microtiter plate. Each microspot contains capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) Samples are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by washing the plate with a benchtop plate washer or manual wash manifold. +C) A mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +D) Streptavidin-HRP (horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a washing step. +E) A high-sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to emit light. +F) The plate is placed into the Quanterix SP-X imaging system. A scientific-grade CCD camera images the entire plate and all micro-spots simultaneously. The low background of the plate surface and the high-sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The imaging software utilizes algorithms to optimize exposure time +9 +Table of Contents +and combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +Below is an image of a 96-well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We believe the Simoa planar array technology is well-suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with ultra-sensitive detection in a multiplex assay format. The figure below demonstrates 10-plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) listed in femtogram per ml. +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, our Simoa bead-based technology has also been used to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR-based assays with the following benefits: +● no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +● reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; and +● the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water or serum samples. +10 +Table of Contents +For detection of nucleic acids with our Simoa bead-based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research/pharma and diagnostics markets. +Life Science Research/Pharma Markets +We have initially targeted the large and growing life science research and pharma markets. We have chosen these markets to target initially because of the reduced regulatory and reimbursement risk. We believe our Simoa platforms are well-positioned to capture a significant share of these markets because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +In addition, as pharmaceutical companies look for ways to more efficiently and effectively develop and obtain regulatory approval for drugs, use of biomarkers in clinical drug trials is becoming more prevalent. Biomarkers are increasingly being used as clinical endpoints in clinical trials. Drug developers can also use diagnostics to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. In addition, researchers can also use Simoa to monitor a drug candidate’s unwanted effect on “off-target” biomarkers and predict side effects, addressing the significant issue of drug toxicity, which is a leading cause of death in the United States. With Simoa’s sensitivity and its ability to detect many biomarkers in blood, plasma and other non-invasive samples that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. +Based on industry estimates, we believe the proteomics life science research/pharma total addressable market is approximately $20 billion. +Diagnostics +The diagnostic market represents a significant commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non-invasive +11 +Table of Contents +diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +Simoa technology also has significant potential in the emerging field of screening and diagnostics. A screen, aid to diagnostic, or diagnostic test is a biomarker test that is specifically linked to a therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use these tests to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. Such tests have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only could Simoa be used to develop tests to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity can also enable the development of tests based on protein biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This would quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing dosages or even switching therapies. +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +We recently launched our first diagnostic LDTs in our Accelerator Laboratory. In July 2022, we launched an LDT to quantitatively measure pTau-181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +There has also been significant interest from third parties to use our technology to develop applications for the diagnostic market. Following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary NfL antibodies, which will allow Siemens to begin developing blood-based NfL clinical diagnostic tests for future commercialization. Additionally, in September 2020, we entered into a non-exclusive License Agreement with Abbott Laboratories, pursuant to which we granted Abbott a non-exclusive, worldwide, royalty-bearing license under our bead-based single molecule detection patents for IVD use. +Based on industry estimates, we believe the proteomics diagnostic total addressable market is approximately $55 billion. +See “Government Regulation” and “Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement” for a discussion regarding the regulatory approvals that may be required for use of our products for diagnostic purposes, and related risks. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses, including neurology and oncology, as well as cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally only been detectable in CSF, has the potential to rapidly advance neurology research and drug development, and transform the way brain diseases and injuries are diagnosed and treated. Prior to the launch of our pTau-181 LDT for clinical use in July 2022, the brain was the only organ in the body for which there was not a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either brain imaging or a spinal tap to collect CSF, both of which are costly +12 +Table of Contents +and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood-brain barrier and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of many these neural biomarkers in the blood can be so low that they are difficult to detect by conventional, analog immunoassay technologies. +To date, there have been over 1,400 neurology-related scientific publications using our Simoa technologies, and we believe that ultra-sensitive digital detection of neural-related biomarkers in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including Alzheimer’s disease, multiple sclerosis, frontotemporal dementia, Parkinson’s disease, and traumatic brain injury (TBI). The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. The importance of neurological biomarkers, such as NfL, pTau-181, pTau-217, GFAP and A b 42/40, has increased dramatically in recent years. In addition, biomarkers are being increasingly used as an adjunct by pharmaceutical companies in clinical trials to help increase the potential for regulatory approval, particularly in neurological indications. With Simoa’s sensitivity and its ability to detect many neurological biomarkers in blood and plasma that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity, in particular with respect to Alzheimer’s disease and multiple sclerosis. +Dementia/Alzheimer’s Disease +Dementia is a collective name for brain syndromes that affect memory, thinking, behavior and emotion. According to Alzheimer’s Disease International , as of 2021, there were more than 55 million people worldwide living with dementia, a figure expected to increase to over 139 million by 2050, and the annual global cost of dementia is now above $1.3 trillion. Alzheimer’s disease is a progressive neurodegenerative disorder that affects cognition, function and behavior and is the most common cause of dementia. +In November 2022 at the 15 th Clinical Trials on Alzheimer’s Disease (CTAD) conference, Eisai Co., Ltd. and Biogen Corporation presented results from the Phase 3 clinical trial (Clarity AD) of lecanemab, an investigational drug aimed at slowing the progression of cognitive decline caused by Alzheimer’s disease. Target engagement and activity of the drug in downstream processes was explored with a panel of fluid biomarkers, including plasma pTau-181, GFAP and NfL, using Quanterix’s ultrasensitive Simoa assay kits. In January 2023, the FDA approved lecanemab for the treatment of patients with mild cognitive impairment or mild dementia due to Alzheimer’s disease. +In 2021, Lilly presented new data from its Phase 2 TRAILBLAZER-ALZ study of its Alzheimer’s disease drug candidate donanemab, which employed our ultra-sensitive Simoa technology to measure plasma pTau-217, using antibodies developed by Lilly. Lilly reported a significant reduction in blood levels of phosphorylated Tau protein after treatment with donanemab, and that a reduction in plasma pTau-217 levels correlated with the slowing of cognitive decline. In addition, following the FDA approval of its Alzheimer’s disease drug ADUHELM™, Biogen conducted Simoa biomarker studies on Phase 3 EMERGE and ENGAGE trial samples, utilizing Simoa technology to measure plasma pTau-181. Preliminary data was reported that showed a dose-dependent reduction in plasma pTau-181 levels following treatment with ADUHELM, which correlated with decreases in amyloid PET and a slowing of cognitive decline across four independent assessment tools. +In October 2021, the FDA granted our Simoa pTau-181 blood test Breakthrough Device designation as an aid in diagnostic evaluation of Alzheimer’s disease. The FDA’s Breakthrough Device designation is granted to products that have the potential to offer more effective diagnosis of life-threatening diseases with an unmet medical need. The program is designed to enable accelerated development, assessment and review processes, with the intention to provide patients with more timely access to breakthrough technologies or devices. Proposed indications under the Breakthrough Device designation include use of the test results in adult patients, aged 50 years and over, presenting with cognitive impairment who are being evaluated for Alzheimer’s disease and other causes of cognitive decline as an aid in diagnostic evaluation for Alzheimer’s disease. +In March 2022, we were awarded funding of $2.3 million by the Alzheimer’s Drug Discovery Foundation (ADDF) in support of a proposal “Clinical Implementation of Blood-Based Biomarkers for Alzheimer’s Disease: Clinical Validation, IVD Product Development, and Market Development.” ADDF is a philanthropic foundation which +13 +Table of Contents +aims to accelerate Alzheimer’s drug and diagnostics development. The project is aimed at clinically validating a multi-biomarker blood test for detection of Alzheimer’s disease in a large prospective trial that includes both primary care and specialist memory clinical settings. The multi-biomarker approach is based on studies that have shown that combining the signals from multiple biomarkers relevant to Alzheimer’s pathophysiology provides greater diagnostic accuracy than any single biomarker alone. The Simoa pTau-181 assay will be part of the multi-biomarker test, as well as our GFAP, NfL, A b 42, and A b 40 assays. The latter four assays are multiplexed into a single test that measures all biomarkers simultaneously. Thus, this validation study will serve to validate pTau-181 as a standalone test and will also leverage Simoa’s multiplexing capability to combine additional biomarkers for even greater accuracy. +In addition to the ADDF clinical validation program, we are nearing completion of a second prospective clinical trial (BioHermes) in partnership with the Global Alzheimer’s Platform Foundation (GAPF). GAPF is a non-profit organization dedicated to speeding the delivery of innovative therapies to Alzheimer’s patients by reducing the time and cost of Alzheimer’s disease clinical trials. The BioHermes trial is being conducted across 17 clinical sites in the United States and is examining blood test accuracy across 1,000 cognitively normal and mildly impaired Alzheimer’s patients in comparison with amyloid PET scan. This study is expected to support a regulatory filing for FDA clearance of our pTau-181 test pursuant to the Breakthrough Device designation. +Multiple Sclerosis +Multiple sclerosis is a chronic disease affecting the central nervous system (the brain and spinal cord). Multiple sclerosis occurs when the immune system attacks nerve fibers and myelin sheathing (a fatty substance which surrounds/insulates healthy nerve fibers) in the brain and spinal cord. This attack causes inflammation, which destroys nerve cell processes and myelin, altering electrical messages in the brain. Multiple sclerosis is unpredictable and affects each patient differently – some individuals may be mildly affected, while others may lose their ability to write, speak or walk. According to the National MS Society, more than 2.3 million people have a diagnosis of multiple sclerosis globally. In the U.S. alone, the National MS Society recently completed a prevalence study estimating nearly 1,000,000 people over the age of 18 live with a diagnosis of multiple sclerosis. +Evidence of the potential clinical utility of NfL as a biomarker in multiple sclerosis is progressing rapidly, and Simoa’s role in that progression has been foundational. The Simoa NfL assay pioneered measurement of NfL in blood, and in the past five years, the Simoa NfL assay has been used in hundreds of published studies. In 2022, Simoa technology supported 35 scientific presentations at the 38 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS), the world’s largest meeting dedicated to advancing research for multiple sclerosis . In 2021, Simoa technology supported 31 scientific presentations at ECTRIMS. In 2020, Simoa supported 42 presentations at ECTRIMS. A t ECTRIMS in 2019, there were nearly 50 presentations in which our Simoa NfL assay was used. +As an example, in one 2019 presentation, Novartis presented positive data from its Phase III ASCLEPIOS I and II studies of its multiple sclerosis drug candidate, ofatumumab. One of the secondary endpoints included serum levels of NfL as measured using our Simoa NfL assay. Novartis presented data that showed that, starting at three months after initiation of ofatumumab treatment, and then at 12 and 24 months timepoints, patients given ofatumumab had significantly lower blood levels of NfL, compared to those in the comparator arm of teriflunomide treated patients. +In another ECTRIMS presentation in 2019, Roche presented retrospective data from its Phase III OPERA I, OPERA II and ORATORIO trials of its approved multiple sclerosis drug OCREVUS (ocrelizumab). In the data presented at ECTRIMS, it was shown that treatment with OCREVUS lowered blood NfL levels and increased the proportion of patients reaching healthy donor range for NfL in both relapsing multiple sclerosis and primary progressive multiple sclerosis. Roche believes that this data helps advance the understanding of NfL as a potential biomarker of disease activity and for treatment monitoring and may provide insight into the neuroprotective effects of the drug. +In an article published by Bjornevik, et al. in JAMA Neurology in September 2019, researchers presented data that showed that levels of serum NfL, as measured by the Simoa NfL assay, were increased six years before the clinical onset of multiple sclerosis. The researchers concluded that these data indicate that multiple sclerosis may have a +14 +Table of Contents +prodromal phase lasting several years and that neuroaxonal damage occurs during this phase, emphasizing the importance of early diagnosis and treatment. +In a study published in Science in January 2022, researchers leveraged Simoa’s ability to detect the NfL at ultra-low levels to show that Epstein-Barr virus (EBV) increases susceptibility toward developing multiple sclerosis. Researchers of the study tested the hypothesis that multiple sclerosis is caused by EBV in a cohort comprising more than 10 million young adults on active duty in the U.S. military, 955 of whom were diagnosed with multiple sclerosis during their period of service. Risk of multiple sclerosis increased 32-fold after infection with EBV, but was not increased after infection with other viruses, including the similarly transmitted cytomegalovirus. Serum levels of NfL, a biomarker of neuroaxonal degeneration, increased only after EBV seroconversion, suggesting that EBV played a role in nerve cell damage. +In April 2022, the FDA granted our Simoa NfL plasma test Breakthrough Device designation as a prognostic aid in assessing the risk of disease activity in patients diagnosed with relapsing-remitting multiple sclerosis (RRMS). The test has shown promise to be used in conjunction with clinical, imaging and laboratory findings as an aid in identifying RRMS patients who are at lower or higher risk for relapse within four years. We believe this prognostic information could be clinically useful in tailoring the therapeutic approach to more effectively treat the disease. +Traumatic Brain Injury (TBI) +TBIs lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as NfL, tau, GFAP and UCH-L1, to more adequately address diagnosis of TBIs and overall brain health. +Leading researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy (CTE), which currently can only be diagnosed after death via a brain autopsy. A publication by a National Institute of Health researcher indicates that measuring tau in the blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the immuno-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a number of tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which +15 +Table of Contents +is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We also believe residual cancer cell detection post-surgery or post-treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a greater risk of reoccurrence post-surgery due to residual cancer. For example, we have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen (PSA) that is over 1,000-fold more sensitive than conventional ELISA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn’s disease undergoing anti-TNF-α therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF-α levels of the patients before and after treatment. These levels were all below the LoD of traditional immunoassays. +16 +Table of Contents +We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making early stage detection more specific and widely available. +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +For example, we have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than conventional ELISA assays capable of detecting the HIV-specific antigen, p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +17 +Table of Contents +In addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile ( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly one in four deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +18 +Table of Contents +Our Products and Services +Our Quanterix commercial portfolio includes research use only (RUO) instruments, assay kits and other consumables, and contract research services offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD-X +● +Commercially launched the next-generation HD-X in the second half of 2019 to replace the HD-1 launched in 2014 +● +Simoa bead-based platform technology +● +Most widely referenced ultra-sensitive multiplex immunoassay platform on market +● +Fully automated, floor-standing instrument +● +Wide dynamic range +● +Multiplexing capability (up to 4-plex) with small sample volume +● +Up to 400 samples per eight-hour shift +● +Homebrew capabilities +SR-X +● +Commercially launched in December 2017 +● +Simoa bead-based platform technology +● +Reader only, benchtop instrument with lower price point +● +Similar sensitivity, dynamic range and homebrew capabilities as HD-X +● +Multiplexing capability: SR-X currently has up to 4-plex capability +● +Sample prep and assay protocol flexibility +SP-X +● +Commercially launched in April 2019 +● +Simoa planar array platform technology +● +Reader only, benchtop instrument with lower price point +● +Similar sensitivity, dynamic range and homebrew capabilities as HD-X +● +Multiplexing capability: SP-X currently has up to 10-plex capability +● +Sample prep and assay protocol flexibility +19 +Table of Contents +Product +Key attributes +Simoa assays and other consumables +● +Menu of approximately 36 single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology +● +Menu of Simoa planar array reagent kits includes approximately 115 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research +● +Homebrew kits containing reagents and supporting user guides enabling customers to develop custom assays +● +Proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead-based assays +NfL antibodies and NfL ELISA kits +● +Sold through our wholly-owned subsidiary, Uman, which we acquired in 2019 +● +NfL capture/detection antibodies with unparalleled sensitivity and specificity +● +NfL ELISA kits for CSF (CE-certified in Europe; RUO outside of Europe) +● +NfL ELISA kits for serum (RUO) +● +Licensing and supply arrangement with Siemens Healthineers that will allow Siemens to begin developing blood-based NfL clinical tests for future commercialization +Services +● +Contract research services provided through our Accelerator Laboratory +● +Over 1,900 projects completed to date +● +Extended warranty and service contracts +● +CLIA-certified lab available – LDT for pTau-181 launched in July 2022 and LDT for NfL launched in January 2023 +Instruments and Consumables +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1, our very first instrument, which was launched in January 2014. The HD-X was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X uses our Simoa bead-based technology and is the most sensitive automated multiplex protein detection platform commercially available. Assays for the HD-X are fully automated (i.e., from sample in to result out), and results for up to 66 samples are available in approximately one hour. Samples can be input into the instrument via 96-well microtiter plates or sample tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +20 +Table of Contents +Specialized software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration of multiple biological molecules. The HD-X software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to concentrations for the different biological molecules. +By the end of 2022, approximately 79% of the HD installed base were HD-X instruments. +SR-X +We commercially launched the SR-X instrument in the fourth quarter of 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra-sensitive detection capabilities enabled by Simoa. +In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instruments using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately 2.5 hours. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon Biosystems (Aushon), which we acquired in 2018, for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide sensitivity similar to that found in our Simoa bead-based platform. The Simoa planar array technology utilizes a 96-well microtiter plate with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar to the SR-X, the assay prep workflow utilized for the SP-X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid handling methods as the SR-X. The SP-X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 36 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 115 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to these assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes and disposable tips. Our goal is to continue to add to our assay kits to extend our application base. +We have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to manufacturing and final documentation. +21 +Table of Contents +We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu expansion goals. +NfL Antibodies and NfL ELISA Kits +Uman is our wholly owned subsidiary that supplies NfL antibodies and ELISA kits for NfL detection. Uman’s NfL antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies worldwide as the premier solution for the detection of NfL to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Through Uman we sell proprietary NfL capture and detection antibodies, as well as two NfL ELISA kits for CSF, one of which is CE-certified in Europe and one RUO NfL ELISA kit for serum. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. Researchers, academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, including: +● Sample testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer’s needs and even large studies can be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +● Homebrew assay development. Utilizing proprietary or commercially available reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +● Custom development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +● LDT Testing. We have recently begun offering LDT testing through our CLIA-certified laboratory. In July 2022, we launched an LDT to quantitatively measure pTau-181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +To date, we have completed over 1,900 projects for more than 400 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We also intend to selectively expand our assay menu to extend the scope of applications for our platform to biomarkers of significant +22 +Table of Contents +interest to the scientific community. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional major markets, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, we sell Uman’s NfL antibodies and NfL ELISA kits directly and in conjunction with a distributor worldwide. Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological advances in Simoa systems, workflows, and notable research being performed by our customers or us. As our primary point of contact in the marketplace, our sales force focuses on delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As of December 31, 2022, we had 125 full-time employees in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We expect we will expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region countries such as South Korea and Australia as well as in South America. We are expanding into these regions via initial penetration with distributors and then subsequent support with Quanterix-employed sales and support personnel. +Our sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and governmental research institutions. +In addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness of our technologies, demonstrate the benefits relative to existing technologies and accelerate adoption. We also seek to increase awareness of our products through participation at trade shows, academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +Our instruments require a capital investment by our customers. The sales process typically involves numerous interactions and demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the instruments including running experiments in the Accelerator Laboratory and comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +Manufacturing and Supply +We outsource the development and manufacturing of our Simoa bead-based instruments to third-party manufacturers, and we develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is manufactured by STRATEC Biomedical AG (STRATEC), based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. The SR-X is manufactured by Paramit Corporation (Paramit), based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements” for a description of our agreements with STRATEC and Paramit. +23 +Table of Contents +Installation of, and training on, our instruments is provided by our employees in the markets where we conduct direct sales, and by distributors in those markets where we operate with distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we would experience additional costs, delays and difficulties in doing so, and our business could be harmed. +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component that is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Reagents for our bead-based assays include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we are working to increase the shelf life of our bead-based assays to 12 months or more. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. We believe that this agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead-based platform are commercially available. +We assemble our 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +NfL antibodies and NfL ELISA Kits +The storage of Uman’s proprietary NfL antibody producing hybridomas as well as the cultivation and purification of the antibodies is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s NfL ELISA kits. The antibody reagents are labeled and released to market after testing. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s NfL ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. All incoming goods are subject to receipt control and any deviations related to quality deficiencies are registered. The kit components include buffers (sample diluents and wash solutions), ELISA 96-well plates coated with a capture antibody, detector antibodies, streptavidine conjugates, substrates (TMB) and stop reagents. The kit components are labeled (either RUO or CE) and assembled. The final ELISA kit products are subject to quality control procedures, which include +24 +Table of Contents +testing of human CSF or human serum quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months (NF-light ELISA (CSF)) or 13 months (NF-light Serum ELISA). +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC (the STRATEC Supply Agreement), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The STRATEC Supply Agreement was amended in November 2016 to reduce the number of HD instruments we were committed to procure from STRATEC, and this commitment has been met. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase our common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the Paramit Agreement) with Paramit. Under the terms of the Paramit Agreement, we engaged Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts for the SR-X instrument. Paramit has no obligation to manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement had an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for proteomics discovery and clinical research applications. For example, companies such as Bio-Techne, Luminex, MesoScale Discovery, Gyros, O-Link, SEER, Somalogic, MilliporeSigma, Bio-Rad Laboratories, Thermo Fisher Scientific, and others, have products for protein measurements in biofluids that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research +25 +Table of Contents +laboratories such as Covance, Q2 Solutions, Rules Based Medicine, Monogram Biosciences, PPD Laboratories, and others, some of whom are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research and diagnostic markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors in our target markets include: +● sensitivity; +● cost of instruments and consumables; +● assay menu; +● reputation among customers and key opinion leaders; +● innovation in product offerings; +● accuracy and reproducibility of results; and +● customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University (Tufts), in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from Tufts the relevant patent filings related to these technologies. (See “—License Agreement with Tufts University” below). In addition to licensed patents, we have developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. Our portfolio also includes issued patents and patent applications acquired as part of our 2018 acquisition of Aushon Biosystems. We believe our proprietary platforms are a core strength of our business and our strategy includes the continued development of our patent portfolio. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature, seeking to protect not only technology we currently practice but also alternative, related embodiments. +26 +Table of Contents +Simoa and Related Technology +As of March 1, 2023, we had exclusively licensed 17 patents and two patent applications from Tufts. These patents and patent applications include eight issued U.S. patents and two pending U.S. patent applications, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +A first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes seven granted U.S. patents, one pending U.S. patent application, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A third patent family licensed from Tufts is directed to methods for detecting short nucleic acids. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue in this family is May 29, 2039. +As of March 1, 2023, we owned 29 issued U.S. patents and 17 pending U.S. patent applications, eight granted European patents and three pending European patent applications, six granted Japanese patents and one pending Japanese patent application, four granted Chinese patents and two pending Chinese patent application, four granted Canadian patents and one pending Canadian patent application, and one registered Hong Kong patent application. +A first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads, including multiplexing. This patent family includes four granted U.S. patents and two pending U.S. patent applications, three granted European patents (nationalized and active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes five granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is September 28, 2028. +A fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 24, 2030. +A fifth patent family owned by us is directed to instruments and consumables. This patent family includes two granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active in eleven countries) and one pending European patent application, two granted Japanese patents, one granted Chinese patent and one pending Chinese patent applications, one registered Hong Kong patent application, and one granted +27 +Table of Contents +Canadian patent. The standard patent expiration date for the U.S. patents in this family is February 25, 2031, and for any non-U.S. patents is January 27, 2032. +A sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is September 20, 2038. +A ninth patent family owned by us is directed to methods and systems for highly sensitive assays, including methods and systems for improving capture object loading efficiency and/or use of low numbers of capture objects in assays. This patent family includes one pending U.S. patent application, one pending European patent application, one pending Japanese patent application, one pending Chinese patent application, and one pending Canadian patent application. The standard patent expiration date for any patents that may issue from this family is April 14, 2041. +In addition to the nine patent families described above, we own or co-own nine additional patent families directed to the measurement of particular types of analytes, including β-amyloid peptide, tau protein, toxin B of C. difficile , neurofilament light, glial fibrillary acidic protein, ubiquitin carboxyl-terminal hydrolase L1, antigens from infectious organisms such as viruses (e.g., coronaviruses), and DNA or RNA molecules. Among the granted patents and pending patent applications in these nine families are two granted U.S. patents directed to methods for determining treatment protocols and/or a prognosis of a patient’s recovery from a brain injury based on measurements of tau protein in blood and one granted U.S. patent and one granted European patent (nationalized and active in three countries) directed to detection of C. difficile . Any patents that may issue from these patent applications would have standard expiration dates between 2032 and 2041. +With the acquisition of Aushon in January 2018, we acquired their patent portfolio for our planar array technology. As of March 1, 2023, the acquired patent portfolio includes at least ten issued U.S. patents and one pending U.S. patent application, one granted Canadian patent, and two granted European patents (nationalized and active in eight countries). +We have licensed additional patents and patent applications from third parties. These include a portfolio of patent filings we licensed from Harvard University directed to additional single molecule assay technologies originated in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. +A first patent family exclusively licensed by us from Harvard University is directed to assays that provide digital measurement methods to detect proteins and other biomolecules, e.g., at low- to mid-attomolar concentrations. This patent family includes one pending International Patent Application. The standard patent expiration date for any patents that may issue from this family is June 22, 2041. +A second patent family exclusively licensed by us from Harvard University is directed to single molecule assays for ultrasensitive detection of analytes. The standard patent expiration date for any patents that may issue from this family will be in 2042. +A third patent family exclusively licensed by us from Harvard University is directed to high-sensitivity methods for detection and quantification of target analytes in liquid samples (e.g., biological or environmental samples). The standard patent expiration date for any patents that may issue from this family is August 15, 2039. +28 +Table of Contents +A fourth patent family non-exclusively licensed by us from Harvard University is directed to methods and compositions to detect Mycobacterium tuberculosis antigens, e.g., lipoarabinomannan (LAM) and/or Ag85B (Rv1886c), in a sample (e.g., a human urine sample) for diagnosis of tuberculosis. The standard patent expiration date for any patents that may issue from this family is December 17, 2040. +In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable for a fee. +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 amendment, we issued Tufts shares of our Series C-1 Preferred Stock, which converted into shares of our common stock in connection with our initial public offering. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +The majority of our products are currently intended for research use only (RUO) applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or the Center for Medicare & Medicaid Services (CMS). Although most in vitro diagnostic products intended for RUO are not currently required to obtain premarket clearance or approval by the FDA, products labeled as RUO are subject to the FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than research purposes. Consequently, other than our two laboratory developed tests intended for clinical testing, our products are labeled and intended “For Research Use Only. Not for Diagnostic Procedures.” +The FDA has issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (the RUO/IUO Guidance). The purpose of an FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for investigational use only (IUO) and when products labeled RUO or IUO will be viewed by the FDA as intended for clinical use, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory +29 +Table of Contents +requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s premarket notification and clearance process (510(k)), premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance was not intended as a compliance requirement, we believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. +IVD tests intended for clinical diagnostic use are regulated by the FDA as medical devices, however, the FDA has traditionally not regulated certain laboratory tests referred to as laboratory developed tests (LDTs) (as discussed further below). The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising and labeling of our clinical IVD devices (other than our LDTs) and we will be required to register as a medical device manufacturer and list our marketed products. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards and guidance documents setting out labeling and testing requirements. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval, including any conditions imposed as part of the approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification (510(k)) and receive clearance from the FDA, which is otherwise a premarketing requirement for Class I and Class II devices that are not exempt. Class III devices may not be commercialized until a premarket approval application (PMA) is submitted to and approved by the FDA. Novel devices that have not been classified require either approval of a PMA or FDA review of a de novo classification request before they can be marketed. +510(k) Clearance Pathway +To obtain 510(k) clearance for Class I and Class II devices that are not exempt, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent (SE) to a predicate device legally marketed in the U.S. for which a PMA was not required. Substantial equivalence means that the device has the same intended use as the predicate device and either (a) has the same technological characteristics as the predicate device or (b) has different technological characteristics but does not raise difference questions of safety and effectiveness and information in the premarket notification demonstrates the device is as safe and effective as the predicate. The FDA is supposed to make a SE determination within 90 days of the FDA’s receipt of the 510(k), but it often takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre-market approval. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the +30 +Table of Contents +FDA’s satisfaction a reasonable assurance that the device is safe and effective for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the accepted application, although review of the application generally can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with its quality system regulations (QSRs). New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and efficacy of the device. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. +However, a de novo classification request allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo classification request, but the review often takes longer if the FDA requests additional information. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. +Emergency Use Authorization +In emergency situations, such as a pandemic, the FDA has the authority to allow unapproved medical products or unapproved uses of cleared or approved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by chemical, biological, radiological or nuclear warfare threat agents when there are no adequate, approved, and available alternatives. +Under this authority, the FDA may issue an emergency use authorization (EUA) for an unapproved device if the following four statutory criteria have been met: (1) a serious or life-threatening condition exists; (2) evidence of effectiveness of the device exists; (3) a risk-benefit analysis shows that the benefits of the product outweigh the risks; and (4) no other alternatives exist for diagnosing, preventing or treating the disease or condition. Evidence of effectiveness includes medical devices that “may be effective” to prevent, diagnose, or treat the disease or condition identified in a declaration of emergency issued by the Secretary of the Department of Health and Human Services (HHS). The “may be effective” standard for EUAs requires a lower level of evidence than the “effectiveness” standard that FDA uses for product approvals in non-emergency situations. The FDA assesses the potential effectiveness of a possible EUA product on a case-by-case basis using a risk-benefit analysis. In determining whether the known and potential benefits of the product outweigh the known and potential risks, the FDA examines the totality of the scientific evidence to make an overall risk-benefit determination. Such evidence, which could arise from a variety of sources, may include (but is not limited to) results of domestic and foreign clinical trials, in vivo efficacy data from animal models, in vitro data, as well as the quality and quantity of the available evidence. +31 +Table of Contents +Once granted, an EUA will remain in effect and generally terminate on the earlier of (1) the determination by the Secretary of HHS that the public health emergency has ceased or (2) a change in the approval status of the product such that the authorized use(s) of the product are no longer unapproved. After the EUA is no longer valid, the product is no longer considered to be legally marketed and one of the FDA’s non-emergency premarket pathways would be necessary to resume or continue distribution of the subject product. +The FDA also may revise or revoke an EUA if the circumstances justifying its issuance no longer exist, the criteria for its issuance are no longer met, or other circumstances make a revision or revocation appropriate to protect the public health or safety. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k) or a de novo classification request. In the U.S., if the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption (IDE) application and obtains approval of the IDE from the FDA. Non-significant risk device studies do not require FDA approval of an IDE application. Both significant risk and non-significant risk clinical trials are also subject to the review, approval and oversight of an institutional review board (IRB). The clinical trials must be conducted in accordance with the FDA’s IDE regulations and good clinical practices. A clinical trial may be suspended by the FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. Clinical trials are also subject to a requirement to submit certain information to the ClincialTrials.gov database maintained by the National Institutes of Health. +Breakthrough Device Designation +FDA Breakthrough Device de signation is granted to certain medical devices and device-led combination products that provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating diseases or conditions. The goal is to give patients and doctors timely access to these medical devices by speeding up their development, assessment, and review, while preserving the statutory standards for premarket approval. The Breakthrough Devices Program offers device companies an opportunity to interact with the FDA's experts through several different program options to efficiently address topics as they arise during the premarket review phase, which can help companies receive feedback from the FDA and identify areas of agreement in a timely way. Recipients may also receive prioritized review of their submission. Although Breakthrough Device designation or access to any other expedited program may expedite the development or clearance/authorization/approval process, it is not guaranteed to do so, and, more importantly, it does not change the standards for clearance/authorization/approval. Designation for any expedited review procedure does not ensure that we will ultimately obtain regulatory clearance or approval for such product. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +● establishment registration and device listing; +● the QSR, which requires manufacturers, including third-party contract manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; +32 +Table of Contents +● labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to promotional activities; +● medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur; +● corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +● post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device. +To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant PMA approvals of new devices; withdrawal of PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +We own and operate a CLIA-certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of research testing that does not report patient specific results). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for the diagnosis, prevention, or treatment of any disease or impairment of, or the assessment of health of, human beings. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program for each of the specialties and subspecialties for which it is certified. If a laboratory fails to achieve a passing score on a proficiency test, then its CLIA certificate may be suspended, limited or revoked, or other sanctions may be imposed. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year (except laboratories with only a certificate of waiver or certificate of provider-performed microscopy procedures are not subject to biennial inspections), in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered by high-complexity laboratories for the last few decades as LDTs, the validation and performance of which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs under the agency’s medical device authorities, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices. In 2010, the FDA announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. To date, the FDA has not issued such guidance, and has indicated that Congress should enact legislation to address improved oversight of diagnostics, +33 +Table of Contents +including LDTs, rather than the FDA addressing the issue through administrative proposals. However, FDA has increased its oversight of what it perceived as especially high-risk LDTs, and in October 2018 the FDA issued a safety communication warning against the use of unapproved LDTs that describe relationships between gene variants and particular drugs (pharmacogenomic tests). FDA also regulated LDTs for Covid-19 under its EUA authority and related guidance. HHS initially issued a policy in August 2020 stating that FDA could not require premarket review (including EUAs) for LDTs. But this HHS policy was revoked in November 2021, reinstating FDA's prior approach for oversight of Covid-19 LDTs. Thus, while FDA generally exercises enforcement discretion for LDTs it continues to exercise oversight over certain high-risk tests. In addition, over the past several years, several bills to impose a new FDA regulatory framework with similarities to the current medical device framework for “in vitro clinical tests,” which would include both in vitro diagnostics and LDTs, have been introduced. We cannot predict the ultimate timing or form of any such legislation or future FDA guidance or regulation or their potential impact. Any new regulatory approach for LDTs by the FDA, whether through legislation or regulation, would likely lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of any changes to the FDA’s current approach is unknown, it may be extensive and may result in significant change. +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out-of-state laboratories to obtain licensure. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third-party payors. +When we perform clinical diagnostic testing, we are subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, in the European Union (the E.U.) new regulations recently entered into force that introduce greater regulation of medical devices and IVDs. The new IVD regulation (the IVD Regulation) is significantly different from the European directive for IVD medical devices (the IVD Directive) that it replaces in that it ensures that the new requirements apply uniformly and on the same schedule across the member states, includes a risk-based classification system and increases the requirements for conformity assessment. +The CE registration for the Nf-L ELISA assay kit of our subsidiary Uman was approved in March 2014 under the IVD Directive . Under the IVD Directive, the assay is classified as a general IVD product and required self-certification with no involvement of a notified body/authority. The IVD Regulation introduces a new classification system for IVDs and assessment by a notified body is required for class B, C and D products. Uman’s Nf-L ELISA assay kit is classified as a class B product and must fully comply with (and have a CE mark issued under) the IVD Regulation by May 2027. The new requirements include an ISO 13485 certification of the quality system (which Uman received in July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g., clinical evidence and post-market activities). The work to evaluate and to meet the new technical requirements is on-going. When all requirements are met, a notified body will be contacted, and the certification initiated. +The NF-light Serum ELISA is currently sold only as a RUO product (not intended for diagnostic use). Work is on-going to prepare a technical file compliant with the IVD Regulation for this product as well. +34 +Table of Contents +Other Governmental Regulation +Privacy and Data Security Laws and Regulations +As a business with a global footprint, compliance with evolving regulations and standards in privacy and data security has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of increased regulatory enforcement activity. Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce. +For example, in the U.S., the collection, maintenance, protection, use, transmission, disclosure and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international and industry levels. U.S. federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by health care providers. Privacy and Security Rules under HIPAA, as amended, and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH), govern the use, disclosure, and security of protected health information by “Covered Entities,” (which are health care providers that submit electronic claims, health plans, and health care clearinghouses) and by their “Business Associates” (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the Covered Entity’s workforce). Rules under HIPAA and HITECH include specific security standards and breach notification requirements. HHS (through the Office of Civil Rights) has direct civil enforcement authority against Covered Entities and Business Associates with regard to both the Security and Privacy Rules. The U.S. Department of Justice has criminal enforcement authority against Covered Entities, Business Associates, and certain other entities and individuals. In addition, State Attorneys General may being enforcement actions under HIPAA. Generally Quanterix is not a Covered Entity, however, we may operate as a Business Associate to Covered Entities under certain circumstances. +In addition to the regulation of personal health information, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for other kinds of personally identifiable information, such as state laws that govern the use, disclosure and protection of sensitive personal information, such as Social Security numbers, or that are designed to protect credit card account data. State consumer protection laws may also establish privacy and security standards for use and management of personally identifiable information, including information related to consumers and care providers. +Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. Legal requirements in foreign countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the E.U., stringent data protection and privacy rules which substantially impact the use of patient data across the healthcare industry became effective in May 2018. The E.U. General Data Protection Regulation (GDPR) applies uniformly across the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals residing in the E.U. to comply with E.U. privacy and data protection rules. +Because the laws and regulations continue to expand, differ from jurisdiction to jurisdiction, and are subject to evolving (and at times inconsistent) governmental interpretation, compliance with these laws and regulations may require significant additional expenditures or changes in products or business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities. +Environmental Health and Safety Laws +35 +Table of Contents +We are subject to federal, state, and local laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation, storage and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (OSHA), has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. OSHA also regulates the use of hazardous chemicals in the workplace. Likewise, we are subject to EPA and state requirements relating to the management and disposal of hazardous waste, and state requirements relating to the disposal of regulated medical waste. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +Employees and Human Capital +As of December 31, 2022, we had 370 full-time employees, of which 125 work in sales, sales support, field service, and marketing, 85 work in engineering and research and development, 104 work in manufacturing and operations and 56 work in general and administration. Of our 370 full-time employees, 309 were located in the United States and 61 were located in 11 foreign countries. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We have a unique culture that stresses the impact our work has on the eradication of human diseases. We invest in creating a diverse, inclusive and safe work environment where our employees can deliver their workplace best every day. +Our success depends upon our ability to attract and retain highly qualified management and technical employees. Talent management is critical to our ability to execute our long-term growth strategy, and we seek to cultivate a superior pool of talent by providing career growth, on-the-job learning opportunities and competitive compensation. We are committed to an inclusive culture which values equality, opportunity and respect. In support of our inclusive culture, we sponsor an internal Diversity, Equity and Inclusion Committee comprised of employees and executives, provide respectful workplace training to strengthen employee understanding and consciously strive to recruit a diverse talent pool across all levels of the organization. As of December 31, 2022, approximately 44% of our employees were women and approximately 36% were non-white. +Workforce Compensation and Pay Equity +We provide robust compensation and benefits programs to help meet the needs of our employees. We provide our full-time employees with highly competitive salaries, as well a bonus and/or commission plan, a matching 401(k) Plan, healthcare and insurance benefits, paid time off and family leave. We also provide all of our employees with targeted equity-based grants with vesting conditions designed to facilitate retention through the opportunity to benefit financially from our growth and profitability. +Company Culture +We expect all of our employees and contractors to observe the highest levels of business ethics, integrity, mutual respect, tolerance and inclusivity. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies reflecting these values and also provide direction for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization, and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is fundamentally connected to the physical and mental well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees and contractors. We provide our +36 +Table of Contents +employees with a wide range of benefits, including benefits directed to their health, safety and long-term financial security. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. Our electronically filed reports and other information that we file with the SEC can be viewed on the SEC’s website at http://www.sec.gov . +Item 1A. RISK FACTORS +The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page ii of this Annual Report on Form 10-K for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. +Risk Factor Summary +Our business is subject to numerous risks and uncertainties. The following summary highlights some of the risks to be considered with respect to our business and prospects. This summary is not complete and the risks summarized below are not the only risks we face. Readers should review and carefully consider the risks and uncertainties described in more detail below, which includes a more complete discussion of these risks. +● We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +● Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, which could cause the value of our common stock to fluctuate or decline significantly. +● If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +● Sales of our assays for neurological indications have become increasingly important to our business, and any significant decrease in sales of such assays could have a material adverse effect on our business. +37 +Table of Contents +● We may fail to achieve the intended cost savings, revenue improvement, and related benefits from our Restructuring Plan. +● We may not be able to obtain the anticipated product and quality-related benefits from our assay improvement program . +● Failure to remediate a material weakness in, or inherent limitations associated with, our internal accounting controls could result in material misstatements in our financial statements. +● Because a significant portion of our revenue comes from a few large customers, any significant decrease in sales to these customers, due to industry consolidation or otherwise, could harm our operating results. +● Our long-term results depend upon our ability to improve existing products, develop or acquire new technology, and develop, introduce and market new products successfully. +● If defects are discovered in our products, we may incur additional unforeseen costs, our products may be subject to recalls, customers may not purchase our products, our reputation may suffer, and ultimately our sales and operating earnings could be negatively affected. +● We may seek to enter into strategic collaborations and licensing arrangements with third parties, but we may not be successful in establishing or maintaining such arrangements. +● We generate a substantial portion of our revenue internationally and we expect this will continue in the future; as a result, our business is subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +● We rely on a single contract manufacturer to manufacture and supply our Simoa HD-X instrument and rely on a different single contract manufacturer to manufacture and supply our Simoa SR-X. If either of these manufacturers should fail to perform, or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +● We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and our SP-X instrument, and we may not be able to find replacements or immediately transition to alternative suppliers if any of these suppliers fail to perform, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +● Epidemic diseases, such as COVID-19 and its variants, and other events could negatively affect various aspects of our business, make it more difficult to meet our obligations to our customers and/or result in reduced demand from our customers, each of which could have a material adverse effect on our business, financial condition, results of operations or cash flows. +● If the FDA determines that our products are subject to regulation as medical devices or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then-marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +● Cybersecurity breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +38 +Table of Contents +● If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our operations or continue offering our LDTs. +● If we are unable to protect our intellectual property, our ability to maintain any technological or competitive advantage over our competitors and potential competitors may be reduced and our business may be harmed. +● If we or any of our partners are sued for infringing intellectual property rights of third parties, the resulting litigation would be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +● We may not be able to protect our intellectual property rights throughout the world, which could have a materially adverse effect on our business . +● Our stock price may fluctuate significantly. +Risks Related to Our Financial Condition +We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +We incurred net losses of $96.7 million, $57.7 million and $31.5 million for the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $402.2 million. We cannot predict if or when we will achieve profitability or if or when we will be able to sustain such profitability once achieved. We expect that our losses will continue at least through the next 24 months as we continue to invest funds for technology development, including our assay redevelopment program designed to improve our ability to manufacture and deliver high-quality assays at scale and execute our strategy for our entry into translational pharma and clinical markets. We may incur significant losses in the future for a number of reasons, many of which are beyond our control, including the other risks described in this Annual Report on Form 10-K, the market acceptance of our products, competitive products, future product development and our market penetration and margins. +Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, which could cause the value of our common stock to fluctuate or decline significantly. +Numerous factors, many of which are outside of our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively affect our business and prospects. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others. As a result, comparing our operating results on a period-to-period basis might not be meaningful. Investors should not rely on our past results as indicative of our future performance. Moreover, our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline significantly. +Our future capital needs are uncertain and we may need to raise additional funds in the future. +We believe that our existing cash and cash equivalents as of December 31, 2022, together with our cash generated from commercial sales, will enable us to fund our operating expenses and capital expenditure requirements for the foreseeable future. However, our future funding requirements will depend on many factors, including: +● continued market acceptance of our products and the ability of our products to meet our customers’ expectations; +39 +Table of Contents +● the cost and timing of establishing additional sales, marketing and distribution capabilities; +● the extent to which we achieve intended cost savings, revenue improvement and related benefits from our Restructuring Plan; +● the extent to which we are able to successfully complete our assay improvement program to enhance product quality; +● the cost of our research and development activities; +● our ability to enter into collaborations in the future, and the success of any such collaborations; +● potential opportunities to strategically acquire and integrate companies or technologies that may be complementary to our business; +● the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +● the effect of competing technological and market developments. +If we need additional capital in the future, we may not be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could have a material adverse effect on our financial condition, operating results and business. +Failure to remediate a material weakness in, or inherent limitations associated with, internal accounting controls could result in material misstatements in our financial statements. +Our management has identified material weaknesses in our internal control over financial reporting related to the operating effectiveness of our internal controls associated with (i) the accounting for inventory, including excess and obsolescence reserves, (ii) the accounting for salary and commissions expense, (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases, and (iv) the accounting for property and equipment, net. See “Item 9A. Controls and Procedures”. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result, management has concluded that, due to such material weaknesses, our disclosure controls and procedures were not effective as of December 31, 2022. +Our efforts to improve our internal controls are ongoing; however, there are inherent limitations in all control systems and no evaluation of controls can provide absolute assurance that all deficiencies have been detected. If we are unable to maintain effective internal control over financial reporting, or after having remediated such material weaknesses, fail to maintain the effectiveness of our internal control over financial reporting or our disclosure controls and procedures, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline and we could be subject to regulatory scrutiny, civil or criminal penalties or litigation. Continued or future failure to maintain effective internal control over financial reporting could also result in financial statements that do not accurately reflect our financial condition or results of operations, may result in material misstatements in our financial statements and may also restrict our future access to the capital markets. +40 +Table of Contents +We are currently implementing a plan intended to remediate the material weaknesses described above. The implementation of this plan could be costly and distract management from other activities. There can be no assurance that we will not conclude in the future that we have not effectively remediated these material weaknesses and they continue to exist or that we will not identify any significant deficiencies or other material weaknesses that will impair our ability to report our financial condition and results of operations accurately or on a timely basis. +Our ability to use net operating losses to offset future income may be subject to certain limitations. +As of December 31, 2022, we had federal net operating loss (NOLs) carryforwards to offset future taxable income of approximately $309.7 million, which begin to expire in 2026. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We have already experienced ownership changes as defined under Section 382 of the Code. Depending on the timing of any future utilization of our NOLs, the amount that can be utilized each year may be limited as a result of such previous ownership changes. In addition, future changes in our stock ownership, including changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. +Risks Related to Our Business +If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +Our success depends on our ability to develop and market products that are recognized and accepted by our customers and potential customers as reliable, enabling and cost-effective. Continued market acceptance of our Simoa technology platform and products and other platforms and products we may develop in the future will depend on many factors, including our ability to convince potential customers that our technology is an attractive alternative to other available technologies. Historically, a significant part of our sales and marketing efforts has been directed at demonstrating the advantages of our technology to industry leaders and encouraging such leaders to publish or present their evaluation of our system. We also need to demonstrate to current and prospective customers that our products can help them accomplish their objectives in a cost-effective and efficient manner. If we are unable to continue to motivate leading researchers to use Simoa technology or other technologies we may develop, or if such researchers are unable to achieve or unwilling to publish or present significant experimental results using our systems, acceptance and adoption of our systems may be slowed and our ability to retain and grow our customer base and increase our revenue would be adversely affected. +Our future success is dependent upon our ability to retain and further penetrate our existing customer base and attract new customers. +Our success will depend upon our ability to successfully retain, respond to the evolving needs of, and increase our market share among, existing customers and add new customers. Identifying, cultivating, engaging and marketing to customers requires substantial time, expertise and expense and involves a number of risks, including that: +● we may not have the ability to attract, retain and manage the sales, marketing and service personnel necessary to expand market acceptance for our Simoa technology or other platforms we may develop in the future; +● the time and cost of maintaining and growing a specialized sales, marketing and service force may be better spent elsewhere; and +● our sales, marketing and service force may be unable to accomplish their goals. +41 +Table of Contents +We have utilized third parties to assist with sales, distribution and customer support in certain regions of the world. When we enter into such arrangements, there is no guarantee that we will be successful in attracting desirable sales and distribution partners. There is also no guarantee that we will be able to enter into such arrangements on favorable terms. Any failure of our sales and marketing efforts, or those of any third-party sales and distribution partners, would adversely affect our business. +Sales of our assays for neurological indications have become increasingly important to our business, and any significant decrease in sales of such assays could have a material adverse effect on our business. +Neurology has been one of our primary focus areas for commercialization of our Simoa technology and the services that we provide to our customers. Sales from neurological-related biomarkers have become an increasingly important part of our business. There can be no assurance that we will continue to derive meaningful revenues from the sale of our neurological products, from services related to neurodegenerative conditions or from sales of instruments driven by customers desiring access to our technology for work relating to neurological conditions. The adoption by our customers of competitive technologies for detecting biomarkers of neurodegenerative conditions could negatively impact our revenues and have a material adverse effect on our business. +We may fail to achieve the intended cost savings, revenue improvement, and related benefits from our Restructuring Plan . +In August 2022, we announced a plan of restructuring and strategic re-alignment, which included the elimination of 119 positions, or 25% of our workforce at the time, and other cost-savings measures (the Restructuring Plan). We incurred expenses of approximately $3.8 million related to the Restructuring Plan in the third and fourth quarter of 2022, substantially all of which were cash expenditures for severance and other costs relating to the Restructuring Plan. Overall, as a result of the Restructuring Plan we expect to realize estimated annualized operating expense savings of approximately $25 million. However, these estimates are subject to a number of assumptions, and actual results may differ. There is no guarantee that the Restructuring Plan will achieve its intended benefits. For example, our cost restructuring and business re-alignment efforts may not result in the anticipated savings or other economic benefits and could result in total costs and expenses that are greater than expected, each of which could have an adverse effect on our business. As part of the Restructuring Plan, we do not currently, nor do we intend to in the future, occupy the additional space acquired under the Bedford facilities lease agreement. We are reviewing our alternatives with respect to this space. These alternatives may include sub-leasing all, or a portion, of the Bedford facilities. We believe that the Billerica office, laboratory and manufacturing space will be sufficient to meet our needs for the foreseeable future. Refer to Note 12 to the consolidated financial statements for further details related to the Bedford lease. The Restructuring Plan may cause disruption to our business operations, and we may fail to effectively execute on the Restructuring. +We may not be able to obtain the anticipated product and quality-related benefits from our assay improvement program . +In connection with the Restructuring Plan, we have implemented an assay improvement program designed to improve our ability to manufacture and deliver high-quality assays at scale. We made initial progress toward this initiative in 2022, and we expect that the program will be completed in 2023. We may not be able to obtain the anticipated product and quality-related benefits from these efforts. Further, we may be delayed in completing this program. Delays in completing the assay improvement program or our inability to fully realize the anticipated product and quality-related benefits could materially and adversely affect our revenue and cash flows and could undermine customer confidence in our products and adversely affect our business . +The sales cycle for our Simoa instruments can be lengthy and variable, which makes it difficult for us to forecast revenue and other operating results. +The sales process for our Simoa instruments generally involves numerous interactions with multiple individuals within an organization, and often includes in-depth analysis by potential customers of our technology and products and a lengthy review process. Our customers’ evaluation processes often involve a number of factors, many of which are +42 +Table of Contents +beyond our control. As a result of these factors, the capital investment required to purchase our systems, and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly. Given the length and uncertainty of our sales cycle, we have in the past experienced, and expect in the future to experience, fluctuations in our sales on a period-to-period basis. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems, using existing assays not requiring capital equipment, or purchasing systems other than ours. +Because a significant portion of our revenue comes from a few large customers, any significant decrease in sales to these customers, due to industry consolidation or otherwise, could harm our operating results. +One customer accounted for 13% of our total revenue for the year ended December 31, 2022, and several other customers accounted for a significant portion of our total revenue. The loss of a significant amount of business from one or more of our major customers would have a material adverse effect on our business. There can be no assurance that there will not be a loss or reduction in business from one or more of our major customers. In addition, we cannot assure that net sales from customers that have accounted for significant net sales in the past, either individually or as a group, will reach or exceed historical levels in any future period. +Our long-term results depend upon our ability to improve existing products and introduce and market new products successfully. +We generally sell our products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. Accordingly, our business is dependent on the continued improvement of our existing Simoa products and our development of new products utilizing Simoa or other technology we develop or acquire. As we introduce new products or refine, improve or upgrade versions of existing products, we cannot predict the level of market acceptance or the amount of market share these products will achieve, if any. We cannot guarantee that we will not experience material delays in the introduction of new products in the future. In addition, introducing new products could result in a decrease in revenues from our existing products. Consistent with our strategy of offering new products and product refinements, we have invested substantial capital on research and development, and we expect to continue to use a substantial amount of capital for product research and development. Our research and development initiatives can be costly and time-consuming, and they may fail to achieve the intended benefits. We may need more capital for product research and development than is available on terms favorable to us, if at all. If we do not develop new products and product enhancements based on technological innovation on a timely basis, our products may become obsolete over time and our revenues, cash flow, profitability and competitive position will suffer. +If defects are discovered in our products, we may incur additional unforeseen costs, our products may be subject to recalls, customers may not purchase our products, our reputation may suffer, and ultimately our sales and operating earnings could be negatively affected. +Our Simoa products are complex and may contain undetected errors or defects, especially when first introduced or as new versions or new products are released. New products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment. We continue to invest funds for technology development and quality assurance, including our assay redevelopment program, which is designed to improve our ability to manufacture and deliver high-quality assays at scale. However, there can be no assurance that we will be successful in our efforts to avoid our products containing undiscovered defects. Defects or errors in our products may discourage customers from purchasing our products. Disruptions affecting the introduction or release of, or other performance problems with, our products may damage our customers’ businesses and could harm their and our reputation. If that occurs, we may incur significant costs, the attention of our key personnel could be diverted or other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages related to errors or defects in our products. In addition, if we do not meet industry or quality standards, if applicable, our products may be subject to recall. A material liability claim, recall or other occurrence that harms our reputation or decreases market acceptance of our products could harm our business and operating results. +43 +Table of Contents +Use of our products or services by us or a customer for diagnostic purposes could result in a product liability claim alleging that one of our products contained a design or manufacturing defect that resulted in the failure to adequately perform, leading to death or injury. A product liability claim could result in substantial damages and be costly and time-consuming to defend, either of which could materially harm our business or financial condition. We cannot guarantee that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future. +We may seek to enter into additional strategic collaborations and licensing arrangements with third parties, but we may not be successful in establishing or maintaining such arrangements. +We may seek to enter into additional strategic collaborations and licensing agreements with third parties to develop products based on our Simoa technology, such as for certain IVD purposes. However, we may not be successful in doing so. Establishing collaborations and licensing arrangements is difficult and time-consuming, and discussions may not lead to collaborations or licenses on favorable terms, if at all. Even if we establish such relationships, if our partners do not prioritize and commit sufficient resources to develop and sell products based on our Simoa technology, such relationships may never result in the successful development or commercialization of products based on our Simoa technology. +Our reliance on distributors for sales of our products outside of the United States could limit or prevent us from selling our products and could impact our revenue. +We have established exclusive distribution agreements for our Simoa instruments and related consumable products within certain foreign countries, including Australia, Brazil, China, the Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan and the UAE. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or if we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth. In addition, if our distributors fail to comply with applicable laws and ethical standards, including anti-bribery laws, this could damage our reputation and could have a significant adverse effect on our business and our revenues. +We generate a substantial portion of our revenue internationally and we expect this will continue in the future; as a result, our business is subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +For the years ended December 31, 2022, 2021, and 2020, approximately 38%, 36% and 31%, respectively, of our total revenue was generated from customers located outside of North America. We believe that a substantial percentage of our future revenue will continue to come from international sources as we expand our overseas operations and develop opportunities in additional areas. Engaging in international business involves a number of difficulties and risks, including: +● required compliance with existing and changing U.S. or foreign regulatory requirements and laws; +● difficulties and costs of staffing and managing foreign operations; +● a shortage of high-quality salespeople and distributors; +● pricing pressure that we may experience internationally; +44 +Table of Contents +● difficulties in maintaining consistency with our internal guidelines; +● difficulties in enforcing our intellectual property rights and in defending against third-party threats and intellectual property enforcement actions against us or any of our distributors, suppliers or collaborators; +● reduced or varied protection for intellectual property rights in some countries; +● required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, data privacy requirements, such as the GDPR, labor laws and anti-competition regulations; +● export or import restrictions and supply chain disruptions; +● laws and business practices favoring local companies; +● longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; +● the imposition of restrictions on the activities of foreign agents, representatives and distributors; +● foreign currency exchange rate fluctuations; +● the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; +● the impact of political and economic instability and conflict, which could lead to uncertainty and instability in global financial markets; +● scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; +● the imposition of new trade restrictions; and +● potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers. +Historically, most of our revenue has been denominated in U.S. dollars. In the future, we may sell our products and services in local currency outside of the United States. As our operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. If we dedicate significant resources to our international operations and are unable to manage these risks effectively, our business, operating results and financial condition will suffer. +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws by us or our agents. +We are subject to the U.S. Foreign Corrupt Practices Act (the FCPA), which prohibits companies and individuals from corruptly making payments, directly or indirectly through third parties, to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. We are also subject to the FCPA’s accounting provisions, which require us to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority and responsibility over our assets. Our +45 +Table of Contents +reliance on independent distributors to sell our products internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because there are circumstances under which we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing their distributors and other third parties to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and, as a result, we cannot guarantee that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also incur severe penalties, including criminal and civil penalties, disgorgement and other remedial measures. +We rely on a single contract manufacturer to manufacture and supply our Simoa HD-X instrument and rely on a different single contract manufacturer to manufacture and supply our Simoa SR-X instrument. If either of these manufacturers should fail to perform, or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +We currently rely on a single contract manufacturer, STRATEC, an analytical and diagnostic systems manufacturer located in Germany, to manufacture and supply all of our Simoa HD-X instruments. In addition, we currently rely on a single contract manufacturer, Paramit, a contract manufacturer located in California, to manufacture and supply all of our SR-X instruments. Since our contract with STRATEC does not commit them to supply quantities beyond the amounts included in our forecasts and our contract with Paramit does not commit them to carry inventory or make available any particular quantities, these contract manufacturers may give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. If either of these manufacturers were not able to supply instruments, our business would be harmed. +In the event it becomes necessary to utilize a different contract manufacturer for the HD-X instrument or the SR-X instrument, we would experience additional costs, delays and difficulties in doing so as a result of needing to identify and enter into an agreement with a new supplier as well as needing to prepare such new supplier to meet the logistical requirements associated with manufacturing our instruments, and our business would suffer. We may also experience additional costs and delays in the event we need access to or rights under any intellectual property of STRATEC. +In addition, certain of the components used in our instruments are sourced by these manufacturers from limited or sole suppliers. If they were to lose such suppliers, there can be no assurance that they would be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our ability to sell and deliver instruments to customers could occur if our manufacturers encounter delays or difficulties in securing these components, or if the quality of the components supplied do not meet specifications, or if they cannot then obtain an acceptable substitute. If any of these events occur, our business and operating results could be harmed. +We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and services and our SP-X instrument, and we may not be able to find replacements or immediately transition to alternative suppliers if any of these suppliers fail to perform, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +We rely on limited or sole suppliers for certain reagents and other materials and components that are used in our consumable products and services and in our SP-X instrument. While we have long-term contracts with some critical suppliers, we do not have contracts with all suppliers and instead rely on periodically forecasting our needs for such materials and entering into standard purchase orders with our suppliers. In addition, our use of many of the materials used in our consumable products is limited to research use only. As we expand into diagnostic applications for our products, we will need to secure diagnostic rights to such materials. If we were to lose suppliers or were unable to secure required rights for materials from suppliers, there can be no assurance that we will be able to identify or enter into +46 +Table of Contents +agreements with alternative suppliers on a timely basis and on acceptable terms, if at all. An interruption in our operations could occur if we encounter delays or difficulties in securing these materials or any required rights to these materials, if the quality of the materials supplied do not meet our requirements, or if we cannot then obtain an acceptable substitute. The time and effort required to qualify a new supplier and ensure that the new materials provide the same or better quality results could result in significant additional costs. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. +Increased demand may cause us to experience delays in production or backlogs in deliveries that could limit the growth of our revenue or increase our losses. +A significant unforecasted increase in demand for our products may result in delays or shortfalls in our production and backlogs in deliveries. If we are unable to keep up with demand for our products, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products. Our inability to successfully manufacture our products would have a material adverse effect on our operating results. +The life sciences research and diagnostic markets are highly competitive. If we fail to effectively compete, our business, financial condition and operating results will suffer. +We face significant competition in the life sciences research and diagnostic markets. We currently compete with both established and early-stage companies that design, manufacture and market systems and consumable supplies. Many of our current competitors have competitive advantages over us, including: +● greater name and brand recognition; +● substantially greater financial and human resources; +● broader product lines; +● larger sales forces and more established distributor networks; +● more substantial intellectual property portfolios; +● larger and more established customer bases and relationships; and +● better established, larger scale and lower cost manufacturing capabilities. +We cannot guarantee that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot guarantee that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results. +Integrating any business, product or technology we acquire can be expensive and time-consuming and can disrupt and adversely affect our ongoing business, including product sales, and distract our management. +We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in complementary businesses, such as our 2018 acquisition of Aushon and our 2019 +47 +Table of Contents +acquisition of Uman. Our ability to successfully integrate any business, product or technology we acquire depends on a number of factors, including, but not limited to, our ability to: +● minimize the disruption and distraction of our management and other employees, including our sales force, in connection with the integration of any acquired business, product or technology; +● minimize disruption in relationships with customers, distributors or suppliers as a result of such a transaction; +● avoid acquisition of unanticipated liabilities related to acquired companies; +● maintain and increase sales of our existing products; +● establish or manage the transition of the manufacture and supply of any acquired product; +● identify and add the necessary sales, marketing, manufacturing, regulatory and other related personnel, capabilities and infrastructure that are required to successfully integrate any acquired business, product or technology; +● manage the transition and migration of acquired personnel and all commercial, financial, legal, regulatory and other pertinent information relating to any acquired business, product or technology; +● comply with legal, regulatory and contractual requirements applicable to any acquired business, product or technology; and +● maintain and extend intellectual property protection for any acquired product or technology. +If we are unable to perform the above functions or otherwise effectively integrate any acquired businesses, products or technologies, our business, financial condition and operating results will suffer. +Foreign acquisitions (such as our acquisition of Uman) involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. +Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +Epidemic diseases, such as COVID-19 and its variants, and other events could negatively affect various aspects of our business, make it more difficult to meet our obligations to our customers and/or result in reduced demand from our customers, each of which could have a material adverse effect on our business, financial condition, results of operations or cash flows. +Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, such as COVID-19 and its variants, or as a result of natural disasters or other catastrophic events . Potential impacts to our business include disruptions to or restrictions on our employees’ and customers’ ability to travel, temporary closures of the facilities of our suppliers or customers, delays in installation of instruments and delays in shipments to and from affected countries. Any such travel restrictions and business closures could adversely impact our operations locally and worldwide, including our ability to manufacture, sell or distribute our products, as well as cause temporary closures of our foreign distributors, or the facilities of suppliers or customers. Any material disruption of our employees, distributors, suppliers or customers in impacted countries could impact our global sales and operating results. In addition, if any of these events adversely +48 +Table of Contents +affect the economies and financial markets of countries in which we sell our products and services, resulting in an economic downturn, demand for our products could be affected and could adversely impact our operating results. +Risks Related to Government Regulation and Diagnostic Product Reimbursement +If the FDA determines that our products are subject to regulation as medical devices or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then marketed products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +We focused initially on the life sciences research market. This includes offering products for use by laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Accordingly, the majority of our products are labeled as “Research Use Only”. While we focused initially on the life sciences research market and RUO products only, our strategy includes expanding our product line to encompass products that are intended to be used for the diagnosis of disease, including LDTs and IVD devices, either alone or in collaboration with third parties. Other than our LDTs, such IVD products, once developed and offered, will be subject to regulation by the FDA, or comparable international agencies, as medical devices including requirements for regulatory clearance or approval of such products before they can be marketed. +The process of obtaining regulatory clearances to market a medical device can be costly and time consuming, and we or our collaborators may not be able to obtain these clearances or approvals on a timely basis, if at all. In general, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approved PMA, unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other pre-amendment, 510(k)-exempt, 510(k) cleared products, or PMA-approved products that have subsequently been down-classified. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is novel, it is automatically classified into Class III, and the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo classification process. Pursuant to amendments to the statute in 2012, a manufacturer can also submit a petition for a direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk. +Class III devices, which are high risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, require the approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. +Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products internationally for such uses, we may be subject to rigorous international regulation in the future. In these circumstances, we may rely significantly on our foreign independent distributors or collaborators to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries. +If we or our collaborators are required to obtain a PMA or 510(k) clearance for products based on our technology, we or they would be subject to a substantial number of additional requirements for medical devices, including establishment registration, device listing, QSRs —which cover the design, testing, production, control, quality assurance, labeling, packaging, servicing, sterilization (if required), and storage and shipping of medical devices (among other activities) —product labeling, advertising, recordkeeping, post-market surveillance, post-approval studies, adverse event reporting, and correction and removal (recall) regulations. One or more of the products we or a collaborator may develop using our technology may also require clinical trials in order to generate the data required for a PMA, de novo classification request or 510(k) premarket notification. Complying with these requirements may be time-consuming and +49 +Table of Contents +expensive. We or our collaborators may be required to expend significant resources to ensure ongoing compliance with the FDA regulations and/or take satisfactory corrective action in response to enforcement action, which may have a material adverse effect on the ability to design, develop, and commercialize products using our technology as planned. Failure to comply with these requirements may subject us or a collaborator to a range of enforcement actions, such as warning letters, injunctions, civil monetary penalties, criminal prosecution, recall and/or seizure of products, and revocation of marketing authorization, as well as significant adverse publicity. If we or our collaborators fail to obtain, or experience significant delays in obtaining, regulatory approvals for IVD products, such products may not be able to be launched or successfully commercialized in a timely manner, or at all. +LDTs are a subset of IVD tests that are offered as services by high complexity clinical laboratories and designed, manufactured and used within a single laboratory. In July 2022, we launched an LDT to quantitatively measure pTau-181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. The FDA maintains that LDTs are medical devices and has for the most part exercised enforcement discretion for most LDTs, meaning that the FDA has not required LDTs to obtain premarket approval or clearance or comply with post-market medical device requirements. A significant change in the way that the FDA regulates any LDTs that we, our collaborators or our customers develop using our technology could affect our business. The FDA has considered the appropriate way to regulate such tests, but after publishing several draft guidances in 2014 and holding a number of public hearings and workshops, no final guidance has been issued, as the FDA indicated the agency would defer to a legislative approach. Congress has considered several bills that would have imposed a new FDA regulatory framework (with many similarities to the current device framework) for LDTs and IVD devices, but to date, has not passed such legislation. However, if Congress or the FDA requires laboratories to undergo premarket review and comply with other applicable FDA requirements in the future, the cost and time required to commercialize an LDT will increase substantially, and may reduce the financial incentive for laboratories to develop LDTs, which could reduce demand for our instruments and our other products. The FDA could also take enforcement action against us if it determines the tests we have currently launched as LDTs do not fall within the agency’s definition of an LDT and therefore do not fall within the scope of the agency’s enforcement discretion for LDTs. +Foreign jurisdictions have laws and regulations similar to those described above, which may adversely affect our ability to market our products as planned in such countries. The number and scope of these requirements are increasing. As in the United States, the cost and time required to comply with regulatory requirements may be substantial, and there is no guarantee that we will obtain the necessary authorization(s) required to make our products commercially viable. In addition, the imposition of foreign requirements may also have a material adverse effect on the commercial viability of our operations. +Our products may in the future be subject to product recalls that could harm our reputation, business and financial results. +The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products, including RUO products, in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain recalls (including field corrections and removals) be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted. +50 +Table of Contents +U.S. legislative, FDA or global regulatory reforms may make it more difficult and costly for us to obtain any required regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. For example, in December 2022, Congress enacted the Food and Drug Omnibus Reform Act of 2022 (FDORA). FDORA reauthorized the FDA to collect device user fees and contained substantive amendments to the device provisions of the FDCA, including imposing new cybersecurity and clinical trial requirements for devices. Congress has also considered, but not yet passed, legislation to impose a new FDA regulatory framework for IVD devices and LDTs. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Moreover, leadership, personnel and structural changes within the FDA as well as recent and future federal election outcomes could result in significant legislative and regulatory reforms impacting the FDA’s regulation of our products. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business. +In addition, in the E.U. new regulations recently entered into force that result in greater regulation of medical devices and IVDs. The IVD Regulation is significantly different from the IVD Directive that it replaces in that it ensures that the new requirements apply uniformly and on the same schedule across the member states, includes a risk-based classification system and increases the requirements for conformity assessment. The CE registration for Uman’s Nf-L ELISA assay kit for cerebral spinal fluid was approved in March 2014 under the IVD Directive . Under the IVD Directive the assay is classified as a general IVD product, class I and required self-certification with no involvement of a notified body/authority. The IVD Regulation introduces a new classification system for IVDs and assessment by a notified body is required for class B, C and D products. Uman’s Nf-L ELISA assay kit for CSF is classified as a class B product and must fully comply with (and have a CE mark issued under) the IVD Regulation by May 2027. The new requirements include an ISO 13485 certification of the quality system (which Uman received July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g. clinical evidence and post-market activities). The work to evaluate and to meet the new technical requirements is on-going. +In order to continue to sell our products in the E.U., we must maintain our CE marks and comply with the IVD Regulation. Our failure to continue to comply with applicable foreign regulatory requirements, including those administered by authorities of the European Economic Area (EEA) countries, could result in enforcement actions against us, including refusal, suspension or withdrawal of our CE Certificates of Conformity by our notified body, which could impair our ability to market products in the EEA in the future. Any changes to the membership of the E.U., such as the departure of the United Kingdom, may impact the regulatory requirements for the impacted countries and impair our business operations and our ability to market products in such countries. +If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our Accelerator laboratory operations or continue offering our LDTs. +The operation of our CLIA-certified laboratory is subject to regulation by numerous federal, state and local governmental authorities in the United States. This laboratory holds a CLIA certificate of compliance and is licensed by the Commonwealth of Massachusetts and the State of Maryland, and we may obtain other state licenses if required in the future. Failure to comply with federal or state regulations or changes in those regulatory requirements could result in a substantial curtailment or even prohibition of the operations of our laboratory and could have an adverse effect on our business. CLIA is a federal law that regulates clinical laboratories that perform testing on human specimens for the purpose of providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the +51 +Table of Contents +assessment of health of, human beings. To maintain CLIA certification, laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make unannounced inspections of these laboratories. If we were to lose our CLIA certification or any required state licenses, whether as a result of a revocation, suspension or limitation, it could have a material adverse effect on our business. +We expect to rely on third parties in conducting any required future studies of diagnostic products that may be required by the FDA or other regulatory authorities, and those third parties may not perform satisfactorily. +We do not have the ability to independently conduct clinical trials or other studies that may be required to obtain FDA and other regulatory clearance or approval for future diagnostic products. Accordingly, we expect that we would rely on third parties, such as clinical investigators, contract research organizations, consultants, and collaborators to conduct such studies if needed. For example, we are currently working with the Alzheimer’s Drug Discovery Foundation and the Global Alzheimer’s Platform Foundation on prospective clinical trials for our assays. Our reliance on these third parties for clinical and other development activities would reduce our control over these activities. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised, we may not be able to obtain regulatory clearance or approval. +If diagnostic procedures that are enabled by our technology are subject to unfavorable pricing regulations or third-party coverage and reimbursement policies, our business could be harmed. +The ability of us, our customers or our collaborators to commercialize diagnostic tests based on our technology, including our recently launched LDTs, will depend in part on the extent to which coverage and reimbursement for these tests will be available from government health programs, private health insurers and other third-party payors. In the United States, the principal decisions about reimbursement for new technologies are often made by CMS. Private payors often follow CMS’s reimbursement policies to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of payments for particular products and procedures. We cannot be sure that coverage will be available for any diagnostic tests based on our technology, and, if coverage is available, the level of reimbursement. Payor coverage and reimbursement decisions may impact the demand for those tests. If coverage is not available or the reimbursement amount is inadequate, any tests for which marketing authorization is received may not be able to be successfully commercialized. +Current and future legislation may increase the difficulty and cost to obtain marketing approval of and to commercialize any products based on our technology and affect the prices that may be obtained. +The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the ACA), is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. As a result, certain sections of the ACA have not been fully implemented or were effectively repealed. The uncertainty around the future of the ACA, and in particular the impact to reimbursement levels and the number of insured individuals, may lead to uncertainty or delay in the purchasing decisions of our customers, which may in turn negatively affect our product sales. If there are not adequate reimbursement levels, our business and results of operations could be adversely affected. +In addition, other legislative changes have been proposed and adopted since the ACA was enacted. We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we or our collaborators will receive for any cleared or approved product. Any reduction in payments from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare +52 +Table of Contents +reforms may prevent us from being able to generate revenue, attain profitability, or commercialize any of our products for which we receive marketing approval. +In addition, sales of our tests outside of the United States will subject us to foreign regulatory requirements, which may also change over time. +We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business, or the effect any future legislation or regulation will have on us. Any such initiatives may result in decreased profits to us, lower reimbursements by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations. +Risks Related to Our Operations +We depend on our information technology systems, and any failure of these systems could harm our business. +We depend on information technology and telecommunications systems to operate our business. Our enterprise software systems affect a broad range of business processes and functional areas, including, for example, systems handling human resources, accounting, manufacturing, inventory control, financial controls and reporting, sales administration, and other infrastructure operations. We maintain preventative and detective security controls and seek to enhance such controls by, for example, augmenting the monitoring and alerting functions, network design, and automatic countermeasure operations of our technical systems. We also periodically assess the adequacy of our hardware and systems and are planning to upgrade hardware and systems where appropriate. These information technology and telecommunications systems support a variety of functions, including manufacturing operations, quality control, customer service support, finance and other general administrative activities. +Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications, systems or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses, and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, those measures may be inadequate and failures or significant downtime of our information technology or telecommunications systems or those used by our third-party suppliers could prevent us from operating our business and managing the administrative aspects of our business. Loss of data or a material delay in our access to our data due to a security breach or other interruption could also prevent us from operating our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business. +Cybersecurity breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +In the ordinary course of our business, we collect and store sensitive data, and intellectual property and proprietary business information owned or controlled by ourselves or our customers. This data encompasses a wide variety of business-critical information including research and development information, operational information, commercial information, and business and financial information. We face four primary risks relative to protecting this critical information: loss of access; inappropriate disclosure; inappropriate modification; and inadequate monitoring of our controls over the first three risks. +The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses, breaches, interruptions due to employee error, malfeasance, faulty password management, lapses in compliance with privacy and security mandates, or other +53 +Table of Contents +disruptions. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Our information technology systems may have vulnerabilities, and we may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyberattacks, such as ransomware attacks. A significant cyber incident, including system failure, security breach, disruption by malware or other damage, could interrupt or delay our operations, result in a violation of applicable cybersecurity and privacy and other laws, damage our reputation, cause a loss of customers or expose sensitive customer data, or give rise to monetary fines and other penalties, which could be significant. +Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. Third parties may attempt to fraudulently induce employees or other persons into disclosing usernames, passwords or other sensitive information, which may in turn be used to access our information systems, commit identity theft or carry out other unauthorized or illegal activities. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. We engage third-party vendors and service providers to store and otherwise process some of our data, including sensitive and personal information. Our vendors and service providers may also be the targets of the risks described above, including cyberattacks, malicious software, phishing schemes, and fraud. Our ability to monitor our vendors and service providers’ data security is limited, and, in any event, third parties may be able to circumvent those security measures, resulting in the unauthorized access to, misuse, disclosure, loss or destruction of our data, including sensitive and personal information, and disruption of our or third-party service providers’ systems. We and our third-party service providers may face difficulties in identifying, or promptly responding to, potential security breaches and other instances of unauthorized access to, or disclosure or other loss of, information. Any hacking or other attack on our or our third-party service providers’ or vendors’ systems, and any unauthorized access to, or disclosure or other loss of, information suffered by us or our third-party service providers or vendors, or the perception that any of these have occurred, could result in legal claims or proceedings, loss of intellectual property, liability under laws that protect the privacy of personal information, negative publicity, disruption of our operations and damage to our reputation, which could divert our management’s attention from the operation of our business and materially and adversely affect our business, revenues and competitive position. Moreover, we may need to increase our efforts to train our personnel to detect and defend against cyber- or phishing-attacks, which are becoming more sophisticated and frequent, and we may need to implement additional protective measures to reduce the risk of potential security breaches, which could cause us to incur significant additional expenses. +Any such security breach or interruption, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. federal government or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business and operations. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful. +In addition, our insurance may be insufficient to cover our losses resulting from cyber-attacks, breaches, or other interruptions, and any incidents may result in loss of, or increased costs of, such insurance. The successful assertion of one or more large claims against us that exceed available insurance coverage, the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage, could have a material adverse effect on our business, including our financial condition, results of operations and reputation. +54 +Table of Contents +We are currently subject to, and may in the future become subject to additional, U.S. federal and state laws and regulations imposing obligations on how we collect, store and process personal information. Our actual or perceived failure to comply with such obligations could harm our business. Ensuring compliance with such laws could also impair our efforts to maintain and expand our future customer base, and thereby decrease our revenue. +In the ordinary course of our business, we currently, and in the future will, collect, store, transfer, use or process sensitive data, including personally identifiable information of employees, and intellectual property and proprietary business information owned or controlled by ourselves and other parties. The secure processing, storage, maintenance, and transmission of this critical information are vital to our operations and business strategy. We are, and may increasingly become, subject to various laws and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The regulatory environment related to data privacy and security is increasingly rigorous, with new and constantly changing requirements applicable to our business, and enforcement practices are likely to remain uncertain for the foreseeable future. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may have a material adverse effect on our business, financial condition, results of operations and prospects. +In the United States, various federal and state regulators, including governmental agencies like the Federal Trade Commission, have adopted, or are considering adopting, laws and regulations concerning personal information and data security. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. For example, the California Consumer Privacy Act (the CCPA), which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. In November 2020, California also passed the California Privacy Rights Act (the CPRA), which significantly expands the CCPA, including by introducing additional obligations such as data minimization and storage limitations and granting additional rights to consumers. In 2021, Virginia and Colorado both passed comprehensive state data privacy laws. In addition, laws in all 50 U.S. states require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. State laws are changing rapidly and there is discussion in the U.S. Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted. These and future laws and regulations may increase our compliance costs and potential liability. +Furthermore, regulations promulgated pursuant to HIPAA establish privacy and security standards that limit the use and disclosure of individually identifiable health information (known as “protected health information”) and require the implementation of administrative, physical and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information. Determining whether protected health information has been handled in compliance with applicable privacy standards and our contractual obligations can require complex factual and statistical analyses and may be subject to changing interpretation. Although we take measures to protect sensitive data from unauthorized access, use or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance or other malicious or inadvertent disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, manipulated, publicly disclosed, lost or stolen. Any such access, breach or other loss of information could result in legal claims or proceedings, and liability under federal or state laws that protect the privacy of personal information, such as the HIPAA, HITECH and regulatory penalties. Notice of breaches must be made to affected individuals, the Secretary of the Department of Health and Human Services, and for extensive breaches, notice may need to be made to the media. Such a notice could harm our reputation and our ability to compete. +In addition, the European Parliament and the Council of the E.U. adopted the GDPR in 2016 to replace the European Union Data Protection Directive and related country-specific legislation. The GDPR took effect in May 2018 +55 +Table of Contents +and governs the collection and use of personal data in the E.U. The GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the E.U. to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. While we have taken steps to comply with the GDPR, including reviewing our security procedures and entering into data processing agreements with relevant contractors, we cannot guarantee that our compliance efforts will be fully successful. +Further, unauthorized access, loss or dissemination of sensitive information could also disrupt our operations, including our ability to conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business, any of which could adversely affect our reputation and our business. In addition, there can be no assurance that we will promptly detect any such disruption or security breach, if at all. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our products could be delayed. +We face risks related to handling of hazardous materials and other regulations governing environmental, health and safety. +Our operations are subject to complex and stringent federal, state and local environmental, health, safety and other laws and regulations that both public officials and in some circumstances private individuals may seek to enforce. Our activities that are subject to these laws and regulations include, among other things, our use of hazardous materials and the generation, transportation, disposal and storage of waste. Although we have secured clearance from the EPA historically, and currently are operating in compliance with applicable EPA rules and regulations, our business could be adversely affected if we discover that we or an acquired business is not in material compliance with these rules and regulations. In the future, we may pursue the use of other surfactant substances that will require clearance from the EPA, and we may fail to obtain such clearance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business. +Risks Related to Intellectual Property +If we are unable to protect our intellectual property, our ability to maintain any technological or competitive advantage over our competitors and potential competitors may be reduced, and our business may be harmed. +We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us, we may lose our technological or competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. +Our currently pending or future patent applications may not result in granted patents, and we cannot predict how long it will take for such patents to be granted. It is possible that, for any of our patents that have granted or that may grant in the future, others will design around our patented technologies. Further, other parties may challenge any patents granted to us and courts or regulatory agencies could hold our patents to be invalid or unenforceable. We may not be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, or to such patents being interpreted narrowly or otherwise in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our competitors may be diminished because of these uncertainties. For +56 +Table of Contents +these and other reasons, our intellectual property may not provide us with any competitive advantage. To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate coverage over our products and protection against our competitors’ products, our competitive position could be adversely affected, as could our business. +In addition to pursuing patents on our technology, we also rely upon trademarks, trade secrets, copyrights and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. In addition, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be undermined. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time-consuming, the outcome would be unpredictable, and any remedy may be inadequate. In addition, courts outside of the United States may be less willing to protect trade secrets. +Some of our owned and in-licensed intellectual property has been discovered through government-funded programs and thus is subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers. +Some of the intellectual property rights we own and have in-licensed have been generated through the use of U.S. government funding and are therefore subject to certain federal regulations. For example, some of the issued U.S. patents we own and all of the intellectual property rights licensed to us under our license agreement with Tufts have been generated using U.S. government funds. As a result, the U.S. government has certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act of 1980 (the Bayh-Dole Act). These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if the government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government, elect title, and file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturing may limit our ability to license the applicable patent rights on an exclusive basis under certain circumstances. +If we enter into future arrangements involving government funding, and we make inventions as a result of such funding, intellectual property rights to such discoveries may be subject to the applicable provisions of the Bayh-Dole Act. To the extent any of our current or future intellectual property is generated through the use of U.S. government funding, the provisions of the Bayh-Dole Act may similarly apply. Any exercise by the government of certain of its rights could harm our competitive position, business, financial condition, results of operations and prospects. +57 +Table of Contents +Our Simoa bead-based technology is licensed to us by Tufts University. Any loss of our rights to this technology could prevent us from selling our products. +Our Simoa bead-based technology is licensed exclusively to us from Tufts University (Tufts). We do not own the patents that underlie this license. Our rights to use this technology and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of the license. Our principal obligations under our license agreement with Tufts are as follows: +● making royalty payments; +● making milestone payments; +● paying annual maintenance fees for the underlying patents; +● using commercially reasonable efforts to develop and sell a product using the licensed technology and developing a market for such product; +● paying and/or reimbursing fees related to prosecution, maintenance and enforcement of patent rights; and +● providing certain reports. +If we breach any of these obligations, Tufts may have the right to terminate the license, which could result in our being unable to develop, manufacture and sell products using our Simoa bead-based technology or a competitor gaining access to the Simoa technology. Termination of our license agreement with Tufts would have a material adverse effect on our business. +In addition, we are a party to a number of other agreements that include licenses to intellectual property, including non-exclusive licenses. We expect that we may need to enter into additional license agreements in the future. Our business could suffer materially and adversely, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. +We may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we cannot provide any assurances that we would be able to do so. +We may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. If we could not obtain a license, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected products, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation. +Licensing of intellectual property involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement. If disputes over intellectual property that we have licensed prevent or impair our ability to maintain the licensing arrangements on acceptable terms, +58 +Table of Contents +we may be unable to successfully develop and commercialize the affected product, or the dispute may have an adverse effect on our results of operation. +In addition to agreements pursuant to which we in-license intellectual property, we have in the past and expect in the future to grant licenses under our intellectual property. Like in-licenses, out-licenses are complex, and disputes may arise between us and our licensees. Moreover, our licensees may breach their obligations, or we may be exposed to liability due to our failure or alleged failure to satisfy our obligations. Any such occurrence could have an adverse effect on our business. +If we or any of our partners are sued for infringing intellectual property rights of third parties, the resulting litigation would be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +Our success also depends on our ability to develop, manufacture, market and sell our products and perform our services without infringing upon the proprietary rights of third parties. Numerous U.S.- and foreign-issued patents and pending patent applications owned by third parties exist in the fields in which we are developing products and services. As part of a business strategy to impede our successful commercialization and entry into new markets, competitors have claimed, and may claim in the future, that our products and/or services infringe their intellectual property rights and have suggested, and may suggest in the future, that we enter into license agreements. Any such claims made to date are, we believe, without merit. +Even if such claims are without merit, we could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against claims of infringement made by third parties or settling such claims. Any adverse ruling by a court or administrative body, or perception of an adverse ruling, may have a material adverse impact on our ability to conduct our business and our finances. Moreover, third parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more products or services and could result in a substantial award of damages against us. In addition, since we sometimes indemnify customers, collaborators or licensees, we may have additional liability in connection with any infringement or alleged infringement of third-party intellectual property. +Because patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our products or proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any of our products. There is a substantial amount of litigation involving patent and other intellectual property rights in our industry. If a third party claims that we or any of our licensors, customers or collaboration partners infringe upon a third party’s intellectual property rights, we may have to: +● seek to obtain licenses that may not be available on commercially reasonable terms, if at all; +● abandon any infringing product or redesign our products or processes to avoid infringement; +● pay substantial damages including, in an exceptional case, treble damages and attorneys’ fees, which we may have to pay if a court decides that the product or proprietary technology at issue infringes upon or violates the third-party’s rights; +● pay substantial royalties or fees or grant cross-licenses to our technology; or +● defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources. +59 +Table of Contents +We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful. +Competitors may infringe our patents or the patents that we license. In the event of infringement or unauthorized use, we may file one or more infringement lawsuits, which can be expensive and time-consuming. An adverse result in any such litigation proceedings could put one or more of our patents at risk of being invalidated, found to be unenforceable or interpreted narrowly, and it could put our patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. +Many of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise any funds necessary to continue our operations, continue our internal research programs, in-license needed technology, or enter into development partnerships that would help us bring our products to market. +In addition, patent litigation can be very costly and time-consuming. An adverse outcome in such litigation or proceedings may expose us or any of our future development partners to loss of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all. +Our issued patents could be found invalid or unenforceable if challenged in court, which could have a material adverse impact on our business. +If we or any of our partners were to initiate legal proceedings against a third party to enforce a patent covering one of our products or services, the defendant in such litigation could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement, or failure to claim patent eligible subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. Third parties may also raise similar claims before the USPTO even outside of the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the challenged patent. Such a loss of patent protection would have a material adverse impact on our business. +We may not be able to protect our intellectual property rights throughout the world, which could have a material adverse effect on our business. +Filing, prosecuting and defending patents on current and future products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside of the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent that federal and state laws do in the United States. Consequently, regardless of whether we are able to prevent third parties from practicing our inventions in the United States, we may not be able to prevent third parties from practicing our inventions in all countries outside of the United States, or from selling or importing products made by using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products, and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as it is in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from competing. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. +60 +Table of Contents +Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, such as China and certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license and may adversely impact our business. +In addition, we and our partners also face the risk that our products are imported or reimported into markets with relatively higher prices from markets with relatively lower prices, which would result in a decrease of sales and any payments we receive from the affected market. Recent developments in U.S. patent law have made it more difficult to stop these and related practices based on theories of patent infringement. +Changes in patent laws or patent jurisprudence could diminish the value of patents in general, thereby impairing our ability to protect our products. +Under the America Invents Act (the AIA), as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This requires us to be cognizant of the time from invention to the filing of a patent application, but circumstances could prevent us from promptly filing patent applications on our inventions. +Among some of the other changes introduced by the AIA are changes that limit where a patent holder may file a patent infringement suit and provide additional opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our owned and in-licensed U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings, compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. The AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. +Additionally, the U.S. Supreme Court has ruled on several patent cases in recent years, such as Impression Products, Inc. v. Lexmark International, Inc., Association for Molecular Pathology v. Myriad Genetics, Inc. , Mayo Collaborative Services v. Prometheus Laboratories, Inc. and Alice Corporation Pty. Ltd. v. CLS Bank International , either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. +61 +Table of Contents +If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. +Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +We use third-party software that may be difficult to replace or may cause errors or failures of our products that could lead to lost customers or harm to our reputation. +We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party software or other third-party software failures could result in errors, defects or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs. +We will need to maintain our relationships with third-party software providers and to obtain software from such providers that does not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver reliable products to our customers and could harm our reputation and results of operations. +Risks Related to Our Common Stock and Being a Public Company +Our stock price has fluctuated significantly and may continue to fluctuate significantly. +The market price of shares of our common stock has been and could continue to be subject to wide fluctuations in response to many factors listed in this section, and others beyond our control, including: +● actual or anticipated fluctuations in our financial condition and operating results; +● announcements by us, our partners or our competitors of new products, significant contracts, restructuring plans, strategic partnerships, joint ventures, collaborations, acquisitions, commercial relationships or capital commitments; +● competition from existing products or new products that may emerge; +● failure to meet or exceed financial estimates and projections of the investment community or that we may provide to the public; +● issuance of new or updated research or reports by securities analysts or recommendations with respect to our stock; +● positive or adverse regulatory announcements; +● disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; +62 +Table of Contents +● commencement of, or our involvement in, litigation; +● fluctuations in the valuation of companies perceived by investors to be comparable to us; +● conditions in our markets; +● manufacturing disputes or delays; +● any future sales of our common stock or other securities; +● any change to the composition of our board of directors or key personnel; +● general economic conditions and slow or negative growth of our markets; +● share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; +● announcement or expectation of additional debt or equity financing efforts; and +● other factors described in this Risk Factors section of this Annual Report on Form 10-K. +These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and life science companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have on occasion instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. +If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline. +The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the public markets, which could cause our stock price or trading volume to decline. +We have never paid dividends on our capital stock, and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases. +We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the shareholders in the foreseeable future. Consequently, in the foreseeable future, shareholders will likely only experience a gain from an investment in our common stock if the price of our common stock increases. +63 +Table of Contents +Anti-takeover provisions contained in our restated certificate of incorporation and restated by-laws, as well as provisions of Delaware law, could impair a takeover attempt. +Our restated certificate of incorporation, restated by-laws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions: +● authorizing our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board of directors may determine; +● specifying that special meetings of our stockholders can be called only by our board of directors and that our stockholders may not act by written consent; +● establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors; +● providing that directors may be removed only for cause; +● providing that our board of directors may create new directorships and that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; +● establishing that our board of directors is divided into three classes with each class serving staggered three-year terms; +● providing that our board of directors may amend our restated by-laws without stockholder approval; and +● requiring a super-majority of votes to amend certain of the above-mentioned provisions. +These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. +Any provision of our restated certificate of incorporation, restated by-laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +Item 1B. UNRESOLVED STAFF COMMENTS +Not applicable. +Item 2. PROPERTIES +We currently lease approximately 91,600 square feet of office, laboratory and manufacturing space at our headquarters in Billerica, Massachusetts. The premises covered by this lease serve as our principal office and laboratory space. The initial term of the Billerica lease is eleven years and five months beginning on April 1, 2019, and we have the option to extend the lease for two additional five-year periods. In addition, in the first quarter of 2022, we executed a lease for 85,800 square feet of office and laboratory space in Bedford, Massachusetts. The initial term of the Bedford +64 +Table of Contents +lease is eight years and nine months beginning on May 1, 2022. We do not currently occupy the Bedford facilities. As part of the Restructuring Plan, we decided not to utilize the Bedford facilities as part of our own operations and intend to sublease the vacant space . We believe that the Billerica office, laboratory and manufacturing space will be sufficient to meet our needs for the foreseeable future. Refer to Note 12 to the consolidated financial statements for further details related to the Bedford facilities. +Item 3. LEGAL PROCEEDINGS +In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation consisting of intellectual property, contractual, employment and other matters. While the outcome of any such actions or proceedings cannot be predicted with certainty, as of December 31, 2022, we were not party to any material legal proceedings . +Item 4. MINE SAFETY DISCLOSURES +Not applicable. +PART II +Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Market Information +Our common stock is traded on The Nasdaq Global Market under the symbol “QTRX.” +Stockholders +As of February 28, 2023, there were approximately 27 stockholders of record of our common stock. +Unregistered Sales of Securities +There were no unregistered sales of equity securities during the fourth quarter ended December 31, 2022. +Issuer Purchases of Equity Securities +Not applicable. +Item 6. RESERVED +Not applicable. +Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of Quanterix Corporation for the years ended December 31, 2022, and 2021. For a full understanding of our financial condition and results of operations, this discussion should be read in conjunction with our consolidated financial statements and accompanying notes included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. +65 +Table of Contents +For additional information on our financial condition as of December 31, 2021 and results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021 . +Overview +We are a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our instruments are designed to be used either with assays fully developed by us, including all antibodies and supplies required to run the tests, or with “homebrew” kits where we supply some of the components required for testing, and the customer supplies the remaining required elements. Accordingly, our installed instruments generate a recurring revenue stream. As the installed base of the Simoa instruments increases, total consumables revenue overall is expected to increase. +We commercially launched our first immunoassay platform, the Simoa HD-1, in January 2014. The HD-1 is based on our bead-based technology, and assays run on the HD-1 are fully automated. We initiated commercial launch of the SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-1 in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of applications. In July 2019, we launched the Simoa HD-X, an upgraded version of the Simoa HD-1, which replaces the HD-1. The HD-X has been designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. We began shipping and installing HD-X instruments at customer locations in 2019, and by the end of 2022, approximately 79% of the HD instrument installed base were HD-X instruments. +With our acquisition of Aushon in 2018, we acquired a CLIA certified laboratory, as well as their proprietary sensitive planar array detection technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined the planar array technology to develop the SP-X instrument to provide sensitivity similar to that found in our Simoa bead-based platform. We commercially launched the SP-X instrument in April 2019. +Our wholly owned subsidiary UmanDiagnostics AB (Uman), a Swedish company located in Umeå, Sweden, supplies neurofilament light (Nf-L) antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. +We also provide contract research services for customers through our CLIA-certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 1,900 projects for more than 400 customers from all over the world using our Simoa platforms. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe, and through distributors or sales agents in select markets, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, Uman sells Nf-L antibodies and Nf-L ELISA kits directly, and in conjunction with us and another distributor worldwide. We have an +66 +Table of Contents +extensive base of customers in world class academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. +Although the COVID-19 pandemic negatively affected revenues in 2020 and the first part of 2021, we have seen less of an impact related to COVID-19 as customers began returning to normal operations beginning in mid-2021. However, we expect COVID-19 related challenges may continue for the foreseeable future and potentially increase if variants result in new shutdowns. +During the COVID-19 pandemic, we determined that our cytokine assay technology could provide researchers with important and differentiated tools to study disease progression, cytokine release syndrome, and patient-treatment response in the fight against COVID-19 and developed a SARS antibody test and SARS antigen test, each of which was run on our HD-X instrument. In December 2020, the FDA issued an EUA for our Simoa Semi-Quantitative SARS-CoV-2 IgG Antibody Test, and in January 2021, the FDA issued an EUA for our Simoa SARS-CoV-2 N Protein Antigen Test. In September 2021, the FDA expanded the EUA for our Simoa SARS-CoV-2 N Protein Antigen Test to include testing with nasal swabs and saliva and for asymptomatic serial testing with nasal swab samples. In 2022, we voluntarily withdrew the EUA for these tests. +Restructuring and Strategic Re-Alignment +Following a strategic review and assessment of our operations and cost structure, on August 8, 2022, we announced a plan of restructuring and strategic re-alignment (the Restructuring Plan). As part of this plan, we began an assay redevelopment program with the ultimate objective of improving our ability to manufacture and deliver high-quality assays at scale. The plan aligns our investments to best serve the needs of customers, focuses innovation efforts on key platforms and provides the foundation for our entry into translational pharma and clinical markets, which we believe will be required to access new growth categories. The Restructuring Plan included the elimination of 119 positions and other cost-saving measures. The workforce reduction was substantially completed by the end of the third quarter of 2022. As part of the Restructuring Plan, we are also reviewing alternative uses of the additional facility space that we currently lease in Bedford, Massachusetts. These alternatives may include termination of the lease, or sub-leasing all, or a portion, of the Bedford facilities. During the year ended December 31, 2022, we recorded an impairment expense of $16.3 million on our long-lived assets related to the Bedford facilities, as well as a $1.1 million impairment expense related to software projects. Overall, as a result of the Restructuring Plan, we expect to realize estimated annualized operating expense savings of approximately $25 million. +As of December 31, 2022, we had cash and cash equivalents of $338.7 million. Since inception, we have incurred annual net losses. Our net loss was $96.7 million and $57.7 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $402.2 million and stockholders' equity of $358.9 million. We expect to continue to incur significant expenses and operating losses at least through the next 24 months. We expect our expenses will increase substantially as we: +● expand our sales and marketing efforts to further commercialize our products; +● strategically acquire and integrate companies or technologies that may be complementary to our business; +● expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our products are deemed by the FDA to be medical devices or otherwise subject to additional regulation by the FDA; +● seek PMA or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market products for use in the prevention, diagnosis or treatment of a disease or other condition; +● hire additional personnel and grow our employee headcount; +● enter into collaboration arrangements, if any, or in-license other products and technologies; and +● add operational, financial and management information systems. +Financial Operations Overview +67 +Table of Contents +Revenue +Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606 - Revenue from Contracts with Customers (ASC 606), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. +Once a contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying license relative to the option exercise price, including assumptions about technical feasibility and the probability of developing a candidate that would be subject to the option rights. The exercise of a material right is accounted for as a contract modification for accounting purposes. +The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (SSP) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations. +We generate product revenue primarily from sales of our HD-X, SR-X, and SP-X instruments and related reagents and other consumables. We currently sell our products for RUO applications and our customers are primarily laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Sales of our consumables have consistently increased due to an increasing number of instruments being installed in the field, all of which require certain of our consumables to run customers’ specific tests. Consumable revenue consists of sales of complete assays which are developed internally by us, plus sales of “homebrew” kits which contain all the elements necessary to run tests with the exception of the specific antibodies utilized which are separately provided by the customer. +Service and other revenue consists of testing services provided by us in our Accelerator Laboratory on behalf of certain research customers, in addition to warranty and other service-based revenue. Services provided in our Accelerator Laboratory include sample testing, homebrew assay development and custom assay development. +Collaboration and license revenue consists of revenue associated with licensing our technology to third parties and for related services. +Grants received by us that do not require the transfer of goods or services to a customer are accounted for by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance (IAS 20). Under IAS 20, we recognize revenue as the matching expense or asset is incurred or capitalized. +68 +Table of Contents +Cost of Products, Services and Collaboration Revenue +Cost of goods sold for products consists of HD-X, HD-1, and SR-X instrument costs from the manufacturer and related reagents and other consumables. Cost of goods sold for SP-X consists of costs based on the internal assembly of this item. Raw material part costs; inbound freight, shipping and handling costs associated with purchased goods; contract manufacturer costs; personnel costs; royalties; overhead and other direct costs related to those sales are classified as cost of goods sold for products. +Cost of goods sold for services consists of raw materials, personnel costs, royalties as well as overhead and other direct costs associated with operating the Accelerator Laboratory on behalf of customers, in addition to costs related to warranties and other costs of servicing equipment at customer sites. +Cost of collaboration revenue consists of royalty expense due to third parties from revenue generated by collaboration or license deals. +Research and Development Expenses +Research and development expenses consist of personnel costs, research supplies, third-party development costs for new products, materials for prototypes, and allocated overhead costs that include facility and other overhead costs. We have made substantial investments in research and development since our inception, and plan to continue to make substantial investments in the future. Our research and development efforts have focused primarily on the tasks required to support development and commercialization of new and existing products and improved product quality. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to increase in future periods. Additionally, costs incurred related to grant revenue are recorded as research and development expenses. +Selling, General and Administrative Expenses +Selling, general and administrative expenses consist primarily of personnel costs for our sales and marketing, finance, legal, human resources and general management, costs associated with shipping and handling for product sales, other general and administrative costs, as well as professional services costs, such as marketing, advertising, legal and accounting services in addition to allocated overhead costs that include facility and other overhead costs. +The classification of shipping and handling costs for product sales varies from company to company with some companies recording these as selling, general, and administrative expenses and others recording such expenses within costs of goods sold for products. To the extent the classification of these shipping and handling costs differs from the classification used by other companies, our gross margins may not be comparable with those reported by such other companies. Shipping and handling costs for product sales included within selling, general and administrative expenses were $7.2 million and $6.9 million for the years ended December 31, 2022 and 2021, respectively, and our gross margin was 44.4% and 55.8% for the years ended December 31, 2022 and 2021, respectively. If these shipping and handling costs had been included in cost of goods sold for products, our non-GAAP gross margin would have been 37.5% and 49.6% for the years ended December 31, 2022 and 2021, respectively. See “Non-GAAP Financial Measures” below. +We expect, but cannot guarantee, that annual selling, general and administrative expenses will not increase significantly over the next 12 to 14 months. +Non-GAAP Financial Measures +To supplement our financial statements presented on a GAAP basis, we present non-GAAP gross profit and non-GAAP gross margin, which are calculated by including shipping and handling costs for product sales within cost of goods sold instead of within selling, general and administrative expenses. Management uses these non-GAAP measures to evaluate our operating performance in a manner that allows for meaningful period-to-period comparison and analysis of trends in our business and our competitors. Management believes that presentation of non-GAAP gross margin provides useful information to investors in assessing our operating performance within our industry and in order to allow +69 +Table of Contents +comparability to the presentation of other companies in our industry where shipping and handling costs are included in cost of goods sold for products. Management also uses non-GAAP gross margin as a factor in assessing the Company’s progress against the Restructuring Plan. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for, the financial information presented in accordance with GAAP. +Set forth below is a reconciliation of non-GAAP gross profit, non-GAAP gross margin and non-GAAP operating expenses to their most directly comparable GAAP financial measures. +Reconciliation of Non-GAAP Financial Measures: +Year Ended December 31, +2022 +2021 +GAAP gross profit +$ +46,806 +$ +61,728 +Shipping and handling costs +(7,206) +(6,892) +Non-GAAP gross profit +$ +39,600 +$ +54,836 +GAAP Revenue +$ +105,522 +$ +110,556 +GAAP Gross margin (gross profit as % of revenue) +44.4% +55.8% +Non-GAAP gross margin (non-GAAP gross profit as % of revenue) +37.5% +49.6% +GAAP total operating expenses +$ +148,510 +$ +120,314 +Shipping and handling costs +(7,206) +(6,892) +Non-GAAP total operating expenses +$ +141,304 +$ +113,422 +GAAP loss from operations +$ +(101,704) +$ +(58,586) +Non-GAAP loss from operations +$ +(101,704) +$ +(58,586) +Goodwill, Intangibles and Long-Lived Assets Impairment Expenses +Goodwill, intangibles and long-lived assets impairment expense consists primarily of impairment charges recorded due to an impairment event. We perform an impairment assessment annually, or whenever events or circumstances indicate that the carrying amount of the asset (asset group) may not be recoverable, of goodwill, intangibles and long-lived assets under the guidance of US GAAP accounting standards ASC 350 - Intangibles – Goodwill and Other (ASC 350) and ASC 360 - Property, Plant and Equipment (ASC 360). If impairment is indicated, we measure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset. Fair value is generally determined using a discounted future cash flow analysis. During the year ended December 31, 2022, the Company recorded a goodwill impairment charge of $8.2 million and impairment expense of $17.4 million for other long-lived assets due to impairment indicators identified. As of December 31, 2022, there was no remaining goodwill. There were no impairment charges recorded for the year ended December 31, 2021. +Critical Accounting Policies, Significant Judgments and Estimates +Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates may occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. +70 +Table of Contents +We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other significant accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. Our significant accounting policies are more fully described in “Significant Accounting Policies” in Note 2 in the notes to our consolidated financial statements. +Revenue Recognition +We recognize revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that we expect to be entitled to receive in exchange for these goods and services, incentives and taxes collected from customers, that are subsequently remitted to governmental authorities. +Product Revenue +Our products are composed of analyzer instruments, assay kits and other consumables such as reagents. Products are sold directly to biopharmaceutical and academic research organizations or are sold through distributors in EMEA and Asia Pacific regions. The sales of instruments are generally accompanied by an initial year of implied service-type warranties and may be bundled with assays and other consumables and may also include other items such as training and installation of the instrument and/or an extended service warranty. Revenues from the sale of products are recognized at a point in time when we transfer control of the product to the customer, which is upon installation for instruments sold to direct customers, and based upon shipping terms for assay kits and other consumables. Revenue for instruments sold to distributors is generally recognized based upon shipping terms (either upon shipment or delivery). +Service and Other Revenue +Service revenues are composed of contract research services, initial implied one-year service-type warranties, extended services contracts and other services such as training. Contract research services are provided through our Accelerator Laboratory and generally consist of fixed fee contracts. Revenues from contract research services are recognized at a point in time when we complete and deliver our research report on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. Revenues from service-type warranties are recognized ratably over the contract service period. +During the first quarter of 2022, we entered into a Master Collaboration Agreement with Eli Lilly and Company (Lilly) establishing a framework for future projects focused on the development of Simoa immunoassays (the Lilly Collaboration Agreement). We also entered into a Statement of Work under the Lilly Collaboration Agreement to perform assay research and development services within the field of Alzheimer’s disease. In connection with the Lilly Collaboration Agreement, we received a non-refundable up-front payment of $5.0 million during the first quarter of 2022, and under the Statement of Work received $1.5 million per calendar quarter during 2022, beginning with the first quarter of 2022. The revenue was recognized over a one-year period. The Lilly Collaboration Agreement automatically renews on a quarterly basis unless Lilly provides 100 days’ termination notice. +Concurrent with the execution of the Lilly Collaboration Agreement, we entered into a Technology License Agreement (the Lilly License) under which Lilly granted to the Company a non-exclusive license to Lilly’s proprietary P-tau217 antibody technology for potential near-term use in research use only products and services and future in vitro diagnostics applications within the field of Alzheimer’s disease. In consideration of the license, we paid an upfront fee, are required to make milestone payments based on the achievement of predetermined regulatory and commercial events, and will pay a royalty on net sales of licensed products. +We concluded that the Lilly Collaboration Agreement (including the Statement of Work) and the Lilly License represented a single contract with a customer, and we are accounting for the agreements as service revenue recognized over time as the services are delivered. The transaction price for the Lilly Collaboration Agreement was $10.9 million. Contingent amounts due to Lilly, under the Lilly License, represent variable consideration payable to a customer and will be recognized as reductions to service revenue up to the amount of the transaction price recognized, when probable. +71 +Table of Contents +During the year ended December 31, 2022, we recognized approximately $10.9 million of revenue from the Lilly Collaboration Agreement. +Collaboration and License Revenue +We may enter into agreements to license the intellectual property and know-how associated with our instruments in exchange for license fees and future royalties (as described below). The license agreements provide the licensee with a right to use the intellectual property with the license fee revenues recognized at a point in time as the underlying license is considered functional intellectual property. We have recognized royalty revenue based on sales or usage related to our licensing technology and intellectual property. +Payment Terms +Our payment terms vary by the type and location of customer and the products or services offered. Payment from customers is generally required in a term ranging from 30 to 45 days from date of shipment or satisfaction of the performance obligation with no discounts for early payment. Occasionally we do provide extended payment terms or financing arrangements to customers. +Disaggregated Revenue +When disaggregating revenue, we consider all of the economic factors that may affect revenues. The following tables disaggregate our revenue from contracts with customers based on their location by revenue type: +Year Ended +December 31, 2022 +(in thousands) +North America +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +9,254 +8,362 +7,388 +$ +25,004 +Consumable and other products +25,894 +14,514 +4,396 +44,804 +Total +$ +35,148 +$ +22,876 +$ +11,784 +$ +69,808 +Service and other revenues: +Service-type warranties +$ +5,581 +$ +2,779 +$ +480 +$ +8,840 +Research services +22,493 +1,013 +147 +23,653 +Other services +1,144 +722 +136 +2,002 +Total +$ +29,218 +$ +4,514 +$ +763 +$ +34,495 +Collaboration and license revenue: +Collaboration and license revenue +$ +274 +$ +323 +$ +52 +$ +649 +72 +Table of Contents +Year Ended +December 31, 2021 +(in thousands) +North America +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +12,138 +$ +8,178 +$ +5,657 +$ +25,973 +Consumable and other products +34,997 +16,122 +3,970 +55,089 +Total +$ +47,135 +$ +24,300 +$ +9,627 +$ +81,062 +Service and other revenues: +Service-type warranties +$ +4,334 +$ +2,039 +$ +255 +$ +6,628 +Research services +12,101 +2,600 +124 +14,825 +Other services +1,372 +695 +109 +2,176 +Total +$ +17,807 +$ +5,334 +$ +488 +$ +23,629 +Collaboration and license revenue: +Collaboration and license revenue +$ +360 +$ +288 +$ +— +$ +648 +Our contracts with customers may include promises to transfer multiple products and services to a customer. In accordance with ASC 606, we combine any performance obligations that are immaterial with one or more other performance obligations that are material to the contract. For arrangements with multiple performance obligations, we allocate the contract transaction price, including discounts, to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. We determine standalone selling prices based on prices charged to customers in observable transactions, and use a range of amounts to estimate standalone selling prices for each performance obligation. We may have more than one range of standalone selling price for certain products and services based on the pricing for different customer classes. +Variable consideration in our contracts primarily relates to (i) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (ii) certain non-fixed fee research services contracts. ASC 606 provides for an exception to estimating the variable consideration for sales- and usage-based royalties related to the license of intellectual property, such that the sales- or usage-based royalty will be recognized in the period the underlying transaction occurs. We have recorded sales- or usage-based royalty revenue for the years ended December 31, 2022 and 2021 related to the intellectual property licensed by Uman. We recognize revenues from sales- or usage-based royalty revenue at the later of when the sales or usage occurs and the satisfaction or partial satisfaction of the performance obligation to which the royalty has been allocated. +The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as of December 31, 2022 is $10.1 million. Of the performance obligations not yet satisfied or that are partially satisfied, $8.6 million is expected to be recognized as revenue in the next 12 months, with the remainder to be recognized within the 24 months thereafter. The $10.1 million principally consists of $9.6 million billed for undelivered services related to initial and extended service-type warranties and research services, as well as $0.5 million related to undelivered licenses of intellectual property for a diagnostics company. +We have classified the balance of capitalized costs to obtain a contract as a component of prepaid expenses and other current assets as of December 31, 2022 and will amortize the expense as a component of cost of goods sold and selling, general and administrative expense over the estimated life of the contract. We consider potential impairment in these amounts each period. +ASC 606 provides entities with certain practical expedients and accounting policy elections to minimize the cost and burden of adoption. We exclude from the transaction price any amounts collected from customers related to sales and other similar taxes. We have elected to account for the shipping and handling as an activity to fulfill the +73 +Table of Contents +promise to transfer the product, and therefore will not evaluate whether shipping and handling activities are promised services to its customers. +When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. We do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. None of our contracts contained a significant financing component for the years ended December 31, 2022 and 2021. +Grant Revenue +We recognize grant revenue as we perform services under the arrangement when the funding is committed. Revenues and related research and development expenses are presented gross in the consolidated statements of operations as we have determined we are the primary obligor under the arrangement relative to the research and development services. +Accounting for grants does not fall under ASC 606, as the grantor will not benefit directly from our expansion or product development. As there is no authoritative guidance under U.S. GAAP on accounting for grants to for-profit business entities, we have accounted for grants by analogy to IAS 20. +Our grants contain both monetary amounts granted related to assets and monetary amounts granted related to income, which are grants other than those related to assets. The grants related to assets are for the expansion and increase of manufacturing capacity. The grants related to income are for additional research and development, as well as other non-asset related scale up costs. We determined it was appropriate to account for each monetary grant amount under the appropriate accounting treatment outlined in IAS 20. +Under IAS 20, grants related to assets shall be presented in the consolidated balance sheets either by recognizing the grant as deferred income (which is recognized in the consolidated statements of operations on a systematic basis over the useful life of the asset), or by deducting the grant in calculating the carrying amount of the asset (which is recognized in the consolidated statements of operations over the life of the depreciable asset as a reduced depreciation expense). Both methods are acceptable under IAS 20. We have elected to record grants related to assets as a deduction in calculating the carrying value of the asset. +Under IAS 20, grants related to income are presented as part of the consolidated statements of operations, either separately or under a general heading. Both methods are acceptable under IAS 20. We have elected to record grants related to income separately on the consolidated statements of operations as grant revenue. The related expenses are recorded within operating expenses and not deducted. +On September 29, 2020, we entered into WP2 with the NIH under its RADx program. The contract, with a total award value of $18.2 million, accelerated the continued development, scale-up, and deployment of the novel SARS-CoV-2 antigen detection test using our Simoa technology. The contract provided funding to expand assay kit manufacturing capacity and commercial deployment readiness. Release of the $18.2 million of funding under WP2 was based on the achievement of certain milestones. Contract funding was subject to achievement of these pre-defined milestones and the contract period ran through September 2021, with one milestone extended to March 31, 2022. As of December 31, 2022, we received the full $18.2 million under WP2. During the year ended December 31, 2022, we recognized no grant revenue and incurred no research and development expense related to WP2. During the year ended December 31, 2021, we recognized $5.2 million in grant revenue and incurred $3.4 million in research and development expense related to WP2. +74 +Table of Contents +The following table summarizes the cumulative RADx activity as of December 31, 2022 and 2021 (in thousands): +December 31, 2022 +December 31, 2021 +Total grant revenue from research and development activities +$ +9,576 +$ +9,576 +Total proceeds used for assets +8,624 +8,104 +Total recognized +$ +18,200 +$ +17,680 +Total recognized +$ +18,200 +$ +17,680 +Total amount accrued +— +— +Total cash received +$ +18,200 +$ +17,680 +Total proceeds received +$ +18,200 +$ +17,680 +Total proceeds reasonably assured +— +520 +Total RADx Grant amount +$ +18,200 +$ +18,200 +ADDF +On March 24, 2022, we entered into a contract with the Alzheimer’s Drug Discovery Foundation (ADDF) (the ADDF Grant). ADDF is a charitable venture philanthropy entity that has granted us funding in support of certain activities for the development of an in vitro diagnostic (IVD) test for early detection of Alzheimer's disease. The ADDF Grant, which has a total funding value of $2.3 million, restricts our use of the granted funds to be used solely for activities related to the Alzheimer’s diagnostic test development project. Contract funding is subject to achievement of these pre-defined milestones and the contract period runs through June 2024. We are recognizing revenue over time as the related services are performed. As of December 31, 2022, we had received $1.3 million of the total funding value of $2.3 million under the ADDF Grant. During the year ended December 31, 2022, we recognized $0.6 million in grant revenue and incurred $0.6 million in research and development expense related to the ADDF Grant. +Stock-Based Compensation +We account for stock-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees and non-employees, including grants of stock options, to be recognized in the statement of operations based on their fair values. Stock-based compensation awards have historically consisted of stock options and restricted stock units. +We recognize forfeitures as they occur. We estimate the grant date fair value, and the resulting stock-based compensation expense, using a Black-Scholes option-pricing model. The grant date fair value of the stock-based awards for employees is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. The grant date fair value of stock-based awards for non-employees is recognized on a straight-line basis over the vesting period. +The fair value of stock options granted to employees and non-employees is estimated on the grant date using a Black-Scholes option-pricing model, based on the assumptions noted in the following table: +Year Ended December 31, +2022 +2021 +Risk-free interest rate +1.4% - 4.1% +0.4% - 1.3% +Expected dividend yield +None +None +Expected term (in years) +5.0 - 5.8 +6.0 +Expected volatility +55.0% - 70.8% +49.2% - 55.6% +Weighted-average grant date fair value +$ 9.88 +$ 29.96 +75 +Table of Contents +Expected volatility was calculated based on proportional weighting of reported volatility data for a representative group of guideline publicly traded companies for which historical information was available, as well as our stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. We estimate the expected life of options granted to employees utilizing the simplified method which calculates the expected life of an option as the average of the time to vesting and contractual life of the options. The expected life is applied to the stock option grant group as a whole, as we do not expect substantially different exercise or post-vesting termination behavior among our employee population. We use the simplified method due to the lack of historical exercise data and the plain nature of the stock options. We use the remaining contractual term for the expected life of non-employee awards. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on common stock. +We determined the fair value of each share of common stock underlying share-based awards based on the closing price of our common stock as reported by Nasdaq on the date of grant. +The table below summarizes the stock-based compensation expense recognized in our statements of operations by classification (in thousands): +Year Ended December 31, +2022 +2021 +Cost of product revenue +$ +608 +$ +471 +Cost of service and other revenue +819 +403 +Research and development +1,639 +1,807 +General and administrative +12,376 +13,294 +Total stock-based compensation +$ +15,442 +$ +15,975 +As of December 31, 2022, we had $33.9 million of total unrecognized stock-based compensation costs which we expect to recognize over a weighted-average period of 2.9 years. +76 +Table of Contents +Results of Operations +Comparison of the Years Ended December 31, 2022, and December 31, 2021 (dollars in thousands): +Year Ended December 31, +2022 +2021 +Increase (Decrease) +% of +% of +revenue +revenue +Amount +% +Product revenue +$ +69,808 +66 +% +$ +81,062 +73 +% +$ +(11,254) +(14) +% +Service and other revenue +34,495 +33 +% +23,629 +21 +% +10,866 +46 +% +Collaboration revenue +649 +0.5 +% +648 +1 +% +1 +0 +% +Grant revenue +570 +0.5 +% +5,217 +5 +% +(4,647) +(89) +% +Total revenue +105,522 +100 +% +110,556 +100 +% +(5,034) +(5) +% +Cost of goods sold: +Cost of product revenue +40,809 +39 +% +34,149 +31 +% +6,660 +20 +% +Cost of service and other revenue +17,907 +17 +% +14,679 +13 +% +3,228 +22 +% +Cost of collaboration and license revenue +— +— +% +— +— +% +— +— +% +Total costs of goods sold, services, and licenses +58,716 +56 +% +48,828 +44 +% +9,888 +20 +% +Gross profit +46,806 +44 +% +61,728 +56 +% +(14,922) +(24) +% +Operating expenses: +Research and Development Expense +25,890 +25 +% +27,978 +25 +% +(2,088) +(7) +% +Selling, general and administrative +91,995 +87 +% +92,336 +84 +% +(341) +(0) +% +Other lease costs +1,278 +1 +% +— +— +% +1,278 +100 +% +Restructuring +3,755 +4 +% +— +— +% +3,755 +100 +% +Goodwill impairment +8,220 +8 +% +— +— +% +8,220 +100 +% +Impairment expense +17,372 +16 +% +— +— +% +17,372 +100 +% +Total operating expenses +148,510 +141 +% +120,314 +109 +% +28,196 +23 +% +Loss from operations +(101,704) +(96) +% +(58,586) +(53) +% +(43,118) +(74) +% +Interest income (expense), net +5,131 +5 +% +(403) +— +% +5,534 +1,373 +% +Other (expense) income, net +(62) +— +% +1,265 +1 +% +(1,327) +(105) +% +Loss before income taxes +(96,635) +(92) +% +(57,724) +(52) +% +(38,911) +(67) +% +Income tax (expense) benefit +(65) +— +% +36 +— +% +(101) +(281) +% +Net loss +$ +(96,700) +(92) +% +$ +(57,688) +(52) +% +$ +(39,012) +(68) +% +Revenue +Revenue decreased by $5.0 million, or 5%, to $105.5 million for the year ended December 31, 2022 as compared to $110.6 million for the year ended December 31, 2021. +Product revenue decreased by $11.3 million, or 14%, to $69.8 million for the year ended December 31, 2022, as compared to $81.1 million for the year ended December 31, 2021. P roduct revenue consisted of sales of instruments totaling $25.0 million and sales of consumables and other products totaling $44.8 million for the year ended December 31, 2022. Product revenue consisted of sales of instruments totaling $26.0 million and sales of consumables and other products of $55.1 million for the year ended December 31, 2021. The decrease in product revenue was primarily due to reducing our production levels of consumables to ensure quality as we address the issues affecting our consumables . +Service and other revenue increased by $10.9 million, or 46%, to $34.5 million for the year ended December 31, 2022, as compared to $23.6 million for the year ended December 31, 2021. The increase in service and other revenue was primarily due to the revenue related to Lilly Collaboration Agreement recognized during the year-ended December 31, 2022. +We had $0.6 million and $0.6 million in collaboration revenue during the year ended December 31, 2022 and 2021, respectively, related to licensing technology and intellectual property. +77 +Table of Contents +We had grant revenue of $0.6 million related to the ADDF grant that was recognized during the year ended December 31, 2022, and grant revenue of $5.2 million related to our contract with WP2 was recognized during the year ended December 31, 2021. +Cost of Goods Sold, Services, and Licenses +Cost of product revenue increased by $6.7 million, or 20%, to $40.8 million for the year ended December 31, 2022, as compared to $34.1 million for the year ended December 31, 2021. The increase was primarily due to increased reserves for excess and discontinued products partially offset by lower volume. +Cost of service and other revenue increased by $3.2 million, or 22%, to $17.9 million for the year ended December 31, 2022, as compared to $14.7 million for the year ended December 31, 2021, primarily due to increased personnel costs from the build out of our field service organization as well as the increased efforts related to the Lilly Collaboration Agreement. +Total cost of goods sold, services, and licenses as a percentage of revenue increased to 56% of total revenue for the year ended December 31, 2022, from 44% for the year ended December 31, 2021, primarily due to increased reserves for excess and discontinued products, and changes in product mix, partially offset by decreased product revenues. +Research and Development Expense +Research and development expense decreased by $2.1 million, or 7%, to $25.9 million for the year ended December 31, 2022, as compared to $28.0 million for the year ended December 31, 2021. The decrease was mainly due to the reduction in headcount in connection with the implementation of the Restructuring Plan. +Selling, General and Administrative Expense +Selling, general and administrative expense decreased by $0.3 million, to $92.0 million for the year ended December 31, 2022 as compared to $92.3 million for the year ended December 31, 2021. This was primarily driven by the reduction in headcount in connection with the implementation of the Restructuring Plan, offset by the rent expense increase year over year due to the newly leased facilities in Bedford, Massachusetts. Included within selling, general and administrative expense are shipping and handling costs for product sales of $7.2 million and $6.9 million for the years ended December 31, 2022 and 2021, respectively. +Other Lease Costs +During the year ended December 31, 2022, we incurred other lease costs of $1.3 million. As part of the Restructuring Plan, we are not utilizing the office and laboratory space leased in Bedford, Massachusetts and are evaluating alternatives, including termination of the lease or sub-leasing the facilities. Other lease costs represent the depreciation expense of the right-of-use asset and the accretion of the lease facility for periods after the impairment and the determination that the facilities would not be utilized. There were no similar charges in the same period in 2021. +Restructuring, Goodwill Impairment, and Impairment Expense +During the year ended December 31, 2022, we incurred restructuring expense of $3.8 million, non-cash impairment expenses for long-lived assets of $17.4 million and non-cash impairment expenses for goodwill of $8.2 million. Included in restructuring expense were costs for severance and one-time termination benefits in connection with the elimination of 119 positions across the Company, associated legal fees and contract cancellation costs due to the implementation of the Restructuring Plan. Impairment expense of $17.4 million includes $16.3 million associated with the Bedford, Massachusetts facilities and $1.1 million associated with the impairment of software costs for projects that have been rationalized as part of the Restructuring Plan. As part of the Restructuring Plan, we are not utilizing the Bedford, Massachusetts facilities and are evaluating alternatives, including terminating the lease or sub-leasing the +78 +Table of Contents +facilities. The entire goodwill balance was written off during the year ended December 31, 2022, following the assessment of our interim goodwill impairment test. There were no similar charges in the same period in 2021. +Interest Income (Expense), Net +Interest income (expense), net increased by $5.5 million to $5.1 million of income for the year ended December 31, 2022, as compared to ($0.4) million of expense for the year ended December 31, 2021. This increase was due to the favorable impact of higher interest rates earned on cash and cash equivalents as well as the settlement of our notes payable in the year ended December 31, 2021. +Other (Expense) Income, Net +Other (expense) income, net decreased by $1.4 million to ($0.1) million of expense for the year ended December 31, 2022, as compared to $1.3 million of income for the year ended December 31, 2021. The decrease was primarily due to the recognition of a one-time employee retention tax credit of $2.2 million established under the Coronavirus Aid, Relief, and Economic Security Act in 2021. +Income Tax (Expense) Benefit, Net +Income tax (expense) benefit, net was less than ($0.1) million of expense for the year ended December 31, 2022, as compared to benefit of less than $0.1 million for the same period in 2021. The change was primarily due to the decrease in the tax benefit recorded on the operating results of our foreign subsidiaries. +Liquidity and Capital Resources +Since our inception, we have incurred annual net losses and negative cash flows from operations. We used $48.3 million and $47.9 million of cash for our operating activities for the years ended December 31, 2022 and 2021, respectively. +The impact to our operating cash flows of an increase in net loss of $39.0 million for the year ended December 31, 2022, was primarily offset due to one-time non-cash expenses (i.e., goodwill and long-lived assets impairment), improved collection of receivables, and lower levels of inventory. This resulted in no significant change in net cash used in operating activities during the years ended December 31, 2022, and 2021. As of December 31, 2022, we had an accumulated deficit of $402.2 million. As of December 2022, we had cash and cash equivalents of $338.7 million. +Sources of Liquidity +To date, we have financed our operations principally through equity offerings, borrowings from credit facilities and revenue from our commercial operations. +Equity Offerings +In February 2021, we raised approximately $270 million of net proceeds through an underwritten public offering of approximately 4.1 million shares of our common stock at a public offering price of $70.00 per share. There were no equity offerings during the year ended December 31, 2022. +Loan Facility with Hercules +On April 14, 2014, we executed a loan agreement with Hercules Capital, Inc. (Hercules), as subsequently amended most recently in April 2019. The interest rate on this term loan was variable based on a calculation of 8.0% plus the prime rate less 5.25%, with a minimum interest rate of 8.0%. Interest was to be paid monthly beginning the month following the borrowing date. Under the amended agreement, we were required to pay the loan principal in four equal installments starting July 1, 2021, with the final principal payment and end of term charge to be made on October 1, 2021. On October 1, 2021, we made the final principal payment, including end of term fees, of $2.0 million related to +79 +Table of Contents +the loan agreement. There were no outstanding balances under the loan facility at any time during the year ended December 31, 2022. +Cash Flows +The following table presents our cash flows for each period presented (in thousands): +Year Ended December 31, +2022 +2021 +Net cash used in operating activities +$ +(48,272) +$ +(47,907) +Net cash used in investing activities +(11,206) +(6,338) +Net cash provided by financing activities +2,311 +270,795 +Net increase in cash and cash equivalents +$ +(57,167) +$ +216,550 +Net Cash Used in Operating Activities +We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to support the growth of our business. We have historically experienced negative cash flows from operating activities as we have developed our technology, expanded our business and built out our infrastructure and this may continue in the future. +Net cash used in operating activities was $48.3 million during the year ended December 31, 2022. Net cash used in operating activities primarily consisted of net loss of $96.7 million offset by non-cash charges of $15.4 million of stock-based compensation expense, $5.3 million of depreciation and amortization expense, $8.2 million of goodwill impairment and $17.4 million of impairment of long-lived assets. Net changes in operating assets and liabilities resulted in net cash inflows of $2.1 million, primarily due to a decrease in accounts receivable of $5.2 million, decrease in inventory of $5.4 million as well as an increase in deferred revenue of $2.6 million, offset by a decrease in payables of $5.4 million, decrease in compensation and payroll accruals of $4.1 million and an increase in prepaid expenses and other assets of $0.6 million. +Net cash used in operating activities was $47.9 million during the year ended December 31, 2021. Net cash used in operating activities primarily consisted of net loss of $57.7 million offset by non-cash charges of $16.0 million of stock based compensation expense and $4.9 million of depreciation and amortization expense. Cash used as a result of changes in operating assets and liabilities of $12.2 million was primarily due to an increase in inventory of $8.1 million and an increase in accounts receivable of $6.9 million, offset by an increase in accounts payable, accrued compensation and benefits and other accrued expenses of $3.5 million, all driven by growth and our investments in process improvements. +Net Cash Used in Investing Activities +Historically, our primary investing activities have consisted of capital expenditures for the purchase of capital equipment to support our expanding infrastructure and work force. We expect to continue to incur additional costs for capital expenditures related to these efforts in future periods. +On a net basis, we used $11.2 million of cash during the year ended December 31, 2022, consisting of $11.7 million for the purchase of property and equipment, offset by $0.5 million in grant proceeds related to assets acquired under RADx grant. +On a net basis, we used $6.3 million of cash during the year ended December 31, 2021, consisting of $13.6 million for the purchase of property and equipment, offset by $7.3 million in grant proceeds related to assets acquired under WP2. +80 +Table of Contents +Net Cash Provided by Financing Activities +Historically, we have financed our operations principally through equity offerings, borrowings from credit facilities and revenue from our commercial operations. +Financing activities provided $2.3 million of cash during the year ended December 31, 2022, consisting of $1.4 million in net proceeds from the exercise of stock options and $0.9 million in net proceeds from purchases under our Employee Stock Purchase Plan. +Financing activities provided $270.8 million of cash during the year ended December 31, 2021, primarily from $269.7 million in net proceeds from our underwritten public offering during the first quarter of 2021. +Capital Resources +We have not achieved profitability on an annual basis since our inception, and we expect to continue to incur net losses in the future. We also expect that our operating expenses will increase as we continue to increase our marketing efforts to drive adoption of our commercial products as well as our investment in improving the quality of our products and services. Our liquidity requirements have historically consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, working capital, debt service and general corporate expenses. +We believe cash generated from commercial sales along with our current cash and cash equivalents will be sufficient to meet our anticipated operating cash requirements for at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our sales and marketing activities and grow our customer base. Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in Item 1A, “Risk Factors” of this Annual Report on Form 10-K. We have based our estimates on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including: +● continued market acceptance of our products and services and the ability of our products to meet our customers’ expectations; +● the cost and timing of establishing additional sales, marketing and distribution capabilities; +● the extent to which we achieve intended cost savings, revenue improvement and related benefits from our Restructuring Plan; +● the extent to which we are able to successfully complete our assay improvement program to enhance product quality; +● the cost of our research and development activities; +● our ability to enter into collaborations in the future, and the success of any such collaborations; +● potential opportunities to strategically acquire and integrate companies or technologies that may be complementary to our business; +● the cost and timing of potential regulatory clearances or approvals that may be required in the future for our products; and +● the effect of competing technological and market developments. +We cannot guarantee that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not +81 +Table of Contents +able to obtain sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. +If the conditions for raising capital are favorable, we may seek to finance future cash needs through public or private equity or debt offerings or other financings. +Contractual Obligations, Commitments and Contingencies +Lease Obligations +We currently lease approximately 91,600 square feet of office, laboratory, and manufacturing space at our headquarters in Billerica, Massachusetts. The premises covered by this lease serve as our principal office and laboratory space. The initial term of the Billerica lease is eleven years and five months beginning on April 1, 2019, and we have the option to extend the lease for two additional five-year periods. +On January 28, 2022, we executed a lease for 85,800 square feet of office and laboratory space in Bedford, Massachusetts. The lease commencement date was February 1, 2022, when we gained access to the underlying facilities. The initial term of the lease’s payment schedule is eight years and nine months beginning on May 1, 2022. We have the option to extend the lease for two additional five-year periods. As part of the Restructuring Plan, we decided not to utilize these facilities as part of our own operations. We are reviewing our alternatives with respect to this space. These alternatives may include the termination of the lease or the sub-lease of all or a portion of the leased facilities. Refer to Note 12 to the consolidated financial statements for further details related to the Bedford space. +In addition, our subsidiary, Uman, leases a total of approximately 6,500 square feet of office, laboratory, manufacturing and storage space in Umeå, Sweden through multiple leases that expire at various dates through June 30, 2025. +The following table summarizes our operating lease obligations (in thousands): +As of December 31, 2022 +2023 +$ +6,707 +2024 +7,064 +2025 +7,228 +2026 +7,408 +2027 +7,641 +thereafter +23,621 +Total +$ +59,669 +Backlog +We generally expect to ship all instrument and consumable orders in the same fiscal quarter in which they are received, with the exception of orders received near the end of a fiscal quarter. As a result, our backlog at the end of any fiscal quarter is typically insignificant. +82 +Table of Contents +Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +We are exposed to financial market risk, including foreign currency exchange risk and interest rate risk. +Concentration of Revenue and Credit Risk +Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Cash equivalents consist primarily of cash deposits and short-term, highly liquid investments that are readily convertible into cash, such as government securities with original maturities of less than 90 days at the date of purchase. Deposits of cash held outside the United States totaled approximately $3.6 million and $3.4 million at December 31, 2022 and 2021, respectively. +We grant credit to customers in the ordinary course of business. Credit evaluations are performed on an ongoing basis to reduce credit risk, and no collateral is required from our customers. An allowance for credit loss is provided for those accounts receivable considered to be uncollectible based upon historical experience and credit evaluation. As of December 31, 2022, no customer individually accounted for more than 10% of our gross accounts receivable. As of December 31, 2021, one company represented 18% of our gross accounts receivable. Due to the nature of our quarterly revenue streams derived from royalty revenue, it is not unusual for our accounts receivable balances to include a few customers with large balances. There were no material losses recorded due to customers’ non-payment for the years ended December 31, 2022, or 2021. +For the year ended December 31, 2022, only one company accounted for more than 10% of our total revenue at 13%. For the year ended December 31, 2021, no customers individually accounted for more than 10% of our total revenue. +Foreign Currency Exchange Risk +As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. For the years ended December 31, 2022 and 2021, approximately 38% and 36%, respectively, of our total revenue was generated from customers located outside of North America. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Canada, Europe, Japan and China. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. Fluctuations in currency exchange rates could harm our business in the future. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables as of December 31, 2022 would not have been material. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables as of December 31, 2021 would not have been material. +To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future. +Interest Rate Risk +We had cash and cash equivalents of $338.7 million as of December 31, 2022. These amounts were held primarily in cash on deposit with banks. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had decreased by 10% during the years ended December 31, 2022 and 2021, our interest income would not have been materially affected. We do not hold or issue financial instruments for trading purposes. +Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K beginning on page F-1. +83 +Table of Contents +Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +Item 9A. CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2022, due to the material weaknesses described below in Management’s Report on Internal Control over Financial Reporting. +Management’s Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022, based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the framework set forth in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was not effective at the reasonable assurance level as of December 31, 2022, due to the material weaknesses described below. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. +Based on the evaluation described above, our management concluded that control deficiencies existed as of December 31, 2022, and that these control deficiencies constituted material weaknesses in our internal control over financial reporting. The material weaknesses related to the operating effectiveness of our internal control associated with (i) the accounting for inventory, including excess and obsolescence reserves, (ii) the accounting for salary and commissions expense, (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases, and (iv) the accounting for property and equipment, net. The primary cause of these control deficiencies is that we did not maintain a sufficient number of qualified personnel with requisite expertise in key accounting and finance functions, including following the implementation of the Restructuring Plan in the second half of 2022. In addition, our reliance on a significant number of end user computing tools requires additional procedures to verify the completeness and accuracy of information used within our analyses. +There were no material misstatements as a result of the material weaknesses discussed above. If not remediated, or if we identify further material weaknesses in our internal control, our failure to establish and maintain effective +84 +Table of Contents +disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our consolidated financial statements or a failure to meet our reporting and financial obligations. +The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. +Management’s Plan to Remediate the Material Weaknesses +Management, with oversight from the Audit Committee of our Board of Directors, is taking steps to remediate the control deficiencies which resulted in the material weaknesses described above by implementing changes to our internal control over financial reporting. Our plans for remediation include, but are not limited to, the efforts summarized below, which have been or are in the process of being implemented: +● we have hired, and will continue to hire, additional personnel (including those with public company experience) who have the appropriate level of expertise in the areas of accounting, financial reporting, and internal controls commensurate with the volume and complexity of our reporting requirements; +● we have engaged accounting advisory consultants to provide additional depth and breadth in our period end close, technical accounting, and financial reporting capabilities until we have filled vacancies with qualified personnel; +● we will engage a third-party service provider to perform an assessment of our internal control design and related documentation; +● we have engaged a third-party consultant to assess our current enterprise resource planning system and identify opportunities to enhance our use of the system through automating certain controls and processes; and +● we have engaged an accounting advisory consultant to conduct additional trainings on a regular basis related to internal control over financial reporting to our team members including, but not limited to, finance and accounting personnel. +We are also developing a plan to manage, on an ongoing basis, the impact of personnel turnover in the areas of accounting and financial reporting by broadening the understanding and knowledge of a larger group of personnel who can thereby work to support our operations during periods of reduced staffing. +We expect to continue our efforts to remediate the material weaknesses as described above through fiscal year 2023. We believe that the implementation of the above steps will allow us to address the deficient controls within our internal control environment, which will facilitate the remediation of the material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, we will take additional measures to address control deficiencies and we may modify certain of the remediation measures described above. Following our design and implementation of our remediation efforts, we will need to demonstrate their operating effectiveness. We will not be able to consider the material weaknesses remediated until the applicable remedial controls operate for a sufficient period of time and our management has concluded, through testing, that our controls are operating effectively. +Changes in Internal Control over Financial Reporting +Other than related to the changes outlined above to remediate the material weaknesses described above, there have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +85 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on Internal Control over Financial Reporting +We have audited Quanterix Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Quanterix Corporation (the Company) has not maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in internal controls related to (i) the accounting for inventory, including excess and obsolescence reserves, (ii) the accounting for salary and commissions expense, (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases, and (iv) the accounting for property and equipment, net. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022, and December 31, 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated March 6, 2023, which expressed an unqualified opinion thereon. +Basis for Opinion +The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded +86 +Table of Contents +as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Ernst & Young LLP +Boston, Massachusetts +March 6, 2023 +Item 9B. OTHER INFORMATION +Not applicable. +Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +PART III +Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by this Item 10 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 11. EXECUTIVE COMPENSATION +The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference. +87 +Table of Contents +PART IV +Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(1) Financial Statements +The consolidated financial statements are included beginning on page F-1 attached hereto and are filed as part of this Annual Report on Form 10-K. +(2) Financial Statement Schedules +Financial statement schedules have been omitted since they either are not required, not applicable, or the information is otherwise included. +(3) Exhibits +The following is a list of exhibits filed as part of this Annual Report on Form 10-K: +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +3.1 +Amended and Restated Certificate of Incorporation +8-K +12/15/2017 +001-38319 +3.2 +Restated Bylaws +8-K +12/15/2017 +001-38319 +4.1 +Description of Securities +10-K +3/13/2020 +001-38319 +4.2 +Form of Common Stock Certificate +S-1 +11/9/2017 +333-221475 +10.1.1+ +2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.1.2+ +Form of Incentive Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.1.3+ +Form of Non-qualified Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.1.4+ +Form of Restricted Stock Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.2.1+ +2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +10.2.2+ +Form of Stock Option Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +88 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.2.3+ +Form of Restricted Stock Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +10.2.4+ +Form of Restricted Stock Unit Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +10.3.1 ++ +Amended and Restated Employment Agreement, dated April 25, 2022, between the Registrant and E. Kevin Hrusovsky +8-K +4/29/2022 +001-38319 +10.3.2 ++ +Separation Agreement, effective as of August 8, 2022, between the Registrant and E. Kevin Hrusovsky +8-K +8/8/2022 +001-38319 +10.4+ +Employment Agreement, dated June 22, 2021, between the Registrant and Michael Doyle +8-K +6/28/2021 +001-38319 +10.5+ +Amended and Restated Employment Agreement, dated April 25, 2022, between the Registrant and Dr. Masoud Toloue +8-K +4/29/2022 +001-38319 +10.6+ +Employment Agreement, dated March 28, 2022, between the Registrant and Dan Pikora +8-K +9/8/2022 +001-38319 +10.7.1* +Exclusive License Agreement, dated June 18, 2007, between the Registrant and Tufts University, as amended on April 29, 2013 +S-1 +11/9/2017 +333-221475 +10.7.2* +Second Amendment, dated August 22, 2017, to the Exclusive License Agreement between the Registrant and Tufts University +S-1 +11/9/2017 +333-221475 +10.7.3 +@ +Third Amendment, dated September 25, 2020, to the Exclusive License Agreement between the Registrant and Tufts University +10-Q +11/6/2020 +001-38319 +89 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.8.1* +Supply and Manufacturing Agreement, dated September 14, 2011, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/2017 +333-221475 +10.8.2 +First Amendment to Supply and Manufacturing Agreement, dated October 17, 2013, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/2017 +333-221475 +10.9.1* +STRATEC Development Services and Equity Participation Agreement, dated August 15, 2011, between the Registrant and STRATEC Biomedical Systems AG +S-1 +11/9/2017 +333-221475 +10.9.2* +First Amendment to STRATEC Development Services and Equity Participation Agreement and Second Amendment to Supply and Manufacturing Agreement, dated November 18, 2016, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/2017 +333-221475 +10.10* +Manufacturing Services Agreement, dated November 23, 2016, between the Registrant and Paramit Corporation +S-1 +11/9/2017 +333-221475 +10.11+ +Form of Indemnification Agreement +S-1/A +11/27/2017 +333-221475 +10.12 +Lease Agreement by and between SSI 900 Middlesex MA LP and the Registrant, dated October 2, 2018. +8-K +10/5/2018 +001-38319 +10.13 +Lease Agreement by and between the Registrant and XChange Owner LLC, dated January 28, 2022 . +8-K +1/31/2022 +001-38319 +10.14+ +Amended and Restated 2018 Non-Employee Director Compensation Policy +10-K +3/1/2022 +001-38319 +21.1 +Subsidiaries of Registrant +10-K +3/5/2021 +001-38319 +23.1 +Consent of Ernst & Young LLP +X +90 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +32.1 +Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +X +101.INS +Inline XBRL Instance Document. +X +101.SCH +Inline XBRL Taxonomy Extension Schema Document. +X +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document. +X +101.DEF +Inline XBRL Taxonomy Extension Definition. +X +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document. +X +101.PRE +Inline XBRL Taxonomy Presentation Linkbase Document. +X +104 +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) ++ +Management contract or compensatory plan or arrangement. +* +Confidential treatment has been granted for portions of this Exhibit. Redacted portions have been filed separately with the SEC. +@ +Portions of this document (indicated by “[***]”) have been omitted because such information is not material and is the type of information that the Registrant treats as private or confidential. +Item 16. FORM 10-K SUMMARY +Not applicable. +91 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +QUANTERIX CORPORATION +Date: March 6, 2023 +By: +/s/ MASOUD TOLOUE, PH.D. +Masoud Toloue, Ph. D. +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ MASOUD TOLOUE, PH.D. +President and Chief Executive Officer and Director (Principal Executive Officer) +March 6, 2023 +Masoud Toloue, Ph. D. +/s/ MICHAEL A. DOYLE +Chief Financial Officer +March 6, 2023 +Michael A. Doyle +(Principal Financial Officer and Principal Accounting Officer) +/s/ Martin D. Madaus, Ph.D. +Chairman +March 6, 2023 +Martin D. Madaus, Ph.D. +/s/ BRIAN J. BLASER +Director +March 6, 2023 +Brian J. Blaser +/s/ KEITH L. CRANDELL +Director +March 6, 2023 +Keith L. Crandell +/s/ KAREN A. FLYNN +Director +March 6, 2023 +Karen A. Flynn +/s/ SARAH E. HLAVINKA +Director +March 6, 2023 +Sarah E. Hlavinka +/s/ PAUL M. MEISTER +Director +March 6, 2023 +Paul M. Meister +/s/ LAURIE J. OLSON +Director +March 6, 2023 +Laurie J. Olson +/s/ DAVID R. WALT, PH.D. +Director +March 6, 2023 +David R. Walt, Ph.D. +92 +Table of Contents +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +QUANTERIX CORPORATION +Years ended December 31, 2022, 2021, and 2020 +Page +Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) +F-2 +Consolidated Balance Sheets +F-4 +Consolidated Statements of Operations +F-5 +Consolidated Statements of Comprehensive Loss +F-6 +Consolidated Statements of Cash Flows +F-7 +Consolidated Statements of Stockholders’ Equity +F-8 +Notes to Consolidated Financial Statements +F-9 +F-1 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of Quanterix Corporation (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 6, 2023 expressed an adverse opinion thereon. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. +Excess Inventory +Description of the Matter +As of December 31, 2022, the Company had recognized inventory of $16.8 million. As discussed in Note 2 to the consolidated financial statements, the Company analyzes its inventory levels at each reporting date to identify inventory that is in excess of expected sales requirements. In the event that the Company identifies excess inventory, the Company recognizes a reduction in the carrying value of inventory. +Auditing management’s valuation of inventory involved judgement in evaluating management’s analysis and significant assumptions related to projections of future demand which is dependent on market factors. +F-2 +Table of Contents +How We Addressed the Matter in Our Audit +To audit the Company’s valuation of inventory, we performed audit procedures that included, among others, performing inquiries of management and testing the completeness and accuracy of the underlying data used supporting the Company’s estimate. To evaluate the Company’s estimate of future demand, we independently assessed the sensitivity and impact of reasonably possible changes in forecasted demand and the impact on the Company’s calculation of excess inventory. We evaluated inventory levels compared to forecasted demand, historical sales and specific product considerations. We performed inquiries with appropriate non-financial personnel, including supply chain employees, regarding obsolete or discontinued inventory items and other factors to corroborate management's assertions regarding qualitative judgments about discontinued, slow moving and obsolete inventories. We also evaluated management's ability to accurately forecast demand by comparing actual demand to management's prior estimates. +/s/ Ernst & Young LLP +We have served as the Company’s auditor since 2008. +Boston, Massachusetts +March 6, 2023 +F-3 +Table of Contents +Quanterix Corporation +Consolidated Balance Sheets +(amounts in thousands, except share and per share data) +December 31, 2022 +December 31, 2021 +Assets +Current assets: +Cash and cash equivalents +$ +338,740 +$ +396,465 +Accounts receivable (less allowance for credit losses of $ 118 and $ 419 as of December 31, 2022 and December 31, 2021, respectively; including $ 89 and $ 200 due from related parties as of December 31, 2022 and December 31, 2021, respectively) +19,017 +23,786 +Inventory +16,786 +22,190 +Prepaid expenses and other current assets +6,860 +6,514 +Total current assets +381,403 +448,955 +Restricted cash +2,597 +2,577 +Property and equipment, net +20,162 +17,960 +Intangible assets, net +7,516 +10,534 +Goodwill +— +9,632 +Right-of-use assets +21,223 +11,491 +Other non-current assets +1,298 +378 +Total assets +$ +434,199 +$ +501,527 +Liabilities and stockholders’ equity +Current liabilities: +Accounts payable (including $ 0 and $ 42 to related parties as of December 31, 2022 and December 31, 2021, respectively) +$ +3,836 +$ +9,209 +Accrued compensation and benefits +10,658 +13,252 +Other accrued expenses +4,747 +6,486 +Deferred revenue (including $ 69 and $ 54 with related parties as of December 31, 2022 and December 31, 2021, respectively) +8,644 +6,361 +Short term lease liabilities +2,687 +1,428 +Other current liabilities +386 +241 +Total current liabilities +30,958 +36,977 +Deferred revenue, net of current portion +1,415 +1,099 +Long term lease liabilities +41,417 +20,464 +Other non-current liabilities +1,469 +2,035 +Total liabilities +75,259 +60,575 +Commitments and contingencies (Note 13) +Stockholders’ equity: +Common stock, $ 0.001 par value: +Authorized shares: 120,000,000 at December 31, 2022 and December 31, 2021, respectively; Issued and outstanding : 37,279,994 shares and 36,768,035 shares at December 31, 2022 and December 31, 2021, respectively +37 +37 +Additional paid-in capital +763,688 +745,936 +Accumulated other comprehensive income +( 2,623 ) +441 +Accumulated deficit +( 402,162 ) +( 305,462 ) +Total stockholders’ equity +358,940 +440,952 +Total liabilities and stockholders’ equity +$ +434,199 +$ +501,527 +The accompanying notes are an integral part of these financial statements. +F-4 +Table of Contents +Quanterix Corporation +Consolidated Statements of Operations +(amounts in thousands, except share and per share data) +Years Ended +December 31, +2022 +2021 +2020 +Product revenue (including related party activity of $ 2,634 , $ 505 , and $ 580 for the years ended December 31, 2022, 2021, and 2020, respectively) +$ +69,808 +$ +81,062 +$ +44,017 +Service and other revenue (including related party activity of $ 11 , $ 114 , and $ 202 for the years ended December 31, 2022, 2021, and 2020, respectively) +34,495 +23,629 +24,129 +Collaboration revenue +649 +648 +11,809 +Grant revenue +570 +5,217 +6,422 +Total revenue +105,522 +110,556 +86,377 +Costs of goods sold: +Cost of product revenue (including related party activity of $ 154 , $ 1,936 , and $ 205 for the years ended December 31, 2022, 2021, and 2020 respectively) +40,809 +34,149 +25,950 +Cost of service and other revenue (including related party activity of $ 87 , $ 74 , and $ 52 for the years ended December 31, 2022, 2021, and 2020 respectively) +17,907 +14,679 +11,245 +Cost of collaboration and license revenue (including related party activity of $ 0 , $ 0 , and $ 1,000 for the years ended December 31, 2022, 2021, and 2020 respectively) +— +— +1,000 +Total costs of goods sold, services, and licenses +58,716 +48,828 +38,195 +Gross profit +46,806 +61,728 +48,182 +Operating expenses: +Research and Development Expense (including related party activity of $ 696 , $ 565 , and $ 235 for the years ended December 31, 2022, 2021, and 2020 respectively) +25,890 +27,978 +20,174 +Selling, general and administrative (including related party activity of $ 41 , $ 89 , and $ 37 for the years ended December 31, 2022, 2021, and 2020 respectively) +91,995 +92,336 +59,592 +Other lease costs +1,278 +— +— +Restructuring +3,755 +— +— +Goodwill impairment +8,220 +— +— +Impairment expense +17,372 +— +— +Total operating expenses +148,510 +120,314 +79,766 +Loss from operations +( 101,704 ) +( 58,586 ) +( 31,584 ) +Interest income (expense), net +5,131 +( 403 ) +( 273 ) +Other (expense) income, net +( 62 ) +1,265 +( 49 ) +Loss before income taxes +( 96,635 ) +( 57,724 ) +( 31,906 ) +Income tax (expense) benefit +( 65 ) +36 +376 +Net loss +$ +( 96,700 ) +$ +( 57,688 ) +$ +( 31,530 ) +Net loss per share, basic and diluted +$ +( 2.61 ) +$ +( 1.60 ) +$ +( 1.07 ) +Weighted-average common shares outstanding, basic and diluted +36,990,965 +35,997,473 +29,589,132 +The accompanying notes are an integral part of these financial statements. +F-5 +Table of Contents +Quanterix Corporation +Consolidated Statements of Comprehensive Loss +(amounts in thousands) +Years Ended December 31, +2022 +2021 +2020 +Net loss +$ +( 96,700 ) +$ +( 57,688 ) +$ +( 31,530 ) +Other comprehensive loss: +Foreign currency translation adjustment +( 3,064 ) +( 1,993 ) +2,587 +Total other comprehensive loss +( 3,064 ) +( 1,993 ) +2,587 +Comprehensive loss +$ +( 99,764 ) +$ +( 59,681 ) +$ +( 28,943 ) +The accompanying notes are an integral part of these financial statements. +F-6 +Table of Contents +Quanterix Corporation +Consolidated Statements of C as h Flows +(amounts in thousands) +Year Ended December 31, +2022 +2021 +2020 +Operating activities +Net loss +$ +( 96,700 ) +$ +( 57,688 ) +$ +( 31,530 ) +Adjustments to reconcile net loss to net cash used in operating activities: +Depreciation and amortization expense +5,349 +4,851 +4,312 +Inventory step-up amortization +— +275 +722 +Credit (income) loss expense on accounts receivable +( 301 ) +213 +493 +Unrealized losses (gains) on foreign currency transactions +( 219 ) +263 +( 20 ) +Non-cash lease expense +715 +499 +245 +Stock-based compensation expense +15,442 +15,975 +10,099 +Goodwill impairment +8,220 +— +— +Impairment of long-lived assets +17,372 +— +— +Non-cash interest expense +— +65 +86 +Deferred taxes +( 226 ) +— +— +Loss on disposal of fixed assets +6 +89 +171 +Changes in operating assets and liabilities: +Accounts receivable +5,156 +( 6,853 ) +( 6,733 ) +Prepaid expenses and other assets +( 568 ) +( 393 ) +( 3,927 ) +Inventory +5,386 +( 8,090 ) +( 5,119 ) +Other non-current assets +( 909 ) +( 2 ) +198 +Accounts payable +( 5,362 ) +2,414 +649 +Accrued compensation and benefits, other accrued expenses and other current liabilities +( 3,976 ) +606 +6,326 +Operating lease liabilities +( 266 ) +( 1,230 ) +316 +Other non-current liabilities +10 +( 363 ) +( 488 ) +Deferred revenue +2,599 +1,462 +835 +Net cash used in operating activities +( 48,272 ) +( 47,907 ) +( 23,365 ) +Investing activities +Purchases of property and equipment +( 11,726 ) +( 13,616 ) +( 3,930 ) +Proceeds from RADx grant on assets purchased +520 +7,278 +3,304 +Net cash used in investing activities +( 11,206 ) +( 6,338 ) +( 626 ) +Financing activities +Proceeds from stock options exercised +1,430 +7,750 +4,019 +Sale of common stock in underwritten public offering, net +— +269,718 +91,404 +Proceeds from ESPP purchase +881 +1,065 +888 +Payments on notes payable +— +( 7,738 ) +( 75 ) +Net cash provided by financing activities +2,311 +270,795 +96,236 +Net increase in cash and cash equivalents +( 57,167 ) +216,550 +72,245 +Effect of foreign currency exchange rate on cash +( 538 ) +( 92 ) +158 +Cash, restricted cash, and cash equivalents at beginning of period +399,042 +182,584 +110,181 +Cash, restricted cash, and cash equivalents at end of period +$ +341,337 +$ +399,042 +$ +182,584 +Supplemental cash flow information +Cash paid for interest +$ +— +$ +389 +$ +625 +Cash paid for taxes +$ +684 +$ +— +$ +— +Noncash transactions: +Purchases of property and equipment included in accounts payable and other accrued expenses +$ +152 +$ +229 +$ +1,029 +Right-of-use asset obtained in exchange for lease liabilities +$ +22,494 +$ +— +$ +— +Reconciliation of cash, cash equivalents, and restricted cash: +Cash and cash equivalents +$ +338,740 +$ +396,465 +$ +181,584 +Restricted cash +$ +2,597 +$ +2,577 +$ +1,000 +Total cash, cash equivalents, and restricted cash +$ +341,337 +$ +399,042 +$ +182,584 +The accompanying notes are an integral part of these financial statements. +F-7 +Table of Contents +Quanterix Corporation +Consolidated Statements of Stockholders’ Equity +(amounts in thousands, except share data) +Accumulated +Common +Common +Additional +other +Total +stock +stock +paid-in +comprehensive +Accumulated +stockholders’ +shares +value +capital +income (loss) +deficit +equity +Balance at December 31, 2019 +28,112,201 +$ +28 +$ +345,027 +$ +( 153 ) +$ +( 216,244 ) +$ +128,658 +Issuance of capital shares: +−Exercised stock options +407,687 +1 +4,018 +— +— +4,019 +−Restricted units converted +182,036 +— +— +— +— +— +−ESPP stock purchase +45,846 +— +888 +— +— +888 +Sale of common stock in underwritten public offering, net +3,048,774 +3 +91,401 +— +— +91,404 +Stock-based compensation expense +— +— +10,099 +— +— +10,099 +Cumulative translation adjustment +— +— +— +2,587 +— +2,587 +Net loss +— +— +— +— +( 31,530 ) +( 31,530 ) +Balance at December 31, 2020 +31,796,544 +$ +32 +$ +451,433 +$ +2,434 +$ +( 247,774 ) +$ +206,125 +Issuance of capital shares: +−Exercised warrants +7,347 +— +— +— +— +— +−Exercised stock options +516,792 +1 +7,749 +— +— +7,750 +−Restricted units converted +307,004 +— +— +— +— +— +−ESPP stock purchase +29,037 +— +1,065 +— +— +1,065 +−Issuance of common stock +4,169 +— +— +— +— +— +Sale of common stock in underwritten public offering, net +4,107,142 +4 +269,714 +— +— +269,718 +Stock-based compensation expense +— +— +15,975 +— +— +15,975 +Cumulative translation adjustment +— +— +— +( 1,993 ) +— +( 1,993 ) +Net loss +— +— +— +— +( 57,688 ) +( 57,688 ) +Balance at December 31, 2021 +36,768,035 +$ +37 +$ +745,936 +$ +441 +$ +( 305,462 ) +$ +440,952 +Issuance of capital shares: +−Exercised stock options +243,792 +— +1,430 +— +— +1,430 +−Restricted units converted +199,938 +— +( 1 ) +— +— +( 1 ) +−ESPP stock purchase +57,485 +— +881 +— +— +881 +−Issuance of common stock +10,744 +— +— +— +— +— +Stock-based compensation expense +— +— +15,442 +— +— +15,442 +Cumulative translation adjustment +— +— +— +( 3,064 ) +— +( 3,064 ) +Net loss +— +— +— +— +( 96,700 ) +( 96,700 ) +Balance at December 31, 2022 +37,279,994 +$ +37 +$ +763,688 +$ +( 2,623 ) +$ +( 402,162 ) +$ +358,940 +The accompanying notes are an integral part of these financial statements. +F-8 +Table of Contents +Quanterix Corporation +Notes to Consolidated Financial Statements +1. Organization and operations +Quanterix Corporation (Nasdaq: QTRX) (the Company) is a life sciences company that has developed next generation, ultra-sensitive digital immunoassay platforms that advance precision health for life sciences research and diagnostics. The Company’s platforms are based on its proprietary digital “Simoa” detection technology. The Company’s Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations and have been discovered using technologies such as mass spectrometry. These capabilities provide the Company’s customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. The Company is currently focusing on protein detection, but the Company’s Simoa platforms have also demonstrated applicability across other testing applications, including detection of nucleic acids and small molecules. +The Company launched its first immunoassay platform, the Simoa HD-1, in 2014. The HD-1 is a fully automated immunoassay bead-based platform with multiplexing and custom assay capability, and related assay test kits and consumable materials. The Company launched a second bead-based immunoassay platform (SR-X) in the fourth quarter of 2017 with a more compact footprint than the Simoa HD-1 and less automation designed for lower volume requirements while still allowing multiplexing and custom assay capability. The Company initiated an early-access program for its third instrument (SP-X) on the new Simoa planar array platform in January 2019, with the full commercial launch commencing in April 2019. In July 2019, the Company launched the Simoa HD-X, an upgraded version of the Simoa HD-1 which replaces the HD-1. The HD-X has been designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The Company began shipping and installing HD-X instruments at customer locations in the third quarter of 2019. The Company also performs research services on behalf of customers to apply the Simoa technology to specific customer needs. The Company's customers are primarily in the research use only market, which includes academic and governmental research institutions, the research and development laboratories of pharmaceutical manufacturers, contract research organizations, and specialty research laboratories. +The Company’s wholly owned subsidiary UmanDiagnostics AB (Uman), a Swedish company located in Umeå, Sweden, supplies neurofilament light (Nf-L) antibodies and ELISA kits, which are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of Nf-L to advance the development of therapeutics and diagnostics for neurodegenerative conditions. +Underwritten public offerings +On August 6, 2020, the Company entered into an underwriting agreement with SVB Leerink LLC and Cowen and Company, LLC (Cowen), as representatives of the several underwriters, relating to an underwritten public offering of approximately 3.0 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 97.6 million. The Company incurred $ 6.2 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 91.4 million. +On February 3, 2021, the Company entered into an underwriting agreement with Goldman Sachs & Co. LLC, Leerink, and Cowen, as representatives of the several underwriters, relating to an underwritten public offering of approximately 4.1 million shares of the Company’s common stock, par value $ 0.001 per share. The underwritten public offering resulted in gross proceeds of $ 287.5 million. The Company incurred $ 17.8 million in issuance costs associated with the underwritten public offering, resulting in net proceeds to the Company of $ 269.7 million. +F-9 +Table of Contents +Liquidity +The Company has recognized annual losses from operations since inception and has an accumulated deficit of $ 402.2 million as of December 31, 2022. The Company incurred net losses of $ 96.7 million, $ 57.7 million, and $ 31.5 million for the years ended December 31, 2022, 2021, and 2020, respectively. The Company had $ 338.7 million and $ 396.5 million of unrestricted cash and cash equivalents for the years ended December 31, 2022 and 2021, respectively. The Company expects that its cash and cash equivalents, as of December 31, 2022, will be sufficient to fund its operations for a period of at least one year from the date the consolidated financial statements are issued. There can be no assurances, however, that no additional funding will be required or that additional funding will be available on terms acceptable to the Company, or at all. +2. Significant accounting policies +Principles of consolidation +The consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Quanterix Corporation, and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. +Use of estimates +The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. In making those estimates and assumptions, the Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. The Company’s significant estimates included in the preparation of the consolidated financial statements are related to revenue recognition and valuation of inventory. Actual results could differ from those estimates. +Reclassifications +Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the current year’s presentation. +Segment information +Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker, the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company and the Company's chief operating decision-maker reviews the Company's operations and manages its business as a single operating segment. +Cost of revenue +Cost of goods sold for products consists of HD-X, HD-1, and SR-X instrument costs from the manufacturer and related reagents and other consumables. Cost of goods sold for SP-X consists of costs based on the internal assembly of this item. Raw material part costs; inbound freight, shipping and handling costs associated with purchased goods; contract manufacturer costs; personnel costs; royalties; overhead and other direct costs related to those sales are classified as cost of goods sold for products. +Cost of service and other revenue consists of raw materials, personnel costs, royalties as well as overhead and other direct costs associated with operating the Accelerator Laboratory on behalf of customers, in addition to costs related to warranties and other costs of servicing equipment at customer sites. +F-10 +Table of Contents +Cost of license revenue consists of license fees that are the direct results of cash payments received related to license agreements. +Research and development expenses +Research and development expenses, including personnel costs, allocated facility costs, lab supplies, outside services, contract laboratory costs are charged to research and development expense as incurred. The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expense when the service has been performed or when the goods have been received. Expenses incurred related to grant funded activities are recorded in research and development expense. +Selling, general, and administrative expenses +Selling, general and administrative expenses consist primarily of personnel costs for the Company’s sales and marketing, finance, legal, human resources and general management, costs associated with shipping and handling for product sales, other general and administrative costs, as well as professional services costs, such as marketing, advertising, legal and accounting services in addition to allocated overhead costs that include facility and other overhead costs. +The classification of shipping and handling costs for product sales as selling, general, and administrative expenses varies from company to company with some companies recording these as selling, general and administrative expenses and others recording such expenses within costs of goods sold for products. To the extent the classification of these shipping and handling costs differs from the reporting approach used by other companies, the Company’s gross margins may not be comparable with those reported by such other companies. Shipping and handling costs for product sales included within selling, general and administrative expenses were $ 7.2 million, $ 6.9 million and $ 4.8 million for the years ended December 31, 2022, 2021 and 2020, respectively. +Net loss per share +Basic net loss per common share attributable to common stockholders is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares. For purposes of the diluted net loss per share calculations, unvested restricted common stock, restricted stock units, common stock options, and warrants are considered to be potentially dilutive securities, but are excluded from the diluted net loss per share because their effect would be anti-dilutive and therefore basic and diluted net loss per share were the same for all periods presented. +Cash and cash equivalents +Cash and cash equivalents consist of cash deposits and short-term, highly liquid investments that are readily convertible into cash, with original maturities of three months or less. Cash equivalents are carried at fair value based on quoted prices for identical assets. Cash and cash equivalents consist of the following (in thousands): +As of +December 31, +2022 +2021 +Cash +$ +32,643 +$ +64,372 +Money market funds invested in U.S. Treasury obligations +306,097 +332,093 +Total cash and cash equivalents +$ +338,740 +$ +396,465 +Restricted cash and deposits +Restricted cash primarily represents collateral for a letter of credit issued as security for the lease for the Company’s headquarters in Billerica, Massachusetts, and additional space in Bedford, Massachusetts, and to secure the +F-11 +Table of Contents +Company’s corporate credit card program. The restricted cash is long term in nature as the Company will not have access to the funds until more than one year from December 31, 2022. +Inventory +Inventory is stated at the lower of cost or market on a first-in, first-out (FIFO) basis. The Company analyzes its inventory levels on each reporting date and writes down inventory that is expected to expire prior to being sold and inventory in excess of expected sales requirements. In the event that the Company identifies these conditions exist in its inventory, the carrying value is reduced to its estimated net realizable value. +Property and equipment +Property and equipment, including leasehold improvements, are stated at cost and are depreciated, or amortized in the case of leasehold improvements, over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable and recognizes an impairment loss when it is probable that an asset’s realizable value is less than the carrying value. The Company recorded impairment expenses during the year-end December 31, 2022. Refer to Note 7 for additional details. +Depreciation is calculated based upon the following estimated useful lives of the assets: +Laboratory and manufacturing equipment +Five years +Computers and software +Three years +Office furniture and equipment +Seven years +Leasehold improvements +Shorter of the useful life of the asset or the remaining term of the lease +Leases +The Company accounts for leases in accordance with ASC Topic 842, Leases (ASC 842), which was adopted on January 1, 2020. ASC 842 requires a lessee to recognize assets and liabilities on the balance sheet for most leases. Lessees are differentiated between finance leases and operating leases, and classification impacts expense recognition. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use (ROU) assets and short-term and long-term lease liabilities, as applicable. The Company does not recognize leases on the balance sheet with a term of twelve months or less. The Company’s leases consist of office and lab space and office equipment. All of the Company’s leases are classified as operating, and options to renew a lease are only included in the lease term to the extent those options are reasonably certain to be exercised. Additionally, the Company does not separate lease and non-lease components for all leases. +Operating lease liabilities and their corresponding ROU assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The rate implicit in lease contracts is typically not readily determinable and, as a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments, for a similar term, in a similar economic environment. To estimate its incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have a rating agency-based credit rating. +Software development costs +The Company develops and modifies software related to the operation of some of its instruments. Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Based on +F-12 +Table of Contents +the Company’s product development process, technological feasibility is established upon the completion of a working model. The Company does not incur material costs between the completion of the working model and the point at which the product is ready for release. Therefore, software development costs are charged to the statement of operations as incurred as research and development expense. +Fair value of financial instruments +ASC Topic 820, Fair Value Measurement (ASC 820), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. +ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following: +Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. +Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and +Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. +To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. +The carrying amount reflected on the balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximated their fair values, due to the short-term nature of these instruments. +Fair value measurements are as follows (in thousands): +Quoted prices +Significant +in active +Significant other +unobservable +markets +observable +inputs +December 31, 2022 +Total +(Level 1) +inputs (Level 2) +(Level 3) +Financial assets +Cash equivalents - money market funds +$ +306,097 +$ +306,097 +$ +— +$ +— +F-13 +Table of Contents +Quoted prices +Significant +Significant +in active +other +unobservable +markets +observable +inputs +December 31, 2021 +Total +(Level 1) +inputs (Level 2) +(Level 3) +Financial assets +Cash equivalents - money market funds +$ +332,093 +$ +332,093 +$ +— +$ +— +Warranties +The Company provides a one-year warranty and maintenance service related to its instruments and sells extended warranty contracts for additional periods. The Company defers revenue associated with these services and recognizes them on a pro-rata basis over the period of service. +Income taxes +The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. +The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740 Income Taxes (ASC 740). When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2022 and 2021, the Company did not have any significant uncertain tax positions. +Credit, product, and supplier concentrations and off-balance-sheet risk +The Company has no significant off-balance-sheet risk, such as foreign exchange contracts, option contracts, or other hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash and cash equivalents and a cost method investment. The Company places its cash and cash equivalents principally in depository accounts with a bank. +The Company is also subject to supply chain risks related to the outsourcing of the manufacturing of its instruments. Although there are a limited number of manufacturers for instruments of this type, the Company believes that other suppliers could provide similar products on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. In addition to outsourcing the manufacturing of its instruments, the Company also purchases antibodies through a number of different suppliers. Although a disruption in service from any one of its antibody suppliers is possible, the Company believes that it would be able to find an adequate supply from alternative suppliers. +Customers outside the United States represented 41 % and 39 % of the Company’s gross trade accounts receivable balance as of December 31, 2022, and 2021, respectively. For the year ended December 31, 2022, one customer of approximately $ 13.7 million revenue accounted for 13 % of the Company’s total revenue. For the year ended December 31, 2021, no customers individually accounted for more than 10 % of the Company’s total revenue. +Stock-based compensation +The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). The Company generally recognizes stock-based payments to employees and non-employees based on their grant date fair values. Stock-based compensation awards have historically consisted of stock +F-14 +Table of Contents +options and restricted stock units. Stock-based compensation costs for employees are recognized as expense over the requisite service period, which is generally the vesting period of the respective awards. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. There were no material non-employee awards outstanding during the years ended December 31, 2022, 2021, and 2020. +The Company recognizes forfeitures as they occur. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. +The fair value of stock options granted to employees and non-employees is estimated on the grant date using the Black-Scholes option-pricing model, based on the assumptions noted in the following table: +Year Ended December 31, +2022 +2021 +2020 +Risk-free interest rate +1.4 % - 4.1 % +0.4 % - 1.3 % +0.4 % - 1.7 % +Expected dividend yield +None +None +None +Expected term (in years) +5.0 - 5.8 +6.0 +6.0 +Expected volatility +55.0 % - 70.8 % +49.2 % - 55.6 % +43.9 % - 49.2 % +Weighted-average grant date fair value +$ 9.88 +$ 29.96 +$ 12.66 +The Company uses its historical volatility and implied volatility as a basis to estimate expected volatility in the Company’s valuation of stock options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected term assumption. The Company estimates the expected term of options granted to employees utilizing the simplified method which calculates the expected term of an option as the average of the time to vesting and contractual life of the options. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. The Company used the simplified method due to the lack of historical exercise data and the plain nature of the stock options. The Company uses the remaining contractual term for the expected term of non-employee awards. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on common stock. +Recent accounting pronouncements +Adopted +In June 2016, the Financial Accounting Standards Board (FASB) established Topic 326 , Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (ASC 326) by issuing ASU No. 2016-13 (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The Company early adopted ASU 2016-13 on January 1, 2021 using the modified retrospective approach. The Company’s consolidated financial statements for prior-year periods have not been revised and are reflective of the credit loss requirements which were in effect for that period. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements. +In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15) . This ASU addresses the accounting for implementation, setup and other upfront costs paid by a customer in a cloud computing or hosting arrangement. The guidance aligns the accounting treatment of these costs incurred in a hosting arrangement treated as a service contract with the requirements for capitalization and amortization costs to develop or obtain internal-use software. The Company adopted ASU 2018-15 on January 1, 2021 using the prospective method. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial statements. +In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which is intended to simplify various areas related to ASC 740, Income Taxes (ASC 740). ASU 2019- +F-15 +Table of Contents +12 removes certain exceptions for performing intra period tax allocations and calculating income taxes in interim periods. The guidance also simplifies the accounting for transactions that result in a step-up in the tax basis of goodwill and the effect of enacted changes in tax laws or rates in interim periods. The Company early adopted ASU 2019-12 on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements. +3. Revenue +The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that the Company expects to be entitled to receive in exchange for these goods and services, incentives and taxes collected from customers that are subsequently remitted to governmental authorities. +Customers +The Company’s customers primarily consist of entities engaged in the life sciences research market that pursue the discovery and development of new drugs for a variety of neurologic, cardiovascular, oncologic and other protein biomarkers associated with diseases. The Company’s customer base includes several of the largest biopharmaceutical companies, academic research organizations and distributors who serve certain geographic markets. +Product revenue +The Company’s products are composed of analyzer instruments, assay kits and other consumables such as reagents. Products are sold directly to biopharmaceutical and academic research organizations or are sold through distributors in EMEA and Asia Pacific regions. The sales of instruments are generally accompanied by an initial year of implied service-type warranties and may be bundled with assays and other consumables and may also include other items such as training and installation of the instrument and/or an extended service warranty. Revenues from the sale of products are recognized at a point in time when the Company transfers control of the product to the customer, which is generally upon installation for instruments sold to direct customers, and based upon shipping terms for assay kits and other consumables. Revenue for instruments sold to distributors is generally recognized based upon shipping terms (either upon shipment or delivery). +Service and other revenue +Service revenues are composed of contract research services, initial implied one-year service-type warranties, extended services contracts and other services such as training. Contract research services are provided through the Company’s Accelerator Laboratory and generally consist of fixed fee contracts. Revenues from contract research services are recognized at a point in time when the Company completes and delivers its research report on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. Revenues from service-type warranties are recognized ratably over the contract service period. For contract research services recognized over time, the Company uses the output method to measure the progress toward the complete satisfaction of the performance obligations. Revenues from other services are immaterial. +During the first quarter of 2022, the Company entered into a Master Collaboration Agreement with Eli Lilly and Company (Lilly) establishing a framework for future projects focused on the development of Simoa immunoassays (the Lilly Collaboration Agreement). The Company also entered into a Statement of Work under the Lilly Collaboration Agreement to perform assay research and development services within the field of Alzheimer’s disease. In connection with the Lilly Collaboration Agreement, the Company received a non-refundable up-front payment of $ 5.0 million during the first quarter of 2022, and under the Statement of Work received $ 1.5 million per calendar quarter during 2022, beginning with the first quarter of 2022. The revenue has been recognized over a one-year period. The Lilly Collaboration Agreement automatically renews on a quarterly basis unless Lilly provides 100 days ’ termination notice. +F-16 +Table of Contents +Concurrent with the execution of the Lilly Collaboration Agreement, the Company entered into a Technology License Agreement (the Lilly License) under which Lilly granted to the Company a non-exclusive license to Lilly’s proprietary P-tau217 antibody technology for potential near-term use in research use only products and services and future in vitro diagnostics applications within the field of Alzheimer’s disease. In consideration of the license, the Company paid an upfront fee, is required to make milestone payments based on the achievement of predetermined regulatory and commercial events, and will pay a royalty on net sales of licensed products. +The Company concluded that the Lilly Collaboration Agreement (including the Statement of Work) and the Lilly License represented a single contract with a customer and we are accounting for the agreements as service revenue recognized over time as the services are delivered. The transaction price for the Lilly Collaboration Agreement is $ 10.9 million. Contingent amounts due to Lilly, under the Lilly License, represent variable consideration payable to a customer and will be recognized as reductions to service revenue up to the amount of the transaction price recognized, when probable. The Company is utilizing an input method to measure the delivery of services by calculating costs incurred at each period end relative to total costs expected to be incurred. +During the year ended December 31, 2022, the Company recognized approximately $ 10.9 million of revenue from the Lilly Collaboration Agreement. +Collaboration and license revenue +The Company may enter into agreements to license the intellectual property and know-how associated with its instruments and certain antibodies in exchange for license fees and future royalties (as described below). The license agreements provide the licensee with a right to use the intellectual property with the license fee revenues recognized at a point in time as the underlying license is considered functional intellectual property. +Payment terms +The Company’s payment terms vary by the type and location of the customer and the products or services offered. Payment from customers is generally required in a term ranging from 30 to 45 days from date of shipment or satisfaction of the performance obligation. The Company does not provide financing arrangements to its customers. +Disaggregated revenue +When disaggregating revenue, the Company considered all of the economic factors that may affect its revenues. The following tables disaggregate the Company’s revenue from contracts with customers by revenue type (in thousands): +Year Ended +December 31, 2022 +(in thousands) +North America +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +9,254 +8,362 +7,388 +$ +25,004 +Consumable and other products +25,894 +14,514 +4,396 +44,804 +Total +$ +35,148 +$ +22,876 +$ +11,784 +$ +69,808 +Service and other revenues: +Service-type warranties +$ +5,581 +$ +2,779 +$ +480 +$ +8,840 +Research services +22,493 +1,013 +147 +23,653 +Other services +1,144 +722 +136 +2,002 +Total +$ +29,218 +$ +4,514 +$ +763 +$ +34,495 +Collaboration and license revenue: +Collaboration and license revenue +$ +274 +$ +323 +$ +52 +$ +649 +F-17 +Table of Contents +Year Ended +December 31, 2021 +(in thousands) +North America +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +12,138 +$ +8,178 +$ +5,657 +$ +25,973 +Consumable and other products +34,997 +16,122 +3,970 +55,089 +Total +$ +47,135 +$ +24,300 +$ +9,627 +$ +81,062 +Service and other revenues: +Service-type warranties +$ +4,334 +$ +2,039 +$ +255 +$ +6,628 +Research services +12,101 +2,600 +124 +14,825 +Other services +1,372 +695 +109 +2,176 +Total +$ +17,807 +$ +5,334 +$ +488 +$ +23,629 +Collaboration and license revenue: +Collaboration and license revenue +$ +360 +$ +288 +$ +— +$ +648 +Year Ended +December 31, 2020 +(in thousands) +North America +EMEA +Asia Pacific +Total +Product revenues: +Instruments +$ +8,680 +$ +4,332 +$ +3,594 +$ +16,606 +Consumable and other products +14,305 +10,854 +2,252 +27,411 +Total +$ +22,985 +$ +15,186 +$ +5,846 +$ +44,017 +Service and other revenues: +Service-type warranties +$ +3,171 +$ +1,543 +$ +207 +$ +4,921 +Research services +15,011 +2,225 +737 +17,973 +Other services +700 +435 +100 +1,235 +Total +$ +18,882 +$ +4,203 +$ +1,044 +$ +24,129 +Collaboration and license revenue: +Collaboration and license revenue +$ +11,685 +$ +124 +$ +— +$ +11,809 +The Company’s contracts with customers may include promises to transfer multiple products and services to a customer. The Company combines any performance obligations that are immaterial with one or more other performance obligations that are material to the contract. For arrangements with multiple performance obligations, the Company allocates the contract transaction price, including discounts, to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company determines standalone selling prices based on prices charged to customers in observable transactions and uses a range of amounts to estimate standalone selling prices for each performance obligation. The Company may have more than one range of standalone selling price for certain products and services based on the pricing for different customer classes. +Variable consideration in the Company’s contracts primarily relates to (i) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (ii) certain non-fixed fee research services contracts. Accounting Standard Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606) provides for an exception to estimating the variable consideration for sales- and usage-based royalties related to the license of intellectual property, such that the sales- and usage-based royalty will be recognized in the period the underlying transaction occurs. The Company recognizes revenue from sales- and usage-based royalty revenue at the later of when the sale or usage occurs and the satisfaction or partial satisfaction of the performance obligation to which the royalty has been allocated. +F-18 +Table of Contents +Changes in deferred revenue from contracts with customers were as follows (in thousands): +Year Ended December 31, 2022 +Balance at December 31, 2021 +$ +7,460 +Deferral of revenue +11,444 +Recognition of deferred revenue +( 8,845 ) +Balance at December 31, 2022 +$ +10,059 +The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or that are partially satisfied as of December 31, 2022 is $ 10.1 million. Of the performance obligations not yet satisfied or that are partially satisfied, $ 8.6 million is expected to be recognized as revenue in the next 12 months , with the remainder to be recognized within the 24 months thereafter. The $ 10.1 million principally consists of amounts billed for undelivered services related to initial and extended service-type warranties and research services, as well as $ 0.5 million related to undelivered licenses of intellectual property for a diagnostics company. For further discussion, refer to Note 5. +Costs to obtain a contract +The Company’s sales commissions are generally based on bookings of the Company. The Company has determined that certain commissions paid under its sales incentive programs meet the requirements to be capitalized as they are incremental and would not have occurred absent a customer contract. The change in the balance of costs to obtain a contract are as follows (in thousands): +2022 +Balance at January 1 +$ +440 +Deferral of costs to obtain a contract +1,387 +Recognition of costs to obtain a contract +( 1,450 ) +Balance at December 31 +$ +377 +The Company has classified the balance of capitalized costs to obtain a contract as a component of prepaid expenses and other current assets and will subsequently amortize the expense as a component of cost of goods sold and selling, general, and administrative expense over the estimated life of the contract. The Company considers potential impairment in these amounts each period. +ASC 606 provides entities with certain practical expedients and accounting policy elections to minimize the cost and burden of adoption. +The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed. +The Company will exclude from its transaction price any amounts collected from customers related to sales and other similar taxes. +When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. The Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of December 31, 2022, and 2021, respectively. +F-19 +Table of Contents +The Company has elected to account for the shipping and handling as an activity to fulfill the promise to transfer the product, and therefore will not evaluate whether shipping and handling activities are promised services to its customers. +Grant revenue +The Company recognizes grant revenue as the Company performs services under the arrangement when the funding is committed. Revenues and related research and development expenses are presented gross in the consolidated statements of operations as the Company has determined it is the primary obligor under the arrangement relative to the research and development services. +Accounting for grants does not fall under ASC 606, as the grantor will not benefit directly from the Company’s expansion or product development. As there is no authoritative guidance under U.S. GAAP on accounting for grants to for profit business entities from government entities, the Company has accounted for grants obtained with the National Institute of Health (NIH) under its Rapid Acceleration of Diagnostics (RADx) program by analogy to International Accounting Standards Topic 20, Accounting for Government Grants and Disclosure of Government Assistance (IAS 20) The Company accounts for grants from the Alzheimer’s Drug Discovery Foundation (ADDF) under ASC Topic 958, Not for-Profit Entities (ASC 958). +Under IAS 20, grants related to assets shall be presented in the consolidated balance sheets either by recognizing the grant as deferred income (which is recognized in the consolidated statements of operations on a systematic basis over the useful life of the asset), or by deducting the grant in calculating the carrying amount of the asset (which is recognized in the consolidated statements of operations over the life of the depreciable asset as a reduced depreciation expense). Both methods are acceptable under IAS 20. The Company has elected to record grants related to assets as a deduction in calculating the carrying value of the asset. +Under IAS 20, grants related to income are presented as part of the consolidated statements of operations, either separately or under a general heading. Both methods are acceptable under IAS 20. The Company has elected to record grants related to income separately on the consolidated statements of operations as grant revenue. The related expenses are recorded within operating expenses. +Under ASC 958, grants related to income are presented as part of the consolidated statements of operations, either separately or under a general heading. Both methods are acceptable under ASC 958. The Company has elected to record grants related to income separately on the consolidated statements of operations as grant revenue. The related expenses are recorded within operating expenses. +RADx grant +On September 29, 2020, the Company entered into WP2 with the NIH under its RADx program. The contract, which had a total award value of $ 18.2 million, accelerated the continued development, scale-up, and deployment of the novel SARS-CoV-2 antigen detection test using the Company’s Simoa technology. The contract provided funding to expand assay kit manufacturing capacity and commercial deployment readiness. Release of the $ 18.2 million of funding under WP2 was based on the achievement of certain milestones. Contract funding was subject to achievement of these pre-defined milestones and the contract period ran through September 2021, with one milestone extended to March 31, 2022. The Company has received the full $ 18.2 million under WP2. During the year ended December 31, 2022, the Company recognized no grant revenue and incurred no research and development expense related to WP2. During the year ended December 31, 2021, the Company recognized $ 5.2 million in grant revenue and incurred $ 3.4 million in research and development expense related to WP2. During the year ended December 31, 2020, the Company recognized $ 4.4 million in grant revenue and incurred $ 2.6 million in research and development expense related to WP2. +The RADx Grant contains both monetary amounts granted related to assets and monetary amounts granted related to income, which are grants other than those related to assets. The grants related to assets are for the expansion and increase of manufacturing capacity. The grants related to income are for additional research and development, as well as other non-asset related scale up costs. +F-20 +Table of Contents +The following table summarizes the cumulative activity under the RADx Grant (in thousands): +December 31, 2022 +December 31, 2021 +December 31, 2020 +Total grant revenue from research and development activities +$ +9,576 +$ +9,576 +$ +4,362 +Total proceeds used for assets +8,624 +8,104 +826 +Total deferred proceeds for assets +— +— +2,478 +Total deferred grant revenue +— +— +304 +Total recognized +$ +18,200 +$ +17,680 +$ +7,970 +Total recognized +$ +18,200 +$ +17,680 +$ +7,970 +Total amount accrued +— +— +( 2,968 ) +Total cash received +$ +18,200 +$ +17,680 +$ +5,002 +Total proceeds received +$ +18,200 +$ +17,680 +$ +5,002 +Total proceeds reasonably assured +— +520 +13,198 +Total RADx Grant amount +$ +18,200 +$ +18,200 +$ +18,200 +ADDF +On March 24, 2022, the Company entered into a contract with the Alzheimer’s Drug Discovery Foundation (ADDF) (the ADDF Grant). ADDF is a charitable venture philanthropy entity that has granted the Company funding in support of certain activities for the development of an in vitro diagnostic (IVD) test for early detection of Alzheimer's disease. The ADDF Grant, which has a total funding value of $ 2.3 million, restricts the Company’s use of the granted funds to be used solely for activities related to the Alzheimer’s diagnostic test development project. Contract funding is subject to achievement of these pre-defined milestones and the contract period runs through June 2024. The Company recognizes revenue over time as the related services are performed. As of December 31, 2022, the Company had received $ 1.3 million of the total funding value of $ 2.3 million under the ADDF Grant. During the year ended December 31, 2022, the Company recognized $ 0.6 million in grant revenue and incurred $ 0.6 million in research and development expense related to the ADDF Grant. No such activities occurred in the years ended December 31, 2021 and 2020. +4. Allowance for credit losses +The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers’ trade accounts receivable. Due to the short-term nature of such receivables, the estimated accounts receivable that may not be collected is based on aging of the accounts receivable balances. +Customers are assessed for credit worthiness upfront through a credit review, which includes assessment based on the Company’s analysis of customers’ financial statements when a credit rating is not available. The Company evaluates contract terms and conditions, country, and political risk, and may require prepayment to mitigate risk of loss. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company monitors changes to the receivables balance on a timely basis, and balances are written off as they are determined to be uncollectable after all collection efforts have been exhausted. +Activity related to the allowance for credit losses was as follows (in thousands): +2022 +2021 +2020 +Balance at January 1 +$ +419 +$ +370 +$ +162 +Provision charges +752 +213 +493 +Deductions +( 1,053 ) +( 164 ) +( 285 ) +Balance at December 31 +$ +118 +$ +419 +$ +370 +F-21 +Table of Contents +5. Collaboration and license arrangements +The Company has entered into certain licenses with other companies for use of the Company’s technology. These licenses have royalty components which the Company earns and recognizes as collaboration and license revenue throughout the year. As of December 31, 2022 and 2021, the Company had $ 0.5 million of deferred revenue related to ongoing negotiations with a diagnostics company. +Abbott Laboratories +On September 29, 2020, the Company entered into a Non-Exclusive License Agreement (the Abbott License Agreement) with Abbott. Pursuant to the terms of the Abbott License Agreement, the Company granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under the Company’s bead-based single molecule detection patents (Licensed Patents) in the field of in vitro diagnostics. Abbott has paid the Company an initial license fee of $ 10.0 million in connection with the execution of the Abbott License Agreement, which was recognized as license revenue for the year ended December 31, 2020. Abbott has also agreed to pay the Company milestone fees subject to the achievement by Abbott of certain development, regulatory and commercialization milestones and low single-digit royalties on net sales of licensed products. +The Abbott License Agreement includes customary representations and warranties, covenants and indemnification obligations for a transaction of this nature. The Abbot License Agreement became effective upon signing and will continue until expiration of the last-to-expire Licensed Patent, or the agreement is earlier terminated. Under the terms of the Abbott License Agreement, the Company and Abbott each have the right to terminate the agreement for uncured material breach by, or insolvency of, the other party. Abbott may also terminate the Abbott License Agreement at any time without cause upon 60 days ’ notice. +During the years ended December 31, 2022 and 2021, the Company recognized no revenue, respectively, within collaboration and license revenue related to the initial license fee under the Abbott License Agreement. +6. Inventory +Inventory consists of the following (in thousands): +As of December 31, +2022 +2021 +Raw materials +$ +5,509 +$ +7,892 +Work in process +3,362 +4,923 +Finished goods +7,915 +9,375 +Total +$ +16,786 +$ +22,190 +Inventory comprises commercial instruments, assays, and the materials required to manufacture assays. +F-22 +Table of Contents +7. Property and equipment +Property and equipment consists of the following (in thousands): +As of December 31, +2022 +2021 +Laboratory and manufacturing equipment +$ +11,806 +$ +9,742 +Office furniture and equipment +1,798 +1,617 +Computers and software +3,831 +3,893 +Leasehold improvements +13,688 +10,413 +Total cost +$ +31,123 +$ +25,665 +Less: accumulated depreciation +( 10,961 ) +( 7,705 ) +Property and equipment, net +$ +20,162 +$ +17,960 +The Company incurred depreciation expense of $ 3.5 million, $ 2.8 million and $ 2.2 million for the years ended December 31, 2022, 2021, and 2020, respectively. The Company has instruments included in laboratory and manufacturing equipment, which are used internally by the Company. As of December 31, 2022, the laboratory and manufacturing equipment balance includes $ 7.5 million of cost and $ 3.2 million of accumulated depreciation related to these instruments. As of December 31, 2021, the laboratory and manufacturing equipment balance includes $ 3.9 million of cost and $ 1.5 million of accumulated depreciation related to these instruments. +For the year ended December 31, 2022, the Company recorded $ 4.3 million of impairment expense to leasehold improvements and other assets associated with the Bedford, Massachusetts leased office and laboratory space not being utilized by the Company. The Company decided not to utilize the space as part of the Restructuring Plan and intends to sublease the vacant space to recover a portion of the total cost. The Company’s decision to not utilize, and sublease, the leased asset triggered an impairment event. The impairment testing deemed all assets associated with the leased assets as one asset group. The impairment analysis evaluated the present value of net cash flows under the original lease and the estimated cash flows under the sublease to identify the impairment amount. The impairment assessment considered all industry and economic factors such as rental rates, interest rates and recent real estate activities to estimate the net cash flows analysis and impairment amount. +The Company recorded $ 1.1 million of impairment expense to Computers and software for the year ended December 31, 2022. A change in the scope of the intended use of these assets was considered to be the triggering event for the impairment assessment and expense. +No such impairment expenses were recognized for the years ended December 31, 2021 and 2020. +8. Other accrued expenses +Other accrued expenses consist of the following (in thousands): +As of December 31, +2022 +2021 +Royalties +$ +815 +$ +1,250 +Professional and outside services +1,409 +2,126 +Tax liabilities +172 +430 +Other +2,351 +2,680 +Total accrued expenses +$ +4,747 +$ +6,486 +F-23 +Table of Contents +9. Income taxes +The following table presents the components of loss before income taxes (in thousands): +Year Ended December 31, +2022 +2021 +2020 +United States +$ +( 89,590 ) +$ +( 56,554 ) +$ +( 29,896 ) +Foreign +( 7,045 ) +( 1,170 ) +( 2,010 ) +Total loss before income taxes +$ +( 96,635 ) +$ +( 57,724 ) +$ +( 31,906 ) +The following table summarizes income tax (expense) benefit (in thousands): +Year Ended December 31, +2022 +2021 +2020 +Current: +United States +Federal +$ +— +$ +— +$ +— +State +( 77 ) +( 30 ) +( 13 ) +Foreign +( 368 ) +( 342 ) +( 102 ) +Total current income tax provision +( 445 ) +( 372 ) +( 115 ) +Deferred +United States +Federal +10 +5 +( 8 ) +State +13 +( 6 ) +( 3 ) +Foreign +357 +409 +502 +Total deferred income tax benefit +380 +408 +491 +Total income tax (expense) benefit +$ +( 65 ) +$ +36 +$ +376 +A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: +Year Ended December 31, +2022 +2021 +2020 +Federal statutory income tax rate +21.0 +% +21.0 +% +21.0 +% +Foreign tax rate differential +— +% +— +% +0.30 +% +State taxes, net of federal benefit +2.7 +% +6.5 +% +2.5 +% +Tax credits +1.4 +% +2.0 +% +1.6 +% +Share-based compensation +( 2.5 ) +% +7.4 +% +5.2 +% +Permanent items +( 0.3 ) +% +( 1.8 ) +% +( 0.4 ) +% +Deferred tax rate change +— +% +0.2 +% +0.3 +% +Change in valuation allowance +( 20.8 ) +% +( 34.8 ) +% +( 29.7 ) +% +Impairment of goodwill +( 1.7 ) +% +— +% +— +% +Other +0.0 +% +( 0.4 ) +% +0.4 +% +Effective income tax rate +( 0.2 ) +% +0.1 +% +1.2 +% +The effective income tax rate differs from the U.S. federal statutory rate of 21.0 % primarily as a result of the valuation allowance maintained against the Company’s net deferred tax assets. +F-24 +Table of Contents +Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): +December 31, +2022 +2021 +Deferred tax assets: +Net operating loss carryforwards +$ +78,191 +$ +67,543 +Tax credits +7,407 +6,113 +Deferred revenue +2,385 +1,862 +Amortization +847 +962 +Stock-based compensation +2,773 +3,138 +Inventory +1,507 +686 +Capitalized R&D Costs +5,680 +— +Lease liability +10,856 +5,464 +Other deferred tax assets +1,370 +2,340 +Total deferred tax assets +111,016 +88,108 +Less: valuation allowances +( 103,243 ) +( 83,121 ) +Net deferred tax assets +7,773 +4,987 +Deferred tax liabilities: +Right-of-Use Assets +( 5,219 ) +( 2,867 ) +Depreciation +( 2,244 ) +( 1,752 ) +Amortization acquired intangibles +( 1,570 ) +( 2,208 ) +Goodwill +— +( 66 ) +Other deferred tax liabilities +( 209 ) +( 129 ) +Net deferred tax (liability) asset +$ +( 1,469 ) +$ +( 2,035 ) +The Company’s change in its valuation allowance account with respect to the deferred tax asset is as follows (in thousands): +2022 +2021 +Balance, beginning of year +$ +83,121 +$ +63,609 +Change in valuation allowance +20,122 +19,512 +Balance, end of year +$ +103,243 +$ +83,121 +The valuation allowance increased during the year ended December 31, 2022 primarily as a result of the U.S. operating losses incurred and research and development tax credit carryforwards generated during the year. +In determining the need for a valuation allowance, the Company has given consideration to the cumulative book income and loss positions of each of its entities as well as its worldwide cumulative book loss position. The Company has assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carryback net operating losses (NOLs), the existence of reversing taxable temporary differences, the availability of tax planning strategies, and forecasted future taxable income. At December 31, 2022, the Company maintains a full valuation allowance against its worldwide net deferred tax assets. +As of December 31, 2022, the Company had U.S. federal NOLs of approximately $ 309.7 million. U.S. federal NOLs generated through December 31, 2017 of approximately $ 108.5 million expire at various dates through 2037, and U.S. federal NOLs generated in the tax years beginning after December 31, 2017 of approximately $ 201.2 million do not expire. As of December 31, 2022, the Company had $ 207.4 million of state NOLs, approximately $ 197.4 million expire at various dates through 2042, and certain state NOLs of approximately $ 10.0 million do not expire. As of December 31, 2022, the Company had U.S. federal tax credit carryforwards of approximately $ 5.8 million that expire at various dates through 2042. As of December 31, 2022, the Company had U.S. state tax credit carryforwards of approximately $ 2.0 million that expire at various dates through 2037. +F-25 +Table of Contents +Under Sections 382 and 383 of the U.S. Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an ownership change generally occurs if there is a cumulative change in its ownership by 5 % stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under U.S. state tax laws. Under the Tax Cuts and Jobs Act of 2017 (TCJA), the use of federal NOLs arising in taxable years beginning after December 31, 2017 is limited to 80% of current year taxable income and NOLs arising in taxable years ending after December 31, 2017 may not be carried back (though any such NOLs may be carried forward indefinitely). +The Company may have experienced an ownership change in the past and may experience ownership changes in the future as a result of future transactions in its share capital, some of which may be outside of the control of the Company. As a result, if the Company earns net taxable income, its ability to use its pre-change NOLs, or other pre-change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to significant limitations. +The Company accounts for uncertain tax positions using a more likely than not threshold for recognizing uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on an ongoing basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. The Company accounts for interest and penalties related to uncertain tax positions as a component of its benefit (provision) for income taxes. For the years ended December 31, 2022, 2021, and 2020, the Company had no tax reserves accrued for uncertain tax positions and there were no accrued interest or penalties in the consolidated statements of operations. +The Company is subject to taxation in the United States as well as the Netherlands, Sweden, and China. At December 31, 2022, the Company is generally no longer subject to examination by taxing authorities in the United States for years prior to 2019. However, NOLs and tax credits in the United States may be subject to adjustments by taxing authorities in future years in which they are utilized. The Company’s foreign subsidiaries remain open to examination by taxing authorities from 2013 onward. +As of December 31, 2022, the Company’s foreign subsidiaries had immaterial undistributed earnings and the tax payable on the earnings that are indefinitely reinvested would be immaterial. +10. Stock-Based Compensation +Stock-based compensation +Stock-based compensation expense for all stock awards consists of the following (in thousands): +December 31, +2022 +2021 +2020 +Cost of product revenue +$ +608 +$ +471 +$ +189 +Cost of service and other revenue +819 +403 +311 +Research and development +1,639 +1,807 +1,129 +Selling, general, and administrative +12,376 +13,294 +8,470 +Total stock-based compensation +$ +15,442 +$ +15,975 +$ +10,099 +At December 31, 2022, there was $ 33.9 million of total unrecognized compensation cost related to unvested stock options and restricted stock units which is expected to be recognized over the remaining weighted-average vesting period of 2.9 years. +F-26 +Table of Contents +Stock-based compensation plans +In June 2007, the Company adopted the 2007 Stock Option and Grant Plan (the 2007 Plan), under which it could grant incentive stock options, non-qualified options, restricted stock, and stock grants. In connection with the completion of the Company’s IPO, the Company terminated the 2007 Plan. As of December 31, 2022, 207,464 shares were outstanding under the 2007 Plan, and no shares are available for future grant under the 2007 Plan. +In December 2017, the Company adopted the 2017 Employee, Director and Consultant Equity Incentive Plan (the 2017 Plan), under which it may grant incentive stock options, non-qualified stock options, restricted stock, and other stock-based awards. As of December 31, 2017, the 2017 Plan allowed for the issuance of up to 1,042,314 shares of common stock plus up to 2,490,290 shares of common stock represented by awards granted under the 2007 Plan that are forfeited, expired, or are cancelled without delivery of shares or which result in the forfeiture of shares of common stock back to the Company on or after the date the 2017 Plan became effective. As of December 31, 2022, 3,168,278 shares were outstanding and there were 1,847,643 shares available for grant under the 2017 Plan. +In addition, the 2017 Plan contains an “evergreen” provision, which allows for an annual increase in the number of shares of common stock available for issuance under the 2017 Plan on the first day of each fiscal year during the period beginning in fiscal year 2019 and ending in fiscal year 2027. The annual increase in the number of shares shall be equal to the lowest of: (i) 4 % of the number of shares of common stock outstanding as of such date and (ii) an amount determined by the Company’s Board of Directors or Compensation Committee. On January 3, 2023, the number of shares of common stock available for issuance under the 2017 plan was increased by 1,488,696 shares in accordance with the 2017 Plan’s evergreen provision. +In December 2017, the Company adopted the 2017 Employee Stock Purchase Plan (the 2017 ESPP). As of December 31, 2019, the 2017 ESPP allowed for the issuance of up to 612,572 shares of common stock. As of December 31, 2022, 1,447,467 shares were available for grant under the 2017 ESPP. +In addition, the 2017 ESPP contains an “evergreen” provision, which allows for an increase on the first day of each fiscal year beginning with fiscal year 2018. The increase in the number of shares shall be equal to the lowest of: (i) 1 % of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year and (ii) an amount determined by the Company’s Board of Directors or Compensation Committee. On January 3, 2023, the number of shares of common stock available for issuance under the 2017 ESPP was increased by 372,174 shares in accordance with the 2017 ESPP’s evergreen provision. +The 2017 ESPP provides for six-month option periods commencing on March 1 and ending August 31 and commencing September 1 and ending February 28 of each calendar year. +Stock options +Under the 2017 Plan, stock options may not be granted with exercise prices of less than fair market value on the date of the grant. Options generally vest ratably over a four-year period with 25 % vesting on the first anniversary and the remaining 75 % vesting ratably on a monthly basis over the remaining three years . These options expire ten years after the grant date. Option activity is as follows: +Weighted-average +Remaining +contractual +Aggregate intrinsic value +Options +exercise price +life (in years) +(in thousands) +Outstanding at December 31, 2021 +2,204,813 +$ +25.36 +6.8 +$ +44,813 +Granted +1,507,452 +$ +18.07 +Exercised +( 243,792 ) +$ +5.10 +Cancelled +( 1,280,825 ) +$ +28.63 +Outstanding at December 31, 2022 +2,187,648 +$ +20.69 +8.1 +4,273 +Exercisable at December 31, 2022 +820,868 +$ +22.92 +5.8 +1,566 +Vested and expected to vest at December 31, 2022 +2,187,648 +$ +20.69 +8.1 +4,273 +F-27 +Table of Contents +Restricted stock units +Restricted stock units (RSUs) represent the right to receive shares of common stock upon meeting specified vesting requirements. A summary of RSU activity is as follows: +Weighted-average +Weighted-average +Aggregate +grant date fair +remaining contractual +intrinsic value +Shares +value per share +life (in years) +(in thousands) +Unvested RSUs as of December 31, 2021 +529,871 +$ +49.32 +9.7 +$ +22,467 +Granted +1,273,807 +$ +18.32 +Vested +( 200,078 ) +$ +48.93 +Cancelled +( 415,506 ) +$ +34.94 +Unvested RSUs as of December 31, 2022 +1,188,094 +21.18 +9.6 +$ +16,455 +Expected to convert at December 31, 2022 +1,188,094 +$ +21.18 +$ +16,455 +11. Earnings (Loss) Per Share +The following table presents the computation of basic and diluted earnings per share: +Year Ended December 31, +2022 +2021 +2020 +(in thousands, except share and per share data) +Numerator: +Net loss attributable to Quanterix Corporation +($ 96,700 ) +($ 57,688 ) +($ 31,530 ) +Denominator: +Weighted average shares of common stock outstanding, basic and diluted +36,990,965 +35,997,473 +29,589,132 +Net loss per share attributable to Quanterix Corporation, basic and diluted +($ 2.61 ) +($ 1.60 ) +($ 1.07 ) +In periods when the Company is in a net loss position, dilutive securities are excluded from the computation of diluted earnings per share because their inclusion would have an anti-dilutive effect. Thus, basic net loss per share is the same as diluted net loss per share. The following common share equivalents have been excluded from the calculation of diluted net loss per share: +Year Ended December 31, +2022 +2021 +2020 +Unvested restricted common stock and restricted stock units +701,707 +531,473 +518,387 +Outstanding stock options +446,180 +2,304,543 +2,494,045 +Outstanding common stock warrants +— +— +10,000 +12. Leases +Bedford Lease +On January 28, 2022, the Company executed a lease for 85,800 square feet of office and laboratory space in Bedford, Massachusetts. The lease commencement date was February 1, 2022, when the Company gained access to the underlying facilities. The Company has negotiated a tenant improvement allowance with the landlord which will offset a portion of the Company’s construction costs. The Company has assessed whether improvements made to the premises are landlord-owned or company-owned, with payments made by the Company for landlord-owned assets accounted for as lease incentives. The initial term of the lease’s payment schedule is eight years and nine months beginning on May 1, 2022. The Company has the option to extend the lease for two additional five-year periods. +F-28 +Table of Contents +In applying the ASC 842 transition guidance, the Bedford Lease has been assessed as an operating lease and the Company recorded ROU assets of $ 18.2 million and lease liability of $ 23.7 million on the effective date. The difference between the ROU and the lease liability was driven by the lease obligation incentive of $ 5.5 million. +As part of the Restructuring Plan, the Company decided not to utilize these facilities as part of its own operations and intends to sublease the vacant space to recover a portion of the total cost. The Company’s decision to not utilize, and sublease, the leased asset triggered an impairment event. The impairment testing deemed all assets associated with the leased assets as one asset group. The impairment analysis evaluated the present value of net cash flows under the original lease and the estimated cash flows under the sublease to identify the impairment amount. The impairment assessment considered all industry and economic factors such as rental rates, interest rates and recent real estate activities to estimate the net cash flows analysis and impairment amount. +For the year ended December 31, 2022, the Company recorded an impairment of $ 12.0 million to the right-of-use assets related to the Bedford facilities. +No such impairment expenses were recognized for the years ended December 31, 2021 and 2020. +Summary of all lease costs recognized under ASC 842 +Total operating lease costs were $ 8.9 million, which includes $ 3.4 million of short term and variable lease costs for the year ended December 31, 2022. Total operating lease costs were $ 5.4 million and $ 4.8 million for the years ended December 31, 2021 and 2020, respectively. The fixed lease costs were $ 5.5 million, $ 5.4 million and $ 4.8 million for the years ended December 31, 2022, 2021 and 2020, respectively. Short-term lease costs and variable lease costs incurred by the Company for the years ended December 31, 2021 and 2020 were considered immaterial. +Refer to table below for additional information related to operating leases under ASC 842: +Year Ended December 31, +Operating leases (in thousands) +2022 +2021 +Supplemental balance sheet information: +Weighted average remaining lease term (years) +7.8 +8.6 +Weighted average discount rate +7.83 % +9.73 % +Supplemental cash flow information: +Operating cash flows used for operating leases +$ +6,539 +$ +3,388 +Future minimum commitments under ASC 842 under the Company’s operating leases in effect at December 31, 2022 were as follows: +Maturity of lease liabilities (in thousands) +As of December 31, 2022 +2023 +$ +6,707 +2024 +7,064 +2025 +7,228 +2026 +7,408 +2027 +7,641 +thereafter +23,621 +Total lease payments +$ +59,669 +Less: imputed interest and lease incentive reimbursements +15,565 +Total operating lease liabilities +$ +44,104 +F-29 +Table of Contents +13. Commitments and contingencies +Purchase Commitments +Stratec +During the year ended December 31, 2022, the Company entered into a supply agreement (the Stratec Supply Agreement) with Stratec Consumables GmBH (Stratec) to order discs used in manufacturing the Simoa HD-X instrument. As part of the Stratec Supply Agreement, the Company agreed to purchase a total of 375,000 discs to be shipped at various points starting in 2022 and continuing through 2024 at an agreed purchase price per disc. In 2022, under the Stratec Supply Agreement, Stratec shipped 75,000 discs to the Company. The Company recorded cost of product revenue related to this shipment of $ 0.5 million for the year ended December 31, 2022. No such activities existed for the years ended December 31, 2021 and 2020. Additionally, per the Stratec Supply Agreement, during the years ended December 31, 2023 and 2024, Stratec is required to ship 220,000 and 80,000 discs, respectively, to the Company. In the years ending December 31, 2023 and 2024, the Company expects to record cost of product revenue of $ 1.6 million and $ 0.6 million, respectively, related to those shipments. As of December 31, 2022, the Company also has $ 0.9 million of open purchase orders with Stratec. +Other Purchase Commitments +The Company purchases substantial amounts of raw materials for manufacturing operations under annual and multi-year agreements, some of which have minimum quantity requirements. Additionally, the Company enters into annual agreements for other parts of its operations. The Company has total purchase commitments for the year ended December 31, 2022, of $ 3.1 million, most of which the Company expects to incur in the year ending December 31, 2023. +License Agreements +Tufts University +In June 2007, the Company entered into a license agreement (the License Agreement) for certain intellectual property with Tufts University (Tufts). Tufts is a related party to the Company due to Tufts’ equity ownership in the Company and because a board member of the Company’s Board of Directors was affiliated with Tufts. The License Agreement, which was subsequently amended, is exclusive and sub-licensable, and will continue in effect on a country by country basis as long as there is a valid claim of a licensed patent in a country. The Company is committed to pay license and maintenance fees, prior to commercialization, in addition to low single digit royalties on direct sales and services and a royalty on sublicense income. During the years ended December 31, 2022, 2021, and 2020, the Company recorded royalty expense of $ 1.4 million, $ 1.6 million and $ 1.1 million, respectively, related to Tufts. This royalty expense is recorded in cost of product revenue on the consolidated statements of operations. During the year ended December 31, 2020, the Company incurred $ 1.0 million in cost of collaboration and license revenue owed to Tufts related to sublicensing certain technology and intellectual property to Abbott Laboratories (Abbott), refer to Note 5 for additional details. +Legal contingencies +The Company is subject to claims in the ordinary course of business; however, the Company is not currently a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results of its operations. The Company accrues for contingent liabilities to the extent that the liability is probable and estimable. +F-30 +Table of Contents +14. Restructuring and Other Charges +Following a strategic review and assessment of the Company’s operations and cost structure, on August 8, 2022, the Company announced a plan of restructuring and strategic re-alignment (the Restructuring Plan). As part of the Restructuring Plan, the Company began an assay redevelopment program with the ultimate objective of improving its ability to manufacture and deliver high-quality assays at scale. In accordance with the Restructuring Plan, the Company implemented a workforce reduction, which was substantially completed by the end of the third quarter of 2022. The Company recorded charges during the year ended December 31, 2022, consisting of one-time termination benefits for employee severance, benefits and related costs, all of which were cash expenditures. +The following shows the number of positions by function and by location eliminated in connection with the Restructuring Plan: +North America +EMEA +Asia Pacific +Total +Cost of goods sold +21 +— +— +21 +Research and development +34 +1 +— +35 +Selling, general and administrative +50 +9 +4 +63 +Total headcount +105 +10 +4 +119 +As part of the Restructuring Plan, the Company also performed an assessment of impairment for long-lived assets, including right-of-use assets, and recorded an impairment charge of $ 17.4 million. The impairment expense includes $ 16.3 million associated with the right-of-use and property and equipment at the Bedford facilities and $ 1.1 million for software costs related to projects that have been rationalized as part of the Restructuring Plan. Refer to Note 7 and Note 12 for further information. +The following table presents the restructuring reserve and provision activity for the year ended December 31, 2022 (in thousands): +Severance and Employee Benefit Costs +Other Restructuring Charges +Total +Balance at January 1, 2022 +$ +— +$ +— +$ +— +Charges +3,634 +121 +3,755 +Cash payments +( 3,288 ) +( 121 ) +( 3,409 ) +Foreign exchange +( 18 ) +— +( 18 ) +Balance at December 31, 2022 +$ +328 +$ +— +$ +328 +No such restructuring activities existed for the years ended December 31, 2021 and 2020. +15. Notes payable +Loan agreement +On April 14, 2014, the Company executed a loan agreement with a lender, as subsequently amended. As of December 31, 2021, there were no additional amounts available to borrow under the debt facility. The interest rate on the term loan was variable based on the greater of 8 % or 8 % plus the prime rate less 5.25 %. Interest was paid monthly beginning the month following the borrowing date. At loan inception and in connection with the amendments, the Company issued the lender warrants to purchase shares of stock. The loan agreement also contained prepayment penalties and an end of term charge. Fees incurred upon execution of the agreements, and the fair value of warrants on +F-31 +Table of Contents +the date of grant were accounted for as a reduction in the book value of debt and accreted through interest expense, using the effective interest rate method, over the term of the debt. Under the amended agreement, the Company was required to pay the loan principal in four equal installments starting July 1, 2021, with the final payment and end of term charge to be made on October 1, 2021. On October 1, 2021, the Company made the final principal payment, including end of term fees, of $ 2.0 million related to the loan agreement. +The Company has not executed any subsequent loan agreements and there were no outstanding loan balances during the year ended December 31, 2022. +16. Employee benefit plans +The Company sponsors a 401(k) savings plan for employees. The Company may make discretionary contributions for each 401(k) plan year. During the years ended December 31, 2022, 2021, and 2020, the Company made contributions of $ 1.2 million, $ 1.1 million, and $ 0.7 million, respectively. +17. Goodwill and intangible assets +During the third quarter of 2022, the Company identified certain indicators of impairment, including the significant decline in the Company’s stock price, actions taken under the Restructuring Plan and the reduction of forecasted sales and profitability. As a result, the Company performed an interim goodwill impairment test. It was determined that the Company’s goodwill was impaired as the carrying amount of the Company’s sole reporting unit exceeded the estimated fair value. The Company concluded that the entire goodwill balance was impaired and recognized a non-cash impairment charge during the third quarter of 2022. +The changes in the carrying amount of goodwill are as follows (in thousands): +Goodwill +Balance as of December 31, 2021 +$ +9,632 +Impairment losses +( 8,220 ) +Foreign exchange adjustments +( 1,412 ) +Balance as of December 31, 2022 +$ +— +Acquired intangible assets, principally originating from the acquisition of Uman, consist of the following (dollars in thousands): +December 31, 2022 +Estimated +Cumulative +Useful +Gross Carrying +Accumulated +Translation +Net Carrying +Weighted Average +Life (in years) +Value +Amortization +Adjustment +Value +Life R emaining (in years) +Know-how +8.5 +$ +13,000 +$ +( 4,763 ) +$ +( 1,433 ) +$ +6,804 +5.0 +Developed technology +7 +1,650 +( 1,458 ) +— +192 +2.1 +Customer relationships +8.5 - 10 +1,360 +( 938 ) +( 12 ) +410 +5.1 +Non-compete agreements +5.5 +340 +( 193 ) +( 37 ) +110 +2.0 +Trade names +3 +50 +( 50 ) +— +— +— +Total +$ +16,400 +$ +( 7,402 ) +$ +( 1,482 ) +$ +7,516 +F-32 +Table of Contents +December 31, 2021 +Estimated +Cumulative +Useful +Gross Carrying +Accumulated +Translation +Net Carrying +Weighted Average +Life (in years) +Value +Amortization +Adjustment +Value +Life R emaining (in years) +Know-how +8.5 +$ +13,000 +$ +( 3,825 ) +$ +241 +$ +9,416 +6.0 +Developed technology +7 +1,650 +( 1,277 ) +— +373 +3.1 +Customer relationships +8.5 - 10 +1,360 +( 792 ) +2 +570 +6.1 +Non-compete agreements +5.5 +340 +( 170 ) +5 +175 +3.0 +Trade names +3 +50 +( 50 ) +— +- +— +Total +$ +16,400 +$ +( 6,114 ) +$ +248 +$ +10,534 +The Company recorded amortization expense of $ 1.8 million, $ 2.0 million, and $ 2.1 million for the years ended December 31, 2022, 2021, and 2020, respectively. Amortization of developed technology is recorded within research and development expenses, amortization of customer relationships is recorded within selling, general, and administrative expenses, amortization of trade names is recorded within selling, general, and administrative expenses, amortization of non-compete agreements is recorded within selling, general, and administrative expenses, and amortization of know-how is recorded within cost of goods sold. +Future estimated amortization expense of acquired intangible assets as of December 31, 2022 is as follows (amounts in thousands): +As of December 31, 2022 +2023 +$ +1,665 +2024 +1,584 +2025 +1,447 +2026 +1,420 +2027 +1,398 +Thereafter +2 +Total amortization expense +$ +7,516 +18. Related party transactions +As described in Note 13, in June 2007, the Company entered into a license agreement for certain intellectual property with Tufts. Tufts is a related party to the Company due to Tufts’ equity ownership in the Company and because one of the Company’s directors was affiliated with Tufts. During the years ended December 31, 2022, 2021, and 2020, the Company recorded royalty expense of $ 1.4 million, $ 1.6 million and $ 1.1 million, respectively, related to Tufts. This royalty expense is recorded in cost of product revenue on the consolidated statements of operations. During the year ended December 31, 2020, the Company also incurred $ 1.0 million in cost of collaboration and license revenue owed to Tufts related to sublicensing certain technology and intellectual property to Abbott, refer to 5 for additional details. +One of the Company’s directors is affiliated with Harvard University and Mass General Brigham. Revenue recorded from sales to Harvard University and its affiliates and to Mass General Brigham and its affiliates totaled $ 0.7 million, $ 0.2 million, $ 0.1 million for the years ended December 31, 2022, 2021, and 2020 respectively. The Company recorded cost of goods sold of $ 0.1 million for the year ended December 31, 2022 related to Harvard University and its affiliates and to Mass General Brigham and its affiliates, with immaterial cost of goods sold recorded for years ended December 31, 2021 and 2020. The Company also incurred research and development expenses of $ 0.6 million with Harvard University and its affiliates for the year ended December 31, 2022, with immaterial research and development expenses incurred for years ended December 31, 2021 and 2020. The Company had $ 0.1 million and $ 0.2 million in accounts receivable from Harvard University and its affiliates and Mass General Brigham and its affiliates at December 31, 2022 and 2021, respectively. Deferred revenue from Harvard University and its affiliates and Mass General Brigham and its affiliates was $ 0.1 million at both December 31, 2022 and 2021. +On May 26, 2022, the Company entered into an agreement (the UltraDx Agreement) with UltraDx Limited (UltraDx), a new company formed by ARCH Venture Partners (ARCH). Under the UltraDx Agreement, the Company +F-33 +Table of Contents +will supply HD-X instruments (both fully assembled and disassembled) as well as assays and assay components to UltraDx, and UltraDx has the non-exclusive right to seek Chinese regulatory approval of and to commercialize the HD-X instrument and related assays in the Chinese neurological in vitro diagnostic market. The Company has determined that UltraDx is a related party because one of the Company’s directors is affiliated with ARCH and UltraDx. Under the terms of the UltraDx Agreement, the Company shipped a total of ten fully assembled and disassembled HD-X instruments to UltraDx on June 30, 2022 at a purchase price of approximately $ 1.9 million. The Company recognized revenue on these shipments upon receipt of payment during the year ended December 31, 2022. No such activities occurred in the years ended December 31, 2021 and 2020. +F-34 \ No newline at end of file diff --git a/raw/filings/0001503274/2022/0001558370-23-002855/filing_metadata.csv b/raw/filings/0001503274/2022/0001558370-23-002855/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..800fa39584914f4e407790de22340cab08c7d62d --- /dev/null +++ b/raw/filings/0001503274/2022/0001558370-23-002855/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001503274,QTRX,Quanterix Corp,10-K,2023-03-06,2022-12-31,2023-03-06T14:16:33.000Z,0001558370-23-002855,tmb-20221231x10k.htm,10-K,13069678,1,1,https://www.sec.gov/Archives/edgar/data/1503274/000155837023002855/tmb-20221231x10k.htm,https://www.sec.gov/Archives/edgar/data/1503274/000155837023002855/,2022,2022,1 diff --git a/raw/filings/0001503274/2022/0001558370-23-002855/item1.txt b/raw/filings/0001503274/2022/0001558370-23-002855/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..effa3af4d3fca4f9bc488fbfd0674a5cf96ab06c --- /dev/null +++ b/raw/filings/0001503274/2022/0001558370-23-002855/item1.txt @@ -0,0 +1,461 @@ +Item 1. BUSINESS +Overview +We are a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology. Our Simoa bead-based and planar array platforms enable customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies, and also allow researchers to define and validate the function of novel protein biomarkers that are only present in very low concentrations. These capabilities provide our customers with insight into the role of protein biomarkers in human health that has not been possible with other existing technologies and enable researchers to unlock unique insights into the continuum between health and disease. We believe this greater insight will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +We believe that our Simoa platforms are among the most sensitive commercially available multiplex protein detection platforms and significantly advance enzyme-linked immunosorbent assay (ELISA) technology, which has been the industry standard for protein detection for over 45 years. Proteins are complex molecules that are required for the structure, function and regulation of the body’s tissues and organs, and are the functional units that carry out specific tasks in every cell. The human body contains approximately 20,000 genes, each of which can produce multiple proteins. It is estimated that these 20,000 genes can produce over 100,000 different proteins, of which 10,000 – 15,000 are estimated to be secreted in blood. Proteins are considered to be the best analytes – providing the most real-time picture of disease, and researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. We believe that Simoa’s sensitivity offers a new way to monitor healthy individuals and detect proteins associated with nascent disease or injury early in the disease cascade, which holds the key to intervention before disease or injury has advanced to the point where more significant clinical signs and symptoms have appeared. +Our Simoa platforms have achieved significant scientific validation and commercial adoption. Simoa technology has been cited in over 2,000 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease and inflammation. Our growing customer base is comprised of over 1,300 customers across our end markets. +Restructuring and Strategic Re-Alignment +Following a strategic review and assessment of our operations and cost structure, in the third quarter of 2022 we announced a plan of restructuring and strategic re-alignment (the Restructuring Plan). As part of this plan, we began an assay redevelopment program with the ultimate objective of improving our ability to manufacture and deliver high-quality assays at scale. The Restructuring Plan aligns our investments to best serve the needs of customers, focuses innovation efforts on key platforms and provides the foundation for our entry into translational pharma and clinical markets, which we believe will be required to access new growth categories. The Restructuring Plan included the elimination of 119 positions and other cost-saving measures. The workforce reduction was substantially completed by the end of the third quarter of 2022. +Our Products and Services +Our proprietary Simoa technology is based on traditional ELISA technology, which has been the most widely used method of detection of proteins for over 45 years. Given our target customers’ familiarity with the core ELISA +1 +Table of Contents +technology, we believe this offers us a significant competitive advantage. Our Simoa bead-based platform differs, however, from conventional ELISA in its ability to trap single molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells, allowing for an analysis and digital readout of each individual molecule, which is not possible with conventional ELISA technology. Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we have also developed a planar array technology to provide sensitivity similar to that found in our Simoa bead-based platform. We currently offer the following three Simoa instruments, which we believe are among the most sensitive multiplex protein detection platforms commercially available today: +● HD-X : We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument, which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. +● SR-X : We commercially launched our SR-X instrument in December 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point, more flexible assay preparation, and a wider range of potential applications. +● SP-X : We commercially launched our SP-X instrument in April 2019. The SP-X is based on our Simoa planar array technology, which allows for significantly greater multiplexing capabilities, and is, we believe, ideal for oncology and immunology applications. +The current menu of approximately 36 analyte-specific single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology, oncology and cardiology for both human and mouse samples. The current menu of Simoa planar array reagent kits includes approximately 115 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. In addition, both the bead-based platform and the planar array platform allow ease and flexibility in assay design, enabling our customers to develop their own in-house assays, called “homebrew” assays. +We also provide contract research services for customers through our CLIA- certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology and supports multiple projects and services, including sample testing, homebrew assay development and custom assay development. To date, we have completed over 1,900 projects for more than 400 customers from all over the world using our Simoa platforms. We have recently begun offering laboratory developed tests (LDTs) through the Accelerator Laboratory. LDTs are diagnostic tests that are developed, validated and performed by a single laboratory. In July 2022, we launched an LDT to quantitatively measure phospho-Tau 181 (pTau-181) in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure neurofilament light chain (NfL) in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +In August 2019, we acquired UmanDiagnostics AB (Uman), a company located in Umeå, Sweden, that commercializes proprietary NfL antibodies and NfL ELISA kits. Uman’s NfL antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies world-wide as the premier solution for the detection of NfL to advance the development of therapeutics and diagnostics for certain neurodegenerative conditions. Since we commercially launched the first assay that could reliably measure NfL in blood using Uman’s antibodies and our Simoa technology in 2017, NfL has seen dramatic growth as a neurological biomarker. The Uman acquisition secured the NfL antibody supply critical to our industry-leading ultrasensitive Simoa NfL assays and services and provides us with additional revenue via the sale of the NfL antibodies and NfL ELISA kits. +We sell our instruments, consumables and services to the life science, pharmaceutical and diagnostics industries through a direct sales force and support organizations in North America and Europe and through distributors or sales agents in select markets. In addition, we sell Uman’s NfL antibodies and NfL ELISA kits directly and in conjunction with a distributor worldwide. We have an extensive base of customers in world class academic and governmental +2 +Table of Contents +research institutions, as well as pharmaceutical, biotechnology and contract research companies, using our technology to gather information to better understand human health. +Our Competitive Strengths +We believe that our competitive strengths include the following: +● Proprietary ultra-sensitive Simoa digital immunoassay technology platforms. We believe our Simoa platforms are among the most sensitive, commercially available protein detection platforms, and can detect and quantify proteins of clinical interest that are undetectable using conventional, analog immunoassay technologies. This sensitivity allows researchers to measure critical protein biomarkers at earlier stages in the progression of a disease or injury, which we believe will enable the development of novel therapies and diagnostics and facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. The sensitivity of our Simoa technology also allows researchers to gather biomarker information from smaller samples that can be collected less invasively than samples required by other assay technologies. +● Technology platforms that leverage and improve upon industry standard ELISA technology. Simoa uses the basic principles of conventional bead-based ELISA immunoassay technology, which has been the most widely used method of detection of proteins for over 45 years. Adding digital capability to this industry standard platform has resulted in expanded capabilities and improved performance. Given our target customers’ familiarity with the core ELISA technology, our Simoa platforms are easily integrated with existing customer workflows including data analysis. +● Deep and expanding scientific validation and customer base. Our Simoa technology has been cited in over 2,000 publications to date, including JAMA Neurology and Nature , and is becoming a vital tool in cutting edge life sciences research. We have established relationships with key opinion leaders, and our growing base of over 1,300 customers includes some of the world’s leading academic and government research institutions and many of the world’s largest biopharmaceutical companies. +● Leading position in market solidified by robust customization capabilities, assay design flexibility and automation of our HD-X instrument. Our technical capabilities and expertise allow our customers to design high-quality, customized assays utilizing our Simoa platforms. The needs of our customers vary widely, and the flexibility of the Simoa detection technology utilized across both our bead-based and planar array platforms allows us to provide innovative, low cost solutions for customers in multiple markets across various applications. In addition, the HD-X instrument provides fully automated analysis from sample introduction to analytical results, and our proprietary approach to ELISA digitization enables rapid digital data acquisition and assay results. This automation and speed provides customers high research and development productivity through greater throughput and lab efficiency. +● Business model that leverages growing installed base of instruments. Our installed instrument base increased to 876 instruments as of December 31, 2022. The integration of our technology into our customers’ projects provides ongoing sales of assays and consumables, and as we continue to grow our installed instrument base, optimize workflows and expand our assay menu, we expect to increase our revenues derived from consumables. +● Our highly experienced senior management team. We are led by a dedicated and highly experienced senior management team with significant industry experience. +Our Strategy +Our goal is to enable new research into biomarkers to allow greater insight into their role in human health in ways that have not been possible with any other current research and diagnostic technology. We believe this greater +3 +Table of Contents +insight will facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +Our strategy to achieve this includes: +● Focus on the highly attractive, expanding market for protein detection and analysis. Our focus on the detection of protein biomarkers is driven by a growing understanding of the essential role and impact of proteins on human health. While genomic research provides valuable information about the role of genes in health and disease, proteins are both more prevalent than nucleic acids and, we believe, more relevant to a precise understanding of the nuanced continuum between health and disease. Protein measurement goes beyond genetic predisposition, indicating the impact of a range of influences on health, including environmental factors and lifestyle, providing deeper and more relevant insight into what is happening in a person’s body in real time. Our technology provides a unique bridge between understanding the human genotype and phenotype, which we believe addresses a large unmet need in life science research, translational medicine and diagnostic and drug development. +● Continue to drive adoption of our Simoa technology in the life science research/pharma market. We believe our Simoa technology has the potential to significantly expand the life science research market because of its unrivaled sensitivity, in particular by enabling researchers to perform studies on protein biomarkers that they were previously unable to perform. We also believe that our Simoa technology is uniquely positioned for use by pharmaceutical companies in drug trials as biomarkers are being increasingly used as an adjunct to help increase the potential of regulatory approval. We have focused initially on these markets because we believe there is reduced regulatory and reimbursement risk for us in these markets. +● Expand our presence in the diagnostics market. We believe Simoa technology has the capability to enable the development of a new category of less-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. In July 2022, we launched an LDT to quantitatively measure pTau-181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure neurofilament light chain (NfL) in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +● Leverage the growing importance of neurological biomarkers to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of neurological biomarkers, such as NfL, pTau-181 and pTau-217, has increased significantly in recent years, and our ultra-sensitive Simoa platforms have allowed research of neurological disorders, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly. Neuro biomarkers, such as NfL, pTau-217 and pTau-181, have shown increasing relevance in neurological research and drug development. In 2021, Eli Lilly and Company (Lilly) presented new data from its Phase 2 TRAILBLAZER-ALZ study of its Alzheimer’s disease drug candidate donanemab, which employed our ultra-sensitive Simoa technology to measure plasma pTau-217, using antibodies developed by Lilly. Lilly reported a significant reduction in blood levels of phosphorylated Tau protein after treatment with donanemab, and that a reduction in plasma pTau-217 levels correlated with the slowing of cognitive decline. In November 2022, Eisai Co., Ltd. and Biogen Corporation presented results from the Phase 3 clinical trial (Clarity AD) of lecanemab, an investigational drug aimed at slowing the progression of cognitive decline caused by Alzheimer’s disease. Target engagement and activity of the drug in downstream processes was explored with a panel of fluid biomarkers, including plasma pTau-181, glial fibrillary acidic protein (GFAP) and NfL using Quanterix’s ultrasensitive Simoa assay kits We believe that the use of biomarkers in clinical trials for neurological conditions is becoming increasingly important. With Simoa’s sensitivity and its ability to detect many neurological biomarkers in blood and plasma that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. +4 +Table of Contents +● Expand further into indications beyond neurology. Because the blood-brain barrier severely restricts the movement of proteins and other substances into blood circulation, we believe that our ultra-sensitive Simoa platforms are particularly well suited for neurology indications. We also believe, however, that the ability of our Simoa technology to detect and quantify low abundance proteins is a distinct advantage in detecting disease earlier in other indications, including oncology, cardiology, infectious disease and inflammation, and there are nearly 700 scientific publications using our Simoa technologies in these non-neurology indications. We intend to expand further into these markets, with a particular focus on oncology. +Industry Background +We intend to pursue the application of our Simoa technology to the life science research/pharma and diagnostics markets. Our initial commercial strategy has targeted the large and growing life science research/pharma markets, and we believe that the diagnostics market represents a significant commercial opportunity for Simoa. Based on industry estimates, we believe the aggregate commercial opportunity across these markets is approximately $75 billion. +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. They are complex molecules that organisms require for the structure, function and regulation of the body’s tissues and organs. For example, proteins provide immune protection, generate movement, transmit nerve impulses and control cell growth and differentiation. Understanding an organism’s proteome, the complete set of proteins and their expression levels, can provide a powerful and unique window into its health, a window that other types of research, such as genomics, cannot provide. +The human body contains approximately 20,000 genes. One of the core functions of genes, which are comprised of DNA, is to regulate protein production—which ones are produced, the volume of each, and for how long—influenced by both biological and environmental factors. These 20,000 genes help govern the expression of over 100,000 proteins, of which 10,000 – 15,000 are estimated to be secreted in blood, the majority of which cannot be consistently detected in healthy individuals using conventional immunoassay technologies. Accordingly, the study of much of the proteome has not been practical given the limited level of sensitivity of existing technologies. +Much like the sequencing of the human genome with the Human Genome Project and the development of both polymerase chain reaction (PCR) and next generation sequencing technologies to detect nucleic acids, both of which accelerated biomedical genomic research, we believe the ability to study more of the proteome enabled by our more sensitive protein detection technology will have a profound impact on proteomic research. With our ultra-sensitive Simoa detection technology, researchers can assess the symptoms of disease or injury and compare them to the presence and levels of relevant proteins that are not detectable using conventional technologies, leading to a better understanding of how proteins individually and/or collectively impact and influence important biological processes and the health and well-being of individuals. We believe this research into understanding the individual characteristics and functioning of proteins will be central to earlier detection, monitoring, prognosis and, ultimately, prevention by providing researchers with the ability to assess the impact of particular proteins on the progress of disease and injury from the time of early onset of symptoms. +Existing Technologies and Their Limitations +Protein Analysis +ELISA has been the most widely used method of sensitive detection of proteins for over 45 years. In simple terms, in ELISA, an unknown amount of antigen (e.g., protein, peptide, antibody, hormone) is affixed to a solid surface, usually a polystyrene multiwell plate, either directly, or indirectly through use of a conjugated secondary or “capture” antibody (sandwich ELISA). A specific “detection” antibody is applied over the surface to bind to the antigen. This detection antibody is linked to an enzyme, and in the final step, a substance called an enzyme substrate is added, and the +5 +Table of Contents +enzyme converts to colored or fluorescent product molecules, which are detected by a plate reader. Sandwich ELISA is depicted in the graphic below: +Aside from ELISA, there are other technologies available for protein analysis today, such as Western blotting, mass spectrometry, chromatography, surface plasmon resonance, Raman-enhanced signal detection, immuno-PCR, and biobarcode assay. However, the proteins detectable by these conventional, analog immunoassay technologies represent a mere fraction of the 10,000-15,000 secreted proteins in circulation in human blood. While a number of techniques have been used to attempt to increase sensitivity of detection, we believe all of these approaches have limitations, including: +● dilution of colored or fluorescent product molecules due to large volume of liquid in traditional-sized wells, limiting sensitivity; +● narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +● low detection limit of readers restricts sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +● limited success in increasing sensitivity of detection due to procedural complexity and length. +Genomic Analysis +Over the past few decades, scientists have developed a variety of genomic analysis methods to measure an increasing number of genomic biomarkers aimed at detecting diseases. The most widely used method for genetic testing is PCR, which involves amplifying, or generating billions of copies of, the DNA sequence in question and then detecting the DNA with the use of fluorescent dyes. PCR is used to amplify the nucleic acid through the use of enzymes and repeated heating and cooling cycles, with fluorescent dyes incorporated during each amplification cycle. The expression of the nucleic acid is then inferred based on the number of amplification cycles required for the target to become detectable. PCR is sometimes referred to as an analog technology because the number of cycles of amplification, rather than a direct measure, is used to infer the level of gene expression. The wide availability of PCR chemistry makes it a popular approach for measuring the expression of nucleic acids, but the use of enzymes in numerous cycles of amplification can introduce distortion and bias into the data, potentially compromising the reliability of results, particularly at low concentrations. +6 +Table of Contents +Our Simoa Technology +Our Simoa technology significantly advances conventional sandwich ELISA technology and is capable of unprecedented protein detection sensitivity. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity that was not previously possible. +Our Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. The following chart describes the steps through which our Simoa bead-based technology detects proteins: +Simoa Bead-Based Analytic Process +Sample Preparation of ELISA Sandwich +Simoa bead-based technology uses beads coated with capture antibodies that bind specifically to the protein being measured. After an enzyme-linked detection antibody binds to the protein, the enzyme substrate is added (as depicted by the white star in the graphic on the left). The enzyme associated with the enzyme-linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to become fluorescent (as depicted by the change in color of the star in the graphic). +Injection of Bead/Substrate Solution into Simoa Disk +This mixture of beads and enzyme substrate is then injected into our proprietary Simoa disk, which contains 24 arrays of microwells arranged radially. Each 3 × 4 millimeter array contains approximately 239,000 microwells, each of which is large enough to accommodate only a single bead. +7 +Table of Contents +Bead/Substrate Solution Settles and Wells are Sealed +The bead/substrate solution is drawn across the array and the beads settle by gravity onto the surface of the array, and a fraction of them fall into the microwells. The remainder lie on the surface, and oil is introduced into the channel to displace the substrate solution and excess beads, and to seal the wells. +Simoa Readout +The entire array is then imaged using ultrasensitive digital imaging, and the sealed wells that contain beads associated with captured and enzyme labeled protein molecules are identified. +The ability to multiplex, or simultaneously measure multiple proteins (or other biomarkers) in a single assay, can be important to researchers to maximize the biological information from a sample and to develop more specific diagnostic tests. However, one of the main issues with multiplexing can be the loss of sensitivity. Our Simoa platforms maintain single plex precision, while competitive platforms lose sensitivity when multiplexing is used. Multiplexing is achieved with our Simoa bead- based technology by using beads labeled with different fluorescent dyes specific to the biomarker being analyzed. After the assay is run, the array of microwells is imaged across the wavelengths of the different labeled beads. The results are measured for each protein captured by each of the different beads. In 2017, we commercially launched a Simoa neurology 4-plex assay (NfL, tau, GFAP and UCH- L1) for the study of neurodegenerative conditions and traumatic brain injury. In 2020, we introduced a Simoa 4-plex assay (Aβ40, Aβ42, GFAP, NfL) designed to measure key biomarkers of Alzheimer’s disease and related disorders. Whereas other assay technologies require CSF to detect all four of these markers, or are limited to only single-plex measurement in serum and plasma, due to Simoa’s sensitivity, we believe this is the only assay that can detect all of these biomarkers directly from serum and plasma samples in a multiplex assay format. This is a significant advantage in terms of ease of use, patient comfort, speed and cost-effectiveness. While we have demonstrated the ability to identify and differentiate up to 35 different bead subpopulations on the HD-X, which is a prerequisite to our ability to develop assays with the capacity to detect an equivalent number of proteins in a single sample, we believe that the ability to multiplex at high levels and maintain single-plex sensitivity and precision is currently limited using bead-based technology due to constraints in the number of bead- containing wells for each plex that are imaged on the Simoa disk. However, our bead-based assay technology was used by researchers to demonstrate a novel workflow to expand multiplexing through a process of sequential incubation steps. We plan to explore this and other methods to potentially expand the multiplexing capabilities of our Simoa assay technology to enable plexing of 10-20 plex over the next several years. +8 +Table of Contents +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA and require two antibodies: one for capture, which is applied to the beads, and one for detection. Unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. The following chart describes the steps through which our Simoa planar array technology detects proteins: +Simoa Planar Array Analytic Process +A) Analyte-specific capture antibodies are printed in microspots (100 microns) in a circular pattern in the bottom of a 96-well microtiter plate. Each microspot contains capture antibodies that are specific for different analytes. Up to 12 spatially resolved microspots can be printed in each well. +B) Samples are added to the plate and incubated with a benchtop plate shaker to bind the target analyte molecules to the microspots. Unbound molecules are removed by washing the plate with a benchtop plate washer or manual wash manifold. +C) A mixture of biotinylated detection antibodies are added to the plate to form the antibody sandwich. Excess detection antibodies are removed by washing. +D) Streptavidin-HRP (horseradish peroxidase enzyme) conjugated is added to the plate to bind to the biotin groups forming the complete immunocomplex followed by a washing step. +E) A high-sensitivity chemiluminescent substate reagent is added to each well. The enzyme associated with the enzyme linked detection antibody then reacts with the enzyme substrate causing the enzyme substrate to emit light. +F) The plate is placed into the Quanterix SP-X imaging system. A scientific-grade CCD camera images the entire plate and all micro-spots simultaneously. The low background of the plate surface and the high-sensitivity of the camera enable detection of very low levels of light with a high dynamic range. The imaging software utilizes algorithms to optimize exposure time +9 +Table of Contents +and combine multiple images in the image analysis. Protein concentrations are determined by comparing the intensity of microspots to known analytical standards. +Below is an image of a 96-well Simoa planar array plate containing 12 microspots. Each microspot represents a different analyte measured in each sample well. +We believe the Simoa planar array technology is well-suited for researchers who value the ability to measure critical immunomodulatory biomarkers in patient serum and plasma with ultra-sensitive detection in a multiplex assay format. The figure below demonstrates 10-plex detection of key cytokines in human serum from normal healthy donors with corresponding assay Limit of Detection (LoD) listed in femtogram per ml. +Nucleic Acid Testing +Our initial focus has been on the use of Simoa technology to detect protein biomarkers. However, our Simoa bead-based technology has also been used to detect nucleic acids in biological samples. While methods for measuring nucleic acid molecules have advanced substantially, currently available techniques still have drawbacks. For example, PCR is a sensitive method that is widely used for measuring gene expression. However, PCR carries the potential for data distortion and bias from the repeated addition of enzymes, and heating and cooling cycles needed to amplify a copy of the nucleic acid being measured. In nucleic acid analysis, we believe that Simoa has the potential to provide the same sensitivity as traditional PCR-based assays with the following benefits: +● no need for amplification of the targeted nucleic acid, which can result in amplification distortion and bias; +● reduced cross-contamination because of direct detection of single molecules vs. the detection of a large number of copies of the nucleic acid; and +● the ability to detect some samples without requiring purification of the nucleic acid, such as in environmental water or serum samples. +10 +Table of Contents +For detection of nucleic acids with our Simoa bead-based technology, instead of coating the beads with capture antibodies as is done for detecting proteins, the beads are coated with nucleic acid capture probes. Samples with the target nucleic acid molecules are then added and are captured by the beads. Nucleic acid detection probes (instead of detection antibodies) are then added and attach to the target nucleic acid molecules which are then labeled using an enzyme substrate that is detected and counted using the Simoa disk and instrument. +Our Market Opportunities +Our commercial strategy is to pursue the application of our Simoa technology to the life science research/pharma and diagnostics markets. +Life Science Research/Pharma Markets +We have initially targeted the large and growing life science research and pharma markets. We have chosen these markets to target initially because of the reduced regulatory and reimbursement risk. We believe our Simoa platforms are well-positioned to capture a significant share of these markets because of superior sensitivity, automated workflow capabilities, multiplexing and the ability to work with a broader range of sample types. +Proteomics, the study of the proteins produced by the body, is important to understanding disease, and researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. Simoa technology provides researchers the ability to see the nuanced continuum of health to disease more efficiently and effectively than any other technology commercially available today, offering the potential for the first time to better understand the onset of disease cascades and catalyzing a new era of medical and life science research, drug discovery and disease prevention. +In addition, as pharmaceutical companies look for ways to more efficiently and effectively develop and obtain regulatory approval for drugs, use of biomarkers in clinical drug trials is becoming more prevalent. Biomarkers are increasingly being used as clinical endpoints in clinical trials. Drug developers can also use diagnostics to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. In addition, researchers can also use Simoa to monitor a drug candidate’s unwanted effect on “off-target” biomarkers and predict side effects, addressing the significant issue of drug toxicity, which is a leading cause of death in the United States. With Simoa’s sensitivity and its ability to detect many biomarkers in blood, plasma and other non-invasive samples that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity. +Based on industry estimates, we believe the proteomics life science research/pharma total addressable market is approximately $20 billion. +Diagnostics +The diagnostic market represents a significant commercial opportunity for our Simoa technology as well. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non-invasive +11 +Table of Contents +diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +Simoa technology also has significant potential in the emerging field of screening and diagnostics. A screen, aid to diagnostic, or diagnostic test is a biomarker test that is specifically linked to a therapeutic drug that can help predict how a patient will respond to the drug. Drug developers can use these tests to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. Such tests have demonstrated the ability to both improve the probability of approval and accelerate approval of new drugs. Not only could Simoa be used to develop tests to stratify patients in clinical trials and for treatment, but Simoa’s sensitivity can also enable the development of tests based on protein biomarkers that can actively and regularly monitor whether an approved drug is having the desired biological effect. This would quickly and efficiently enable doctors to adjust the course of treatment as appropriate by increasing or decreasing dosages or even switching therapies. +The ability of our Simoa platforms to detect and quantify normal physiological levels of low abundance proteins that are undetectable using conventional, analog immunoassay technologies could enable our technology to be used to monitor protein biomarker levels of seemingly healthy, asymptomatic people, and potentially to signal and provide earlier detection of the onset of disease. This has the potential to facilitate a paradigm shift in healthcare, from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis and, ultimately, prevention. +We recently launched our first diagnostic LDTs in our Accelerator Laboratory. In July 2022, we launched an LDT to quantitatively measure pTau-181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +There has also been significant interest from third parties to use our technology to develop applications for the diagnostic market. Following our acquisition of Uman, we entered into a licensing and supply arrangement with Siemens Healthineers for access to Uman’s proprietary NfL antibodies, which will allow Siemens to begin developing blood-based NfL clinical diagnostic tests for future commercialization. Additionally, in September 2020, we entered into a non-exclusive License Agreement with Abbott Laboratories, pursuant to which we granted Abbott a non-exclusive, worldwide, royalty-bearing license under our bead-based single molecule detection patents for IVD use. +Based on industry estimates, we believe the proteomics diagnostic total addressable market is approximately $55 billion. +See “Government Regulation” and “Risk Factors—Risks Related to Governmental Regulation and Diagnostic Product Reimbursement” for a discussion regarding the regulatory approvals that may be required for use of our products for diagnostic purposes, and related risks. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses, including neurology and oncology, as well as cardiology, infectious disease and inflammation. +Neurology +We believe that the ability of our Simoa technology to detect neurological biomarkers in blood at ultra-low levels, which have traditionally only been detectable in CSF, has the potential to rapidly advance neurology research and drug development, and transform the way brain diseases and injuries are diagnosed and treated. Prior to the launch of our pTau-181 LDT for clinical use in July 2022, the brain was the only organ in the body for which there was not a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either brain imaging or a spinal tap to collect CSF, both of which are costly +12 +Table of Contents +and highly invasive for the patient. The sensitivity of the Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood-brain barrier and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of many these neural biomarkers in the blood can be so low that they are difficult to detect by conventional, analog immunoassay technologies. +To date, there have been over 1,400 neurology-related scientific publications using our Simoa technologies, and we believe that ultra-sensitive digital detection of neural-related biomarkers in the blood is becoming an essential research and development tool for an increasing range of neurological disorders, including Alzheimer’s disease, multiple sclerosis, frontotemporal dementia, Parkinson’s disease, and traumatic brain injury (TBI). The goal of this research is to eventually develop accurate diagnostic tools, predictive health screens and, ultimately, more effective treatments. The importance of neurological biomarkers, such as NfL, pTau-181, pTau-217, GFAP and A b 42/40, has increased dramatically in recent years. In addition, biomarkers are being increasingly used as an adjunct by pharmaceutical companies in clinical trials to help increase the potential for regulatory approval, particularly in neurological indications. With Simoa’s sensitivity and its ability to detect many neurological biomarkers in blood and plasma that cannot be detected by many other technologies, we believe that we are uniquely positioned to take advantage of this opportunity, in particular with respect to Alzheimer’s disease and multiple sclerosis. +Dementia/Alzheimer’s Disease +Dementia is a collective name for brain syndromes that affect memory, thinking, behavior and emotion. According to Alzheimer’s Disease International , as of 2021, there were more than 55 million people worldwide living with dementia, a figure expected to increase to over 139 million by 2050, and the annual global cost of dementia is now above $1.3 trillion. Alzheimer’s disease is a progressive neurodegenerative disorder that affects cognition, function and behavior and is the most common cause of dementia. +In November 2022 at the 15 th Clinical Trials on Alzheimer’s Disease (CTAD) conference, Eisai Co., Ltd. and Biogen Corporation presented results from the Phase 3 clinical trial (Clarity AD) of lecanemab, an investigational drug aimed at slowing the progression of cognitive decline caused by Alzheimer’s disease. Target engagement and activity of the drug in downstream processes was explored with a panel of fluid biomarkers, including plasma pTau-181, GFAP and NfL, using Quanterix’s ultrasensitive Simoa assay kits. In January 2023, the FDA approved lecanemab for the treatment of patients with mild cognitive impairment or mild dementia due to Alzheimer’s disease. +In 2021, Lilly presented new data from its Phase 2 TRAILBLAZER-ALZ study of its Alzheimer’s disease drug candidate donanemab, which employed our ultra-sensitive Simoa technology to measure plasma pTau-217, using antibodies developed by Lilly. Lilly reported a significant reduction in blood levels of phosphorylated Tau protein after treatment with donanemab, and that a reduction in plasma pTau-217 levels correlated with the slowing of cognitive decline. In addition, following the FDA approval of its Alzheimer’s disease drug ADUHELM™, Biogen conducted Simoa biomarker studies on Phase 3 EMERGE and ENGAGE trial samples, utilizing Simoa technology to measure plasma pTau-181. Preliminary data was reported that showed a dose-dependent reduction in plasma pTau-181 levels following treatment with ADUHELM, which correlated with decreases in amyloid PET and a slowing of cognitive decline across four independent assessment tools. +In October 2021, the FDA granted our Simoa pTau-181 blood test Breakthrough Device designation as an aid in diagnostic evaluation of Alzheimer’s disease. The FDA’s Breakthrough Device designation is granted to products that have the potential to offer more effective diagnosis of life-threatening diseases with an unmet medical need. The program is designed to enable accelerated development, assessment and review processes, with the intention to provide patients with more timely access to breakthrough technologies or devices. Proposed indications under the Breakthrough Device designation include use of the test results in adult patients, aged 50 years and over, presenting with cognitive impairment who are being evaluated for Alzheimer’s disease and other causes of cognitive decline as an aid in diagnostic evaluation for Alzheimer’s disease. +In March 2022, we were awarded funding of $2.3 million by the Alzheimer’s Drug Discovery Foundation (ADDF) in support of a proposal “Clinical Implementation of Blood-Based Biomarkers for Alzheimer’s Disease: Clinical Validation, IVD Product Development, and Market Development.” ADDF is a philanthropic foundation which +13 +Table of Contents +aims to accelerate Alzheimer’s drug and diagnostics development. The project is aimed at clinically validating a multi-biomarker blood test for detection of Alzheimer’s disease in a large prospective trial that includes both primary care and specialist memory clinical settings. The multi-biomarker approach is based on studies that have shown that combining the signals from multiple biomarkers relevant to Alzheimer’s pathophysiology provides greater diagnostic accuracy than any single biomarker alone. The Simoa pTau-181 assay will be part of the multi-biomarker test, as well as our GFAP, NfL, A b 42, and A b 40 assays. The latter four assays are multiplexed into a single test that measures all biomarkers simultaneously. Thus, this validation study will serve to validate pTau-181 as a standalone test and will also leverage Simoa’s multiplexing capability to combine additional biomarkers for even greater accuracy. +In addition to the ADDF clinical validation program, we are nearing completion of a second prospective clinical trial (BioHermes) in partnership with the Global Alzheimer’s Platform Foundation (GAPF). GAPF is a non-profit organization dedicated to speeding the delivery of innovative therapies to Alzheimer’s patients by reducing the time and cost of Alzheimer’s disease clinical trials. The BioHermes trial is being conducted across 17 clinical sites in the United States and is examining blood test accuracy across 1,000 cognitively normal and mildly impaired Alzheimer’s patients in comparison with amyloid PET scan. This study is expected to support a regulatory filing for FDA clearance of our pTau-181 test pursuant to the Breakthrough Device designation. +Multiple Sclerosis +Multiple sclerosis is a chronic disease affecting the central nervous system (the brain and spinal cord). Multiple sclerosis occurs when the immune system attacks nerve fibers and myelin sheathing (a fatty substance which surrounds/insulates healthy nerve fibers) in the brain and spinal cord. This attack causes inflammation, which destroys nerve cell processes and myelin, altering electrical messages in the brain. Multiple sclerosis is unpredictable and affects each patient differently – some individuals may be mildly affected, while others may lose their ability to write, speak or walk. According to the National MS Society, more than 2.3 million people have a diagnosis of multiple sclerosis globally. In the U.S. alone, the National MS Society recently completed a prevalence study estimating nearly 1,000,000 people over the age of 18 live with a diagnosis of multiple sclerosis. +Evidence of the potential clinical utility of NfL as a biomarker in multiple sclerosis is progressing rapidly, and Simoa’s role in that progression has been foundational. The Simoa NfL assay pioneered measurement of NfL in blood, and in the past five years, the Simoa NfL assay has been used in hundreds of published studies. In 2022, Simoa technology supported 35 scientific presentations at the 38 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS), the world’s largest meeting dedicated to advancing research for multiple sclerosis . In 2021, Simoa technology supported 31 scientific presentations at ECTRIMS. In 2020, Simoa supported 42 presentations at ECTRIMS. A t ECTRIMS in 2019, there were nearly 50 presentations in which our Simoa NfL assay was used. +As an example, in one 2019 presentation, Novartis presented positive data from its Phase III ASCLEPIOS I and II studies of its multiple sclerosis drug candidate, ofatumumab. One of the secondary endpoints included serum levels of NfL as measured using our Simoa NfL assay. Novartis presented data that showed that, starting at three months after initiation of ofatumumab treatment, and then at 12 and 24 months timepoints, patients given ofatumumab had significantly lower blood levels of NfL, compared to those in the comparator arm of teriflunomide treated patients. +In another ECTRIMS presentation in 2019, Roche presented retrospective data from its Phase III OPERA I, OPERA II and ORATORIO trials of its approved multiple sclerosis drug OCREVUS (ocrelizumab). In the data presented at ECTRIMS, it was shown that treatment with OCREVUS lowered blood NfL levels and increased the proportion of patients reaching healthy donor range for NfL in both relapsing multiple sclerosis and primary progressive multiple sclerosis. Roche believes that this data helps advance the understanding of NfL as a potential biomarker of disease activity and for treatment monitoring and may provide insight into the neuroprotective effects of the drug. +In an article published by Bjornevik, et al. in JAMA Neurology in September 2019, researchers presented data that showed that levels of serum NfL, as measured by the Simoa NfL assay, were increased six years before the clinical onset of multiple sclerosis. The researchers concluded that these data indicate that multiple sclerosis may have a +14 +Table of Contents +prodromal phase lasting several years and that neuroaxonal damage occurs during this phase, emphasizing the importance of early diagnosis and treatment. +In a study published in Science in January 2022, researchers leveraged Simoa’s ability to detect the NfL at ultra-low levels to show that Epstein-Barr virus (EBV) increases susceptibility toward developing multiple sclerosis. Researchers of the study tested the hypothesis that multiple sclerosis is caused by EBV in a cohort comprising more than 10 million young adults on active duty in the U.S. military, 955 of whom were diagnosed with multiple sclerosis during their period of service. Risk of multiple sclerosis increased 32-fold after infection with EBV, but was not increased after infection with other viruses, including the similarly transmitted cytomegalovirus. Serum levels of NfL, a biomarker of neuroaxonal degeneration, increased only after EBV seroconversion, suggesting that EBV played a role in nerve cell damage. +In April 2022, the FDA granted our Simoa NfL plasma test Breakthrough Device designation as a prognostic aid in assessing the risk of disease activity in patients diagnosed with relapsing-remitting multiple sclerosis (RRMS). The test has shown promise to be used in conjunction with clinical, imaging and laboratory findings as an aid in identifying RRMS patients who are at lower or higher risk for relapse within four years. We believe this prognostic information could be clinically useful in tailoring the therapeutic approach to more effectively treat the disease. +Traumatic Brain Injury (TBI) +TBIs lead to approximately five million individuals visiting emergency rooms per year in the United States alone, often with broad and inconclusive diagnosis. Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as NfL, tau, GFAP and UCH-L1, to more adequately address diagnosis of TBIs and overall brain health. +Leading researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy (CTE), which currently can only be diagnosed after death via a brain autopsy. A publication by a National Institute of Health researcher indicates that measuring tau in the blood with Simoa may help identify concussed individuals requiring additional rest before they can safely return to play. +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability may result in earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of immuno-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the immuno-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a number of tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which +15 +Table of Contents +is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring immuno-oncology drugs and protocols. +We also believe residual cancer cell detection post-surgery or post-treatment may significantly improve outcomes for a variety of cancer types, by helping identify and segment patients at a greater risk of reoccurrence post-surgery due to residual cancer. For example, we have developed an ultra-sensitive biomarker assay for Prostate Specific Antigen (PSA) that is over 1,000-fold more sensitive than conventional ELISA assays. This assay is the only currently available technology that can detect levels of PSA in blood samples of prostate cancer patients shortly following radical prostatectomy, and we and researchers from Johns Hopkins and NYU conducted a pilot study on the utility of this assay to predict recurrence of prostate cancer after this procedure. In this study, the blood of prostate cancer patients taken three to six months following a radical prostatectomy at least five years earlier was analyzed with Simoa. The majority of samples had PSA levels below the detectable limits of traditional PSA assays. Our Simoa technology, however, was able to detect and quantify PSA levels in all samples. As shown in the following graph, the study demonstrated that the PSA assay using our Simoa technology has the potential to be highly predictive of prostate cancer recurrence over a five-year period. This has the potential to be a powerful prognostic tool, and allowing adjuvant radiation treatment to be targeted only to the men who actually would benefit. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. For example, we conducted a study in conjunction with the Mayo Clinic using our Simoa technology on patients with clinically active Crohn’s disease undergoing anti-TNF-α therapy with Remicade, Humira or Enbrel. As shown in the graph below, researchers were able to detect and quantify the TNF-α levels of the patients before and after treatment. These levels were all below the LoD of traditional immunoassays. +16 +Table of Contents +We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to have a significant impact in reducing the spread of infectious diseases by making early stage detection more specific and widely available. +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +For example, we have developed a simple Simoa assay with more than 4,000-fold greater sensitivity than conventional ELISA assays capable of detecting the HIV-specific antigen, p24. This Simoa p24 sensitivity matches the sensitivity of more expensive and complex nucleic acid testing methods. The following graph shows a comparison that we conducted in 2011 of the Simoa p24 assay with a commercially available nucleic acid testing method, as well as two commercially available p24 immunoassay methods for early detection of HIV infection. The Simoa p24 assay detects infection as early as the nucleic acid testing method (11 days from initial blood draw), and a full week before the earliest signs of infection by the conventional p24 immunoassay methods. This early detection of acute HIV infection can be critical for controlling the spread of HIV, as HIV is ten times more infectious in the acute phase. +17 +Table of Contents +In addition, we believe the detection of a specific protein is more relevant to the determination of the pathogenic effect than detection of the organism itself because someone may carry a pathogenic organism with no pathogenic effect. Researchers have demonstrated that Simoa technology can detect Clostridium difficile ( C. diff ) toxins A and B with sensitivities similar to the PCR detection of the C. diff organism itself. Because the C. diff organism does not always produce toxins, PCR methods that detect the C. diff organism suffer from very high false positive rates, which may result in incorrect diagnoses and the overuse of antibiotics. We believe that using Simoa to detect the toxins rather than the organism has the potential to provide a higher level of sensitivity and specificity, greatly reducing false positives. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly one in four deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +18 +Table of Contents +Our Products and Services +Our Quanterix commercial portfolio includes research use only (RUO) instruments, assay kits and other consumables, and contract research services offered through our Accelerator Laboratory, as follows: +Product +Key attributes +HD-X +● +Commercially launched the next-generation HD-X in the second half of 2019 to replace the HD-1 launched in 2014 +● +Simoa bead-based platform technology +● +Most widely referenced ultra-sensitive multiplex immunoassay platform on market +● +Fully automated, floor-standing instrument +● +Wide dynamic range +● +Multiplexing capability (up to 4-plex) with small sample volume +● +Up to 400 samples per eight-hour shift +● +Homebrew capabilities +SR-X +● +Commercially launched in December 2017 +● +Simoa bead-based platform technology +● +Reader only, benchtop instrument with lower price point +● +Similar sensitivity, dynamic range and homebrew capabilities as HD-X +● +Multiplexing capability: SR-X currently has up to 4-plex capability +● +Sample prep and assay protocol flexibility +SP-X +● +Commercially launched in April 2019 +● +Simoa planar array platform technology +● +Reader only, benchtop instrument with lower price point +● +Similar sensitivity, dynamic range and homebrew capabilities as HD-X +● +Multiplexing capability: SP-X currently has up to 10-plex capability +● +Sample prep and assay protocol flexibility +19 +Table of Contents +Product +Key attributes +Simoa assays and other consumables +● +Menu of approximately 36 single-plex and multi-plex bead-based assay kits includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology +● +Menu of Simoa planar array reagent kits includes approximately 115 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research +● +Homebrew kits containing reagents and supporting user guides enabling customers to develop custom assays +● +Proprietary Simoa disk with 24 arrays, each containing approximately 239,000 microwells for Simoa bead-based assays +NfL antibodies and NfL ELISA kits +● +Sold through our wholly-owned subsidiary, Uman, which we acquired in 2019 +● +NfL capture/detection antibodies with unparalleled sensitivity and specificity +● +NfL ELISA kits for CSF (CE-certified in Europe; RUO outside of Europe) +● +NfL ELISA kits for serum (RUO) +● +Licensing and supply arrangement with Siemens Healthineers that will allow Siemens to begin developing blood-based NfL clinical tests for future commercialization +Services +● +Contract research services provided through our Accelerator Laboratory +● +Over 1,900 projects completed to date +● +Extended warranty and service contracts +● +CLIA-certified lab available – LDT for pTau-181 launched in July 2022 and LDT for NfL launched in January 2023 +Instruments and Consumables +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1, our very first instrument, which was launched in January 2014. The HD-X was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X uses our Simoa bead-based technology and is the most sensitive automated multiplex protein detection platform commercially available. Assays for the HD-X are fully automated (i.e., from sample in to result out), and results for up to 66 samples are available in approximately one hour. Samples can be input into the instrument via 96-well microtiter plates or sample tubes where the system can multiplex and process tests in a variety of assay protocol configurations. +20 +Table of Contents +Specialized software controls the Simoa instrumentation, analyzes the digital images produced, and provides customers with detailed analysis of their samples, such as the concentration of multiple biological molecules. The HD-X software automates the processes for running the instrument and analyzing data from the user-defined protocols. Proprietary image analysis software is embedded in the system, which converts the raw images into signals for each biological molecule being analyzed within a sample. Data reduction software automatically converts those signals to concentrations for the different biological molecules. +By the end of 2022, approximately 79% of the HD installed base were HD-X instruments. +SR-X +We commercially launched the SR-X instrument in the fourth quarter of 2017. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X in a compact benchtop form with a lower price point designed to address the needs of researchers who value the ultra-sensitive detection capabilities enabled by Simoa. +In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instruments using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications including direct detection of nucleic acids. The SR-X system automates the steps loading Simoa beads onto Simoa disks with subsequent imaging, detection and data reduction. Processing time for imaging a 96 well plate is approximately 2.5 hours. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon Biosystems (Aushon), which we acquired in 2018, for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide sensitivity similar to that found in our Simoa bead-based platform. The Simoa planar array technology utilizes a 96-well microtiter plate with up to 10 different assay measurements performed in each well of the plate from as little as 12.5 microliters of sample. +Similar to the SR-X, the assay prep workflow utilized for the SP-X involves assay incubation and washing steps performed outside of the instrument using the same conventional liquid handling methods as the SR-X. The SP-X instrument automates the imaging, detection and data reduction process. Processing time for imaging a 96 well plate is less than five minutes. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 36 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 115 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to these assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes and disposable tips. Our goal is to continue to add to our assay kits to extend our application base. +We have staffed our assay development and manufacturing teams to do the upfront work of antibody sourcing, assay development and optimization, sample testing and validation, transfer to manufacturing and final documentation. +21 +Table of Contents +We outsource some of our assay development activities to other antibody and/or assay development providers and expect to continue to do so to achieve our aggressive menu expansion goals. +NfL Antibodies and NfL ELISA Kits +Uman is our wholly owned subsidiary that supplies NfL antibodies and ELISA kits for NfL detection. Uman’s NfL antibodies are widely recognized by researchers and biopharmaceutical and diagnostics companies worldwide as the premier solution for the detection of NfL to advance the development of therapeutics and diagnostics for neurodegenerative conditions. Through Uman we sell proprietary NfL capture and detection antibodies, as well as two NfL ELISA kits for CSF, one of which is CE-certified in Europe and one RUO NfL ELISA kit for serum. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. Researchers, academics and principal investigators can work with our scientists to test specimens with existing Simoa assays, or prototype, develop and optimize new assays. The Accelerator Laboratory supports multiple projects and services, including: +● Sample testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. The sample protocol can be tailored precisely to the customer’s needs and even large studies can be run quickly. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +● Homebrew assay development. Utilizing proprietary or commercially available reagents in combination with our Homebrew Assay Development Kit, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +● Custom development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +● LDT Testing. We have recently begun offering LDT testing through our CLIA-certified laboratory. In July 2022, we launched an LDT to quantitatively measure pTau-181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +To date, we have completed over 1,900 projects for more than 400 customers from all over the world using our Simoa platforms. In addition to being an important source of revenue, we have also found the Accelerator Laboratory to be a catalyst for placing additional instruments, as a number of customers for whom we have provided contract research services have subsequently purchased an instrument from us. +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continually seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We also intend to selectively expand our assay menu to extend the scope of applications for our platform to biomarkers of significant +22 +Table of Contents +interest to the scientific community. Our assay menu expansion is driven by a number of factors, including input from key opinion leaders, customer feedback, homebrew projects, Accelerator Laboratory projects, new publications on biomarkers of industry interest, and feedback from our sales and marketing team. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional major markets, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, we sell Uman’s NfL antibodies and NfL ELISA kits directly and in conjunction with a distributor worldwide. Our domestic and international sales force informs our current and potential customers of current product offerings, new product and new assay introductions, and technological advances in Simoa systems, workflows, and notable research being performed by our customers or us. As our primary point of contact in the marketplace, our sales force focuses on delivering a consistent marketing message and high level of customer service, while also attempting to help us better understand evolving market and customer needs. +As of December 31, 2022, we had 125 full-time employees in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We expect we will expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China where significant new market opportunities exist. Additionally, we believe that there is significant opportunity in other Asia-Pacific region countries such as South Korea and Australia as well as in South America. We are expanding into these regions via initial penetration with distributors and then subsequent support with Quanterix-employed sales and support personnel. +Our sales and marketing efforts are targeted at key opinion leaders, laboratory directors and principal investigators at leading biotechnology and pharmaceutical companies and governmental research institutions. +In addition to our selling activities, we align with key opinion leaders at leading institutions and clinical research laboratories to help increase scientific and commercial awareness of our technologies, demonstrate the benefits relative to existing technologies and accelerate adoption. We also seek to increase awareness of our products through participation at trade shows, academic conferences, online webinars and dedicated scientific events attended by prominent users and prospective customers. +Our instruments require a capital investment by our customers. The sales process typically involves numerous interactions and demonstrations with multiple people within an organization. Some potential customers conduct in-depth evaluations of the instruments including running experiments in the Accelerator Laboratory and comparing results from competing systems. In addition, in most countries, sales to academic or governmental institutions require participation in a tender process involving preparation of extensive documentation and a lengthy review process. As a result of these factors and the budget cycles of our customers, our sales cycle, the time from initial contact with a customer to our receipt of a purchase order, can often be six to 12 months, or longer. +Manufacturing and Supply +We outsource the development and manufacturing of our Simoa bead-based instruments to third-party manufacturers, and we develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is manufactured by STRATEC Biomedical AG (STRATEC), based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. The SR-X is manufactured by Paramit Corporation (Paramit), based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements” for a description of our agreements with STRATEC and Paramit. +23 +Table of Contents +Installation of, and training on, our instruments is provided by our employees in the markets where we conduct direct sales, and by distributors in those markets where we operate with distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we would experience additional costs, delays and difficulties in doing so, and our business could be harmed. +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component that is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply instruments on a timely basis. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Reagents for our bead-based assays include all components required to run an enzyme based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. In an effort to mitigate this risk through inventory control, we are working to increase the shelf life of our bead-based assays to 12 months or more. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC Biomedical. We believe that this agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC Biomedical, and the disposable tips used in our bead-based platform are commercially available. +We assemble our 96 well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +NfL antibodies and NfL ELISA Kits +The storage of Uman’s proprietary NfL antibody producing hybridomas as well as the cultivation and purification of the antibodies is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s NfL ELISA kits. The antibody reagents are labeled and released to market after testing. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s NfL ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. All incoming goods are subject to receipt control and any deviations related to quality deficiencies are registered. The kit components include buffers (sample diluents and wash solutions), ELISA 96-well plates coated with a capture antibody, detector antibodies, streptavidine conjugates, substrates (TMB) and stop reagents. The kit components are labeled (either RUO or CE) and assembled. The final ELISA kit products are subject to quality control procedures, which include +24 +Table of Contents +testing of human CSF or human serum quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months (NF-light ELISA (CSF)) or 13 months (NF-light Serum ELISA). +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC (the STRATEC Supply Agreement), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. We agreed to purchase a certain number of instruments in the seven years following the acceptance of the first validation instrument. The STRATEC Supply Agreement was amended in November 2016 to reduce the number of HD instruments we were committed to procure from STRATEC, and this commitment has been met. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase our common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the Paramit Agreement) with Paramit. Under the terms of the Paramit Agreement, we engaged Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts for the SR-X instrument. Paramit has no obligation to manufacture our instrument without a purchase order and no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement had an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for proteomics discovery and clinical research applications. For example, companies such as Bio-Techne, Luminex, MesoScale Discovery, Gyros, O-Link, SEER, Somalogic, MilliporeSigma, Bio-Rad Laboratories, Thermo Fisher Scientific, and others, have products for protein measurements in biofluids that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research +25 +Table of Contents +laboratories such as Covance, Q2 Solutions, Rules Based Medicine, Monogram Biosciences, PPD Laboratories, and others, some of whom are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for the life science research and diagnostic markets. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors in our target markets include: +● sensitivity; +● cost of instruments and consumables; +● assay menu; +● reputation among customers and key opinion leaders; +● innovation in product offerings; +● accuracy and reproducibility of results; and +● customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations and partnerships with key opinion leaders. +Intellectual Property +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University (Tufts), in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating the ultra-sensitive detection of proteins, nucleic acids, and cells. We have exclusively licensed from Tufts the relevant patent filings related to these technologies. (See “—License Agreement with Tufts University” below). In addition to licensed patents, we have developed our own portfolio of issued patents and patent applications directed to commercial products and technologies for potential development. Our portfolio also includes issued patents and patent applications acquired as part of our 2018 acquisition of Aushon Biosystems. We believe our proprietary platforms are a core strength of our business and our strategy includes the continued development of our patent portfolio. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications, some of which are reflected in our current products and some of which are not. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature, seeking to protect not only technology we currently practice but also alternative, related embodiments. +26 +Table of Contents +Simoa and Related Technology +As of March 1, 2023, we had exclusively licensed 17 patents and two patent applications from Tufts. These patents and patent applications include eight issued U.S. patents and two pending U.S. patent applications, three granted European patents, three granted Japanese patents, two granted Canadian patents and one granted Australian patent. +A first patent family licensed from Tufts is directed to methods for detecting single molecules. This patent family includes seven granted U.S. patents, one pending U.S. patent application, three granted European patents (each nationalized and active in seven or eight countries), three granted Japanese patents, two granted Canadian patents and one granted Australian patent. The standard patent expiration date for U.S. patents in this family is February 16, 2027, and for the non-U.S. patents is February 20, 2027 or August 30, 2027. +A second patent family licensed from Tufts is directed to methods for detecting the presence of target analytes in multiple samples. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is August 22, 2025. +A third patent family licensed from Tufts is directed to methods for detecting short nucleic acids. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue in this family is May 29, 2039. +As of March 1, 2023, we owned 29 issued U.S. patents and 17 pending U.S. patent applications, eight granted European patents and three pending European patent applications, six granted Japanese patents and one pending Japanese patent application, four granted Chinese patents and two pending Chinese patent application, four granted Canadian patents and one pending Canadian patent application, and one registered Hong Kong patent application. +A first patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads, including multiplexing. This patent family includes four granted U.S. patents and two pending U.S. patent applications, three granted European patents (nationalized and active in eight countries) and one pending European application, two granted Japanese patents, two granted Chinese patents, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A second patent family owned by us is directed to methods and systems for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods or systems for determining concentration based on either counting or measured intensity (extending the dynamic range). This patent family includes five granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active in seven countries), two granted Japanese patents, one granted Chinese patent, and one granted Canadian patent. The standard patent expiration date for the U.S. patents in this family is March 24, 2030, and for the non-U.S. patents is March 1, 2031. +A third patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for analyte capture on beads with or without dissociation. This patent family includes two granted U.S. patents. The standard patent expiration date for the U.S. patents in this family is September 28, 2028. +A fourth patent family owned by us is directed to methods for determining a measure of the concentration of analyte molecules or particles in a fluid sample, and in particular to methods for determining concentration using multiple binding ligands for the same analyte molecule. This patent family includes one granted U.S. patent. The standard patent expiration date for the U.S. patent in this family is March 24, 2030. +A fifth patent family owned by us is directed to instruments and consumables. This patent family includes two granted U.S. patents and one pending U.S. patent application, one granted European patent (nationalized and active in eleven countries) and one pending European patent application, two granted Japanese patents, one granted Chinese patent and one pending Chinese patent applications, one registered Hong Kong patent application, and one granted +27 +Table of Contents +Canadian patent. The standard patent expiration date for the U.S. patents in this family is February 25, 2031, and for any non-U.S. patents is January 27, 2032. +A sixth patent family owned by us is directed to methods and materials for covalently associating a molecular species with a surface. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is May 9, 2034. +A seventh patent family owned by us is directed to methods for improving the accuracy of capture based assays. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is January 13, 2036. +An eighth patent family owned by us is directed to methods and systems for reducing and/or preventing signal decay. This patent family includes one pending U.S. patent application. The standard patent expiration date for any U.S. patents that may issue from this family is September 20, 2038. +A ninth patent family owned by us is directed to methods and systems for highly sensitive assays, including methods and systems for improving capture object loading efficiency and/or use of low numbers of capture objects in assays. This patent family includes one pending U.S. patent application, one pending European patent application, one pending Japanese patent application, one pending Chinese patent application, and one pending Canadian patent application. The standard patent expiration date for any patents that may issue from this family is April 14, 2041. +In addition to the nine patent families described above, we own or co-own nine additional patent families directed to the measurement of particular types of analytes, including β-amyloid peptide, tau protein, toxin B of C. difficile , neurofilament light, glial fibrillary acidic protein, ubiquitin carboxyl-terminal hydrolase L1, antigens from infectious organisms such as viruses (e.g., coronaviruses), and DNA or RNA molecules. Among the granted patents and pending patent applications in these nine families are two granted U.S. patents directed to methods for determining treatment protocols and/or a prognosis of a patient’s recovery from a brain injury based on measurements of tau protein in blood and one granted U.S. patent and one granted European patent (nationalized and active in three countries) directed to detection of C. difficile . Any patents that may issue from these patent applications would have standard expiration dates between 2032 and 2041. +With the acquisition of Aushon in January 2018, we acquired their patent portfolio for our planar array technology. As of March 1, 2023, the acquired patent portfolio includes at least ten issued U.S. patents and one pending U.S. patent application, one granted Canadian patent, and two granted European patents (nationalized and active in eight countries). +We have licensed additional patents and patent applications from third parties. These include a portfolio of patent filings we licensed from Harvard University directed to additional single molecule assay technologies originated in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. +A first patent family exclusively licensed by us from Harvard University is directed to assays that provide digital measurement methods to detect proteins and other biomolecules, e.g., at low- to mid-attomolar concentrations. This patent family includes one pending International Patent Application. The standard patent expiration date for any patents that may issue from this family is June 22, 2041. +A second patent family exclusively licensed by us from Harvard University is directed to single molecule assays for ultrasensitive detection of analytes. The standard patent expiration date for any patents that may issue from this family will be in 2042. +A third patent family exclusively licensed by us from Harvard University is directed to high-sensitivity methods for detection and quantification of target analytes in liquid samples (e.g., biological or environmental samples). The standard patent expiration date for any patents that may issue from this family is August 15, 2039. +28 +Table of Contents +A fourth patent family non-exclusively licensed by us from Harvard University is directed to methods and compositions to detect Mycobacterium tuberculosis antigens, e.g., lipoarabinomannan (LAM) and/or Ag85B (Rv1886c), in a sample (e.g., a human urine sample) for diagnosis of tuberculosis. The standard patent expiration date for any patents that may issue from this family is December 17, 2040. +In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to research, develop, commercialize, use, make, or have made, import or have imported, distribute or have distributed, offer or have offered, and sell or have sold products and services covered by patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable for a fee. +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our common stock. In addition, in connection with the April 2013 amendment, we issued Tufts shares of our Series C-1 Preferred Stock, which converted into shares of our common stock in connection with our initial public offering. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution cost incurred prior to the agreement and for all future patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +The majority of our products are currently intended for research use only (RUO) applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or the Center for Medicare & Medicaid Services (CMS). Although most in vitro diagnostic products intended for RUO are not currently required to obtain premarket clearance or approval by the FDA, products labeled as RUO are subject to the FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than research purposes. Consequently, other than our two laboratory developed tests intended for clinical testing, our products are labeled and intended “For Research Use Only. Not for Diagnostic Procedures.” +The FDA has issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (the RUO/IUO Guidance). The purpose of an FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for investigational use only (IUO) and when products labeled RUO or IUO will be viewed by the FDA as intended for clinical use, but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory +29 +Table of Contents +requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s premarket notification and clearance process (510(k)), premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Although the RUO/IUO Guidance was not intended as a compliance requirement, we believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. +IVD tests intended for clinical diagnostic use are regulated by the FDA as medical devices, however, the FDA has traditionally not regulated certain laboratory tests referred to as laboratory developed tests (LDTs) (as discussed further below). The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. This means that the FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising and labeling of our clinical IVD devices (other than our LDTs) and we will be required to register as a medical device manufacturer and list our marketed products. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards and guidance documents setting out labeling and testing requirements. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval, including any conditions imposed as part of the approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification (510(k)) and receive clearance from the FDA, which is otherwise a premarketing requirement for Class I and Class II devices that are not exempt. Class III devices may not be commercialized until a premarket approval application (PMA) is submitted to and approved by the FDA. Novel devices that have not been classified require either approval of a PMA or FDA review of a de novo classification request before they can be marketed. +510(k) Clearance Pathway +To obtain 510(k) clearance for Class I and Class II devices that are not exempt, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent (SE) to a predicate device legally marketed in the U.S. for which a PMA was not required. Substantial equivalence means that the device has the same intended use as the predicate device and either (a) has the same technological characteristics as the predicate device or (b) has different technological characteristics but does not raise difference questions of safety and effectiveness and information in the premarket notification demonstrates the device is as safe and effective as the predicate. The FDA is supposed to make a SE determination within 90 days of the FDA’s receipt of the 510(k), but it often takes longer if the FDA requests additional information. Most 510(k)s do not require supporting data from clinical trials, but the FDA may request such data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre-market approval. +Premarket Approval Pathway +A PMA must be submitted if a new device cannot be cleared through the 510(k) process. The PMA process is generally more complex, costly and time consuming than the 510(k) process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the +30 +Table of Contents +FDA’s satisfaction a reasonable assurance that the device is safe and effective for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the accepted application, although review of the application generally can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with its quality system regulations (QSRs). New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and efficacy of the device. +De Novo Classification +Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. +However, a de novo classification request allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo classification request, but the review often takes longer if the FDA requests additional information. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. +Emergency Use Authorization +In emergency situations, such as a pandemic, the FDA has the authority to allow unapproved medical products or unapproved uses of cleared or approved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by chemical, biological, radiological or nuclear warfare threat agents when there are no adequate, approved, and available alternatives. +Under this authority, the FDA may issue an emergency use authorization (EUA) for an unapproved device if the following four statutory criteria have been met: (1) a serious or life-threatening condition exists; (2) evidence of effectiveness of the device exists; (3) a risk-benefit analysis shows that the benefits of the product outweigh the risks; and (4) no other alternatives exist for diagnosing, preventing or treating the disease or condition. Evidence of effectiveness includes medical devices that “may be effective” to prevent, diagnose, or treat the disease or condition identified in a declaration of emergency issued by the Secretary of the Department of Health and Human Services (HHS). The “may be effective” standard for EUAs requires a lower level of evidence than the “effectiveness” standard that FDA uses for product approvals in non-emergency situations. The FDA assesses the potential effectiveness of a possible EUA product on a case-by-case basis using a risk-benefit analysis. In determining whether the known and potential benefits of the product outweigh the known and potential risks, the FDA examines the totality of the scientific evidence to make an overall risk-benefit determination. Such evidence, which could arise from a variety of sources, may include (but is not limited to) results of domestic and foreign clinical trials, in vivo efficacy data from animal models, in vitro data, as well as the quality and quantity of the available evidence. +31 +Table of Contents +Once granted, an EUA will remain in effect and generally terminate on the earlier of (1) the determination by the Secretary of HHS that the public health emergency has ceased or (2) a change in the approval status of the product such that the authorized use(s) of the product are no longer unapproved. After the EUA is no longer valid, the product is no longer considered to be legally marketed and one of the FDA’s non-emergency premarket pathways would be necessary to resume or continue distribution of the subject product. +The FDA also may revise or revoke an EUA if the circumstances justifying its issuance no longer exist, the criteria for its issuance are no longer met, or other circumstances make a revision or revocation appropriate to protect the public health or safety. +Clinical Trials +Clinical trials are usually required to support a PMA and are sometimes required for a 510(k) or a de novo classification request. In the U.S., if the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption (IDE) application and obtains approval of the IDE from the FDA. Non-significant risk device studies do not require FDA approval of an IDE application. Both significant risk and non-significant risk clinical trials are also subject to the review, approval and oversight of an institutional review board (IRB). The clinical trials must be conducted in accordance with the FDA’s IDE regulations and good clinical practices. A clinical trial may be suspended by the FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device. Clinical trials are also subject to a requirement to submit certain information to the ClincialTrials.gov database maintained by the National Institutes of Health. +Breakthrough Device Designation +FDA Breakthrough Device de signation is granted to certain medical devices and device-led combination products that provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating diseases or conditions. The goal is to give patients and doctors timely access to these medical devices by speeding up their development, assessment, and review, while preserving the statutory standards for premarket approval. The Breakthrough Devices Program offers device companies an opportunity to interact with the FDA's experts through several different program options to efficiently address topics as they arise during the premarket review phase, which can help companies receive feedback from the FDA and identify areas of agreement in a timely way. Recipients may also receive prioritized review of their submission. Although Breakthrough Device designation or access to any other expedited program may expedite the development or clearance/authorization/approval process, it is not guaranteed to do so, and, more importantly, it does not change the standards for clearance/authorization/approval. Designation for any expedited review procedure does not ensure that we will ultimately obtain regulatory clearance or approval for such product. +FDA Enforcement +After a medical device is placed on the market, numerous regulatory requirements apply. These include among other things: +● establishment registration and device listing; +● the QSR, which requires manufacturers, including third-party contract manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; +32 +Table of Contents +● labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to promotional activities; +● medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur; +● corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug, and Cosmetics Act that may present a risk to health; and +● post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device. +To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant PMA approvals of new devices; withdrawal of PMA approvals; and civil or criminal prosecution. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +We own and operate a CLIA-certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (CLIA) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of research testing that does not report patient specific results). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for the diagnosis, prevention, or treatment of any disease or impairment of, or the assessment of health of, human beings. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program for each of the specialties and subspecialties for which it is certified. If a laboratory fails to achieve a passing score on a proficiency test, then its CLIA certificate may be suspended, limited or revoked, or other sanctions may be imposed. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year (except laboratories with only a certificate of waiver or certificate of provider-performed microscopy procedures are not subject to biennial inspections), in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been traditionally offered by high-complexity laboratories for the last few decades as LDTs, the validation and performance of which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs under the agency’s medical device authorities, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices. In 2010, the FDA announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. To date, the FDA has not issued such guidance, and has indicated that Congress should enact legislation to address improved oversight of diagnostics, +33 +Table of Contents +including LDTs, rather than the FDA addressing the issue through administrative proposals. However, FDA has increased its oversight of what it perceived as especially high-risk LDTs, and in October 2018 the FDA issued a safety communication warning against the use of unapproved LDTs that describe relationships between gene variants and particular drugs (pharmacogenomic tests). FDA also regulated LDTs for Covid-19 under its EUA authority and related guidance. HHS initially issued a policy in August 2020 stating that FDA could not require premarket review (including EUAs) for LDTs. But this HHS policy was revoked in November 2021, reinstating FDA's prior approach for oversight of Covid-19 LDTs. Thus, while FDA generally exercises enforcement discretion for LDTs it continues to exercise oversight over certain high-risk tests. In addition, over the past several years, several bills to impose a new FDA regulatory framework with similarities to the current medical device framework for “in vitro clinical tests,” which would include both in vitro diagnostics and LDTs, have been introduced. We cannot predict the ultimate timing or form of any such legislation or future FDA guidance or regulation or their potential impact. Any new regulatory approach for LDTs by the FDA, whether through legislation or regulation, would likely lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of any changes to the FDA’s current approach is unknown, it may be extensive and may result in significant change. +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out-of-state laboratories to obtain licensure. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third-party payors. +When we perform clinical diagnostic testing, we are subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, in the European Union (the E.U.) new regulations recently entered into force that introduce greater regulation of medical devices and IVDs. The new IVD regulation (the IVD Regulation) is significantly different from the European directive for IVD medical devices (the IVD Directive) that it replaces in that it ensures that the new requirements apply uniformly and on the same schedule across the member states, includes a risk-based classification system and increases the requirements for conformity assessment. +The CE registration for the Nf-L ELISA assay kit of our subsidiary Uman was approved in March 2014 under the IVD Directive . Under the IVD Directive, the assay is classified as a general IVD product and required self-certification with no involvement of a notified body/authority. The IVD Regulation introduces a new classification system for IVDs and assessment by a notified body is required for class B, C and D products. Uman’s Nf-L ELISA assay kit is classified as a class B product and must fully comply with (and have a CE mark issued under) the IVD Regulation by May 2027. The new requirements include an ISO 13485 certification of the quality system (which Uman received in July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g., clinical evidence and post-market activities). The work to evaluate and to meet the new technical requirements is on-going. When all requirements are met, a notified body will be contacted, and the certification initiated. +The NF-light Serum ELISA is currently sold only as a RUO product (not intended for diagnostic use). Work is on-going to prepare a technical file compliant with the IVD Regulation for this product as well. +34 +Table of Contents +Other Governmental Regulation +Privacy and Data Security Laws and Regulations +As a business with a global footprint, compliance with evolving regulations and standards in privacy and data security has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of increased regulatory enforcement activity. Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce. +For example, in the U.S., the collection, maintenance, protection, use, transmission, disclosure and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international and industry levels. U.S. federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by health care providers. Privacy and Security Rules under HIPAA, as amended, and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH), govern the use, disclosure, and security of protected health information by “Covered Entities,” (which are health care providers that submit electronic claims, health plans, and health care clearinghouses) and by their “Business Associates” (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the Covered Entity’s workforce). Rules under HIPAA and HITECH include specific security standards and breach notification requirements. HHS (through the Office of Civil Rights) has direct civil enforcement authority against Covered Entities and Business Associates with regard to both the Security and Privacy Rules. The U.S. Department of Justice has criminal enforcement authority against Covered Entities, Business Associates, and certain other entities and individuals. In addition, State Attorneys General may being enforcement actions under HIPAA. Generally Quanterix is not a Covered Entity, however, we may operate as a Business Associate to Covered Entities under certain circumstances. +In addition to the regulation of personal health information, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for other kinds of personally identifiable information, such as state laws that govern the use, disclosure and protection of sensitive personal information, such as Social Security numbers, or that are designed to protect credit card account data. State consumer protection laws may also establish privacy and security standards for use and management of personally identifiable information, including information related to consumers and care providers. +Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. Legal requirements in foreign countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the E.U., stringent data protection and privacy rules which substantially impact the use of patient data across the healthcare industry became effective in May 2018. The E.U. General Data Protection Regulation (GDPR) applies uniformly across the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals residing in the E.U. to comply with E.U. privacy and data protection rules. +Because the laws and regulations continue to expand, differ from jurisdiction to jurisdiction, and are subject to evolving (and at times inconsistent) governmental interpretation, compliance with these laws and regulations may require significant additional expenditures or changes in products or business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities. +Environmental Health and Safety Laws +35 +Table of Contents +We are subject to federal, state, and local laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation, storage and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (OSHA), has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. OSHA also regulates the use of hazardous chemicals in the workplace. Likewise, we are subject to EPA and state requirements relating to the management and disposal of hazardous waste, and state requirements relating to the disposal of regulated medical waste. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +Employees and Human Capital +As of December 31, 2022, we had 370 full-time employees, of which 125 work in sales, sales support, field service, and marketing, 85 work in engineering and research and development, 104 work in manufacturing and operations and 56 work in general and administration. Of our 370 full-time employees, 309 were located in the United States and 61 were located in 11 foreign countries. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We have a unique culture that stresses the impact our work has on the eradication of human diseases. We invest in creating a diverse, inclusive and safe work environment where our employees can deliver their workplace best every day. +Our success depends upon our ability to attract and retain highly qualified management and technical employees. Talent management is critical to our ability to execute our long-term growth strategy, and we seek to cultivate a superior pool of talent by providing career growth, on-the-job learning opportunities and competitive compensation. We are committed to an inclusive culture which values equality, opportunity and respect. In support of our inclusive culture, we sponsor an internal Diversity, Equity and Inclusion Committee comprised of employees and executives, provide respectful workplace training to strengthen employee understanding and consciously strive to recruit a diverse talent pool across all levels of the organization. As of December 31, 2022, approximately 44% of our employees were women and approximately 36% were non-white. +Workforce Compensation and Pay Equity +We provide robust compensation and benefits programs to help meet the needs of our employees. We provide our full-time employees with highly competitive salaries, as well a bonus and/or commission plan, a matching 401(k) Plan, healthcare and insurance benefits, paid time off and family leave. We also provide all of our employees with targeted equity-based grants with vesting conditions designed to facilitate retention through the opportunity to benefit financially from our growth and profitability. +Company Culture +We expect all of our employees and contractors to observe the highest levels of business ethics, integrity, mutual respect, tolerance and inclusivity. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies reflecting these values and also provide direction for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization, and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is fundamentally connected to the physical and mental well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees and contractors. We provide our +36 +Table of Contents +employees with a wide range of benefits, including benefits directed to their health, safety and long-term financial security. +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. Our electronically filed reports and other information that we file with the SEC can be viewed on the SEC’s website at http://www.sec.gov . \ No newline at end of file diff --git a/raw/filings/0001503274/2022/0001558370-23-002855/item13.txt b/raw/filings/0001503274/2022/0001558370-23-002855/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..0d0e01786e56bf8a4fe7f64a50212be7f48625d9 --- /dev/null +++ b/raw/filings/0001503274/2022/0001558370-23-002855/item13.txt @@ -0,0 +1,2 @@ +Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001503274/2022/0001558370-23-002855/item9a.txt b/raw/filings/0001503274/2022/0001558370-23-002855/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..bd3a7e8e4f45ca233a64da12ea4f9cb952a7ad8a --- /dev/null +++ b/raw/filings/0001503274/2022/0001558370-23-002855/item9a.txt @@ -0,0 +1,45 @@ +Item 9A. CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2022, due to the material weaknesses described below in Management’s Report on Internal Control over Financial Reporting. +Management’s Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022, based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the framework set forth in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was not effective at the reasonable assurance level as of December 31, 2022, due to the material weaknesses described below. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. +Based on the evaluation described above, our management concluded that control deficiencies existed as of December 31, 2022, and that these control deficiencies constituted material weaknesses in our internal control over financial reporting. The material weaknesses related to the operating effectiveness of our internal control associated with (i) the accounting for inventory, including excess and obsolescence reserves, (ii) the accounting for salary and commissions expense, (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases, and (iv) the accounting for property and equipment, net. The primary cause of these control deficiencies is that we did not maintain a sufficient number of qualified personnel with requisite expertise in key accounting and finance functions, including following the implementation of the Restructuring Plan in the second half of 2022. In addition, our reliance on a significant number of end user computing tools requires additional procedures to verify the completeness and accuracy of information used within our analyses. +There were no material misstatements as a result of the material weaknesses discussed above. If not remediated, or if we identify further material weaknesses in our internal control, our failure to establish and maintain effective +84 +Table of Contents +disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our consolidated financial statements or a failure to meet our reporting and financial obligations. +The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. +Management’s Plan to Remediate the Material Weaknesses +Management, with oversight from the Audit Committee of our Board of Directors, is taking steps to remediate the control deficiencies which resulted in the material weaknesses described above by implementing changes to our internal control over financial reporting. Our plans for remediation include, but are not limited to, the efforts summarized below, which have been or are in the process of being implemented: +● we have hired, and will continue to hire, additional personnel (including those with public company experience) who have the appropriate level of expertise in the areas of accounting, financial reporting, and internal controls commensurate with the volume and complexity of our reporting requirements; +● we have engaged accounting advisory consultants to provide additional depth and breadth in our period end close, technical accounting, and financial reporting capabilities until we have filled vacancies with qualified personnel; +● we will engage a third-party service provider to perform an assessment of our internal control design and related documentation; +● we have engaged a third-party consultant to assess our current enterprise resource planning system and identify opportunities to enhance our use of the system through automating certain controls and processes; and +● we have engaged an accounting advisory consultant to conduct additional trainings on a regular basis related to internal control over financial reporting to our team members including, but not limited to, finance and accounting personnel. +We are also developing a plan to manage, on an ongoing basis, the impact of personnel turnover in the areas of accounting and financial reporting by broadening the understanding and knowledge of a larger group of personnel who can thereby work to support our operations during periods of reduced staffing. +We expect to continue our efforts to remediate the material weaknesses as described above through fiscal year 2023. We believe that the implementation of the above steps will allow us to address the deficient controls within our internal control environment, which will facilitate the remediation of the material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, we will take additional measures to address control deficiencies and we may modify certain of the remediation measures described above. Following our design and implementation of our remediation efforts, we will need to demonstrate their operating effectiveness. We will not be able to consider the material weaknesses remediated until the applicable remedial controls operate for a sufficient period of time and our management has concluded, through testing, that our controls are operating effectively. +Changes in Internal Control over Financial Reporting +Other than related to the changes outlined above to remediate the material weaknesses described above, there have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +85 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on Internal Control over Financial Reporting +We have audited Quanterix Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Quanterix Corporation (the Company) has not maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in internal controls related to (i) the accounting for inventory, including excess and obsolescence reserves, (ii) the accounting for salary and commissions expense, (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases, and (iv) the accounting for property and equipment, net. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022, and December 31, 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated March 6, 2023, which expressed an unqualified opinion thereon. +Basis for Opinion +The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded +86 +Table of Contents +as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Ernst & Young LLP +Boston, Massachusetts +March 6, 2023 \ No newline at end of file diff --git a/raw/filings/0001503274/2022/0001558370-23-002855/rp_note.txt b/raw/filings/0001503274/2022/0001558370-23-002855/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..1c51a820fce79b661849a7bc912f5c2e54ba8515 --- /dev/null +++ b/raw/filings/0001503274/2022/0001558370-23-002855/rp_note.txt @@ -0,0 +1,8 @@ +18. Related party transactions +As described in Note 13, in June 2007, the Company entered into a license agreement for certain intellectual property with Tufts. Tufts is a related party to the Company due to Tufts’ equity ownership in the Company and because one of the Company’s directors was affiliated with Tufts. During the years ended December 31, 2022, 2021, and 2020, the Company recorded royalty expense of $ 1.4 million, $ 1.6 million and $ 1.1 million, respectively, related to Tufts. This royalty expense is recorded in cost of product revenue on the consolidated statements of operations. During the year ended December 31, 2020, the Company also incurred $ 1.0 million in cost of collaboration and license revenue owed to Tufts related to sublicensing certain technology and intellectual property to Abbott, refer to 5 for additional details. +One of the Company’s directors is affiliated with Harvard University and Mass General Brigham. Revenue recorded from sales to Harvard University and its affiliates and to Mass General Brigham and its affiliates totaled $ 0.7 million, $ 0.2 million, $ 0.1 million for the years ended December 31, 2022, 2021, and 2020 respectively. The Company recorded cost of goods sold of $ 0.1 million for the year ended December 31, 2022 related to Harvard University and its affiliates and to Mass General Brigham and its affiliates, with immaterial cost of goods sold recorded for years ended December 31, 2021 and 2020. The Company also incurred research and development expenses of $ 0.6 million with Harvard University and its affiliates for the year ended December 31, 2022, with immaterial research and development expenses incurred for years ended December 31, 2021 and 2020. The Company had $ 0.1 million and $ 0.2 million in accounts receivable from Harvard University and its affiliates and Mass General Brigham and its affiliates at December 31, 2022 and 2021, respectively. Deferred revenue from Harvard University and its affiliates and Mass General Brigham and its affiliates was $ 0.1 million at both December 31, 2022 and 2021. +On May 26, 2022, the Company entered into an agreement (the UltraDx Agreement) with UltraDx Limited (UltraDx), a new company formed by ARCH Venture Partners (ARCH). Under the UltraDx Agreement, the Company +F-33 +Table of Contents +will supply HD-X instruments (both fully assembled and disassembled) as well as assays and assay components to UltraDx, and UltraDx has the non-exclusive right to seek Chinese regulatory approval of and to commercialize the HD-X instrument and related assays in the Chinese neurological in vitro diagnostic market. The Company has determined that UltraDx is a related party because one of the Company’s directors is affiliated with ARCH and UltraDx. Under the terms of the UltraDx Agreement, the Company shipped a total of ten fully assembled and disassembled HD-X instruments to UltraDx on June 30, 2022 at a purchase price of approximately $ 1.9 million. The Company recognized revenue on these shipments upon receipt of payment during the year ended December 31, 2022. No such activities occurred in the years ended December 31, 2021 and 2020. +F-34 \ No newline at end of file diff --git a/raw/filings/0001503274/2022/0001558370-23-002855/rpt_disclosure.txt b/raw/filings/0001503274/2022/0001558370-23-002855/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..06af6f330164ece45b65cc9bd07205f62f883afe --- /dev/null +++ b/raw/filings/0001503274/2022/0001558370-23-002855/rpt_disclosure.txt @@ -0,0 +1,9 @@ +CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS +Since January 1, 2023, we have engaged in the following transactions with our directors, director nominees, executive officers and holders of more than 5% of our common stock, which we refer to as our principal stockholders, and affiliates or immediate family members of our directors, executive officers and principal stockholders. We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties. +We entered into a License Agreement with Tufts University in 2007, as amended in 2013, 2017 and 2020, pursuant to which we obtained an exclusive, worldwide license to our core SIMOA technology, and entered into additional license agreements with Tufts to certain related technology. David R. Walt, Ph.D., one of our directors, founding scientist and an inventor of the SIMOA technology, previously served as a professor at Tufts University. Under these licenses, we are required to pay Tufts University royalties on net sales of licensed products and services as well as a portion of our applicable sublicense revenues. During the year ended December 31, 2023, we recorded royalty expense of $1.7 million under these licenses. Tufts University pays a portion of the royalties and license payments received from us to Dr. Walt pursuant to an arrangement between Tufts University and Dr. Walt, the amount of which is determined on a formulaic basis. +In August 2022, we also entered into a license agreement with Harvard University related to immunoassay technology developed by Dr. Walt at Harvard and Brigham and Women’s Hospital. In connection with entering into this agreement, we paid Harvard an upfront fee of $625,000 in 2022. Under this license, we are required to pay Harvard royalties on net sales of licensed products and services as well as a portion of our applicable sublicense revenues. During the year ended December 31, 2023, we recorded no royalty expense under this license. Harvard is obligated to pay a portion of the payments received from us to Dr. Walt pursuant to an arrangement between Harvard and Dr. Walt. We also sell products and services to laboratories affiliated with Harvard and Brigham and Women’s Hospital that are overseen by Dr. Walt. During the year ended December 31, 2023, we recorded revenue from these sales of approximately $1.3 million. +In May 2022, we entered into an agreement with UltraDx Limited (“UltraDx”), a company formed by ARCH Venture Partners (“ARCH”). Keith Crandell, who was a director of Quanterix until June 2023, is a managing director of ARCH and is a founder of UltraDx. Under this agreement, we agreed to supply HD-X instruments (both fully assembled and disassembled) as well as assays and assay components to UltraDx, and UltraDx has the non-exclusive right to seek Chinese regulatory approval of and to commercialize the HD-X instrument and related assays in the Chinese neurological in the vitro diagnostic market. The agreement included the payment to us by UltraDx of contingent, non-cash consideration in the form of ordinary shares of UltraDx with a deemed fair value of $1.0 million. The issuance of the shares was contingent on UltraDx completing a preferred share financing under certain qualifying terms and conditions. In the second quarter of 2023, UltraDx completed the qualified preferred share financing and issued us one million ordinary shares. During the year ended December 31, 2023, we recognized $1.8 million of revenue from UltraDx, which includes the one-time revenue from the receipt of the UltraDx shares in the second quarter of 2023. +Indemnification Agreements with Officers and Directors and Directors’ and Officers’ Liability Insurance +We have entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements, our restated certificate of incorporation and our restated bylaws require us to indemnify our directors to the fullest extent not prohibited by Delaware law. Subject to certain limitations, our restated bylaws also require us to advance expenses incurred by our directors and officers. +The 2007 Plan and the 2017 Plan also provide that our directors (and in the case of the 2017 Plan, our employees) will not be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the respective plan, and the members of our Board and any committee administering the plan will be entitled to indemnification and reimbursement by us in respect of any claim, loss, damage or expense (including reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors’ and officers’ liability insurance coverage which may be in effect from time to time. +45 \ No newline at end of file diff --git a/raw/filings/0001503274/2023/0001558370-24-002205/filing.txt b/raw/filings/0001503274/2023/0001558370-24-002205/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..8c99f4486ed1bcef2b90c4fc4ed7ca5678211cc0 --- /dev/null +++ b/raw/filings/0001503274/2023/0001558370-24-002205/filing.txt @@ -0,0 +1,3743 @@ +Quanterix Corp 0001503274 FY false 38014000 P12M 37280000 1000000 1000000 0001503274 us-gaap:DomesticCountryMember qtrx:ThroughTaxYear2042Member 2023-12-31 0001503274 us-gaap:CommonStockMember 2023-01-01 2023-12-31 0001503274 us-gaap:CommonStockMember 2022-01-01 2022-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2022-01-01 2022-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2021-01-01 2021-12-31 0001503274 us-gaap:RetainedEarningsMember 2023-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2023-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2023-12-31 0001503274 us-gaap:RetainedEarningsMember 2022-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2022-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-12-31 0001503274 us-gaap:RetainedEarningsMember 2021-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-12-31 0001503274 us-gaap:RetainedEarningsMember 2020-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-12-31 0001503274 us-gaap:CommonStockMember 2023-12-31 0001503274 us-gaap:CommonStockMember 2022-12-31 0001503274 us-gaap:CommonStockMember 2021-12-31 0001503274 us-gaap:CommonStockMember 2020-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2022-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2023-12-31 0001503274 us-gaap:EmployeeStockOptionMember qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2017-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2017-12-31 0001503274 srt:MinimumMember us-gaap:EmployeeStockOptionMember 2023-01-01 2023-12-31 0001503274 srt:MaximumMember us-gaap:EmployeeStockOptionMember 2023-01-01 2023-12-31 0001503274 srt:MinimumMember us-gaap:EmployeeStockOptionMember 2022-01-01 2022-12-31 0001503274 srt:MaximumMember us-gaap:EmployeeStockOptionMember 2022-01-01 2022-12-31 0001503274 qtrx:EmployeeStockPurchasePlanAwardsMember 2023-01-01 2023-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2022-01-01 2022-12-31 0001503274 qtrx:EmployeeStockPurchasePlanAwardsMember 2022-01-01 2022-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2021-01-01 2021-12-31 0001503274 qtrx:EmployeeStockPurchasePlanAwardsMember 2021-01-01 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2023-01-01 2023-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2022-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2022-01-01 2022-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2021-01-01 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2023-01-01 2023-12-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2023-01-01 2023-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2023-01-01 2023-12-31 0001503274 qtrx:HarvardUniversityMember qtrx:LicenseAgreementsMember 2023-01-01 2023-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2022-01-01 2022-12-31 0001503274 qtrx:HarvardUniversityMember qtrx:LicenseAgreementsMember 2022-01-01 2022-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2021-01-01 2021-12-31 0001503274 qtrx:HarvardUniversityMember 2022-01-01 2022-12-31 0001503274 qtrx:UndeliveredLicensesOfIntellectualPropertyMember 2023-12-31 0001503274 2024-01-01 2023-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2023-01-01 2023-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2023-01-01 2023-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2023-01-01 2023-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2023-01-01 2023-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2023-01-01 2023-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2023-01-01 2023-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2023-01-01 2023-12-31 0001503274 us-gaap:GrantMember qtrx:NationalInstitutesOfHealthMember 2023-01-01 2023-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2023-01-01 2023-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2023-01-01 2023-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2023-01-01 2023-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2023-01-01 2023-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2023-01-01 2023-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2023-01-01 2023-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2023-01-01 2023-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2023-01-01 2023-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2023-01-01 2023-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2023-01-01 2023-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2023-01-01 2023-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2023-01-01 2023-12-31 0001503274 qtrx:EliLillyMember qtrx:CollaborationAgreementMember 2023-01-01 2023-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2023-01-01 2023-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2023-01-01 2023-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2023-01-01 2023-12-31 0001503274 us-gaap:LicenseAndServiceMember 2023-01-01 2023-12-31 0001503274 us-gaap:GrantMember 2023-01-01 2023-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2023-01-01 2023-12-31 0001503274 qtrx:ResearchServicesMember 2023-01-01 2023-12-31 0001503274 qtrx:OtherServicesMember 2023-01-01 2023-12-31 0001503274 qtrx:InstrumentProductsMember 2023-01-01 2023-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2023-01-01 2023-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2022-01-01 2023-12-31 0001503274 us-gaap:ServiceMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 us-gaap:GrantMember qtrx:AlzheimerSDiseaseDiagnosticFundMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 qtrx:EliLillyMember qtrx:CollaborationAgreementMember 2022-01-01 2022-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2022-01-01 2022-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2022-01-01 2022-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember 2022-01-01 2022-12-31 0001503274 us-gaap:GrantMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2022-01-01 2022-12-31 0001503274 qtrx:ResearchServicesMember 2022-01-01 2022-12-31 0001503274 qtrx:OtherServicesMember 2022-01-01 2022-12-31 0001503274 qtrx:InstrumentProductsMember 2022-01-01 2022-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceOtherMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 us-gaap:ServiceOtherMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 us-gaap:ServiceOtherMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 us-gaap:GrantMember qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember us-gaap:EMEAMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:NorthAmericaMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember srt:AsiaPacificMember 2021-01-01 2021-12-31 0001503274 us-gaap:LicenseAndServiceMember 2021-01-01 2021-12-31 0001503274 us-gaap:GrantMember 2021-01-01 2021-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2021-01-01 2021-12-31 0001503274 qtrx:ResearchServicesMember 2021-01-01 2021-12-31 0001503274 qtrx:OtherServicesMember 2021-01-01 2021-12-31 0001503274 qtrx:InstrumentProductsMember 2021-01-01 2021-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2021-01-01 2021-12-31 0001503274 us-gaap:EmployeeSeveranceMember 2023-12-31 0001503274 us-gaap:EmployeeSeveranceMember 2022-12-31 0001503274 qtrx:RouAssetsAndRelatedLeaseholdImprovementsMember us-gaap:OtherRestructuringMember 2023-01-01 2023-12-31 0001503274 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember us-gaap:OtherRestructuringMember 2022-01-01 2022-12-31 0001503274 us-gaap:GoodwillMember us-gaap:OtherRestructuringMember 2022-01-01 2022-12-31 0001503274 qtrx:RouAssetsAndRelatedLeaseholdImprovementsMember us-gaap:OtherRestructuringMember 2022-01-01 2022-12-31 0001503274 us-gaap:OtherRestructuringMember 2022-01-01 2022-12-31 0001503274 qtrx:NationalInstitutesOfHealthMember 2023-01-01 2023-12-31 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2023-01-01 2023-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2022-01-01 2023-12-31 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2022-01-01 2022-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2021-01-01 2021-12-31 0001503274 us-gaap:OtherMachineryAndEquipmentMember 2023-12-31 0001503274 us-gaap:OfficeEquipmentMember 2023-12-31 0001503274 us-gaap:ComputerEquipmentMember 2023-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2023-12-31 0001503274 qtrx:OfficeFurnitureAndEquipmentMember 2023-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2023-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2023-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2022-12-31 0001503274 qtrx:OfficeFurnitureAndEquipmentMember 2022-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2022-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2022-12-31 0001503274 qtrx:UnderwrittenPublicOfferingMember 2021-01-01 2021-12-31 0001503274 us-gaap:EmployeeSeveranceMember 2023-01-01 2023-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-01-01 2022-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-01-01 2021-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2023-01-01 2023-12-31 0001503274 qtrx:StratecSupplyAgreementMember 2023-12-31 0001503274 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2023-12-31 0001503274 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2022-12-31 0001503274 us-gaap:DomesticCountryMember 2023-12-31 0001503274 us-gaap:RetainedEarningsMember 2023-01-01 2023-12-31 0001503274 us-gaap:RetainedEarningsMember 2022-01-01 2022-12-31 0001503274 us-gaap:RetainedEarningsMember 2021-01-01 2021-12-31 0001503274 us-gaap:GrantMember qtrx:AlzheimerSDiseaseDiagnosticFundMember 2023-01-01 2023-12-31 0001503274 2022-07-01 2022-09-30 0001503274 srt:MinimumMember us-gaap:CustomerRelationshipsMember 2023-12-31 0001503274 srt:MaximumMember us-gaap:CustomerRelationshipsMember 2023-12-31 0001503274 srt:MinimumMember us-gaap:CustomerRelationshipsMember 2022-12-31 0001503274 srt:MaximumMember us-gaap:CustomerRelationshipsMember 2022-12-31 0001503274 us-gaap:TradeNamesMember 2023-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2023-12-31 0001503274 us-gaap:TradeNamesMember 2022-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2022-12-31 0001503274 2023-06-26 2023-06-26 0001503274 qtrx:RestrictedStockUnitsAndStockOptionsMember 2023-12-31 0001503274 qtrx:RestrictedStockUnitsAndStockOptionsMember 2023-01-01 2023-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2021-01-01 2023-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember 2023-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember 2023-12-31 0001503274 us-gaap:CommercialPaperMember 2023-12-31 0001503274 us-gaap:ServiceOtherMember 2023-01-01 2023-12-31 0001503274 us-gaap:ProductMember 2023-01-01 2023-12-31 0001503274 qtrx:UltradxLimitedCompanyMember 2023-01-01 2023-12-31 0001503274 qtrx:StratecSupplyAgreementMember 2023-01-01 2023-12-31 0001503274 qtrx:HarvardUniversityMember 2023-01-01 2023-12-31 0001503274 us-gaap:ServiceOtherMember 2022-01-01 2022-12-31 0001503274 us-gaap:ProductMember 2022-01-01 2022-12-31 0001503274 qtrx:UltradxLimitedCompanyMember 2022-01-01 2022-12-31 0001503274 qtrx:StratecSupplyAgreementMember 2022-01-01 2022-12-31 0001503274 us-gaap:ServiceOtherMember 2021-01-01 2021-12-31 0001503274 us-gaap:ProductMember 2021-01-01 2021-12-31 0001503274 qtrx:CustomersOutsideOfUnitedStatesMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2023-01-01 2023-12-31 0001503274 qtrx:CustomersOutsideOfUnitedStatesMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2022-01-01 2022-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2023-12-31 0001503274 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2023-12-31 0001503274 us-gaap:USTreasurySecuritiesMember 2023-12-31 0001503274 us-gaap:MoneyMarketFundsMember 2023-12-31 0001503274 2021-01-01 2023-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:USTreasurySecuritiesMember 2023-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember 2023-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember 2023-12-31 0001503274 us-gaap:CommercialPaperMember 2023-12-31 0001503274 us-gaap:CashAndCashEquivalentsMember 2023-12-31 0001503274 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2022-12-31 0001503274 us-gaap:MoneyMarketFundsMember 2022-12-31 0001503274 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember 2023-12-31 0001503274 us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2023-12-31 0001503274 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember 2022-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2022-12-31 0001503274 us-gaap:WarrantMember 2023-01-01 2023-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2023-01-01 2023-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2023-01-01 2023-12-31 0001503274 qtrx:EstimatedEsppPurchasesMember 2023-01-01 2023-12-31 0001503274 us-gaap:WarrantMember 2022-01-01 2022-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2022-01-01 2022-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2022-01-01 2022-12-31 0001503274 qtrx:EstimatedEsppPurchasesMember 2022-01-01 2022-12-31 0001503274 us-gaap:WarrantMember 2021-01-01 2021-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2021-01-01 2021-12-31 0001503274 qtrx:UnvestedRestrictedCommonStockAndRestrictedStockUnitsMember 2021-01-01 2021-12-31 0001503274 qtrx:EstimatedEsppPurchasesMember 2021-01-01 2021-12-31 0001503274 2020-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2023-01-01 2023-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2023-01-01 2023-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2023-01-01 2023-12-31 0001503274 qtrx:CostOfProductRevenueMember 2023-01-01 2023-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2022-01-01 2022-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2022-01-01 2022-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2022-01-01 2022-12-31 0001503274 qtrx:CostOfProductRevenueMember 2022-01-01 2022-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2021-01-01 2021-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2021-01-01 2021-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2021-01-01 2021-12-31 0001503274 qtrx:CostOfProductRevenueMember 2021-01-01 2021-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2023-01-01 2023-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-12-31 0001503274 qtrx:UltradxLimitedCompanyMember 2023-12-31 0001503274 qtrx:HarvardUniversityMember qtrx:LicenseAgreementsMember 2022-08-01 2022-08-31 0001503274 2021-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2023-01-01 2023-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2023-01-01 2023-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2023-12-31 0001503274 qtrx:EmployeeStockPurchase2017PlanMember 2019-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2023-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2023-01-01 2023-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-12-31 0001503274 us-gaap:CommonStockMember 2021-01-01 2021-12-31 0001503274 qtrx:RestructuringPlanQ32022Member 2021-01-01 2021-12-31 0001503274 2021-01-01 2022-12-31 0001503274 srt:MinimumMember 2023-01-01 2023-12-31 0001503274 srt:MaximumMember 2023-01-01 2023-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember 2023-12-31 0001503274 us-gaap:DomesticCountryMember 2018-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember qtrx:ThroughTaxYear2042Member 2023-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember qtrx:ThroughTaxYear2038Member 2023-12-31 0001503274 us-gaap:DomesticCountryMember qtrx:ThroughTaxYear2043Member 2023-12-31 0001503274 us-gaap:DomesticCountryMember qtrx:ThroughTaxYear2037Member 2017-12-31 0001503274 qtrx:StratecConsumablesGmbhMember qtrx:StratecSupplyAgreementMember 2023-01-01 2023-12-31 0001503274 qtrx:StratecConsumablesGmbhMember qtrx:StratecSupplyAgreementMember 2022-01-01 2022-12-31 0001503274 qtrx:StratecSupplyAgreementMember 2022-01-01 2024-12-31 0001503274 qtrx:OneCustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2023-01-01 2023-12-31 0001503274 qtrx:OneCustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2022-01-01 2022-12-31 0001503274 qtrx:CustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001503274 qtrx:RestructuringPlanQ32022Member 2023-01-01 2023-12-31 0001503274 qtrx:RestructuringPlanQ32022Member 2022-01-01 2022-12-31 0001503274 qtrx:NationalInstitutesOfHealthMember 2023-12-31 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2023-12-31 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-06-30 0001503274 us-gaap:FairValueMeasurementsNonrecurringMember 2023-01-01 2023-12-31 0001503274 srt:MinimumMember 2023-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2023-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2023-12-31 0001503274 qtrx:KnowHowMember 2023-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2022-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2022-12-31 0001503274 qtrx:KnowHowMember 2022-12-31 0001503274 qtrx:NationalInstitutesOfHealthMember 2022-09-21 2022-09-21 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2022-03-24 2022-03-24 0001503274 qtrx:RapidAccelerationOfDiagnosticsRadxProgramWorkplanTwoMember 2020-09-29 2020-09-29 0001503274 qtrx:EliLillyMember qtrx:MasterCollaborationAgreementMember 2022-01-01 2022-03-31 0001503274 qtrx:EliLillyMember qtrx:StatementOfWorksAgreementMember 2022-01-01 2022-03-31 0001503274 qtrx:UltradxLimitedCompanyMember 2022-09-30 0001503274 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember qtrx:UltradxLimitedCompanyMember 2023-04-01 2023-06-30 0001503274 qtrx:UltradxLimitedCompanyMember 2023-04-01 2023-06-30 0001503274 qtrx:UltradxLimitedCompanyMember 2022-07-01 2022-09-30 0001503274 qtrx:RestructuringPlanQ32022Member 2023-12-31 0001503274 qtrx:RestructuringPlanQ32022Member 2022-12-31 0001503274 2023-12-31 0001503274 2022-12-31 0001503274 2022-01-01 2022-12-31 0001503274 2021-01-01 2021-12-31 0001503274 2023-10-01 2023-12-31 0001503274 2023-06-30 0001503274 2024-02-26 0001503274 2023-01-01 2023-12-31 xbrli:shares iso4217:USD xbrli:pure qtrx:customer qtrx:project qtrx:item iso4217:USD xbrli:shares qtrx:position +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2023 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission file number: 001-38319 +QUANTERIX CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +20-8957988 +(I.R.S. Employer Identification No.) +900 Middlesex Turnpike , Billerica , MA +(Address of principal executive offices) +01821 +(Zip Code) +Registrant’s telephone number, including area code: ( 617 ) 301-9400 +Securities registered pursuant to Section 12(b) of the Exchange Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value per share +QTRX +The Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Exchange Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No ◻ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ◻ No ⌧ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ⌧ +Accelerated filer ◻ +Non-accelerated filer ◻ +Smaller reporting company ◻ +Emerging growth company ◻ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +As of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2023), the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last reported sales price for the registrant’s common stock, par value $0.001 per share, on The Nasdaq Global Market on such date, was approximately $ 796 million. +As of February 26, 2024, the registrant had 38,063,618 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s proxy statement for its 2024 Annual Stockholders’ Meeting, which the registrant intends to file with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2023, are incorporated by reference into Part III of this Annual Report on Form 10-K. +Table of Contents +QUANTERIX CORPORATION +INDEX TO FORM 10-K +Note Regarding Forward-Looking Statements +Page +PART I +Item 1. +Business +1 +Item 1A. +Risk Factors +19 +Item 1B. +Unresolved Staff Comments +38 +Item 1C. +Cybersecurity +39 +Item 2. +Properties +40 +Item 3. +Legal Proceedings +40 +Item 4. +Mine Safety Disclosures +40 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +41 +Item 6. +Reserved +42 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +43 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +55 +Item 8. +Financial Statements and Supplementary Data +56 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +56 +Item 9A. +Controls and Procedures +56 +Item 9B. +Other Information +61 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +61 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +62 +Item 11. +Executive Compensation +62 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +62 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +62 +Item 14. +Principal Accountant Fees and Services +62 +PART IV +Item 15. +Exhibits and Financial Statement Schedules +63 +Item 16. +Form 10-K Summary +67 +Signatures +68 +Consolidated Financial Statements +F-1 +i +Table of Contents +Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “it,” “us,” and “our” in this Annual Report on Form 10 K refer to Quanterix Corporation and its consolidated subsidiaries. +Note Regarding Forward-Looking Statements +This Annual Report on Form 10-K contains forward-looking statements (within the meaning of the U.S. Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, forward-looking statements can be identified by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about: +● the implementation of our business model and strategic plans for our business, products and services, especially following the restructuring and strategic realignment we commenced in the third quarter of 2022; +● the potential size of the markets and fields addressable by our Simoa technology platforms; +● the commercialization and adoption of our existing products and services and the success of our new product and service offerings; +● our estimates regarding expenses, future revenues, capital requirements, and our needs for additional financing; +● the ability of our Simoa technology’s sensitivity to improve existing diagnostics and to enable the development of new diagnostic tests and tools; +● the potential of our Simoa technology in the field of screening/diagnostic tests linked to therapeutic drugs and adoption by healthcare professionals; +● the impact of our Simoa technology on proteomic research; +● our ability to realize the intended benefits of our assay redevelopment program; +● our ability to retain and expand our customer base and achieve sufficient market acceptance of our products; +● the ability of our contract manufacturers to reliably and consistently manufacture and supply our Simoa instruments; +● the usefulness of the data generated by our Simoa technology in the life science research and diagnostics fields; +● our ability to successfully penetrate the diagnostics market; and +● our future financial performance. +These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those further described in the section titled “Part I, Item 1A, Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. +Readers should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to new information, actual results, or to changes in our expectations, except as required by law. +ii +Table of Contents +Readers should read this Annual Report on Form 10-K and any documents referenced herein that we have filed with the Securities and Exchange Commission (“SEC”) as exhibits to this Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect. +This Annual Report on Form 10-K includes statistical and other industry, and market data that we obtained from industry publications and research, surveys, and studies conducted by third parties. Industry publications and third-party research, surveys, and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Such data involves a number of assumptions and limitations and contains projections, and estimates of the future performance of the markets in which we operate and intend to operate that are subject to a high degree of uncertainty. We caution not to give undue weight to such projections, assumptions and estimates. +Service Marks, Trademarks, and Trade Names +“Quanterix,” “Simoa,” “Simoa HD-X,” “Simoa HD-1,” “SR-X,” “SP-X”, “HD-X”, “LucentAD,” “Lucent Diagnostics,” and our logo are our trademarks. All other service marks, trademarks, and trade names appearing in this Annual Report on Form 10-K are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us, by these other companies. +iii +Table of Contents +PART I +ITEM 1. BUSINESS +Overview +We are a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology and enable customers to reliably detect protein biomarkers at ultra-low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies. The ability of our Simoa platforms to detect proteins in the femtomolar range is enabling the development of novel therapies and diagnostics and has the potential to facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis, and, ultimately, prevention. Our Simoa platforms have achieved significant scientific validation and commercial adoption, and our Simoa technology has been cited in more than 2,700 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease, and inflammation. +Industry Background +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. Proteins are analytes that are highly relevant physiologically, providing real-time pictures of disease, and researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. +Enzyme-linked immunosorbent assay (“ELISA”) technology has been the most widely used method of sensitive detection of proteins for more than 50 years. In simple terms, ELISA involves using a plate coated with an antibody that binds to the target molecule. If the target is present in the sample, it attaches to the plate via the antibody. Then, a second molecule, often an enzyme-linked antibody, is added, binding to the target. The enzyme produces a detectable signal (like fluorescence or a color change) when a specific substrate is added, indicating the presence and quantity of the target molecule in the sample. Although ELISA is widely used in medical diagnostics and research, it has very significant limitations, including: +● limited sensitivity due to dilution of colored or fluorescent product molecules in the large volume of liquid in traditional-sized wells; +● narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +● low detection limit of readers restricts sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +● limited success in increasing sensitivity of detection due to procedural complexity and length. +Our Simoa Technology +Our Simoa bead-based and planar array technologies are based on traditional ELISA technology but significantly advance conventional ELISA technology and are capable of substantially greater protein detection sensitivity. We believe that our Simoa platforms are among the most sensitive commercially available multiplex protein detection platforms. +1 +Table of Contents +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA. However, unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity in the femtomolar range compared with nanomolar and picomolar levels of detection in conventional ELISA. +Our Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA. However, unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. +Restructuring Plan +In August 2022, we announced a restructuring and strategic realignment plan (the “Restructuring Plan”). The Restructuring Plan included the elimination of 119 positions across the Company in 2022 and other cost-saving measures that were substantially completed in 2022. T he Restructuring Plan also included an assay redevelopment program with the objective of improving our ability to manufacture and deliver high-quality assays at scale. This six-quarter operational program was substantially completed in the fourth quarter of 2023, and we have now launched five new Simoa Advantage PLUS assays. The Simoa Advantage PLUS assays have been developed using improved protocols, by leveraging manufacturing efficiencies and reagent improvements to provide more consistent results and improved lot-to-lot consistency, and through enabling production of larger lot sizes with extended shelf lives. These assays began shipping to customers in the first quarter of 2024. We expect to continue to apply these improved protocols and manufacturing efficiencies to other existing assays and assays that we may develop in the future. +Our Strategy +Our commercial strategy is to pursue the application of our Simoa technology in life science research/pharma and diagnostics. Our strategy to achieve this includes: +● Continue to drive adoption of our Simoa technology in life science research/pharma. We believe our Simoa technology has the potential to significantly expand the life science research market and is uniquely positioned for use by pharmaceutical companies in drug trials as biomarkers are being increasingly used as an adjunct to help increase the potential of regulatory approval. +● Expand our presence in diagnostics. We believe Simoa technology has the capability to enable the development of a new category of less-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive, and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +2 +Table of Contents +● Leverage the growing importance of neurological biomarkers to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of neurological biomarkers, such as neurofilament light chain (NfL), p-Tau 181, p-Tau 217 and glial fibrillary acidic protein (GFAP) , has increased significantly in recent years, and our ultra-sensitive Simoa platforms have allowed research of neurological disorders, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly. +● Expand further into indications beyond neurology. Although we believe that our ultra-sensitive Simoa platforms are particularly well suited for neurology indications, we also believe that the ability of our Simoa technology to detect and quantify low abundance proteins is a distinct advantage in detecting disease earlier in other indications, including oncology, infectious disease, inflammation and cardiology, and there are over 800 scientific publications that reference our Simoa technologies in non-neurology indications. +Our Market Opportunities +Based on industry estimates, the life science research/pharma and diagnostics markets are believed to have an aggregate total addressable market (“TAM”) of approximately $75 billion. +Life Science Research/Pharma +We have targeted the large and growing life science research and pharma market because of the relatively low regulatory and reimbursement risk. We believe our Simoa platforms are well-positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing, and the ability to work with a broader range of sample types. +Researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. +In addition, as pharmaceutical companies look for ways to more efficiently and effectively develop and obtain regulatory approval for drugs, use of biomarkers in clinical drug trials is becoming more prevalent. Biomarkers are increasingly being used as clinical endpoints in clinical trials. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. Drug developers can also use diagnostics to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. +Based on industry estimates, we believe the proteomics life science research/pharma TAM is approximately $20 billion. +Diagnostics +Diagnostics represents a significant commercial opportunity for our Simoa technology. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +3 +Table of Contents +Based on industry estimates, we believe the proteomics diagnostics TAM is approximately $55 billion. +Our Products and Services +Instruments +We currently offer the following three Simoa instruments, which we believe are among the most sensitive multiplex protein detection platforms commercially available today: +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument, which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. By the end of 2023, approximately 82% of the HD installed base were HD-X instruments. +SR-X +We commercially launched our SR-X instrument in December 2017 as a compact benchtop instrument with a lower price point, more flexible assay preparation, and a wider range of applications. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X. In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instrument using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon Biosystems (Aushon), which we acquired in 2018, for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide sensitivity similar to that found in our Simoa bead-based platform. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 36 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the +4 +Table of Contents +planar array instrument includes approximately 95 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to the assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes and disposable tips. +NfL Antibodies and NfL ELISA Kits +In August 2019, we acquired UmanDiagnostics AB (“Uman”), a company located in Umeå, Sweden, that commercializes proprietary NfL antibodies and NfL ELISA kits. Uman’s NfL antibodies are used by researchers and biopharmaceutical and diagnostics companies to detect NfL to advance the development of therapeutics and diagnostics for certain neurodegenerative conditions. Since we commercially launched the first assay that could reliably measure NfL in blood using Uman’s antibodies and our Simoa technology in 2017, NfL has seen dramatic growth as a neurological biomarker. Through Uman we sell proprietary NfL capture and detection antibodies, as well as two NfL ELISA kits for CSF, one of which is CE-certified in Europe, and one research use only (“RUO”) NfL ELISA kit for serum. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. The Accelerator Laboratory supports multiple projects and services, including: +● Sample Testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +● Homebrew Assay Development. Utilizing proprietary or commercially available reagents in combination with our homebrew assay kits, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +● Custom Assay Development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +● Lucent Diagnostics. In July 2023, we launched Lucent Diagnostics, our brand for clinical testing services for healthcare providers in the field of neurology, with testing services initially focused on Alzheimer’s disease. The first product offering was LucentAD, a blood test to aid in the evaluation of patients experiencing cognitive symptoms consistent with the early signs of Alzheimer’s disease. Subsequently, we launched an additional blood test for Alzheimer’s disease, LucentAD p-Tau 217, in October 2023. The process for testing involves a healthcare provider drawing a blood sample from an individual, shipping the sample to our Accelerator Laboratory, to analyze the sample and communicating the result back to the provider. To support a streamlined provider workflow, we have also launched a web portal where healthcare providers can order sample collection materials, order a test, track the status of a test and retrieve the test report. +● LDT Testing. We currently offer three laboratory developed tests (LDTs) through our CLIA-certified laboratory: (1) an LDT to quantitatively measure p-Tau 181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease; (2) an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system +5 +Table of Contents +damage; and (3) an LDT to quantitatively measure p-Tau 217 in plasma to aid in the diagnosis of Alzheimer’s disease. +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continue to seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We intend to selectively expand our assay menu to extend the scope of applications for our platform to biomarkers of significant interest to the scientific community. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses, including neurology and oncology, as well as cardiology, infectious disease, and inflammation. +Neurology +The ability of Simoa technology to detect neurological biomarkers in blood at ultra-low levels, combined with our multiplexing capability, has significantly advanced neurology research, drug development, and diagnostics test development. Prior to the launch of our p-Tau 181 LDT for clinical use in July 2022, the brain was the only organ in the body for which there was not a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either brain imaging or a spinal tap to collect CSF. The sensitivity of Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood brain barrier and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of many of these neural biomarkers in the blood can be so low that they are difficult to detect by conventional, analog immunoassay technologies. Furthermore, neurological pathophysiology is complex, and it has become clear that no single biomarker is sufficient to serve as comprehensive indicator of these processes. For this reason, the capability of Simoa to multiplex blood-based tests for multiple neural biomarkers into a single test has emerged as enormously useful to facilitate biomarker profiling of neurological disorders. This capability has materially contributed to rapid research progress, notably in the Alzheimer’s disease landscape. +Developments on the Alzheimer’s Disease Landscape +The FDA approval of Leqembi as a disease-modifying treatment for Alzheimer’s disease, and the ongoing FDA review of donanemab, has underscored a need for a non-invasive widely available blood test to facilitate diagnosis in the early stages of the disease to identify patients for treatment when therapeutic intervention is most likely to deliver clinical benefit. Currently established biomarker-based approaches to diagnostic workup for Alzheimer’s include positron emission tomography (PET) imaging and CSF biomarkers for amyloid and phosphorylated tau, both of which are invasive, expensive, and may not be widely available. A Rand Corporation study on the readiness of the U.S. health care system infrastructure for an Alzheimer’s treatment highlighted a dire situation of unpreparedness and where key bottlenecks lie. The model assumed annual mild cognitive impairment (MCI) screening for adults leading to 7.5 million referrals to a diagnostic phase in a secondary specialist setting, which is well beyond the country’s capacity. Of these referrals, 6.7 million were assumed to require CSF biomarker or amyloid PET testing for biomarker-based diagnosis of Alzheimer’s disease at an estimated cost of $20.1 billion. Of the amyloid positive subjects, 80% (2.4 million) were assumed to fit the criteria for therapeutic intervention. Assessing the effectiveness of an anti-amyloid Alzheimer’s +6 +Table of Contents +therapy by testing for amyloid plaque reduction over the course of treatment would potentially involve serial testing of each subject with CSF analysis or PET imaging at a significant cost with currently available detection modalities. The availability of a simple blood test for amyloid positivity has the potential to alleviate bottleneck and cost burdens and facilitate the accessibility of Alzheimer’s therapeutic intervention for patients. We believe our Simoa technology is well-suited to meet this critical need. +High Accuracy Simoa p-Tau 217 Test +The Alzheimer’s field has converged to a consensus on the most desirable single blood-based biomarker at present: plasma p-Tau 217. This biomarker has been shown to out-perform all the other plasma biomarker candidates for Alzheimer’s diagnostics and disease progression monitoring. The biomarker also has the distinction of being very low abundance in blood and difficult to measure by conventional means. Quanterix is well-positioned to provide multiple assays for robustly measuring p-Tau 217 in plasma and helping to establish the clinical evidence through a body of peer reviewed publications demonstrating the superiority of this biomarker relative to other biomarkers. While p-Tau 217 has demonstrated superiority over other neural biomarkers, the strength of the data across all the biomarker candidates (p-Tau 217, p-Tau 181, amyloid b 42/40 ratio, GFAP, NfL) is such that all these biomarkers have been included in the recent updated criteria for diagnosis and staging of Alzheimer’s disease from the National Institute on Aging and Alzheimer’s Association (NIA-AA). However, only p-Tau 217 has been recommended by the NIA-AA as being sufficiently accurate as a single biomarker to enable a diagnostic use case. With this recent consensus on p-Tau 217, Quanterix has launched an LDT for p-Tau 217 to make the test available for clinical use. The test was extensively validated across two independent cohorts (873 samples), and the diagnostic accuracy of the test was shown to meet or exceed the recommendation of the NIA-AA (≥90% accuracy, sensitivity and specificity ≥90%). Thus, the Simoa p-Tau 217 test meets or exceeds the diagnostic performance criteria for the only plasma-based test for Alzheimer’s disease recommended by the NIA-AA. +Simoa Multi-Marker Algorithmic Test +Leveraging both the multiplexing and high sensitivity capability of Simoa, Quanterix has developed a multiplex test that combines four biomarkers into a single plasma test: amyloid b 42, amyloid b 40, GFAP, and NfL. This 4-plex assay, along with p-Tau 181 and p-Tau 217, has been employed by researchers to advance the understanding of how blood-based biomarkers reflect different aspects of Alzheimer’s pathology to both further the basic knowledge of the disease pathophysiology, and to explore the potential of these biomarkers to predict disease state, severity, and progression. This work has resulted in a large body of published evidence that has advanced the understanding of the disease and facilitated drug development through the use of these biomarkers as exploratory indicators of drug target engagement. From a diagnostic test standpoint, a central concept has emerged: since these biomarkers reflect different aspects of Alzheimer’s pathology, combining their signals through logistic regression can enhance overall test accuracy. Furthermore, profiling these biomarkers individually can help clinicians evaluate patients with cognitive symptoms with differential diagnostic information. This information, together with clinical evaluations and cognitive testing, can help determine whether cognitive symptoms are the result of Alzheimer’s disease, or another type of dementia. For example, a patient presenting with cognitive symptoms who has a normal p-Tau 181/217 level, but an abnormal NfL level, is likely to have frontal temporal dementia (FTD). For these reasons, Quanterix is partnering with the Alzheimer’s Drug Discovery Foundation to develop and clinically implement a multi-marker blood test to aid Alzheimer’s diagnosis and differential diagnosis of patients presenting with cognitive symptoms of uncertain origin. The validation of the test includes the 4-plexed biomarkers listed above together with p-Tau 217, and this test is expected to launch in 2024. +Other Neurological Conditions +Our ultra-sensitive Simoa technology has also been instrumental in advancing research into other neurological conditions, such as multiple sclerosis and traumatic brain injury (“TBI”). Evidence of the potential clinical utility of NfL as a biomarker in multiple sclerosis has progressed rapidly, and Simoa’s role in that progression has been foundational. In the past several years, Simoa technology has supported a number of scientific presentations at the 39 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (“ECTRIMS”), the world’s largest meeting dedicated to advancing research for multiple sclerosis. In April 2022, the FDA granted our Simoa NfL plasma test Breakthrough Device designation as a prognostic aid in assessing the risk of disease activity in patients diagnosed with +7 +Table of Contents +relapsing-remitting multiple sclerosis (“RRMS”). The test has shown promise to be used in conjunction with clinical, imaging and laboratory findings as an aid in identifying RRMS patients who are at lower or higher risk for relapse within four years. We believe this prognostic information could be clinically useful in tailoring the therapeutic approach to more effectively treat the disease. +Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as NfL, tau, GFAP and UCH-L1, to more adequately aid in diagnosis of TBIs and overall brain health. Researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy (CTE), which currently can only be diagnosed after death via a brain autopsy. +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability has the potential to enable earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of health-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the health-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a number of tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring health-oncology drugs and protocols. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +8 +Table of Contents +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to impact the reduction of the spread of infectious diseases by making early stage detection more specific and widely available. +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly one in four deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional countries, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, we sell Uman’s NfL antibodies and NfL ELISA kits directly and in conjunction with a distributor worldwide. +As of December 31, 2023, we had 141 employees in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We expect we will expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China and other Asia-Pacific region countries where significant new opportunities exist. +Manufacturing and Supply +We outsource the development and manufacturing of our Simoa bead-based instruments to third-party manufacturers, and we develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is manufactured by STRATEC Biomedical AG (“STRATEC”), based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. The SR-X is manufactured by Paramit Corporation (“Paramit”), based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements” for a description of our agreements with STRATEC and Paramit. Installation of, and training on, our instruments is provided by our employees where we conduct direct sales, and by distributors where sales are conducted through distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we could experience additional costs, delays and difficulties in doing so, and our business could be harmed. +9 +Table of Contents +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component that is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply SP-X instruments on a timely basis. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Our bead-based assays include all components required to run an enzyme-based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. As part of our assay redevelopment program, we have increased the shelf life of our bead-based assays to 18 months and believe we are able to mitigate this supplier risk through inventory control. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC. We believe that this agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC, and the disposable tips used in our bead-based platform are commercially available. +We assemble our 96-well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +NfL antibodies and NfL ELISA Kits +The storage of Uman’s proprietary NfL antibody producing hybridomas, as well as the cultivation and purification of the antibodies, is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s NfL ELISA kits. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s NfL ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. The kit components include buffers (sample diluents and wash solutions), ELISA 96-well plates coated with a capture antibody, detector antibodies, streptavidine conjugates, substrates (TMB) and stop reagents. The final ELISA kit products are subject to quality control procedures, which include testing of human CSF or human serum quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months (NF-light ELISA (CSF)) or 13 months (NF-light Serum ELISA). +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. In September 2011, +10 +Table of Contents +we also entered into a Supply and Manufacturing Agreement with STRATEC (the “STRATEC Supply Agreement”), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase our common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the “Paramit Agreement”) with Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts for the SR-X instrument. Paramit has no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement had an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for proteomics discovery and clinical research applications. For example, companies such as Bio-Techne, DiaSorin, MesoScale Discovery, Gyros, SEER, MilliporeSigma, Bio-Rad Laboratories, Thermo Fisher Scientific, Roche, C2N Diagnostics, and others, have products for protein measurements in biofluids that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as LabCorp, Covance, Q2 Solutions, Rules Based Medicine, Monogram Biosciences, PPD Laboratories, and others, some of which are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for life science research and diagnostics. Many of the companies with which we compete or will compete have substantially greater resources than we have. +11 +Table of Contents +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors for us include: +● sensitivity; +● cost of instruments and consumables; +● reputation among customers and key opinion leaders; +● innovation in product offerings; +● accuracy and reproducibility of results; and +● customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations, and partnerships with key opinion leaders. +Intellectual Property +Our success depends in part on our ability to obtain and maintain intellectual property protection for our products and technology. We use a variety of intellectual property protection strategies, including patents, trademarks, trade secrets, and other methods of protecting proprietary information. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature, seeking to protect not only technology we currently practice but also alternative, related embodiments. +As of December 31, 2023, we owned or exclusively licensed 105 issued patents and patent applications worldwide. Our owned or exclusively licensed patents and patent applications, if issued, are expected to expire between 2025 and 2042, in each case without taking into account any possible patent term adjustments or extensions and assuming payment of all appropriate maintenance, renewal, annuity or other governmental fees. +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University (Tufts), in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating ultra-sensitive detection. We have exclusively licensed from Tufts the relevant patent filings related to these technologies. (See “—License Agreement with Tufts University” below). +In addition to our reliance on patent protection for our inventions, products and technologies, we also rely on trade secrets, know-how, confidentiality agreements, and continuing technological innovation to develop and maintain our competitive position. For example, some elements of our manufacturing processes, analytics techniques and processes, as well as computational-biological algorithms, and related processes and software, are based on unpatented trade secrets and know-how that are not publicly disclosed. Although we take steps to protect our proprietary information and trade secrets, including through contractual means with our employees, advisors and consultants, these agreements may be breached or may be unenforceable and we may not have adequate remedies. In addition, third parties may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. As a result, we may not be able to meaningfully protect our intellectual property. For further discussion of the risks relating to our intellectual property, see the section titled “Risk factors—Risks Related to our Intellectual Property.” +12 +Table of Contents +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to all patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable. +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our stock. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +The majority of our products are currently intended for RUO applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or the Center for Medicare & Medicaid Services (“CMS”). Although most in vitro diagnostic products intended for RUO are not currently required to obtain premarket clearance or approval by the FDA, products labeled as RUO are subject to the FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than non-clinical research purposes. Consequently, other than our three laboratory developed tests intended for clinical testing, our products are labeled and intended “For Research Use Only. Not for Diagnostic Procedures.” +The FDA has issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (the “RUO/IUO Guidance”). The purpose of this FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for investigational use only (“IUO”) and when products labeled RUO or IUO will be viewed by the FDA as intended for clinical use. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s premarket notification and clearance process (510(k)), premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. We believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. +IVD tests intended for clinical diagnostic use are regulated by the FDA as medical devices, however, the FDA has traditionally not regulated certain laboratory tests referred to as laboratory developed tests (“LDTs”) (as discussed further below). The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other +13 +Table of Contents +conditions or in the cure, mitigation, treatment, or prevention of disease in man. The FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising, and labeling of our clinical IVD devices (other than our LDTs) and we will be required to register as a medical device manufacturer and list our marketed products. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +We own and operate a CLIA-certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of research testing that does not report patient specific results). A clinical laboratory is defined by CLIA as any facility that performs examinations of specimens obtained from humans for the purpose of providing information for the diagnosis, prevention, or treatment of any disease or impairment of, or the assessment of health of, human beings. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program for each of the specialties and subspecialties for which it is certified. If a laboratory fails to achieve a passing score on a proficiency test, then its CLIA certificate may be suspended, limited or revoked, or other sanctions may be imposed. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year (except laboratories with only a certificate of waiver or certificate of provider-performed microscopy procedures are not subject to biennial inspections), in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been offered by high-complexity laboratories for the last few decades as LDTs, the validation and performance of which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs under the agency’s medical device authorities, but historically has not exercised enforcement with respect to most LDTs when they meet FDA’s definition of an LDT. FDA defines an LDT as an in vitro diagnostic that is intended for clinical use and is designed, manufactured, and used within a single high-complexity, CLIA-certified laboratory. In 2010, the FDA had announced that it decided to exercise regulatory authority over LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. The FDA never finalized such guidance and later indicated that Congress should enact legislation to address improved oversight of diagnostics, including LDTs, rather than the FDA addressing the issue through administrative proposals. However, over the past several years, FDA has increased its oversight of what it perceived as especially high-risk LDTs, and in October 2018 the FDA issued a safety communication warning against the use of unapproved LDTs that describe relationships between gene variants and particular drugs. FDA also regulated LDTs for Covid-19 under its emergency use authorization (“EUA”) authority and related guidance. In August 2020, the Department of Health and Human Services (“HHS”) issued a policy stating that FDA could not require premarket review (including EUAs) for LDTs, but this policy was revoked by the HHS in November 2021 (accordingly, reinstating FDA’s EUA requirements for Covid-19 LDTs). Thus, while FDA generally exercises enforcement discretion for LDTs, it continues to exercise oversight over certain high-risk tests. In addition, over the past several years, several bills to establish a new FDA regulatory framework with similarities to the current medical device framework for “in vitro clinical tests,” which would include both in vitro diagnostics and LDTs, have been introduced but have not been enacted. +Most recently, however, in September 2023, FDA issued a proposed rule regarding LDTs that would establish that in vitro diagnostic products are devices under the Federal Food, Drug, and Cosmetic Act, including when the manufacturer is a laboratory. The proposed rule also describes a policy under which FDA would provide greater oversight of LDTs by phasing out its general enforcement discretion approach, and phase in medical device regulation, for LDTs over a period of four years. FDA requested comment on several aspects of its proposal and approach, including whether certain types of LDTs should remain under enforcement discretion. Currently FDA’s target date for final action on this rule is April 2024, but we cannot predict the ultimate timing or form of FDA guidance or regulation, legislative +14 +Table of Contents +action or their potential impact. Any new regulatory approach for LDTs by the FDA, including as described in the September 2023 proposed rule, would likely lead to an increased regulatory burden, including additional costs and delays in introducing new LDTs, and could result in tests being removed from the market if regulatory clearance or approval from FDA cannot be obtained. +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, New York, Pennsylvania, Rhode Island, and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out-of-state laboratories to obtain licensure. Laboratories also must receive approval from New York for any LDT that has not been reviewed by FDA, to the extent that LDT is offered to New York patients. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third-party payors. +When we perform clinical diagnostic testing, we may be subject to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), depending on the types of transactions we engage in, as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +We must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, in the European Union (the “E.U.”) new regulations recently entered into force that introduce greater regulation of medical devices and IVDs. The new IVD regulation (the “IVD Regulation”) is significantly different from the European directive for IVD medical devices (the “IVD Directive”) that it replaces in that it ensures that the new requirements apply uniformly and on the same schedule across the member states, includes a risk-based classification system and increases the requirements for conformity assessment. +The CE registration for the NfL ELISA assay kit of our subsidiary Uman was approved in March 2014 under the IVD Directive . Under the IVD Directive, the assay is classified as a general IVD product and required self-certification with no involvement of a notified body/authority. The IVD Regulation introduces a new classification system for IVDs and assessment by a notified body is required for class B, C and D products. Uman’s NfL ELISA assay kit is classified as a class B product and must fully comply with (and have a CE mark issued under) the IVD Regulation by May 2027 (subject to proposed extension of the transitional periods in the IVD Regulation). The new requirements include an ISO 13485 certification of the quality system (which Uman received in July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g., clinical evidence and post-market activities). The work to evaluate and to meet the new technical requirements is on-going. When all requirements are met, a notified body will be contacted, and the certification initiated. +The NF-light Serum ELISA is currently sold only as a RUO product (not intended for diagnostic use). Work is on-going to prepare a technical file compliant with the IVD Regulation for this product as well. +Other Governmental Regulation +Privacy and Data Security Laws and Regulations +As a business with a global footprint, compliance with evolving regulations and standards in privacy and data security has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of +15 +Table of Contents +increased regulatory enforcement activity. Our business relies on various safeguards to secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce. +For example, in the U.S., the collection, maintenance, protection, use, transmission, disclosure, and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international, and industry levels. U.S. federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by health care providers. Privacy and Security Rules under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), govern the use, disclosure, and security of protected health information by “Covered Entities,” (which include health care providers that submit electronic claims, health plans, and health care clearinghouses) and by their “Business Associates” (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the Covered Entity’s workforce). Rules under HIPAA and HITECH include specific security standards and breach notification requirements. HHS (through the Office for Civil Rights) has direct civil enforcement authority against Covered Entities and Business Associates with regard to both the Security and Privacy Rules. The U.S. Department of Justice has criminal enforcement authority against Covered Entities, Business Associates, and certain other entities and individuals. In addition, State Attorneys General may being enforcement actions under HIPAA. Generally Quanterix is not a Covered Entity, however, we may operate as a Business Associate to Covered Entities under certain circumstances. +In addition, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for personal information, such as comprehensive state privacy laws that govern the use, disclosure and protection of personal information, such as certain health information, Social Security numbers, and credit card account data. State consumer protection laws and consumer health privacy laws also establish privacy and security standards for use and management of personal information, including information related to consumers and care providers. +Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. Legal requirements in foreign countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the E.U., stringent data protection and privacy rules which substantially impact the use of patient data across the healthcare industry became effective in May 2018. The E.U. General Data Protection Regulation (“GDPR”) applies uniformly across the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals residing in the E.U. to comply with E.U. privacy and data protection rules. In the area of health data, the GDPR is supplemented by national laws and regulations that are less harmonized. +Because data privacy laws and regulations continue to expand, differ from jurisdiction to jurisdiction, and are subject to evolving (and at times inconsistent) governmental interpretation, compliance with these laws and regulations may require significant additional expenditures or changes in products or business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities. +Environmental Health and Safety Laws +We are subject to federal, state, and local laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation, storage and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (“OSHA”), has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. OSHA also regulates the use of hazardous chemicals in the workplace. Likewise, we are subject to EPA and state requirements +16 +Table of Contents +relating to the management and disposal of hazardous waste, and state requirements relating to the disposal of regulated medical waste. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +Employees and Human Capital +As of December 31, 2023, we had 441 full-time employees, of which 141 worked in sales, sales support, field service, and marketing, 121 worked in engineering and research and development, 117 worked in manufacturing and operations and 62 worked in general and administration. Of our 441 full-time employees, 382 were located in the United States and 59 were located in 13 foreign countries. None of our employees is represented by a labor union or subject to a collective bargaining agreement. We have a strong culture that emphasizes the impact our work has on the detection of neurological and other critical disorders. +Our success depends upon our ability to attract and retain highly qualified employees. Talent management is critical to our ability to execute our long-term growth strategy, and we seek to cultivate a high performing pool of talent by providing career growth, on-the-job learning opportunities and competitive total rewards. +Workforce Compensation and Pay Equity +We provide competitive compensation and benefits programs to help recruit and retain our high performing employees. We utilize third party benchmark compensation data to assist in the evaluation of market wages. Our compensation is designed to attract, retain, and motivate employees to achieve results while balancing short- and long-term company performance. All of our employees are eligible for an annual bonus and/or commission plan, a matching 401(k) Plan (in the case of US employees), healthcare and insurance benefits, paid time off, family leave, employee assistance programs, and behavioral health services. Additionally, all our employees are eligible for annual equity-based grants with vesting conditions designed to award our employees’ performance and encourage retention. +Company Culture +We are committed to an inclusive culture which is grounded on our values of integrity, respect, and equality. In support of our inclusive culture, we sponsor an internal group of culture champions who are focused on diversity, equity, and inclusion. These champions are comprised of employees and executives whose mission is to provide respectful workplace training and awareness to strengthen employee understanding and knowledge of key topics focused on diversity and inclusion. As of December 31, 2023, approximately 43% of our employees were women and approximately 40% of our employees were non-white. +We expect all personnel working at Quanterix, employees, interns, and contractors, to observe the highest levels of business ethics, integrity, and mutual respect. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies that reflect our values and provide guidance for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization, and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is dependent on the physical and mental well-being of our employees. Accordingly, we are committed to creating a safe and healthy workplace for all personnel. We provide our employees with a wide range of policies and practices to ensure an environment of physical and psychological safety and well-being. +17 +Table of Contents +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. Our electronically filed reports and other information that we file with the SEC can be viewed on the SEC’s website at http://www.sec.gov . +18 +Table of Contents +ITEM 1A. RISK FACTORS +The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page ii of this Annual Report on Form 10-K for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. +Risk Factor Summary +Our business is subject to numerous risks and uncertainties. The following summary highlights some of the risks to be considered with respect to our business and prospects. This summary is not complete and the risks summarized below are not the only risks we face. Readers should review and carefully consider the risks and uncertainties described in more detail below, which includes a more complete discussion of these risks. +● Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, which could cause the value of our common stock to fluctuate or decline significantly. +● We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +● Failure to remediate material weaknesses in, or inherent limitations associated with, our internal control over financial reporting could result in material misstatements in our financial statements. +● If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +● Sales of our assays for neurological indications have become increasingly important to our business, and any significant decrease in sales of such assays could have a material adverse effect on our business. +● We may not be successful in penetrating the diagnostics market . +● Because a significant portion of our revenue comes from a few large customers, any significant decrease in sales to these customers, due to industry consolidation or otherwise, could harm our operating results. +● Our long-term results depend upon our ability to improve existing products, develop or acquire new technology, and develop, introduce and market new products successfully. +● Defects or other quality issues in our products could lead to unforeseen costs, product recalls, adverse regulatory actions, negative publicity, and litigation, including product liability claims, any of which could cause customers to decide not to purchase our products, harm our reputation, and negatively affect our sales, operating results and financial condition . +● We generate a substantial portion of our revenue internationally and we expect this will continue in the future; as a result, our business is subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +● We rely on a single contract manufacturer to manufacture and supply our Simoa HD-X instrument and rely on a different single contract manufacturer to manufacture and supply our Simoa SR-X. If either of these manufacturers should fail to perform, or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +● We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and our SP-X instrument, and we may not be able to find replacements or immediately transition to alternative suppliers if any of these suppliers fail to perform, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +● We face significant competition in the life sciences research and diagnostic markets. +● If the FDA determines that our products are subject to regulation as medical devices, if the FDA modifies its regulations to require that our LDTs are subject to regulation as devices, or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s) and may be required to cease or limit sales of our then-marketed +19 +Table of Contents +products, which could materially and adversely affect our business, financial condition and results of operations. Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +● If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our operations or continue offering our LDTs. +● Cybersecurity breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +● If we are unable to protect our intellectual property, our ability to maintain any technological or competitive advantage over our competitors and potential competitors may be reduced and our business may be harmed. +● If we or any of our partners are sued for infringing intellectual property rights of third parties, the resulting litigation would be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +● Our stock price may fluctuate significantly. +Risks Related to Our Financial Condition +Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, which could cause the value of our common stock to fluctuate or decline significantly. +Numerous factors, many of which are outside of our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others, and comparing our operating results on a period-to-period basis might not be meaningful. Investors should not rely on our past results as indicative of our future performance. Moreover, our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline significantly. +We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +We incurred net losses of $32.3 million, $96.7 million and $57.7 million for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, we had an accumulated deficit of $434.5 million. We cannot predict if or when we will achieve profitability or if or when we will be able to sustain profitability once achieved. We expect that our losses will continue at least through the next 24 months as we execute our strategy for our entry into translational pharma and clinical diagnostic markets. We may incur significant losses in the future for a number of reasons, many of which are beyond our control, including the other risks described in this Annual Report on Form 10-K, the market acceptance of our products, competitive products, future product development and our market penetration and margins. +Failure to remediate material weaknesses in, or inherent limitations associated with, internal control over financial reporting could result in material misstatements in our financial statements. +In our Annual Report on Form 10-K for the year ended December 31, 2022, we identified four material weaknesses in our internal control over financial reporting, relating to the operating effectiveness of our internal controls associated with: (i) the accounting for inventory, including excess and obsolescence reserves (the “Inventory MW”), (ii) the accounting for salaries and commissions expense (the “Compensation MW”), (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases (the “Financial Statement Close Process MW”), and (iv) the accounting for property and equipment, net (the “Property and Equipment MW”). +20 +Table of Contents +During 2023, we took a number of actions designed to improve our internal control over financial reporting to remediate these material weaknesses. Based on these efforts, and after demonstrating the operating effectiveness of the related internal controls for a sufficient period of time, our management has concluded that the Financial Statement Close Process MW and Compensation MW were remediated as of December 31, 2023. However, management also concluded that control deficiencies did exist as of December 31, 2023, and that these control deficiencies constituted material weaknesses in our internal control over financial reporting. Specifically, management concluded that a portion of the Inventory MW related to the valuation of our inventory, including excess and obsolescence reserves (the “Inventory Valuation MW”) and the Property and Equipment MW continued to exist as of December 31, 2023. The primary cause of the Inventory Valuation MW is our reliance on manual processes to verify the completeness and accuracy of information used in our inventory valuation outputs, and the adequacy and documentation of reviews over these outputs. For the Property and Equipment MW, while the related internal controls were implemented and effective as of December 31, 2023, they were not in all cases in place for a sufficient period of time to demonstrate operating effectiveness as of December 31, 2023. For a discussion of these material weaknesses and our efforts to remediate them, please see “Item 9A. Controls and Procedures”. +Our efforts to remediate the outstanding material weaknesses, and to maintain effective internal control over financial reporting, are ongoing; however, there are inherent limitations in all control systems and no evaluation of controls can provide absolute assurance that all deficiencies have been detected. We cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future. If after having remediated the remaining material weaknesses we are unable to maintain the effectiveness of our internal control over financial reporting or our disclosure controls and procedures, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to regulatory scrutiny, civil or criminal penalties or litigation. Continued or future failure to maintain effective internal control over financial reporting could also result in financial statements that do not accurately reflect our financial condition or results of operations, may result in material misstatements in our financial statements and may also restrict our future access to the capital markets. +During the year ended December 31, 2023, we incurred significant expense and dedicated significant internal resources to address the material weaknesses described above, and we expect that the continued execution of the plan to remediate the remaining material weaknesses will be costly and will distract management from other activities. There can be no assurance that we will conclude in the future that we have effectively remediated the remaining material weaknesses or that we will not identify any significant deficiencies or other material weaknesses that will impair our ability to report our financial condition and results of operations accurately or on a timely basis. +Our ability to use net operating losses to offset future income may be subject to certain limitations. +As of December 31, 2023, we had federal net operating loss (“NOLs”) carryforwards to offset future taxable income of approximately $313.4 million, which begin to expire in 2026. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We have already experienced ownership changes as defined under Section 382 of the Code. Depending on the timing of any future utilization of our NOLs, the amount that can be utilized each year may be limited as a result of such previous ownership changes. In addition, future changes in our stock ownership, including changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. +Risks Related to Our Business +If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +Our success depends on our ability to develop and market products that are recognized and accepted by our customers and potential customers as reliable, enabling and cost-effective. Continued market acceptance of our Simoa +21 +Table of Contents +technology platform and products and other platforms and products we may develop in the future will depend on many factors, including our ability to convince potential customers that our technology is an attractive alternative to other available technologies. If we are unable to continue to motivate customers to use Simoa technology or other technologies we may develop, adoption of our technology may be slowed and our ability to retain and grow our customer base and increase our revenue would be adversely affected. +Sales of our assays for neurological indications have become increasingly important to our business, and any significant decrease in sales of such assays could have a material adverse effect on our business. +Neurology has been one of our primary focus areas for commercialization of our Simoa technology and the services that we provide to our customers. Sales from neurological-related biomarkers have become an increasingly important part of our business. There can be no assurance that we will continue to derive meaningful revenues from the sale of our neurological products, from services related to neurodegenerative conditions or from sales of instruments driven by customers desiring access to our technology for work relating to neurological conditions. The adoption by our customers of competitive technologies for detecting biomarkers of neurodegenerative conditions could negatively impact our revenues and have a material adverse effect on our business. +We may not be successful in penetrating the diagnostics market. +We believe our Simoa technology has the capability to enable the development of a new category of less-invasive diagnostic tests that could replace current invasive, expensive, and inconvenient diagnostic methods. Accordingly, we have begun to expand into the diagnostics market. Transitioning from research use only to also serving the diagnostics market entails significant risks, including: +● significant investments in product development, scaling manufacturing processes, marketing and sales activities, regulatory compliance, reimbursement and billing activities and infrastructure to support the foregoing; +● navigating complex regulatory frameworks, including but not limited to FDA regulations and equivalent agencies internationally; +● competition from products that may offer superior performance, pricing, or convenience, and prevent us from penetrating target markets effectively; and +● challenges associated with obtaining adequate reimbursement from government healthcare programs and private insurers. +Further, our progress in penetrating the diagnostics market may be slower than we intend and may require a substantially larger investment than we expect. If we are unable to manage these risks effectively, our efforts to penetrate the diagnostics market may be unsuccessful, and our business, operating results and financial condition could suffer. +The sales cycle for our Simoa instruments can be lengthy and variable, which makes it difficult for us to forecast revenue and other operating results. +The sales process for our Simoa instruments generally involves numerous interactions with multiple individuals within an organization, and often includes in-depth analysis by potential customers of our technology and products and a lengthy review process. Our customers’ evaluation processes often involve a number of factors, many of which are beyond our control. As a result of these factors, the capital investment required to purchase our systems, and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly. In 2023, these factors resulted in softness in sales of our instruments. Given the length and uncertainty of our sales cycle, we have in the past experienced, and expect in the future to experience, fluctuations in our sales on a period-to-period basis. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems, using existing assays not requiring capital equipment, or purchasing systems other than ours. +22 +Table of Contents +Because a significant portion of our revenue comes from a few large customers, any significant decrease in sales to these customers, due to industry consolidation or otherwise, could harm our operating results. +One customer accounted for greater than 10% of our total revenue for the year ended December 31, 2023, and several other customers accounted for a significant portion of our total revenue. The loss of a significant amount of business from one or more of our major customers would have a material adverse effect on our business. There can be no assurance that there will not be a loss or reduction in business from one or more of our major customers. In addition, we cannot assure that net sales from customers that have accounted for significant net sales in the past, either individually or as a group, will reach or exceed historical levels in any future period. +Our long-term results depend upon our ability to improve existing products and introduce and market new products successfully. +We generally sell our products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. Accordingly, our business is dependent on the continued improvement of our existing Simoa products and our development of new products utilizing Simoa or other technology we develop or acquire. As we introduce new products or refine, improve or upgrade versions of existing products, we cannot predict the level of market acceptance or the amount of market share these products will achieve, if any. We cannot guarantee that we will not experience material delays in the introduction of new products in the future. In addition, introduction of new products could result in a decrease in revenues from existing products. Consistent with our strategy of offering new products and product refinements, we have invested substantial capital on research and development, and we expect to continue to use a substantial amount of capital for product research and development. Our research and development initiatives can be costly and time-consuming, and they may fail to achieve the intended benefits. If we do not develop new products and product enhancements based on technological innovation on a timely basis, our products may become obsolete over time and our revenues, cash flow, profitability and competitive position will suffer. +Defects or other quality issues in our products could lead to unforeseen costs, product recalls, adverse regulatory actions, negative publicity, and litigation, including product liability claims, any of which could cause customers to decide not to purchase our products, harm our reputation, and negatively affect our sales, operating results and financial condition. +Our Simoa products are complex and may contain undetected errors or defects, especially when first introduced or as new versions or new products are released. We have in the past devoted, and will continue to devote, funding and resources to technology development, quality assurance and manufacturing initiatives designed to ensure or improve quality, such as the assay redevelopment program initiated in 2022. However, there can be no assurance that we will be successful in our efforts to manufacture products at a level of quality necessary for our customers or to avoid our products containing undiscovered defects or quality issues. Defects, errors or quality issues in our products may discourage customers from purchasing our products and could harm our reputation. We may also be subject to warranty claims and litigation involving claims for damages or incur additional costs, in each case due to errors or defects in our products. In addition, if we do not meet industry or quality standards, if applicable, our products may be subject to recall, and products subject to the FDA’s medical device regulations could be required to be recalled under such regulations. A material liability claim, recall or other occurrence that harms our reputation or decreases market acceptance of our products could harm our business and operating results . +Use of our products or services by us or a customer for diagnostic purposes could result in a product liability claim alleging that one of our products contained a design or manufacturing defect that resulted in the failure to adequately perform, leading to death or injury. A product liability claim could result in substantial damages and be costly and time-consuming to defend, either of which could materially harm our business or financial condition. We cannot guarantee that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future. +23 +Table of Contents +Our reliance on distributors for sales of our products outside of the United States could impact our revenue. +We have established distribution agreements for our Simoa instruments and related consumable products with distributors in certain foreign countries, including Australia, Brazil, China, the Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan and the UAE. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or if we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth. In addition, if our distributors fail to comply with applicable laws and ethical standards, including anti-bribery laws, this could damage our reputation and could have a significant adverse effect on our business and our revenues. +We generate a substantial portion of our revenue internationally and we expect this will continue in the future; as a result, our business is subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +For the years ended December 31, 2023, 2022, and 2021, approximately 37%, 38% and 36%, respectively, of our total revenue was generated from customers located outside of North America. We believe that a substantial percentage of our future revenue will continue to come from international sources as we expand our overseas operations and develop opportunities in additional areas. Engaging in international business involves a number of difficulties and risks, including: +● difficulties and costs of staffing and managing foreign operations; +● required compliance with existing and changing U.S. or foreign regulatory requirements and laws; +● a shortage of high-quality salespeople and distributors; +● pricing pressure that we may experience internationally; +● difficulties in enforcing our intellectual property rights and in defending against third-party threats and intellectual property enforcement actions against us or any of our distributors, suppliers or collaborators; +● reduced or varied protection for intellectual property rights in some countries; +● required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, data privacy requirements, such as the GDPR, labor laws and anti-competition regulations; +● export or import restrictions and supply chain disruptions; +● laws and business practices favoring local companies; +● longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; +● the imposition of restrictions on the activities of foreign agents, representatives and distributors; +● foreign currency exchange rate fluctuations; +● the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; +● the impact of political and economic instability and conflict, which could lead to uncertainty and instability in global financial markets; +● scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; +● the imposition of new trade restrictions; and +● potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers. +24 +Table of Contents +If we are unable to manage these risks effectively, our business, operating results and financial condition will suffer. +We rely on a single contract manufacturer to manufacture and supply our Simoa HD-X instrument and rely on a different single contract manufacturer to manufacture and supply our Simoa SR-X instrument. If either of these manufacturers should fail to perform, or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +We currently rely on a single contract manufacturer, STRATEC, an analytical and diagnostic systems manufacturer located in Germany, to manufacture and supply all of our Simoa HD-X instruments. In addition, we currently rely on a single contract manufacturer, Paramit, a contract manufacturer located in California, to manufacture and supply all of our SR-X instruments. Since our contract with STRATEC does not commit them to supply quantities beyond the amounts included in our forecasts and our contract with Paramit does not commit them to carry inventory or make available any particular quantities, we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. If either of these manufacturers were not able to supply instruments, our business would be harmed. +In the event it becomes necessary to utilize a different contract manufacturer for the HD-X instrument or the SR-X instrument, we would experience additional costs, delays and difficulties in doing so as a result of needing to identify and enter into an agreement with a new supplier as well as needing to prepare such new supplier to meet the logistical requirements associated with manufacturing our instruments, and our business would suffer. We may also experience additional costs and delays in the event we need access to or rights under any intellectual property of STRATEC. +In addition, certain of the components used in our instruments are sourced by these manufacturers from limited or sole suppliers. If they were to lose such suppliers, there can be no assurance that they would be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our ability to sell and deliver instruments to customers could occur if our manufacturers encounter delays or difficulties in securing these components, or if the quality of the components supplied do not meet specifications, or if they cannot then obtain an acceptable substitute. If any of these events occur, our business and operating results could be harmed. +We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and services and our SP-X instrument, and we may not be able to find replacements or immediately transition to alternative suppliers if any of these suppliers fail to perform, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +We rely on limited or sole suppliers for certain reagents and other materials and components that are used in our consumable products and services and in our SP-X instrument. While we have long-term contracts with some critical suppliers, we do not have contracts with all suppliers and instead rely on periodically forecasting our needs for such materials and entering into standard purchase orders with our suppliers. In addition, our use of many of the materials used in our consumable products is limited to research use only. As we expand into diagnostic applications for our products, we will need to secure diagnostic rights to such materials. If we were to lose suppliers or were unable to secure required rights for materials from suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis and on acceptable terms, if at all. An interruption in our operations could occur if we encounter delays or difficulties in securing these materials or any required rights to these materials, if the quality of the materials supplied do not meet our requirements, or if we cannot then obtain an acceptable substitute. The time and effort required to qualify a new supplier and ensure that the new materials provide the same or better quality results could result in significant additional costs. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. +25 +Table of Contents +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws by us or our agents. +We are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), which prohibits companies and individuals from corruptly making payments, directly or indirectly through third parties, to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. We are also subject to the FCPA’s accounting provisions, which require us to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority and responsibility over our assets. Our reliance on independent distributors to sell our products internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because there are circumstances under which we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing their distributors and other third parties to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also incur severe penalties, including criminal and civil penalties, disgorgement and other remedial measures. +The life sciences research and diagnostic markets are highly competitive. If we fail to effectively compete, our business, financial condition and operating results will suffer. +We face significant competition in the life sciences research and diagnostic markets. We currently compete with both established and early-stage companies that design, manufacture and market systems and consumable supplies. Many of our current competitors have competitive advantages over us, including: +● greater name and brand recognition; +● substantially greater financial and human resources; +● broader product lines; +● larger sales forces and more established distributor networks; +● more substantial intellectual property portfolios; +● larger and more established customer bases and relationships; and +● better established, larger scale and lower cost manufacturing capabilities. +We cannot guarantee that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot guarantee that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results. +Integrating any business, product or technology we acquire can be expensive and time-consuming and can disrupt and adversely affect our ongoing business, including product sales, and distract our management. +We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in complementary businesses. Our ability to successfully integrate any business, product or technology we acquire depends on a number of factors, including, but not limited to, our ability to: +● minimize the disruption and distraction of our management and other employees in connection with the integration of any acquired business, product or technology; +● avoid acquisition of unanticipated liabilities related to acquired companies; +● maintain and increase sales of our existing products; +26 +Table of Contents +● establish or manage the transition of the manufacture and supply of any acquired product; +● identify and add the necessary sales, marketing, manufacturing, regulatory and other related personnel, capabilities and infrastructure that are required to successfully integrate any acquired business, product or technology; +● manage the transition and migration of acquired personnel and all commercial, financial, legal, regulatory and other pertinent information relating to any acquired business, product or technology; +● comply with legal, regulatory and contractual requirements applicable to any acquired business, product or technology; and +● maintain and extend intellectual property protection for any acquired product or technology. +If we are unable to perform the above functions or otherwise effectively integrate any acquired businesses, products or technologies, our business, financial condition and operating results will suffer. +Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +Risks Related to Government Regulation and Diagnostic Product Reimbursement +If the FDA determines that our products are subject to regulation as medical devices, if the FDA modifies its regulations to require that our LDTs are subject to regulation as devices, or if we seek to market our products for clinical diagnostic or health screening use, we will be required to obtain regulatory clearance(s) or approval(s). Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +We focused initially on the life sciences research market. This includes offering products for use by laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Accordingly, the majority of our products are labeled as “Research Use Only”. While we focused initially on the life sciences research market and RUO products only, our strategy includes expanding our product line to encompass products that are intended to be used for the diagnosis of disease, including LDTs and IVD devices, either alone or in collaboration with third parties. IVD products are subject to regulation by the FDA, or comparable international agencies, as medical devices including requirements for regulatory clearance or approval of such products before they can be marketed. +The process of obtaining regulatory clearances to market a medical device can be costly and time consuming, and we or our collaborators may not be able to obtain these clearances or approvals on a timely basis, if at all. In general, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“FDCA”), or is the subject of an approved PMA, unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to a legally marketed predicate device, which can include pre-amendment, 510(k)-exempt, 510(k) cleared products, or PMA-approved products that have subsequently been down-classified. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is novel, it is automatically classified into Class III, and the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek classification of the device through the de novo classification process. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. +If any of our products are subject to medical device regulation, we would be subject to a substantial number of additional requirements for medical devices, including establishment registration, device listing, QSRs —which cover the design, testing, production, control, quality assurance, labeling, packaging, servicing, sterilization (if required), and storage and shipping of medical devices (among other activities) —product labeling, advertising, recordkeeping, +27 +Table of Contents +post-market surveillance, post-approval studies, adverse event reporting, and correction and removal (recall) regulations. One or more of the products we may develop using our technology may also require clinical trials in order to generate the data required for a PMA, de novo classification request or 510(k) premarket notification. Complying with these requirements may be time-consuming and expensive. We may be required to expend significant resources to ensure ongoing compliance with the FDA regulations. Failure to comply with these requirements may subject us to a range of enforcement actions, such as warning letters, injunctions, civil monetary penalties, criminal prosecution, recall and/or seizure of products, and revocation of marketing authorization, as well as significant adverse publicity. If we fail to obtain, or experience significant delays in obtaining, regulatory approvals for IVD products, such products may not be able to be launched or successfully commercialized in a timely manner, or at all. +LDTs are a subset of IVD tests that are offered as services by CLIA-certified high complexity clinical laboratories and designed, manufactured and used within a single laboratory. In July 2022, we launched an LDT to quantitatively measure p-Tau 181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. The FDA maintains that LDTs are medical devices and has, for the most part, exercised enforcement discretion for most LDTs, meaning that the FDA has not required LDTs to obtain premarket approval or clearance or comply with post-market medical device requirements. A significant change in the way that the FDA regulates LDTs could affect our business. Most recently, in September 2023, FDA announced a proposed rule regarding LDTs that would make explicit that in vitro diagnostic products are devices under the Federal Food, Drug, and Cosmetic Act, including when the manufacturer is a laboratory. The proposed rule also describes a policy under which FDA would provide greater oversight of LDTs by phasing out its general enforcement discretion approach, and phase in medical device regulation, for LDTs over a period of four years. FDA requested comment on several aspects of its proposal and approach, including whether certain types of LDTs should remain under enforcement discretion. Currently FDA’s target date for final action on this rule is April 2024, but we cannot predict the ultimate timing or form of FDA guidance or regulation, legislative action or their potential impact. Any new regulatory approach for LDTs by the FDA, including as described in the September 2023 proposed rule, would likely lead to an increased regulatory burden, including additional costs and delays in introducing new tests, and potentially a requirement for our current LDTs to receive premarket clearance or approval from FDA to continue offering them after the enforcement discretion phaseout is complete. Any new regulatory approach could also result in our tests being removed from the market if we are not able to secure regulatory clearance or approval from FDA. FDA’s rule could also have impacts on our business more broadly, given that many of our customers would be subject to additional regulation and delays, which could potentially affect the development of new diagnostics that incorporate our instruments or consumables. This also may increase costs and regulatory burdens on laboratories that develop LDTs, thereby reducing the financial incentive for laboratories to develop new LDTs or invest in instruments, which could reduce demand for our instruments and our other products. +Foreign jurisdictions have laws and regulations similar to those described above, which may adversely affect our ability to market our products as planned in such countries. The number and scope of these requirements are increasing. As in the United States, the cost and time required to comply with regulatory requirements may be substantial, and there is no guarantee that we will obtain the necessary authorization(s) required to make our products commercially viable. In addition, the imposition of foreign requirements may also have a material adverse effect on the commercial viability of our operations. +Our products may in the future be subject to product recalls that could harm our reputation, business and financial results. +The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products, including RUO products, in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall of a medical device must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. +28 +Table of Contents +U.S. legislative, FDA or global regulatory reforms may make it more difficult and costly for us to obtain any required regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. For example, in December 2022, Congress enacted the Food and Drug Omnibus Reform Act of 2022 (“FDORA”). FDORA reauthorized the FDA to collect device user fees and contained substantive amendments to the device provisions of the FDCA, including imposing new cybersecurity and clinical trial requirements for devices. Congress has also considered, but not yet passed, legislation to impose a new FDA regulatory framework for all diagnostics, including IVD devices and LDTs. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. For example, in September 2023, the FDA issued a proposed rule to change the FDA’s regulatory approach to LDTs. Under the proposed rule, FDA would phase out its current enforcement discretion approach for LDTs, and phase in medical device regulation, over a period of four years. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business. +In addition, in the E.U. new regulations recently entered into force that result in greater regulation of medical devices and IVDs. The IVD Regulation is significantly different from the IVD Directive that it replaces in that it ensures that the new requirements apply uniformly and on the same schedule across the member states, includes a risk-based classification system and increases the requirements for conformity assessment. The CE registration for Uman’s NfL ELISA assay kit for cerebral spinal fluid was approved in March 2014 under the IVD Directive . Under the IVD Directive the assay is classified as a general IVD product, and required self-certification with no involvement of a notified body/authority. The IVD Regulation introduces a new classification system for IVDs and assessment by a notified body is required for class B, C and D products. Uman’s NfL ELISA assay kit for CSF is classified as a class B product and must fully comply with (and have a CE mark issued under) the IVD Regulation by May 2027 (subject to proposed extension of the transitional periods in the IVD Regulation). The new requirements include an ISO 13485 certification of the quality system (which Uman received in July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g. clinical evidence and post-market activities). The work to evaluate and to meet the new technical requirements is on-going. +Our failure to continue to comply with applicable foreign regulatory requirements, including those administered by authorities of the European Economic Area (“EEA”) countries, could result in enforcement actions against us, including refusal, suspension or withdrawal of our CE Certificates of Conformity by our notified body, which could impair our ability to market products in the EEA in the future. +If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our Accelerator laboratory operations or continue offering our LDTs. +CLIA is a federal law that regulates clinical laboratories that perform examination of human specimens for the purpose of providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of health of, human beings. The operation of our CLIA-certified laboratory is subject to regulation by numerous federal, state and local governmental authorities in the United States. This laboratory holds a CLIA certificate of compliance for high-complexity testing and is licensed by California, Maryland, Massachusetts, Pennsylvania and Rhode Island, and we may obtain other state licenses if required in the future. Failure to comply with federal or state regulations or changes in those regulatory requirements could result in a substantial curtailment or even prohibition of the operations of our laboratory and could have an adverse effect on our business. To maintain CLIA certification, laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make unannounced +29 +Table of Contents +inspections of these laboratories. If we were to lose our CLIA certification or any required state licenses, whether as a result of a revocation, suspension or limitation, it could have a material adverse effect on our business. +We expect to rely on third parties in conducting any required future studies of diagnostic products that may be required by the FDA or other regulatory authorities, and those third parties may not perform satisfactorily. +We do not have the ability to independently conduct clinical trials or other studies that may be required to obtain FDA and other regulatory clearance or approval for future diagnostic products. Accordingly, we expect that we would rely on third parties, such as clinical investigators, contract research organizations, consultants, and collaborators to conduct such studies if needed. For example, we are currently working with the Alzheimer’s Drug Discovery Foundation and the Global Alzheimer’s Platform Foundation on prospective clinical trials for our assays. Our reliance on these third parties for clinical and other development activities would reduce our control over these activities. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised, we may not be able to obtain regulatory clearance or approval. +If diagnostic procedures that are enabled by our technology are subject to unfavorable pricing regulations or third-party coverage and reimbursement policies, our business could be harmed. +The ability of us, our customers or our collaborators to commercialize diagnostic tests based on our technology, including our recently launched LDTs, will depend in part on the extent to which coverage and reimbursement for these tests will be available from government health care programs, private health insurers and other third-party payors. In the United States, the principal decisions about reimbursement for new technologies are often made by CMS. Private payors often follow CMS’s reimbursement policies to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of payments for particular products and procedures. We cannot be sure that coverage will be available for any diagnostic tests based on our technology, and, if coverage is available, the level of reimbursement. Payor coverage and reimbursement decisions may impact the demand for those tests. If coverage is not available or the reimbursement amount is inadequate, any tests for which marketing authorization is received may not be able to be successfully commercialized. +Risks Related to Our Operations +We depend on our information technology systems, and any failure of these systems could harm our business. +We depend on information technology and telecommunications systems to operate our business. Our enterprise software systems affect a broad range of business processes and functional areas, including, for example, systems handling human resources, accounting, manufacturing, inventory control, financial controls and reporting, sales administration, and other infrastructure operations. We maintain preventative and detective security controls and seek to enhance such controls by, for example, augmenting the monitoring and alerting functions, network design, and automatic countermeasure operations of our technical systems. We also periodically assess the adequacy of our hardware and systems and are planning to upgrade hardware and systems where appropriate. These information technology and telecommunications systems support a variety of functions, including manufacturing operations, quality control, customer service support, finance, and other general administrative activities. +Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications, systems or network failures, malicious human acts, and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses, and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, those measures may be inadequate and failures or significant downtime of our information technology or telecommunications systems or those used by our third-party suppliers could prevent us from operating our business and managing the administrative aspects of our business. Loss of data or a material delay in our access to our data due to a security breach +30 +Table of Contents +or other interruption could also prevent us from operating our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business. +Cybersecurity breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +In the ordinary course of our business, we collect and store sensitive data, and intellectual property and proprietary business information owned or controlled by ourselves or our customers. This data encompasses a wide variety of business-critical information including research and development information, operational information, commercial information, and business and financial information. We face four primary risks relative to protecting this critical information: loss of access; inappropriate disclosure; inappropriate modification; and inadequate monitoring of our controls over the first three risks. +The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses, breaches, interruptions due to employee error, malfeasance, faulty password management, lapses in compliance with privacy and security mandates, or other disruptions. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, no security measure is infallible and there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions will not be successful or damaging. Our information technology systems may have vulnerabilities, and we may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyberattacks, such as ransomware attacks. Although we have experienced cybersecurity incidents from time to time that have not had a material adverse effect on our business, financial condition, or results of operations, there can be no assurance that a cyber-attack, security breach, or other cybersecurity incident will not have a material adverse effect on us in the future. A significant cyber incident, including system failure, security breach, disruption by malware or other damage, could interrupt or delay our operations, result in a violation of applicable cybersecurity and privacy and other laws, damage our reputation, cause a loss of customers, or expose sensitive customer data, or give rise to monetary fines and other penalties, which could be significant. +Third parties may attempt to fraudulently induce employees or other persons into disclosing usernames, passwords, or other sensitive information, which may in turn be used to access our information systems, commit identity theft or carry out other unauthorized or illegal activities. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost, or stolen. We engage third-party vendors and service providers to store and otherwise process some of our data, including sensitive and personal information. Our vendors and service providers may also be the targets of the risks described above, including cyberattacks, malicious software, phishing schemes, and fraud. Our ability to monitor our vendors and service providers’ data security is limited, and third parties may be able to circumvent any security measures, resulting in the unauthorized access to, misuse, disclosure, loss or destruction of our data, including sensitive and personal information, and disruption of our or third-party service providers’ systems. We and our third-party service providers may face difficulties in identifying, or promptly responding to, potential security breaches and other instances of unauthorized access to, or disclosure or other loss of, information. Any hacking or other attack on our or our third-party service providers’ or vendors’ systems, and any unauthorized access to, or disclosure or other loss of, information suffered by us or our third-party service providers or vendors, or the perception that any of these have occurred, could result in legal claims or proceedings, loss of intellectual property, liability under laws that protect the privacy of personal information, negative publicity, disruption of our operations and damage to our reputation, which could divert our management’s attention from the operation of our business and materially and adversely affect our business, revenues and competitive position. +31 +Table of Contents +Any security breach or interruption, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by state or federal governments or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful. +In addition, our insurance may be insufficient to cover our losses resulting from cyber-attacks, breaches, or other interruptions, and any incidents may result in loss of, or increased costs of, such insurance. The successful assertion of one or more large claims against us that exceed available insurance coverage, the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage, could have a material adverse effect on our business, including our financial condition, results of operations and reputation. +We are currently subject to, and may in the future become subject to additional, U.S. federal and state and international laws and regulations imposing obligations on how we collect, store and process personal information. Our actual or perceived failure to comply with such obligations could harm our business. Ensuring compliance with such laws could also impair our efforts to maintain and expand our future customer base, and thereby decrease our revenue. +In the ordinary course of our business we collect, store, transfer, use or process sensitive data, including personally identifiable information of employees, and intellectual property and proprietary business information owned or controlled by ourselves and other parties. The secure processing, storage, maintenance, and transmission of this critical information are vital to our operations and business strategy. We are, and may increasingly become, subject to various laws and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The regulatory environment related to data privacy and security is increasingly rigorous, with new and constantly changing requirements applicable to our business, and enforcement practices are likely to remain uncertain for the foreseeable future. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may have a material adverse effect on our business, financial condition, results of operations and prospects. +In the United States, various federal and state regulators, including governmental agencies like the Federal Trade Commission, have adopted, or are considering adopting, laws and regulations concerning personal information and data security. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international, or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. For example, the California Consumer Privacy Act (the “CCPA”), which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide disclosures to California consumers regarding the processing of their personal data, as well as data protection and privacy rights, including the ability to opt-out of certain sales or sharing of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. In November 2020, California also passed the California Privacy Rights Act (the “CPRA”), which became effective on January 1, 2023 and significantly expands the CCPA, including by introducing additional obligations such as data minimization and storage limitations and granting additional rights to consumers. More recently, other states, including Connecticut, Colorado, Utah and Virginia have passed comprehensive state data privacy laws, and states like Washington and Nevada have enacted consumer health privacy laws. Most of these laws are enforced by state attorneys general, but there is the potential for private actions by plaintiffs in some circumstances under certain laws. In addition, laws in all 50 U.S. states require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. State laws are changing rapidly and there is discussion in the U.S. Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted. These and future laws and regulations may increase our compliance costs and potential liability. +32 +Table of Contents +Furthermore, regulations promulgated pursuant to HIPAA establish privacy and security standards that limit the use and disclosure of individually identifiable health information (known as “protected health information”) and require the implementation of administrative, physical, and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information. Determining whether protected health information has been handled in compliance with applicable privacy standards and our contractual obligations can require complex factual and statistical analyses and may be subject to changing interpretation. Although we take measures to protect sensitive data from unauthorized access, use or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance or other malicious or inadvertent disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, manipulated, publicly disclosed, lost, or stolen. Any such access, breach or other loss of information could result in legal claims or proceedings, and liability under federal or state laws that protect the privacy of personal information, such as the HIPAA, HITECH, and regulatory penalties. Notice of breaches must be made to affected individuals, the Secretary of the Department of Health and Human Services, and for extensive breaches, notice may need to be made to the media. Such a notice could harm our reputation and our ability to compete. +Outside of the United States, many countries have privacy and data security laws and regulations concerning the collection and use of personal data, including but not limited to the GDPR and China’s Personal Information Protection Law (“PIPL”). The GDPR, which governs the collection and use of personal data in the E.U. and is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the E.U. to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. While we have taken steps to comply with the GDPR, including reviewing our security procedures and entering into data processing agreements with relevant contractors, we cannot guarantee that our compliance efforts will be fully successful. +Risks Related to Intellectual Property +If we are unable to protect our intellectual property, our ability to maintain any technological or competitive advantage over our competitors and potential competitors may be reduced, and our business may be harmed. +We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us, we may lose our technological or competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. +Our currently pending or future patent applications may not result in granted patents, and we cannot predict how long it will take for such patents to be granted. It is possible that, for any of our patents that have granted or that may grant in the future, others will design around our patented technologies. Further, other parties may challenge any patents granted to us and courts or regulatory agencies could hold our patents to be invalid or unenforceable. We may not be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, or to such patents being interpreted narrowly or otherwise in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our competitors may be diminished because of these uncertainties. For these and other reasons, our intellectual property may not provide us with any competitive advantage. To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate coverage over our products and protection against our competitors’ products, our competitive position could be adversely affected, as could our business. +33 +Table of Contents +In addition to pursuing patents on our technology, we also rely upon trademarks, trade secrets, copyrights and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. In addition, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be undermined. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time-consuming, the outcome would be unpredictable, and any remedy may be inadequate. In addition, courts outside of the United States may be less willing to protect trade secrets. +Some of our owned and in-licensed intellectual property has been discovered through government-funded programs and thus is subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers. +Some of the intellectual property rights we own and have in-licensed have been generated through the use of U.S. government funding and are therefore subject to certain federal regulations. For example, some of the issued U.S. patents we own and all of the intellectual property rights licensed to us under our license agreement with Tufts have been generated using U.S. government funds. As a result, the U.S. government has certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act of 1980. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if the government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government, elect title, and file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturing may limit our ability to license the applicable patent rights on an exclusive basis under certain circumstances. +Our Simoa bead-based technology is licensed to us by Tufts University. Any loss of our rights to this technology or other technologies we license could prevent us from selling our products. +Our Simoa bead-based technology is licensed exclusively to us from Tufts University (“Tufts”). We do not own the patents that underlie this license. Our rights to use this technology and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of the license. Our principal obligations under our license agreement with Tufts are as follows: +● making royalty payments; +34 +Table of Contents +● making milestone payments; +● paying annual maintenance fees for the underlying patents; +● using commercially reasonable efforts to develop and sell a product using the licensed technology and developing a market for such product; +● paying and/or reimbursing fees related to prosecution, maintenance and enforcement of patent rights; and +● providing certain reports. +If we breach any of these obligations, Tufts may have the right to terminate the license, which could result in our being unable to develop, manufacture and sell products using our Simoa bead-based technology or a competitor gaining access to the Simoa technology. Termination of our license agreement with Tufts would have a material adverse effect on our business. +In addition, we are a party to a number of other agreements that include licenses to intellectual property, including non-exclusive licenses. We expect that we may need to enter into additional license agreements in the future. Our business could suffer materially and adversely, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. +If we or any of our partners are sued for infringing intellectual property rights of third parties, the resulting litigation would be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +Our success also depends on our ability to develop, manufacture, market and sell our products and perform our services without infringing upon the proprietary rights of third parties. As part of a business strategy to impede our successful commercialization and entry into new markets, competitors have claimed, and may claim in the future, that our products and/or services infringe their intellectual property rights and have suggested, and may suggest in the future, that we enter into license agreements. We believe any such claims made to date are without merit. However, even if such claims are without merit, we could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against claims of infringement made by third parties or settling such claims. Any adverse ruling by a court or administrative body, or perception of an adverse ruling, may have a material adverse impact on our ability to conduct our business and our finances. Moreover, third parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more products or services and could result in a substantial award of damages against us. In addition, since we sometimes indemnify customers, collaborators or licensees, we may have additional liability in connection with any infringement or alleged infringement of third party intellectual property. +Because patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our products or proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any of our products. There is a substantial amount of litigation involving patent and other intellectual property rights in our industry. If a third party claims that we or any of our licensors, customers or collaboration partners infringe upon a third party’s intellectual property rights, we may have to: +● seek to obtain licenses that may not be available on commercially reasonable terms, if at all; +● abandon any infringing product or redesign our products or processes to avoid infringement; +● pay substantial damages, including, in exceptional cases, treble damages and attorneys’ fees; +● pay substantial royalties or fees or grant cross-licenses to our technology; or +● defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources. +35 +Table of Contents +We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful. +Competitors may infringe our patents or the patents that we license. In the event of infringement or unauthorized use, we may file one or more infringement lawsuits. Patent litigation can be very costly and time-consuming, and the outcome is uncertain. In addition, if we or any of our partners were to initiate legal proceedings against a third party to enforce a patent covering one of our products or services, the defendant in such litigation could counterclaim that our patent is invalid and/or unenforceable. In patent litigation, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. The outcome following legal assertions of invalidity and unenforceability is unpredictable. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the challenged patent. Such a loss of patent protection could have a material adverse impact on our business. +We may not be able to protect our intellectual property rights throughout the world, which could have a material adverse effect on our business. +Filing, prosecuting and defending patents on current and future products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside of the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent that federal and state laws do in the United States. Consequently, regardless of whether we are able to prevent third parties from practicing our inventions in the United States, we may not be able to prevent third parties from practicing our inventions in all countries outside of the United States, or from selling or importing products made by using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products, and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as it is in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from competing. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, such as China and certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license and may adversely impact our business. +In addition, we and our partners also face the risk that our products are imported or reimported into markets with relatively higher prices from markets with relatively lower prices, which would result in a decrease of sales and any payments we receive from the affected market. Recent developments in U.S. patent law have made it more difficult to stop these and related practices based on theories of patent infringement. +36 +Table of Contents +We use third-party software that may be difficult to replace or may cause errors or failures of our products that could lead to lost customers or harm to our reputation. +We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party software or other third-party software failures could result in errors, defects or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs. +Risks Related to Our Common Stock and Being a Public Company +Our stock price has fluctuated significantly and may continue to fluctuate significantly. +The market price of shares of our common stock has been and could continue to be subject to wide fluctuations in response to many factors listed in this section, and others beyond our control, including: +● actual or anticipated fluctuations in our financial condition and operating results; +● announcements by us, our partners or our competitors of new products, significant contracts, restructuring plans, strategic partnerships, joint ventures, collaborations, acquisitions, commercial relationships or capital commitments; +● competition from existing products or new products that may emerge; +● failure to meet or exceed financial estimates and projections of the investment community or that we may provide to the public; +● issuance of new or updated research or reports by securities analysts or recommendations with respect to our stock; +● positive or adverse regulatory announcements; +● disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; +● commencement of, or our involvement in, litigation; +● fluctuations in the valuation of companies perceived by investors to be comparable to us; +● conditions in our markets; +● manufacturing disputes or delays, product defects or material product quality control issues; +● any future sales of our common stock or other securities; +● any change to the composition of our board of directors or key personnel; +● general economic conditions and slow or negative growth of our markets; +● a material cybersecurity incident; +● share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; +● announcement or expectation of additional debt or equity financing efforts; and +● other factors described in this Risk Factors section of this Annual Report on Form 10-K. +These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and life science companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have on occasion instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. +37 +Table of Contents +We have never paid dividends on our capital stock, and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases. +We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the shareholders in the foreseeable future. Consequently, in the foreseeable future, shareholders will likely only experience a gain from an investment in our common stock if the price of our common stock increases. +Anti-takeover provisions contained in our restated certificate of incorporation and restated by-laws, as well as provisions of Delaware law, could impair a takeover attempt. +Our restated certificate of incorporation, restated by-laws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions: +● authorizing our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board of directors may determine; +● specifying that special meetings of our stockholders can be called only by our board of directors and that our stockholders may not act by written consent; +● establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors; +● providing that directors may be removed only for cause; +● providing that our board of directors may create new directorships and that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; +● establishing that our board of directors is divided into three classes with each class serving staggered three-year terms; +● providing that our board of directors may amend our restated by-laws without stockholder approval; and +● requiring a super-majority of votes to amend certain of the above-mentioned provisions. +These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. +Any provision of our restated certificate of incorporation, restated by-laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock +ITEM 1B. UNRESOLVED STAFF COMMENTS +Not applicable. +38 +Table of Contents +ITEM 1C. CYBERSECURITY +We maintain a cybersecurity risk management program designed to identify, assess, manage, mitigate and respond to cybersecurity threats. Our cybersecurity program is overseen by our Chief Information Officer (“CIO”), who has more than 20 years of experience in information technology. This program incorporates policies, processes, and activities over domains such as access control; facility and data protection; IT systems and data transmission security; threat intelligence and incident response; third-party risk management; disaster recovery; and vulnerability management. We have implemented a risk-based approach to identify and assess the cybersecurity threats that could affect our business and information systems. Thus, we base our program on multiple security frameworks including the National Institute of Standards and Technology (“NIST”), HIPAA, and privacy laws such as the E.U.’s GDPR. We also require that third-party service providers with access to personal or proprietary information implement and maintain cybersecurity practices consistent with applicable legal standards. +Cybersecurity is complex and subject to constantly evolving threats. Accordingly, we engage a range of external experts, including cybersecurity consultants and auditors in evaluating and testing our risk management systems. These partnerships enable us to leverage specialized knowledge and insights. Our collaboration with these third-party experts includes regular audits, threat assessments, and consultation on security enhancements. +Our CIO is tasked with ensuring that the highest levels of management and our Board of Directors are informed about the cybersecurity posture and potential risks facing the Company. Our CIO regularly briefs our CEO about cybersecurity risk management. The CIO’s staff regularly informs the CIO about the latest developments in cybersecurity, including potential threats and risk management techniques. In the event of a cybersecurity incident, the CIO is informed promptly following its detection, and our response is governed by a detailed incident response plan that includes prompt actions to mitigate the impact of the incident and longer-term strategies for remediation and prevention of future incidents. The CIO has also chartered an Information Security Steering Committee made up of cross-functional executive leaders that meets quarterly on topics such as the current cybersecurity landscape and emerging threats; status of ongoing cybersecurity initiatives and strategies; incident reports and learnings from any cybersecurity events; and compliance with regulatory requirements and industry standards. +Cybersecurity risk management is integrated into our broader risk management framework. The Audit Committee of our Board of Directors, which has responsibility for oversight of risk management, also has responsibility for oversight of our program, policies and procedures related to information security and data protection. On a regular basis, the CIO reports to the Audit Committee of our Board of Directors on cybersecurity risks as well as mitigation strategies and the status of initiatives to strengthen our information security systems. The CIO also provides periodic updates to our full Board of Directors, as appropriate. +For a discussion of our risks related to cybersecurity, see the section titled, “Item 1A. Risk Factors – Risks Related to our Operations – Cybersecurity breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation . ” +39 +Table of Contents +ITEM 2. PROPERTIES +Our corporate headquarters are currently located in Billerica, Massachusetts, which consists of an approximately 91,600 square foot facility we lease for office, laboratory, and manufacturing purposes. We also lease office and laboratory space domestically in Bedford, Massachusetts, and internationally in the Netherlands, Sweden, and China. In the first quarter of 2022, we executed a lease for 85,800 square feet of office and laboratory space in Bedford, Massachusetts. The initial term of the Bedford lease is eight years and nine months beginning on May 1, 2022. We do not currently occupy the Bedford facilities. +We believe our facilities are adequate and suitable for our current operations and that should it be needed, additional or alternative space is available to accommodate our operations. +ITEM 3. LEGAL PROCEEDINGS +In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation consisting of intellectual property, contractual, employment, and other matters. While the outcome of any such actions or proceedings cannot be predicted with certainty, as of the date of this Annual Report on Form 10-K, we were not party to any legal proceedings, the outcome of which would be expected to have a material adverse effect on our financial condition or results of operations. Regardless of any outcome, litigation can have a material adverse effect on us due to defense and settlement costs, diversion of management resources, and other factors. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +40 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF E QUITY SECURITIES +Market Information +Our common stock is traded on The Nasdaq Global Market under the symbol “QTRX.” +Holders of Record +As of February 26, 2024, there were approximately 19 stockholders of record of our common stock. +Dividends +Dividends are declared at the discretion of our Board of Directors and depend on actual cash flow from operations, our financial condition, capital requirements, and any other factors our Board of Directors may consider relevant. Since our inception, we have not declared or paid any dividends. +Securities Authorized for Issuance under Equity Compensation Plans +Refer to the section titled “Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K for information required by Item 201(d) of Regulation S-K. +Unregistered Sales of Securities +There were no unregistered sales of equity securities during the year ended December 31, 2023. +Issuer Purchases of Equity Securities +Not applicable. +41 +Table of Contents +Stock Performance Graph +The following graph compares the cumulative total shareholder returns over the past five years for our common stock, the NASDAQ Composite Index, and the NASDAQ Biotechnology Index, assuming $100 invested on December 31, 2018, and reinvestment of dividends, if paid: +ITEM 6. RESERVED +Not applicable. +42 +Table of Contents +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND R ESULTS OF OPERATIONS +The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of Quanterix Corporation for the years ended December 31, 2023 and 2022. For a full understanding of our financial condition and results of operations, this discussion and analysis should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in the section titled “Part II. Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. In addition to historical information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results, performance, or experience may differ materially from those discussed below due to various important factors, risks, and uncertainties, including, but not limited to, those set forth under the sections titled “Part I, Item 1A. Risk Factors” and “Note Regarding Forward-Looking Statements” included in this Annual Report on Form 10-K. Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “it,” “us,“ and “our” in this Annual Report on Form 10-K refer to Quanterix Corporation and its consolidated subsidiaries. +For additional information on our financial condition as of December 31, 2022 and results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021, refer to the section titled “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022 . +Overview +We are a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology and enable customers to reliably detect protein biomarkers at ultra-low concentrations in blood, serum, and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies. The ability of our Simoa platforms to detect proteins in the femtomolar range is enabling the development of novel therapies and diagnostics and has the potential to facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis, and, ultimately, prevention. Our Simoa platforms have achieved significant scientific validation and commercial adoption, and our Simoa technology has been cited in more than 2,700 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease, and inflammation. +Our instruments are designed to be used either with assays fully developed by us, including all antibodies and supplies required to run the assays, or with “homebrew” assay kits where we supply some of the components required for testing, and the customer supplies the remaining required elements. Accordingly, our installed instruments generate a recurring revenue stream. As the installed base of the Simoa instruments increases, we expect total consumables revenue to increase. +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument, launched in January 2014), collectively “HD Instruments”, that is designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X uses our bead-based technology and assays run on the HD-X are fully automated. By the end of 2023, approximately 82% of the HD Instrument installed base were HD-X instruments. +Further, we launched our SR-X instrument in 2017 as a compact desktop instrument with a lower price point, more flexible assay preparation, and a wider range of applications. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X. +With our acquisition of Aushon BioSystems, Inc. in 2018, we acquired their CLIA certified laboratory and their proprietary sensitive planar array detection technology. The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of research testing that does not report patient specific results). Leveraging our proprietary +43 +Table of Contents +sophisticated Simoa image analysis and data analysis algorithms, we further refined the planar array technology to develop the SP-X instrument to provide sensitivity similar to that found in our Simoa bead-based platform. We commercially launched the SP-X instrument in 2019. +Our wholly owned subsidiary UmanDiagnostics AB (“Uman”), a company located in Umeå, Sweden, supplies neurofilament light (“NfL”), antibodies, and enzyme-linked immunoassay (“ELISA”) kits, which are used by researchers and biopharmaceutical and diagnostics companies world-wide in the detection of NfL to advance the development of therapeutics and diagnostics for neurodegenerative conditions. +We also provide contract research services for customers and Laboratory Developed Test (“LDT”) services through our CLIA-certified Accelerator Laboratory (the “Accelerator Laboratory”). The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development, custom assay development, and blood-based biomarker testing. To date, we have completed over 2,200 projects for more than 480 customers from all over the world using our Simoa platforms. +We have an extensive base of customers including pharmaceutical, biotechnology, contract research organizations, academic and governmental research institutions. We sell our instruments, consumables, and services through a direct field sales and support organizations in North America and Europe, and through our own sales force and distributors in additional countries, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and the United Arab Emirates. In addition, Uman sells NfL antibodies and NfL ELISA kits directly, and in conjunction with us and another distributor, worldwide. +Our total revenues were $122.4 million and $105.5 million for the years ended December 31, 2023 and 2022, respectively. Since our inception, we have incurred annual net losses, including net losses of $32.3 million and $96.7 million for the years ended December 31, 2023 and 2022, respectively. +We expect to incur significant expenses and operating losses at least through the next 24 months, and we expect our expenses to increase substantially as we: +● expand our sales and marketing efforts to further commercialize our products; +● expand our research and development efforts to improve our existing products and develop and launch new products, particularly if any of our products become subject to additional or more burdensome regulation by the U.S. Food and Drug Administration (the “FDA”); +● invest in our diagnostics business in support of the launch of Lucent Diagnostics, additional LDTs, and other diagnostics initiatives including entry into translational pharma and clinical diagnostic markets ; +● seek Premarket Approval (“PMA”) or 510(k) clearance from the FDA for our existing products or new products if or when we decide to market products for use in the prevention, diagnosis, or treatment of a disease or other condition; +● hire additional personnel to support our growth and research and development; +● strategically acquire and integrate companies or technologies that may be complementary to our business; +● enter into collaboration arrangements, or in-license other products and technologies; and +● add operational, financial, and management information systems. +Recent Business Developments +In October 2023, we entered into a license agreement with Janssen Sciences Ireland UC, a Johnson & Johnson Company, (“Janssen”). The agreement grants us worldwide, non-exclusive rights to Janssen’s p-Tau 217 antibodies and assay designs for use in clinical research and diagnostic products, including in the production of Simoa p-Tau 217 research use only assay (“RUO”) kits for global distribution. Under this license, we are required to pay royalties on net sales of the licensed products and service activities. +44 +Table of Contents +In July 2023, we launched Lucent Diagnostics, our brand for clinical testing services for healthcare providers in the field of neurology. Testing services were initially focused on Alzheimer’s disease at the same time newly approved therapies were becoming available. The first product offering was LucentAD, a blood test to aid the evaluation of patients experiencing cognitive symptoms consistent with the early signs of Alzheimer’s disease. In October 2023, we launched an improved blood test for Alzheimer’s disease, LucentAD p-Tau 217. These tests have not been cleared or approved by the FDA. We do not expect material revenues from these tests until late 2024 or later. For further discussion of FDA requirements refer to the section titled “Item 1. Business - Government Regulations”. +In August 2022, we announced a restructuring and strategic realignment plan (the “Restructuring Plan”). The Restructuring Plan included the elimination of 119 positions across the company in 2022 and other cost-saving measures that were substantially completed in 2022. The Restructuring Plan also included an assay redevelopment program with the objective of improving our ability to manufacture and deliver high-quality assays at scale. This six-quarter operational program was substantially completed in the fourth quarter of 2023, and we have now launched five new Simoa Advantage PLUS assays. The Simoa Advantage PLUS assays have been developed using improved protocols, by leveraging manufacturing efficiencies and reagent improvements to provide more consistent results and improved lot-to-lot consistency, and through enabling production of larger lot sizes with extended shelf lives. These assays began shipping to customers in the first quarter of 2024. We expect to continue to apply these improved protocols and manufacturing efficiencies to other existing assays and assays that we may develop in the future. +Components of Results of Operations +Revenues +Product Revenue +Our product revenues are generated from sales of (1) instruments and (2) consumables and related revenues. +Instrument revenues consist of sales of our instruments (HD-X, SR-X, and SP-X). We currently sell our products for RUO applications directly to customers or through distributors. Direct sales of instruments to customers include an initial year of implied service-type warranties. Sales of instruments to distributors include a license to import and resell the instruments. Instrument sales may also be bundled with assays and other consumables, training, installation, and/or an extended service warranty. +Consumable and other revenues consist of sales of assays fully developed by us, including all antibodies and supplies required to run the assays, or with “homebrew” assay kits where we supply some of the components required for testing, and the customer supplies the remaining required elements. Consumable and other revenues also consist of replacement parts, reagents, and antibodies. +Service and Other Revenue +Service revenues consist of fixed fee contract research services through our Accelerator Laboratory, initial implied service-type warranties, extended service warranty contracts, repair services, and other services such as training. +Collaboration and License Revenue +Collaboration and license revenues consist of licensing our technology, intellectual property, and know-how associated with our instruments to third parties and for related services. License arrangements consist of sales or usage-based fees and/or future royalties. +Grant Revenue +Grant revenues consist of funding received to perform specific research and development services under grant arrangements. +45 +Table of Contents +Cost of Goods Sold and Services +Cost of Product Revenue +Cost of product revenue consists of manufacturing and assembly costs for instruments, related reagents, other consumables, contract manufacturer costs, personnel costs, royalties, overhead, and other direct costs related to product sales. Raw material part costs include inbound freight, and shipping and handling costs associated with purchased goods. Cost of product revenue also includes royalty fees due to third parties from revenue generated by collaboration or license deals. +Cost of Service and Other Revenue +Cost of services and other revenue consists of direct costs associated with operating our Accelerator Laboratory on behalf of customers, including raw materials, personnel costs, royalties, allocated overhead and other related costs. Additional costs include costs related to warranty services and other costs of servicing equipment at customer sites. +Research and Development Expense +Research and development expense consists of personnel costs, research supplies, third-party development costs for new products, materials for prototypes, quality assurance, and allocated overhead costs that include facility and other related costs. We have made substantial investments in research and development since our inception and plan to continue to make substantial investments in the future. Our research and development efforts have focused primarily on supporting development and commercialization of new and existing products and improved product quality. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to increase in future periods. +Selling, General and Administrative Expense +Selling, general and administrative expense consists of personnel costs for our sales and marketing, finance, legal, human resources, and general management teams, shipping and handling for product sales, other general and administrative costs, as well as professional services costs, such as marketing, advertising, legal and accounting services, and allocated overhead costs that include facility and other related costs. We expect to increase the size of our selling, general and administrative functions to support the growth in our business and newly launched Lucent Diagnostics. However, selling, general and administrative expenses in total are not expected to increase at the same rate in future periods as total revenue or research and development expenses. +The classification of shipping and handling costs for product sales varies from company to company, with some companies recording these as selling, general and administrative expenses and others recording such expenses within costs of goods sold for products. To the extent our classification of these shipping and handling costs differs from the classification used by other companies, our gross margins may not be comparable with those reported by such other companies. +Other Lease Costs +Other lease costs consist of amortization of operating lease right-of-use assets and other facility operating expenses from leased facilities we are not using as a result of the Restructuring Plan. +Impairment and Restructuring +Impairment and restructuring expense primarily consists of charges recorded as a result of the Restructuring Plan. +As a result of the Restructuring Plan, we performed an impairment assessment of our goodwill, long-lived assets, including operating lease right-of-use assets, property and equipment, and intangibles. All of our goodwill, and a +46 +Table of Contents +portion of our operating lease right-of-use assets (including related property and equipment) were determined to be impaired as their carrying values exceeded their fair values, and corresponding impairment charges were recorded in the year ended December 31, 2022. During the year ended December 31, 2023, we continued to reassess the remaining operating lease right-of-use assets and related property and equipment and recorded an additional impairment charge. +Additional impairment expenses consist of assessments of our intangible and long-lived assets annually, or whenever events or circumstances indicate that the carrying amount of the asset(s) may not be recoverable. +Interest Income +Interest income consists of interest earned on cash, cash equivalents, and marketable securities, and the accretion of discounts from the purchase of marketable securities. +Other Income (Expense), Net +Other income (expense), net primarily consists of unrealized and realized gains and losses on foreign currency, and other non-recurring items that are not a part of our core business operations. +Income Tax Expense +Income tax expense consists primarily of income taxes related to federal, state, and foreign jurisdictions in which we conduct business. +Comparison of Results of Operations for Years Ended December 31, 2023 and 2022: +The following table sets forth select Consolidated Statements of Operations data, and such data as a percentage of total revenues (in thousands, except percentages): +Year Ended December 31, +Increase (Decrease) +2023 +% of revenue +2022 +% of revenue +Amount +% +Revenues: +Product revenue +$ +79,460 +65 +% +$ +69,808 +66 +% +$ +9,652 +14 +% +Service and other revenue +40,299 +33 +% +34,495 +33 +% +5,804 +17 +% +Collaboration and license revenue +1,380 +1 +% +649 +1 +% +731 +113 +% +Grant revenue +1,229 +1 +% +570 +1 +% +659 +116 +% +Total revenues +122,368 +100 +% +105,522 +100 +% +16,846 +16 +% +Costs of goods sold and services: +Cost of product revenue +32,636 +27 +% +40,809 +39 +% +(8,173) +(20) +% +Cost of service and other revenue +19,086 +16 +% +17,907 +17 +% +1,179 +7 +% +Total costs of goods sold and services +51,722 +42 +% +58,716 +56 +% +(6,994) +(12) +% +Gross profit +70,646 +58 +% +46,806 +44 +% +23,840 +51 +% +Operating expenses: +Research and development +24,857 +20 +% +25,890 +25 +% +(1,033) +(4) +% +Selling, general and administrative +90,241 +74 +% +91,995 +87 +% +(1,754) +(2) +% +Other lease costs +3,712 +3 +% +1,278 +1 +% +2,434 +191 +% +Impairment and restructuring +1,537 +1 +% +29,347 +28 +% +(27,810) +(95) +% +Total operating expenses +120,347 +98 +% +148,510 +141 +% +(28,163) +(19) +% +Loss from operations +(49,701) +(41) +% +(101,704) +(96) +% +52,003 +51 +% +Interest income +15,839 +13 +% +5,131 +5 +% +10,708 +209 +% +Other income (expense), net +2,247 +2 +% +(62) +— +% +2,309 +3,702 +% +Loss before income taxes +(31,615) +(26) +% +(96,635) +(92) +% +65,020 +67 +% +Income tax expense +(719) +(1) +% +(65) +— +% +(654) +(1,007) +% +Net loss +$ +(32,334) +(26) +% +$ +(96,700) +(92) +% +$ +64,366 +67 +% +47 +Table of Contents +Revenues +Total revenues increased $16.8 million, or 16%, to $122.4 million for the year ended December 31, 2023, compared to $105.5 million for the year ended December 31, 2022. +Product revenue of $79.5 million for the year ended December 31, 2023 consisted of instrument sales of $15.7 million and sales of consumables and other products of $63.8 million. This represented an increase of $9.7 million, or 14%, compared to product revenue of $69.8 million for the year ended December 31, 2022. The increase in product revenue was primarily due to a $19.0 million increase in sales of consumables and increased average selling prices. This increase was partially offset by a $9.3 million decrease in instrument sales due to reduced demand in what we believe is a constrained capital funding environment. We expect softness in instrument sales to continue in 2024. +Service revenue was $40.3 million for the year ended December 31, 2023, compared to $34.5 million for the year ended December 31, 2022, an increase of $5.8 million, or 17%. This increase was primarily due to a $9.0 million increase in Accelerator Laboratory revenue driven by higher volumes of sample testing and assay development services, and was partially offset by a $4.9 million decrease in revenue recognized from a collaboration agreement with Eli Lilly and Company (the “Lilly Collaboration Agreement”) due to non-recurring upfront payments received in 2022. The Lilly Collaboration Agreement e stablishes a framework for future projects focused on the development of Simoa immunoassays. +Collaboration and license revenue was $1.4 million for the year ended December 31, 2023, compared to $0.6 million for the year ended December 31, 2022, an increase of $0.7 million, or 113%. The increase was primarily due to $0.5 million of one-time revenue in 2023 related to the expiration of a previously paid for option to expand the scope of a license agreement with Abbott Laboratories entered into in 2020, pursuant to which we granted Abbott a non-exclusive, worldwide, royalty-bearing license, without the right to sublicense, under the Company’s bead-based single molecule detection patents in the field of in vitro diagnostics . +Grant revenue was $1.2 million for the year ended December 31, 2023, compared to $0.6 million for the year ended December 31, 2022, an increase of $0.7 million, or 116%, driven by receipt of a portion of a grant from the National Institutes of Health . Refer to Note 3 – Revenue and Related Matters within the Notes to the Consolidated Financial Statements, for more information regarding this grant. +Cost of Goods Sold and Services +Total cost of goods sold and services decreased $7.0 million, or 12%, to $51.7 million for the year ended December 31, 2023 compared to $58.7 million for the year ended December 31, 2022. +Cost of product revenue decreased $8.2 million, or 20%, to $32.6 million for the year ended December 31, 2023, compared to $40.8 million for the year ended December 31, 2022. The decrease was primarily due to improvement in inventory management and manufacturing processes as well as lower instrument sales, partially offset by higher costs related to increased consumables sales. +Cost of service and other revenue increased $1.2 million, or 7%, to $19.1 million for the year ended December 31, 2023, compared to $17.9 million for the year ended December 31, 2022. This increase was primarily due to an increase in department costs including compensation and benefits costs related to increased headcount, and was partially offset by lower costs related to the Lilly Collaboration Agreement. +Research and Development +Research and development expense decreased $1.0 million, or 4%, to $24.9 million for the year ended December 31, 2023, compared to $25.9 million for the year ended December 31, 2022. This decrease was primarily due to a decrease in compensation and benefit costs related to the reduction in headcount from the Restructuring Plan, which was partially offset by an increase in costs related to the assay redevelopment program under the Restructuring Plan including consulting fees, lab supplies, equipment, and product development activities. +48 +Table of Contents +Selling, General and Administrative +Selling, general and administrative expense decreased $1.8 million, or 2% to $90.2 million for the year ended December 31, 2023, compared to $92.0 million for the year ended December 31, 2022. The decrease was primarily due to a decrease in compensation and benefit costs related to the reduction in headcount from the Restructuring Plan and a full twelve months of facilities costs from the leased office and laboratory facilities we are not using being recorded in other lease costs instead of selling, general, and administrative expenses on the Consolidated Statements of Operations. These decreases were partially offset by (1) an increase in professional services and consulting fees related to our efforts to remediate the material weaknesses in our internal control over financial reporting described in our Annual Report on Form 10-K for the year ended December 31, 2022, (2) an increase in software and information technology expenses, and (3) an increase in shipping and handling costs for consumables and other products due to higher volume. Included within selling, general and administrative expense are $8.1 million and $7.2 million of shipping and handling costs for product sales for the years ended December 31, 2023 and 2022, respectively. +Other Lease Costs +Other lease costs increased $2.4 million, or 190%, to $3.7 million for the year ended December 31, 2023, compared to $1.3 million for the year ended December 31, 2022. As part of the Restructuring Plan, we are not using two leased office and laboratory facilities and are evaluating alternatives, including sub-leasing the facilities. Other lease costs include the amortization of the related operating lease right-of-use assets and other leased facility operating expenses from periods after the initiation of the Restructuring Plan and the determination that the facilities would not be used. Lease costs in 2022 represent four and a half months of cost in 2022 after the Restructuring Plan was implemented, as compared to twelve months of costs in 2023. Expenses incurred prior to the Restructuring Plan were recorded in selling, general, and administrative on the Consolidated Statements of Operations. +Impairment and Restructuring +Impairment and restructuring costs were $1.5 million for the year ended December 31, 2023, compared to $29.3 million for the year ended December 31, 2022. This decrease reflects the implementation of the Restructuring Plan in August 2022, which did not repeat in 2023. +Costs incurred during the year ended December 31, 2023 primarily relate to long-lived asset impairment charges associated with two leased facilities we are not using. Costs incurred during the year ended December 31, 2022 include (1) $8.2 million of goodwill impairment charges, (2) $16.3 million of long-lived asset impairment charges associated with the leased facilities that we are not using, (3) $1.1 million of software costs related to projects that were rationalized as part of the Restructuring Plan, and (4) $3.8 million of restructuring expenses primarily for severance and one-time termination benefits in connection with the elimination of 119 positions across the Company. +Interest Income +Interest income increased by $10.7 million, or 209% to $15.8 million for the year ended December 31, 2023, compared to $5.1 million for the year ended December 31, 2022. This increase was primarily due to higher interest rates earned on cash, cash equivalents, and marketable securities, and the accretion of discounts from the purchase of marketable securities. +Other Income (Expense), Net +Other income (expense) was $2.2 million of income for the year ended December 31, 2023, compared to $0.1 million of expense for the year ended December 31, 2022. The increase was primarily due to recognizing a $2.4 million receivable under the Employee Retention Credit established by the Coronavirus Aid, Relief, and Economic Security Act in 2021. +49 +Table of Contents +Income Tax Expense +Income tax expense was $0.7 million for the year ended December 31, 2023, as compared to $0.1 million for the year ended December 31, 2022. The change was primarily due to the increase in the tax expense recorded on the operating results of our foreign subsidiaries. +Liquidity and Capital Resources +Our principal sources of liquidity are cash, cash equivalents, marketable securities, and funds generated from sales of our products and services. As of December 31, 2023, we had cash and cash equivalents of $174.4 million and $146.9 million of available for sale marketable securities . Historically we have financed our operations through equity offerings and borrowings from credit facilities. +We believe our cash, cash equivalents, and marketable securities, along with funds generated from sales of our products and services, will be sufficient to meet our anticipated operating cash requirements for at least 12 months from the date of this Annual Report on Form 10-K. +Our liquidity requirements have consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, working capital, and general corporate expenses. Our future capital requirements will depend on many factors, including, but not limited to, our pace of growth, expansion and introduction of new products and services, including Lucent Diagnostics, continuing market acceptance of our products and services, regulatory guidelines or approval of our products or services. +We regularly assess potential acquisitions and have a strategy to pursue acquisitions of complementary businesses, services, and technologies. To the extent our existing cash, cash equivalents, and marketable securities are insufficient to fund future activities or requirements to continue operating our business, we may need to raise additional capital. +If needed, we cannot guarantee that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, if needed, we may have to delay development or commercialization of our products and services. We also may have to reduce marketing, customer support or other resources devoted to our products, or cease operations. +If the conditions for raising capital are favorable, we may seek to finance future cash needs through public or private equity, debt offerings, or other financings. +50 +Table of Contents +Cash Flows +The following table summarizes our cash flows (in thousands): +Year Ended December 31, +2023 +2022 +Net cash used in operating activities +$ +(18,902) +$ +(48,272) +Net cash used in investing activities +(148,401) +(11,206) +Net cash provided by financing activities +2,691 +2,311 +Net decrease in cash, cash equivalents, and restricted cash +$ +(164,612) +$ +(57,167) +Net Cash Used in Operating Activities +We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to develop new products and services, invest in process and product improvements, and increase our sales and marketing efforts. We have historically experienced negative cash flows from operating activities as we have developed our technology, expanded our business, and built our infrastructure. We expect negative cash flows from operating activities will continue in the future. +Net cash used in operating activities was $18.9 million and $48.3 million for the years ended December 31, 2023 and 2022, respectively. The $29.4 million reduction in net cash used in operating activities was primarily driven by an overall reduction in our net loss, adjusted for non-cash items, consisting of revenue growth, a full year of reduced expenses resulting from the Restructuring Plan, continued improvements in our inventory management and manufacturing processes leading to improved gross margin, and increased interest income from investing in marketable securities and rising interest rates. The reduction was offset by changes in working capital items, primarily an increase in accounts receivable from strong revenue growth through the fourth quarter of 2023 and an increase in inventory as a result of completing the assay development program and manufacturing new assays to begin shipping to customers in the first quarter of 2024. +Net Cash Used in Investing Activities +Our primary investing activities consist of purchases of marketable securities to increase the interest income we would otherwise earn in cash accounts. Additionally, we use funds towards capital expenditures for the purchase of equipment to support our expanding infrastructure and work force. We expect to continue to incur additional capital expenditures related to these efforts in future periods. Cash used towards capital expenditures can be partially offset by proceeds from grants with third parties to purchase assets (refer to the section titled “Grant Revenue” in Note 3 − Revenue and Related Matters in the Notes to Consolidated Financial Statements for more information). +Net cash used in investing activities was $148.4 million during the year ended December 31, 2023, which consisted of the purchase of $175.6 million of marketable securities, proceeds from the maturities of marketable securities of $31.0 million, and $3.8 million of purchases of property and equipment. +Net cash used in investing activities was $11.2 million during the year ended December 31, 2022, which consisted of $11.7 million of purchases of property and equipment which were partially offset by $0.5 million in grant proceeds under the grant received from the National Institutes of Health under its Rapid Acceleration of Diagnostics program. Refer to Note 3 – Revenue and Related Matters , within the Notes to the Consolidated Financial Statements, for more information regarding this grant. +Net Cash Provided by Financing Activities +Financing activities provided $2.7 million and $2.3 million of cash during the years ended December 31, 2023 and 2022, respectively, from sales of our common stock under our employee stock purchase plan and from the exercise of options under our equity incentive plan. +51 +Table of Contents +Future Cash Obligations +In addition to the future cash obligations described below, we have other payables and liabilities that may be legally enforceable but are not considered contractual commitments. Refer to Note 15 − Commitments and Contingencies in the Notes to Consolidated Financial Statements for a summary of our purchase commitments and other obligations as of December 31, 2023. +Operating Leases +We lease office, laboratory, and manufacturing space for our employees and operations, as well as office equipment, under non-cancellable operating lease agreements (refer to Note 14 − Leases in the Notes to Consolidated Financial Statements). The remaining duration of non-cancellable operating leases ranges from four months to seven years. Remaining lease payments within one year, within two to three years, within four to five years, and greater than five years from December 31, 2023 are $7.1 million, $14.7 million, $15.5 million, and $15.7 million, respectively. +STRATEC Purchase Commitment +During the year ended December 31, 2022, the Company and STRATEC Consumables GmbH (“STRATEC”) entered into an amendment to the supply agreement with STRATEC (as amended, the “STRATEC Supply Agreement”), related to the supply of discs used in Simoa bead-based instruments. As part of the STRATEC Supply Agreement, the Company agreed to purchase a total of 515,000 discs to be shipped at various points starting in 2022 and continuing through 2024 at an agreed purchase price per disc. +The total purchase commitment under the STRATEC Supply Agreement is $3.7 million, of which $2.1 million has been paid, and $1.0 million is due within one year from December 31, 2023. +Critical Accounting Policies and Estimates +Our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience, worldwide economic conditions, both general and specific to the life sciences industry, and on various other assumptions we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis, and changes in accounting estimates may occur from period to period. Accordingly, actual results could differ significantly from the estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. +Our significant accounting policies are described in Note 2 – Significant Accounting Policies in the Notes to Consolidated Financial Statements. We believe that the assumptions and estimates in the following critical accounting policies involve a greater degree of judgment and complexity and accordingly are the most critical to understanding and evaluating the potential impact to our Consolidated Financial Statements. +Revenue from Contracts with Customers +We generate revenue from the sale of products, services, and licenses, as further described in the section titled “Components of Results of Operations” above. +For contracts with customers, we recognize revenue when a customer obtains control of promised products or services, for an amount that reflects the consideration expected to be received in exchange for those products or services. We follow the five-step framework prescribed by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606 - Revenue from Contracts with Customers (“ASC 606”) to determine revenue recognition: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) +52 +Table of Contents +determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Revenues are presented net of any sales, value added, or similar taxes collected from customers and remitted to the government. +We determine the transaction price based on the amount of consideration we expect to be entitled to, which is generally equal to our contract amounts. In some cases, our contracts contain variable consideration which primarily relates to (1) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (2) contracts with minimum purchase commitments. For sales and usage-based royalties, ASC 606 provides an exception to estimating variable consideration. Under this exception, we recognize revenues from sales- or usage-based royalty revenue at the later of when the sales or usage occurs or the satisfaction (or partial satisfaction) of the performance obligation to which the royalty has been allocated. All other variable amounts are constrained to the minimum guaranteed contract amount so that a reversal of cumulative revenue does not occur in future periods. Once there is no longer uncertainty over a variable amount, any incremental fees we are entitled to are allocated to the related performance obligations. +Our contracts may include either a single promise (referred to as a performance obligation) to transfer a product or service, or a combination of multiple performance obligations to transfer products or services. We evaluate the existence of multiple performance obligations within our contracts by using judgment to determine if (1) the customer can benefit from each contractual promise on its own or together with readily available resources and (2) the transfer of each contractual promise is separately identifiable from other promises in a contract. When both criteria are met, each promise is accounted for as a separate performance obligation. +Direct instrument sales include installation and an initial year of implied service-type warranties. We have determined that the instrument and installation are a combined performance obligation as the customer cannot benefit from the instrument without the installation and no other vendors can provide installation of our specialized instruments. The implied service-type warranty is considered a separate performance obligation since a customer could benefit from it independently with readily available resources and is capable of being sold on its own. Sales of instruments to distributors include a license to import and resell the instruments. We have determined these distributor licenses are part of a combined performance obligation with the instrument as the distributor only benefits from the combination of the instrument and ability to resell it. +Instrument sales may also be bundled with assays and other consumables, training, and/or an extended service warranty, each of which is considered a separate performance obligation. +Contracts that include rights to additional products or services that are exercisable at a customer’s discretion are generally considered options. We assess if these options provide a material right to the customer and if so, the material right is considered a performance obligation. The identification of material rights requires judgment to determine if the value of the option to purchase additional products and services in relation to options that may be provided to, and prices paid by, customers in the normal course of business. Material rights are recognized when they are exercised by a customer or upon expiration of the right. +For contracts that contain multiple performance obligations, the transaction price is allocated among the performance obligations on a relative basis according to their standalone selling prices (“SSP”). Determining the SSP for performance obligations requires judgment. We determine SSP based on factors including prices charged to customers in observable transactions, internal pricing objectives and list prices, and pricing of similar products, and we use a range of amounts to estimate SSP. We have more than one range of standalone selling price for certain products and services based on the geographic location of the customer and sales channel. +The majority of our products and services are recognized at the point in time we transfer control to the customer. +53 +Table of Contents +For product revenues, direct instrument sales to customers are recognized upon completion of the instrument’s installation. For instrument sales to distributors, revenue is recognized based on the agreed upon shipping terms (either upon shipment or delivery) as that is when title passes to the customer. +Services revenues generated from contract research services in our Accelerator Laboratory are recognized upon completion and delivery of the research results. In cases where we maintain a contractual right to payment for service performed (including a reasonable profit margin), revenue is recognized over time as the services are provided, using an output method that is based on the number of completed results. Service revenues generated from warranties and service contracts are recognized ratably over the service period as the customer simultaneously receives and benefits from the services. +Collaboration and license revenues are recognized at the point in time the license is delivered as the customer has the right to use the intellectual property when it is received. Royalty revenues that are sales- or usage- based are recognized at the later of when the sales or usage occurs or the satisfaction (or partial satisfaction) of the performance obligation to which the royalty has been allocated. +Inventory Reserves +Inventory is stated at the lower of cost or net realizable value on a first-in, first-out (“FIFO”) basis and includes the cost of materials, labor, and manufacturing overhead. We analyze our inventory levels on each reporting date for slow-moving, excess, and obsolete inventory, and inventory expected to expire prior to being used. Our analysis requires judgment and is based on factors including, but not limited to, our recent historical activity, anticipated or forecasted demand for our products (developed through our planning and sales and marketing inputs), and market conditions. If we identify any of these adverse conditions exist, the carrying value of the inventory is reduced to its estimated net realizable value by providing estimated reserves for excess or obsolete inventory. We adjust the reserves for excess or obsolete inventory and record additional inventory write downs based on unfavorable changes in estimated customer demand or actual market conditions that may differ from management projections. +Impairment of Other Long-Lived Assets +Our long-lived assets consist of operating lease right-of-use assets, property and equipment, and intangible assets. We review the carrying amount of our long-lived assets for impairment whenever events or circumstances indicate that the estimated useful lives may warrant revision, or that the carrying amount of the assets may not be fully recoverable. To assess whether a long-lived asset or asset group has been impaired, the estimated undiscounted and discounted future cash flows for the estimated remaining useful life or estimated lease term of the asset is compared to its carrying value. Significant judgment is required to estimate future cash flows, including, but not limited to, the expected use of the asset, historical client retention rates, technology roadmaps, consumer awareness, trademark and trade name history, contractual provisions that could limit or extend an asset's useful life, market data, discount rates, and potential sublease opportunities, including rent and rent escalation rates, time to sublease, and free rent periods. To the extent that the future cash flows are less than the carrying value, a long-lived asset or asset group is impaired and written down to its estimated fair value. +Non-GAAP Financial Measures +To supplement our financial statements presented on a U.S. GAAP basis, we present non-GAAP gross profit, non-GAAP gross margin, non-GAAP total operating expenses, and non-GAAP loss from operations. These non-GAAP measures are calculated by including shipping and handling costs for product sales within cost of product revenue instead of within selling, general and administrative expenses. We use these non-GAAP measures to evaluate our operating performance in a manner that allows for meaningful period-to-period comparison and analysis of trends in our business and our competitors. We believe that presentation of these non-GAAP measures provides useful information to investors in assessing our operating performance within our industry and to allow comparability to the presentation of other companies in our industry where shipping and handling costs are included in cost of goods sold for products. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for, the financial information presented in accordance with U.S. GAAP. +54 +Table of Contents +Set forth below is a reconciliation of non-GAAP gross profit, non-GAAP gross margin, non-GAAP total operating expenses, and non-GAAP loss from operations to their most directly comparable GAAP financial measures (in thousands). +Year Ended December 31, +2023 +2022 +GAAP gross profit +$ +70,646 +$ +46,806 +Shipping and handling costs +(8,146) +(7,211) +Non-GAAP gross profit +$ +62,500 +$ +39,595 +GAAP revenue +$ +122,368 +$ +105,522 +GAAP gross margin (gross profit as % of revenue) +57.7% +44.4% +Non-GAAP gross margin (non-GAAP gross profit as % of revenue) +51.1% +37.5% +GAAP total operating expenses +$ +120,347 +$ +148,510 +Shipping and handling costs +(8,146) +(7,211) +Non-GAAP total operating expenses +$ +112,201 +$ +141,299 +GAAP loss from operations +$ +(49,701) +$ +(101,704) +Non-GAAP loss from operations +$ +(49,701) +$ +(101,704) +Recent Accounting Pronouncements +Refer to Note 2 − Significant Accounting Policies in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption and effects on our Consolidated Financial Statements. +ITEM 7A. QUANTITATIVE AND QUALITATIVE D ISCLOSURES ABOUT MARKET RISK +We are exposed to a variety of market risks, including fluctuations in foreign currency exchange rates and interest rates affecting the return on our cash, cash equivalents, and marketable securities. +Foreign Currency Exchange Risk +As we expand internationally, our results of operations and cash flows will become increasingly subject to foreign exchange rate fluctuations. For the years ended December 31, 2023 and 2022, approximately 37% and 38%, respectively, of our total revenue was generated from customers located outside of the United States. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Canada, Europe, Japan, and China. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign exchange rates in Canadian dollars, Euros, British pounds, Swedish krona, Japanese yen, Chinese yuan, and other foreign currencies. Fluctuations in exchange rates could harm our business in the future. As of December 31, 2023, the effect of a hypothetical 10% adverse change in exchange rates on foreign denominated cash and payables would not have been material and a similar adverse change on foreign denominated receivables would decrease potential cash inflows by $0.8 million. +To date, we have not entered into any foreign currency hedging contracts although we may do so in the future. +Interest Rate Risk +We had cash and cash equivalents of $174.4 million and marketable securities of $146.9 million as of December 31, 2023. All cash, cash equivalents, and marketable securities are held at large commercial banks. Marketable securities consisted entirely of highly rated debt securities including commercial paper, U.S. Treasuries, corporate notes and bonds, U.S. Government agency bonds, certificates of deposit, and similar types of debt securities. Due to the short-term nature and investment grade quality of these investments, we do not believe we have material exposure to changes in interest rates. Additionally, if needed, we have the ability to hold our marketable securities until +55 +Table of Contents +maturity (without giving effect to any future acquisitions or mergers) and we do not hold or issue financial instruments for trading purposes. Therefore, we do not expect our operating results or cash flows to be affected materially by a sudden change in market interest rates. +Declines in interest rates, however, would reduce future investment income. If overall interest rates had decreased by a hypothetical 10% during the year ended December 31, 2023, our interest income would have decreased income by approximately $1.3 million. +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY D ATA +The financial statements required to be filed pursuant to Item 8 are included in this Annual Report on Form 10-K beginning on page F-1. +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON A CCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +ITEM 9A. CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2023, due to the material weaknesses described below in Management’s Report on Internal Control over Financial Reporting. +Management’s Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. +In Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, we identified four material weaknesses in our internal control over financial reporting, relating to the operating effectiveness of our internal controls associated with: (i) the accounting for inventory, including excess and obsolescence reserves (the “Inventory MW”), (ii) the accounting for salaries and commissions expense (the “Compensation MW”), (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases (the “Financial Statement Close Process MW”), and (iv) the accounting for property and equipment, net (the “Property and Equipment MW”). +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. +56 +Table of Contents +Remediation of Previously-Identified Material Weaknesses +During 2023, we took a number of actions and incurred expenses of approximately $4.2 million, including the efforts outlined below, designed to improve our internal control over financial reporting to remediate the material weaknesses identified above. These efforts included: +● hired additional personnel with public company experience who have the appropriate level of expertise in the respective areas of accounting, SEC financial reporting, and associated internal controls commensurate with the type, volume, and complexity of our accounting operations and reporting requirements, including a Corporate Controller and an Assistant Controller; +● continued to supplement our team with advisory consultants to provide additional depth and breadth in our period-end closes, technical accounting, financial reporting capabilities, and internal controls compliance; +● implemented recommendations from a third-party service provider we engaged to perform an assessment of our internal control design and operation and provide us recommendations to enhance the effectiveness of such controls; +● engaged a third-party consultant to assess our current enterprise resource planning system and identify opportunities to enhance our use of the system through automating certain controls and processes, for which development of system enhancements were made and continue to be underway; and +● engaged an accounting advisory consultant who conducted additional trainings on a regular basis related to internal control over financial reporting with our team members including, but not limited to, finance and accounting personnel. +Based on the efforts above and after demonstrating the operating effectiveness of the related internal controls for a sufficient period of time, management has concluded that the Financial Statement Close Process MW and Compensation MW were remediated as of December 31, 2023. +Evaluation of Controls and Procedures +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the framework set forth in Internal Control-Integrated Framework, as well as the actions outlined above, while our management concluded that the Financial Statement Close Process MW and Compensation MW were remediated as of December 31, 2023, management concluded that our internal control over financing reporting was not effective at the reasonable assurance level as of December 31, 2023 due to the material weaknesses described below. +Our management concluded that control deficiencies existed as of December 31, 2023, and that these control deficiencies constituted material weaknesses in our internal control over financial reporting. Specifically, management concluded that a portion of the Inventory MW related to the valuation of our inventory, including excess and obsolescence reserves (the “Inventory Valuation MW”) and the Property and Equipment MW continued to exist as of December 31, 2023. The primary cause of the Inventory Valuation MW is our reliance on manual processes to verify the completeness and accuracy of information used in our inventory valuation outputs, and the adequacy and documentation of reviews over these outputs. For the Property and Equipment MW, while the related internal controls were implemented and effective as of December 31, 2023, they were not in all cases in place for a sufficient period of time to demonstrate operating effectiveness as of December 31, 2023. +We have not identified any material misstatements as a result of the material weaknesses discussed above. If not remediated, or if we identify further material weaknesses in our internal control, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our consolidated financial statements or a failure to meet our reporting and financial obligations. +57 +Table of Contents +The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. +Continuing Remediation Efforts +Management, with oversight from the Audit Committee of our Board of Directors, is taking steps to remediate the control deficiencies that resulted in the Inventory Valuation MW and Property and Equipment MW described above by implementing changes to our internal control over financial reporting. Our plans for remediation include, but are not limited to, the efforts summarized below, which have been or are in the process of being implemented: +● we have engaged accounting advisory consultants to implement new software systems to automate manual key inventory valuation processes and outputs; +● we will strengthen, document, and implement additional compensating controls; +● we will continue to focus on effectively operating controls that did not have a sufficient period of time to demonstrate operating effectiveness as of December 31, 2023; and +● we will continue to evaluate, enhance, and add personnel in the finance organization with a focus on the requisite experience in the areas of accounting, SEC financial reporting, and associated internal controls. +We expect to continue our efforts to remediate the Inventory Valuation MW and Property and Equipment MW as described above through fiscal year 2024. We believe that the implementation of the above steps will allow us to address the deficient controls within our internal control environment, which will facilitate the remediation of the Inventory Valuation MW and Property and Equipment MW. As we continue to evaluate and work to improve our internal control over financial reporting, we will take additional measures to address control deficiencies and we may modify certain of the remediation measures described above. Following our design and implementation of our remediation efforts, we will need to demonstrate their operating effectiveness. We will not be able to consider the Inventory Valuation MW and Property and Equipment MW remediated until the applicable remedial controls operate for a sufficient period of time and our management has concluded, through testing, that our controls are operating effectively. +Changes in Internal Control over Financial Reporting +Other than related to the changes outlined above to remediate the material weaknesses described above, there have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +58 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on Internal Control over Financial Reporting +We have audited Quanterix Corporation’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Quanterix Corporation (the Company) has not maintained effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in internal controls related to (i) the accounting for inventory valuation, including excess and obsolescence reserves, and (ii) the accounting for property and equipment, net. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and December 31, 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated February 29, 2024, which expressed an unqualified opinion thereon. +Basis for Opinion +The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management +59 +Table of Contents +and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Ernst & Young LLP +Boston, Massachusetts +February 29, 2024 +60 +Table of Contents +ITEM 9B. OTHER INFORMATION +Securities Trading Plans of Directors and Executive Officers +During the three months ended December 31, 2023, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c) of Regulation S-K). +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +61 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND C ORPORATE GOVERNANCE +The information required by this Item will be set forth in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023 and is incorporated into this Annual Report on Form 10-K by reference. +ITEM 11. EXECUTIVE COMPENSATION +The information required by this Item will be set forth in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023 and is incorporated into this Annual Report on Form 10-K by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND R ELATED STOCKHOLDER MATTERS +The information required by this Item will be set forth in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023 and is incorporated into this Annual Report on Form 10-K by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item will be set forth in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023 and is incorporated into this Annual Report on Form 10-K by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICE S +Our independent registered public accounting firm is Ernst & Young LLP, New York, NY, (PCAOB ID 42). +The other information required by this Item will be set forth in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023 and is incorporated into this Annual Report on Form 10-K by reference. +62 +Table of Contents +PART IV +ITEM 15. EXHIBITS AND F INANCIAL STATEMENT SCHEDULES +(1) Financial Statements +The Consolidated Financial Statements are included beginning on page F-1 attached hereto and are filed as part of this Annual Report on Form 10-K. +(2) Financial Statement Schedules +Financial statement schedules have been omitted since they either are not required, not applicable, or the information is otherwise included. +(3) Exhibits +The following is a list of exhibits filed as part of this Annual Report on Form 10-K: +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +3.1 +Amended and Restated Certificate of Incorporation +8-K +12/15/2017 +001-38319 +3.2 +Restated Bylaws +10-Q +8/8/2023 +001-38319 +4.1 +Description of Securities +10-K +3/13/2020 +001-38319 +4.2 +Form of Common Stock Certificate +S-1 +11/9/2017 +333-221475 +10.1.1+ +2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.1.2+ +Form of Incentive Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.1.3+ +Form of Non-qualified Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +10.1.4+ +Form of Restricted Stock Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 +11/9/2017 +333-221475 +63 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.2.1+ +2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +10.2.2+ +Form of Stock Option Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +10.2.3+ +Form of Restricted Stock Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A +11/27/2017 +333-221475 +10.2.4+ +Form of Restricted Stock Unit Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +X +10.3+ +Employment Agreement, dated August 3, 2023, between the Registrant and Vandana Sriram +8-K +8/9/2023 +001-38319 +10.4+ +Amended and Restated Employment Agreement, dated March 27, 2023, between the Registrant and Michael Doyle +8-K +3/27/2023 +001-38319 +10.5+ +Amended and Restated Employment Agreement, dated April 25, 2022, between the Registrant and Dr. Masoud Toloue +8-K +4/29/2022 +001-38319 +10.6+ +Employment Agreement, dated March 28, 2022, between the Registrant and Dan Pikora +8-K +9/8/2022 +001-38319 +64 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.7.1* +Exclusive License Agreement, dated June 18, 2007, between the Registrant and Tufts University, as amended on April 29, 2013 +S-1 +11/9/2017 +333-221475 +10.7.2* +Second Amendment, dated August 22, 2017, to the Exclusive License Agreement between the Registrant and Tufts University +S-1 +11/9/2017 +333-221475 +10.7.3@ +Third Amendment, dated September 25, 2020, to the Exclusive License Agreement between the Registrant and Tufts University +10-Q +11/6/2020 +001-38319 +10.8.1* +Supply and Manufacturing Agreement, dated September 14, 2011, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/2017 +333-221475 +10.8.2 +First Amendment to Supply and Manufacturing Agreement, dated October 17, 2013, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/2017 +333-221475 +10.9.1* +STRATEC Development Services and Equity Participation Agreement, dated August 15, 2011, between the Registrant and STRATEC Biomedical Systems AG +S-1 +11/9/2017 +333-221475 +65 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +10.9.2* +First Amendment to STRATEC Development Services and Equity Participation Agreement and Second Amendment to Supply and Manufacturing Agreement, dated November 18, 2016, between the Registrant and STRATEC Biomedical AG +S-1 +11/9/2017 +333-221475 +10.10* +Manufacturing Services Agreement, dated November 23, 2016, between the Registrant and Paramit Corporation +S-1 +11/9/2017 +333-221475 +10.11+ +Form of Indemnification Agreement +S-1/A +11/27/2017 +333-221475 +10.12 +Lease Agreement by and between SSI 900 Middlesex MA LP and the Registrant, dated October 2, 2018 +8-K +10/5/2018 +001-38319 +10.13 +Lease Agreement by and between the Registrant and XChange Owner LLC, dated January 28, 2022 +8-K +1/31/2022 +001-38319 +10.14+ +Amended and Restated Non-Employee Director Compensation Policy +X +21.1 +Subsidiaries of Registrant +10-K +3/5/2021 +001-38319 +23.1 +Consent of Ernst & Young LLP +X +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +66 +Table of Contents +Exhibit Number +Exhibit Description +Filed +Herewith +Incorporated by +Reference herein from +Form or Schedule +Filing Date +SEC File/ +Reg. Number +32.1 +Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +X +97.1 +Policy relating to recovery of erroneously awarded compensation +X +101.INS +Inline XBRL Instance Document +X +101.SCH +Inline XBRL Taxonomy Extension Schema Document +X +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document +X +101.DEF +Inline XBRL Taxonomy Extension Definition +X +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document +X +101.PRE +Inline XBRL Taxonomy Presentation Linkbase Document +X +104 +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) ++ +Management contract or compensatory plan or arrangement. +* +Confidential treatment has been granted for portions of this Exhibit. Redacted portions have been filed separately with the SEC. +@ +Portions of this document (indicated by “[***]”) have been omitted because such information is not material and is the type of information that the Registrant treats as private or confidential. +ITEM 16. FORM 10-K S UMMARY +Not applicable. +67 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +QUANTERIX CORPORATION +Date: February 29, 2024 +By: +/s/ MASOUD TOLOUE, PH.D. +Masoud Toloue, Ph. D. +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ MASOUD TOLOUE, PH.D. +President and Chief Executive Officer and Director (Principal Executive Officer) +February 29, 2024 +Masoud Toloue, Ph.D. +/s/ VANDANA SRIRAM +Chief Financial Officer +February 29, 2024 +Vandana Sriram +(Principal Financial Officer and Principal Accounting Officer) +/s/ MARTIN D. MADAUS, PH.D. +Chairman +February 29, 2024 +Martin D. Madaus, Ph.D. +/s/ BRIAN J. BLASER +Director +February 29, 2024 +Brian J. Blaser +/s/ WILLIAM DONNELLY +Director +February 29, 2024 +William Donnelly +/s/ KAREN A. FLYNN +Director +February 29, 2024 +Karen A. Flynn +/s/ SARAH E. HLAVINKA +Director +February 29, 2024 +Sarah E. Hlavinka +/s/ PAUL M. MEISTER +Director +February 29, 2024 +Paul M. Meister +/s/ LAURIE J. OLSON +Director +February 29, 2024 +Laurie J. Olson +/s/ DAVID R. WALT, PH.D. +Director +February 29, 2024 +David R. Walt, Ph.D. +68 +Table of Contents +QUANTERIX CORPORATION +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) +F-2 +Consolidated Balance Sheets as of December 31, 2023 and 2022 +F-3 +Consolidated Statements of Operations for the years ended December 31, 2023, 2022, and 2021 +F-4 +Consolidated Statements of Comprehensive Loss for the years ended December 31, 2023, 2022, and 2021 +F-5 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2023, 2022, and 2021 +F-6 +Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021 +F-7 +Notes to Consolidated Financial Statements +F-8 +F-1 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of Quanterix Corporation (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 29, 2024 expressed an adverse opinion thereon. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. +Excess Inventory +Description of the Matter +As of December 31, 2023, the Company had recognized inventory of $22.4 million. As discussed in Note 2 to the consolidated financial statements, the Company analyzes its inventory levels at each reporting date for slow moving, excess or obsolete inventory and inventory expected to expire prior to being used. In the event that the Company identifies adverse conditions, the carrying value of the inventory is reduced to its estimated net realizable value. +Auditing management’s valuation of inventory involved judgement in evaluating management’s analysis and significant assumptions related to projections of future demand which is dependent on market factors. +How We Addressed the Matter in Our Audit +To audit the Company’s valuation of inventory, we performed audit procedures that included, among others, performing inquiries of management and testing the completeness and accuracy of the underlying data used supporting the Company’s estimate. To evaluate the Company’s estimate of future demand, we independently assessed the sensitivity and impact of reasonably possible changes in forecasted demand and the impact on the Company’s calculation of excess inventory. We evaluated inventory levels compared to forecasted demand, historical sales and specific product considerations. We performed inquiries with appropriate non-financial personnel, including supply chain employees, regarding obsolete or discontinued inventory items and other factors as well as obtained supporting evidence to corroborate management's assertions regarding qualitative judgments about discontinued, slow moving and obsolete inventories. We also evaluated management's ability to accurately forecast demand by comparing actual demand to management's prior estimates. +/s/ Ernst & Young LLP +We have served as the Company’s auditor since 2008. +Boston, Massachusetts +February 29, 2024 +F-2 +Table of Contents +QUANTERIX CORPORATION +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except per share data) +December 31, 2023 +December 31, 2022 +ASSETS +Current assets: +Cash and cash equivalents +$ +174,422 +$ +338,740 +Marketable securities +146,902 +— +Accounts receivable, net of allowance for expected credit losses +25,414 +19,017 +Inventory +22,365 +16,786 +Prepaid expenses and other current assets +9,291 +6,860 +Total current assets +378,394 +381,403 +Restricted cash +2,604 +2,597 +Property and equipment, net +17,926 +20,162 +Intangible assets, net +6,034 +7,516 +Operating lease right-of-use assets +18,251 +21,223 +Other non-current assets +1,802 +1,298 +Total assets +$ +425,011 +$ +434,199 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Accounts payable +$ +5,048 +$ +3,836 +Accrued compensation and benefits +13,659 +10,658 +Accrued expenses and other current liabilities +6,041 +5,133 +Deferred revenue +9,468 +8,644 +Operating lease liabilities +4,241 +2,687 +Total current liabilities +38,457 +30,958 +Deferred revenue, net of current portion +1,227 +1,415 +Operating lease liabilities, net of current portion +37,223 +41,417 +Other non-current liabilities +1,177 +1,469 +Total liabilities +78,084 +75,259 +Commitments and contingencies (Note 15) +Stockholders’ equity: +Common stock, $ 0.001 par value per share: +Authorized: 120,000 shares; issued and outstanding : 38,014 and 37,280 shares at December 31, 2023 and 2022, respectively +38 +37 +Additional paid-in capital +783,142 +763,688 +Accumulated other comprehensive loss +( 1,757 ) +( 2,623 ) +Accumulated deficit +( 434,496 ) +( 402,162 ) +Total stockholders’ equity +346,927 +358,940 +Total liabilities and stockholders’ equity +$ +425,011 +$ +434,199 +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-3 +Table of Contents +QUANTERIX CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +(amounts in thousands, except per share data) +Year Ended December 31, +2023 +2022 +2021 +Revenues: +Product revenue +$ +79,460 +$ +69,808 +$ +81,062 +Service and other revenue +40,299 +34,495 +23,629 +Collaboration and license revenue +1,380 +649 +648 +Grant revenue +1,229 +570 +5,217 +Total revenues +122,368 +105,522 +110,556 +Costs of goods sold and services: +Cost of product revenue +32,636 +40,809 +34,149 +Cost of service and other revenue +19,086 +17,907 +14,679 +Total costs of goods sold and services +51,722 +58,716 +48,828 +Gross profit +70,646 +46,806 +61,728 +Operating expenses: +Research and development +24,857 +25,890 +27,978 +Selling, general and administrative +90,241 +91,995 +92,336 +Other lease costs +3,712 +1,278 +— +Impairment and restructuring +1,537 +29,347 +— +Total operating expenses +120,347 +148,510 +120,314 +Loss from operations +( 49,701 ) +( 101,704 ) +( 58,586 ) +Interest income (expense), net +15,839 +5,131 +( 403 ) +Other income (expense), net +2,247 +( 62 ) +1,265 +Loss before income taxes +( 31,615 ) +( 96,635 ) +( 57,724 ) +Income tax (expense) benefit +( 719 ) +( 65 ) +36 +Net loss +$ +( 32,334 ) +$ +( 96,700 ) +$ +( 57,688 ) +Net loss per common share, basic and diluted +$ +( 0.86 ) +$ +( 2.61 ) +$ +( 1.60 ) +Weighted-average common shares outstanding, basic and diluted +37,594 +36,991 +35,997 +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-4 +Table of Contents +QUANTERIX CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS +(amounts in thousands) +Year Ended December 31, +2023 +2022 +2021 +Net loss +$ +( 32,334 ) +$ +( 96,700 ) +$ +( 57,688 ) +Other comprehensive loss, net of tax: +Unrealized gains on marketable securities +325 +— +— +Foreign currency translation +541 +( 3,064 ) +( 1,993 ) +Total other comprehensive income (loss) +866 +( 3,064 ) +( 1,993 ) +Comprehensive loss +$ +( 31,468 ) +$ +( 99,764 ) +$ +( 59,681 ) +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-5 +Table of Contents +QUANTERIX CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +(amounts in thousands) +Year ended December 31, 2023 +Common Stock +Shares +Amount +Additional paid-in capital +Accumulated other comprehensive loss +Accumulated +deficit +Total shareholders' equity +Balance at December 31, 2022 +37,280 +$ +37 +$ +763,688 +$ +( 2,623 ) +$ +( 402,162 ) +$ +358,940 +Issuance of common stock under stock plans, including tax effects +734 +1 +2,690 +— +— +2,691 +Stock-based compensation expense +— +— +16,764 +— +— +16,764 +Unrealized gains on marketable securities, net of tax +— +— +— +325 +— +325 +Foreign currency translation +— +— +— +541 +— +541 +Net loss +— +— +— +— +( 32,334 ) +( 32,334 ) +Balance at December 31, 2023 +38,014 +$ +38 +$ +783,142 +$ +( 1,757 ) +$ +( 434,496 ) +$ +346,927 +Year ended December 31, 2022 +Common Stock +Shares +Amount +Additional paid-in capital +Accumulated other comprehensive loss +Accumulated +deficit +Total shareholders' equity +Balance at December 31, 2021 +36,768 +$ +37 +$ +745,936 +$ +441 +$ +( 305,462 ) +$ +440,952 +Issuance of common stock under stock plans, including tax effects +512 +— +2,310 +— +— +2,310 +Stock-based compensation expense +— +— +15,442 +— +— +15,442 +Foreign currency translation +— +— +— +( 3,064 ) +— +( 3,064 ) +Net loss +— +— +— +— +( 96,700 ) +( 96,700 ) +Balance at December 31, 2022 +37,280 +$ +37 +$ +763,688 +$ +( 2,623 ) +$ +( 402,162 ) +$ +358,940 +Year ended December 31, 2021 +Common Stock +Shares +Amount +Additional paid-in capital +Accumulated other comprehensive loss +Accumulated +deficit +Total shareholders' equity +Balance at December 31, 2020 +31,797 +$ +32 +$ +451,433 +$ +2,434 +$ +( 247,774 ) +$ +206,125 +Issuance of common stock under stock plans, including tax effects +864 +1 +8,814 +— +— +8,815 +Sale of common stock in underwritten public offering, net +4,107 +4 +269,714 +— +— +269,718 +Stock-based compensation expense +— +— +15,975 +— +— +15,975 +Foreign currency translation +— +— +— +( 1,993 ) +— +( 1,993 ) +Net loss +— +— +— +— +( 57,688 ) +( 57,688 ) +Balance at December 31, 2021 +36,768 +$ +37 +$ +745,936 +$ +441 +$ +( 305,462 ) +$ +440,952 +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-6 +Table of Contents +QUANTERIX CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Year Ended December 31, +2023 +2022 +2021 +Cash flows from operating activities: +Net loss +$ +( 32,334 ) +$ +( 96,700 ) +$ +( 57,688 ) +Adjustments to reconcile net loss to net cash used in operating activities: +Depreciation and amortization expense +6,364 +5,349 +4,851 +Credit losses (gains) on accounts receivable +336 +( 301 ) +213 +Accretion of marketable securities +( 1,964 ) +— +— +Operating lease right-of-use asset amortization +2,015 +715 +499 +Stock-based compensation expense +16,764 +15,442 +15,975 +Impairment +1,570 +25,592 +— +Other operating activity +150 +( 439 ) +692 +Changes in assets and liabilities: +Accounts receivable +( 6,695 ) +5,156 +( 6,853 ) +Inventory +( 5,364 ) +5,386 +( 8,090 ) +Prepaid expenses and other current assets +( 2,371 ) +( 568 ) +( 393 ) +Other non-current assets +( 775 ) +( 909 ) +( 2 ) +Accounts payable +1,189 +( 5,362 ) +2,414 +Accrued compensation and benefits, accrued expenses, and other current liabilities +4,276 +( 3,976 ) +606 +Deferred revenue +635 +2,599 +1,462 +Operating lease liabilities +( 2,645 ) +( 266 ) +( 1,230 ) +Other non-current liabilities +( 53 ) +10 +( 363 ) +Net cash used in operating activities +( 18,902 ) +( 48,272 ) +( 47,907 ) +Cash flows from investing activities: +Purchases of marketable debt securities +( 175,613 ) +— +— +Proceeds from marketable debt securities +31,000 +— +— +Purchases of property and equipment +( 3,788 ) +( 11,726 ) +( 13,616 ) +Proceeds from RADx grant on assets purchased +— +520 +7,278 +Net cash used in investing activities +( 148,401 ) +( 11,206 ) +( 6,338 ) +Cash flows from financing activities: +Proceeds from common stock issued under stock plans +2,889 +2,311 +8,815 +Payments for employee taxes withheld on stock-based compensation awards +( 198 ) +— +— +Sale of common stock in underwritten public offering, net +— +— +269,718 +Payments on notes payable +— +— +( 7,738 ) +Net cash provided by financing activities +2,691 +2,311 +270,795 +Net increase (decrease) in cash, cash equivalents, and restricted cash +( 164,612 ) +( 57,167 ) +216,550 +Effect of exchange rate changes on cash, cash equivalents, and restricted cash +301 +( 538 ) +( 92 ) +Cash, cash equivalents, and restricted cash at beginning of period +341,337 +399,042 +182,584 +Cash, cash equivalents, and restricted cash at end of period +$ +177,026 +$ +341,337 +$ +399,042 +Supplemental disclosure of cash flow information: +Cash paid for taxes +$ +808 +$ +684 +$ +— +Cash paid for interest +$ +— +$ +— +$ +389 +Purchases of property and equipment in accounts payable and accruals +$ +419 +$ +152 +$ +229 +Operating lease right-of-use assets obtained in exchange for lease liabilities +$ +— +$ +22,494 +$ +— +Non-cash consideration received under product sales agreement (Note 3, 6) +$ +775 +$ +— +$ +— +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-7 +Table of Contents +QUANTERIX CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1. Organization and Nature of Business +Quanterix Corporation (“Quanterix” or the “Company”) is a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. The Company’s platforms are based on its proprietary digital “Simoa” detection technology and enable customers to reliably detect protein biomarkers in ultra- low concentrations in blood, serum, and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies. The ability of the Company’s Simoa platforms to detect proteins in the femtomolar range is enabling the development of novel therapies and diagnostics and has the potential to facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis, and, ultimately, prevention. +The Company also provides contract research services for customers and Laboratory Developed Test (“LDT”) services through its CLIA-certified Accelerator Laboratory (the “Accelerator Laboratory”). The Accelerator Laboratory provides customers with access to Simoa technology and supports multiple projects and services, including sample testing, homebrew assay development, custom assay development, and blood-based biomarker testing. To date, the Company has completed over 2,200 projects for more than 480 customers from all over the world using its Simoa platforms. +Liquidity +The Company has recognized annual losses from operations since inception and has an accumulated deficit of $ 434.5 million as of December 31, 2023. The Company incurred net losses of $ 32.3 million, $ 96.7 million, and $ 57.7 million for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, the Company had cash and cash equivalents of $ 174.4 million and marketable securities of $ 146.9 million. The Company expects that its current cash, cash equivalents, and marketable securities will be sufficient to fund its operations for a period of at least one year from the date the Consolidated Financial Statements are issued. +Note 2. Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements and notes herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding annual financial reporting on Form 10-K. +The Company’s fiscal year is the twelve-month period from January 1 through December 31, and all references to “2023,” “2022,” and “2021,” refer to the fiscal year unless otherwise noted. Certain amounts in the prior years’ Consolidated Financial Statements have been reclassified to conform to the current year’s presentation. +Use of Estimates +The preparation of the Consolidated Financial Statements and Notes to Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during each fiscal year. Such estimates include, but are not limited to, revenue recognition, valuation of inventory, leases, valuation and impairment of long-lived assets, recoverability of deferred tax assets, and stock-based compensation expense. The Company bases its estimates on historical experience, known trends, worldwide economic conditions, both general and specific to the life sciences industry, and other relevant factors it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates and changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates. +F-8 +Table of Contents +Principles of Consolidation +The Consolidated Financial Statements include the accounts of Quanterix and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. +In accordance with Accounting Standards Codification (“ASC”) 810 – Consolidation , the Company assesses the terms of its non-marketable equity investments in entities to determine if any meet the definition of a variable interest entity (“VIE”) and require consolidation into its Consolidated Financial Statements. Refer to Note 19 − Variable Interest Entities for further discussion. +Foreign Currency +The functional currency of the Company’s subsidiaries is their respective local currencies. These subsidiary financial statements are translated into U.S. dollars using the period-end exchange rates for assets and liabilities, average exchange rates during the corresponding period for revenue and expenses, and historical rates for equity. The effects of foreign currency translation adjustments are recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity on the Consolidated Balance Sheets. +Foreign currency transaction gains (losses) are included in other income (expense), net on the Consolidated Statements of Operations. Foreign exchange losses were not material during the year ended December 31, 2023, and were $ 0.8 million and $ 0.4 million during the years ended December 31, 2022 and 2021, respectively. +Segment Information +Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker (“CODM”), in deciding how to allocate resources and assess performance. The Company’s CODM is the chief executive officer, who reviews the Company's operations and manages its business as a single operating segment as of December 31, 2023. +Revenue from Contracts with Customers +The Company generates the majority of its revenues from contracts with customers and accounts for them pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 606 - Revenue from Contracts with Customers (“ASC 606”). Refer to the section titled “Grant Revenue” below for discussion the Company’s accounting policy for revenue generated from grant awards. +For contracts with customers, the Company recognizes revenue when a customer obtains control of promised products or services, for an amount that reflects the consideration expected to be received in exchange for those products or services. The Company follows the five step revenue model prescribed by ASC 606 to determine revenue recognition: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Revenues are presented net of any sales, value added, or similar taxes collected from customers and remitted to the government. +The Company accounts for a contract when it has approval and commitment from both parties, the fees, payment terms and rights of the parties regarding the products or services to be transferred are identified, the contract has commercial substance, and it is probable that substantially all of the consideration for the products and services expected to be transferred is collectible. The Company applies judgment in determining the customer’s ability and intention to pay for services expected to be transferred, which is based on factors including the customer’s payment history, management’s ability to mitigate exposure to credit risk (for example, requiring payment in advance of the transfer of products or services, or the ability to stop transferring promised products or services in the event a customer fails to pay consideration when due), and experience selling to similarly situated customers. +F-9 +Table of Contents +The Company’s contracts may include either a single promise (referred to as a performance obligation) to transfer a product or service, or a combination of multiple performance obligations to transfer products or services. The Company evaluates the existence of multiple performance obligations within its contracts by using judgment to determine if (1) the customer can benefit from each contractual promise on its own or together with readily available resources and (2) the transfer of each contractual promise is separately identifiable from other promises in a contract. When both criteria are met, each promise is accounted for as a separate performance obligation. Additionally, the Company has elected the practical expedient under ASC 606 to account for shipping and handling as an activity to fulfill a promise to transfer a product, and therefore does not evaluate whether shipping and handling activities are promised services to its customers. +Contracts that include rights to additional products or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the customer and if so, the material right is considered a performance obligation. The identification of material rights requires judgment to determine the value of the option to purchase additional products and services in relation to options that may be provided to, and prices paid by, customers in the normal course of business. Material rights are recognized when exercised by a customer or upon expiration of the right. +The Company determines the transaction price of its contracts based on the amount of consideration it expects to be entitled to, which is generally equal to the contract amount. In some cases, contracts contain variable consideration which primarily relates to (1) sales- and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (2) contracts with minimum purchase commitments. For sales and usage-based royalties, ASC 606 provides an exception to estimating variable consideration. Under this exception, the Company recognizes revenues from sales- or usage-based royalty revenue at the later of when the sales or usage occurs or the satisfaction (or partial satisfaction) of the performance obligation to which the royalty has been allocated. All other variable amounts are constrained to the minimum guaranteed contract amount so that a reversal of cumulative revenue does not occur in future periods. Once there is no longer uncertainty over a variable amount, any incremental fees the Company is entitled to are allocated to the related performance obligation(s). +For contracts that contain multiple performance obligations, the Company allocates the transaction price among the performance obligations on a relative basis according to their standalone selling prices (“SSP”). Determining the SSP for performance obligations requires judgment and is based on factors including prices charged to customers in observable transactions, internal pricing objectives and list prices, and pricing of similar products. The Company uses a range of amounts to estimate SSP and has more than one range for certain products and services based on the geographic location of customers and sales channel. +Product Revenue +The Company’s product revenues are composed of instruments, assay kits, replacement parts, and other consumables such as reagents and antibodies. Products are sold directly to customers and are also sold through distributors in EMEA and Asia Pacific regions. Direct instrument sales include installation and an initial year of implied service-type warranties. The Company has determined that the instrument and installation are a combined performance obligation as the customer cannot benefit from the instrument without the installation and no other vendors can provide the installation of the Company’s specialized instruments. The implied service-type warranty is considered a separate performance obligation since a customer could benefit from it independently with readily available resources and is capable of being sold on its own. Sales of instruments to distributors include a license to import and resell the instruments. The Company has determined these distributor licenses are part of a combined performance obligation with the instrument as the distributor only benefits from the combination of the instrument and ability to resell it. +Instrument sales may also be bundled with assays and other consumables, training, and/or an extended service warranty, each of which is considered a separate performance obligation. +Product revenues for direct instrument sales to customers are recognized upon completion of the instrument’s installation. For instrument sales to distributors, revenue is recognized based on the agreed upon shipping terms (either upon shipment or delivery) as that is when title passes to the customer. +F-10 +Table of Contents +Service Revenue +Service revenues are composed of contract research services, initial year of implied service-type warranties, extended services warranty contracts, repair services, and other services such as training. Contract research services are provided through the Company’s Accelerator Laboratory and generally consist of fixed fee contracts. +Revenues from contract research services are recognized at the point in time when the Company completes and delivers its research results on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. For contract research services recognized over time, the Company uses the output method based on the number of completed results. Revenues from other services are recognized at the point in time when the training or other services are delivered as the customer simultaneously receives and benefits from the services. Revenues from service-type warranties are recognized ratably over the contract service period. +Collaboration and License Revenue +Collaboration and license revenues are composed of revenue associated with licensing to third parties the Company’s technology, intellectual property, and know-how associated with our instruments and for related services. License arrangements consist of sales or usage-based fees and/or future royalties. Revenues are recognized at the point in time the license is delivered as the underlying license is considered functional intellectual property. Royalty revenues that are sales- or usage- based are recognized at the later of when the sales or usage occurs and the satisfaction (or partial satisfaction) of the performance obligation to which the royalty has been allocated. +Contract Assets and Liabilities +Accounts Receivable and Allowance for Credit Losses +The Company is exposed to credit losses primarily through accounts receivable from sales of its products and services. Accounts receivable includes amounts billed and currently due from customers. Since the only condition for payment of the Company’s invoices is the passage of time, the Company records a receivable on the date the invoice is issued. Also included in accounts receivable are unbilled amounts resulting from revenue exceeding the amount billed to the customer, where the right to payment is unconditional. If the right to payment for services performed was conditional on something other than the passage of time, the unbilled amount would be recorded as a separate contract asset. +The Company’s expected loss allowance methodology is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers’ accounts receivable. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company monitors changes to the receivables balance on a timely basis, and balances are written off as they are determined to be uncollectable after collection efforts have been exhausted. +Generally, the Company’s contracts are non-cancellable. For contracts that are cancellable by the customer, the Company does not record a receivable when it issues an invoice. The Company records accounts receivable on these contracts only up to the amount of revenue recognized but not yet collected. +The Company’s payment terms vary by the type and location of the customer and the products or services offered. Payment from customers is generally required 30 to 45 days from date of shipment or satisfaction of the performance obligation. The Company does not provide financing arrangements to its customers. +The Company refers to contract liabilities as deferred revenue on the Consolidated Balance Sheets. For deferred revenue, the Company applies the practical expedient under ASC 606 that allows for the exclusion of (1) contracts with original expected length of one year or less and (2) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed from the amount of remaining performance obligations disclosed. +F-11 +Table of Contents +Costs to Obtain Contracts +The Company capitalizes commissions paid to its sales representatives and related fringe benefit costs that are incremental to obtaining customer contracts. Capitalized commissions are recorded in prepaid expenses and other current assets and other non-current assets on the Consolidated Balance Sheets. These commissions are amortized over the life of the contract and are recorded in cost of goods sold and selling, general and administrative expense on the Consolidated Statements of Operations. The Company has elected the practical expedient allowing commissions with an amortization period of one year or less to be expensed as incurred. +Commissions associated with instrument sales are generally earned when installation is complete and title to the instrument has transferred. Commissions associated with consumables sales are earned when title to the product transfers. Commissions associated with warranty and extended service contracts are earned upon booking. +Warranties +The Company provides an initial year of warranty and maintenance service related to its instruments sold directly to customers and sells extended warranty contracts for additional periods. The Company defers revenue associated with these warranty services and recognizes them ratably over the service period. +Grant Revenue +Accounting for grants does not fall under ASC 606, as the grantor will not benefit directly from the Company’s expansion or product development, and no products or services are transferred to the grantor. As there is no authoritative guidance under U.S. GAAP on accounting for grants to for profit business entities from government entities, the Company accounts for grants by analogy to International Accounting Standards Topic 20, Accounting for Government Grants and Disclosure of Government Assistance (“IAS 20”) and ASC Topic 958, Not for-Profit Entities (“ASC 958”). The decision to account for a grant under IAS 20 or ASC 958 is based on whether the grantor is a government entity. +The Company records grants related to assets as a deduction in calculating the carrying value of the asset, and to record grants related to income separately on the Consolidated Statements of Operations on a gross basis as grant revenue. The related expenses are recorded on a gross basis within operating expenses. These methods are elections an entity can make under both IAS 20 and ASC 958. +The Company recognizes grant revenue as the Company performs services under the arrangement when the funding is committed and as each grant’s activities are performed. The timing of revenue recognition and receipt of funding varies by grant and can be independent from performance of the related activities, such as an upfront payment of the award value, or subsequent to the Company’s requests for reimbursement for already performed activities (subject to the approval of the granting organization). +Cost of Goods Sold and Services +Cost of Product Revenue +Cost of product revenue consists of manufacturing and assembly costs for instruments, related reagents, other consumables, contract manufacturer costs, personnel costs, royalties, overhead, and other direct costs related to product sales. Raw material part costs include inbound freight, shipping and handling costs associated with purchased goods, contract manufacturer costs, personnel costs, royalties, overhead and other direct costs related to product sales. Additionally included in cost of product revenue are royalty fees due to third parties from revenue generated by collaboration or license deals. +Cost of Service and Other Revenue +Cost of services and other revenue consists of direct costs associated with operating the Company’s Accelerator Laboratory on behalf of its customers, including raw materials, personnel costs, royalties, allocated overhead costs that include facility and other related costs, and other direct costs. Additional costs include costs related to warranties, and other costs of servicing equipment at customer sites. +F-12 +Table of Contents +Research and Development Expenses +Research and development expense consists primarily of personnel costs, research supplies, third-party development costs for new products, materials for prototypes, quality assurance, and allocated overhead costs that include facility and other related costs. The Company accounts for nonrefundable advance payments for products and services that will be used in future research and development activities as expense when the service has been performed or when the products have been received. +For arrangements in which the Company receives funding from third parties for research and development activities (excluding the government sponsored arrangements), the Company assesses whether the arrangement is within the scope of ASC 730 – Research and Development . When the Company is entitled to receive reimbursements, does not have an obligation to repay, does not transfer products or services, and is the primary beneficiary of the activities, the Company records the reimbursable amounts as a reduction to research and development expense. Amounts reimbursed in excess of the cost incurred by the Company are recorded within other income (expense), net on the Consolidated Statements of Operations. +Reimbursable amounts recorded as a reduction to research and development expenses were not material during the years ended December 31, 2023, 2022, and 2021. Amounts reimbursed in excess of costs incurred by the Company related to activities funded by third parties were $ 0.4 million during the year ended December 31, 2023. No reimbursable amounts were received during the years ended December 31, 2022, and 2021. +Selling, General and Administrative Expenses +Selling, general and administrative expense consists primarily of personnel costs for our sales and marketing, finance, legal, human resources, and general management teams, shipping and handling for product sales, other general and administrative costs, as well as professional services costs, such as marketing, advertising, legal and accounting services, and allocated overhead costs that include facility and other related costs. The classification of shipping and handling costs for product sales as selling, general and administrative expenses varies from company to company with some companies recording these as selling, general and administrative expenses and others recording such expenses within costs of goods sold for products. To the extent the classification of its shipping and handling costs differs from the reporting approach used by other companies, the Company’s gross margins may not be comparable with those reported by such other companies. +Net Loss Per Share +Basic net loss per common share attributable to common stockholders is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted net loss per common share attributable to common stockholders is calculated under the treasury stock method by dividing the loss attributable to common stockholders by the diluted weighted-average number of common shares outstanding. Diluted weighted-average shares outstanding reflect the dilutive effect, if any, of potential common shares issued, such as unvested common stock, unvested restricted stock units (“RSUs”), common stock options, and shares estimated to be purchased under the Company’s employee stock purchase plan (“ESPP”). During periods when the Company is in a net loss position, these potential common shares are excluded from the diluted net loss per common share attributable to common stockholders because their effect would be anti-dilutive. Accordingly, basic and diluted net loss per common share attributable to common stockholders were the same for all periods presented. +Cash and Cash Equivalents +Cash and cash equivalents consist of cash deposits and short-term, highly liquid marketable securities that are readily convertible into cash, with original maturities of three months or less. Cash and cash equivalents consist of the following (in thousands): +As of December 31, +2023 +2022 +Cash +$ +12,162 +$ +32,643 +Money market funds +155,367 +306,097 +Marketable securities +6,893 +— +Total cash and cash equivalents +$ +174,422 +$ +338,740 +F-13 +Table of Contents +Restricted Cash +The following table summarizes the period ending cash and cash equivalents as presented on the Consolidated Balance Sheets and the total cash, cash equivalents, and restricted cash as presented on the Consolidated Statements of Cash Flows (in thousands): +As of December 31, +2023 +2022 +Cash and cash equivalents +$ +174,422 +$ +338,740 +Restricted cash +2,604 +2,597 +Cash, cash equivalents, and restricted cash +$ +177,026 +$ +341,337 +Restricted cash consists of collateral for a letter of credit issued as security for two of the Company’s leased facilities and to secure the Company’s corporate credit card program. The short-term or long-term classification is determined in accordance with the expiration of the underlying letter of credit and security. +Marketable Securities +The Company’s current portfolio of marketable securities is entirely debt securities and may at any time include commercial paper, U.S. Treasuries, corporate notes and bonds, U.S. Government agency bonds, certificates of deposit, and similar types of debt securities. Marketable debt securities with original maturities of three months or less at the time of purchase are recorded in cash equivalents on the Consolidated Balance Sheets as they are considered highly liquid and readily convertible into cash. All other marketable securities, including those with maturities beyond one year, are recorded as current assets on the Consolidated Balance Sheets based on their highly liquid nature and because such securities are available for use in current operations. +The Company classifies its marketable securities as either held to maturity, available-for-sale, or trading at the time of purchase and re-evaluates such classification at each balance sheet date. All of the Company’s marketable securities are currently classified as available-for-sale as it may use them in current operations. Available-for-sale securities are recorded at fair value (refer to Note 6 − Fair Value of Financial Instruments ). +Unrealized gains and losses (other than impairment or credit related losses) are recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity on the Consolidated Balance Sheets. Realized gains and losses are determined using the specific identification method and are recorded in other income (expense), net on the Consolidated Statements of Operations. +Quarterly, or more frequently if circumstances warrant, the Company monitors its marketable securities for impairment. In the event a security’s fair value is less than its amortized cost basis, the Company evaluates whether an impairment exists and if the impairment is a result of credit loss or other factors. For a security in an unrealized loss position, if the Company intends to sell the security in an unrealized loss position, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, an impairment loss equal to the difference between the security’s fair value and amortized cost basis is recorded in other income (expense), net. Additionally, the Company determines if a credit loss exists by considering information about the collectability of the security, current market conditions, and the issuer’s financial condition. If a decline in fair value is a result of a credit loss, an allowance for credit losses is recorded in other income (expense), net on the Consolidated Statement of Operations, limited to the portion attributed to the credit loss. +The Company has also elected the practical expedient to separately present accrued interest receivable from its marketable securities balance. Such accrued interest is recorded in prepaid expenses and other current assets on the Consolidated Balance Sheets and is not included in the assessment and measurement of impairment of its marketable securities. +Inventory +Inventory consists of instruments, assays, and the materials required to manufacture instruments and assays. +F-14 +Table of Contents +Inventory is stated at the lower of cost or net realizable value on a first-in, first-out (“FIFO”) basis and includes the cost of materials, labor, and manufacturing overhead. The Company analyzes its inventory levels on each reporting date for slow-moving, excess, and obsolete inventory, and inventory expected to expire prior to being used. These analyses require judgment and are based on factors including, but not limited to, recent historical activity, anticipated or forecasted demand for the Company’s products (developed through its planning and sales and marketing inputs, and market conditions). If the Company identifies adverse conditions exist, the carrying value of the inventory is reduced to its estimated net realizable value by providing estimated reserves for excess or obsolete inventory. +The Company adjusts the reserves for excess or obsolete inventory and records additional inventory write downs based on unfavorable changes in estimated customer demand or actual market conditions that may differ from its projections. +Property and Equipment +Property and equipment, including leasehold improvements, are stated at cost, net of accumulated depreciation. These assets are depreciated over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred, whereas significant expenditures that extend the useful lives of existing assets are capitalized as additions to property and equipment. +Depreciation is calculated based upon the following estimated useful lives: +Estimated Useful Life +Laboratory and manufacturing equipment +5 Years +Office furniture and equipment +7 Years +Computers and software +3 Years +Leasehold improvements +Shorter of asset's life or remaining lease term +Leases +The Company enters into operating leases for office, laboratory, and manufacturing spaces, as well as office equipment, and determines whether an arrangement is a lease at inception of the arrangement. The Company accounts for a lease when it has the right to control the leased asset for a period of time, while obtaining substantially all of the assets’ economic benefits. Leases are recorded on the Consolidated Balance Sheets as operating lease right-of-use (“ROU”) assets and current or non-current operating lease liabilities, as applicable. All of the Company’s leases are classified as operating leases. Additionally, the Company does not separate lease and non-lease components. +Operating lease ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the future minimum lease payments over the lease term and any initial direct costs incurred. Initial direct costs are incremental costs of a lease that would not have been incurred had the lease not been executed. The discount rate used to determine the present value of the lease payments is the Company’s incremental borrowing rate on a collateralized basis for a similar term and amount, as generally an implicit rate in the lease is not readily determinable. To estimate its incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have an agency-based credit rating. +The Company’s lease agreements can contain lease and non-lease components. The Company accounts for the lease and fixed payments for non-lease components as a single lease component under ASC 842– Leases , which increases the amount of the ROU assets and lease liabilities. Most of the Company’s lease agreements also contain variable payments, primarily maintenance, utility, and other-related costs, which are expensed as incurred and not included in the measurement of the ROU assets and lease liabilities. +Some of the Company’s leases contain options to extend or terminate the lease. When determining the lease term, these options are included in the measurement and recognition of the Company’s ROU assets and lease liabilities when it is reasonably certain that the Company will exercise the option(s). The Company considers various economic factors when making this determination, including, but not limited to, the significance of leasehold improvements incurred in the leased space, the difficulty in replacing the asset, underlying contractual obligations, and specific characteristics unique to a particular lease. Subsequent to +F-15 +Table of Contents +entering into a lease arrangement, the Company reassesses the certainty of exercising options to extend or terminate a lease. When it becomes reasonably certain that the Company will exercise an option that was not included in the lease term, the Company accounts for the change in circumstances as a lease modification, which results in the remeasurement of the ROU asset and lease liability as of the modification date. +Leases with a term of 12 months or less upon commencement are not recorded on the Consolidated Balance Sheets and are recorded to expense on a straight-line basis over the lease term. +Impairment of Goodwill +The Company assesses goodwill for impairment at the reporting unit level annually and whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such events or circumstances could include the occurrence of operating losses, a significant decline in earnings, or significant changes in or restructuring of the business. The impairment test is first performed at the reporting unit level using a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying value. If the reporting unit does not pass the qualitative assessment, the reporting unit’s carrying value is compared to its fair value, using estimates including forecasts of discounted future cash flows and peer market multiples. An impairment charge is recorded equal to the excess of the reporting unit’s carrying value over its fair value. +Impairment of Long-Lived Assets +The Company’s long-lived assets consist of operating lease ROU assets, property and equipment, and intangible assets. The Company reviews the carrying amount of its long-lived assets for impairment whenever events or circumstances indicate that the estimated useful lives may warrant revision, or that the carrying amount of the assets may not be fully recoverable. To assess whether a long-lived asset or group of assets has been impaired, the estimated undiscounted and discounted future cash flows for the estimated remaining useful life or estimated lease term of the asset (or the primary asset in the asset group) are compared to their carrying values. Significant judgment is required to estimate future cash flows, including, but not limited to, the expected use of the asset (group), historical customer retention rates, technology roadmaps, customer awareness, trademark and trade name history, contractual provisions that could limit or extend an asset's useful life, market data, discount rates, potential sublease opportunities including rent and rent escalation rates, time to sublease, and free rent periods. To the extent that the future cash flows are less than the carrying value, the asset(s) are impaired and written down to its estimated fair value. +Software Development Costs +The Company develops and modifies software related to the operation of some of its instruments and internal use software supporting the Company’s operations. Certain costs incurred during the application development stage including external direct costs of services used in the development or internal personnel costs for employees directly associated with the development, are capitalized. The Company begins depreciating these costs over the life of the related asset upon completion of a working model or when it is ready for its intended use. Capitalized software development costs related to software owned or developed by the Company are recorded in property and equipment on the Consolidated Balance Sheets. Capitalized software development costs related to software hosted by a vendor (i.e. cloud computing) are recorded in prepaid expenses and other current assets, and other non-current assets on the Consolidated Balance Sheets. +Costs incurred during the preliminary project stage and post-configuration stages are expensed as incurred. +Fair Value of Financial Instruments +The carrying amount reflected in the Consolidated Balance Sheets for cash, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued compensation and benefits, and accrued expenses and other current liabilities approximate their fair values due to their short-term nature. +Additionally, the Company has certain financial assets that are required to be measured at fair value on a recurring basis including cash equivalents and marketable securities. Pursuant to the accounting standards for fair value measurements, the fair values of these financial assets are classified as Level 1, 2, or 3 within the fair value hierarchy as follows: +F-16 +Table of Contents +● Level 1: Observable inputs based on unadjusted quoted prices in active markets for identical assets. +● Level 2: Inputs, other than Level 1 inputs, that are observable either directly or indirectly, such as quoted prices for similar assets, quoted prices in markets that are not active, other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets. +● Level 3: Unobservable inputs for which there is little or no market data and such inputs are significant to the fair value of the assets. These inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset. +To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. +Income Taxes +The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Consolidated Financial Statements or tax returns. Deferred tax assets and liabilities are determined based on differences between the carrying amount and the tax basis of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. +The Company accounts for uncertain tax positions using a more likely than not threshold for recognizing uncertain tax positions, in accordance with ASC 740 – Income Taxes . The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity, and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on an ongoing basis and adjusts any liability recorded to reflect subsequent changes in the relevant facts surrounding the uncertain positions. Amounts recorded for uncertain tax positions, including interest and penalties, are recorded in income tax (expense) benefit on the Consolidated Statement of Operations. +Credit, Product, and Supplier Concentrations and Off-Balance-Sheet Risk +Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash, cash equivalents, marketable securities, and accounts receivable. The Company limits its risk exposure by having its cash, cash equivalents, and marketable securities held at large commercial banks. +Customers outside the United States represented 38 % and 41 % of the Company’s gross trade accounts receivable balance as of December 31, 2023 and 2022, respectively. +For the year ended December 31, 2023, one customer of approximately $ 14.0 million revenue accounted for greater than 10 % of the Company’s total revenue. For the year ended December 31, 2022, one customer of approximately $ 13.7 million revenue accounted for greater than 10 % of the Company’s total revenue. For the year ended December 31, 2021, no customer individually accounted for greater than 10 % of the Company’s total revenue. +The Company is also subject to supply chain risks related to outsourced manufacturing of its instruments. Although there are a limited number of manufacturers for its instruments, the Company believes that other suppliers could provide similar manufacturing on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. In addition to outsourced manufacturing of its instruments, the Company also purchases antibodies through a number of different suppliers. Although a disruption in service from any one of its antibody suppliers is possible, the Company believes that it would be able to find an adequate supply from alternative suppliers. +Stock-Based Compensation +The Company measures and recognizes stock-based compensation expense by calculating the estimated fair value of stock options, RSUs, or purchase rights issued under the Company’s ESPP on the grant date. The Company generally issues new common +F-17 +Table of Contents +shares upon exercise of options and vesting of RSUs. Awards granted by the Company are routine in nature including new hire, annual, and promotion grants. +The fair value of stock options and purchase rights under the ESPP is estimated using the Black-Scholes option-pricing model. The Black-Scholes model requires the Company to make assumptions about the expected or contractual term of the option or purchase right, the expected volatility, risk-free interest rates, and expected dividend yield. The Company estimates the expected term of options granted to employees utilizing historical exercise data. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. During 2023, the expected volatility was based on the Company’s historical volatility. Prior to 2023, the expected volatility was estimated based on both the Company’s volatility and the average volatility for comparable publicly traded companies over a period equal to the expected term of the related stock-based awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected term. The expected dividend yield is zero as the Company has never paid dividends and has no current plans to pay any dividends on common stock. +The fair value of RSUs is determined using the closing market price of the Company’s common stock on the grant date. +The Company recognizes stock-based compensation expense on a straight-line basis over the award’s requisite service period, which is the vesting period for stock options and RSUs, and the offering period for purchase rights under the ESPP. The Company recognizes forfeitures as they occur. +Advertising +The Company expenses the cost of advertising as incurred and records them in selling, general and administrative expense in the Consolidated Statements of Operations. Advertising expense was $ 0.3 million, $ 0.3 million, and $ 0.5 million for the years ended December 31, 2023, 2022, and 2021, respectively. +Recent Accounting Pronouncements +Recent Accounting Standards To Be Adopted +In June 2022, the FASB issued ASC Update No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . This update clarifies the guidance in Topic 820 related to measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, as well as introduces new disclosure requirements for these types of equity securities. The new standard will be effective for the Company on January 1, 2024. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations. +In November 2023, the FASB issued ASC Update No. 2023-07, Segment Reporting (Topic 280): Improvement to Reportable Segment Disclosures. This update enhances reportable segment disclosure requirements by requiring public entities to provide disclosures of significant segment expenses and other segment items, as well as disclosures about a reportable segment’s profit or loss and assets that are currently required annually in interim periods. The new standard will be effective for the Company’s annual financial statements for the period beginning on January 1, 2024. The adoption of this standard is not expected to have a material impact on the Company’s disclosures. +In December 2023, the FASB issued ASC Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update enhances income tax disclosure requirements by requiring public entities to provide additional information in its tax rate reconciliation and additional disclosures about income taxes paid. The update is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance and the amendments in this update should be applied prospectively, but entities have the option to apply it retrospectively. The Company is currently evaluating the impact that the standard will have on its Consolidated Financial Statements. +F-18 +Table of Contents +Note 3. Revenue and Related Matters +Revenue from Contracts with Customers +The Company’s customers primarily consist of entities engaged in the life sciences research that pursue the discovery and development of new drugs for a variety of neurologic, oncologic, cardiovascular, infectious disease, and other protein biomarkers associated with diseases. The Company’s customer base includes pharmaceutical, biotechnology, contract research organizations, academic, and government institutions. +Disaggregated Revenue +When disaggregating revenue, the Company considers all of the economic factors that may affect its revenues. The following tables disaggregate the Company’s revenue from contracts with customers by geography, based on the location products and services are consumed, and revenue type (in thousands): +Year Ended December 31, 2023 +(in thousands) +North America +EMEA +Asia Pacific +Total +Product revenue: +Instruments +$ +6,374 +$ +4,384 +$ +4,947 +$ +15,705 +Consumable and other products +35,018 +21,128 +7,609 +63,755 +Total +$ +41,392 +$ +25,512 +$ +12,556 +$ +79,460 +Service revenue: +Service-type warranties +$ +6,369 +$ +3,089 +$ +631 +$ +10,089 +Research services +24,706 +2,000 +1,122 +27,828 +Other services +1,436 +951 +( 5 ) +2,382 +Total +$ +32,511 +$ +6,040 +$ +1,748 +$ +40,299 +Collaboration and license revenue: +1,380 +— +— +1,380 +Total +$ +1,380 +$ +— +$ +— +$ +1,380 +Year Ended December 31, 2022 +(in thousands) +North America +EMEA +Asia Pacific +Total +Product revenue: +Instruments +$ +9,254 +$ +8,362 +$ +7,388 +$ +25,004 +Consumable and other products +25,894 +14,514 +4,396 +44,804 +Total +$ +35,148 +$ +22,876 +$ +11,784 +$ +69,808 +Service and other revenues: +Service-type warranties +$ +5,581 +$ +2,779 +$ +480 +$ +8,840 +Research services +22,493 +1,013 +147 +23,653 +Other services +1,144 +722 +136 +2,002 +Total +$ +29,218 +$ +4,514 +$ +763 +$ +34,495 +Collaboration and license revenue: +Total +$ +274 +$ +323 +$ +52 +$ +649 +F-19 +Table of Contents +Year Ended December 31, 2021 +(in thousands) +North America +EMEA +Asia Pacific +Total +Product revenue: +Instruments +$ +12,138 +$ +8,178 +$ +5,657 +$ +25,973 +Consumable and other products +34,997 +16,122 +3,970 +55,089 +Total +$ +47,135 +$ +24,300 +$ +9,627 +$ +81,062 +Service and other revenue: +Service-type warranties +$ +4,334 +$ +2,039 +$ +255 +$ +6,628 +Research services +12,101 +2,600 +124 +14,825 +Other services +1,372 +695 +109 +2,176 +Total +$ +17,807 +$ +5,334 +$ +488 +$ +23,629 +Collaboration and license revenue: +Total +$ +360 +$ +288 +$ +— +$ +648 +UltraDx Product Sales Agreement +On May 26, 2022, the Company and UltraDx Limited (“UltraDx”), a company formed by ARCH Venture Partners (“ARCH”), entered into an agreement (the “UltraDx Agreement”). Under the UltraDx Agreement, the Company agreed to supply UltraDx with HD-X instruments (both fully assembled and disassembled), assays and assay components, and granted a co-exclusive license to manufacture, seek Chinese regulatory approval of (including performance of any necessary research and development activities), and commercialize, HD-X instruments assembled in China and related assays in the Chinese in vitro diagnostic (“IVD”) market. Refer to Note 16 − Related Party Transactions for a discussion of the related party relationships between Quanterix and these entities. +The Company determined that the instruments, components, and licenses formed a single, combined performance obligation. The consideration due to the Company included (1) cash proceeds of $ 1.9 million, which was received and recognized as revenue in the third quarter of 2022 when the instruments, components, and licenses were delivered to and paid for by UltraDx, and (2) contingent, non-cash consideration in the form of ordinary shares of UltraDx with a deemed fair value of $ 1.0 million. The issuance of the shares was contingent on UltraDx completing a preferred share financing under the terms and conditions in the UltraDx Agreement. Given the uncertainty of the completion of the preferred share financing, the Company concluded that the non-cash consideration related to the ordinary shares was variable consideration that was fully constrained at contract inception. +In the second quarter of 2023, UltraDx completed the qualified preferred share financing and issued to the Company one million ordinary shares. Refer to Note 6 − Fair Value of Financial Instruments for the Company’s disclosures related to determining the fair value of the shares received. Also refer to Note 19 − Variable Interest Entities for additional information on the Company’s investment in UltraDx as a result of the share issuance. +During the year ended December 31, 2023, the Company recognized $ 1.8 million of revenue from UltraDx, which includes the one-time revenue from the receipt of the UltraDx shares in the second quarter of 2023. During the year ended December 31, 2022, the Company recognized $ 1.9 million of revenue from UltraDx. +Eli Lilly and Company Service Revenue Agreements +On February 25, 2022, the Company entered into a Master Collaboration Agreement with Eli Lilly and Company (“Lilly”) establishing a framework for future projects focused on the development of Simoa immunoassays (the “Lilly Collaboration Agreement”). The Company also entered into a statement of work under the Lilly Collaboration Agreement to perform assay research and development services within the field of Alzheimer’s disease. In connection with the Lilly Collaboration Agreement, the Company received a non-refundable up-front payment of $ 5.0 million during the first quarter of 2022, which was recognized over a one-year period. In addition, under the statement of work, the Company receives $ 1.5 million per calendar quarter, which began in the first quarter of 2022. The statement of work automatically renews on a quarterly basis until Lilly provides a termination notice in accordance with the terms of the Lilly Collaboration Agreement. As of December 31, 2023, the Lilly Collaboration Agreement and the statement of work were still in effect. +F-20 +Table of Contents +Concurrent with the execution of the Lilly Collaboration Agreement, the Company entered into a Technology License Agreement (the “Lilly License”) under which Lilly granted the Company a non-exclusive license to Lilly’s proprietary p-Tau 217 antibody technology for use in research use only products and services and future IVD applications within the field of Alzheimer’s disease. In consideration of the Lilly License, the Company paid an upfront fee, is required to make milestone payments based on the achievement of predetermined regulatory and commercial events, and will pay royalties on net sales of licensed products. +The Company recognized revenue from the Lilly Collaboration Agreement of $ 6.0 million during the year ended December 31, 2023, and $ 10.9 million during the year ended December 31, 2022. +Contract Assets +There were no contract assets as of December 31, 2023. +Deferred Revenue +During the years ended December 31, 2023 and 2022, the Company recognized $ 7.7 million and $ 5.5 million of revenue, respectively, related to its deferred revenue balance at January 1 of each such period. +Remaining Performance Obligations +As of December 31, 2023, the aggregate amount of transaction prices allocated to performance obligations that were not yet satisfied, or were partially satisfied, was $ 10.7 million. Of the performance obligations not yet satisfied or partially satisfied, $ 9.5 million is expected to be recognized as revenue in the next 12 months , with the remainder expected to be recognized thereafter. The $ 10.7 million primarily consists of amounts billed for undelivered services related to initial and extended service-type warranties and research services. +Costs to Obtain a Contract +Changes in costs to obtain a contract were as follows (in thousands): +2023 +2022 +2021 +Balance at December 31 of prior year +$ +377 +$ +440 +$ +248 +Capitalization of costs to obtain a contract +528 +1,387 +905 +Recognition of costs to obtain a contract +( 617 ) +( 1,450 ) +( 713 ) +Balance at December 31 +$ +288 +$ +377 +$ +440 +The Company evaluates potential impairment of these amounts at each balance sheet date, and no related impairments were recorded during the years ended December 31, 2023, 2022, and 2021, respectively. +Grant Revenue +All of the Company's grant revenue is generated within North America. Grant revenue for the years ended December 31, 2023, 2022, and 2021 was $ 1.2 million, $ 0.6 million, and $ 5.2 million, respectively. +NIH Grant +On September 21, 2022, the Company and the National Institutes of Health (the “NIH”), an agency of the U.S. Department of Health and Human Services, entered into a contract (the “NIH Grant”) with a total award value of $ 1.7 million. The NIH granted the Company funding in support of the development of certain point-of-care diagnostic technologies through collaborative efforts. Grant funding is to be used solely for activities related to the point-of-care diagnostic device development project and the contract period runs through August 2025. Receipt of the award value occurs throughout the term of the contract period and after the Company submits for reimbursement of activities related to the grant. As of December 31, 2023, the Company had received $ 0.6 million of the award value. +F-21 +Table of Contents +During the year ended December 31, 2023, grant revenue recognized and research and development expenses incurred were $ 0.7 million a nd $ 0.6 million, respectively . During the year ended December 31, 2022, grant revenue recognized and research and development expenses incurred were not material. +ADDF Grant +On March 24, 2022, the Company and the Alzheimer’s Drug Discovery Foundation (the “ADDF”) entered into a contract (the “ADDF Grant”) with a total funding value of $ 2.3 million. The ADDF is a charitable venture philanthropy entity that granted the Company funding in support of certain activities for the development of an IVD test for early detection of Alzheimer's disease. The ADDF Grant restricts the Company’s use of the granted funds solely for activities related to the Company’s Alzheimer’s diagnostic test development project and the contract period runs through June 2024. Receipt of the contract funding was subject to achievement of pre-defined milestones, and as of December 31, 2023, the Company had received the total funding value of $ 2.3 million. +During the year ended December 31, 2023, grant revenue recognized and research and development expenses incurred was $ 0.5 million a nd $ 0.5 million, respectively . During the year ended December 31, 2022, grant revenue recognized and research and development expenses incurred was $ 0.6 million and $ 0.6 million, respectively. As of December 31, 2023, the Company had $ 1.1 million of deferred revenue related to the ADDF Grant. +RADx Grant +On September 29, 2020, the Company entered into a contract with the NIH under its Rapid Acceleration of Diagnostics (“RADx”) program (the “RADx Grant”), with a total award value of $ 18.2 million. The RADx Grant was to accelerate the continued development, scale-up, and deployment of the novel SARS-CoV-2 antigen detection test using the Company’s Simoa technology. Grant funding was used to expand assay kit manufacturing capacity and commercial deployment readiness, and the contract ran through the final milestone on May 31, 2022. Receipt of the award value occurred throughout the term of the contract period and after the Company submitted for reimbursement of activities related to the grant. During the first half of 2022, the Company received $ 0.5 million which represented the final and total funding value of the $ 18.2 million award. +During the years ended December 31, 2023 and 2022, the Company recognized no grant revenue and incurred no research and development expenses. During the year ended December 31, 2021, the Company recognized $ 5.2 million in grant revenue and incurred $ 3.4 million in research and development expenses. As of December 31, 2023, the Company had no future obligations under the RADx Grant. +Note 4. Allowance for Credit Losses +The change in the allowance for credit losses on accounts receivable is summarized as follows (in thousands): +2023 +2022 +2021 +Balance at December 31 of prior year +$ +118 +$ +419 +$ +370 +Provision for expected credit losses +729 +752 +213 +Write-offs and recoveries collected +( 393 ) +( 1,053 ) +( 164 ) +Balance at December 31 +$ +454 +$ +118 +$ +419 +F-22 +Table of Contents +Note 5. Marketable Securities +The amortized cost, gross unrealized gains, gross unrealized losses, and fair value of the Company’s marketable securities by major security type were as follows (in thousands): +As of December 31, 2023 +Amortized cost +Unrealized Gains +Unrealized Losses +Fair Value +Commercial paper +$ +53,482 +$ +23 +$ +( 12 ) +$ +53,493 +U.S. Treasuries +4,896 +1 +— +4,897 +U.S. Government agency bonds +28,366 +39 +( 7 ) +28,398 +Corporate bonds +66,726 +289 +( 8 ) +67,007 +Total marketable securities +$ +153,470 +$ +352 +$ +( 27 ) +$ +153,795 +Marketable securities are reported in the following Consolidated Balance Sheets captions: +Cash and cash equivalents +$ +6,893 +Marketable securities +146,902 +Total marketable securities +$ +153,795 +The Company did no t have any marketable securities as of December 31, 2022. +The following table shows the fair value and gross unrealized losses of the Company’s available-for-sale securities with unrealized losses that are not deemed to be other-than-temporary, aggregated by major security type and length of time that the individual securities have been in a continuous unrealized loss position (in thousands): +Less Than 12 Months +As of December 31, 2023 +Fair Value +Unrealized Losses +Commercial paper +$ +32,137 +$ +( 12 ) +U.S. Government agency bonds +15,861 +( 7 ) +Corporate bonds +8,367 +( 8 ) +Total +$ +56,365 +$ +( 27 ) +The Company did not have any individual securities in a continuous loss position for greater than 12 months, and there were no individual securities that were in a significant unrealized loss position as of December 31, 2023. For marketable securities in an unrealized loss position, the Company does not intend to sell them before recovery of their amortized cost bases, it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost bases, and the unrealized losses are not credit related. Accordingly, the Company has not recorded any impairment losses or a credit loss allowance. +The Company did not sell any marketable securities or record any realized gains or losses for the year ended December 31, 2023. At December 31, 2023, the Company had $ 1.0 million of accrued interest receivable on its marketable securities. +The following table summarizes the contractual maturities of the Company’s marketable securities (in thousands): +As of December 31, 2023 +Amortized cost +Fair Value +Due within one year +$ +95,188 +$ +95,232 +Due in one to two years +58,282 +58,563 +Total +$ +153,470 +$ +153,795 +F-23 +Table of Contents +Note 6. Fair Value of Financial Instruments +Recurring Fair Value Measurements +The following tables present the Company’s fair value hierarchy for its financial assets that are measured at fair value on a recurring basis (in thousands): +As of December 31, 2023 +Total +Level 1 +Level 2 +Level 3 +Financial assets: +Cash equivalents: (1) +Money market funds +$ +155,367 +$ +155,367 +$ +— +$ +— +Commercial paper +1,996 +— +1,996 +— +U.S. Treasuries +4,897 +— +4,897 +— +Total cash equivalents +162,260 +155,367 +6,893 +— +Marketable securities: (2) +Commercial paper +51,498 +— +51,498 +— +U.S. Treasuries +— +— +— +— +U.S. Government agency bonds +28,398 +— +28,398 +— +Corporate bonds +67,006 +— +67,006 +— +Total marketable securities +146,902 +— +146,902 +— +Total financial assets +$ +309,162 +$ +155,367 +$ +153,795 +$ +— +As of December 31, 2022 +Total +Level 1 +Level 2 +Level 3 +Financial assets: +Money market funds (1) +$ +306,097 +$ +306,097 +$ +— +$ +— +Total financial assets +$ +306,097 +$ +306,097 +$ +— +$ +— +(1) Included in cash and cash equivalents on the Consolidated Balance Sheets. +(2) Marketable securities are initially valued at their purchase price and subsequently fair valued at the end of each reporting period utilizing third party pricing services or other observable data. The pricing services utilize industry standard valuation methods, including both income and market-based approaches and observable market inputs to determine the fair value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates, and other industry and economic events. +Nonrecurring Fair Value Measurements +The Company has several non-marketable equity investments in entities that are evaluated under the VIE guidance (refer to Note 19 - Variable Interest Entities for further discussion). Pursuant to ASC 321 – Investments – Equity Securities , the Company uses the measurement alternative for equity investments without readily determinable fair values and recognizes its non-marketable equity investments at cost, less any impairment, and adjusted for any observable price changes in orderly transactions. +On June 26, 2023, the Company received ordinary shares in UltraDx (refer to Note 3 − Revenue and Related Matters ) which were valued at $ 1.0 million upon receipt, primarily using the third-party purchase price of similar interests issued during UltraDx’s financing event that closed in the second quarter of 2023. As UltraDx is a recently formed, privately held entity, there was minimal market activity or other financial information available to determine the fair value of UltraDx’s shares and therefore this investment is considered a Level 3 financial asset. Changes in the inputs and assumptions used to determine the fair value would have resulted in a higher or lower fair value measurement. +During the year ended December 31, 2023, the Company recorded $ 0.5 million in adjustments to the fair value of its non-marketable equity investments. As of December 31, 2023 and December 31, 2022, the carrying value of the Company’s Level 3 financial assets was $ 0.8 million and $ 0.3 million, respectively, and is included in other non-current assets on the Consolidated Balance Sheets. +F-24 +Table of Contents +Other Fair Value Disclosures +During the years ended December 31, 2023 and 2022, the Company did not transfer financial assets between levels of the fair value hierarchy. Additionally, there have been no changes to the valuation techniques for Level 2 or Level 3 financial assets. +Note 7. Inventory +Inventory, net of inventory reserves, consisted of the following (in thousands): +As of December 31, +2023 +2022 +Raw materials +$ +5,114 +$ +5,509 +Work in process +4,466 +3,362 +Finished goods +12,785 +7,915 +Total inventory +$ +22,365 +$ +16,786 +Note 8. Property and Equipment +Property and equipment consisted of the following (in thousands): +As of December 31, +2023 +2022 +Laboratory and manufacturing equipment +$ +13,141 +$ +11,806 +Office furniture and equipment +1,905 +1,798 +Computers and software +3,927 +3,831 +Leasehold improvements +13,074 +13,688 +Total cost +$ +32,047 +$ +31,123 +Less: accumulated depreciation +( 14,121 ) +( 10,961 ) +Property and equipment, net +$ +17,926 +$ +20,162 +The Company incurred depreciation expense of $ 4.7 million, $ 3.5 million, and $ 2.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. Substantially all of the Company’s property and equipment is located in North America. +During the year ended December 31, 2023, the Company had $0.8 million of disposals related to equipment no longer being used by the Company. There were no material disposals during the years ended December 31, 2022, and 2021. +For the years ended December 31, 2023, and 2022, the Company recorded impairments related to leasehold improvements associated with two leased facilities not being used. Refer to Note 14 − Leases for further discussion. There were no material impairments relating to property and equipment during the year ended December 31, 2021. +As of December 31, 2023, the Company capitalized $ 1.1 million of software development costs, all of which are included in the computers and software category above. Amounts capitalized as of December 31, 2022 and 2021 were no t material. Depreciation of capitalized software costs for the years ended December 31, 2023, 2022, and 2021 was no t material. +F-25 +Table of Contents +Note 9. Accrued Expenses and Other Current Liabilities +Accrued expenses and other current liabilities consisted of the following (in thousands): +As of December 31, +2023 +2022 +Accrued professional services +$ +1,596 +$ +1,409 +Accrued royalties +1,689 +815 +Accrued tax liabilities +808 +172 +Other accrued expenses +1,948 +2,737 +Total accrued expenses and other current liabilities +$ +6,041 +$ +5,133 +Note 10. Stock-Based Compensation +Stock-Based Compensation Plans +In December 2017, the Company adopted the 2017 Employee, Director and Consultant Equity Incentive Plan (the “2017 Plan”), under which it may grant incentive stock options, non-qualified stock options, RSUs, and other stock-based awards. As of December 31, 2017, the 2017 Plan allowed for the issuance of (1) up to 1.0 million shares of common stock and (2) up to 2.5 million shares of common stock represented by awards granted under the 2007 Stock Option and Grant Plan (which was terminated upon completion of the Company’s initial public offering) that were forfeited, expired, or cancelled without delivery of shares or which result in the forfeiture of shares of common stock back to the Company on or after the date the 2017 Plan became effective. The 2017 Plan contains an “evergreen” provision, which allows for an annual increase in the number of shares of common stock available for issuance under the 2017 Plan on the first day of each fiscal year during the period beginning in 2019 and ending in 2027. The annual increase is equal to the lowest of (1) 4 % of the number of shares of common stock outstanding as of such date and (2) an amount determined by the Company’s Board of Directors or Compensation Committee. As of December 31, 2023, 4.0 million shares were outstanding and there were 2.0 million shares available for grant under the 2017 Plan. +In December 2017, the Company adopted the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). As of December 31, 2019, the 2017 ESPP allowed for the issuance of up to 0.6 million shares of common stock. The 2017 ESPP contains an “evergreen” provision, which allows for an increase in the number of shares under the plan on the first day of each fiscal year beginning with 2018 and ending in 2027. The increase is equal to the lowest of: (1) 1 % of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year and (2) an amount determined by the Company’s Board of Directors or Compensation Committee. As of December 31, 2023, 1.7 million shares were available for grant under the 2017 ESPP. +The 2017 ESPP provides for six-month offering periods commencing and ending on March 1 through August 31, and September 1 through February 28. During the years ended December 31, 2023, 2022, and 2021, employees purchased 121 thousand, 57 thousand, and 29 thousand shares, respectively, of the Company’s common stock pursuant to the 2017 ESPP. +Stock Options +Under the 2017 Plan, stock options may not be granted with exercise prices of less than fair market value on the date of the grant. Options generally vest ratably over a four-year period with 25 % vesting on the first anniversary and the remaining 75 % vesting ratably on a monthly basis over the remaining three years . These options expire ten years after the grant date. +F-26 +Table of Contents +Stock option activity for the year ended December 31, 2023 is presented below (in thousands, except per share and contractual life amounts): +Weighted-average +Weighted-average remaining contractual +Aggregate +Number of options +exercise price per share +life (in years) +intrinsic value +Outstanding at December 31, 2022 +2,188 +$ +20.69 +8.1 +$ +4,273 +Granted +1,187 +16.23 +Exercised +( 161 ) +11.77 +Forfeited/expired +( 440 ) +18.65 +Outstanding at December 31, 2023 +2,774 +$ +19.62 +7.9 +$ +26,941 +Exercisable at December 31, 2023 +1,117 +$ +22.81 +6.4 +$ +9,176 +Vested and expected to vest at December 31, 2023 +2,774 +$ +19.62 +7.9 +$ +26,941 +The total intrinsic value of stock options exercised was $ 1.9 million in 2023, $ 3.4 million in 2022, and $ 24.3 million in 2021. +Restricted Stock Units +RSUs represent the right to receive shares of common stock upon meeting specified vesting requirements. Shares are delivered to the grantee upon vesting, less shares for the payment of withholding taxes. RSU activity for the year ended December 31, 2023 is presented below (in thousands, except per share amounts): +Weighted-average grant +Number of shares +date fair value per share +Unvested as of December 31, 2022 +1,188 +$ +21.18 +Granted +868 +15.90 +Vested +( 453 ) +23.00 +Forfeited +( 275 ) +17.50 +Unvested as of December 31, 2023 +1,328 +$ +17.87 +Expected to convert at December 31, 2023 +1,328 +$ +17.87 +The weighted average grant-date fair value per share of awards granted was $ 15.90 in 2023, $ 18.32 in 2022, and $ 58.20 in 2021.The total fair value of shares that vested was $ 10.4 million in 2023, $ 9.8 million in 2022 and $ 7.3 million in 2021. +Stock-Based Compensation Expense +Stock-based compensation expense was recorded in the following categories on the Consolidated Statements of Operations (in thousands): +Year Ended December 31, +2023 +2022 +2021 +Cost of product revenue +$ +826 +$ +608 +$ +471 +Cost of service and other revenue +1,124 +819 +403 +Research and development +1,704 +1,639 +1,807 +Selling, general and administrative +13,110 +12,376 +13,294 +Total stock-based compensation +$ +16,764 +$ +15,442 +$ +15,975 +As of December 31, 2023, there was $ 35.4 million of total unrecognized stock-based compensation expense related to unvested RSUs and stock options, which is expected to be recognized over the remaining weighted-average vesting period of 2.7 years. +F-27 +Table of Contents +The fair value of the Company’s stock options granted and purchase rights to the ESPP were estimated using the Black-Scholes valuation model with the following assumptions: +Year Ended December 31, +2023 +2022 +2021 +Stock Options: +Risk-free interest rate +3.5 % - 4.7 % +1.4 % - 4.1 % +0.4 % - 1.3 % +Expected dividend yield +None +None +None +Expected term (in years) +5.0 - 5.2 +5.0 - 5.8 +6.0 +Expected volatility +71.1 % - 83.1 % +55.0 % - 70.8 % +49.2 % - 55.6 % +Weighted-average grant date fair value per share +$ +10.63 +$ +9.88 +$ +29.96 +Employee Stock Purchase Plan: +Risk-free interest rate +5.2 % - 5.5 % +0.7 % - 3.9 % +0.1 % +Expected dividend yield +None +None +None +Expected term (in years) +0.5 +0.5 +0.5 +Expected volatility +72.8 % - 82.5 % +51.9 % - 117.3 % +46.3 % - 59.8 % +Weighted-average grant date fair value per share +$ +3.19 +$ +3.53 +$ +8.06 +Note 11. Net Loss Per Share +The following table presents the computation of basic and diluted net loss per share (in thousands, except per share data): +Year Ended December 31, +2023 +2022 +2021 +Numerator: +Net loss +$ +( 32,334 ) +$ +( 96,700 ) +$ +( 57,688 ) +Denominator: +Weighted average common shares outstanding, basic and diluted +37,594 +36,991 +35,997 +Net loss per share, basic and diluted +$ +( 0.86 ) +$ +( 2.61 ) +$ +( 1.60 ) +As the Company was in a net loss position, the following common share equivalents (calculated on a weighted average basis) were excluded from the calculation of diluted net loss per share (in thousands): +Year Ended December 31, +2023 +2022 +2021 +Stock options +2,783 +446 +2,305 +Common stock and RSUs +1,512 +702 +531 +Estimated ESPP purchases +23 +52 +8 +Total dilutive shares +4,318 +1,200 +2,844 +Note 12. Income Taxes +The following table presents the components of loss before income taxes (in thousands): +Year Ended December 31, +2023 +2022 +2021 +United States +$ +( 34,337 ) +$ +( 89,590 ) +$ +( 56,554 ) +Foreign +2,722 +( 7,045 ) +( 1,170 ) +Total loss before income taxes +$ +( 31,615 ) +$ +( 96,635 ) +$ +( 57,724 ) +F-28 +Table of Contents +The following table summarizes income tax (expense) benefit (in thousands): +Year Ended December 31, +2023 +2022 +2021 +Current: +United States +Federal +$ +— +$ +— +$ +— +State +( 161 ) +( 77 ) +( 30 ) +Foreign +( 850 ) +( 368 ) +( 342 ) +Total current income tax provision +( 1,011 ) +( 445 ) +( 372 ) +Deferred +United States +Federal +— +10 +5 +State +— +13 +( 6 ) +Foreign +292 +357 +409 +Total deferred income tax benefit +292 +380 +408 +Total income tax (expense) benefit +$ +( 719 ) +$ +( 65 ) +$ +36 +A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: +Year Ended December 31, +2023 +2022 +2021 +Federal statutory income tax rate +21.0 +% +21.0 +% +21.0 +% +Non-deductible executive compensation +( 2.3 ) +% +( 0.1 ) +% +( 1.6 ) +% +State taxes, net of federal benefit +0.8 +% +2.7 +% +6.5 +% +Tax credits +4.3 +% +1.4 +% +2.0 +% +Stock-based compensation +( 1.3 ) +% +( 2.5 ) +% +7.4 +% +Permanent items +( 0.5 ) +% +( 0.2 ) +% +( 0.2 ) +% +Deferred tax rate change +— +% +— +% +0.2 +% +Change in valuation allowance +( 25.0 ) +% +( 20.8 ) +% +( 34.8 ) +% +Impairment of goodwill +— +% +( 1.7 ) +% +— +% +Other +0.7 +% +— +% +( 0.4 ) +% +Effective income tax rate +( 2.3 ) +% +( 0.2 ) +% +0.1 +% +The effective income tax rate differs from the U.S. federal statutory rate of 21.0 % primarily as a result of the valuation allowance maintained against the Company’s net deferred tax assets. +F-29 +Table of Contents +Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): +As of December 31, +2023 +2022 +Deferred tax assets: +Net operating loss carryforwards +$ +78,812 +$ +78,191 +Tax credits +8,758 +7,407 +Deferred revenue +2,523 +2,385 +Amortization +734 +847 +Stock-based compensation +3,217 +2,773 +Inventory +1,404 +1,507 +Capitalized R&D Costs +9,210 +5,680 +Lease liability +10,043 +10,856 +Other deferred tax assets +2,256 +1,370 +Total deferred tax assets +116,957 +111,016 +Less: valuation allowances +( 111,147 ) +( 103,243 ) +Net deferred tax assets +5,810 +7,773 +Deferred tax liabilities: +Right-of-Use Assets +( 4,414 ) +( 5,219 ) +Depreciation +( 1,319 ) +( 2,244 ) +Amortization acquired intangibles +( 1,254 ) +( 1,570 ) +Goodwill +— +— +Other deferred tax liabilities +— +( 209 ) +Net deferred tax (liability) asset +$ +( 1,177 ) +$ +( 1,469 ) +The Company records deferred tax liabilities in other non-current liabilities on the Consolidated Balance Sheets. +The Company’s change in its valuation allowance account related to deferred tax assets was as follows (in thousands): +2023 +2022 +Balance at December 31 of prior year +$ +103,243 +$ +83,121 +Change in valuation allowance +7,904 +20,122 +Balance at December 31 +$ +111,147 +$ +103,243 +The valuation allowance increased during the year ended December 31, 2023 primarily as a result of the U.S. operating losses incurred. +In determining the need for a valuation allowance, the Company considers the cumulative book income and loss positions of each of its entities as well as its worldwide cumulative loss position. The Company has assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carryback net operating losses (“NOLs”), the existence of reversing taxable temporary differences, the availability of tax planning strategies, and forecasted future taxable income. At December 31, 2023, the Company maintained a full valuation allowance against its worldwide net deferred tax assets, as it concluded that it was more likely than not that the deferred assets will not be utilized. +As of December 31, 2023, the Company had U.S. federal net operating losses (“NOLs”) of approximately $ 313.4 million. U.S. federal NOLs generated through December 31, 2017 of approximately $ 108.5 million expire at various dates through 2037, and U.S. federal NOLs generated after December 31, 2017 of approximately $ 204.9 million do not expire. As of December 31, 2023, the Company had U.S. federal tax credit carryforwards of approximately $ 6.7 million that expire at various dates through 2043. +As of December 31, 2023, the Company had $ 214.9 million of state NOLs, approximately $ 204.3 million of which expire at various dates through 2042, and approximately $ 10.6 million of which do not expire. As of December 31, 2023, the Company had U.S. state tax credit carryforwards of approximately $ 2.6 million that expire at various dates through 2038. +F-30 +Table of Contents +Under Sections 382 and 383 of the U.S. Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-ownership change NOLs and other pre-ownership change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an ownership change occurs if there is a cumulative change in an entity’s ownership by 5% stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under U.S. state tax laws. Under the Tax Cuts and Jobs Act of 2017 (“TCJA”), the use of federal NOLs arising in taxable years beginning after December 31, 2017 is limited to 80% of current year taxable income and NOLs arising in taxable years ending after December 31, 2017 may not be carried back (though any such NOLs may be carried forward indefinitely). +The Company may have experienced an ownership change in the past and may experience ownership changes in the future as a result of future transactions in its share capital, some of which may be outside of the control of the Company. As a result, if the Company earns net taxable income, its ability to use its pre-ownership change NOLs, or other pre-ownership change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to significant limitations. +For the years ended December 31, 2023, 2022, and 2021, the Company had no tax reserves accrued for uncertain tax positions. +The Company is subject to taxation in the United States as well as the Netherlands, Sweden, and China. At December 31, 2023, the Company is generally no longer subject to examination by taxing authorities in the United States for years prior to 2020. However, NOLs and tax credits in the United States may be subject to adjustments by taxing authorities in future years in which they are utilized. The Company’s foreign subsidiaries remain open to examination by taxing authorities from 2018 onward. +As of December 31, 2023, the Company’s foreign subsidiaries had immaterial undistributed earnings and the tax payable on the earnings that are indefinitely reinvested would be immaterial. +Note 13. Goodwill and Intangible Assets +During the third quarter of 2022, the Company identified certain indicators of impairment, including the significant decline in the Company’s stock price, actions taken under the Restructuring Plan (Refer to Note 17 – Restructuring) , and a reduction of forecasted sales and profitability. As a result, the Company performed a goodwill impairment test and determined the carrying amount of the Company’s sole reporting unit exceeded its estimated fair value. The Company concluded that its entire goodwill balance was impaired and recognized an $ 8.2 million impairment charge during the third quarter of 2022. As of December 31, 2023 and December 31, 2022, the Company had no remaining goodwill balance. +Acquired intangible assets consisted of the following (in thousands, except useful life and weighted average life amounts): +As of December 31, 2023 +Estimated +Cumulative +Useful +Gross Carrying +Accumulated +Translation +Net Carrying +Weighted Average +Life (in years) +Value +Amortization +Adjustment +Value +Life Remaining (in years) +Know-how +8.5 +$ +13,000 +$ +( 6,326 ) +$ +( 1,050 ) +$ +5,624 +4.0 +Developed technology +7 +1,650 +( 1,581 ) +— +69 +1.1 +Customer relationships +8.5 - 10 +1,360 +( 1,067 ) +( 9 ) +284 +4.1 +Non-compete agreements +5.5 +340 +( 256 ) +( 27 ) +57 +1.0 +Trade names +3 +50 +( 50 ) +— +— +— +Total +$ +16,400 +$ +( 9,280 ) +$ +( 1,086 ) +$ +6,034 +F-31 +Table of Contents +As of December 31, 2022 +Estimated +Cumulative +Useful +Gross Carrying +Accumulated +Translation +Net Carrying +Weighted Average +Life (in years) +Value +Amortization +Adjustment +Value +Life Remaining (in years) +Know-how +8.5 +$ +13,000 +$ +( 4,763 ) +$ +( 1,433 ) +$ +6,804 +5.0 +Developed technology +7 +1,650 +( 1,458 ) +— +192 +2.1 +Customer relationships +8.5 - 10 +1,360 +( 938 ) +( 12 ) +410 +5.1 +Non-compete agreements +5.5 +340 +( 193 ) +( 37 ) +110 +2.0 +Trade names +3 +50 +( 50 ) +— +— +— +Total +$ +16,400 +$ +( 7,402 ) +$ +( 1,482 ) +$ +7,516 +The Company recorded amortization expense of $ 1.6 million, $ 1.8 million, and $ 2.0 million for the years ended December 31, 2023, 2022, and 2021, respectively. Amortization of know-how is recorded in cost of goods sold; amortization of developed technology is recorded in research and development expenses; and amortization of customer relationships, non-compete agreements and trade names are recorded in selling, general and administrative expenses on the Consolidated Statements of Operations. +Future estimated amortization expense is as follows (amounts in thousands): +As of December 31, 2023 +2024 +$ +1,631 +2025 +1,493 +2026 +1,465 +2027 +1,443 +2028 +2 +Thereafter +— +Total amortization expense +$ +6,034 +Note 14. Leases +As part of the Restructuring Plan in the third quarter of 2022 (refer to Note 17 − Restructuring ), the Company decided not to use two leased facilities in its operations and intends to sublease the vacant space to recover a portion of the total lease costs. The Company’s decision to not use the leased facilities triggered an impairment assessment and the related ROU assets and leasehold improvements became their own asset group. The impairment analysis evaluated the present value of net cash flows under the original lease and the estimated cash flows under estimated subleases to identify any impairment amount. The impairment assessment considered all industry and economic factors such as rental rates, interest rates, and recent real estate activities to estimate the net cash flows analysis and impairment amount. During 2023, the Company continued to reassess the remaining ROU assets and leasehold improvements associated with the leased facilities that remained vacant. +The above assessments resulted in the Company recording an impairment charge of $ 1.3 million and $ 16.3 million during the years ended December 31, 2023 and 2022, respectively, which was recorded in impairment and restructuring on the Consolidated Statements of Operations. For the years ended December 31, 2023 and 2022, impairment charges included $ 1.1 million and $ 12.0 million impairment of ROU assets, respectively. For the related leasehold improvements, during the year ended December 31, 2023, impairment charges were no t material and for the year ended December 31, 2022 impairment charges were $ 4.3 million. After recording impairments for the year ended December 31, 2023 and 2022, the carrying value of ROU assets and related leasehold improvements for facilities not being used were $ 10.1 million and $ 12.8 million, respectively. +There were no ROU asset or leasehold improvement impairments recorded in 2021. +F-32 +Table of Contents +The components of the lease costs and supplemental cash flow information relating to the Company's leases were as follows (in thousands): +Year Ended December 31, +2023 +2022 +2021 +Operating lease cost +$ +5,209 +$ +5,488 +$ +2,726 +Short-term and variable lease cost +3,996 +3,417 +2,699 +Total lease cost +$ +9,205 +$ +8,905 +$ +5,425 +Year Ended December 31, +2023 +2022 +Cash paid for amounts included in the measurement of operating lease liabilities +$ +8,935 +$ +6,539 +Operating ROU assets obtained in exchange for lease obligations +$ +— +$ +22,494 +Weighted average remaining lease term - operating leases (years) +6.8 +7.8 +Weighted average discount rate - operating leases +7.86 % +7.83 % +The undiscounted future lease payments for non-cancelable operating leases were as follows (in thousands): +Maturity of lease liabilities +As of December 31, 2023 +2024 +$ +7,094 +2025 +7,254 +2026 +7,408 +2027 +7,641 +2028 +7,880 +Thereafter +15,741 +Total lease payments +$ +53,018 +Less: imputed interest +( 11,554 ) +Total operating lease liabilities +$ +41,464 +Operating lease balances presented on the Consolidated Balance Sheets were as follows (in thousands): +As of December 31, 2023 +Operating lease ROU assets +$ +18,251 +Operating lease liabilities +$ +4,241 +Operating lease liabilities, net of current portion +37,223 +Total operating lease liabilities +$ +41,464 +Note 15. Commitments and Contingencies +Purchase Commitments +STRATEC +During 2022, the Company and STRATEC Consumables GmbH (“STRATEC”) entered into an amendment to the supply agreement with STRATEC (as amended, the “STRATEC Supply Agreement”), related to the supply of discs used in Simoa bead-based instruments. As part of the STRATEC Supply Agreement, the Company agreed to purchase a total of 515 thousand discs to be shipped at various points starting in 2022 and continuing through 2024 at an agreed purchase price per disc. +The total purchase commitment under the STRATEC Supply Agreement is $ 3.7 million, of which $ 2.1 million has been paid, and $ 1.0 million is due within one year from December 31, 2023. +In 2023 and 2022, STRATEC shipped 218 thousand and 75 thousand discs, respectively, to the Company. The Company recorded cost of product revenue related to these shipments of $ 1.6 million and $ 0.5 million for the years ended December 31, 2023 and 2022, respectively. During 2024, STRATEC is required to ship 222 thousand discs to the Company. +F-33 +Table of Contents +Other Purchase Commitments +The Company’s other non-cancellable purchase commitments primarily consist of purchases of raw materials for manufacturing operations under annual and multi-year agreements, some of which have minimum quantity requirements. The Company’s total purchase commitments under these agreements as of December 31, 2023 was $ 3.1 million, most of which the Company expects to incur in the year ending December 31, 2024. +License Agreements +Harvard University +In August 2022, the Company and Harvard University (“Harvard”) entered into an exclusive license agreement (the “Harvard License Agreement”) for certain intellectual property owned by Harvard. Pursuant to the Harvard License Agreement, the Company paid an upfront fee of $ 0.6 million, which was recorded in research and development expenses on the Consolidated Statements of Operations. Under this license, the Company is required to pay Harvard low single-digit royalties on net sales of products and services using the licensed technology, as well as a portion of its applicable sublicense revenues. The Company incurred no royalty expense under the Harvard License Agreement for the years ended December 31, 2023 and 2022. +Refer to Note 16 − Related Party Transactions for a discussion of a related party relationship with Harvard. +Tufts University +In June 2007, the Company and Tufts University (“Tufts”) entered into a license agreement (the “Tufts License Agreement”) for certain intellectual property owned by Tufts. The Tufts License Agreement, which was subsequently amended, is exclusive and sub-licensable, and will continue in effect on a country by country basis as long as there is a valid claim of a licensed patent in a country. The Company is contractually obligated to pay license and maintenance fees that are creditable against royalties, in addition to low single-digit royalties on direct sales and services, and a royalty on sublicense income. The Company incurred royalty expenses related to the Tufts License Agreement of $ 1.7 million, $ 1.4 million, and $ 1.6 million, during the years ended December 31, 2023, 2022, and 2021, respectively, which was recorded in cost of product revenue on the Consolidated Statements of Operations. +Refer to Note 16 − Related Party Transactions for a discussion of a related party relationship with Tufts. +Legal Contingencies +The Company is subject to claims in the ordinary course of business; however, the Company is not currently a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or results of operations. The Company accrues for contingent liabilities when losses are probable and estimable. If an estimate of a probable loss is a range and no amount within the range is more likely than any other amount in the range, the Company accrues the minimum amount of the range. +Note 16. Related Party Transactions +In June 2007, the Company entered into the Tufts License Agreement for certain intellectual property owned by Tufts (refer to Note 15 − Commitments and Contingencies ). A member of the Company’s Board of Directors was previously affiliated with Tufts. This Board member continues to receive compensation from Tufts on a formulaic basis based on royalties and license payments the Company makes to Tufts. At December 31, 2023 and 2022, open payable balances to Tufts were not material. +In August 2022, the Company entered into the Harvard License Agreement for certain intellectual property owned by Harvard (refer to Note 15 − Commitments and Contingencies ). Harvard is obligated to pay a portion of the payments received from the Company under the Harvard License Agreement to a member of the Company’s Board of Directors. A member of the Company’s Board of Directors is also affiliated with Harvard and Mass General Brigham. Revenue recorded from sales of products and services to Harvard and its affiliates and to Mass General Brigham and its affiliates totaled $ 1.3 million and $ 0.7 million for the years ended December 31, 2023 and 2022, respectively, and was not material for the year ended December 31, 2021. Cost of +F-34 +Table of Contents +product revenue and operating expenses with Harvard and its affiliates and Mass General Brigham and its affiliates was $ 0.3 million for the year ended December 31, 2023, and was not material for the years ended December 31, 2022 and 2021. At December 31, 2023 and 2022, open payables to and receivable balances from Harvard and Mass General Brigham were not material. +As discussed in Note 3 − Revenue and Related Matters , on May 26, 2022, the Company and UltraDx, a company formed by ARCH, entered into the UltraDx Agreement to supply certain instruments and to grant certain licenses. At contract inception, the Company determined that UltraDx was a related party because a member of the Company’s Board of Directors was affiliated with ARCH and UltraDx. As of June 7, 2023, this individual was no longer a member of the Company’s Board of Directors. Cost of product revenue with UltraDx was $ 0.3 million for the year ended December 31, 2023 and $ 0.7 million for the year ended December 31, 2022. At December 31, 2023 and 2022, there were no open payable balances to UltraDx and open receivable balances from UltraDx were not material. +Note 17. Restructuring +Following a strategic review and assessment of the Company’s operations and cost structure, on August 8, 2022, the Company announced a plan of restructuring and strategic re-alignment plan (the “Restructuring Plan”). As part of the Restructuring Plan, the Company began an assay redevelopment program with the ultimate objective of improving its ability to manufacture and deliver high-quality assays at scale. The Restructuring Plan aligned the Company’s investments to best serve the needs of its customers, focused the Company’s innovation efforts on key platforms, and provided a foundation for the Company’s entry into translational pharma and clinical markets. In accordance with the Restructuring Plan, the Company implemented a workforce reduction, which was substantially completed by the end of the third quarter of 2022. The Restructuring Plan included the elimination of 119 positions and other cost-saving measures. +During the year ended December 31, 2022, the Company incurred approximately $ 3.8 million of expenses related to the Restructuring Plan, which represents the total amount expected to be incurred and the amount incurred to date. These costs were recorded in impairment and restructuring on the Consolidated Statements of Operations and were substantially for cash payments of severance and employee benefits, $ 3.5 million of which was paid by December 31, 2022. +As a result of the Restructuring Plan, the Company performed an impairment assessment of its goodwill, long-lived assets, including ROU assets and related leasehold improvements, and intangibles. The assessments resulted in the Company recording an impairment charge of $ 25.6 million during the year ended December 31, 2022, which was recorded in impairment and restructuring on the Consolidated Statements of Operations. The impairment charge included (1) $ 8.2 million of goodwill (refer to Note 13 − Goodwill and Intangible Assets ), (2) $ 16.3 million associated with the ROU assets and related leasehold improvements at two leased facilities not being used (refer to Note 14 − Leases ), and (3) $ 1.1 million for software costs related to projects that were rationalized as part of the Restructuring Plan or the related exit and disposal costs. During the year ended December 31, 2023, the Company recorded an additional impairment of $ 1.3 million associated with the ROU asset and related leasehold improvements at the leased facilities not being used (refer to Note 14 − Leases ) +The following table presents the restructuring reserve and provision activity for the year ended December 31, 2023 (in thousands): +Severance and Employee Benefit Costs +Balance at December 31, 2022 +$ +328 +Accrual adjustments +( 33 ) +Cash payments +( 16 ) +Foreign currency translation +8 +Balance at December 31, 2023 +$ +287 +The Company did not have any restructuring activities related to the Restructuring Plan during the year ended December 31, 2023. +F-35 +Table of Contents +Note 18. Employee Benefit Plans +The Company sponsors a 401(k) savings plan for employees and may make discretionary contributions. During the years ended December 31, 2023, 2022, and 2021, the Company made contributions of $ 0.8 million, $ 1.2 million, and $ 1.1 million, respectively. +Note 19. Variable Interest Entities +The Company enters into relationships with, or has investments in, other entities that may be VIEs. The Company assesses the criteria in ASC 810 – Consolidation to determine if any of these entities meet the definition of a VIE and require consolidation into its financial statements. The Company’s analysis determines whether it has a controlling financial interest and also identifies the primary beneficiary of a VIE as the enterprise that has both (1) the power to direct activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. +As discussed in Note 3 − Revenue and Related Matters , during the second quarter of 2023 the Company received one million ordinary shares of UltraDx under the UltraDx Agreement. Primarily due to having less than a 5 % ownership interest in UltraDx, the Company concluded that it does not have the power to direct activities impacting UltraDx’s economic performance and therefore the Company is not the primary beneficiary of the VIE. +Based on the Company’s assessments, it does not have any controlling financial interests in any VIEs, and therefore did not consolidate any VIEs into its Consolidated Financial Statements during the years ended December 31, 2023 and 2022. As of December 31, 2023 and 2022, the carrying value of the Company’s investments in VIEs was $ 0.8 million and $ 0.3 million, respectively, which were recorded in other non-current assets on the Consolidated Balance Sheets. Refer to Note 6 − Fair Value of Financial Instruments for the Company’s related valuation disclosures. Maximum exposure to losses related to these VIEs is limited to their carrying value and the Company does not have any future funding commitments to these VIEs. +F-36 \ No newline at end of file diff --git a/raw/filings/0001503274/2023/0001558370-24-002205/filing_metadata.csv b/raw/filings/0001503274/2023/0001558370-24-002205/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..5fab329d119a84c7023f5eb0c5a7cbc04ab6016f --- /dev/null +++ b/raw/filings/0001503274/2023/0001558370-24-002205/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001503274,QTRX,Quanterix Corp,10-K,2024-02-29,2023-12-31,2024-02-29T21:58:13.000Z,0001558370-24-002205,tmb-20231231x10k.htm,10-K,13029863,1,1,https://www.sec.gov/Archives/edgar/data/1503274/000155837024002205/tmb-20231231x10k.htm,https://www.sec.gov/Archives/edgar/data/1503274/000155837024002205/,2023,2023,1 diff --git a/raw/filings/0001503274/2023/0001558370-24-002205/item1.txt b/raw/filings/0001503274/2023/0001558370-24-002205/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..1dd5380d9c870bc09b85cfadedec8b1ca459d3c9 --- /dev/null +++ b/raw/filings/0001503274/2023/0001558370-24-002205/item1.txt @@ -0,0 +1,212 @@ +ITEM 1. BUSINESS +Overview +We are a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology and enable customers to reliably detect protein biomarkers at ultra-low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies. The ability of our Simoa platforms to detect proteins in the femtomolar range is enabling the development of novel therapies and diagnostics and has the potential to facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis, and, ultimately, prevention. Our Simoa platforms have achieved significant scientific validation and commercial adoption, and our Simoa technology has been cited in more than 2,700 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease, and inflammation. +Industry Background +Proteins are versatile macromolecules and serve critical functions in nearly all biological processes. Proteins are analytes that are highly relevant physiologically, providing real-time pictures of disease, and researchers and clinicians rely extensively on protein biomarkers for use as research and clinical tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. +Enzyme-linked immunosorbent assay (“ELISA”) technology has been the most widely used method of sensitive detection of proteins for more than 50 years. In simple terms, ELISA involves using a plate coated with an antibody that binds to the target molecule. If the target is present in the sample, it attaches to the plate via the antibody. Then, a second molecule, often an enzyme-linked antibody, is added, binding to the target. The enzyme produces a detectable signal (like fluorescence or a color change) when a specific substrate is added, indicating the presence and quantity of the target molecule in the sample. Although ELISA is widely used in medical diagnostics and research, it has very significant limitations, including: +● limited sensitivity due to dilution of colored or fluorescent product molecules in the large volume of liquid in traditional-sized wells; +● narrow dynamic range (i.e., the range of concentration of proteins being detected), that may require sample dilution, diluting molecules and increasing sample volume requiring additional enzymes to reach detection limit; +● low detection limit of readers restricts sensitivity and ability to detect low abundance proteins, particularly when proteins are at normal physiological levels; and +● limited success in increasing sensitivity of detection due to procedural complexity and length. +Our Simoa Technology +Our Simoa bead-based and planar array technologies are based on traditional ELISA technology but significantly advance conventional ELISA technology and are capable of substantially greater protein detection sensitivity. We believe that our Simoa platforms are among the most sensitive commercially available multiplex protein detection platforms. +1 +Table of Contents +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA. However, unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter that are 2.5 billion times smaller than traditional ELISA wells. Traditional ELISA analog measurements increase in intensity only as the concentration of a sample increases. Simoa bead-based digital technology measurements, however, are independent of sample concentration intensity and rely on a binary signal/no signal readout, enabling detection sensitivity in the femtomolar range compared with nanomolar and picomolar levels of detection in conventional ELISA. +Our Simoa bead-based platform is highly flexible, designed to enable practical high-sensitivity protein analysis for academic researchers looking at novel proteins all the way through to high throughput analysis performed by large biopharmaceutical organizations. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA. However, unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +Our Simoa planar array platform is highly flexible, designed to enable practical high-sensitivity multiplex protein analysis for drug discovery and development applications as well as translational biomarker research. +Restructuring Plan +In August 2022, we announced a restructuring and strategic realignment plan (the “Restructuring Plan”). The Restructuring Plan included the elimination of 119 positions across the Company in 2022 and other cost-saving measures that were substantially completed in 2022. T he Restructuring Plan also included an assay redevelopment program with the objective of improving our ability to manufacture and deliver high-quality assays at scale. This six-quarter operational program was substantially completed in the fourth quarter of 2023, and we have now launched five new Simoa Advantage PLUS assays. The Simoa Advantage PLUS assays have been developed using improved protocols, by leveraging manufacturing efficiencies and reagent improvements to provide more consistent results and improved lot-to-lot consistency, and through enabling production of larger lot sizes with extended shelf lives. These assays began shipping to customers in the first quarter of 2024. We expect to continue to apply these improved protocols and manufacturing efficiencies to other existing assays and assays that we may develop in the future. +Our Strategy +Our commercial strategy is to pursue the application of our Simoa technology in life science research/pharma and diagnostics. Our strategy to achieve this includes: +● Continue to drive adoption of our Simoa technology in life science research/pharma. We believe our Simoa technology has the potential to significantly expand the life science research market and is uniquely positioned for use by pharmaceutical companies in drug trials as biomarkers are being increasingly used as an adjunct to help increase the potential of regulatory approval. +● Expand our presence in diagnostics. We believe Simoa technology has the capability to enable the development of a new category of less-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive, and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +2 +Table of Contents +● Leverage the growing importance of neurological biomarkers to advance the development of therapeutics and diagnostics for neurodegenerative conditions. The importance of neurological biomarkers, such as neurofilament light chain (NfL), p-Tau 181, p-Tau 217 and glial fibrillary acidic protein (GFAP) , has increased significantly in recent years, and our ultra-sensitive Simoa platforms have allowed research of neurological disorders, previously limited primarily to cerebrospinal fluid (CSF), to expand significantly. +● Expand further into indications beyond neurology. Although we believe that our ultra-sensitive Simoa platforms are particularly well suited for neurology indications, we also believe that the ability of our Simoa technology to detect and quantify low abundance proteins is a distinct advantage in detecting disease earlier in other indications, including oncology, infectious disease, inflammation and cardiology, and there are over 800 scientific publications that reference our Simoa technologies in non-neurology indications. +Our Market Opportunities +Based on industry estimates, the life science research/pharma and diagnostics markets are believed to have an aggregate total addressable market (“TAM”) of approximately $75 billion. +Life Science Research/Pharma +We have targeted the large and growing life science research and pharma market because of the relatively low regulatory and reimbursement risk. We believe our Simoa platforms are well-positioned to capture a significant share of this market because of superior sensitivity, automated workflow capabilities, multiplexing, and the ability to work with a broader range of sample types. +Researchers study proteins to understand the biological basis for disease and how to improve diagnosis and treatment. The proteins detectable by conventional, analog immunoassay technologies represent a mere fraction of the proteins that can be detected by Simoa technology, and we believe that Simoa can inspire a new level of research into these previously undetectable proteins and their role in disease. By substantially lowering the limit of detection of protein biomarkers, our Simoa platforms hold significant potential to expand research into the diseases associated with the thousands of proteins that were previously undetectable, as well as into earlier detection of the proteins currently detectable by other technologies only after they have reached levels that reflect more advanced disease or injury. +In addition, as pharmaceutical companies look for ways to more efficiently and effectively develop and obtain regulatory approval for drugs, use of biomarkers in clinical drug trials is becoming more prevalent. Biomarkers are increasingly being used as clinical endpoints in clinical trials. Using Simoa’s unprecedented sensitivity to measure previously undetectable levels of target biomarkers prior to and following administration of a drug, drug developers can non-invasively and objectively determine whether a drug candidate is having a desired impact on the target biomarker. Drug developers can also use diagnostics to stratify patients and select only those patients for whom a drug is expected to be most effective and safe. +Based on industry estimates, we believe the proteomics life science research/pharma TAM is approximately $20 billion. +Diagnostics +Diagnostics represents a significant commercial opportunity for our Simoa technology. We believe existing biomarker diagnostics can be improved by Simoa’s sensitivity to enable earlier detection of diseases and injuries, and that new diagnostics may be developed using protein biomarkers that are not detectable using conventional, analog immunoassay technologies but are detectable using Simoa technology. We also believe that the ultra-sensitive protein detection provided by our Simoa platforms can enable the development of a new category of non-invasive diagnostic tests and tools based on blood, serum and other fluids that have the potential to replace current more invasive, expensive and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. +3 +Table of Contents +Based on industry estimates, we believe the proteomics diagnostics TAM is approximately $55 billion. +Our Products and Services +Instruments +We currently offer the following three Simoa instruments, which we believe are among the most sensitive multiplex protein detection platforms commercially available today: +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument, which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. By the end of 2023, approximately 82% of the HD installed base were HD-X instruments. +SR-X +We commercially launched our SR-X instrument in December 2017 as a compact benchtop instrument with a lower price point, more flexible assay preparation, and a wider range of applications. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X. In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instrument using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon Biosystems (Aushon), which we acquired in 2018, for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide sensitivity similar to that found in our Simoa bead-based platform. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 36 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the +4 +Table of Contents +planar array instrument includes approximately 95 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to the assays we have developed, both of the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes and disposable tips. +NfL Antibodies and NfL ELISA Kits +In August 2019, we acquired UmanDiagnostics AB (“Uman”), a company located in Umeå, Sweden, that commercializes proprietary NfL antibodies and NfL ELISA kits. Uman’s NfL antibodies are used by researchers and biopharmaceutical and diagnostics companies to detect NfL to advance the development of therapeutics and diagnostics for certain neurodegenerative conditions. Since we commercially launched the first assay that could reliably measure NfL in blood using Uman’s antibodies and our Simoa technology in 2017, NfL has seen dramatic growth as a neurological biomarker. Through Uman we sell proprietary NfL capture and detection antibodies, as well as two NfL ELISA kits for CSF, one of which is CE-certified in Europe, and one research use only (“RUO”) NfL ELISA kit for serum. +Services +Through our Accelerator Laboratory, which includes a CLIA-certified laboratory, we provide customers a contract research option. The Accelerator Laboratory supports multiple projects and services, including: +● Sample Testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +● Homebrew Assay Development. Utilizing proprietary or commercially available reagents in combination with our homebrew assay kits, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization or validation to ultimately deliver the highest level of performance. +● Custom Assay Development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to validated kits for assays not yet commercially available on the Simoa platform. +● Lucent Diagnostics. In July 2023, we launched Lucent Diagnostics, our brand for clinical testing services for healthcare providers in the field of neurology, with testing services initially focused on Alzheimer’s disease. The first product offering was LucentAD, a blood test to aid in the evaluation of patients experiencing cognitive symptoms consistent with the early signs of Alzheimer’s disease. Subsequently, we launched an additional blood test for Alzheimer’s disease, LucentAD p-Tau 217, in October 2023. The process for testing involves a healthcare provider drawing a blood sample from an individual, shipping the sample to our Accelerator Laboratory, to analyze the sample and communicating the result back to the provider. To support a streamlined provider workflow, we have also launched a web portal where healthcare providers can order sample collection materials, order a test, track the status of a test and retrieve the test report. +● LDT Testing. We currently offer three laboratory developed tests (LDTs) through our CLIA-certified laboratory: (1) an LDT to quantitatively measure p-Tau 181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease; (2) an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system +5 +Table of Contents +damage; and (3) an LDT to quantitatively measure p-Tau 217 in plasma to aid in the diagnosis of Alzheimer’s disease. +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continue to seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We intend to selectively expand our assay menu to extend the scope of applications for our platform to biomarkers of significant interest to the scientific community. We also intend to continue to develop and market new instruments with different and/or improved capabilities in order to further broaden our market reach. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses, including neurology and oncology, as well as cardiology, infectious disease, and inflammation. +Neurology +The ability of Simoa technology to detect neurological biomarkers in blood at ultra-low levels, combined with our multiplexing capability, has significantly advanced neurology research, drug development, and diagnostics test development. Prior to the launch of our p-Tau 181 LDT for clinical use in July 2022, the brain was the only organ in the body for which there was not a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either brain imaging or a spinal tap to collect CSF. The sensitivity of Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood brain barrier and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of many of these neural biomarkers in the blood can be so low that they are difficult to detect by conventional, analog immunoassay technologies. Furthermore, neurological pathophysiology is complex, and it has become clear that no single biomarker is sufficient to serve as comprehensive indicator of these processes. For this reason, the capability of Simoa to multiplex blood-based tests for multiple neural biomarkers into a single test has emerged as enormously useful to facilitate biomarker profiling of neurological disorders. This capability has materially contributed to rapid research progress, notably in the Alzheimer’s disease landscape. +Developments on the Alzheimer’s Disease Landscape +The FDA approval of Leqembi as a disease-modifying treatment for Alzheimer’s disease, and the ongoing FDA review of donanemab, has underscored a need for a non-invasive widely available blood test to facilitate diagnosis in the early stages of the disease to identify patients for treatment when therapeutic intervention is most likely to deliver clinical benefit. Currently established biomarker-based approaches to diagnostic workup for Alzheimer’s include positron emission tomography (PET) imaging and CSF biomarkers for amyloid and phosphorylated tau, both of which are invasive, expensive, and may not be widely available. A Rand Corporation study on the readiness of the U.S. health care system infrastructure for an Alzheimer’s treatment highlighted a dire situation of unpreparedness and where key bottlenecks lie. The model assumed annual mild cognitive impairment (MCI) screening for adults leading to 7.5 million referrals to a diagnostic phase in a secondary specialist setting, which is well beyond the country’s capacity. Of these referrals, 6.7 million were assumed to require CSF biomarker or amyloid PET testing for biomarker-based diagnosis of Alzheimer’s disease at an estimated cost of $20.1 billion. Of the amyloid positive subjects, 80% (2.4 million) were assumed to fit the criteria for therapeutic intervention. Assessing the effectiveness of an anti-amyloid Alzheimer’s +6 +Table of Contents +therapy by testing for amyloid plaque reduction over the course of treatment would potentially involve serial testing of each subject with CSF analysis or PET imaging at a significant cost with currently available detection modalities. The availability of a simple blood test for amyloid positivity has the potential to alleviate bottleneck and cost burdens and facilitate the accessibility of Alzheimer’s therapeutic intervention for patients. We believe our Simoa technology is well-suited to meet this critical need. +High Accuracy Simoa p-Tau 217 Test +The Alzheimer’s field has converged to a consensus on the most desirable single blood-based biomarker at present: plasma p-Tau 217. This biomarker has been shown to out-perform all the other plasma biomarker candidates for Alzheimer’s diagnostics and disease progression monitoring. The biomarker also has the distinction of being very low abundance in blood and difficult to measure by conventional means. Quanterix is well-positioned to provide multiple assays for robustly measuring p-Tau 217 in plasma and helping to establish the clinical evidence through a body of peer reviewed publications demonstrating the superiority of this biomarker relative to other biomarkers. While p-Tau 217 has demonstrated superiority over other neural biomarkers, the strength of the data across all the biomarker candidates (p-Tau 217, p-Tau 181, amyloid b 42/40 ratio, GFAP, NfL) is such that all these biomarkers have been included in the recent updated criteria for diagnosis and staging of Alzheimer’s disease from the National Institute on Aging and Alzheimer’s Association (NIA-AA). However, only p-Tau 217 has been recommended by the NIA-AA as being sufficiently accurate as a single biomarker to enable a diagnostic use case. With this recent consensus on p-Tau 217, Quanterix has launched an LDT for p-Tau 217 to make the test available for clinical use. The test was extensively validated across two independent cohorts (873 samples), and the diagnostic accuracy of the test was shown to meet or exceed the recommendation of the NIA-AA (≥90% accuracy, sensitivity and specificity ≥90%). Thus, the Simoa p-Tau 217 test meets or exceeds the diagnostic performance criteria for the only plasma-based test for Alzheimer’s disease recommended by the NIA-AA. +Simoa Multi-Marker Algorithmic Test +Leveraging both the multiplexing and high sensitivity capability of Simoa, Quanterix has developed a multiplex test that combines four biomarkers into a single plasma test: amyloid b 42, amyloid b 40, GFAP, and NfL. This 4-plex assay, along with p-Tau 181 and p-Tau 217, has been employed by researchers to advance the understanding of how blood-based biomarkers reflect different aspects of Alzheimer’s pathology to both further the basic knowledge of the disease pathophysiology, and to explore the potential of these biomarkers to predict disease state, severity, and progression. This work has resulted in a large body of published evidence that has advanced the understanding of the disease and facilitated drug development through the use of these biomarkers as exploratory indicators of drug target engagement. From a diagnostic test standpoint, a central concept has emerged: since these biomarkers reflect different aspects of Alzheimer’s pathology, combining their signals through logistic regression can enhance overall test accuracy. Furthermore, profiling these biomarkers individually can help clinicians evaluate patients with cognitive symptoms with differential diagnostic information. This information, together with clinical evaluations and cognitive testing, can help determine whether cognitive symptoms are the result of Alzheimer’s disease, or another type of dementia. For example, a patient presenting with cognitive symptoms who has a normal p-Tau 181/217 level, but an abnormal NfL level, is likely to have frontal temporal dementia (FTD). For these reasons, Quanterix is partnering with the Alzheimer’s Drug Discovery Foundation to develop and clinically implement a multi-marker blood test to aid Alzheimer’s diagnosis and differential diagnosis of patients presenting with cognitive symptoms of uncertain origin. The validation of the test includes the 4-plexed biomarkers listed above together with p-Tau 217, and this test is expected to launch in 2024. +Other Neurological Conditions +Our ultra-sensitive Simoa technology has also been instrumental in advancing research into other neurological conditions, such as multiple sclerosis and traumatic brain injury (“TBI”). Evidence of the potential clinical utility of NfL as a biomarker in multiple sclerosis has progressed rapidly, and Simoa’s role in that progression has been foundational. In the past several years, Simoa technology has supported a number of scientific presentations at the 39 th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (“ECTRIMS”), the world’s largest meeting dedicated to advancing research for multiple sclerosis. In April 2022, the FDA granted our Simoa NfL plasma test Breakthrough Device designation as a prognostic aid in assessing the risk of disease activity in patients diagnosed with +7 +Table of Contents +relapsing-remitting multiple sclerosis (“RRMS”). The test has shown promise to be used in conjunction with clinical, imaging and laboratory findings as an aid in identifying RRMS patients who are at lower or higher risk for relapse within four years. We believe this prognostic information could be clinically useful in tailoring the therapeutic approach to more effectively treat the disease. +Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as NfL, tau, GFAP and UCH-L1, to more adequately aid in diagnosis of TBIs and overall brain health. Researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy (CTE), which currently can only be diagnosed after death via a brain autopsy. +Oncology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability has the potential to enable earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of health-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the health-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a number of tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma (IFN-gamma) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring health-oncology drugs and protocols. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +8 +Table of Contents +Infectious Disease +The ability to detect infectious disease biomarkers before the onset of an immune response, where a virus is most contagious and multiplying rapidly, is critical for controlling the spread of disease. We believe that our Simoa technology has the potential to impact the reduction of the spread of infectious diseases by making early stage detection more specific and widely available. +Today, early detection of infectious disease is conducted using nucleic acid testing to detect the nucleic acid of the viral or bacterial organism because the levels of infectious disease specific antigens are too low in the early stage of disease to be detected by traditional immunoassay technology. However, the sensitivity of our single molecule detection capabilities enables the detection of extremely low levels of infectious disease specific antigens with sensitivity that can rival the use of nucleic acid testing in this application, without the potential biases inherent in amplification technologies, such as PCR. +Cardiology +Heart disease and related cardiovascular ailments remain the leading cause of death in the United States, contributing to nearly one in four deaths in the United States, according to the CDC. A significant need remains for early prediction of heart attacks and other cardiac events. Simoa’s highly sensitive digital measurement capabilities have the potential to be used to predict early cardiac disease. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional countries, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, we sell Uman’s NfL antibodies and NfL ELISA kits directly and in conjunction with a distributor worldwide. +As of December 31, 2023, we had 141 employees in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We expect we will expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China and other Asia-Pacific region countries where significant new opportunities exist. +Manufacturing and Supply +We outsource the development and manufacturing of our Simoa bead-based instruments to third-party manufacturers, and we develop and manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is manufactured by STRATEC Biomedical AG (“STRATEC”), based in Birkenfeld, Germany, and is manufactured and shipped from their Birkenfeld and Beringen, Switzerland facilities. The SR-X is manufactured by Paramit Corporation (“Paramit”), based in Morgan Hill, California, and is shipped to our global customers by Paramit. See “—Key Agreements” for a description of our agreements with STRATEC and Paramit. Installation of, and training on, our instruments is provided by our employees where we conduct direct sales, and by distributors where sales are conducted through distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we could experience additional costs, delays and difficulties in doing so, and our business could be harmed. +9 +Table of Contents +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component that is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply SP-X instruments on a timely basis. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Our bead-based assays include all components required to run an enzyme-based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. As part of our assay redevelopment program, we have increased the shelf life of our bead-based assays to 18 months and believe we are able to mitigate this supplier risk through inventory control. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables, a subsidiary of STRATEC. We believe that this agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC, and the disposable tips used in our bead-based platform are commercially available. +We assemble our 96-well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +NfL antibodies and NfL ELISA Kits +The storage of Uman’s proprietary NfL antibody producing hybridomas, as well as the cultivation and purification of the antibodies, is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s NfL ELISA kits. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s NfL ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. The kit components include buffers (sample diluents and wash solutions), ELISA 96-well plates coated with a capture antibody, detector antibodies, streptavidine conjugates, substrates (TMB) and stop reagents. The final ELISA kit products are subject to quality control procedures, which include testing of human CSF or human serum quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months (NF-light ELISA (CSF)) or 13 months (NF-light Serum ELISA). +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. In September 2011, +10 +Table of Contents +we also entered into a Supply and Manufacturing Agreement with STRATEC (the “STRATEC Supply Agreement”), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase our common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the “Paramit Agreement”) with Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts for the SR-X instrument. Paramit has no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement had an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for proteomics discovery and clinical research applications. For example, companies such as Bio-Techne, DiaSorin, MesoScale Discovery, Gyros, SEER, MilliporeSigma, Bio-Rad Laboratories, Thermo Fisher Scientific, Roche, C2N Diagnostics, and others, have products for protein measurements in biofluids that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as LabCorp, Covance, Q2 Solutions, Rules Based Medicine, Monogram Biosciences, PPD Laboratories, and others, some of which are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics, we expect to compete with companies such as Siemens, Abbott, Roche, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for life science research and diagnostics. Many of the companies with which we compete or will compete have substantially greater resources than we have. +11 +Table of Contents +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. We believe the principal competitive factors for us include: +● sensitivity; +● cost of instruments and consumables; +● reputation among customers and key opinion leaders; +● innovation in product offerings; +● accuracy and reproducibility of results; and +● customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations, and partnerships with key opinion leaders. +Intellectual Property +Our success depends in part on our ability to obtain and maintain intellectual property protection for our products and technology. We use a variety of intellectual property protection strategies, including patents, trademarks, trade secrets, and other methods of protecting proprietary information. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature, seeking to protect not only technology we currently practice but also alternative, related embodiments. +As of December 31, 2023, we owned or exclusively licensed 105 issued patents and patent applications worldwide. Our owned or exclusively licensed patents and patent applications, if issued, are expected to expire between 2025 and 2042, in each case without taking into account any possible patent term adjustments or extensions and assuming payment of all appropriate maintenance, renewal, annuity or other governmental fees. +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts University (Tufts), in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board of Directors. Prof. Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating ultra-sensitive detection. We have exclusively licensed from Tufts the relevant patent filings related to these technologies. (See “—License Agreement with Tufts University” below). +In addition to our reliance on patent protection for our inventions, products and technologies, we also rely on trade secrets, know-how, confidentiality agreements, and continuing technological innovation to develop and maintain our competitive position. For example, some elements of our manufacturing processes, analytics techniques and processes, as well as computational-biological algorithms, and related processes and software, are based on unpatented trade secrets and know-how that are not publicly disclosed. Although we take steps to protect our proprietary information and trade secrets, including through contractual means with our employees, advisors and consultants, these agreements may be breached or may be unenforceable and we may not have adequate remedies. In addition, third parties may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. As a result, we may not be able to meaningfully protect our intellectual property. For further discussion of the risks relating to our intellectual property, see the section titled “Risk factors—Risks Related to our Intellectual Property.” +12 +Table of Contents +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to all patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable. +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our stock. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +The majority of our products are currently intended for RUO applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or the Center for Medicare & Medicaid Services (“CMS”). Although most in vitro diagnostic products intended for RUO are not currently required to obtain premarket clearance or approval by the FDA, products labeled as RUO are subject to the FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than non-clinical research purposes. Consequently, other than our three laboratory developed tests intended for clinical testing, our products are labeled and intended “For Research Use Only. Not for Diagnostic Procedures.” +The FDA has issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (the “RUO/IUO Guidance”). The purpose of this FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for investigational use only (“IUO”) and when products labeled RUO or IUO will be viewed by the FDA as intended for clinical use. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s premarket notification and clearance process (510(k)), premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. We believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. +IVD tests intended for clinical diagnostic use are regulated by the FDA as medical devices, however, the FDA has traditionally not regulated certain laboratory tests referred to as laboratory developed tests (“LDTs”) (as discussed further below). The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other +13 +Table of Contents +conditions or in the cure, mitigation, treatment, or prevention of disease in man. The FDA will regulate the development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising, and labeling of our clinical IVD devices (other than our LDTs) and we will be required to register as a medical device manufacturer and list our marketed products. +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +We own and operate a CLIA-certified laboratory. The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of research testing that does not report patient specific results). A clinical laboratory is defined by CLIA as any facility that performs examinations of specimens obtained from humans for the purpose of providing information for the diagnosis, prevention, or treatment of any disease or impairment of, or the assessment of health of, human beings. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program for each of the specialties and subspecialties for which it is certified. If a laboratory fails to achieve a passing score on a proficiency test, then its CLIA certificate may be suspended, limited or revoked, or other sanctions may be imposed. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year (except laboratories with only a certificate of waiver or certificate of provider-performed microscopy procedures are not subject to biennial inspections), in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers. These tests have been offered by high-complexity laboratories for the last few decades as LDTs, the validation and performance of which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs under the agency’s medical device authorities, but historically has not exercised enforcement with respect to most LDTs when they meet FDA’s definition of an LDT. FDA defines an LDT as an in vitro diagnostic that is intended for clinical use and is designed, manufactured, and used within a single high-complexity, CLIA-certified laboratory. In 2010, the FDA had announced that it decided to exercise regulatory authority over LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. The FDA never finalized such guidance and later indicated that Congress should enact legislation to address improved oversight of diagnostics, including LDTs, rather than the FDA addressing the issue through administrative proposals. However, over the past several years, FDA has increased its oversight of what it perceived as especially high-risk LDTs, and in October 2018 the FDA issued a safety communication warning against the use of unapproved LDTs that describe relationships between gene variants and particular drugs. FDA also regulated LDTs for Covid-19 under its emergency use authorization (“EUA”) authority and related guidance. In August 2020, the Department of Health and Human Services (“HHS”) issued a policy stating that FDA could not require premarket review (including EUAs) for LDTs, but this policy was revoked by the HHS in November 2021 (accordingly, reinstating FDA’s EUA requirements for Covid-19 LDTs). Thus, while FDA generally exercises enforcement discretion for LDTs, it continues to exercise oversight over certain high-risk tests. In addition, over the past several years, several bills to establish a new FDA regulatory framework with similarities to the current medical device framework for “in vitro clinical tests,” which would include both in vitro diagnostics and LDTs, have been introduced but have not been enacted. +Most recently, however, in September 2023, FDA issued a proposed rule regarding LDTs that would establish that in vitro diagnostic products are devices under the Federal Food, Drug, and Cosmetic Act, including when the manufacturer is a laboratory. The proposed rule also describes a policy under which FDA would provide greater oversight of LDTs by phasing out its general enforcement discretion approach, and phase in medical device regulation, for LDTs over a period of four years. FDA requested comment on several aspects of its proposal and approach, including whether certain types of LDTs should remain under enforcement discretion. Currently FDA’s target date for final action on this rule is April 2024, but we cannot predict the ultimate timing or form of FDA guidance or regulation, legislative +14 +Table of Contents +action or their potential impact. Any new regulatory approach for LDTs by the FDA, including as described in the September 2023 proposed rule, would likely lead to an increased regulatory burden, including additional costs and delays in introducing new LDTs, and could result in tests being removed from the market if regulatory clearance or approval from FDA cannot be obtained. +In addition, some states require that any laboratory be licensed by the appropriate state agency in the state in which it operates. Laboratories must also hold state licenses or permits, as applicable, from various states including, but not limited to, California, New York, Pennsylvania, Rhode Island, and Maryland, to the extent that they accept specimens from one or more of these states, each of which requires out-of-state laboratories to obtain licensure. Laboratories also must receive approval from New York for any LDT that has not been reviewed by FDA, to the extent that LDT is offered to New York patients. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third-party payors. +When we perform clinical diagnostic testing, we may be subject to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), depending on the types of transactions we engage in, as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +We must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, in the European Union (the “E.U.”) new regulations recently entered into force that introduce greater regulation of medical devices and IVDs. The new IVD regulation (the “IVD Regulation”) is significantly different from the European directive for IVD medical devices (the “IVD Directive”) that it replaces in that it ensures that the new requirements apply uniformly and on the same schedule across the member states, includes a risk-based classification system and increases the requirements for conformity assessment. +The CE registration for the NfL ELISA assay kit of our subsidiary Uman was approved in March 2014 under the IVD Directive . Under the IVD Directive, the assay is classified as a general IVD product and required self-certification with no involvement of a notified body/authority. The IVD Regulation introduces a new classification system for IVDs and assessment by a notified body is required for class B, C and D products. Uman’s NfL ELISA assay kit is classified as a class B product and must fully comply with (and have a CE mark issued under) the IVD Regulation by May 2027 (subject to proposed extension of the transitional periods in the IVD Regulation). The new requirements include an ISO 13485 certification of the quality system (which Uman received in July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g., clinical evidence and post-market activities). The work to evaluate and to meet the new technical requirements is on-going. When all requirements are met, a notified body will be contacted, and the certification initiated. +The NF-light Serum ELISA is currently sold only as a RUO product (not intended for diagnostic use). Work is on-going to prepare a technical file compliant with the IVD Regulation for this product as well. +Other Governmental Regulation +Privacy and Data Security Laws and Regulations +As a business with a global footprint, compliance with evolving regulations and standards in privacy and data security has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of +15 +Table of Contents +increased regulatory enforcement activity. Our business relies on various safeguards to secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce. +For example, in the U.S., the collection, maintenance, protection, use, transmission, disclosure, and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international, and industry levels. U.S. federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by health care providers. Privacy and Security Rules under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), govern the use, disclosure, and security of protected health information by “Covered Entities,” (which include health care providers that submit electronic claims, health plans, and health care clearinghouses) and by their “Business Associates” (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the Covered Entity’s workforce). Rules under HIPAA and HITECH include specific security standards and breach notification requirements. HHS (through the Office for Civil Rights) has direct civil enforcement authority against Covered Entities and Business Associates with regard to both the Security and Privacy Rules. The U.S. Department of Justice has criminal enforcement authority against Covered Entities, Business Associates, and certain other entities and individuals. In addition, State Attorneys General may being enforcement actions under HIPAA. Generally Quanterix is not a Covered Entity, however, we may operate as a Business Associate to Covered Entities under certain circumstances. +In addition, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for personal information, such as comprehensive state privacy laws that govern the use, disclosure and protection of personal information, such as certain health information, Social Security numbers, and credit card account data. State consumer protection laws and consumer health privacy laws also establish privacy and security standards for use and management of personal information, including information related to consumers and care providers. +Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. Legal requirements in foreign countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the E.U., stringent data protection and privacy rules which substantially impact the use of patient data across the healthcare industry became effective in May 2018. The E.U. General Data Protection Regulation (“GDPR”) applies uniformly across the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals residing in the E.U. to comply with E.U. privacy and data protection rules. In the area of health data, the GDPR is supplemented by national laws and regulations that are less harmonized. +Because data privacy laws and regulations continue to expand, differ from jurisdiction to jurisdiction, and are subject to evolving (and at times inconsistent) governmental interpretation, compliance with these laws and regulations may require significant additional expenditures or changes in products or business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities. +Environmental Health and Safety Laws +We are subject to federal, state, and local laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation, storage and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (“OSHA”), has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. OSHA also regulates the use of hazardous chemicals in the workplace. Likewise, we are subject to EPA and state requirements +16 +Table of Contents +relating to the management and disposal of hazardous waste, and state requirements relating to the disposal of regulated medical waste. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research. +Employees and Human Capital +As of December 31, 2023, we had 441 full-time employees, of which 141 worked in sales, sales support, field service, and marketing, 121 worked in engineering and research and development, 117 worked in manufacturing and operations and 62 worked in general and administration. Of our 441 full-time employees, 382 were located in the United States and 59 were located in 13 foreign countries. None of our employees is represented by a labor union or subject to a collective bargaining agreement. We have a strong culture that emphasizes the impact our work has on the detection of neurological and other critical disorders. +Our success depends upon our ability to attract and retain highly qualified employees. Talent management is critical to our ability to execute our long-term growth strategy, and we seek to cultivate a high performing pool of talent by providing career growth, on-the-job learning opportunities and competitive total rewards. +Workforce Compensation and Pay Equity +We provide competitive compensation and benefits programs to help recruit and retain our high performing employees. We utilize third party benchmark compensation data to assist in the evaluation of market wages. Our compensation is designed to attract, retain, and motivate employees to achieve results while balancing short- and long-term company performance. All of our employees are eligible for an annual bonus and/or commission plan, a matching 401(k) Plan (in the case of US employees), healthcare and insurance benefits, paid time off, family leave, employee assistance programs, and behavioral health services. Additionally, all our employees are eligible for annual equity-based grants with vesting conditions designed to award our employees’ performance and encourage retention. +Company Culture +We are committed to an inclusive culture which is grounded on our values of integrity, respect, and equality. In support of our inclusive culture, we sponsor an internal group of culture champions who are focused on diversity, equity, and inclusion. These champions are comprised of employees and executives whose mission is to provide respectful workplace training and awareness to strengthen employee understanding and knowledge of key topics focused on diversity and inclusion. As of December 31, 2023, approximately 43% of our employees were women and approximately 40% of our employees were non-white. +We expect all personnel working at Quanterix, employees, interns, and contractors, to observe the highest levels of business ethics, integrity, and mutual respect. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies that reflect our values and provide guidance for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization, and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is dependent on the physical and mental well-being of our employees. Accordingly, we are committed to creating a safe and healthy workplace for all personnel. We provide our employees with a wide range of policies and practices to ensure an environment of physical and psychological safety and well-being. +17 +Table of Contents +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. Our electronically filed reports and other information that we file with the SEC can be viewed on the SEC’s website at http://www.sec.gov . +18 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001503274/2023/0001558370-24-002205/item13.txt b/raw/filings/0001503274/2023/0001558370-24-002205/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..2572b8258d996879a92a537a5e08558832b51651 --- /dev/null +++ b/raw/filings/0001503274/2023/0001558370-24-002205/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item will be set forth in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023 and is incorporated into this Annual Report on Form 10-K by reference. \ No newline at end of file diff --git a/raw/filings/0001503274/2023/0001558370-24-002205/item9a.txt b/raw/filings/0001503274/2023/0001558370-24-002205/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..3cf6ce790027c65dc5b0350149e8ed97d7b295ee --- /dev/null +++ b/raw/filings/0001503274/2023/0001558370-24-002205/item9a.txt @@ -0,0 +1,56 @@ +ITEM 9A. CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2023, due to the material weaknesses described below in Management’s Report on Internal Control over Financial Reporting. +Management’s Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. +In Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, we identified four material weaknesses in our internal control over financial reporting, relating to the operating effectiveness of our internal controls associated with: (i) the accounting for inventory, including excess and obsolescence reserves (the “Inventory MW”), (ii) the accounting for salaries and commissions expense (the “Compensation MW”), (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases (the “Financial Statement Close Process MW”), and (iv) the accounting for property and equipment, net (the “Property and Equipment MW”). +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. +56 +Table of Contents +Remediation of Previously-Identified Material Weaknesses +During 2023, we took a number of actions and incurred expenses of approximately $4.2 million, including the efforts outlined below, designed to improve our internal control over financial reporting to remediate the material weaknesses identified above. These efforts included: +● hired additional personnel with public company experience who have the appropriate level of expertise in the respective areas of accounting, SEC financial reporting, and associated internal controls commensurate with the type, volume, and complexity of our accounting operations and reporting requirements, including a Corporate Controller and an Assistant Controller; +● continued to supplement our team with advisory consultants to provide additional depth and breadth in our period-end closes, technical accounting, financial reporting capabilities, and internal controls compliance; +● implemented recommendations from a third-party service provider we engaged to perform an assessment of our internal control design and operation and provide us recommendations to enhance the effectiveness of such controls; +● engaged a third-party consultant to assess our current enterprise resource planning system and identify opportunities to enhance our use of the system through automating certain controls and processes, for which development of system enhancements were made and continue to be underway; and +● engaged an accounting advisory consultant who conducted additional trainings on a regular basis related to internal control over financial reporting with our team members including, but not limited to, finance and accounting personnel. +Based on the efforts above and after demonstrating the operating effectiveness of the related internal controls for a sufficient period of time, management has concluded that the Financial Statement Close Process MW and Compensation MW were remediated as of December 31, 2023. +Evaluation of Controls and Procedures +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the framework set forth in Internal Control-Integrated Framework, as well as the actions outlined above, while our management concluded that the Financial Statement Close Process MW and Compensation MW were remediated as of December 31, 2023, management concluded that our internal control over financing reporting was not effective at the reasonable assurance level as of December 31, 2023 due to the material weaknesses described below. +Our management concluded that control deficiencies existed as of December 31, 2023, and that these control deficiencies constituted material weaknesses in our internal control over financial reporting. Specifically, management concluded that a portion of the Inventory MW related to the valuation of our inventory, including excess and obsolescence reserves (the “Inventory Valuation MW”) and the Property and Equipment MW continued to exist as of December 31, 2023. The primary cause of the Inventory Valuation MW is our reliance on manual processes to verify the completeness and accuracy of information used in our inventory valuation outputs, and the adequacy and documentation of reviews over these outputs. For the Property and Equipment MW, while the related internal controls were implemented and effective as of December 31, 2023, they were not in all cases in place for a sufficient period of time to demonstrate operating effectiveness as of December 31, 2023. +We have not identified any material misstatements as a result of the material weaknesses discussed above. If not remediated, or if we identify further material weaknesses in our internal control, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our consolidated financial statements or a failure to meet our reporting and financial obligations. +57 +Table of Contents +The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. +Continuing Remediation Efforts +Management, with oversight from the Audit Committee of our Board of Directors, is taking steps to remediate the control deficiencies that resulted in the Inventory Valuation MW and Property and Equipment MW described above by implementing changes to our internal control over financial reporting. Our plans for remediation include, but are not limited to, the efforts summarized below, which have been or are in the process of being implemented: +● we have engaged accounting advisory consultants to implement new software systems to automate manual key inventory valuation processes and outputs; +● we will strengthen, document, and implement additional compensating controls; +● we will continue to focus on effectively operating controls that did not have a sufficient period of time to demonstrate operating effectiveness as of December 31, 2023; and +● we will continue to evaluate, enhance, and add personnel in the finance organization with a focus on the requisite experience in the areas of accounting, SEC financial reporting, and associated internal controls. +We expect to continue our efforts to remediate the Inventory Valuation MW and Property and Equipment MW as described above through fiscal year 2024. We believe that the implementation of the above steps will allow us to address the deficient controls within our internal control environment, which will facilitate the remediation of the Inventory Valuation MW and Property and Equipment MW. As we continue to evaluate and work to improve our internal control over financial reporting, we will take additional measures to address control deficiencies and we may modify certain of the remediation measures described above. Following our design and implementation of our remediation efforts, we will need to demonstrate their operating effectiveness. We will not be able to consider the Inventory Valuation MW and Property and Equipment MW remediated until the applicable remedial controls operate for a sufficient period of time and our management has concluded, through testing, that our controls are operating effectively. +Changes in Internal Control over Financial Reporting +Other than related to the changes outlined above to remediate the material weaknesses described above, there have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +58 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on Internal Control over Financial Reporting +We have audited Quanterix Corporation’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Quanterix Corporation (the Company) has not maintained effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in internal controls related to (i) the accounting for inventory valuation, including excess and obsolescence reserves, and (ii) the accounting for property and equipment, net. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and December 31, 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated February 29, 2024, which expressed an unqualified opinion thereon. +Basis for Opinion +The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management +59 +Table of Contents +and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Ernst & Young LLP +Boston, Massachusetts +February 29, 2024 +60 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001503274/2023/0001558370-24-002205/rp_note.txt b/raw/filings/0001503274/2023/0001558370-24-002205/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..554ae86d3533cf7f6b203832caed92922c939cc9 --- /dev/null +++ b/raw/filings/0001503274/2023/0001558370-24-002205/rp_note.txt @@ -0,0 +1,7 @@ +Note 16. Related Party Transactions +In June 2007, the Company entered into the Tufts License Agreement for certain intellectual property owned by Tufts (refer to Note 15 − Commitments and Contingencies ). A member of the Company’s Board of Directors was previously affiliated with Tufts. This Board member continues to receive compensation from Tufts on a formulaic basis based on royalties and license payments the Company makes to Tufts. At December 31, 2023 and 2022, open payable balances to Tufts were not material. +In August 2022, the Company entered into the Harvard License Agreement for certain intellectual property owned by Harvard (refer to Note 15 − Commitments and Contingencies ). Harvard is obligated to pay a portion of the payments received from the Company under the Harvard License Agreement to a member of the Company’s Board of Directors. A member of the Company’s Board of Directors is also affiliated with Harvard and Mass General Brigham. Revenue recorded from sales of products and services to Harvard and its affiliates and to Mass General Brigham and its affiliates totaled $ 1.3 million and $ 0.7 million for the years ended December 31, 2023 and 2022, respectively, and was not material for the year ended December 31, 2021. Cost of +F-34 +Table of Contents +product revenue and operating expenses with Harvard and its affiliates and Mass General Brigham and its affiliates was $ 0.3 million for the year ended December 31, 2023, and was not material for the years ended December 31, 2022 and 2021. At December 31, 2023 and 2022, open payables to and receivable balances from Harvard and Mass General Brigham were not material. +As discussed in Note 3 − Revenue and Related Matters , on May 26, 2022, the Company and UltraDx, a company formed by ARCH, entered into the UltraDx Agreement to supply certain instruments and to grant certain licenses. At contract inception, the Company determined that UltraDx was a related party because a member of the Company’s Board of Directors was affiliated with ARCH and UltraDx. As of June 7, 2023, this individual was no longer a member of the Company’s Board of Directors. Cost of product revenue with UltraDx was $ 0.3 million for the year ended December 31, 2023 and $ 0.7 million for the year ended December 31, 2022. At December 31, 2023 and 2022, there were no open payable balances to UltraDx and open receivable balances from UltraDx were not material. \ No newline at end of file diff --git a/raw/filings/0001503274/2023/0001558370-24-002205/rpt_disclosure.txt b/raw/filings/0001503274/2023/0001558370-24-002205/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..06af6f330164ece45b65cc9bd07205f62f883afe --- /dev/null +++ b/raw/filings/0001503274/2023/0001558370-24-002205/rpt_disclosure.txt @@ -0,0 +1,9 @@ +CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS +Since January 1, 2023, we have engaged in the following transactions with our directors, director nominees, executive officers and holders of more than 5% of our common stock, which we refer to as our principal stockholders, and affiliates or immediate family members of our directors, executive officers and principal stockholders. We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties. +We entered into a License Agreement with Tufts University in 2007, as amended in 2013, 2017 and 2020, pursuant to which we obtained an exclusive, worldwide license to our core SIMOA technology, and entered into additional license agreements with Tufts to certain related technology. David R. Walt, Ph.D., one of our directors, founding scientist and an inventor of the SIMOA technology, previously served as a professor at Tufts University. Under these licenses, we are required to pay Tufts University royalties on net sales of licensed products and services as well as a portion of our applicable sublicense revenues. During the year ended December 31, 2023, we recorded royalty expense of $1.7 million under these licenses. Tufts University pays a portion of the royalties and license payments received from us to Dr. Walt pursuant to an arrangement between Tufts University and Dr. Walt, the amount of which is determined on a formulaic basis. +In August 2022, we also entered into a license agreement with Harvard University related to immunoassay technology developed by Dr. Walt at Harvard and Brigham and Women’s Hospital. In connection with entering into this agreement, we paid Harvard an upfront fee of $625,000 in 2022. Under this license, we are required to pay Harvard royalties on net sales of licensed products and services as well as a portion of our applicable sublicense revenues. During the year ended December 31, 2023, we recorded no royalty expense under this license. Harvard is obligated to pay a portion of the payments received from us to Dr. Walt pursuant to an arrangement between Harvard and Dr. Walt. We also sell products and services to laboratories affiliated with Harvard and Brigham and Women’s Hospital that are overseen by Dr. Walt. During the year ended December 31, 2023, we recorded revenue from these sales of approximately $1.3 million. +In May 2022, we entered into an agreement with UltraDx Limited (“UltraDx”), a company formed by ARCH Venture Partners (“ARCH”). Keith Crandell, who was a director of Quanterix until June 2023, is a managing director of ARCH and is a founder of UltraDx. Under this agreement, we agreed to supply HD-X instruments (both fully assembled and disassembled) as well as assays and assay components to UltraDx, and UltraDx has the non-exclusive right to seek Chinese regulatory approval of and to commercialize the HD-X instrument and related assays in the Chinese neurological in the vitro diagnostic market. The agreement included the payment to us by UltraDx of contingent, non-cash consideration in the form of ordinary shares of UltraDx with a deemed fair value of $1.0 million. The issuance of the shares was contingent on UltraDx completing a preferred share financing under certain qualifying terms and conditions. In the second quarter of 2023, UltraDx completed the qualified preferred share financing and issued us one million ordinary shares. During the year ended December 31, 2023, we recognized $1.8 million of revenue from UltraDx, which includes the one-time revenue from the receipt of the UltraDx shares in the second quarter of 2023. +Indemnification Agreements with Officers and Directors and Directors’ and Officers’ Liability Insurance +We have entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements, our restated certificate of incorporation and our restated bylaws require us to indemnify our directors to the fullest extent not prohibited by Delaware law. Subject to certain limitations, our restated bylaws also require us to advance expenses incurred by our directors and officers. +The 2007 Plan and the 2017 Plan also provide that our directors (and in the case of the 2017 Plan, our employees) will not be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the respective plan, and the members of our Board and any committee administering the plan will be entitled to indemnification and reimbursement by us in respect of any claim, loss, damage or expense (including reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors’ and officers’ liability insurance coverage which may be in effect from time to time. +45 \ No newline at end of file diff --git a/raw/filings/0001503274/2024/0001503274-25-000031/filing.txt b/raw/filings/0001503274/2024/0001503274-25-000031/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..e96eff913bd96992f6039ad9c7264754954ec1a0 --- /dev/null +++ b/raw/filings/0001503274/2024/0001503274-25-000031/filing.txt @@ -0,0 +1,2229 @@ +qtrx-20241231 +0001503274 false FY 2024 0.318 iso4217:USD xbrli:shares iso4217:USD xbrli:shares qtrx:facility qtrx:customer xbrli:pure qtrx:position 0001503274 2024-01-01 2024-12-31 0001503274 2024-06-30 0001503274 2025-03-11 0001503274 2024-10-01 2024-12-31 0001503274 2024-12-31 0001503274 2023-12-31 0001503274 us-gaap:ProductMember 2024-01-01 2024-12-31 0001503274 us-gaap:ProductMember 2023-01-01 2023-12-31 0001503274 us-gaap:ProductMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceAndOtherRevenueMember 2024-01-01 2024-12-31 0001503274 qtrx:ServiceAndOtherRevenueMember 2023-01-01 2023-12-31 0001503274 qtrx:ServiceAndOtherRevenueMember 2022-01-01 2022-12-31 0001503274 us-gaap:LicenseAndServiceMember 2024-01-01 2024-12-31 0001503274 us-gaap:LicenseAndServiceMember 2023-01-01 2023-12-31 0001503274 us-gaap:LicenseAndServiceMember 2022-01-01 2022-12-31 0001503274 us-gaap:GrantMember 2024-01-01 2024-12-31 0001503274 us-gaap:GrantMember 2023-01-01 2023-12-31 0001503274 us-gaap:GrantMember 2022-01-01 2022-12-31 0001503274 2023-01-01 2023-12-31 0001503274 2022-01-01 2022-12-31 0001503274 us-gaap:CommonStockMember 2021-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-12-31 0001503274 us-gaap:RetainedEarningsMember 2021-12-31 0001503274 2021-12-31 0001503274 us-gaap:CommonStockMember 2022-01-01 2022-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-01-01 2022-12-31 0001503274 us-gaap:RetainedEarningsMember 2022-01-01 2022-12-31 0001503274 us-gaap:CommonStockMember 2022-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2022-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2022-12-31 0001503274 us-gaap:RetainedEarningsMember 2022-12-31 0001503274 2022-12-31 0001503274 us-gaap:CommonStockMember 2023-01-01 2023-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2023-01-01 2023-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2023-01-01 2023-12-31 0001503274 us-gaap:RetainedEarningsMember 2023-01-01 2023-12-31 0001503274 us-gaap:CommonStockMember 2023-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2023-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2023-12-31 0001503274 us-gaap:RetainedEarningsMember 2023-12-31 0001503274 us-gaap:CommonStockMember 2024-01-01 2024-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2024-01-01 2024-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2024-01-01 2024-12-31 0001503274 us-gaap:RetainedEarningsMember 2024-01-01 2024-12-31 0001503274 us-gaap:CommonStockMember 2024-12-31 0001503274 us-gaap:AdditionalPaidInCapitalMember 2024-12-31 0001503274 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2024-12-31 0001503274 us-gaap:RetainedEarningsMember 2024-12-31 0001503274 srt:MinimumMember 2024-01-01 2024-12-31 0001503274 srt:MaximumMember 2024-01-01 2024-12-31 0001503274 us-gaap:OtherMachineryAndEquipmentMember 2024-12-31 0001503274 us-gaap:FurnitureAndFixturesMember 2024-12-31 0001503274 us-gaap:ComputerEquipmentMember 2024-12-31 0001503274 qtrx:CustomerMember us-gaap:CustomerConcentrationRiskMember us-gaap:AccountsReceivableMember 2024-01-01 2024-12-31 0001503274 qtrx:OneCustomerMember us-gaap:CustomerConcentrationRiskMember us-gaap:AccountsReceivableMember 2023-01-01 2023-12-31 0001503274 qtrx:CustomersOutsideOfUnitedStatesMember us-gaap:CustomerConcentrationRiskMember us-gaap:AccountsReceivableMember 2024-01-01 2024-12-31 0001503274 qtrx:CustomersOutsideOfUnitedStatesMember us-gaap:CustomerConcentrationRiskMember us-gaap:AccountsReceivableMember 2023-01-01 2023-12-31 0001503274 qtrx:CustomerMember us-gaap:CustomerConcentrationRiskMember us-gaap:SalesRevenueNetMember 2024-01-01 2024-12-31 0001503274 qtrx:OneCustomerMember us-gaap:CustomerConcentrationRiskMember us-gaap:SalesRevenueNetMember 2023-01-01 2023-12-31 0001503274 qtrx:OneCustomerMember us-gaap:CustomerConcentrationRiskMember us-gaap:SalesRevenueNetMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember qtrx:InstrumentProductsMember 2024-01-01 2024-12-31 0001503274 us-gaap:EMEAMember qtrx:InstrumentProductsMember 2024-01-01 2024-12-31 0001503274 srt:AsiaPacificMember qtrx:InstrumentProductsMember 2024-01-01 2024-12-31 0001503274 qtrx:InstrumentProductsMember 2024-01-01 2024-12-31 0001503274 srt:NorthAmericaMember qtrx:ConsumableAndOtherProductsMember 2024-01-01 2024-12-31 0001503274 us-gaap:EMEAMember qtrx:ConsumableAndOtherProductsMember 2024-01-01 2024-12-31 0001503274 srt:AsiaPacificMember qtrx:ConsumableAndOtherProductsMember 2024-01-01 2024-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2024-01-01 2024-12-31 0001503274 srt:NorthAmericaMember us-gaap:ProductMember 2024-01-01 2024-12-31 0001503274 us-gaap:EMEAMember us-gaap:ProductMember 2024-01-01 2024-12-31 0001503274 srt:AsiaPacificMember us-gaap:ProductMember 2024-01-01 2024-12-31 0001503274 srt:NorthAmericaMember qtrx:ResearchServicesMember 2024-01-01 2024-12-31 0001503274 us-gaap:EMEAMember qtrx:ResearchServicesMember 2024-01-01 2024-12-31 0001503274 srt:AsiaPacificMember qtrx:ResearchServicesMember 2024-01-01 2024-12-31 0001503274 qtrx:ResearchServicesMember 2024-01-01 2024-12-31 0001503274 srt:NorthAmericaMember qtrx:ServiceTypeWarrantiesMember 2024-01-01 2024-12-31 0001503274 us-gaap:EMEAMember qtrx:ServiceTypeWarrantiesMember 2024-01-01 2024-12-31 0001503274 srt:AsiaPacificMember qtrx:ServiceTypeWarrantiesMember 2024-01-01 2024-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2024-01-01 2024-12-31 0001503274 srt:NorthAmericaMember qtrx:OtherServicesMember 2024-01-01 2024-12-31 0001503274 us-gaap:EMEAMember qtrx:OtherServicesMember 2024-01-01 2024-12-31 0001503274 srt:AsiaPacificMember qtrx:OtherServicesMember 2024-01-01 2024-12-31 0001503274 qtrx:OtherServicesMember 2024-01-01 2024-12-31 0001503274 srt:NorthAmericaMember qtrx:ServiceAndOtherRevenueMember 2024-01-01 2024-12-31 0001503274 us-gaap:EMEAMember qtrx:ServiceAndOtherRevenueMember 2024-01-01 2024-12-31 0001503274 srt:AsiaPacificMember qtrx:ServiceAndOtherRevenueMember 2024-01-01 2024-12-31 0001503274 srt:NorthAmericaMember us-gaap:LicenseAndServiceMember 2024-01-01 2024-12-31 0001503274 us-gaap:EMEAMember us-gaap:LicenseAndServiceMember 2024-01-01 2024-12-31 0001503274 srt:AsiaPacificMember us-gaap:LicenseAndServiceMember 2024-01-01 2024-12-31 0001503274 srt:NorthAmericaMember qtrx:InstrumentProductsMember 2023-01-01 2023-12-31 0001503274 us-gaap:EMEAMember qtrx:InstrumentProductsMember 2023-01-01 2023-12-31 0001503274 srt:AsiaPacificMember qtrx:InstrumentProductsMember 2023-01-01 2023-12-31 0001503274 qtrx:InstrumentProductsMember 2023-01-01 2023-12-31 0001503274 srt:NorthAmericaMember qtrx:ConsumableAndOtherProductsMember 2023-01-01 2023-12-31 0001503274 us-gaap:EMEAMember qtrx:ConsumableAndOtherProductsMember 2023-01-01 2023-12-31 0001503274 srt:AsiaPacificMember qtrx:ConsumableAndOtherProductsMember 2023-01-01 2023-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2023-01-01 2023-12-31 0001503274 srt:NorthAmericaMember us-gaap:ProductMember 2023-01-01 2023-12-31 0001503274 us-gaap:EMEAMember us-gaap:ProductMember 2023-01-01 2023-12-31 0001503274 srt:AsiaPacificMember us-gaap:ProductMember 2023-01-01 2023-12-31 0001503274 srt:NorthAmericaMember qtrx:ResearchServicesMember 2023-01-01 2023-12-31 0001503274 us-gaap:EMEAMember qtrx:ResearchServicesMember 2023-01-01 2023-12-31 0001503274 srt:AsiaPacificMember qtrx:ResearchServicesMember 2023-01-01 2023-12-31 0001503274 qtrx:ResearchServicesMember 2023-01-01 2023-12-31 0001503274 srt:NorthAmericaMember qtrx:ServiceTypeWarrantiesMember 2023-01-01 2023-12-31 0001503274 us-gaap:EMEAMember qtrx:ServiceTypeWarrantiesMember 2023-01-01 2023-12-31 0001503274 srt:AsiaPacificMember qtrx:ServiceTypeWarrantiesMember 2023-01-01 2023-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2023-01-01 2023-12-31 0001503274 srt:NorthAmericaMember qtrx:OtherServicesMember 2023-01-01 2023-12-31 0001503274 us-gaap:EMEAMember qtrx:OtherServicesMember 2023-01-01 2023-12-31 0001503274 srt:AsiaPacificMember qtrx:OtherServicesMember 2023-01-01 2023-12-31 0001503274 qtrx:OtherServicesMember 2023-01-01 2023-12-31 0001503274 srt:NorthAmericaMember qtrx:ServiceAndOtherRevenueMember 2023-01-01 2023-12-31 0001503274 us-gaap:EMEAMember qtrx:ServiceAndOtherRevenueMember 2023-01-01 2023-12-31 0001503274 srt:AsiaPacificMember qtrx:ServiceAndOtherRevenueMember 2023-01-01 2023-12-31 0001503274 srt:NorthAmericaMember us-gaap:LicenseAndServiceMember 2023-01-01 2023-12-31 0001503274 us-gaap:EMEAMember us-gaap:LicenseAndServiceMember 2023-01-01 2023-12-31 0001503274 srt:AsiaPacificMember us-gaap:LicenseAndServiceMember 2023-01-01 2023-12-31 0001503274 srt:NorthAmericaMember qtrx:InstrumentProductsMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember qtrx:InstrumentProductsMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember qtrx:InstrumentProductsMember 2022-01-01 2022-12-31 0001503274 qtrx:InstrumentProductsMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember qtrx:ConsumableAndOtherProductsMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember qtrx:ConsumableAndOtherProductsMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember qtrx:ConsumableAndOtherProductsMember 2022-01-01 2022-12-31 0001503274 qtrx:ConsumableAndOtherProductsMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember us-gaap:ProductMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember us-gaap:ProductMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember us-gaap:ProductMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember qtrx:ResearchServicesMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember qtrx:ResearchServicesMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember qtrx:ResearchServicesMember 2022-01-01 2022-12-31 0001503274 qtrx:ResearchServicesMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember qtrx:ServiceTypeWarrantiesMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember qtrx:ServiceTypeWarrantiesMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember qtrx:ServiceTypeWarrantiesMember 2022-01-01 2022-12-31 0001503274 qtrx:ServiceTypeWarrantiesMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember qtrx:OtherServicesMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember qtrx:OtherServicesMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember qtrx:OtherServicesMember 2022-01-01 2022-12-31 0001503274 qtrx:OtherServicesMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember qtrx:ServiceAndOtherRevenueMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember qtrx:ServiceAndOtherRevenueMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember qtrx:ServiceAndOtherRevenueMember 2022-01-01 2022-12-31 0001503274 srt:NorthAmericaMember us-gaap:LicenseAndServiceMember 2022-01-01 2022-12-31 0001503274 us-gaap:EMEAMember us-gaap:LicenseAndServiceMember 2022-01-01 2022-12-31 0001503274 srt:AsiaPacificMember us-gaap:LicenseAndServiceMember 2022-01-01 2022-12-31 0001503274 2022-05-26 2022-05-26 0001503274 qtrx:UltraDxLimitedCompanyMember us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2023-04-01 2023-06-30 0001503274 qtrx:UltradxLimitedCompanyMember 2024-01-01 2024-12-31 0001503274 qtrx:UltradxLimitedCompanyMember 2023-01-01 2023-12-31 0001503274 qtrx:UltradxLimitedCompanyMember 2022-01-01 2022-12-31 0001503274 qtrx:EliLillyMember qtrx:StatementOfWorksAgreementMember 2022-01-01 2022-03-31 0001503274 qtrx:EliLillyMember qtrx:StatementOfWorksAgreementMember 2024-07-01 2024-09-30 0001503274 qtrx:EliLillyMember qtrx:CollaborationAgreementMember 2024-01-01 2024-12-31 0001503274 qtrx:EliLillyMember qtrx:CollaborationAgreementMember 2023-01-01 2023-12-31 0001503274 qtrx:EliLillyMember qtrx:CollaborationAgreementMember 2022-01-01 2022-12-31 0001503274 2025-01-01 2024-12-31 0001503274 qtrx:UndeliveredLicensesOfIntellectualPropertyMember 2024-12-31 0001503274 qtrx:NationalInstitutesOfHealthMember 2022-09-21 2022-09-21 0001503274 qtrx:NationalInstitutesOfHealthMember 2024-12-31 0001503274 us-gaap:GrantMember qtrx:NationalInstitutesOfHealthMember 2024-01-01 2024-12-31 0001503274 us-gaap:GrantMember qtrx:NationalInstitutesOfHealthMember 2023-01-01 2023-12-31 0001503274 qtrx:NationalInstitutesOfHealthMember 2024-01-01 2024-12-31 0001503274 qtrx:NationalInstitutesOfHealthMember 2023-01-01 2023-12-31 0001503274 qtrx:NationalInstitutesOfHealthMember 2022-01-01 2022-12-31 0001503274 us-gaap:GrantMember qtrx:NationalInstitutesOfHealthMember 2022-01-01 2022-12-31 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2022-03-24 2022-03-24 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2023-01-01 2023-12-31 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2024-01-01 2024-12-31 0001503274 qtrx:AlzheimerSDiseaseDiagnosticFundMember 2022-01-01 2022-12-31 0001503274 us-gaap:GrantMember qtrx:AlzheimerSDiseaseDiagnosticFundMember 2024-01-01 2024-12-31 0001503274 us-gaap:CommercialPaperMember 2024-12-31 0001503274 us-gaap:USTreasurySecuritiesMember 2024-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember 2024-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember 2024-12-31 0001503274 us-gaap:CommercialPaperMember 2023-12-31 0001503274 us-gaap:USTreasurySecuritiesMember 2023-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember 2023-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember 2023-12-31 0001503274 us-gaap:CashAndCashEquivalentsMember 2023-12-31 0001503274 us-gaap:MoneyMarketFundsMember 2024-12-31 0001503274 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2024-12-31 0001503274 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel2Member 2024-12-31 0001503274 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel3Member 2024-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2024-12-31 0001503274 us-gaap:FairValueInputsLevel2Member 2024-12-31 0001503274 us-gaap:FairValueInputsLevel3Member 2024-12-31 0001503274 us-gaap:CommercialPaperMember 2024-12-31 0001503274 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel1Member 2024-12-31 0001503274 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel2Member 2024-12-31 0001503274 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel3Member 2024-12-31 0001503274 us-gaap:USTreasurySecuritiesMember 2024-12-31 0001503274 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel1Member 2024-12-31 0001503274 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel2Member 2024-12-31 0001503274 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel3Member 2024-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember 2024-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember us-gaap:FairValueInputsLevel1Member 2024-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember us-gaap:FairValueInputsLevel2Member 2024-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember us-gaap:FairValueInputsLevel3Member 2024-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember 2024-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember us-gaap:FairValueInputsLevel1Member 2024-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember us-gaap:FairValueInputsLevel2Member 2024-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember us-gaap:FairValueInputsLevel3Member 2024-12-31 0001503274 us-gaap:MoneyMarketFundsMember 2023-12-31 0001503274 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2023-12-31 0001503274 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel3Member 2023-12-31 0001503274 us-gaap:CommercialPaperMember 2023-12-31 0001503274 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel1Member 2023-12-31 0001503274 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel3Member 2023-12-31 0001503274 us-gaap:USTreasurySecuritiesMember 2023-12-31 0001503274 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel1Member 2023-12-31 0001503274 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel3Member 2023-12-31 0001503274 us-gaap:FairValueInputsLevel1Member 2023-12-31 0001503274 us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:FairValueInputsLevel3Member 2023-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember 2023-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember us-gaap:FairValueInputsLevel1Member 2023-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:USGovernmentAgenciesDebtSecuritiesMember us-gaap:FairValueInputsLevel3Member 2023-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember 2023-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember us-gaap:FairValueInputsLevel1Member 2023-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember us-gaap:FairValueInputsLevel2Member 2023-12-31 0001503274 us-gaap:CorporateBondSecuritiesMember us-gaap:FairValueInputsLevel3Member 2023-12-31 0001503274 2022-05-27 2022-05-27 0001503274 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember 2023-12-31 0001503274 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember 2024-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2024-12-31 0001503274 qtrx:LaboratoryAndManufacturingEquipmentMember 2023-12-31 0001503274 us-gaap:FurnitureAndFixturesMember 2023-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2024-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2023-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2024-12-31 0001503274 us-gaap:LeaseholdImprovementsMember 2023-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2024-01-01 2024-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2023-01-01 2023-12-31 0001503274 qtrx:ComputersAndSoftwareMember 2022-01-01 2022-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2017-12-31 0001503274 us-gaap:EmployeeStockOptionMember qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2017-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2024-12-31 0001503274 qtrx:EmployeeDirectorAndConsultant2017EquityIncentivePlanMember 2024-01-01 2024-12-31 0001503274 qtrx:EmployeeStockPurchasePlan2017Member 2019-12-31 0001503274 qtrx:EmployeeStockPurchasePlan2017Member 2024-01-01 2024-12-31 0001503274 qtrx:EmployeeStockPurchasePlan2017Member 2023-01-01 2023-12-31 0001503274 qtrx:EmployeeStockPurchasePlan2017Member 2022-01-01 2022-12-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2024-01-01 2024-12-31 0001503274 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2024-01-01 2024-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2024-01-01 2024-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2023-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2023-01-01 2023-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2024-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2023-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2024-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2023-01-01 2023-12-31 0001503274 us-gaap:RestrictedStockUnitsRSUMember 2022-01-01 2022-12-31 0001503274 qtrx:CostOfProductRevenueMember 2024-01-01 2024-12-31 0001503274 qtrx:CostOfProductRevenueMember 2023-01-01 2023-12-31 0001503274 qtrx:CostOfProductRevenueMember 2022-01-01 2022-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2024-01-01 2024-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2023-01-01 2023-12-31 0001503274 qtrx:CostOfServiceAndOtherRevenueMember 2022-01-01 2022-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2024-01-01 2024-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2023-01-01 2023-12-31 0001503274 us-gaap:ResearchAndDevelopmentExpenseMember 2022-01-01 2022-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2024-01-01 2024-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2023-01-01 2023-12-31 0001503274 us-gaap:GeneralAndAdministrativeExpenseMember 2022-01-01 2022-12-31 0001503274 qtrx:RestrictedStockUnitsAndStockOptionsMember 2024-12-31 0001503274 qtrx:RestrictedStockUnitsAndStockOptionsMember 2024-01-01 2024-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2022-01-01 2022-12-31 0001503274 us-gaap:EmployeeStockOptionMember srt:MinimumMember 2024-01-01 2024-12-31 0001503274 us-gaap:EmployeeStockOptionMember srt:MaximumMember 2024-01-01 2024-12-31 0001503274 us-gaap:EmployeeStockOptionMember srt:MinimumMember 2023-01-01 2023-12-31 0001503274 us-gaap:EmployeeStockOptionMember srt:MaximumMember 2023-01-01 2023-12-31 0001503274 srt:MinimumMember 2022-01-01 2022-12-31 0001503274 srt:MaximumMember 2022-01-01 2022-12-31 0001503274 qtrx:EmployeeStockPurchasePlanAwardsMember 2024-01-01 2024-12-31 0001503274 qtrx:EmployeeStockPurchasePlanAwardsMember 2023-01-01 2023-12-31 0001503274 qtrx:EmployeeStockPurchasePlanAwardsMember 2022-01-01 2022-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2024-01-01 2024-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2023-01-01 2023-12-31 0001503274 us-gaap:EmployeeStockOptionMember 2022-01-01 2022-12-31 0001503274 qtrx:CommonStockAndRSUsMember 2024-01-01 2024-12-31 0001503274 qtrx:CommonStockAndRSUsMember 2023-01-01 2023-12-31 0001503274 qtrx:CommonStockAndRSUsMember 2022-01-01 2022-12-31 0001503274 qtrx:EstimatedEsppPurchasesMember 2024-01-01 2024-12-31 0001503274 qtrx:EstimatedEsppPurchasesMember 2023-01-01 2023-12-31 0001503274 qtrx:EstimatedEsppPurchasesMember 2022-01-01 2022-12-31 0001503274 us-gaap:DomesticCountryMember 2024-12-31 0001503274 qtrx:ThroughTaxYear2037Member us-gaap:DomesticCountryMember 2017-12-31 0001503274 us-gaap:DomesticCountryMember 2017-12-31 0001503274 qtrx:ThroughTaxYear2043Member us-gaap:DomesticCountryMember 2024-12-31 0001503274 qtrx:ThroughTaxYear2042Member us-gaap:DomesticCountryMember 2024-12-31 0001503274 us-gaap:StateAndLocalJurisdictionMember 2024-12-31 0001503274 qtrx:ThroughTaxYear2042Member us-gaap:StateAndLocalJurisdictionMember 2024-12-31 0001503274 qtrx:ThroughTaxYear2038Member us-gaap:StateAndLocalJurisdictionMember 2024-12-31 0001503274 qtrx:KnowHowMember 2024-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2024-12-31 0001503274 us-gaap:CustomerRelationshipsMember srt:MinimumMember 2024-12-31 0001503274 us-gaap:CustomerRelationshipsMember srt:MaximumMember 2024-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2024-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2024-12-31 0001503274 us-gaap:TradeNamesMember 2024-12-31 0001503274 qtrx:KnowHowMember 2023-12-31 0001503274 us-gaap:DevelopedTechnologyRightsMember 2023-12-31 0001503274 us-gaap:CustomerRelationshipsMember srt:MinimumMember 2023-12-31 0001503274 us-gaap:CustomerRelationshipsMember srt:MaximumMember 2023-12-31 0001503274 us-gaap:CustomerRelationshipsMember 2023-12-31 0001503274 us-gaap:NoncompeteAgreementsMember 2023-12-31 0001503274 us-gaap:TradeNamesMember 2023-12-31 0001503274 2022-07-01 2022-09-30 0001503274 qtrx:RestructuringPlanQ32022Member 2024-12-31 0001503274 qtrx:RestructuringPlanQ32022Member 2023-12-31 0001503274 qtrx:HarvardUniversityMember qtrx:LicenseAgreementsMember 2022-08-01 2022-08-31 0001503274 qtrx:HarvardUniversityMember qtrx:LicenseAgreementsMember 2023-01-01 2023-12-31 0001503274 qtrx:HarvardUniversityMember qtrx:LicenseAgreementsMember 2024-01-01 2024-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2024-01-01 2024-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2023-01-01 2023-12-31 0001503274 qtrx:TuftsUniversityMember qtrx:LicenseAgreementsMember 2022-01-01 2022-12-31 0001503274 qtrx:HarvardUniversityMember 2024-01-01 2024-12-31 0001503274 qtrx:HarvardUniversityMember 2023-01-01 2023-12-31 0001503274 qtrx:HarvardUniversityMember 2022-01-01 2022-12-31 0001503274 qtrx:HarvardUniversityMember 2024-12-31 0001503274 qtrx:HarvardUniversityMember 2023-12-31 0001503274 qtrx:UltradxLimitedCompanyMember 2024-12-31 0001503274 qtrx:UltradxLimitedCompanyMember 2023-12-31 0001503274 qtrx:ReportableSegmentMember 2024-01-01 2024-12-31 0001503274 qtrx:ReportableSegmentMember 2023-01-01 2023-12-31 0001503274 qtrx:ReportableSegmentMember 2022-01-01 2022-12-31 0001503274 us-gaap:GrantMember qtrx:ReportableSegmentMember 2024-01-01 2024-12-31 0001503274 us-gaap:GrantMember qtrx:ReportableSegmentMember 2023-01-01 2023-12-31 0001503274 us-gaap:GrantMember qtrx:ReportableSegmentMember 2022-01-01 2022-12-31 0001503274 us-gaap:OtherRestructuringMember 2022-01-01 2022-12-31 0001503274 us-gaap:OtherRestructuringMember us-gaap:GoodwillMember 2022-01-01 2022-12-31 0001503274 us-gaap:OtherRestructuringMember qtrx:RouAssetsAndRelatedLeaseholdImprovementsMember 2022-01-01 2022-12-31 0001503274 us-gaap:OtherRestructuringMember us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2022-01-01 2022-12-31 0001503274 us-gaap:OtherRestructuringMember qtrx:RouAssetsAndRelatedLeaseholdImprovementsMember 2023-01-01 2023-12-31 0001503274 qtrx:UltradxLimitedCompanyMember us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2023-04-01 2023-06-30 0001503274 qtrx:UltradxLimitedCompanyMember 2023-04-01 2023-06-30 0001503274 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2024-12-31 0001503274 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2023-12-31 0001503274 us-gaap:SubsequentEventMember qtrx:AkoyaBiosciencesInc.Member 2025-01-09 0001503274 us-gaap:SubsequentEventMember 2025-01-09 0001503274 qtrx:AkoyaBiosciencesInc.Member us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember 2025-01-09 0001503274 qtrx:EmissionInc.Member us-gaap:SubsequentEventMember 2025-01-08 2025-01-08 0001503274 qtrx:EmissionInc.Member us-gaap:SubsequentEventMember 2025-01-08 0001503274 us-gaap:CallOptionMember us-gaap:SubsequentEventMember 2025-01-08 0001503274 qtrx:AkoyaBiosciencesInc.Member us-gaap:SubsequentEventMember 2025-01-09 +Table of Cont ents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +______________________________________________ +FORM 10-K +______________________________________________ +(Mark One) +x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2024 +OR +o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission file number: 001-38319 +_________________________________________________________________ +QUANTERIX CORPORATION +(Exact name of registrant as specified in its charter) +_________________________________________________________________ +Delaware +(State or other jurisdiction of +incorporation or organization) +20-8957988 +(I.R.S. Employer Identification No.) +900 Middlesex Turnpike , Billerica , MA +(Address of principal executive offices) +01821 +(Zip Code) +Registrant’s telephone number, including area code: ( 617 ) 301-9400 +Securities registered pursuant to Section 12(b) of the Exchange Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, $0.001 par value per share QTRX The Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Exchange Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large Accelerated filer +o +Accelerated filer +x +Non-accelerated filer o Smaller reporting company o +Emerging growth company o +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x +As of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2024), the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last reported sales price for the registrant’s common stock, par value $0.001 per share, on The Nasdaq Global Market on such date, was approximately $ 477 million. +As of March 11, 2025, the registrant had 38,776,208 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s proxy statement for its 2025 Annual Stockholders’ Meeting, which the registrant intends to file with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2024, are incorporated by reference into Part III of this Annual Report on Form 10-K. +Table of Cont ents +QUANTERIX CORPORATION +INDEX TO FORM 10-K +Note Regarding Forward-Looking Statements +Page +PART I +Item 1. +Business +1 +Item 1A. +Risk Factors +18 +Item 1B. +Unresolved Staff Comments +44 +Item 1C. +Cybersecurity +44 +Item 2. +Properties +45 +Item 3. +Legal Proceedings +45 +Item 4. +Mine Safety Disclosures +45 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +46 +Item 6. +Reserved +47 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +48 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +60 +Item 8. +Financial Statements and Supplementary Data +61 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +61 +Item 9A. +Controls and Procedures +62 +Item 9B. +Other Information +67 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +67 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +68 +Item 11. +Executive Compensation +68 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +68 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +68 +Item 14. +Principal Accountant Fees and Services +68 +PART IV +Item 15. +Exhibits and Financial Statement Schedules +69 +Item 16. +Form 10-K Summary +72 +Signatures +73 +Consolidated Financial Statements +F- 1 +i +Table of Cont ents +Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “it,” “us,” and “our” in this Annual Report on Form 10 K refer to Quanterix Corporation and its consolidated subsidiaries. +Note Regarding Forward-Looking Statements +This Annual Report on Form 10-K contains forward-looking statements (within the meaning of the U.S. Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, forward-looking statements can be identified by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about: +• our planned acquisition of Akoya Biosciences, Inc. and associated risks, including that we may not complete the acquisition, that the market price of our common stock may be negatively affected by the acquisition, that our operating results and financial position and, following the completion of the acquisition, the combined company’s business, operating results and financial position, could be adversely affected by uncertainty and disruptions related to the transaction and substantial costs we expect to incur related to the transaction and integration, and that we may fail to realize the anticipated benefits and synergies of the acquisition; +• that we may fail to realize the anticipated benefits and synergies of our recent acquisition of Emission, Inc.; +• the commercialization and adoption of our existing products and services and the success of our new product and service offerings; +• our estimates regarding expenses, future revenues, capital requirements, and our needs for additional financing; +• risks related to the restatement of our Consolidated Financial Statements, as previously reported in our amended annual report on Form 10-K/A for the year ended December 31, 2023 and amended quarterly reports on Form 10-Q/A for certain quarterly periods (collectively, the “Amended Filings”), including risks of increased costs and the increased possibility of legal proceedings and regulatory inquiries, sanctions, or investigation; +• our ability to maintain effective internal control over financial reporting and disclosure controls and procedures, including our ability to remediate existing material weaknesses in our internal control over financial reporting and the timing of any such remediation, as well as to reestablish effective disclosure controls and procedures at a reasonable assurance level; +• the ability of our Simoa technology’s sensitivity to improve existing diagnostics and to enable the development of new diagnostic tests and tools; +• the potential of our Simoa technology in the field of screening/diagnostic tests linked to therapeutic drugs and adoption by healthcare professionals; +• the impact of our Simoa technology on proteomic research; +• our ability to realize the intended benefits of our assay redevelopment program; +• our ability to retain and expand our customer base and achieve sufficient market acceptance of our products; +• the anticipated timing for launch of, and features of, our next-generation instrument, Simoa ONE; +• the ability of our contract manufacturers and suppliers to reliably and consistently manufacture and supply our Simoa instruments; +• the usefulness of the data generated by our Simoa technology in the life science research and diagnostics fields; +ii +Table of Cont ents +• the impact of changes in U.S. government policies, including potential impacts of tariffs and on federal research funding; +• our ability to successfully penetrate the diagnostics market; and +• our future financial performance. +These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those further described in the section titled “Part I, Item 1A, Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. +Readers should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to new information, actual results, or to changes in our expectations, except as required by law. +Readers should read this Annual Report on Form 10-K and any documents referenced herein that we have filed with the Securities and Exchange Commission (“SEC”) as exhibits to this Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect. +This Annual Report on Form 10-K includes statistical and other industry, and market data that we obtained from industry publications and research, surveys, and studies conducted by third parties. Industry publications and third-party research, surveys, and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Such data involves a number of assumptions and limitations and contains projections, and estimates of the future performance of the markets in which we operate and intend to operate that are subject to a high degree of uncertainty. We caution not to give undue weight to such projections, assumptions and estimates. +Service Marks, Trademarks, and Trade Names +“Quanterix,” “Simoa,” “Simoa HD-X,” “Simoa HD-1,” “Simoa ONE,” “SR-X,” “SP-X”, “HD-X”, “LucentAD,” “Lucent Diagnostics,” and our logo are our trademarks. All other service marks, trademarks, and trade names appearing in this Annual Report on Form 10-K are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us, by these other companies. +iii +Table of Cont ents +PART I +ITEM 1. BUSINESS +Overview +We are a life sciences company that develops and commercializes next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “ Simoa ” detection technology and enable customers to reliably detect protein biomarkers at ultra-low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies. The ability of our Simoa platforms to detect proteins in the femtomolar range enables the development of novel therapies and diagnostics and has the potential to identify early-stage disease markers before symptoms appear to facilitate a paradigm shift in healthcare from an emphasis on later-stage treatment to a focus on earlier detection, monitoring, prognosis, and, ultimately, prevention. Our Simoa platforms have achieved significant commercial adoption with an installed base of over 1,000 instruments, and scientific validation with citations in more than 3,200 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology and immunology, and inflammation. +We sell our proprietary instruments and related consumables worldwide to research laboratories, contract research organizations (“CROs”), academic institutions and bio-pharmaceutical companies. In addition, we provide assay development and sample testing services, including four Laboratory Developed Tests (“LDT”), using our proprietary technology through our Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified Accelerator Laboratory (the “Accelerator Laboratory”) located in Billerica, Massachusetts. +Recent Developments +Acquisition of Emission, Inc. +On January 8, 2025, we acquired all of the issued and outstanding shares of capital stock of Emission, Inc. (“Emission”) for an upfront payment of $10.0 million, with an additional $10.0 million payable upon completion of certain technical milestones. Additionally, the shareholders of Emission (collectively, the “Emission Shareholders”) may receive up to an additional $50.0 million in earnout payments through December 31, 2029, contingent upon the achievement of certain performance milestones. Emission is based in Georgetown, Texas and manufactures large-scale, highly-uniform dye-encapsulating magnetic beads designed for low and mid-plex assays and a mid-plex platform that reads its proprietary beads. In connection with the closing, the parties entered into a call option agreement (the “Option Agreement”), pursuant to which the Emission Shareholders have the right to repurchase all of the outstanding capital stock of Emission for $10.0 million after five years if Emission’s revenues do not exceed $5.0 million in any one year during such five-year period. If the Emission Shareholders exercise the right to repurchase Emission under the Option Agreement and consummate the repurchase, we will retain a perpetual, fully-paid, irrevocable license to all Emission intellectual property required to continue to manufacture and commercialize our products. The acquisition of Emission allows us to secure the supply of highly controlled beads for use in our next generation Simoa ONE instrument that we expect to launch by the end of 2025. It also allows us to develop a new multi-plex segment targeting third-party OEM customers for these beads, which we have branded as Nova Beads. +Agreement to Acquire Akoya Biosciences, Inc. +On January 9, 2025, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire Akoya Biosciences, Inc. (“Akoya”), a life sciences technology company delivering spatial biology solutions through the power of spatial phenotyping. Spatial phenotyping refers to a rapidly evolving technology that enables academic and biopharma scientists to detect and map the distribution of cell types and biomarkers across whole tissue samples at single-cell resolution, enabling advancements in their understanding of disease progression and patient response to therapy. Akoya commercializes proprietary instrument platforms, reagents, software, and services that offer end-to-end solutions to perform tissue analysis and spatial phenotyping from discovery through translational and clinical research and diagnostics. +Pursuant to the Merger Agreement, a newly formed, wholly owned subsidiary of Quanterix will merge with and into Akoya, with Akoya continuing as the surviving corporation and becoming a wholly owned subsidiary of Quanterix (the “Merger”). Upon completion of the Merger, each issued and outstanding share of common stock of Akoya will be converted into 0.318 of a share of our common stock. The closing of the Merger is subject to a number of conditions, +1 +Table of Cont ents +including: (i) approval of the issuance of shares of our common stock in the Merger by our stockholders; (ii) approval of the Merger by Akoya stockholders; (iii) the effectiveness of the registration statement on Form S-4 filed with the SEC in connection with the Merger; (iv) the absence of any order issued or entered, or any law enacted or promulgated having the effect of restraining, enjoining, making illegal or otherwise prohibiting the consummation of the Merger; (v) our submission to Nasdaq of a notification of shares of our common stock to be issued in connection with the Merger; (vi) performance by each party of its respective obligations under the Merger Agreement; and (vii) the absence of a material adverse effect with respect to each of Akoya and us. Subject to fulfillment or waiver of the closing conditions, we expect that the Merger will close in the second quarter of 2025. +We and Akoya have also agreed to use our respective reasonable best efforts to cooperate in good faith to enter into one or more agreements pursuant to which we would provide Akoya with bridge financing. Any such financing would be in the form of subordinated convertible note(s) in an aggregate principal amount not to exceed $30.0 million, subject to Akoya having obtained any required consents and satisfied any other conditions under Akoya’s existing credit facility. As of the date of filing of this annual report, we are negotiating the potential terms of such financing. +Industry Background +Proteins are versatile macromolecules that serve critical functions in nearly all biological processes. Proteins are analytes that are highly relevant physiologically, providing real-time pictures of disease, and researchers and clinicians rely extensively on protein biomarkers for use in research and as clinical and diagnostic tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. +Enzyme-linked immunosorbent assay ( “ ELISA ” ) technology has been the most widely used method of sensitive detection of proteins for more than 50 years. In simple terms, ELISA involves using a plate coated with an antibody that binds to the target molecule. If the target is present in the sample, it attaches to the plate via the antibody. Then, a second molecule, often an enzyme-linked antibody, is added, binding to the target. The enzyme produces a detectable signal (like fluorescence or a color change) when a specific substrate is added, indicating the presence and quantity of the target molecule in the sample. Although ELISA is widely used in medical diagnostics and research, it has very significant limitations, including limited sensitivity and narrow dynamic range (i.e., the range of concentration of proteins being detected). Efforts to increase the sensitivity of conventional ELISA have had limited success due to procedural complexity and length. +Our Simoa Technology +Our Simoa bead-based and planar array technologies are based on traditional ELISA technology but significantly advance conventional ELISA technology and are capable of substantially greater protein detection sensitivity. We believe that our Simoa platforms are among the most sensitive commercially available multiplex protein detection platforms. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA. However, unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells. In traditional analog ELISA measurements, the detected signal increases in intensity as the concentration of a sample increases. In Simoa bead-based digital technology measurements, however, the detected signal relies on a binary signal/no signal readout, enabling single molecule detection, and analytical sensitivity in the femtomolar range compared with nanomolar and picomolar levels of detection in conventional ELISA. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA. However, unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +2 +Table of Cont ents +Our Strategy +Our commercial strategy is based on three core growth vectors: (i) G row menu; (ii) E xpand into adjacencies; and (iii) T ranslate into diagnostics. Our plans to achieve this GET strategy include: +• Growing through rapid internal menu expansion. In August 2022, we initiated an assay redevelopment program with the objective of improving our ability to manufacture and deliver high-quality assays at scale. This program was substantially completed in the fourth quarter of 2023, and in 2024, we launched 20 new assays that were developed using improved protocols, manufacturing efficiencies and reagent improvements to provide more consistent results and improved lot-to-lot consistency. Following the assay redevelopment program, assay development time has been reduced from more than 18 months to less than six months. +• Continuing to grow our leadership position in the measurement of neuro-based biomarkers . We intend to leverage the growing importance of neurological biomarkers to advance the development of therapeutics and diagnostics for neurodegenerative conditions, including Alzheimer’s disease. The importance of neurological biomarkers, such as neurofilament light chain ( “ NfL ” ), p-Tau 181, p-Tau 217 and glial fibrillary acidic protein ( “ GFAP ” ), has increased significantly in recent years, and our ultra-sensitive Simoa platforms have allowed research of neurological disorders, previously limited primarily to cerebrospinal fluid ( “ CSF ” ), to expand significantly. +• Growing menu through strategic acquisitions. We intend to strategically acquire businesses and technologies to grow our operations and strengthen our market position, as evidenced by our recent acquisition of Emission and our proposed acquisition of Akoya. We expect that acquisitions may continue to be an important part of our strategy to increase scale, and we intend to strategically pursue acquisitions to expand product menu, add technologies, and/or provide access to complementary or strategic growth areas. +• Expanding further into indications beyond neurology . Although we intend to continue to extend our leadership position in measuring neuro-based biomarkers, the ability of our Simoa technology to detect and quantify low abundance proteins with exquisite sensitivity is a distinct advantage in detecting disease earlier in other indications, in particular oncology and immunology. There are over 950 scientific publications that reference Simoa technologies in non-neurology indications. We have announced our intent to launch Simoa ONE, a new instrument, by the end of 2025. Simoa ONE is expected to enable up to a 10-fold increase in sensitivity over current Simoa platforms and to allow a substantial increase in plexing and specificity. The Simoa ONE is also expected to have a simple and efficient workflow. We expect these attributes to be particularly attractive to researchers and clinicians in oncology and immunology. In addition, many cancers begin in tissue before they move and migrate to blood. With the proposed acquisition of Akoya, we believe we will be able to combine Akoya’s biomarker detection capability in tissue with our ultra-sensitive biomarker detection in blood to drive development of faster, better testing tools for monitoring and detection in oncology and immunology. +• Expanding our presence in diagnostics . Our ultra-sensitive Simoa platforms have enabled the development of a new category of less-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive, and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. We currently offer four neurological LDTs through our Accelerator Laboratory. +• Helping to build the global infrastructure for Alzheimer’s disease testing and diagnosis . There are over 55 million people living with Alzheimer’s disease, a number that is expected to double by 2050. We believe our ultrasensitive technology can enable earlier detection. We are helping to build the global infrastructure for Alzheimer’s testing in two ways. First, we are enabling partners by providing Simoa technology to a number of the top prescribing hospital networks and reference labs globally. We entered into 12 of these partnerships in 2024 and intend to continue to grow this network in 2025. Second, through our Lucent Diagnostics brand, we are offering best-in-class diagnostic testing through our LucentAD Complete test, which was launched in November 2024. +3 +Table of Cont ents +Our Products and Services +Instruments +We currently offer the following three Simoa instruments, which we believe are among the most sensitive multiplex protein detection platforms commercially available today: +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument, which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. By the end of 2024, approximately 84% of the HD installed base were HD-X instruments. +SR-X +We commercially launched our SR-X instrument in December 2017 as a compact benchtop instrument with a lower price point, more flexible assay preparation, and a wider range of applications. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X. In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instrument using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon Biosystems (Aushon), which we acquired in 2018, for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide sensitivity similar to that found in our Simoa bead-based platform. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 65 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 45 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to the assays we have developed, the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes and disposable tips. +4 +Table of Cont ents +Nova Beads +In January 2025, we acquired Emission, a manufacturer of large-scale, highly-uniform dye-encapsulating magnetic beads designed for low and mid-plex assays. These proprietary beads are engineered for consistency, scalability, and reliability. This acquisition allows us to secure the supply of these highly controlled beads for use in our next generation Simoa ONE instrument. It also allows us to develop a new multi-plex segment targeting third-party OEM customers for these beads, which we have branded as Nova Beads. +NfL Antibodies and NfL ELISA Kits +In August 2019, we acquired UmanDiagnostics AB ( “ Uman ” ), a company located in Umeå, Sweden, that commercializes proprietary NfL antibodies and NfL ELISA kits. Uman’s NfL antibodies are used by researchers and biopharmaceutical and diagnostics companies to detect NfL to advance the development of therapeutics and diagnostics for certain neurodegenerative conditions. Since we commercially launched the first assay that could reliably measure NfL in blood using Uman’s antibodies and our Simoa technology in 2017, NfL has seen dramatic growth as a neurological biomarker. Through Uman, we sell proprietary NfL capture and detection antibodies, as well as two NfL ELISA kits for CSF, one of which is CE-certified in Europe, and one RUO NfL ELISA kit for serum. +Services +Through our CLIA-certified Accelerator Laboratory, we provide customers a contract research option. The Accelerator Laboratory supports multiple projects and services, including: +• Sample Testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +• Homebrew Assay Development. Utilizing proprietary or commercially available reagents in combination with our homebrew assay kits, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization to ultimately deliver the highest level of performance. +• Custom Assay Development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to kits for assays not yet commercially available on the Simoa platform. +• LDT Testing . We currently offer the following four LDTs through our Accelerator Laboratory: +1. LucentAD p-Tau 181 : an LDT to quantitatively measure p-Tau 181 in plasma as an aid in diagnosis of Alzheimer’s disease. +2. Simoa NfL LDT : an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +3. LucentAD p-Tau 217 : an LDT to quantitatively measure p-Tau 217 in plasma to aid in diagnosis of Alzheimer’s disease. +4. LucentAD Complete : a multi-marker (p-Tau 217, amyloid β 42 ( “ Aβ42 ” ), amyloid β 40 ( “ Aβ40 ” ), NfL, and GFAP) algorithmic LDT for high accuracy plasma detection of amyloid pathology to aid in diagnostic evaluation of patients with cognitive issues who may have Alzheimer’s disease. By using a proprietary algorithm to score five AD-related biomarkers, LucentAD Complete provides significantly better amyloid classification compared to single-marker tests alone and has lowered the intermediate zone of a single-marker test from 30% to 10%, while maintaining high sensitivity, specificity and accuracy. +5 +Table of Cont ents +• Lucent Diagnostics. In July 2023, we launched Lucent Diagnostics, a neurology healthcare provider-facing portal, with testing services initially focused on Alzheimer’s disease. To support a streamlined provider workflow, Lucent Diagnostics includes a web portal where healthcare providers can order sample collection materials, order a test, track the status of a test and retrieve the test report. The process for testing involves a healthcare provider drawing a blood sample from an individual and shipping the sample to our Accelerator Laboratory to analyze the sample and communicate the result back to the provider. Healthcare providers can currently order the following tests through Lucent Diagnostics: LucentAD p-Tau 181, LucentAD p-Tau 217 and LucentAD Complete . +Extended Warranty and Service Contracts +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continue to seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We intend to expand our assay menu to extend the scope of applications for our platform to biomarkers of significant interest to the scientific community. +Simoa ONE +Using breakthrough technology licensed from the laboratory of our co-founder, David Walt, we are developing Simoa ONE, a new instrument that we expect to launch by the end of 2025. Simoa ONE is expected to enable up to a 10-fold increase in sensitivity over current Simoa platforms. The instrument is based on optically encoded barcodes and proprietary beads developed by Emission to allow a substantial increase in plexing and specificity of Simoa measurements. Simoa ONE is based on simple instrumentation and assay workflow to efficiently deliver high throughput, quantitative results. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses, including neurology, oncology and immunology, as well as inflammation . +Neurology +The ability of Simoa technology to detect neurological biomarkers in blood at ultra-low levels, combined with our multiplexing capability, has significantly advanced neurology research, drug development, and diagnostics test development. Prior to the launch of our p-Tau 181 LDT for clinical use in July 2022, the brain was the only organ in the body for which there was not a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either brain imaging or a spinal tap to collect CSF. The sensitivity of Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood brain barrier and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of many of these neural biomarkers in the blood can be so low that they are difficult to detect by conventional, analog immunoassay technologies. Furthermore, neurological pathophysiology is complex, and it has become clear that no single biomarker is sufficient to serve as comprehensive indicator of these processes. For this reason, the capability of Simoa to multiplex blood-based tests for multiple neural biomarkers into a single test has emerged as useful to facilitate biomarker profiling of neurological disorders. This capability has materially contributed to rapid research progress, notably in the Alzheimer’s disease landscape. +Developments on the Alzheimer’s Disease Landscape +The FDA approval of Leqembi and Kisunla as disease-modifying treatments for Alzheimer’s disease has underscored an urgent need for non-invasive widely available blood tests to facilitate diagnosis in the early stages of the +6 +Table of Cont ents +disease to identify patients for treatment when therapeutic intervention is most likely to provide clinical benefit. Currently established biomarker- based approaches to diagnostic workup for Alzheimer’s include positron emission tomography ( “ PET ” ) imaging and CSF biomarkers for amyloid and phosphorylated tau, both of which are invasive, expensive, and may not be widely available. A Rand Corporation study on the readiness of the U.S. health care system infrastructure for an Alzheimer’s treatment highlighted a dire situation of unpreparedness and where key bottlenecks lie. The model assumed annual mild cognitive impairment screening for adults leading to 7.5 million referrals to a diagnostic phase in a secondary specialist setting, which is well beyond the country’s capacity. Of these referrals, 6.7 million were assumed to require CSF biomarker or amyloid PET testing for biomarker- based diagnosis of Alzheimer’s disease at an estimated cost of $20.1 billion. Of the amyloid positive subjects, 80% (2.4 million) were assumed to fit the criteria for therapeutic intervention. Assessing the effectiveness of an anti-amyloid Alzheimer’s therapy by testing for amyloid plaque reduction over the course of treatment would potentially involve serial testing of each subject with CSF analysis or PET imaging at a significant cost with currently available detection modalities. The availability of a simple blood test for amyloid positivity has the potential to alleviate bottleneck and cost burdens and facilitate the accessibility of Alzheimer’s therapeutic intervention for patients. We believe our Simoa technology is well-suited to meet this critical need. +High Accuracy Simoa p-Tau 217 Test +The Alzheimer’s field has converged to a consensus on the most desirable single blood-based biomarker at present: plasma p-Tau 217. This biomarker has been shown to out-perform all the other plasma biomarker candidates for Alzheimer’s diagnostics and disease progression monitoring. The biomarker also has the distinction of being low abundance in blood and difficult to measure by conventional means. We provide multiple assays for robustly measuring p-Tau 217 in plasma and helping to establish the clinical evidence through a body of peer reviewed publications demonstrating the superiority of this biomarker relative to other biomarkers. While p-Tau 217 has demonstrated superiority over other plasma neural biomarkers, the strength of the data across a number of other biomarker candidates (p-Tau 181, amyloid β 42/40 ratio, GFAP, NfL) is such that all these biomarkers were included in the recently published “ Revised criteria for diagnosis and staging of Alzheimer’s disease: Alzheimer’s Association Workgroup. ” However, only p-Tau 217 was recommended as being sufficiently accurate as a single biomarker to enable a diagnostic use case. We have launched the LucentAD p-Tau217 LDT for clinical use. This test was robustly validated across two independent cohorts (873 samples), and the diagnostic accuracy of the test was shown to meet or exceed the recommendation of the Alzheimer’s Association Workgroup (≥90% accuracy, sensitivity and specificity ≥90%). Thus, the LucentAD p-Tau 217 test meets or exceeds the diagnostic performance criteria for a plasma-based test for Alzheimer’s disease. +Simoa Multi-Marker Algorithmic Test +Leveraging both the multiplexing and high sensitivity capability of Simoa, we have developed a multi-marker algorithmic test that combines five biomarkers (p-Tau 217, Aβ42, Aβ 40, NfL, and GFAP) and uses a proprietary algorithm for high accuracy plasma detection of amyloid pathology. Researchers have extensively studied these biomarkers to advance the understanding of how blood-based biomarkers reflect different aspects of Alzheimer’s pathology, to both further the basic knowledge of the disease pathophysiology, and to explore the potential of these biomarkers to predict disease state, severity, and progression. This work has resulted in a large body of published evidence that has advanced the understanding of the disease and facilitated drug development through the use of these biomarkers as exploratory indicators of drug target engagement. From a diagnostic test standpoint, a central concept has emerged: since these biomarkers reflect different aspects of Alzheimer’s pathology, combining their signals through logistic regression can enhance overall test accuracy. This information, together with clinical evaluations and cognitive testing, can help determine whether cognitive symptoms are the result of Alzheimer’s disease, or another type of dementia. We have partnered with the Alzheimer’s Drug Discovery Foundation to develop and clinically implement a multi-marker blood test to aid Alzheimer’s diagnosis and differential diagnosis of patients presenting with cognitive symptoms of uncertain origin. Validation data for the clinical performance of the test for amyloid detection was presented at the Clinical Trials on Alzheimer’s Disease annual meeting late 2024. The data across over 1,000 patients showed that the test delivered best-in-class performance for amyloid detection accuracy as well as reduced uncertainty in borderline cases. We launched this multi-marker algorithmic test as an LDT in November 2024 under the brand name LucentAD Complete. The test has also received Breakthrough Device designation by the FDA, and clinical trials to support a regulatory filing are in progress. +Other Neurological Conditions +Our ultra-sensitive Simoa technology has also been instrumental in advancing research into other neurological conditions, such as multiple sclerosis and traumatic brain injury ( “ TBI ” ). Evidence of the potential clinical utility of NfL as a biomarker in multiple sclerosis has progressed rapidly, and Simoa’s role in that progression has been foundational. In +7 +Table of Cont ents +April 2022, the FDA granted our Simoa NfL serum test Breakthrough Device designation as a prognostic aid in assessing the risk of disease activity in patients diagnosed with relapsing-remitting multiple sclerosis ( “ RRMS ” ). The test has shown promise to be used in conjunction with clinical, imaging and laboratory findings as an aid in identifying RRMS patients who are at lower or higher risk for relapse within four years. We believe this prognostic information could be clinically useful in tailoring the therapeutic approach to more effectively treat the disease. +Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as NfL, tau, GFAP and UCH-L1, to more adequately aid in diagnosis of TBIs and overall brain health. Researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy, which currently can only be diagnosed after death via a brain autopsy. +Additional assays for blood-based biomarkers with potential utility in Alzheimer’s research and diagnostics have either been launched or are in development. These include brain-derived Tau, p-Tau 231, p-Tau 212, sTREM2, and PSD95. +Oncology and Immunology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability has the potential to enable earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of health-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the health-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a number of tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma ( “ IFN-gamma ” ) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring health-oncology drugs and protocols. +We believe that our Simoa ONE instrument, which is expected to be launched by the end of 2025, with its increased sensitivity, increased plexing ability and simple and efficient workflow will be well suited for oncology and immunology indications. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease +8 +Table of Cont ents +response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional countries, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, we sell Uman’s NfL antibodies and NfL ELISA kits directly and in conjunction with a distributor worldwide. +As of December 31, 2024, we had 136 employees in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We expect we will expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China and other Asia-Pacific region countries where significant new opportunities exist. +Manufacturing and Supply +We outsource the manufacturing of our Simoa bead-based instruments to third-party manufacturers, and we manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is supplied by STRATEC, based in Birkenfeld, Germany, and is manufactured and shipped from its Birkenfeld and Beringen, Switzerland facilities. The SR-X is supplied by Paramit, based in Morgan Hill, California, and is shipped to our global customers by Paramit. See the section titled “ — Key Agreements ” for a description of our agreements with STRATEC and Paramit. Installation of, and training on, our instruments is provided by our employees where we conduct direct sales, and by distributors where sales are conducted through distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we could experience additional costs, delays and difficulties in doing so, and our business could be harmed. +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component that is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply SP-X instruments on a timely basis. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Our bead-based assays include all components required to run an enzyme-based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. As part of our assay redevelopment program, we have increased the shelf life of our bead-based assays to 18 months and believe we are able to mitigate this supplier risk through inventory control. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables GmbH, a subsidiary of STRATEC. We believe that this agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC, and the disposable tips used in our bead-based platform are commercially available. +9 +Table of Cont ents +We assemble our 96-well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +Nova Beads +Through our wholly owned subsidiary, Emission, based in Georgetown, Texas, we manufacture these proprietary, next generation monodisperse microspheres (i.e. beads) entirely in-house from readily available materials, which consist of monomers, stabilizers, and surfactants. In the event current suppliers of raw materials are unable to fill orders, we believe there are many alternative suppliers as all the materials are widely commercially available. +NfL antibodies and NfL ELISA Kits +The storage of Uman’s proprietary NfL antibody producing hybridomas, as well as the cultivation and purification of the antibodies, is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s NfL ELISA kits. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s NfL ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. The kit components include buffers (sample diluents and wash solutions), ELISA 96-well plates coated with a capture antibody, detector antibodies, streptavidine conjugates, substrates (TMB) and stop reagents. The final ELISA kit products are subject to quality control procedures, which include testing of human CSF or human serum quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months (NF-light ELISA (CSF)) or 13 months (NF-light Serum ELISA). +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC (the “STRATEC Supply Agreement”), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase our common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the “Paramit Agreement”) with Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts for the SR-X instrument. Paramit has no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess +10 +Table of Cont ents +pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement had an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for proteomics discovery and clinical research applications. For example, companies such as Bio-Techne, MesoScale Discovery, Gyros, SEER, MilliporeSigma, Bio-Rad Laboratories, Thermo Fisher Scientific, Alamar, C2N Diagnostics, and others, have products for protein measurements in biofluids that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as LabCorp, Covance, Q2 Solutions, Rules Based Medicine, Monogram Biosciences, Frontage, PPD Laboratories, and others, some of which are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics, we expect to compete with companies such as Siemens, Abbott, Roche, Fujirebio, DiaSorin, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for life science research and diagnostics. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. we believe the principal competitive factors for us include: +• sensitivity; +• cost of instruments and consumables; +• reputation among customers and key opinion leaders; +• innovation in product offerings; +• accuracy and reproducibility of results; and +• customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations, and partnerships with key opinion leaders. +Intellectual Property +Our success depends in part on our ability to obtain and maintain intellectual property protection for our products and technology. We use a variety of intellectual property protection strategies, including patents, trademarks, trade secrets, and other methods of protecting proprietary information. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with +11 +Table of Cont ents +specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature, seeking to protect not only technology we currently practice but also alternative, related embodiments. +As of December 31, 2024, we owned or exclusively licensed more than 100 issued patents and patent applications worldwide. Our owned or exclusively licensed patents and patent applications, if issued, are expected to expire between 2025 and 2042, in each case without taking into account any possible patent term adjustments or extensions and assuming payment of all appropriate maintenance, renewal, annuity or other governmental fees. +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts, in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board. Professor Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating ultra-sensitive detection. We have exclusively licensed from Tufts the relevant patent rights related to these technologies (see the section titled “— License Agreement with Tufts University ” below). +In addition to our reliance on patent protection for our inventions, products and technologies, we also rely on trade secrets, know-how, confidentiality agreements, and continuing technological innovation to develop and maintain our competitive position. For example, some elements of our manufacturing processes, analytics techniques and processes, as well as computational-biological algorithms, and related processes and software, are based on unpatented trade secrets and know-how that are not publicly disclosed. Although we take steps to protect our proprietary information and trade secrets, including through contractual means with our employees, advisors and consultants, these agreements may be breached or may be unenforceable and we may not have adequate remedies. In addition, third parties may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. As a result, we may not be able to meaningfully protect our intellectual property. For further discussion of the risks relating to our intellectual property, see the section titled “ Risk Factors — Risks Related to our Intellectual Property .” +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to all patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable. +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our stock. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +The majority of our products are currently intended for RUO applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or CMS. Although in vitro diagnostic products intended for RUO are not currently required to obtain premarket clearance or approval by the FDA, products labeled as RUO are subject to the FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than non-clinical research purposes. Consequently, other than our four LDTs intended for clinical testing, our products are labeled and intended “For Research Use Only. Not for Diagnostic Procedures.” +12 +Table of Cont ents +The FDA has issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (the “RUO/IUO Guidance”). The purpose of this FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for investigational use only (“IUO”) and when products labeled RUO or IUO will be viewed by the FDA as intended for clinical use. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s premarket notification and clearance process (510(k)), premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. We believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. +IVD tests that are commercially distributed and intended for clinical diagnostic use are regulated by the FDA as medical devices, however, the FDA has traditionally not regulated most laboratory tests referred to as LDTs (as discussed further below). The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. We currently offer four LDTs through our CLIA-certified laboratory: (1) an LDT to quantitatively measure p-Tau 181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease; (2) an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage; (3) an LDT to quantitatively measure p-Tau 217 in plasma to aid in the diagnosis of Alzheimer’s disease; and (4) a multi-marker (p-Tau 217, Aβ42, Aβ40, NfL, and GFAP) algorithmic LDT, under the brand name LucentAD Complete, for high accuracy plasma detection of amyloid pathology to aid in diagnostic evaluation of patients with cognitive issues who may have Alzheimer’s disease . +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +We own and operate a CLIA-certified laboratory. The CLIA are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of research testing that does not report patient specific results). A clinical laboratory is defined by CLIA as any facility that performs examinations of specimens obtained from humans for the purpose of providing information for the diagnosis, prevention, or treatment of any disease or impairment of, or the assessment of health of, human beings. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program for each of the specialties and subspecialties for which it is certified. If a laboratory fails to achieve a passing score on a proficiency test, then its CLIA certificate may be suspended, limited or revoked, or other sanctions may be imposed. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year (except laboratories with only a certificate of waiver or certificate of provider-performed microscopy procedures are not subject to biennial inspections), in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as our, frequently develop testing procedures to provide diagnostic results to customers. These tests have been offered by high-complexity laboratories for the last few decades as LDTs, the validation and performance of which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs under the agency’s medical device authorities, but historically has not exercised enforcement with respect to most LDTs when they meet FDA’s definition of an LDT. FDA defines an LDT as an in vitro diagnostic that is intended for clinical use and is designed, manufactured, and used within a single high-complexity, CLIA- certified laboratory. In October 2023, FDA issued a proposed rule regarding LDTs that would establish that in vitro diagnostic products are devices under the Federal Food, Drug, and Cosmetic Act, including when the +13 +Table of Cont ents +manufacturer is a laboratory. FDA finalized this rule in April 2024. Under the Final Rule, FDA will provide greater oversight of LDTs by phasing out its general enforcement discretion approach for most LDTs, and phase in medical device regulation, for most LDTs over a period of four years. FDA intends to continue to exercise general enforcement discretion from all requirements under the FDCA for five categories of LDTs: (1) 1976-Type LDTs; (2) human leucocyte antigen (HLA) tests used for organ, stem cell, and tissue transplantation; (3) tests manufactured and used within the Department of Defense (DoD) or the Veterans Health Administration (VHA); (4) forensic (law enforcement) tests; and (5) public health surveillance tests. LDTs that do not fall into any of these five categories are subject to a phase-out of FDA’s previous enforcement discretion approach and a phase-in of medical device regulation over a period of four years and in five stages. However, FDA intends to exercise continued enforcement discretion from certain aspects of medical device regulation for certain types of LDTs. For example, FDA intends to exercise regulatory discretion to not require premarket review or most quality system requirements for “currently marketed” LDTs, which include LDTs that were offered as of May 6, 2024, which is the date the FDA’s rule was finalized. Similarly, FDA intends to exercise regulatory discretion to not require premarket review or most quality system requirements for certain tests offered within integrated health systems. In addition, FDA will exercise regulatory enforcement discretion to not require premarket review for tests first offered after May 6, 2024, but which have been subject to review and approval by the New York State Department of Health’s Clinical Laboratory Evaluation Program (NYS CLEP). Finally, FDA intends to exercise regulatory enforcement discretion and generally not enforce premarket review requirements for certain modifications made to 510(k)-cleared and De Novo- authorized tests by CLIA-certified, high-complexity laboratories, even if that 510(k) clearance or De Novo authorization is held by a different manufacturer. +Certain groups have challenged the legality of FDA’s Final Rule regarding LDTs, asserting (among other things) that the rule exceeds FDA’s statutory authority to regulate medical devices. That lawsuit is pending, with a decision from the District Court expected sometime in 2025. It is also possible that the federal government will modify, delay, or revoke the Final Rule. If the Final Rule is not modified, delayed, revoked, or invalidated when the requirements of the rule go into effect, the rule will result in an increased regulatory burden, including additional costs and delays in introducing new LDTs, and could result in tests being removed from the market. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third-party payors. +When we perform clinical diagnostic testing, we may be subject to HIPAA, depending on the types of transactions we engage in, as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +We must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, in the E.U. new regulations recently entered into force that introduce greater regulation of medical devices and IVDs. The IVD regulation is significantly different from the IVD Directive that it replaces in that it ensures that the new requirements apply uniformly and on the same schedule across the member states, includes a risk-based classification system and increases the requirements for conformity assessment. +The CE registration for the NfL ELISA assay kit of our subsidiary Uman was approved in March 2014 under the IVD Directive. Under the IVD Directive, the assay is classified as a general IVD product and required self-certification with no involvement of a notified body/authority. The IVD Regulation introduces a new classification system for IVDs and assessment by a notified body is required for class B, C and D products. Uman’s NfL ELISA assay kit is classified as a class B product and must fully comply with (and have a CE mark issued under) the IVD Regulation by May 2027 (subject to extension of the transitional periods in the IVD Regulation). The new requirements include an ISO 13485 certification of the quality system (which Uman received in July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g., clinical evidence and post-market activities). The work to evaluate and to meet the new technical requirements is on-going. When all requirements are met, a notified body will be contacted, and the certification initiated. +14 +Table of Cont ents +The NF-light Serum ELISA is currently sold only as a RUO product (not intended for diagnostic use). Work is on-going to prepare a technical file compliant with the IVD Regulation for this product as well. +Other Governmental Regulation +Privacy and Data Security Laws and Regulations +As a business with a global footprint, compliance with evolving regulations and standards in privacy and data security has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of increased regulatory enforcement activity. Our business relies on various safeguards to secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce. +For example, in the U.S., the collection, maintenance, protection, use, transmission, disclosure, and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international, and industry levels. U.S. federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by health care providers. Privacy and Security Rules under HIPAA, as amended by HITECH, govern the use, disclosure, and security of protected health information by “Covered Entities,” (which include health care providers that submit electronic claims, health plans, and health care clearinghouses) and by their “Business Associates” (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the Covered Entity’s workforce). Rules under HIPAA and HITECH include specific security standards and breach notification requirements. The U.S. Department of Health and Human Services (through the Office for Civil Rights) has direct civil enforcement authority against Covered Entities and Business Associates with regard to both the Security and Privacy Rules. The U.S. Department of Justice has criminal enforcement authority against Covered Entities, Business Associates, and certain other entities and individuals. In addition, State Attorneys General may bring enforcement actions under HIPAA. Generally we are not a Covered Entity, however, we may operate as a Business Associate to Covered Entities under certain circumstances. +In addition, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for personal information, such as comprehensive state privacy laws that govern the use, disclosure and protection of personal information, such as certain health information, Social Security numbers, and credit card account data. State consumer protection laws and consumer health privacy laws also establish privacy and security standards for use and management of personal information or consumer health data, including information related to consumers and care providers. +Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. Legal requirements in foreign countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the E.U., stringent data protection and privacy rules which substantially impact the use of patient data across the healthcare industry became effective in May 2018. The GDPR applies uniformly across the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals residing in the E.U. to comply with E.U. privacy and data protection rules. In the area of health data, the GDPR is supplemented by national laws and regulations that are less harmonized. +Because data privacy laws and regulations continue to expand, differ from jurisdiction to jurisdiction, and are subject to evolving (and at times inconsistent) governmental interpretation, compliance with these laws and regulations may require significant additional expenditures or changes in products or business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities. +Environmental Health and Safety Laws +We are subject to federal, state, and local laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation, storage and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (“OSHA”), has established extensive requirements relating specifically to workplace safety for healthcare employers in the +15 +Table of Cont ents +U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. OSHA also regulates the use of hazardous chemicals in the workplace. Likewise, we are subject to the U.S. Environmental Protection Agency and state requirements relating to the management and disposal of hazardous waste, and state requirements relating to the disposal of regulated medical waste. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research and services. +Employees and Human Capital +As of December 31, 2024, we had 471 full-time employees, of which 136 worked in sales, sales support, field service, and marketing, 27 worked in engineering and research and development, 240 worked in manufacturing and operations and 68 worked in general and administration. Of our 471 full-time employees, 411 were located in the United States and 60 were located in 12 foreign countries. None of our employees is represented by a labor union or subject to a collective bargaining agreement. Our culture emphasizes the impact our work has on the detection of neurological and other critical disorders. +Our success depends upon our ability to attract and retain highly qualified employees. Talent management is critical to our ability to execute our long-term growth strategy, and we seek to cultivate a high performing pool of talent by providing career growth, on-the-job learning opportunities and competitive total rewards. +Workforce Compensation and Pay Equity +We provide competitive compensation and benefits programs to help recruit and retain our high performing employees. We utilize third party benchmark compensation data to assist in the evaluation of market wages. Our compensation is designed to attract, retain, and motivate employees to achieve results while balancing short- and long-term company performance. All our employees are eligible for an annual bonus and/or commission plan, a matching 401(k) Plan (in the case of U.S. employees), healthcare and insurance benefits, paid time off, family leave, employee assistance programs, and behavioral health services. Additionally, all our employees are eligible for annual equity-based grants with vesting conditions designed to award our employees’ performance and encourage retention. +Company Culture +We are committed to an inclusive culture which is grounded on our values of integrity, respect, and equality. In support of our inclusive culture, we sponsor an internal group of culture champions who are focused on diversity, equity, and inclusion. These champions are comprised of employees and executives whose mission is to provide respectful workplace training and awareness to strengthen employee understanding and knowledge of key topics focused on diversity and inclusion. As of December 31, 2024, approximately 47% of our employees were women and approximately 37% of our employees were people of color. +We expect all personnel working at Quanterix, employees, interns, and contractors, to observe the highest levels of business ethics, integrity, and mutual respect. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies that reflect our values and provide guidance for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization, and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is dependent on the physical and mental well-being of our employees. Accordingly, we are committed to creating a safe and healthy workplace for all personnel. We provide our employees with a wide range of policies and practices to ensure an environment of physical and psychological safety and well-being. +16 +Table of Cont ents +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. Our electronically filed reports and other information that we file with the SEC can be viewed on the SEC’s website at www.sec.gov . +17 +Table of Cont ents +ITEM 1A. RISK FACTORS +The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page ii of this Annual Report on Form 10-K for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. +Risk Factor Summary +Risks Related to the Merger and the Combined Company +• The Merger may not be completed and the Merger Agreement may be terminated in accordance with its terms. +• The market price for shares of our common stock may be affected by factors different from, or in addition to, those that historically have affected or currently affect the market price of shares of Akoya common stock. +• Actions of activist or dissident stockholders could delay or prevent the approval of the Merger and negatively affect our business and operations. +• The issuance of shares of our common stock to Akoya stockholders in connection with the Merger may cause the market price of our common stock to decline. +• The Merger, and uncertainty regarding the Merger, may cause our customers, service providers, partners, vendors, suppliers and other business relationships to delay or defer decisions concerning us and adversely affect our ability to effectively manage our business, which could adversely affect our operating results and financial position and, following the completion of the Merger, the business, operating results and financial position of us and Akoya as a combined company (the “Combined Company”). +• Whether or not the Merger is completed, the announcement and pendency of the Merger could cause disruptions in our business, which could have an adverse effect on our business and financial results. +• The Merger Agreement contains provisions that could discourage a potential acquirer from acquiring or merging with us. +• We expect to incur substantial costs related to the Merger and integration. +• Combining our business and the business of Akoya may be more difficult, costly or time-consuming than expected and the Combined Company may fail to realize the anticipated benefits of the Merger, which may adversely affect the Combined Company’s business results and negatively affect the value of our common stock following completion of the Merger. +Risks Related to Our Business +• Failure to remediate material weaknesses in, or inherent limitations associated with, our internal control over financial reporting have resulted in, and in the future could result in, material misstatements in our financial statements. +• The restatement of our financial statements as of December 31, 2023 and 2022 and for each of the three years in the period ended December, 31 2023 and for the quarterly and year-to-date (as applicable) periods ended March 31, 2022, June 30, 2022, September 30, 2022, March 31, 2023, June 30, 2023, September 30, 2023, March 31, 2024, and June 30, 2024 (the “Restatement”) may affect stockholder and investor confidence in us or harm our reputation, and may subject us to additional risks and uncertainties, including increased costs and the increased possibility of legal proceedings and regulatory inquiries, sanctions or investigations. +18 +Table of Cont ents +• Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, which could cause the value of our common stock to fluctuate or decline significantly. +• We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +• If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +• Sales of our assays for neurological indications have become increasingly important to our business, and any significant decrease in sales of such assays could have a material adverse effect on our business. +• We may not be successful in penetrating the diagnostics market. +• Because a significant portion of our revenue comes from a few large customers, any significant decrease in sales to these customers, due to industry consolidation or otherwise, could harm our operating results. +• Our long-term results depend upon our ability to improve existing products, develop or acquire new technology, and develop, introduce and market new products successfully. +• We may experience delays in launching our next-generation instrument, Simoa ONE, on our anticipated timeline, which could adversely affect our business, financial condition, and results of operations. +• Defects or other quality issues in our products could lead to unforeseen costs, product recalls, adverse regulatory actions, negative publicity, and litigation, including product liability claims, any of which could cause customers to decide not to purchase our products, harm our reputation, and negatively affect our sales, operating results and financial condition. +• We rely on a single contract manufacturer for our Simoa HD-X instrument and on a different single contract manufacturer for our Simoa SR-X instrument, and we expect to rely on a different single contract manufacturer for our new Simoa ONE instrument. If any of these manufacturers should fail to perform, or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +• We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and our SP-X instrument, and we may not be able to find replacements or immediately transition to alternative suppliers if any of these suppliers fail to perform, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +• We face significant competition in the life sciences research and diagnostic markets. +• Changes in U.S. government policies, including increased tariffs and potential reductions in federal research funding, could adversely affect our business. +• If the FDA determines that our products are subject to regulation as medical devices, if the FDA modifies its regulations to require that our LDTs are subject to regulation as devices, or if we seek to market our products for clinical diagnostic or health screening use, we will be required to comply with medical device law, including in some cases a requirement to obtain regulatory clearance(s) or approval(s). Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +• If we are unable to protect our intellectual property, our ability to maintain any technological or competitive advantage over our competitors and potential competitors may be reduced and our business may be harmed. +Risks Relating to the Merger +The Merger may not be completed and the Merger Agreement may be terminated in accordance with its terms. +The Merger is subject to a number of conditions that must be satisfied (or waived, to the extent permitted), including (i) receipt of the approval of the issuance of shares of our common stock in the Merger by our stockholders; (ii) +19 +Table of Cont ents +receipt of the approval of the Merger by Akoya stockholders; (iii) the effectiveness of the registration statement on Form S-4 filed with the SEC in connection with the Merger; (iv) the absence of any order issued or entered, or any law enacted or promulgated having the effect of restraining, enjoining, making illegal or otherwise prohibiting the consummation of the Merger; (v) the submission by us to Nasdaq of a notification of shares of our common stock to be issued in connection with the Merger; (vi) performance by each party of its respective obligations under the Merger Agreement; and (vii) the absence of a material adverse effect with respect to each of Akoya and us. These conditions to the completion of the Merger, some of which are beyond our control, may not be satisfied or waived in a timely manner or at all, and, accordingly, the Merger may be delayed or not completed. Additionally, either we or Akoya may terminate the Merger Agreement under certain circumstances, subject to the payment of a termination fee of $9 million by us to Akoya or $7 million by Akoya to us in certain cases. These termination fees may have the effect of discouraging alternative transaction proposals. We have incurred and will incur costs in connection with entering into the Merger Agreement and consummating the Merger, many of which will be payable by us whether or not the Merger is completed. Even if the Merger Agreement is terminated under circumstances that would require Akoya to pay us a $7 million termination fee, it may not cover all of the expenses and costs we have incurred. +Failure to complete the Merger could negatively impact our future business and financial results and the trading price of our common stock. +If the Merger is not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the expected benefits of having completed the Merger, we would be subject to a number of risks, including the following: +• we may experience negative reactions from the financial markets, including negative impacts on our stock price; +• we may experience negative reactions from our customers, service providers, partners, vendors, suppliers and employees; +• it could negatively impact our ability to achieve future growth, expand our addressable market and achieve scale and profitability on expected timelines; +• we will have incurred substantial costs towards completion of the Merger and will generally be required to pay our costs relating to the Merger, such as financial advisory, legal, strategic advisory, accounting costs and associated fees and expenses, whether or not the Merger is completed; +• we may provide up to $30 million in bridge financing to Akoya, which would be subordinated to Akoya’s existing credit facility, and if the Merger is not completed for any reason, Akoya may not have the financial resources to repay the bridge financing when due, or at all; and +• we will have committed substantial time and resources to matters relating to the Merger (including integration planning) which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company. +Actions of activist or dissident stockholders could delay or prevent the approval of the Merger and negatively affect our business and operations. +Recently one of our stockholders has indicated that it intends to oppose the Merger. In addition, on March 3, 2025, the same stockholder announced that it is nominating three directors for election to the Board at our 2025 annual meeting of stockholders. As a result of these actions, we will incur significant expenses even if we are successful in completing the Merger or are successful in a potential proxy contest. +In addition, perceived uncertainties as to our future direction, strategy, or leadership, and the diversion of management's and our board of director's attention and resources from our business, created by such activism may result in the loss of business opportunities and make it more difficult to complete strategic transactions or attract and retain investors, customers, employees, and other business partners. Such stockholder activism may also cause significant fluctuation in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. We cannot predict the outcome or timing of any matters +20 +Table of Cont ents +relating to stockholder activism or potential proxy contests or the ultimate impact that such matters may have on our business, liquidity, financial condition, or results of operations. +The issuance of shares of our common stock to Akoya stockholders in connection with the Merger may cause the market price of our common stock to decline. +Upon completion of the Merger, Akoya stockholders will receive 0.318 (the “Exchange Ratio”) shares of our common stock for each share of Akoya common stock they hold. Based on 49,588,743 shares of Akoya common stock issued and outstanding as of February 1, 2025 and the Exchange Ratio, it is expected that we will issue approximately 15,769,220 shares of our common stock to Akoya stockholders in connection with the Merger. In addition, Akoya restricted stock units (“RSUs”) and options to purchase Akoya common stock will be converted into RSUs for our common stock and options to purchase our common stock based on the Exchange Ratio upon completion of the Merger. Former Akoya stockholders may decide not to hold the shares of our common stock that they will receive in the Merger, and our stockholders may decide to reduce their investment in Quanterix as a result of the changes to our investment profile as a result of the Merger. Both the issuance of this amount of new shares in the Merger and any subsequent sales of these shares may cause the market price of our common stock to decline. +After the Merger, our stockholders will have a reduced ownership and voting interest in the Combined Company and may not realize a benefit from the Merger commensurate with their ownership dilution. +The Merger will dilute the ownership position of our stockholders and result in Akoya stockholders having an ownership stake in the Combined Company. Based on the number of shares of our common stock and Akoya common stock outstanding as of February 1, 2025, upon completion of the Merger, our current stockholders are expected to own approximately 71% of our outstanding common stock and former Akoya stockholders are expected to own approximately 29% of our outstanding common stock. +If the Combined Company is unable to fully and timely realize the strategic and financial benefits currently anticipated from the Merger, our stockholders will have experienced substantial dilution of their ownership interests without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the Combined Company is able to realize only part of the strategic and financial benefits currently anticipated from the Merger. +Until the completion of the Merger or the termination of the Merger Agreement pursuant to our terms, we are prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to us and our stockholders. +From and after the date of the Merger Agreement and prior to the completion of the Merger or the termination of the Merger Agreement pursuant to our terms, the Merger Agreement restricts us from taking specified actions without the consent of Akoya and requires that our business be conducted in the ordinary course, subject to certain exceptions. These restrictions may prevent us from taking actions during the pendency of the Merger that would have been beneficial. Adverse effects arising from these restrictions during the pendency of the Merger could be exacerbated by any delays in the completion of the Merger or termination of the Merger Agreement. +Obtaining required approvals and satisfying closing conditions may prevent or delay completion of the Merger, and regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met. +The Merger is subject to a number of conditions to closing. No assurance can be given that the required stockholder approvals can be obtained or that the required conditions to closing will be satisfied, and, if all required approvals are obtained and the required conditions are satisfied, no assurance can be given as to the terms, conditions and timing of such approvals. Any delay in completing the Merger could cause the Combined Company not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve if the Merger is successfully completed within our expected time frame. Additionally, any delays in receipt of required regulatory approvals or satisfaction of the closing conditions will increase the length of time that we are subject to certain restrictive covenants under the Merger Agreement during the pendency of the Merger and increases the risk of disruptions to our operations and business relationships and the impediments to our ability to pursue certain business opportunities or strategic initiatives, which may in turn cause the Combined Company to not realize some or all of the expected benefits of the Merger or adversely impact our future +21 +Table of Cont ents +financial and strategic conditions on a standalone basis if the required approvals and conditions to closing are not obtained or satisfied. +Failure to attract, motivate and retain executives and other key employees could diminish the anticipated benefits of the Merger. +The success of the Merger will depend in part on the Combined Company’s ability to retain the talent and dedication of key employees of each company. It is possible that these employees may decide not to remain with us or Akoya, as applicable, while the Merger is pending, or with the Combined Company following consummation of the Merger. If key employees of either company terminate their employment, or if an insufficient number of employees or sales representatives are retained to maintain effective operations, the Combined Company’s business activities may be adversely affected and management’s attention may be diverted from successfully integrating Quanterix and Akoya to hiring suitable replacements, all of which may cause the Combined Company’s business to suffer. In addition, we and Akoya may not be able to locate suitable replacements for any key employees that leave either company or offer employment to potential replacements on reasonable terms. Moreover, there could be disruptions to or distractions for the workforce and management, including disruptions associated with integrating employees into the Combined Company. No assurance can be given that the Combined Company will be able to attract or retain key employees to the same extent that those companies have been able to attract or retain their own employees in the past. +The Merger, and uncertainty regarding the Merger, may cause our customers, service providers, partners, vendors, suppliers and other business relationships to delay or defer decisions and adversely affect our ability to effectively manage our business, which could adversely affect our business, operating results and financial position and, following the completion of the Merger, the Combined Company’s business, operating results and financial position. +The Merger will happen only if certain stated conditions are met. Accordingly, there may be uncertainty regarding the completion of the Merger. This uncertainty may cause existing or prospective customers, service providers, partners, vendors, suppliers and other business relationships to delay or defer other decisions, including entering into contracts or making other decisions, or seek to change or cancel existing business relationships. Additionally, we are subject to certain restrictive covenants under the Merger Agreement during the pendency of the Merger that may (i) cause us to delay or defer other decisions including entering into contracts or arrangements with existing or prospective customers, service providers, partners, vendors, suppliers and other business relationships or (ii) inhibit our ability to take advantage of certain business opportunities or strategic initiatives. Any such disruptions such as delays or deferrals of those decisions or changes in existing agreements could adversely affect our business, operating results and financial position, whether the Merger is ultimately completed, and following the completion of the Merger, the Combined Company, including an adverse effect on the Combined Company’s ability to realize the anticipated synergies and other benefits of the Merger. The risk, and adverse effect, of any such disruptions could be exacerbated by a delay in completion of the Merger or termination of the Merger Agreement. +Whether or not the Merger is completed, the announcement and pendency of the Merger could cause disruptions in our business, which could have an adverse effect on our business and financial results. +Whether or not the Merger is completed, the announcement and pendency of the Merger could cause disruptions in our business, including by diverting the attention of our management and employee team, such as those involved in day-to-day operations, toward the completion of the Merger. In addition, we have diverted significant management resources in an effort to complete the Merger and are each subject to restrictions contained in the Merger Agreement on the conduct of our business. If the Merger is not completed, we will have incurred significant costs, including the diversion of management resources, for which we will have received little or no benefit. +The Merger Agreement contains provisions that could discourage a potential competing acquirer that might be willing to pay more to acquire or merge with us. +The Merger Agreement contains provisions that make it more difficult for us to be acquired by, or enter into certain combination transactions with, a third party. The Merger Agreement contains certain provisions that restrict our ability to, among other things, solicit, initiate or knowingly encourage, or take any other action to knowingly facilitate any alternative transaction, participate in any discussions or negotiations, or cooperate in any way with any person, with respect to any alternative transaction or amend or grant any waiver of any standstill or similar agreement. In addition, following receipt by either us or Akoya of any alternative transaction proposal that constitutes a “superior proposal,” each of us or +22 +Table of Cont ents +Akoya, respectively, will have an opportunity to offer to modify the terms of the Merger Agreement before our board or the Akoya board, respectively, may withdraw or qualify our recommendation to stockholders, with respect to the approval of the Merger, in favor of such superior proposal. +If the Merger Agreement is terminated under specified circumstances, we may be required to pay a termination fee of $9 million to Akoya. These provisions could discourage a potential third-party acquirer, strategic transaction partner or business combination partner that might have an interest in acquiring or combining with all us or pursuing an alternative transaction from considering or proposing such a transaction. If the Merger Agreement is terminated we determine to seek another business combination transaction, we may not be able to successfully negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger. +We expect to incur substantial costs related to the Merger and integration. +We have incurred and expect to incur substantial non-recurring costs associated with combining the operations of the two companies, as well as transaction fees and other costs related to the Merger. Such costs include, among others, filing and registration fees with the SEC, and legal, accounting, investment banking, consulting, public relations and proxy solicitation fees. Most of these costs are payable by us regardless of whether the Merger is completed. +The Combined Company will also incur restructuring and integration costs in connection with the Merger. There are processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the Merger and the integration of Akoya’s business into the Combined Company. Although we expect that the elimination of duplicative costs, strategic benefits and additional income, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction expenses, Merger-related and restructuring costs over time, any net benefit may not be achieved in the near term or at all. While we have assumed that certain expenses would be incurred in connection with the Merger and the other transactions contemplated by the Merger Agreement, there are many factors beyond our control that could affect the total amount or the timing of the integration and implementation expenses. +Lawsuits or other legal proceedings may be filed against us, Akoya, the Combined Company and members of their respective boards of directors, in connection with the Merger, and an adverse ruling in any such lawsuit may prevent the Merger from becoming effective or from becoming effective within the expected time frame, or have an adverse impact on the Combined Company’s business and operations. +Transactions such as the Merger are frequently subject to litigation or other legal proceedings, including actions alleging that our board or Akoya’s board breached their respective fiduciary duties to their stockholders by entering into the Merger Agreement, by failing to obtain a greater value in the transaction for their stockholders or otherwise. Neither we nor Akoya can provide assurance that such litigation or other legal proceedings will not be brought. If litigation or other legal proceedings are in fact brought against us or Akoya, or against our board or Akoya’s board, they will defend against it, but might not be successful in doing so. An adverse outcome in such matters, as well as the costs and efforts of a defense even if successful, could have a material adverse effect on the business, results of operation or financial position of Quanterix, Akoya or the Combined Company, including through the possible diversion of either company’s resources or distraction of key personnel. +Furthermore, one of the conditions to the completion of the Merger is the absence of an order (whether temporary or permanent) issued or entered after the date of the Merger Agreement by any governmental body enjoining or otherwise prohibiting the consummation of the Merger. As such, if any plaintiffs are successful in obtaining an injunction preventing the consummation of the Merger, that injunction may prevent the Merger from becoming effective or from becoming effective within the expected time frame. +If the Merger is completed, the Combined Company may be exposed to increased litigation or other legal proceedings from stockholders, customers, partners, suppliers, contractors and other third parties due to the merger of our and Akoya’s businesses following the Merger. Even if such lawsuits or other legal proceedings are without merit, defending against these claims can result in substantial costs and divert management time and attention. Such litigation or an adverse judgment resulting in monetary damages may have an adverse impact on the Combined Company’s business and results of operations or may cause disruptions to the Combined Company’s operations. +23 +Table of Cont ents +Risks Relating to the Combined Company +Combining the businesses of Quanterix and Akoya may be more difficult, costly or time-consuming than expected and the Combined Company may fail to realize the anticipated benefits of the Merger, which may adversely affect the Combined Company’s business results and negatively affect the value of our common stock following the Merger. +The success of the Merger will depend on, among other things, our ability to realize the anticipated benefits, synergies and efficiencies from combining the businesses of Quanterix and Akoya. This success will depend on, among other factors, our ability to integrate our business with the business of Akoya. If we are not able to successfully integrate Akoya’s business into the Combined Company within the anticipated time frame, or at all, the anticipated synergies, efficiencies and other benefits of the Merger may not be realized fully, or at all, or may take longer to realize than expected. +We and Akoya have operated and, until the completion of the Merger, will continue to operate independently. There can be no assurances that these businesses can be integrated successfully. It is possible that the integration process could result in the loss of key employees, a reduction in the ability to attract talent, the inability to maintain relationships with our and Akoya’s customers, service providers, partners, vendors, suppliers and other business relationships, the disruption of either company’s or both companies’ ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. The challenges involved in this integration, which will be complex and time- consuming, include the following: +combining the businesses of Quanterix and Akoya, including respective operations and corporate functions, and meeting the capital requirements of the Combined Company in a manner that permits the Combined Company to achieve any revenue synergies or efficiencies anticipated to result from the Merger, the failure of which would result in the anticipated benefits of the Merger not being realized in the time frame currently anticipated or at all; +• integrating, retaining and, where applicable, cross-training personnel from the two companies; +• integrating the offerings and services available to customers; +• integrating each company’s technologies and technologies licensed by them from third parties; +• identifying and eliminating redundant and underperforming functions and assets; +• harmonizing each company’s operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes; +• maintaining existing relationships with each company’s customers, service providers, partners, vendors and suppliers, and leveraging relationships with such third parties for the benefit of the Combined Company; +• addressing possible differences in business backgrounds, corporate cultures and management philosophies; +• consolidating each company’s administrative and information technology infrastructure; +• coordinating geographically dispersed organizations; and +• effecting actions that may be required in connection with obtaining regulatory or other governmental approvals. +In addition, at times the attention of certain members of either company’s or both companies’ management and resources may be focused on completion of the Merger and the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may have been beneficial to such company, which may disrupt each company’s ongoing business and the business of the Combined Company. An inability to realize the full extent of the anticipated benefits of the Merger, as well as any delays or higher than expected integration costs encountered in the integration process, could have an adverse effect upon the revenues, level of expenses and operating results of the Combined Company, which may adversely affect the value of our common stock following the Merger. +24 +Table of Cont ents +Certain customers may seek to modify contractual relationships with the Combined Company, which could have an adverse effect on the Combined Company’s business and operations. +As a result of the Merger, the Combined Company may experience impacts on relationships with our customers that may harm the Combined Company’s business and results of operations. Certain counterparties may seek to terminate or modify contractual obligations following the Merger whether or not contractual rights are triggered as a result of the Merger. There can be no guarantee that our or Akoya’s contractual counterparties will continue to have a relationship with the Combined Company or do so on the same or similar contractual terms following the Merger. If any contractual counterparties (such as customers, service providers, partners, vendors or suppliers) seek to terminate or modify contractual obligations or discontinue the relationship with the Combined Company, then the Combined Company’s business and results of operations may be harmed. +Completion of the Merger may trigger change in control, assignment or other provisions in certain agreements to which Akoya is a party, which may have an adverse impact on the Combined Company’s business and results of operations. +The completion of the Merger may trigger change in control, assignment and other provisions in certain agreements to which Akoya is a party. If Akoya is unable to negotiate waivers of or consents under those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages or other remedies. Even if Akoya is able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to the Combined Company. Any of the foregoing or similar developments may have an adverse impact on the business, financial condition and results of operations of the Combined Company, or the ability of us to successfully integrate Akoya’s business. +Risks Related to our Financial Condition and Financial Reporting Matters +Failure to remediate material weaknesses in, or inherent limitations associated with, our internal control over financial reporting have resulted in, and in the future could result in, material misstatements in our financial statements. +In our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 6, 2023, we identified four material weaknesses in our internal control over financial reporting relating to the operating effectiveness of our internal controls, including a material weakness associated with (i) the accounting for inventory, including excess and obsolescence reserves (the “Inventory MW”), (ii) the accounting for salaries and commissions expense (the “Compensation MW”), (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases (the “Financial Statement Close Process MW”), and (iv) the accounting for property and equipment, net (the “Property and Equipment MW”). In our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Original Report”), filed with the SEC on February 29, 2024, we indicated that our management concluded that the Financial Statement Close Process MW and Compensation MW were remediated. However, we also concluded that control deficiencies existed as of December 31, 2023, and that these control deficiencies constituted material weaknesses in our internal control over financial reporting. Specifically, management concluded that a portion of the Inventory MW related to the valuation of our inventory, including excess and obsolescence reserves (the “Inventory Valuation MW”) and the Property and Equipment MW continued to exist as of December 31, 2023. Subsequent to the filing of the 2023 Original Report, in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2023, filed with the SEC on December 26, 2024 (the “Amended Annual Report on Form 10-K/A”), we indicated that our management concluded that the Restatement in the Amended Annual Report on Form 10-K/A was a result of a newly identified design deficiency associated with the Inventory Valuation MW, related to the Company's internal controls over the capitalization of labor and overhead costs. +Based on our efforts and after demonstrating the operating effectiveness of the related internal controls for a sufficient period of time, management has concluded that the Property and Equipment MW was remediated as of December 31, 2024. However, as of December 31, 2024, the Inventory Valuation MW, including the additional control design deficiency, was not remediated and we have identified an additional material weakness in the operating effectiveness of our internal controls associated with the accounting for Accelerator Laboratory revenue, a component of our service and other revenue. We are working to remediate these two outstanding material weaknesses, but will not be able to consider any material weakness remediated until the applicable remedial controls operate for a sufficient period of time and our management has concluded, through testing, that our controls are operating effectively. +25 +Table of Cont ents +Our efforts to remediate outstanding material weaknesses, and to maintain effective internal control over financial reporting, are ongoing; however, there are inherent limitations in all control systems and no evaluation of controls can provide absolute assurance that all deficiencies have been detected. We cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future. If after having remediated outstanding material weaknesses we are unable to maintain the effectiveness of our internal control over financial reporting or our disclosure controls and procedures, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to regulatory scrutiny, civil, or criminal penalties or litigation. Continued or future failure to maintain effective internal control over financial reporting could also result in financial statements that do not accurately reflect our financial condition or results of operations, may result in material misstatements in our financial statements, and may also restrict our future access to the capital markets. +We have incurred significant expense and dedicated significant internal resources to address the material weaknesses described above, and we expect that the continued execution of the plan to remediate the remaining material weaknesses will continue to be costly and will distract management from other activities. There can be no assurance that we will conclude in the future that we have effectively remediated outstanding material weaknesses or that we will not identify any additional significant deficiencies or material weaknesses that will impair our ability to report our financial condition and results of operations accurately or on a timely basis. +The Restatement of our financial statements may affect stockholder and investor confidence in us or harm our reputation, and may subject us to additional risks and uncertainties, including increased costs and the increased possibility of legal proceedings and regulatory inquiries, sanctions or investigations. +We have incurred, and may continue to incur, substantial unanticipated costs for accounting and legal fees in connection with, or related to, the Restatement. The Restatement could also subject us to other risks and uncertainties, including the increased possibility of legal proceedings and inquiries, sanctions, or investigations by the SEC or other regulatory authorities relating to the Restatement. Any of the foregoing may adversely affect our reputation, the accuracy and timing of our financial reporting, or our business, results of operations, liquidity, and financial condition, or cause stockholders, investors, and customers to lose confidence in the accuracy and completeness of our financial reports, or cause the market price of our common stock to decline. Any such legal proceedings or regulatory inquiries, sanctions, or investigation, whether successful or not, could adversely affect our business, financial condition, and results of operations. +Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, which could cause the value of our common stock to fluctuate or decline significantly. +Numerous factors, many of which are outside of our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others, and comparing our operating results on a period-to-period basis might not be meaningful. Investors should not rely on our past results as indicative of our future performance. Moreover, our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline significantly. +We have incurred annual losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability. +We incurred net losses of $38.5 million, $28.4 million, and $99.6 million for the years ended December 31, 2024, 2023, and 2022, respectively. As of December 31, 2024, we had an accumulated deficit of $470.1 million. We cannot predict if or when we will achieve profitability or if or when we will be able to sustain profitability once achieved. We expect that our losses will continue at least through the next 24 months as we execute our strategy for our entry into translational pharma and clinical diagnostic markets. We may incur significant losses in the future for a number of reasons, many of which are beyond our control, including the other risks described in this Annual Report on Form 10-K, the market acceptance of our products, competitive products, future product development and our market penetration and margins. +26 +Table of Cont ents +Our ability to use net operating losses to offset future income may be subject to certain limitations. +As of December 31, 2024, we had federal net operating loss (“NOLs”) carryforwards to offset future taxable income of approximately $320.0 million, of which approximately $108.5 million begin to expire in 2026. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on our ability to utilize our NOLs to offset future taxable income. We may have already experienced ownership changes as defined under Section 382 of the Code. Depending on the timing of any future utilization of our NOLs, the amount that can be utilized each year may be limited as a result of such previous ownership changes. In addition, future changes in our stock ownership, including changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. +Risks Related to our Business +If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected. +Our success depends on our ability to develop and market products that are recognized and accepted by our customers and potential customers as reliable, enabling and cost-effective. Continued market acceptance of our Simoa technology platform and products and other platforms and products we may develop in the future, such as Simoa ONE, will depend on many factors, including our ability to convince potential customers that our technology is an attractive alternative to other available technologies. If we are unable to continue to motivate customers to use Simoa technology or other technologies we may develop, adoption of our technology may be slowed and our ability to retain and grow our customer base and increase our revenue would be adversely affected. +Sales of our assays for neurological indications have become increasingly important to our business, and any significant decrease in sales of such assays could have a material adverse effect on our business. +Neurology has been one of our primary focus areas for commercialization of our Simoa technology and the services that we provide to our customers. Sales from neurological-related biomarkers have become an increasingly important part of our business. There can be no assurance that we will continue to derive meaningful revenues from the sale of our neurological products, from services related to neurodegenerative conditions or from sales of instruments driven by customers desiring access to our technology for work relating to neurological conditions. The adoption by our customers of competitive technologies for detecting biomarkers of neurodegenerative conditions could negatively impact our revenues and have a material adverse effect on our business. +We may not be successful in penetrating the diagnostics market. +We believe our Simoa technology has the capability to enable the development of a new category of less-invasive diagnostic tests that could replace current invasive, expensive, and inconvenient diagnostic methods. Accordingly, we have begun to expand into the diagnostics market. Transitioning from research use only to also serving the diagnostics market entails significant risks, including: +• significant investments in product development, scaling manufacturing processes, marketing and sales activities, regulatory compliance, reimbursement and billing activities and infrastructure to support the foregoing; +• navigating complex regulatory frameworks, including but not limited to FDA regulations and equivalent agencies internationally; +• competition from products that may offer superior performance, pricing, or convenience, and prevent us from penetrating target markets effectively; and +• challenges associated with obtaining adequate reimbursement from government healthcare programs and private insurers. +27 +Table of Cont ents +Further, our progress in penetrating the diagnostics market may be slower than we intend and may require a substantially larger investment than we expect. If we are unable to manage these risks effectively, our efforts to penetrate the diagnostics market may be unsuccessful, and our business, operating results and financial condition could suffer. +The sales cycle for our Simoa instruments can be lengthy and variable, which makes it difficult for us to forecast revenue and other operating results. +The sales process for our Simoa instruments generally involves numerous interactions with multiple individuals within an organization, and often includes in-depth analysis by potential customers of our technology and products and a lengthy review process. Our customers’ evaluation processes often involve a number of factors, many of which are beyond our control. As a result of these factors, the capital investment required to purchase our systems, and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly. Given the length and uncertainty of our sales cycle, we have in the past experienced, and expect in the future to experience, fluctuations in our sales on a period-to-period basis. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems, using existing assays not requiring capital equipment, or purchasing systems other than ours. +Purchase of our Simoa instruments requires a significant capital investment which can impact sales in times of constrained spending. +The purchase of our Simoa instruments requires a significant investment by our customers, and a reduction in capital spending by potential customers can result in lower instrument sales. During periods of constrained capital spending, potential instrument customers may instead choose to engage our Accelerator lab or an outside lab, or may use another instrument platform that they already have or that is less expensive than the Simoa instruments. We believe that a constrained capital funding environment resulted in softness in instrument sales throughout 2024 and that this constrained spending environment will continue into 2025. +Because a significant portion of our revenue comes from a few large customers, any significant decrease in sales to these customers, due to industry consolidation or otherwise, could harm our operating results. +For the year ended December 31, 2024, our top five customers accounted for approximately 21% of our total revenue. The loss of a significant amount of business from one or more of our major customers would have a material adverse effect on our business. There can be no assurance that there will not be a loss or reduction in business from one or more of our major customers. In addition, we cannot assure that net sales from customers that have accounted for significant net sales in the past, either individually or as a group, will reach or exceed historical levels in any future period. +Our long-term results depend upon our ability to improve existing products and introduce and market new products successfully and timely. +We generally sell our products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. Accordingly, our business is dependent on the continued improvement of our existing Simoa products and our development of new products utilizing Simoa or other technology we develop or acquire. As we introduce new products or refine, improve or upgrade versions of existing products, we cannot predict the level of market acceptance or the amount of market share these products will achieve, if any. We cannot guarantee that we will not experience material delays in the introduction of new products in the future. In addition, introduction of new products could result in a decrease in revenues from existing products. Consistent with our strategy of offering new products and product refinements, we have invested substantial capital on research and development, and we expect to continue to use a substantial amount of capital for product research and development. Our research and development initiatives can be costly and time-consuming, and they may fail to achieve the intended benefits. If we do not develop new products and product enhancements based on technological innovation on a timely basis, our products may become obsolete over time and our revenues, cash flow, profitability and competitive position will suffer. +We may experience delays in launching our next-generation instrument, Simoa ONE, on our anticipated timeline, which could adversely affect our business, financial condition, and results of operations. +We currently expect to launch our next-generation instrument, Simoa ONE, by the end of 2025. However, there are various risks that could delay or prevent the successful launch and commercialization of the instrument. These risks +28 +Table of Cont ents +include, but are not limited to, unforeseen technical challenges, supply chain disruptions, and delays in manufacturing. Many of these risks are beyond our control. +If we experience significant delays in launching Simoa ONE, our ability to generate revenue and achieve market adoption may be adversely impacted. Delays or setbacks could also allow competitors to introduce alternative solutions, erode our market position, or negatively affect customer confidence in our product pipeline. Additionally, if development costs exceed our expectations, or if we are unable to successfully commercialize the platform, our financial condition and results of operations could suffer. +Defects or other quality issues in our products could lead to unforeseen costs, product recalls, adverse regulatory actions, negative publicity, and litigation, including product liability claims, any of which could cause customers to decide not to purchase our products, harm our reputation, and negatively affect our sales, operating results and financial condition. +Our Simoa products are complex and may contain undetected errors or defects, especially when first introduced or as new versions or new products are released. We have in the past devoted, and will continue to devote, funding and resources to technology development, quality assurance and manufacturing initiatives designed to ensure or improve quality, such as the assay redevelopment program which was initiated in 2022 and substantially completed in the fourth quarter of 2023. However, there can be no assurance that we will be successful in our efforts to manufacture products at a level of quality necessary for our customers or to avoid our products containing undiscovered defects or quality issues. Defects, errors or quality issues in our products may discourage customers from purchasing our products and could harm our reputation. We may also be subject to warranty claims and litigation involving claims for damages or incur additional costs, in each case due to errors or defects in our products. In addition, if we do not meet industry or quality standards, if applicable, our products may be subject to recall, and products subject to the FDA’s medical device regulations could be required to be recalled under such regulations. A material liability claim, recall or other occurrence that harms our reputation or decreases market acceptance of our products could harm our business and operating results. +Use of our products or services by us or a customer for diagnostic purposes could result in a product liability claim alleging that one of our products contained a design or manufacturing defect that resulted in the failure to adequately perform, leading to death or injury. A product liability claim could result in substantial damages and be costly and time- consuming to defend, either of which could materially harm our business or financial condition. We cannot guarantee that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future. +Our reliance on distributors for sales of our products outside of the United States could impact our revenue. +We have established distribution agreements for our Simoa instruments and related consumable products with distributors in certain foreign countries, including Australia, Brazil, China, the Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan and the UAE. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or if we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth. In addition, if our distributors fail to comply with applicable laws and ethical standards, including anti-bribery laws, this could damage our reputation and could have a significant adverse effect on our business and our revenues. +We generate a substantial portion of our revenue internationally and we expect this will continue in the future; as a result, our business is subject to various risks relating to our international activities, which could adversely affect our business, operating results and financial condition. +For the years ended December 31, 2024, 2023, and 2022, approximately 36%, 38%, and 38%, respectively, of our total revenue was generated from customers located outside of North America. We believe that a substantial percentage of our future revenue will continue to come from international sources as we expand our overseas operations and develop opportunities in additional areas. Engaging in international business involves a number of difficulties and risks, including: +29 +Table of Cont ents +• difficulties and costs of staffing and managing foreign operations; +• required compliance with existing and changing U.S. or foreign regulatory requirements and laws; +• a shortage of high-quality salespeople and distributors; +• pricing pressure that we may experience internationally; +• difficulties in enforcing our intellectual property rights and in defending against third-party threats and intellectual property enforcement actions against us or any of our distributors, suppliers or collaborators; +• reduced or varied protection for intellectual property rights in some countries; +• compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, data privacy requirements, such as the E.U. General Data Protection Regulation (the “GDPR”), labor laws and anti-competition regulations; +• export or import restrictions and supply chain disruptions; +• laws and business practices favoring local companies; +• longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; +• restrictions on the activities of foreign agents, representatives and distributors; +• foreign currency exchange rate fluctuations; +• the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; +• the impact of political and economic instability and conflict, which could lead to uncertainty and instability in global financial markets; +• scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; +• the imposition of new trade restrictions; and +• potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers. +If we are unable to manage these risks effectively, our business, operating results and financial condition will suffer. +We rely on a single contract manufacturer for our Simoa HD-X instrument and on a different single contract manufacturer for our Simoa SR-X instrument, and we expect to rely on a different single contract manufacturer for our new Simoa ONE instrument. If any of these manufacturers should fail to perform, or not perform satisfactorily, our ability to supply these instruments would be negatively and adversely affected. +We currently rely on a single contract manufacturer, STRATEC Biomedical AG (“STRATEC”), an analytical and diagnostic systems manufacturer located in Germany, to manufacture and supply all of our Simoa HD-X instruments. In addition, we currently rely on a single contract manufacturer, Paramit Corporation (“Paramit”), a contract manufacturer located in California, to manufacture and supply all of our SR-X instruments. We also expect to rely on a single contract manufacturer to supply our new Simoa ONE instrument. Our contract with STRATEC does not commit them to supply quantities beyond the amounts included in our forecasts, and our contract with Paramit does not commit them to carry inventory or make available any particular quantities Accordingly, we may not be able to obtain adequate supplies in a +30 +Table of Cont ents +timely manner or on commercially reasonable terms. If either of these manufacturers are not able to supply instruments, our business would be harmed. +In the event it becomes necessary to utilize a different contract manufacturer for an instrument, we would experience additional costs, delays and difficulties in doing so as a result of needing to identify and enter into an agreement with a new supplier as well as needing to prepare such new supplier to meet the logistical requirements associated with manufacturing our instruments, and our business would suffer. We may also experience additional costs and delays in the event we need access to or rights under any intellectual property of STRATEC. +In addition, certain of the components used in our instruments are sourced by these manufacturers from limited or sole suppliers. If they were to lose such suppliers, there can be no assurance that they would be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. An interruption in our ability to sell and deliver instruments to customers could occur if our manufacturers encounter delays or difficulties in securing these components, or if the quality of the components supplied do not meet specifications, or if they cannot then obtain an acceptable substitute. If any of these events occur, our business and operating results could be harmed. +We rely on a limited number of suppliers or, in some cases, one supplier, for some of our materials and components used in our consumable products and services and our SP-X instrument, and we may not be able to find replacements or immediately transition to alternative suppliers if any of these suppliers fail to perform, which could have a material adverse effect on our business, financial condition, results of operations and reputation. +We rely on limited or sole suppliers for certain reagents and other materials and components that are used in our consumable products and services and in our SP-X instrument. While we have long-term contracts with some critical suppliers, we do not have contracts with all suppliers and instead relies on periodically forecasting our needs for such materials and entering into standard purchase orders with our suppliers. In addition, our use of many of the materials used in our consumable products is limited to research use only. As we expand into diagnostic applications for our products, we will need to secure diagnostic rights to such materials. If we were to lose suppliers or were unable to secure required rights for materials from suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis and on acceptable terms, if at all. An interruption in our operations could occur if we encounter delays or difficulties in securing these materials or any required rights to these materials, if the quality of the materials supplied do not meet our requirements, or if we cannot then obtain an acceptable substitute. The time and effort required to qualify a new supplier and ensure that the new materials provide the same or better quality results could result in significant additional costs. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws by us or our agents. +We are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), which prohibits companies and individuals from corruptly making payments, directly or indirectly through third parties, to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. We are also subject to the FCPA’s accounting provisions, which requires us to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority and responsibility over our assets. Our reliance on independent distributors to sell our products internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because there are circumstances under which we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing their distributors and other third parties to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also incur severe penalties, including criminal and civil penalties, disgorgement and other remedial measures. +31 +Table of Cont ents +The life sciences research and diagnostic markets are highly competitive. If we fail to effectively compete, our business, financial condition and operating results will suffer. +We face significant competition in the life sciences research and diagnostic markets. We currently compete with both established and early-stage companies that design, manufacture and market systems and consumable supplies. Many of our current competitors have competitive advantages over us, including: +• greater name and brand recognition; +• substantially greater financial and human resources; +• broader product lines; +• larger sales forces and more established distributor networks; +• more substantial intellectual property portfolios; +• larger and more established customer bases and relationships; and +• better established, larger scale and lower cost manufacturing capabilities. +We cannot guarantee that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot guarantee that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results. +Integrating any business, product or technology we acquire can be expensive and time-consuming and can disrupt and adversely affect our ongoing business, including product sales, and distract our management. +We have acquired, and may in the future acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in complementary businesses. Our ability to successfully integrate any business, product or technology we acquire depends on a number of factors, including, but not limited to, our ability to: +• minimize the disruption and distraction of our management and other employees in connection with the integration of any acquired business, product or technology; +• avoid acquisition of unanticipated liabilities related to acquired companies; +• maintain and increase sales of our existing products; +• establish or manage the transition of the manufacture and supply of any acquired product; +• identify and add the necessary sales, marketing, manufacturing, regulatory and other related personnel, capabilities and infrastructure that are required to successfully integrate any acquired business, product or technology; +• manage the transition and migration of acquired personnel and all commercial, financial, legal, regulatory and other pertinent information relating to any acquired business, product or technology; +• comply with legal, regulatory and contractual requirements applicable to any acquired business, product or technology; and +• maintain and extend intellectual property protection for any acquired product or technology. +32 +Table of Cont ents +If we are unable to perform the above functions or otherwise effectively integrate any acquired businesses, products or technologies, our business, financial condition and operating results will suffer. +Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +Risks Related to Government Regulation and Diagnostic Product Reimbursement +Changes in U.S. government policies, including increased tariffs and potential reductions in federal research funding, could adversely affect our business. +Recent policy actions, including the imposition of new tariffs on imported materials and goods from certain foreign countries, may have an adverse impact on our business. Increased tariffs on materials, goods and components used by us or our suppliers could raise our production costs, disrupt our supply chain and reduce our competitiveness in the marketplace. +Additionally, reduction in or suspension of certain federal research grants (or certain components of grants), including funding from the National Institutes of Health (NIH), may negatively impact spending within our industry and cause uncertainty. Certain of our customers, including academic institutions and research organizations, may depend in whole or in part on federal grants to advance their medical research activities. Any prolonged suspensions or reductions in such funding could slow innovation, delay collaborations, and limit the adoption of new technologies that contribute to our business growth. +If these or similar policy changes continue or expand, we may face increased costs and demand for our products could be impacted. We cannot predict the full extent of these impacts, but any prolonged disruption could adversely affect our business, financial condition, and results of operations. +If the FDA determines that our products are subject to regulation as medical devices, if the FDA modifies its regulations to require that our LDTs are subject to regulation as devices, or if we seek to market our products for clinical diagnostic or health screening use, we will be required to comply with medical device law, including in some cases a requirement to obtain regulatory clearance(s) or approval(s). Any such regulatory process would be expensive, time-consuming and uncertain both in timing and in outcome. +We focused initially on the life sciences research market. This includes offering products for use by laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. Accordingly, the majority of our products are labeled as “Research Use Only” (“RUO”). While we focused initially on the life sciences research market and RUO products only, our strategy includes expanding our product line to encompass products that are intended to be used for the diagnosis of disease, including LDTs and in vitro diagnostic (“IVD”) devices, either alone or in collaboration with third parties. IVD products are subject to regulation by the FDA, or comparable international agencies, as medical devices including requirements for regulatory clearance or approval of such products before they can be marketed. +The process of obtaining regulatory clearances to market a medical device can be costly and time consuming, and we or our collaborators may not be able to obtain these clearances or approvals on a timely basis, if at all. In general, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“FDCA”), or is the subject of an approved Premarket Approval (“PMA”), unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to a legally marketed predicate device, which can include pre-amendment, 510(k)-exempt, 510(k) cleared products, or PMA-approved products that have subsequently been down-classified. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is novel, it is automatically classified into Class III, and the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek classification of the device through the de novo classification process. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for our intended use. +33 +Table of Cont ents +If any of our products are subject to medical device regulation, we would be subject to a substantial number of additional requirements for medical devices, including establishment registration, device listing, quality system regulations — which cover the design, testing, production, control, quality assurance, labeling, packaging, servicing, sterilization (if required), and storage and shipping of medical devices (among other activities) — product labeling, advertising, recordkeeping, post-market surveillance, post-approval studies, adverse event reporting, and correction and removal (recall) regulations. One or more of the products we may develop using our technology may also require clinical trials in order to generate the data required for a PMA, de novo classification request or 510(k) premarket notification. Complying with these requirements may be time- consuming and expensive. We may be required to expend significant resources to ensure ongoing compliance with the FDA regulations. Failure to comply with these requirements may subject us to a range of enforcement actions, such as warning letters, injunctions, civil monetary penalties, criminal prosecution, recall and/or seizure of products, and revocation of marketing authorization, as well as significant adverse publicity. If we fail to obtain, or experience significant delays in obtaining, regulatory approvals for IVD products, such products may not be able to be launched or successfully commercialized in a timely manner, or at all. +LDTs are a subset of IVD tests that are offered as services by Clinical Laboratory Improvement Amendments of 1988 (“CLIA”)-certified high complexity clinical laboratories and designed, manufactured and used within a single laboratory. In July 2022, we launched an LDT to quantitatively measure p-Tau 181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease, and in January 2023, we launched an LDT to quantitatively measure neurofilament light chain (“NfL”) in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. In October 2023, FDA issued a proposed rule regarding LDTs that would make explicit that in vitro diagnostic products are devices under the FDCA, including when the manufacturer is a laboratory. FDA finalized this rule in April 2024. Under the Final Rule, FDA will increase our regulation of LDTs by phasing out our general enforcement discretion approach, and phase in medical device regulation, for most LDTs over a period of four years. However, FDA intends to exercise continued enforcement discretion from certain aspects of medical device regulation for certain types of LDTs. For example, FDA intends to exercise regulatory discretion to not require premarket review or most quality system requirements for “currently marketed” LDTs, which include LDTs that were offered as of May 6, 2024, which is the date the FDA’s rule was finalized. Because our LDTs were offered as of May 6, 2024, they may qualify as “currently marketed” LDTs, which means they would not be subject to premarket review or certain quality system requirements, although compliance with other aspects of medical device regulation would apply. Certain groups have challenged the legality of FDA’s Final Rule regarding LDTs, asserting (among other things) that the rule exceeds FDA’s statutory authority to regulate medical devices. That lawsuit is pending, with a decision from the District Court expected sometime in 2025. It is also possible that the federal government will modify, delay, or revoke the Final Rule. If the Final Rule is not modified, delayed, revoked, or invalidated when the requirements of the rule go into effect, the rule will result in an increased regulatory burden, including additional costs and delays in introducing new tests. FDA’s rule could also have impacts on our business more broadly, given that many of our customers would be subject to additional regulation and delays, which could potentially affect the development of new diagnostics that incorporate our instruments or consumables. This also may increase costs and regulatory burdens on laboratories that develop LDTs, thereby reducing the financial incentive for laboratories to develop new LDTs or invest in instruments, which could reduce demand for our instruments and our other products. +Foreign jurisdictions have laws and regulations similar to those described above, which may adversely affect our ability to market our products as planned in such countries. The number and scope of these requirements are increasing. As in the United States, the cost and time required to comply with regulatory requirements may be substantial, and there is no guarantee that we will obtain the necessary authorization(s) required to make our products commercially viable. In addition, the imposition of foreign requirements may also have a material adverse effect on the commercial viability of our operations. +Our products may in the future be subject to product recalls that could harm our reputation, business and financial results. +The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products, including RUO products, in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall of a medical device must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. +34 +Table of Cont ents +U.S. legislative, FDA or global regulatory reforms may make it more difficult and costly for us to obtain any required regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. For example, in December 2022, Congress enacted the Food and Drug Omnibus Reform Act of 2022 (“FDORA”). FDORA reauthorized the FDA to collect device user fees and contained substantive amendments to the device provisions of the FDCA, including imposing new cybersecurity and clinical trial requirements for devices. Congress has also considered, but not yet passed, legislation to impose a new FDA regulatory framework for all diagnostics, including IVD devices and LDTs. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business. +In addition, in the E.U. new regulations recently entered into force that result in greater regulation of medical devices and IVDs. The new IVD regulation (the “IVD Regulation”) is significantly different from European directive for IVD medical devices (the “IVD Directive”) that it replaces in that it ensures that the new requirements apply uniformly and on the same schedule across the member states, includes a risk-based classification system and increases the requirements for conformity assessment. The CE registration for UmanDiagnostics AB’s (“Uman’s”) NfL enzyme-linked immunosorbent assay (“ELISA”) kit for cerebral spinal fluid was approved in March 2014 under the IVD Directive. Under the IVD Directive the assay is classified as a general IVD product, and required self-certification with no involvement of a notified body/authority. The IVD Regulation introduces a new classification system for IVDs and assessment by a notified body is required for class B, C and D products. Uman’s NfL ELISA kit for cerebrospinal fluid (“CSF”) is classified as a class B product and must fully comply with (and have a CE mark issued under) the IVD Regulation by May 2027 (subject to extension of the transitional periods in the IVD Regulation). The new requirements include an ISO 13485 certification of the quality system (which Uman received in July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g. clinical evidence and post-market activities). The work to evaluate and to meet the new technical requirements is on-going. +Our failure to continue to comply with applicable foreign regulatory requirements, including those administered by authorities of the European Economic Area (“EEA”) countries, could result in enforcement actions against us, including refusal, suspension or withdrawal of our CE Certificates of Conformity by our notified body, which could impair our ability to market products in the EEA in the future. +If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our Accelerator laboratory operations or continue offering our LDTs. +CLIA is a federal law that regulates clinical laboratories that perform examination of human specimens for the purpose of providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of health of, human beings. The operation of our CLIA-certified laboratory is subject to regulation by numerous federal, state and local governmental authorities in the United States. This laboratory holds a CLIA certificate of compliance for high- complexity testing and is licensed by California, Maryland, Massachusetts, Pennsylvania and Rhode Island, and has applied for a license in the State of New York. We may seek to obtain other state licenses if required in the future. Failure to comply with federal or state regulations or changes in those regulatory requirements could result in a substantial curtailment or even prohibition of the operations of our laboratory and could have an adverse effect on our business. To maintain CLIA certification, laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make unannounced inspections of these laboratories. If we were to lose our CLIA certification or any required state licenses, whether as a result of a revocation, suspension or limitation, we could have a material adverse effect on our business. +35 +Table of Cont ents +We expect to rely on third parties in conducting any required future studies of diagnostic products that may be required by the FDA or other regulatory authorities, and those third parties may not perform satisfactorily. +We do not have the ability to independently conduct clinical trials or other studies that may be required to obtain FDA and other regulatory clearance or approval for future diagnostic products. Accordingly, we expect that we would rely on third parties, such as clinical investigators, CROs, consultants, and collaborators to conduct such studies if needed. For example, we are currently working with the Alzheimer’s Drug Discovery Foundation and the Global Alzheimer’s Platform Foundation on prospective clinical trials for our assays. Our reliance on these third parties for clinical and other development activities would reduce our control over these activities. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised, we may not be able to obtain regulatory clearance or approval. +If diagnostic procedures that are enabled by our technology are subject to unfavorable pricing regulations or third-party coverage and reimbursement policies, our business could be harmed. +The ability of us, our customers or our collaborators to commercialize diagnostic tests based on our technology, including LDTs that we have launched or may launch in the future, will depend in part on the extent to which coverage and reimbursement for these tests will be available from government health care programs, private health insurers and other third-party payors. In the United States, the principal decisions about reimbursement for new technologies are often made by the Center for Medicare & Medicaid Services (“CMS”). Private payors often follow CMS’s reimbursement policies to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement. However, a significant trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of payments for particular products and procedures. We cannot be sure that coverage will be available for any diagnostic tests based on our technology, and, if coverage is available, the level of reimbursement. Payor coverage and reimbursement decisions may impact the demand for those tests. If coverage is not available or the reimbursement amount is inadequate, any tests for which marketing authorization is received may not be able to be successfully commercialized. +Risks Related to our Operations +We depend on our information technology systems, and any failure of these systems could harm our business. +We depend on information technology and telecommunications systems to operate our business. Our enterprise software systems affect a broad range of business processes and functional areas, including, for example, systems handling human resources, accounting, manufacturing, inventory control, financial controls and reporting, sales administration, and other infrastructure operations. We maintain preventive and detective security controls and seek to enhance such controls by, for example, augmenting the monitoring and alerting functions, network design, and automatic countermeasure operations of our technical systems. We also periodically assess the adequacy of our hardware and systems and are planning to upgrade hardware and systems where appropriate. These information technology and telecommunications systems support a variety of functions, including manufacturing operations, quality control, customer service support, finance, and other general administrative activities. +Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications, systems or network failures, malicious human acts, and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses, and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, those measures may be inadequate and failures or significant downtime of our information technology or telecommunications systems or those used by our third-party suppliers could prevent us from operating our business and managing the administrative aspects of our business. Loss of data or a material delay in our access to our data due to a security breach or other interruption could also prevent us from operating our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business. +36 +Table of Cont ents +Cybersecurity breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. +In the ordinary course of our business, we collect and store sensitive data, and intellectual property and proprietary business information owned or controlled by us or our customers. This data encompasses a wide variety of business-critical information including research and development information, operational information, commercial information, and business and financial information. We face four primary risks relative to protecting this critical information: loss of access; inappropriate disclosure; inappropriate modification; and inadequate monitoring of our controls over the first three risks. +The secure processing, storage, maintenance, and transmission of critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses, breaches, interruptions due to employee error, malfeasance, faulty password management, lapses in compliance with privacy and security mandates, or other disruptions. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, no security measure is infallible and there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions will not be successful or damaging. Our information technology systems may have vulnerabilities, and we may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyberattacks, such as ransomware attacks. Although we have experienced cybersecurity incidents from time to time that have not had a material adverse effect on our business, financial condition, or results of operations, there can be no assurance that a cyber-attack, security breach, or other cybersecurity incident will not have a material adverse effect on us in the future. A significant cyber incident, including system failure, security breach, disruption by malware or other damage, could interrupt or delay our operations, result in a violation of applicable cybersecurity and privacy and other laws, damage our reputation, cause a loss of customers, or expose sensitive customer data, or give rise to monetary fines and other penalties, which could be significant. +Third parties may attempt to fraudulently induce employees or other persons into disclosing usernames, passwords, or other sensitive information, which may in turn be used to access our information systems, commit identity theft or carry out other unauthorized or illegal activities. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost, or stolen. We engage third-party vendors and service providers to store and otherwise process some of our data, including sensitive and personal information. Our vendors and service providers may also be the targets of the risks described above, including cyberattacks, malicious software, phishing schemes, and fraud. Our ability to monitor our vendors and service providers’ data security is limited, and third parties may be able to circumvent any security measures, resulting in the unauthorized access to, misuse, disclosure, loss or destruction of our data, including sensitive and personal information, and disruption of our or third-party service providers’ systems. We and our third-party service providers may face difficulties in identifying, or promptly responding to, potential security breaches and other instances of unauthorized access to, or disclosure or other loss of, information. Any hacking or other attack on our or our third-party service providers’ or vendors’ systems, and any unauthorized access to, or disclosure or other loss of, information suffered by us or our third-party service providers or vendors, or the perception that any of these have occurred, could result in legal claims or proceedings, loss of intellectual property, liability under laws that protect the privacy of personal information, negative publicity, disruption of our operations and damage to our reputation, which could divert our management’s attention from the operation of our business and materially and adversely affect our business, revenues and competitive position. +Any security breach or interruption, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by state or federal governments or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful. +37 +Table of Cont ents +In addition, our insurance may be insufficient to cover our losses resulting from cyber-attacks, breaches, or other interruptions, and any incidents may result in loss of, or increased costs of, such insurance. The successful assertion of one or more large claims against us that exceed available insurance coverage, the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage, could have a material adverse effect on our business, including our financial condition, results of operations and reputation. +We are currently subject to, and may in the future become subject to additional, U.S. federal and state and international laws and regulations imposing obligations on how we collect, store and process personal information. Our actual or perceived failure to comply with such obligations could harm our business. Ensuring compliance with such laws could also impair our efforts to maintain and expand our future customer base, and thereby decrease our revenue. +In the ordinary course of our business, we collect, store, transfer, use or process sensitive data, including personally identifiable information of employees and others, and intellectual property and proprietary business information owned or controlled by itself and other parties. The secure processing, storage, maintenance, and transmission of this critical information are vital to our operations and business strategy. We are, and may increasingly become, subject to various laws and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The regulatory environment related to data privacy and security is increasingly rigorous, with new and constantly changing requirements applicable to our business, and enforcement practices are likely to remain uncertain for the foreseeable future. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may have a material adverse effect on our business, financial condition, results of operations and prospects. +In the United States, various federal and state regulators, including governmental agencies like the Federal Trade Commission, have adopted, or are considering adopting, laws and regulations concerning personal information and data security. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international, or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. For example, the California Consumer Privacy Act (the “CCPA”), which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide disclosures to California consumers regarding the processing of their personal data, as well as data protection and privacy rights, including the ability to opt-out of certain sales or sharing of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. In November 2020, California also passed the California Privacy Rights Act (the “CPRA”), which became effective on January 1, 2023 and significantly expands the CCPA, including by introducing additional obligations such as data minimization and storage limitations and granting additional rights to consumers. More recently, other states, including Connecticut, Colorado, Utah and Virginia have passed comprehensive state data privacy laws, and states like Washington and Nevada have enacted consumer health privacy laws. Most of these laws are enforced by state attorneys general, but there is the potential for private actions by plaintiffs in some circumstances under certain laws, including under Washington’s consumer health data privacy law. In addition, laws in all 50 U.S. states require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. State laws are changing rapidly and there is discussion in the U.S. Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted. These and future laws and regulations may increase our compliance costs and potential liability. +Furthermore, regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) establish privacy and security standards that limit the use and disclosure of individually identifiable health information (known as “protected health information”) and require the implementation of administrative, physical, and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information. Determining whether information constitutes protected health information has been handled in compliance with applicable privacy standards and our contractual obligations can require complex factual and statistical analyses and may be subject to changing interpretation. Although we take measures to protect sensitive data from unauthorized access, use or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance or other malicious or inadvertent disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, manipulated, publicly disclosed, lost, or stolen. Any such access, breach or other loss of information could result in legal claims or proceedings, and liability under federal or state laws that protect the +38 +Table of Cont ents +privacy of personal information, such as, if applicable, the HIPAA, the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), and regulatory penalties. Where such laws are applicable, notice of breaches must be made to affected individuals, the Secretary of the Department of Health and Human Services, and for extensive breaches, notice may need to be made to the media. Such a notice could harm our reputation and our ability to compete. +Outside of the United States, many countries have privacy and data security laws and regulations concerning the collection and use of personal data, including but not limited to the GDPR and China’s Personal Information Protection Law. The GDPR, which governs the collection and use of personal data in the E.U. and is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the E.U. to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. While we have taken steps to comply with the GDPR, including reviewing our security procedures and entering into data processing agreements with relevant contractors, we cannot guarantee that our compliance efforts will be fully successful. +Risks Related to Intellectual Property +If we are unable to protect our intellectual property, our ability to maintain any technological or competitive advantage over our competitors and potential competitors may be reduced, and our business may be harmed. +We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us, we may lose our technological or competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. +Our currently pending or future patent applications may not result in granted patents, and we cannot predict how long it will take for such patents to be granted. It is possible that, for any of our patents that have granted or that may grant in the future, others will design around our patented technologies. Further, other parties may challenge any patents granted to us and courts or regulatory agencies could hold our patents to be invalid or unenforceable. We may not be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, or to such patents being interpreted narrowly or otherwise in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our competitors may be diminished because of these uncertainties. For these and other reasons, our intellectual property may not provide us with any competitive advantage. To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate coverage over our products and protection against our competitors’ products, our competitive position could be adversely affected, as could our business. +In addition to pursuing patents on our technology, we also rely upon trademarks, trade secrets, copyrights and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. In addition, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be undermined. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time-consuming, the outcome would be unpredictable, and any remedy may be inadequate. In addition, courts outside of the United States may be less willing to protect trade secrets. +39 +Table of Cont ents +Some of our owned and in-licensed intellectual property has been discovered through government-funded programs and thus is subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers. +Some of the intellectual property rights we own and have in-licensed has been generated through the use of U.S. government funding and are therefore subject to certain federal regulations. For example, some of the issued U.S. patents we own and all of the intellectual property rights licensed to us under our license agreement with Tufts University (“Tufts”) have been generated using U.S. government funds. As a result, the U.S. government has certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act of 1980. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if the government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government, elect title, and file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturing may limit our ability to license the applicable patent rights on an exclusive basis under certain circumstances. +Our Simoa bead-based technology is licensed to us by Tufts. Any loss of our rights to this technology or other technologies we license could prevent us from selling our products. +Our Simoa bead-based technology is licensed exclusively to us from Tufts. We do not own the patents that underlie this license. Our rights to use this technology and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of the license. Our principal obligations under our license agreement with Tufts are as follows: +• making royalty payments; +• making milestone payments; +• paying annual maintenance fees for the underlying patents; +• using commercially reasonable efforts to develop and sell a product using the licensed technology and developing a market for such product; +• paying and/or reimbursing fees related to prosecution, maintenance and enforcement of patent rights; and +• providing certain reports. +If we breach any of these obligations, Tufts may have the right to terminate the license, which could result in us being unable to develop, manufacture and sell products using our Simoa bead-based technology or a competitor gaining access to the Simoa technology. Termination of our license agreement with Tufts would have a material adverse effect on our business. +In addition, we are a party to a number of other agreements that include licenses to intellectual property, including non-exclusive licenses. We expect that we may need to enter into additional license agreements in the future. Our business could suffer materially and adversely, for example, if any current or future licenses terminate, if the licensors fail to abide +40 +Table of Cont ents +by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. +If we or any of our partners are sued for infringing intellectual property rights of third parties, the resulting litigation would be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business. +Our success depends on our ability to develop, manufacture, market and sell our products and perform our services without infringing upon the proprietary rights of third parties. As part of a business strategy to impede our successful commercialization and entry into new markets, competitors have claimed, and may claim in the future, that our products and/or services infringe their intellectual property rights and have suggested, and may suggest in the future, that we enter into license agreements. We believe any such claims made to date are without merit. However, even if such claims are without merit, we could incur substantial costs and divert the attention of our management and technical personnel in defending itself against claims of infringement made by third parties or settling such claims. Any adverse ruling by a court or administrative body, or perception of an adverse ruling, may have a material adverse impact on our ability to conduct our business and our finances. Moreover, third parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more products or services and could result in a substantial award of damages against us. In addition, since we sometimes indemnify customers, collaborators or licensees, we may have additional liability in connection with any infringement or alleged infringement of third party intellectual property. +Because patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our products or proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any of our products. There is a substantial amount of litigation involving patent and other intellectual property rights in our industry. If a third party claims that we or any of our licensors, customers or collaboration partners infringe upon a third party’s intellectual property rights, we may have to: +• seek to obtain licenses that may not be available on commercially reasonable terms, if at all; +• abandon any infringing product or redesign our products or processes to avoid infringement; +• pay substantial damages, including, in exceptional cases, treble damages and attorneys’ fees; +• pay substantial royalties or fees or grant cross-licenses to our technology; or +• defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources. +We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time- consuming and unsuccessful. +Competitors may infringe our patents or the patents that we license. In the event of infringement or unauthorized use, we may file one or more infringement lawsuits. Patent litigation can be very costly and time-consuming, and the outcome is uncertain. In addition, if we or any of our partners were to initiate legal proceedings against a third party to enforce a patent covering one of our products or services, the defendant in such litigation could counterclaim that our patent is invalid and/or unenforceable. In patent litigation, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. The outcome following legal assertions of invalidity and unenforceability is unpredictable. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the challenged patent. Such a loss of patent protection could have a material adverse impact on our business. +We may not be able to protect our intellectual property rights throughout the world, which could have a material adverse effect on our business. +Filing, prosecuting and defending patents on current and future products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside of the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual +41 +Table of Cont ents +property rights to the same extent that federal and state laws do in the United States. Consequently, regardless of whether we are able to prevent third parties from practicing our inventions in the United States, we may not be able to prevent third parties from practicing our inventions in all countries outside of the United States, or from selling or importing products made by using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products, and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as it is in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from competing. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, such as China and certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license and may adversely impact our business. +In addition, we and our partners also face the risk that our products are imported or reimported into markets with relatively higher prices from markets with relatively lower prices, which would result in a decrease of sales and any payments we receive from the affected market. Recent developments in U.S. patent law have made it more difficult to stop these and related practices based on theories of patent infringement. +We use third-party software that may be difficult to replace or may cause errors or failures of our products that could lead to lost customers or harm to our reputation. +We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party software or other third-party software failures could result in errors, defects or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs. +Risks Related to our Common Stock and Being a Public Company +The market price of our common stock has fluctuated significantly and may continue to fluctuate significantly. +The market price of shares of our common stock has been and could continue to be subject to wide fluctuations in response to many factors listed in this section, and others beyond our control, including: +• actual or anticipated fluctuations in our financial condition and operating results; +• announcements by us, our partners or our competitors of new products, significant contracts, restructuring plans, strategic partnerships, joint ventures, collaborations, acquisitions (such as the Merger), commercial relationships or capital commitments, including the Merger; +• competition from existing products or new products that may emerge; +42 +Table of Cont ents +• failure to meet or exceed financial estimates and projections of the investment community or that we may provide to the public; +• issuance of new or updated research or reports by securities analysts or recommendations with respect to our stock; +• positive or adverse regulatory announcements; +• disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; +• commencement of, or our involvement in, litigation; +• fluctuations in the valuation of companies perceived by investors to be comparable to us; +• conditions in our markets; +• manufacturing disputes or delays, product defects or material product quality control issues; +• any future sales of our common stock or other securities; +• any change to the composition of the our board or key personnel; +• general economic conditions and slow or negative growth of our markets; +• a material cybersecurity incident; +• share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; +• announcement or expectation of additional debt or equity financing efforts; and +• other factors described in this Risk Factors section of this Annual Report on Form 10-K. +These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of our common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and life science companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have on occasion instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. +We have never paid dividends on our capital stock, and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases. +We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the stockholders in the foreseeable future. Consequently, in the foreseeable future, stockholders will likely only experience a gain from an investment in our common stock if the price of our common stock increases. +43 +Table of Cont ents +Anti-takeover provisions contained in our restated certificate of incorporation and restated by-laws, as well as provisions of Delaware law, could impair a takeover attempt. +Our restated certificate of incorporation, restated by-laws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by the our board. Our corporate governance documents include provisions: +• authorizing our board to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board may determine; +• specifying that special meetings of our stockholders can be called only by our board and that our stockholders may not act by written consent; +• establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board; +• providing that directors may be removed only for cause; +• providing that our board may create new directorships and that vacancies on the board may be filled only by a majority of directors then in office, even though less than a quorum; +• establishing that our board is divided into three classes with each class serving staggered three-year terms; +• providing that our board may amend the our bylaws without approval of our stockholders; and +• requiring a super-majority of votes to amend certain of the above-mentioned provisions. +These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the DGCL, which prevents some stockholders holding more than 15% of outstanding our common stock from engaging in certain business combinations without approval of the holders of substantially all of the outstanding our common stock. +Any provision of our certificate of incorporation, our bylaws or the DGCL that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +ITEM 1B. UNRESOLVED STAFF COMMENTS +Not applicable. +ITEM 1C. CYBERSECURITY +We maintain a cybersecurity risk management program designed to identify, assess, manage, mitigate and respond to cybersecurity threats. Our cybersecurity program is overseen by our Chief Information Officer (“CIO ”), who has more than 20 years of experience in information technology . This program incorporates policies, processes, and activities over domains such as access control; facility and data protection; IT systems and data transmission security; threat intelligence and incident response; third-party risk management ; disaster recovery; and vulnerability management. We have a comprehensive cybersecurity policy in place that includes robust measures to protect our data and systems from cyber threats, ensuring the integrity and confidentiality of our information. +We have implemented a risk-based approach to identify and assess the cybersecurity threats that could affect our business and information systems. Thus, we base our program on multiple security frameworks including the National Institute of Standards and Technology (“NIST”), HIPAA, and privacy laws such as the E.U.’s GDPR. We also require that third-party service providers with access to personal or proprietary information implement and maintain cybersecurity practices consistent with applicable legal standards. +44 +Table of Cont ents +Cybersecurity is complex and subject to constantly evolving threats. Accordingly, we engage a range of external experts, including cybersecurity consultants and auditors in evaluating and testing our risk management systems. These partnerships enable us to leverage specialized knowledge and insights. Our collaboration with these third-party experts includes regular audits, threat assessments, and consultation on security enhancements. +Our CIO is tasked with ensuring that the highest levels of management and our Board of Directors are informed about the cybersecurity posture and potential risks facing the Company. Our CIO regularly briefs our CEO about cybersecurity risk management. The CIO’s staff regularly informs the CIO about the latest developments in cybersecurity, including potential threats and risk management techniques. In the event of a cybersecurity incident, the CIO is informed promptly following its detection, and our response is governed by a detailed incident response plan that includes prompt actions to mitigate the impact of the incident and longer-term strategies for remediation and prevention of future incidents. The CIO has also chartered an Information Security Steering Committee made up of cross-functional executive leaders that meets quarterly on topics such as the current cybersecurity landscape and emerging threats; status of ongoing cybersecurity initiatives and strategies; incident reports and learnings from any cybersecurity events; and compliance with regulatory requirements and industry standards. +Cybersecurity risk management is integrated into our broader risk management framework. The Audit Committee of our Board of Directors, which has responsibility for oversight of risk management, also has responsibility for oversight of our program, policies and procedures related to information security and data protection. On a regular basis, the CIO reports to the Audit Committee of our Board of Directors on cybersecurity risks as well as mitigation strategies and the status of initiatives to strengthen our information security systems. The CIO also provides periodic updates to our full Board of Directors, as appropriate. We also mandate a rigorous cybersecurity training program for all employees, which includes regular updates and assessments to ensure they are equipped to recognize and respond to potential cyber threats. +For a discussion of our risks related to cybersecurity, see the section titled, “ Item 1A. Risk Factors – Risks Related to our Operations – Cybersecurity breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation .” +ITEM 2. PROPERTIES +Our corporate headquarters are currently located in Billerica, Massachusetts, which consists of an approximately 91,600 square foot facility we lease for office, laboratory, and manufacturing purposes. We also lease office and laboratory space domestically in Bedford, Massachusetts, and internationally in the Netherlands, Sweden, and China. In the first quarter of 2022, we executed a lease for 85,800 square feet of office and laboratory space in Bedford, Massachusetts. The initial term of the Bedford lease is eight years and nine months beginning on May 1, 2022. We do not currently occupy one of the two Bedford facilities. +We believe our facilities are adequate and suitable for our current operations and that, should it be needed, additional or alternative space is available to accommodate our operations. +ITEM 3. LEGAL PROCEEDINGS +In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation consisting of intellectual property, contractual, employment, and other matters. While the outcome of any such actions or proceedings cannot be predicted with certainty, as of the date of this Annual Report on Form 10-K, we were not party to any legal proceedings, the outcome of which would be expected to have a material adverse effect on our financial condition or results of operations. Regardless of any outcome, litigation can have a material adverse effect on us due to defense and settlement costs, diversion of management resources, and other factors. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +45 +Table of Cont ents +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES +Market Information +Our common stock is traded on The Nasdaq Global Market under the symbol “QTRX.” +Holders of Record +As of March 3, 2025, there were approximately 18 holders of record of our common stock. +Dividends +Dividends are declared at the discretion of our Board of Directors and depend on actual cash flow from operations, our financial condition, capital requirements, and any other factors our Board of Directors may consider relevant. Since our inception, we have not declared or paid any dividends. +Securities Authorized for Issuance under Equity Compensation Plans +Refer to the section titled “Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K for information required by Item 201(d) of Regulation S-K. +Unregistered Sales of Securities +There were no unregistered sales of equity securities during the year ended December 31, 2024. +Issuer Purchases of Equity Securities +Not applicable. +46 +Table of Cont ents +Stock Performance Graph +The following graph compares the cumulative total shareholder returns over the past five years for our common stock, the NASDAQ Composite Index, and the NASDAQ Biotechnology Index, assuming $100 invested on December 31, 2019, and reinvestment of dividends, if paid: +*$100 invested on 12/31/19 in stock or index, including reinvestment of dividends. +Fiscal year ending December 31. +ITEM 6. RESERVED +Not applicable. +47 +Table of Cont ents +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of Quanterix Corporation for the years ended December 31, 2024 and 2023. For a full understanding of our financial condition and results of operations, this discussion and analysis should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in the section titled “Part II. Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Certain columns and rows may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying unrounded numbers. In addition to historical information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results, performance, or experience may differ materially from those discussed below due to various important factors, risks, and uncertainties, including, but not limited to, those set forth under the sections titled “Part I, Item 1A. Risk Factors” and “Note Regarding Forward-Looking Statements” included in this Annual Report on Form 10-K. Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “it,” “us,“ and “our” in this Annual Report on Form 10-K refer to Quanterix Corporation and its consolidated subsidiaries. +The discussion and analysis of our financial condition as of, and results of operations for the year ended December 31, 2023 as compared to December 31, 2022 is included in the section titled “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2023 , as filed with the U.S Securities and Exchange Commission (the "SEC") on December 23, 2024. +Overview +We are a life sciences company that develops and commercializes next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology and enable customers to reliably detect protein biomarkers at ultra-low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies. The ability of our Simoa platforms to detect proteins in the femtomolar range enables the development of novel therapies and diagnostics and has the potential to identify early-stage disease markers before symptoms appear to facilitate a paradigm shift in healthcare from an emphasis on later-stage treatment to a focus on earlier detection, monitoring, prognosis, and, ultimately, prevention. Our Simoa platforms have achieved significant commercial adoption with an installed base of over 1,000 instruments, and scientific validation with citations in more than 3,200 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology and immunology, and inflammation . +Our instruments are designed to be used either with assays fully developed by us, including all antibodies and supplies required to run the assays, or with “homebrew” assay kits where we supply some of the components required for testing, and the customer supplies the remaining required elements. Accordingly, our installed instruments generate a recurring revenue stream. As the installed base of the Simoa instruments increases, we expect total consumables revenue to increase. +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument, launched in January 2014), collectively “HD Instruments”, that is designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X uses our bead-based technology and assays run on the HD-X are fully automated. At December 31, 2024, approximately 84% of the HD Instrument installed base were HD-X instruments. +Further, we launched our SR-X instrument in 2017 as a compact desktop instrument with a lower price point, more flexible assay preparation, and a wider range of applications. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X. +With our acquisition of Aushon BioSystems, Inc. in 2018, we acquired their CLIA certified laboratory and their proprietary sensitive planar array detection technology. The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of research testing that does not report patient specific results). Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined the planar array technology to develop +48 +Table of Cont ents +the SP-X instrument to provide sensitivity similar to that found in our Simoa bead-based platform. We commercially launched the SP-X instrument in 2019. +Our wholly owned subsidiary UmanDiagnostics AB (“Uman”), a company located in Umeå, Sweden, supplies neurofilament light (“NfL”), antibodies, and enzyme-linked immunoassay (“ELISA”) kits, which are used by researchers and biopharmaceutical and diagnostics companies world-wide in the detection of NfL to advance the development of therapeutics and diagnostics for neurodegenerative conditions. +We also provide contract research services for customers and Laboratory Developed Test (“LDT”) services through our CLIA-certified Accelerator Laboratory. The Accelerator Laboratory provides customers with access to Simoa technology, and supports multiple projects and services, including sample testing, homebrew assay development, custom assay development, and blood-based biomarker testing. To date, we have completed over 2,400 projects for more than 500 customers from all over the world using our Simoa platforms. +We have an extensive base of customers including pharmaceutical, biotechnology, contract research organizations, academic and governmental research institutions. We sell our instruments, consumables, and services through a direct field sales and support organizations in North America and Europe, and through our own sales force and distributors in additional countries, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and the United Arab Emirates. +Our total revenues were $137.4 million and $122.4 million for the years ended December 31, 2024 and 2023, respectively. Since our inception, we have incurred annual net losses, including net losses of $38.5 million and $28.4 million for the years ended December 31, 2024 and 2023, respectively. +We expect to incur significant expenses and operating losses at least through the next 24 months, and we expect our expenses to increase substantially as we: +• expand our sales and marketing efforts to further commercialize our products; +• expand our research and development efforts to improve our existing, or to develop and launch, new assays and instruments, including Simoa ONE. These expenses could be particularly significant if any of its products become subject to additional or more burdensome regulation by the U.S Food and Drug Administration (the "FDA"); +• invest in Lucent Diagnostics, additional LDTs, and other diagnostics initiatives including entry into translational pharma and clinical diagnostic markets; +• seek Premarket Approval (“PMA”) or 510(k) clearance from the FDA for our existing products or new products, including new assays and instruments, if or when we decide to market products for use in the prevention, diagnosis, or treatment of a disease or other condition; +• hire additional personnel to support our growth and research and development; +• strategically acquire and integrate companies or technologies that may be complementary to our business; +• enter into collaboration arrangements, or in-license other products and technologies; and +• add or enhance operational, financial, and management information systems. +Recent Business Developments +ISO 13485 Certification +On January 31, 2025, we received ISO 13485 certification for our operations in Billerica, Massachusetts. ISO 13485 certification indicates that a company has implemented a quality management system that meets international requirements for medical device manufacturing. +49 +Table of Cont ents +Agreement to Acquire Akoya Biosciences, Inc. +On January 9, 2025, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire Akoya Biosciences, Inc. (“Akoya”), a life sciences technology company based in Marlborough, Massachusetts delivering spatial biology solutions through the power of spatial phenotyping. Spatial phenotyping refers to a rapidly evolving technology that enables academic and biopharma scientists to detect and map the distribution of cell types and biomarkers across whole tissue samples at single-cell resolution, enabling advancements in their understanding of disease progression and patient response to therapy. Akoya commercializes proprietary instrument platforms, reagents, software, and services that offer end-to-end solutions to perform tissue analysis and spatial phenotyping from discovery through translational and clinical research and diagnostics. The transaction is part of our plans to establish the first fully integrated technology ecosystem to identify and measure biomarkers across tissue and blood, expand our technology offerings into oncology and immunology, and expand our portfolio of lab service offerings. +Pursuant to the Merger Agreement, a newly formed, wholly owned subsidiary of Quanterix will merge with and into Akoya, with Akoya continuing as the surviving corporation and becoming a wholly owned subsidiary of Quanterix (the “Merger”). Upon completion of the Merger, each issued and outstanding share of common stock of Akoya will be converted into 0.318 of a share of our common stock. The closing of the Merger is subject to a number of conditions and obligations and we expect that, if approved, the Merger will close in the second quarter of 2025. +We and Akoya have also agreed to use our respective reasonable best efforts to cooperate in good faith to enter into one or more agreements pursuant to which we would provide Akoya with bridge financing. Any such financing would be in the form of subordinated convertible note(s) in an aggregate principal amount not to exceed $30.0 million, subject to Akoya having obtained any required consents and satisfied any other conditions under Akoya’s existing credit facility. As of the date of filing of this annual report, we are negotiating the potential terms of such financing. +Acquisition of Emission Inc. +On January 8, 2025, we acquired all of the issued and outstanding shares of capital stock of Emission (the “Emission Transaction”), a life sciences manufacturing company based in Georgetown, Texas, that produces large-scale, highly-uniform dye-encapsulating magnetic beads designed for low and mid-plex assays and a mid-plex platform that reads its proprietary beads. The transaction is part of our plans to secure the use of Emission’s highly controlled beads in our next generation platforms and expansion into a new multi-plex segment targeting third-party original equipment manufacturer customers. Under the Emission Transaction, we made an upfront payment of $10.0 million, with an additional $10.0 million payable upon completion of certain technical milestones. Additionally, the shareholders of Emission (collectively, the “Emission Shareholders”) may receive up to an additional $50.0 million in earnout payments through December 31, 2029, contingent upon the achievement of certain performance milestones. +In connection with the closing of the Emission Transaction, the parties entered into a call option agreement (the “Option Agreement”), in which the Emission Shareholders have the right to repurchase all of the outstanding capital stock of Emission for $10.0 million after five years if Emission’s revenues do not exceed $5.0 million in any one year during such five-year period. If the Emission Shareholders exercise the right to repurchase Emission under the Option Agreement and consummate the repurchase, we will retain a perpetual, fully-paid, irrevocable license to all Emission intellectual property required to continue to manufacture and commercialize our products. +LucentAD Tests +In October 2024, we launched LucentAD Complete, a confirmatory blood biomarker test capable of providing results equivalent to FDA-cleared CSF biomarkers. This test combines p-Tau 217, Amyloid beta 42, Amyloid beta 40, GFAP, and NfL biomarkers, which are recognized by the Alzheimer’s Association as core biomarkers of amyloid and tau, or biomarkers of non-specific processes involved in Alzheimer’s disease pathophysiology. The LucentAD Complete test is intended for patients being evaluated for Alzheimer’s disease. The results from the LucentAD Complete test can aid in the earlier diagnosis of Alzheimer’s disease, as well as the development of personalized treatment plans. +Additionally, our LucentAD Complete and our LucentAD p-Tau 217 blood tests were granted Breakthrough Device designation by the FDA in January 2025 and March 2024, respectively. This designation is granted to products that have the potential to offer more effective diagnosis of life-threatening diseases with an unmet medical need. Proposed indications for these blood tests include use of the test results in patients presenting with cognitive impairment who are being evaluated for Alzheimer’s disease risk to aid in diagnostic evaluation. These tests are not intended as a stand-alone +50 +Table of Cont ents +diagnostic test and test results will be interpreted in conjunction with other diagnostic tools to establish a final clinical diagnosis. These tests have not been otherwise cleared or approved by the FDA and Breakthrough Device designation does not guarantee that the FDA review and approval process will be shortened or that an application will be approved. +We do not expect material revenue from these tests, or other Lucent Diagnostics tests, until 2025 or later, if at all. +Assay Redevelopment Program +During the fourth quarter of 2023, we substantially completed our six-quarter assay redevelopment program. The objective of this operational program was to improve our ability to manufacture and deliver high-quality assays at scale. Since then, and using the improved protocols resulting from the assay redevelopment program, we have launched our new Simoa Advantage PLUS assays and continue to transition existing assays to Advantage PLUS. The improved protocols leverage manufacturing efficiencies and reagent improvements to provide more consistent results and improved lot-to-lot consistency, which also enables production of larger lot sizes with extended shelf lives. Advantage PLUS assays began shipping to customers in the first quarter of 2024. We expect to continue to apply these improved protocols and manufacturing efficiencies to other existing assays, as well as assays that we may develop in the future. +Components of Results of Operations +Revenues +Product Revenue +Our product revenues are generated from sales of (1) instruments and (2) consumables and related revenues. Our products are sold directly to customers and are also sold through distributors in EMEA and Asia Pacific regions. +Instrument revenues consist of sales of our instruments (HD-X, SR-X, and SP-X). We currently sell our products for RUO applications directly to customers or through distributors. Customers' purchase processes for certain of our instruments can be long and as a result, instrument revenue can vary from period-to-period and can be concentrated to a small number of customers in any given period. Instruments sold directly to customers include an initial year service-type warranty, which is recorded in services and other revenue on the Consolidated Statements of Operations. Instruments sold to distributors include a license to import and resell the instruments and an initial year assurance-type warranty. Costs related to assurance-type warranties are recorded in cost of product revenue on the Consolidated Statements of Operations. Instrument sales may also be bundled with assays and other consumables, training, installation, and/or an extended service warranty. +We expect softness in instrument sales to continue in 2025 as a result of what we believe is a constrained capital funding environment. We believe instrument sales will recover with an improvement in the capital funding environment , and further believe the introduction of our Simoa ONE instrument, which is expected to launch by the end of 2025, will help grow instrument sales in future years. +Consumable and other revenues consist of sales of assays fully developed by us, including all antibodies and supplies required to run the assays, or with “homebrew” assay kits where we supply some of the components required for testing, and the customer supplies the remaining required elements. Consumable and other revenues also consist of replacement parts, reagents, and antibodies. +Service and Other Revenue +Service revenues consist of fixed fee contract research services through our Accelerator Laboratory, initial service-type warranties, extended service warranty contracts, repair services, and other services such as training. +Collaboration and License Revenue +Collaboration and license revenues consist of licensing our technology, intellectual property, and know-how associated with our instruments to third parties and for related services. License arrangements consist of sales or usage-based fees and/or future royalties. +51 +Table of Cont ents +Grant Revenue +Grant revenues consist of funding received to perform specific research and development services under grant arrangements. +Cost of Goods Sold and Services +Cost of Product Revenue +Cost of product revenue consists of manufacturing and assembly costs for instruments, related reagents, other consumables, contract manufacturer costs, personnel costs, royalties, overhead, and other direct costs related to product sales. Raw material part costs include inbound shipping and handling costs associated with purchased goods. Cost of product revenue also includes royalty fees due to third parties from revenue generated by collaboration or license deals. +Cost of Service and Other Revenue +Cost of services and other revenue consists of direct costs associated with operating our Accelerator Laboratory on behalf of customers, including raw materials, personnel costs, royalties, allocated overhead and other related costs. Additional costs include costs related to warranty services and other costs of servicing equipment at customer sites. +Research and Development Expense +Research and development expense consists of personnel costs, research supplies, third-party development costs for new products, materials for prototypes, quality assurance, and allocated overhead costs that include facility and other related costs. We have made substantial investments in research and development since our inception and plan to continue to make substantial investments in the future. Our research and development efforts have focused primarily on supporting development and commercialization of new and existing products and improved product quality. We believe that our continued investment in research and development is essential to our long-term competitive position. We expect research and development expense to continue to increase due to continued investment in new instruments, including Simoa ONE, and assay development. +Selling, General and Administrative Expense +Selling, general and administrative expense consists of personnel costs for our sales and marketing, finance, legal, human resources, and general management teams, shipping and handling for product sales, acquisition related costs, other general and administrative costs, as well as professional services costs, such as marketing, advertising, legal and accounting services, and allocated overhead costs that include facility and other related costs. We expect to increase the size of our selling, general and administrative functions to support the growth in our business and newly launched Lucent Diagnostics. However, selling, general and administrative expenses in total are not expected to increase at the same rate in future periods as total revenue or research and development expenses. +The classification of shipping and handling costs for product sales varies from company to company, with some companies recording these as selling, general and administrative expenses and others recording such expenses within costs of goods sold for products. To the extent our classification of these shipping and handling costs differs from the classification used by other companies, our gross margins may not be comparable with those reported by such other companies. +Other Lease Costs +Other lease costs consist of amortization of operating lease right-of-use assets and other facility operating expenses from leased facilities we are not using as a result of the restructuring and strategic realignment plan (the "Restructuring Plan") in August 2022. +Impairment and Restructuring +Impairment and restructuring expense primarily consists of charges recorded as a result of the Restructuring Plan and the corresponding impairment of our goodwill, long-lived assets (including operating lease right-of-use assets, property and equipment) and intangibles, which were determined to have carrying values exceeding their fair values. +52 +Table of Cont ents +Additional impairment expenses consist of assessments of our intangible and long-lived assets annually, or whenever events or circumstances indicate that the carrying amount of the asset(s) may not be recoverable. +Interest Income +Interest income consists of interest earned on cash, cash equivalents, and marketable securities, and the accretion of discounts from the purchase of marketable securities. +Other Income (Expense), Net +Other income (expense), net primarily consists of unrealized and realized gains and losses on foreign currency, and other non-recurring items that are not a part of our core business operations. +Income Tax Expense +Income tax expense consists primarily of income taxes related to federal, state, and foreign jurisdictions in which we conduct business. +Comparison of Results of Operations for Years Ended December 31, 2024 and 2023: +The following table sets forth select Consolidated Statements of Operations data, and such data as a percentage of total revenues (in thousands, except percentages): +Year Ended December 31, Increase (Decrease) +2024 % of revenue 2023 % of revenue Amount % +Revenues: +Product revenue $ 79,740 58 % $ 79,670 65 % $ 70 — % +Service and other revenue 51,244 37 % 40,089 33 % 11,155 28 % +Collaboration and license revenue 4,452 3 % 1,380 1 % 3,072 223 % +Grant revenue 1,985 1 % 1,229 1 % 756 62 % +Total revenues 137,421 100 % 122,368 100 % 15,053 12 % +Costs of goods sold and services: +Cost of product revenue 33,304 24 % 29,103 24 % 4,201 14 % +Cost of service and other revenue 21,013 15 % 19,041 16 % 1,972 10 % +Total costs of goods sold and services 54,317 39 % 48,144 39 % 6,173 13 % +Gross profit 83,104 60 % 74,224 61 % 8,880 12 % +Operating expenses: +Research and development 31,082 23 % 26,064 21 % 5,018 19 % +Selling, general and administrative 101,618 74 % 89,111 73 % 12,507 14 % +Other lease costs 3,020 2 % 3,712 3 % (692) (19) % +Impairment and restructuring — — % 1,328 1 % (1,328) (100) % +Total operating expenses 135,720 99 % 120,215 98 % 15,505 13 % +Loss from operations (52,616) (39) % (45,991) (37) % (6,625) 14 % +Interest income 14,655 11 % 15,839 13 % (1,184) (7) % +Other income (expense) (136) — % 2,517 2 % (2,653) (105) % +Loss before income taxes (38,097) (28) % (27,635) (22) % (10,462) 38 % +Income tax expense (434) — % (719) (1) % 285 (40) % +Net loss $ (38,531) (28) % $ (28,354) (23) % $ (10,177) 36 % +53 +Table of Cont ents +Revenues +Total revenues increased $15.1 million, or 12%, to $137.4 million for the year ended December 31, 2024, compared to $122.4 million for the year ended December 31, 2023. +Product revenue of $79.7 million for the year ended December 31, 2024 consisted of instrument sales of $10.5 million and sales of consumables and other products of $69.3 million. This represented an increase of $0.1 million, or less than 1%, compared to product revenue of $79.7 million for the year ended December 31, 2023. The increase in product revenue was primarily due to a $5.3 million increase in sales of consumables and higher selling prices and was mostly offset by a $5.3 million decrease in instrument sales due to reduced demand. +Service revenue was $51.2 million for the year ended December 31, 2024, compared to $40.1 million for the year ended December 31, 2023, an increase of $11.2 million, or 28%. This increase was primarily due to a $10.2 million increase in Accelerator Laboratory revenue driven b y higher volumes of sample testing and assay development services, as well as higher selling prices. +Collaboration and license revenue was $4.5 million for the year ended December 31, 2024 , compared to $1.4 million for the year ended December 31, 2023, an increase of $3.1 million, or 223%. The increase was primarily due to LDT and other diagnostic related license revenues. +Grant revenue was $2.0 million for the year ended December 31, 2024 , compared to $1.2 million for the year ended December 31, 2023 , a increase of $0.8 million , or 62%. The increase was primarily due to completion of milestones under certain grants. +Cost of Goods Sold and Services +Total cost of goods sold and services increased $6.2 million, or 13%, to $54.3 million for the year ended December 31, 2024 compared to $48.1 million for the year ended December 31, 2023. +Cost of product revenue increased $4.2 million, or 14%, to $33.3 million for the year ended December 31, 2024, compared to $29.1 million for the year ended December 31, 2023. The increase was primarily due to lower production volume and output, which led to decreased labor and overhead capitalization, increased costs due to the introduction of new assays, and increased compensation and benefits costs related to increased headcount. These increases were partially offset by improvement in inventory management and manufacturing processes and lower instrument sales. +Cost of service and other revenue increased $2.0 million, or 10%, to $21.0 million for the year ended December 31, 2024, compared to $19.0 million for the year ended December 31, 2023. This increase was primarily due to an increase in department costs, including compensation and benefits costs related to increased headcount and lab supplies, as a result of increased demand for Accelerator Laboratory services. Although service and other revenue increased by 28% during the same period, these costs did not increase at the same rate compared to the prior year due to larger project sizes and improved efficiency delivering Accelerator Laboratory services. +Research and Development +Research and development expense increased $5.0 million, or 19%, to $31.1 million for the year ended December 31, 2024, compared to $26.1 million for the year ended December 31, 2023. This increase was primarily due to a $3.2 million increase related to headcount, consisting of $2.9 million in compensation and benefit costs and $0.4 million in stock-based compensation expense, and a $1.7 million increase in costs of outside services and research lab supplies and equipment to enable product development. These increases were partially offset by a $0.4 million decrease from the disposal of certain assets in 2023, which did not repeat in 2024. +54 +Table of Cont ents +Selling, General and Administrative +Selling, general and administrative expense increased $12.5 million, or 14% to $101.6 million for the year ended December 31, 2024, compared to $89.1 million for the year ended December 31, 2023. The increase was primarily due to (1) a $7.1 million increase related to headcount, consisting of $4.7 million in compensation and benefit costs and $2.4 million in stock-based compensation expense, (2) a $3.7 million increase in professional services and consulting fees related to our efforts to remediate the material weaknesses in our internal control over financial reporting described in our Annual Report on Form 10-K (as amended by Amendment No.1 to such report on Form 10-K/A) for the year ended December 31, 2023, the restatement of our financial statements completed on December 23, 2024, and due diligence and other acquisition costs related to the Emission and Akoya transactions, (3) a $0.7 million increase in marketing expense for promotion and branding, (4) a $0.6 million increase in software and information technology expenses, and (5) a $0.4 million increase in travel and related expenses. Included within selling, general and administrative expense are $8.1 million and $7.2 million of shipping and handling costs for product sales for the years ended December 31, 2024 and 2023, respectively. +Other Lease Costs +Other lease costs decreased $0.7 million, or 19%, to $3.0 million for the year ended December 31, 2024, compared to $3.7 million for the year ended December 31, 2023. In the fourth quarter of 2024, we began using one of the leased facilities that we did not occupy as a result of the Restructuring Plan. Accordingly, as of the fourth quarter of 2024, the amortization of the operating lease right-of-use asset and related leased facility operating expenses at this facility are no longer recorded in other lease costs. +Impairment and Restructuring +We did not incur any impairment and restructuring costs for the year ended December 31, 2024, compared to $1.3 million for the year ended December 31, 2023. During 2023, we incurred long-lived asset impairment charges associated with leased facilities we were not using. +Interest Income +Interest income decreased by $1.2 million, or 7% to $14.7 million for the year ended December 31, 2024, compared to $15.8 million for the year ended December 31, 2023. This decrease was primarily due to lower interest rates and a lower balance of cash, cash equivalents, and marketable securities. +Other Income (Expense), Net +Other income (expense) was less than $0.1 million of expense for the year ended December 31, 2024, compared to $2.5 million of income for the year ended December 31, 2023. The decrease was primarily due to recognizing a $2.4 million receivable under the Employee Retention Credit established by the Coronavirus Aid, Relief, and Economic Security Act in the third quarter of 2023. +Income Tax Expense +Income tax expense was $0.4 million for the year ended December 31, 2024, as compared to $0.7 million for the year ended December 31, 2023. The change was primarily due to the decrease in the tax expense recorded on the operating results of our foreign subsidiaries. +Liquidity and Capital Resources +Our principal sources of liquidity are cash, cash equivalents, marketable securities, and funds generated from sales of our products and services. As of December 31, 2024, we had cash and cash equivalents of $56.7 million and $232.4 million of available for sale marketable securities. Historically we have financed our operations through funds generated from sales of our products and services, equity offerings, and borrowings from credit facilities. +We believe our cash, cash equivalents, and marketable securities, along with funds generated from sales of our products and services, will be sufficient to meet our anticipated operating cash requirements for at least 12 months from the date of this Annual Report on Form 10-K. +55 +Table of Cont ents +Our liquidity requirements have consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, working capital, and general corporate expenses. Our future capital requirements will depend on many factors, including, but not limited to, our pace of growth, expansion, or introduction of new instruments, assays, and services, including Lucent Diagnostics and Simoa ONE, and advancing access to our diagnostic tests, market acceptance of our products and services, regulatory requirements, regulatory approval of our products or services, and the effects of competition, technological developments, and broader market and economic trends. Our future capital needs will also depend on the level of our merger and acquisition activity, including purchase price payments, earnout obligations, and acquisition and integration costs. Further, we may need additional liquidity as a result of changes in our operations and strategic plan as a result of future acquisitions, investments, or similar transactions. +On January 8, 2025, we completed the acquisition of Emission for an upfront payment of $10.0 million, with an additional $10.0 million payable upon completion of certain technical milestones, and an additional $50.0 million in earnout payments through December 31, 2029, contingent upon the achievement of certain performance milestones. On January 9, 2025, we announced our plan to merge with Akoya in an all stock transaction. Under the terms of the Merger Agreement with Akoya, we and Akoya have also agreed to use our respective reasonable best efforts to cooperate in good faith to enter into one or more agreements pursuant to which we would provide Akoya with up to $30.0 million of bridge financing prior to closing of the Merger. As of the date of filing this annual report, we are negotiating the potential terms of such financing. We regularly assess other potential acquisitions and may need capital to pursue acquisitions of complementary businesses, services, and technologies. +To the extent our existing cash, cash equivalents, and marketable securities are insufficient to fund future activities or requirements to continue operating our business, we may need to raise additional capital. If the conditions for raising capital are favorable, we may seek to finance future cash needs through public or private equity, debt offerings, or other financings. +If needed, we cannot guarantee that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities or issue equity in connection with a merger or acquisition, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, if needed, we may have to delay development or commercialization of our products and services. We also may have to reduce marketing, customer support or other resources devoted to our products, or cease operations. +If the conditions for raising capital are favorable, we may seek to finance future cash needs through public or private equity, debt offerings, or other financings. +Cash Flows +The following table summarizes our cash flows (in thousands): +Year Ended December 31, +2024 2023 +Net cash used in operating activities $ (35,164) $ (18,849) +Net cash used in investing activities (82,265) (148,454) +Net cash provided by financing activities 456 2,691 +Net decrease in cash, cash equivalents, and restricted cash $ (116,973) $ (164,612) +Net Cash Used in Operating Activities +We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to develop new products and services, invest in process and product improvements, and increase our sales and marketing efforts. We have historically experienced negative cash flows from operating activities as we have developed our technology, expanded our business, and built our infrastructure. We expect negative cash flows from operating activities will continue in the future. +56 +Table of Cont ents +Net cash used in operating activities was $35.2 million and $18.8 million for the years ended December 31, 2024 and 2023, respectively. The $16.3 million increase in net cash used in operating activities was primarily driven by an overall increase in our net loss, adjusted for non-cash items, consisting of product development, increases in headcount primarily across product delivery, research and development, and sales functions, and lower production volume and output which led to decreased labor and overhead capitalization. The increase was partially offset by changes in working capital items, primarily an increase in accounts receivable from revenue growth through the fourth quarter of 2024 and an increase in inventory as a result of manufacturing new assays and purchasing materials for additional new assays in 2025. +Net Cash Used in Investing Activities +Our primary investing activities consist of purchases of marketable securities to increase the interest income we would otherwise earn in cash accounts. Additionally, we use funds towards capital expenditures for the purchase of equipment to support our expanding infrastructure and work force. We expect to continue to incur additional capital expenditures related to these efforts in future periods. +Net cash used in investing activities was $82.3 million during the year ended December 31, 2024, which consisted of the purchase of $295.6 million of marketable securities, proceeds from the maturities of marketable securities of $216.7 million, and $3.4 million of purchases of property and equipment. +Net cash used in investing activities was $148.5 million during the year ended December 31, 2023, which consisted of the purchase of $175.6 million of marketable securities, proceeds from the maturities of marketable securities of $31.0 million, and $3.8 million of purchases of property and equipment. +Net Cash Provided by Financing Activities +Financing activities provided $0.5 million and $2.7 million of cash during each of the years ended December 31, 2024 and 2023, respectively, from sales of our common stock under our employee stock purchase plan and from the exercise of options under our equity incentive plan. +Future Cash Obligations +In addition to the future cash obligations described below, we have other payables and liabilities that may be legally enforceable but are not considered contractual commitments. Refer to Note 15 - Commitments and Contingencies in the Notes to Consolidated Financial Statements for a summary of our purchase commitments and other obligations as of December 31, 2024. +Acquisitions +See the sections titled “Recent Business Developments” and “Liquidity and Capital Resources” within Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information on the acquisition of Emission and the proposed Merger with Akoya. +Operating Leases +We lease office, laboratory, and manufacturing space for our employees and operations, as well as office equipment, under non-cancellable operating lease agreements (refer to Note 14 - Leases in the Notes to Consolidated Financial Statements). The remaining duration of non-cancellable operating leases ranges from four months to seven years. Remaining lease payments within one year, within two to three years, within four to five years, and greater than five years from December 31, 2024 are $7.3 million, $15.1 million, $16.1 million, and $7.6 million, respectively. +Critical Accounting Policies and Estimates +Our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience, worldwide economic conditions, both general and specific to the life sciences industry, and on various other assumptions we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an +57 +Table of Cont ents +ongoing basis, and changes in accounting estimates may occur from period to period. Accordingly, actual results could differ significantly from the estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. +Our significant accounting policies are described in Note 2 - Significant Accounting Policies in the Notes to Consolidated Financial Statements. We believe that the assumptions and estimates in the following critical accounting policies involve a greater degree of judgment and complexity and accordingly are the most critical to understanding and evaluating the potential impact to our Consolidated Financial Statements. +Revenue from Contracts with Customers +We generate revenue from the sale of products, services, and licenses, as further described in the section titled “Components of Results of Operations” above. +For contracts with customers, we recognize revenue when a customer obtains control of promised products or services, for an amount that reflects the consideration expected to be received in exchange for those products or services. We follow the five-step framework prescribed by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606 - Revenue from Contracts with Customers (“ASC 606”) to determine revenue recognition: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Revenues are presented net of any sales, value added, or similar taxes collected from customers and remitted to the government. +We determine the transaction price based on the amount of consideration we expect to be entitled to, which is generally equal to our contract amounts. In some cases, our contracts contain variable consideration which primarily relates to (1) sales and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (2) contracts with minimum purchase commitments. For sales and usage-based royalties, ASC 606 provides an exception to estimating variable consideration. Under this exception, we recognize revenues from sales or usage-based royalty revenue at the later of when the sales or usage occurs or the satisfaction (or partial satisfaction) of the performance obligation to which the royalty has been allocated. All other variable amounts are constrained to the minimum guaranteed contract amount so that a reversal of cumulative revenue does not occur in future periods. Once there is no longer uncertainty over a variable amount, any incremental fees we are entitled to are allocated to the related performance obligations. +Our contracts may include either a single promise (referred to as a performance obligation) to transfer a product or service, or a combination of multiple promises to transfer products or services. We evaluate the existence of multiple promises within our contracts by using judgment to determine if (1) the customer can benefit from each contractual promise on its own or together with readily available resources and (2) the transfer of each contractual promise is separately identifiable from other promises in a contract. When both criteria are met, each promise is accounted for as a separate performance obligation. +Sales of instruments directly to customers include installation and an initial year service-type warranty (which guarantees that our instruments are free from material defects in workmanship and materials, excluding normal wear and tear, and maintenance services). We have determined that the instrument and installation are a combined performance obligation. The service-type warranty is considered a separate performance obligation since a customer could benefit from it independently with readily available resources and is capable of being sold on its own. +Sales of instruments to distributors include a license to import and resell the instruments and an initial year of assurance-type warranty (which guarantees that the products conform to our published specifications). We have determined that the instrument and distributor license are a combined performance obligation since the distributor only benefits from the combination of the instrument and ability to resell it. The assurance-type warranty does not create a separate performance obligation under ASC 606. Under ASC Topic 460 – Guarantees , we establish an accrual for estimated assurance-type warranty expense, which is recorded in cost of product revenue on the Consolidated Statements of Operations. +Instrument sales may also be bundled with assays and other consumables, training, and/or an extended service warranty, each of which is considered a separate performance obligation. +58 +Table of Cont ents +Contracts that include rights to additional products or services that are exercisable at a customer’s discretion are generally considered options. We assess if these options provide a material right to the customer and if so, the material right is considered a performance obligation. The identification of material rights requires judgment to determine if the value of the option to purchase additional products and services in relation to options that may be provided to, and prices paid by, customers in the normal course of business. Material rights are recognized when they are exercised by a customer or upon expiration of the right. +For contracts that contain multiple performance obligations, the transaction price is allocated among the performance obligations on a relative basis according to their standalone selling prices (“SSP”). Determining the SSP for performance obligations requires judgment. We determine SSP based on factors including prices charged to customers in observable transactions, internal pricing objectives and list prices, pricing of similar products, expected costs to manufacture our products, and estimated margins. We have more than one range of standalone selling price for certain products and services based on the geographic location of the customer and sales channel. +The majority of our products and services are recognized at the point in time we transfer control to the customer. +For product revenues, direct instrument sales to customers are recognized upon completion of the instrument’s installation. For instrument sales to distributors, revenue is recognized based on the agreed upon shipping terms (either upon shipment or delivery) as that is when title passes to the customer. +Services revenues generated from contract research services in our Accelerator Laboratory are recognized upon completion and delivery of the research results. In cases where we maintain a contractual right to payment for service performed (including a reasonable profit margin), revenue is recognized over time as the services are provided, using an output method that is based on the number of completed results. Service revenues generated from warranties and service contracts are recognized ratably over the service period as the customer simultaneously receives and benefits from the services. +Collaboration and license revenues are recognized at the point in time the license performance obligation is delivered as the customer has the right to use the intellectual property when it is received. Royalty revenues that are sales or usage-based are recognized at the later of when the sales or usage occurs or the satisfaction (or partial satisfaction) of the performance obligation to which the royalty has been allocated. +Inventory Reserves +Inventory is stated at the lower of cost or net realizable value on a first-in, first-out (“FIFO”) basis and includes the cost of materials, labor, and manufacturing overhead. We analyze our inventory levels on each reporting date for slow-moving, excess, and obsolete inventory, and inventory expected to expire prior to being used. Our analysis requires judgment and is based on factors including, but not limited to, our recent historical activity, anticipated or forecasted demand for our products (developed through our planning and sales and marketing inputs), scientific data supporting the estimated life of materials that expire, and market conditions. If we identify adverse conditions exist, such as unfavorable changes in estimated customer demand, the lives of materials that expire, or actual market conditions that may differ from management projections, the carrying value of the inventory is reduced to its estimated net realizable value by providing estimated reserves for excess or obsolete inventory. +Impairment of Other Long-Lived Assets +Our long-lived assets consist of operating lease right-of-use assets, property and equipment, and intangible assets. We review the carrying amount of our long-lived assets for impairment whenever events or circumstances indicate that the estimated useful lives may warrant revision, or that the carrying amount of the assets may not be fully recoverable. To assess whether a long-lived asset or asset group has been impaired, the estimated undiscounted and discounted future cash flows for the estimated remaining useful life or estimated lease term of the asset is compared to its carrying value. Significant judgment is required to estimate future cash flows, including, but not limited to, the expected use of the asset, historical client retention rates, technology roadmaps, consumer awareness, trademark and trade name history, contractual provisions that could limit or extend an asset's useful life, market data, discount rates, and potential sublease opportunities, including rent and rent escalation rates, time to sublease, and free rent periods. To the extent that the future cash flows are less than the carrying value, a long-lived asset or asset group is impaired and written down to its estimated fair value. +59 +Table of Cont ents +Non-GAAP Financial Measures +To supplement our financial statements presented on a U.S. GAAP basis, we present the following non-GAAP financial measures: adjusted gross profit, adjusted gross margin, adjusted total operating expenses, and adjusted loss from operations. These non-GAAP financial measures are calculated by including shipping and handling costs for product sales within cost of product revenue instead of within selling, general and administrative expenses. We use these non-GAAP measures to evaluate our operating performance in a manner that allows for meaningful period-to-period comparison and analysis of trends in our business and our competitors. We believe that presentation of these non-GAAP measures provides useful information to investors in assessing our operating performance within our industry and to allow comparability to the presentation of other companies in our industry where shipping and handling costs are included in cost of goods sold for products. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for, the financial information presented in accordance with U.S. GAAP. +Set forth below is a reconciliation of adjusted gross profit, adjusted gross margin, adjusted total operating expenses, and adjusted loss from operations from their most directly comparable GAAP financial measures: +Reconciliation of Gross Profit, Gross Margin, Total Operating Expenses and Loss from Operations to +Non-GAAP Financial Measures +(Unaudited, amounts in thousands except percentages) +Three Months Ended December 31, Twelve Months Ended December 31, +2024 2023 2024 2023 +Gross profit $ 22,169 $ 19,406 $ 83,104 $ 74,224 +Shipping and handling costs (1,885) (2,142) (8,113) (8,146) +Adjusted gross profit (non-GAAP) $ 20,284 $ 17,264 $ 74,991 $ 66,078 +Total revenues $ 35,161 $ 31,549 $ 137,421 $ 122,368 +Gross margin (gross profit as % of total revenues) 63.0% 61.5% 60.5% 60.7% +Adjusted gross margin (non-GAAP) (adjusted gross profit as % of total revenues) 57.7% 54.7% 54.6% 54.0% +Total operating expenses $ 36,938 $ 33,023 $ 135,720 $ 120,215 +Shipping and handling costs (1,885) (2,142) (8,113) (8,146) +Adjusted total operating expenses (non-GAAP) $ 35,053 $ 30,881 $ 127,607 $ 112,069 +Loss from operations $ (14,769) $ (13,617) $ (52,616) $ (45,991) +Adjusted loss from operations (non-GAAP) $ (14,769) $ (13,617) $ (52,616) $ (45,991) +Recent Accounting Pronouncements +Refer to Note 2 - Significant Accounting Policies in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption and effects on our Consolidated Financial Statements. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +We are exposed to a variety of market risks, including fluctuations in foreign currency exchange rates and interest rates affecting the return on our cash, cash equivalents, and marketable securities. +60 +Table of Cont ents +Foreign Currency Exchange Risk +As we expand internationally, our results of operations and cash flows will become increasingly subject to foreign exchange rate fluctuations. For both years ended December 31, 2024 and 2023 , approximately 37% and 38%, respectively, of our total revenue was generated from customers located outside of the United States. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Canada, Europe, Japan, and China. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign exchange rates in Canadian dollars, Euros, British pounds, Swedish krona, Japanese yen, Chinese yuan, and other foreign currencies. Fluctuations in exchange rates could harm our business in the future. As of December 31, 2024, the effect of a hypothetical 10% adverse change in exchange rates on foreign denominated cash and payables would not have been material and a similar adverse change on foreign denominated receivables would decrease potential cash inflows by $1.1 million. +To date, we have not entered into any foreign currency hedging contracts although we may do so in the future. +Interest Rate Risk +We had cash and cash equivalents of $56.7 million and marketable securities of $232.4 million as of December 31, 2024. All cash, cash equivalents, and marketable securities are held at large commercial banks. Marketable securities consisted entirely of highly rated debt securities including commercial paper, U.S. Treasuries, corporate notes and bonds, U.S. Government agency bonds, certificates of deposit, and similar types of debt securities. Due to the short-term nature and investment grade quality of these investments, we do not believe we have material exposure to changes in interest rates. Additionally, if needed, we have the ability to hold our marketable securities until maturity (without giving effect to any future acquisitions or mergers) and we do not hold or issue financial instruments for trading purposes. Therefore, we do not expect our operating results or cash flows to be affected materially by a sudden change in market interest rates. +Declines in interest rates, however, would reduce future investment income. If overall interest rates had decreased by a hypothetical 10% during the year ended December 31, 2024, our interest income would have decreased by approximately $1.4 million. +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The financial statements required to be filed pursuant to Item 8 are included in this Annual Report on Form 10-K beginning on page F-1. +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +61 +Table of Cont ents +ITEM 9A. CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2024. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2024, due to the material weaknesses described below in Management’s Report on Internal Control over Financial Reporting. +Management’s Report on Internal Control over Financial Reporting +Introduction +Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. +Previously Identified Material Weaknesses +In the section titled “Part II, Item 9A. Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 6, 2023, we identified four material weaknesses in our internal control over financial reporting relating to the operating effectiveness of our internal controls associated with: (i) the accounting for inventory, including excess and obsolescence reserves (the “Inventory MW”), (ii) the accounting for salaries and commissions expense (the “Compensation MW”), (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases (the “Financial Statement Close Process MW”), and (iv) the accounting for property and equipment, net (the “Property and Equipment MW”). +In our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, originally filed with the SEC on February 29, 2024 (the “2023 Original Report”), our management concluded that the Financial Statement Close Process MW and Compensation MW were remediated as of December 31, 2023. Our management also concluded that control deficiencies for to a portion of the Inventory MW related to the valuation of our inventory, including excess and obsolescence reserves, (“the Inventory Valuation MW”) and the Property and Equipment MW continued to constitute material weaknesses in our internal control over financial reporting. +Subsequent to the filing of the 2023 Original Report, in the section titled “Part II, Item 9A. Controls and Procedures” of Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2023, as filed with the SEC on December 26, 2024 (the “Amended Annual Report on Form 10-K/A”), our management concluded that the restatement of our previously issued financial statements in the Amended Annual Report on Form 10-K/A was a result of a newly identified design deficiency associated with the Inventory Valuation MW, related to the Company's internal controls over the capitalization of labor and overhead costs. +62 +Table of Cont ents +Remediation of Previously Identified Material Weaknesses +During 2024, we took a number of actions designed to improve our internal control over financial reporting and in furtherance of remediating the Inventory Valuation MW and Property and Equipment MW. We incurred expenses of approximately $5.7 million to remediate these material weaknesses. Based on our efforts and after demonstrating the operating effectiveness of the related internal controls for a sufficient period of time, management has concluded that the Property and Equipment MW was remediated as of December 31, 2024. +Evaluation of Controls and Procedures +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2024, based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 Framework”). Based on our evaluation under the 2013 Framework, management concluded that our internal control over financing reporting was not effective at the reasonable assurance level as of December 31, 2024 due to the material weaknesses described below: +• Management concluded the Inventory Valuation MW continued to exist in light of the restatement of our previously issued financial statements included in our Amended Annual Report on Form 10-K/A, and the lack of time available to implement remediation efforts covering both the design and operating effectiveness over the identified control deficiencies. +• Management identified a material weakness in the operating effectiveness of our internal controls associated with the accounting for Accelerator Laboratory revenue, a component of our service and other revenue (the “Accelerator Revenue MW”). The primary cause of the Accelerator Revenue MW was our reliance on manual controls and processes, including insufficient documentation of reviews of the information used to record Accelerator Laboratory revenue. +Nevertheless, based on a number of factors, including the performance of additional procedures by our management designed to ensure the reliability of our financial reporting, we believe that the Consolidated Financial Statements and Notes to Consolidated Financial Statements in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP. +If not remediated, or if we identify further material weaknesses in our internal control, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our consolidated financial statements or a failure to meet our reporting and financial obligations. +The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. +Remediation Efforts +Our management, with oversight from the Audit Committee of our Board of Directors, is taking steps to remediate the control deficiencies that resulted in the Inventory Valuation MW and the Accelerator Revenue MW described above by implementing changes to our internal control over financial reporting. Our remediation activities undertaken to date and additional planned actions include, but are not limited to, the efforts summarized below: +• we have hired a Vice President, SOX Transformation and have begun hiring an internal SOX Transformation team to: +◦ oversee the remediation of our material weaknesses and drive further improvements across our internal controls; +◦ continue evaluating and designing effective and scalable internal controls and to strengthen the documentation of our existing controls; +◦ establish new internal controls evaluating the accounting for inventory and enhance inventory valuation review procedures; +63 +Table of Cont ents +◦ enhance and expand our existing revenue recognition control procedures and attributes to sufficiently document our assessment of, and reviews over, information used to record Accelerator Laboratory revenue; +◦ provide trainings on a regular basis related to internal control over financial reporting for all control owners; and +◦ identify opportunities to enhance our use of our systems through automating certain controls and processes. +• we have engaged accounting advisory consultants to implement new software solutions to automate key manual inventory valuation processes and outputs; +• we have implemented a new analysis of labor and overhead cost capitalization, including related controls; +• we continue to implement additional compensating controls and will continue to do so throughout the remainder of fiscal year 2025; +• we continue to execute controls that we worked to improve during fiscal year 2024 that did not have a sufficient period of time to demonstrate operating effectiveness as of December 31, 2024; +• we continue to evaluate, enhance, and add personnel in the finance organization with a focus on the requisite experience in the areas of accounting, SEC financial reporting, and internal control compliance; and +• we continue to supplement our team with accounting consultants to provide additional depth and breadth in our period end closes, financial reporting capabilities, and internal controls compliance until we have filled key additions or vacancies on our team with qualified personnel for a sufficient period of overlap to ensure successful transition of responsibilities. +We expect to continue our efforts to remediate the Inventory Valuation MW and Accelerator Revenue MW through fiscal year 2025. We believe that the implementation of the above steps will allow us to address the deficient controls within our internal control environment, which will facilitate the remediation of the Inventory Valuation MW and Accelerator Revenue MW. As we continue to evaluate and work to improve our internal control over financial reporting, we will take additional measures to address control deficiencies and we may modify certain of the remediation measures described above. Following our design and implementation of our remediation efforts, we will need to demonstrate their operating effectiveness. We will not be able to consider the Inventory Valuation MW or the Accelerator Revenue MW remediated until the applicable remedial controls operate for a sufficient period of time and our management has concluded, through testing, that our controls are operating effectively. +Changes in Internal Control over Financial Reporting +Other than the changes outlined related to the remediation of the material weaknesses described above, there have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +64 +Table of Cont ents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on Internal Control Over Financial Reporting +We have audited Quanterix Corporation’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Quanterix Corporation (the Company) has not maintained effective internal control over financial reporting as of December 31, 2024, based on the COSO criteria. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in controls related to the valuation of inventory, including excess and obsolescence reserves and the capitalization of labor and overhead costs, and the accounting for Accelerator Laboratory revenue. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2024 consolidated financial statements, and this report does not affect our report dated March 17, 2025 which expressed an unqualified opinion thereon. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +65 +Table of Cont ents +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Ernst & Young LLP +Boston, Massachusetts +March 17, 2025 +66 +Table of Cont ents +ITEM 9B. OTHER INFORMATION +Securities Trading Plans of Directors and Executive Officers +During the three months ended December 31, 2024, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c) of Regulation S-K). +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +67 +Table of Cont ents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by this Item will be set forth in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2024 and is incorporated into this Annual Report on Form 10-K by reference. +ITEM 11. EXECUTIVE COMPENSATION +The information required by this Item will be set forth in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2024 and is incorporated into this Annual Report on Form 10-K by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by this Item will be set forth in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2024 and is incorporated into this Annual Report on Form 10-K by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item will be set forth in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2024 and is incorporated into this Annual Report on Form 10-K by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +Our independent registered public accounting firm is Ernst & Young LLP, New York, NY, (PCAOB ID 42). +The other information required by this Item will be set forth in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2024 and is incorporated into this Annual Report on Form 10-K by reference. +68 +Table of Cont ents +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(1) Financial Statements +The Consolidated Financial Statements are included beginning on page F-1 attached hereto and are filed as part of this Annual Report on Form 10-K. +(2) Financial Statement Schedules +Financial statement schedules have been omitted since they either are not required, not applicable, or the information is otherwise included. +(3) Exhibits +The following is a list of exhibits filed as part of this Annual Report on Form 10-K: +Exhibit Number Exhibit Description Filed +Herewith Incorporated by +Reference herein from +Form or Schedule Filing Date SEC File/ +Reg. Number +2.1@ +Share Purchase Agreement, dated December 16, 2024, by and among Quanterix Corporation, Emission Inc., the Shareholders of Emission Inc. and the Shareholder Representative +8-K 12/17/2024 001-38319 +2.2# +Agreement and Plan of Merger, dated January 9, 2025, by and among the Registrant, Wellfleet Merger Sub, Inc., and Akoya Biosciences, Inc. +8-K +1/10/2025 +001-38319 +3.1 +Amended and Restated Certificate of Incorporation +8-K 12/15/2017 001-38319 +3.2 +Restated Bylaws +10-Q 8/8/2023 001-38319 +4.1 +Description of Securities +10-K 3/13/2020 001-38319 +4.2 +Form of Common Stock Certificate +S-1 11/9/2017 333-221475 +10.1.1+ +2007 Stock Option and Grant Plan, as amended +S-1 11/9/2017 333-221475 +10.1.2+ +Form of Incentive Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 11/9/2017 333-221475 +10.1.3+ +Form of Non-qualified Stock Option Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 11/9/2017 333-221475 +10.1.4+ +Form of Restricted Stock Agreement under the 2007 Stock Option and Grant Plan, as amended +S-1 11/9/2017 333-221475 +10.2.1+ +2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A 11/27/2017 333-221475 +69 +Table of Cont ents +Exhibit Number Exhibit Description Filed +Herewith Incorporated by +Reference herein from +Form or Schedule Filing Date SEC File/ +Reg. Number +10.2.2+ +Form of Stock Option Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A 11/27/2017 333-221475 +10.2.3+ +Form of Restricted Stock Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +S-1/A 11/27/2017 333-221475 +10.2.4+ +Form of Restricted Stock Unit Agreement under the 2017 Employee, Director and Consultant Equity Incentive Plan +10-K 2/29/2024 001-30319 +10.3.1+ +Employment Agreement, dated August 3, 2023, between the Registrant and Vandana Sriram +8-K 8/9/2023 001-38319 +10.3.2+ +Amendment, effective as of April 11, 2024, to the Employment Agreement, dated August 3, 2023, between the Registrant and Vandana Sriram +8-K 4/12/2024 001-38319 +10.4.1+ +Amended and Restated Employment Agreement, dated April 25, 2022, between the Registrant and Dr. Masoud Toloue +8-K 4/29/2022 001-38319 +10.4.2+ +Amendment, dated April 9, 2024, to the Amended and Restated Employment Agreement, dated April 25, 2022, between the Registrant and Dr. Masoud Toloue +8-K 4/12/2024 001-38319 +10.5.1* +Exclusive License Agreement, dated June 18, 2007, between the Registrant and Tufts University, as amended on April 29, 2013 +S-1 11/9/2017 333-221475 +10.5.2* +Second Amendment, dated August 22, 2017, to the Exclusive License Agreement between the Registrant and Tufts University +S-1 11/9/2017 333-221475 +10.5.3@ +Third Amendment, dated September 25, 2020, to the Exclusive License Agreement between the Registrant and Tufts University +10-Q 11/6/2020 001-38319 +10.6.1* +Supply and Manufacturing Agreement, dated September 14, 2011, between the Registrant and STRATEC Biomedical AG +S-1 11/9/2017 333-221475 +10.6.2 +First Amendment to Supply and Manufacturing Agreement, dated October 17, 2013, between the Registrant and STRATEC Biomedical AG +S-1 11/9/2017 333-221475 +10.7.1* +STRATEC Development Services and Equity Participation Agreement, dated August 15, 2011, between the Registrant and STRATEC Biomedical Systems AG +S-1 11/9/2017 333-221475 +70 +Table of Cont ents +Exhibit Number Exhibit Description Filed +Herewith Incorporated by +Reference herein from +Form or Schedule Filing Date SEC File/ +Reg. Number +10.7.2* +First Amendment to STRATEC Development Services and Equity Participation Agreement and Second Amendment to Supply and Manufacturing Agreement, dated November 18, 2016, between the Registrant and STRATEC Biomedical AG +S-1 11/9/2017 333-221475 +10.8* +Manufacturing Services Agreement, dated November 23, 2016, between the Registrant and Paramit Corporation +S-1 11/9/2017 333-221475 +10.9+ +Form of Indemnification Agreement +S-1/A 11/27/2017 333-221475 +10.10 +Lease Agreement by and between SSI 900 Middlesex MA LP and the Registrant, dated October 2, 2018 +8-K 10/5/2018 001-38319 +10.11 +Lease Agreement by and between the Registrant and XChange Owner LLC, dated January 28, 2022 +8-K 1/31/2022 001-38319 +10.12+ +Amended and Restated Non-Employee Director Compensation Policy +X +10.13# +Voting and Support Agreement, dated January 9, 2025, by and among the Registrant and certain stockholders of Akoya Biosciences, Inc. named therein. +8-K +1/10/2025 +001-38319 +19.1 +Q uanterix Insider Trading Policy +X +21.1 +Subsidiaries of Registrant +S-4 2/14/2025 333-284932 +23.1 +Consent of Ernst & Young LLP +X +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +X +32.1 +Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +X +97.1 +Policy relating to recovery of erroneously awarded compensation +10-K 2/29/2024 001-38319 +101.INS Inline XBRL Instance Document X +101.SCH Inline XBRL Taxonomy Extension Schema Document X +71 +Table of Cont ents +Exhibit Number Exhibit Description Filed +Herewith Incorporated by +Reference herein from +Form or Schedule Filing Date SEC File/ +Reg. Number +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X +101.DEF Inline XBRL Taxonomy Extension Definition X +101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X +101.PRE Inline XBRL Taxonomy Presentation Linkbase Document X +104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +______________________________________ ++ +Management contract or compensatory plan or arrangement. +* +Confidential treatment has been granted for portions of this Exhibit. Redacted portions have been filed separately with the SEC. +@ +Portions of this document (indicated by “[***]”) have been omitted because such information is not material and is the type of information that the Registrant treats as private or confidential. +# +Certain exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any of the omitted exhibits and schedules upon request by the SEC; provided, however, that the Registrant may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any exhibits or schedules so furnished. +ITEM 16. FORM 10-K SUMMARY +Not applicable. +72 +Table of Cont ents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +QUANTERIX CORPORATION +Date: March 17, 2025 +By: /s/ MASOUD TOLOUE, PH.D. +Masoud Toloue, Ph. D. +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature Title Date +/s/ MASOUD TOLOUE, PH.D. President and Chief Executive Officer and Director (Principal Executive Officer) March 17, 2025 +Masoud Toloue, Ph.D. +/s/ VANDANA SRIRAM Chief Financial Officer March 17, 2025 +Vandana Sriram (Principal Financial Officer and Principal Accounting Officer) +/s/ MARTIN D. MADAUS, PH.D. Chairman March 17, 2025 +Martin D. Madaus, Ph.D. +/s/ WILLIAM DONNELLY +Director March 17, 2025 +William Donnelly +/s/ JEFFREY T. ELLIOTT +Director March 17, 2025 +Jeffrey T. Elliott +/s/ KAREN A. FLYNN Director March 17, 2025 +Karen A. Flynn +/s/ SARAH E. HLAVINKA Director March 17, 2025 +Sarah E. Hlavinka +/s/ IVANA MAGOVČEVIĆ-LIEBISCH, PH.D., J.D. +Director March 17, 2025 +Ivana Magovčević-Liebisch, Ph.D., J.D. +/s/ PAUL M. MEISTER +Director March 17, 2025 +Paul M. Meister +/s/ DAVID R. WALT, PH.D. March 17, 2025 +David R. Walt, Ph.D. Director +73 +Table of Cont ents +QUANTERIX CORPORATION +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) +F- 2 +Consolidated Balance Sheets as of December 31, 2024 and 2023 +F- 4 +Consolidated Statements of Operations for the years ended December 31, 2024 , 2023 , and 2022 +F- 5 +Consolidated Statements of Comprehensive Loss for the years ended December 31, 2024 , 2023 , and 2022 +F- 6 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2024 , 2023 , and 2022 +F- 7 +Consolidated Statements of Cash Flows for the years ended December 31, 2024 , 2023 , and 2022 +F- 8 +Notes to Consolidated Financial Statements +F- 9 +F-1 +Table of Cont ents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of Quanterix Corporation (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 17, 2025 expressed an adverse opinion thereon. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates. +F-2 +Table of Cont ents +Excess and Obsolete Inventory +Description of the Matter +As of December 31, 2024, the Company had recognized inventory of $32.8 million. As discussed in Note 2 to the consolidated financial statements, the Company analyzes its inventory levels at each reporting date to identify slow moving, excess or obsolete inventory and inventory expected to expire prior to being sold. In the event that the Company identifies adverse conditions, the carrying value of the inventory is reduced to its estimated net realizable value. +Auditing the Company’s valuation of inventory involved judgement in evaluating management’s analysis and significant assumptions related to projections of future demand which is dependent on market factors. +How We Addressed the Matter in Our Audit +To audit the Company’s valuation of inventory, we performed audit procedures that included, among others, performing inquiries of management and testing the completeness and accuracy of the underlying data used supporting the Company’s estimate of future demand. To evaluate the Company’s estimate of future demand, we independently assessed the sensitivity and impact of reasonably possible changes in forecasted demand and the impact on the Company’s calculation of excess inventory. We evaluated inventory levels compared to forecasted demand, historical sales and specific product considerations. We performed inquiries with certain non-financial personnel, including supply chain employees, regarding obsolete or discontinued inventory items, expectations for demand relative to historical activity and expected expiration dates, as well as obtained supporting evidence to evaluate management's assertions regarding qualitative judgments about discontinued, slow moving and obsolete inventories. We also evaluated management's ability to accurately forecast demand by comparing actual inventory usage to management's prior estimates. +/s/ Ernst & Young LLP +We have served as the Company’s auditor since 2008. +Boston, Massachusetts +March 17, 2025 +F-3 +Table of Cont ents +QUANTERIX CORPORATION +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except per share data) +December 31, 2024 December 31, 2023 +ASSETS +Current assets: +Cash and cash equivalents $ 56,709 $ 174,422 +Marketable securities 232,413 146,902 +Accounts receivable, net of allowance for expected credit losses 32,141 25,414 +Inventory 32,775 26,123 +Prepaid expenses and other current assets 9,556 9,234 +Total current assets 363,594 382,095 +Restricted cash 2,610 2,604 +Property and equipment, net 17,150 17,926 +Intangible assets, net 4,031 6,034 +Operating lease right-of-use assets 16,339 18,251 +Other non-current assets 2,809 1,657 +Total assets $ 406,533 $ 428,567 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Accounts payable $ 6,953 $ 5,048 +Accrued compensation and benefits 12,620 14,170 +Accrued expenses and other current liabilities 8,851 6,055 +Deferred revenue 8,827 9,468 +Operating lease liabilities 4,756 4,241 +Total current liabilities 42,007 38,982 +Deferred revenue, net of current portion 1,073 1,227 +Operating lease liabilities, net of current portion 32,615 37,223 +Other non-current liabilities 800 1,177 +Total liabilities 76,495 78,609 +Commitments and contingencies (Note 15) +Stockholders’ equity: +Common stock, $ 0.001 par value per share: +Authorized: 120,000 shares; issued and outstanding: 38,544 and 38,014 shares at December 31, 2024 and 2023, respectively +39 38 +Additional paid-in capital 803,160 783,142 +Accumulated other comprehensive loss ( 3,080 ) ( 1,672 ) +Accumulated deficit ( 470,081 ) ( 431,550 ) +Total stockholders’ equity 330,038 349,958 +Total liabilities and stockholders’ equity $ 406,533 $ 428,567 +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-4 +Table of Cont ents +QUANTERIX CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +(amounts in thousands, except per share data) +Year Ended December 31, +2024 2023 2022 +Revenues: +Product revenue $ 79,740 $ 79,670 $ 69,808 +Service and other revenue 51,244 40,089 34,495 +Collaboration and license revenue 4,452 1,380 649 +Grant revenue 1,985 1,229 570 +Total revenues 137,421 122,368 105,522 +Costs of goods sold and services: +Cost of product revenue 33,304 29,103 42,841 +Cost of service and other revenue 21,013 19,041 17,318 +Total costs of goods sold and services 54,317 48,144 60,159 +Gross profit 83,104 74,224 45,363 +Operating expenses: +Research and development 31,082 26,064 26,809 +Selling, general and administrative 101,618 89,111 91,851 +Other lease costs 3,020 3,712 1,411 +Impairment and restructuring — 1,328 29,556 +Total operating expenses 135,720 120,215 149,627 +Loss from operations ( 52,616 ) ( 45,991 ) ( 104,264 ) +Interest income 14,655 15,839 5,131 +Other income (expense), net ( 136 ) 2,517 ( 277 ) +Loss before income taxes ( 38,097 ) ( 27,635 ) ( 99,410 ) +Income tax expense ( 434 ) ( 719 ) ( 164 ) +Net loss $ ( 38,531 ) $ ( 28,354 ) $ ( 99,574 ) +Net loss per common share, basic and diluted $ ( 1.00 ) $ ( 0.75 ) $ ( 2.69 ) +Weighted-average common shares outstanding, basic and diluted 38,367 37,594 36,991 +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-5 +Table of Cont ents +QUANTERIX CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS +(amounts in thousands) +Year Ended December 31, +2024 2023 2022 +Net loss $ ( 38,531 ) $ ( 28,354 ) $ ( 99,574 ) +Other comprehensive loss, net of tax: +Unrealized gains (losses) on marketable securities ( 219 ) 325 — +Foreign currency translation ( 1,189 ) 541 ( 2,979 ) +Total other comprehensive income (loss) ( 1,408 ) 866 ( 2,979 ) +Comprehensive loss $ ( 39,939 ) $ ( 27,488 ) $ ( 102,553 ) +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-6 +Table of Cont ents +QUANTERIX CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +(amounts in thousands) +Common Stock +Shares Amount Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders' equity +Balance at December 31, 2021 36,768 $ 37 $ 745,936 $ 441 $ ( 303,622 ) $ 442,792 +Issuance of common stock under stock plans, including tax effects 512 — 2,310 — — 2,310 +Stock-based compensation expense — — 15,383 — — 15,383 +Foreign currency translation — — — ( 2,979 ) — ( 2,979 ) +Net loss — — — — ( 99,574 ) ( 99,574 ) +Balance at December 31, 2022 37,280 $ 37 $ 763,629 $ ( 2,538 ) $ ( 403,196 ) $ 357,932 +Issuance of common stock under stock plans, including tax effects 734 1 2,690 — — 2,691 +Stock-based compensation expense — — 16,823 — — 16,823 +Unrealized gains on marketable securities, net of tax — — — 325 — 325 +Foreign currency translation — — — 541 — 541 +Net loss — — — — ( 28,354 ) ( 28,354 ) +Balance at December 31, 2023 38,014 $ 38 $ 783,142 $ ( 1,672 ) $ ( 431,550 ) $ 349,958 +Issuance of common stock under stock plans, including tax effects 559 1 31 — — 32 +Stock-based compensation expense — — 19,987 — — 19,987 +Unrealized losses on marketable securities, net of tax — — — ( 219 ) — ( 219 ) +Foreign currency translation — — — ( 1,189 ) — ( 1,189 ) +Net loss — — — — ( 38,531 ) ( 38,531 ) +Balance at December 31, 2024 38,573 $ 39 $ 803,160 $ ( 3,080 ) $ ( 470,081 ) $ 330,038 +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-7 +Table of Cont ents +QUANTERIX CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Year Ended December 31, +2024 2023 2022 +Cash flows from operating activities: +Net loss $ ( 38,531 ) $ ( 28,354 ) $ ( 99,574 ) +Adjustments to reconcile net loss to net cash used in operating activities: +Depreciation and amortization expense 6,463 6,275 5,409 +Credit losses (gains) on accounts receivable 588 336 ( 301 ) +Accretion of marketable securities ( 6,833 ) ( 1,964 ) — +Operating lease right-of-use asset amortization 1,893 2,015 715 +Stock-based compensation expense 19,987 16,823 15,383 +Impairment — 1,361 25,801 +Other operating activity 55 ( 150 ) ( 340 ) +Changes in assets and liabilities: +Accounts receivable ( 7,704 ) ( 6,695 ) 5,156 +Inventory ( 6,679 ) ( 8,944 ) 7,243 +Prepaid expenses and other current assets ( 443 ) ( 2,371 ) ( 738 ) +Other non-current assets ( 1,215 ) ( 717 ) ( 822 ) +Accounts payable 723 1,189 ( 5,287 ) +Accrued compensation and benefits, accrued expenses, and other current liabilities 1,398 4,410 ( 3,599 ) +Deferred revenue ( 794 ) 635 2,599 +Operating lease liabilities ( 4,075 ) ( 2,645 ) ( 266 ) +Other non-current liabilities 3 ( 53 ) 10 +Net cash used in operating activities ( 35,164 ) ( 18,849 ) ( 48,611 ) +Cash flows from investing activities: +Purchases of marketable debt securities ( 295,606 ) ( 175,613 ) — +Proceeds from maturities of marketable securities 216,709 31,000 — +Purchases of property and equipment ( 3,368 ) ( 3,841 ) ( 11,614 ) +Proceeds from RADx grant on assets purchased — — 520 +Net cash used in investing activities ( 82,265 ) ( 148,454 ) ( 11,094 ) +Cash flows from financing activities: +Proceeds from common stock issued under stock plans 3,066 2,889 2,311 +Payments for employee taxes withheld on stock-based compensation awards ( 2,610 ) ( 198 ) — +Net cash provided by financing activities 456 2,691 2,311 +Net decrease in cash, cash equivalents, and restricted cash ( 116,973 ) ( 164,612 ) ( 57,394 ) +Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 734 ) 301 ( 538 ) +Cash, cash equivalents, and restricted cash at beginning of period 177,026 341,337 399,269 +Cash, cash equivalents, and restricted cash at end of period $ 59,319 $ 177,026 $ 341,337 +Supplemental disclosure of cash flow information: +Cash paid for taxes $ 875 $ 808 $ 684 +Purchases of property and equipment in accounts payable and accruals $ 1,230 $ 419 $ 152 +Operating lease right-of-use assets obtained in exchange for lease liabilities $ — $ — $ 22,494 +Non-cash consideration received under product sales agreement (Note 3, 6) $ — $ 775 $ — +The accompanying notes are an integral part of these Consolidated Financial Statements. +F-8 +Table of Cont ents +QUANTERIX CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1. Organization and Nature of Business +Quanterix Corporation (“Quanterix” or the “Company”) is a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. The Company’s platforms are based on its proprietary digital “Simoa” detection technology and enable customers to reliably detect protein biomarkers in ultra- low concentrations in blood, serum, and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies. The ability of the Company’s Simoa platforms to detect proteins in the femtomolar range is enabling the development of novel therapies and diagnostics and has the potential to facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis, and, ultimately, prevention. +The Company also provides contract research services for customers and Laboratory Developed Test (“LDT”) services through its Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified Accelerator Laboratory (the “Accelerator Laboratory”). The Accelerator Laboratory provides customers with access to Simoa technology and its Lucent Diagnostics clinical testing services and supports multiple projects and services, including sample testing, homebrew assay development, custom assay development, and blood-based biomarker testing. +Liquidity +The Company has recognized annual losses from operations since inception and has an accumulated deficit of $ 470.1 million as of December 31, 2024. The Company incurred net losses of $ 38.5 million, $ 28.4 million, and $ 99.6 million for the years ended December 31, 2024, 2023, and 2022, respectively. As of December 31, 2024, the Company had cash and cash equivalents of $ 56.7 million and marketable securities of $ 232.4 million. The Company expects that its current cash, cash equivalents, and marketable securities will be sufficient to fund its operations for a period of at least one year from the date the Consolidated Financial Statements are issued. +Note 2. Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission regarding annual financial reporting on Form 10-K. +The Company’s fiscal year is the twelve-month period from January 1 through December 31, and all references to “2024,” “2023,” and “2022,” refer to the fiscal year unless otherwise noted. Certain amounts in the prior years’ Consolidated Financial Statements have been reclassified to conform to the current year’s presentation. +Use of Estimates +The preparation of the Consolidated Financial Statements and Notes to Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during each fiscal year. Such estimates include, but are not limited to, revenue recognition, valuation of inventory, leases, and valuation and impairment of long-lived assets. The Company bases its estimates on historical experience, known trends, worldwide economic conditions, both general and specific to the life sciences industry, and other relevant factors it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates and changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates. +Principles of Consolidation +The Consolidated Financial Statements include the accounts of Quanterix and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. +F-9 +Table of Cont ents +The Company enters into relationships with, or has investments in, other entities that may be variable interest entities (“VIEs”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 – Consolidation , the Company assesses the terms of non-marketable equity investments to determine if any meet the definition of a “VIE” and require consolidation into its Consolidated Financial Statements. The Company’s analysis determines whether it has a controlling financial interest and also identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. Refer to Note 20 - Variable Interest Entities for further discussion. +Foreign Currency +The functional currency of the Company’s subsidiaries is their respective local currencies. These subsidiary financial statements are translated into U.S. dollars using the period-end exchange rates for assets and liabilities, average exchange rates during the corresponding period for revenue and expenses, and historical rates for equity. The effects of foreign currency translation adjustments are recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity on the Consolidated Balance Sheets. +Foreign currency transaction gains (losses) are included in other income (expense), net on the Consolidated Statements of Operations. Foreign exchange losses were $ 0.6 million, $ 0.2 million and $ 1.0 million during the years ended December 31, 2024, 2023. and 2022, respectively. +Revenue from Contracts with Customers +The Company generates the majority of its revenues from contracts with customers and accounts for them pursuant to ASC Topic 606 – Revenue from Contracts with Customers (“ASC 606”). Refer to the section titled “Grant Revenue” below for discussion the Company’s accounting policy for revenue generated from grant awards. +For contracts with customers, the Company recognizes revenue when a customer obtains control of promised products or services, for an amount that reflects the consideration expected to be received in exchange for those products or services. The Company follows the five step revenue model prescribed by ASC 606 to determine revenue recognition: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Revenues are presented net of any sales, value added, or similar taxes collected from customers and remitted to the government. +The Company accounts for a contract when it has approval and commitment from both parties, the fees, payment terms and rights of the parties regarding the products or services to be transferred are identified, the contract has commercial substance, and it is probable that substantially all of the consideration for the products and services expected to be transferred is collectible. The Company applies judgment in determining the customer’s ability and intention to pay for services expected to be transferred, which is based on factors including the customer’s payment history, management’s ability to mitigate exposure to credit risk (for example, requiring payment in advance of the transfer of products or services, or the ability to stop transferring promised products or services in the event a customer fails to pay consideration when due), and experience selling to similarly situated customers. +The Company’s contracts may include either a single promise (referred to as a performance obligation) to transfer a product or service, or a combination of multiple promises to transfer products or services. The Company evaluates the existence of multiple promises within its contracts by using judgment to determine if (1) the customer can benefit from each contractual promise on its own or together with readily available resources and (2) the transfer of each contractual promise is separately identifiable from other promises in a contract. When both criteria are met, each promise is accounted for as a separate performance obligation. Additionally, the Company has elected the practical expedient under ASC 606 to account for shipping and handling as an activity to fulfill a promise to transfer a product, and therefore does not evaluate whether shipping and handling activities are promised services to its customers. +F-10 +Table of Cont ents +Contracts that include rights to additional products or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the customer and if so, the material right is considered a performance obligation. The identification of material rights requires judgment to determine the value of the option to purchase additional products and services in relation to options that may be provided to, and prices paid by, customers in the normal course of business. Material rights are recognized when exercised by a customer or upon expiration of the right. +The Company determines the transaction price of its contracts based on the amount of consideration it expects to be entitled to, which is generally equal to the contract amount. In some cases, contracts contain variable consideration which primarily relates to (1) sales and usage-based royalties related to the license of intellectual property in collaboration and license contracts and (2) contracts with minimum purchase commitments. For sales and usage-based royalties, ASC 606 provides an exception to estimating variable consideration. Under this exception, the Company recognizes revenues from sales or usage-based royalty revenue at the later of when the sales or usage occurs or the satisfaction (or partial satisfaction) of the performance obligation to which the royalty has been allocated. All other variable amounts are constrained to the minimum guaranteed contract amount so that a reversal of cumulative revenue does not occur in future periods. Once there is no longer uncertainty over a variable amount, any incremental fees the Company is entitled to are allocated to the related performance obligation(s). +For contracts that contain multiple performance obligations, the Company allocates the transaction price among the performance obligations on a relative basis according to their standalone selling prices (“SSP”). Determining the SSP for performance obligations requires judgment and is based on factors including prices charged to customers in observable transactions, internal pricing objectives and list prices, pricing of similar products, expected costs to manufacture the Company's products, and estimated margins. The Company has more than one range of standalone selling prices for certain products and services based on the geographic location of customers and sales channel. +Product Revenue +The Company’s product revenues are composed of instruments, assay kits, replacement parts, and other consumables such as reagents and antibodies. Products are sold directly to customers and are also sold through distributors in EMEA and Asia Pacific regions. Direct instrument sales include installation and an initial year service-type warranty. The Company has determined that the instrument and installation are a combined performance obligation as the customer cannot benefit from the instrument without the installation. The service-type warranty is considered a separate performance obligation since a customer could benefit from it independently with readily available resources and is capable of being sold on its own (with such warranty recorded in services and other revenue on the Consolidated Statements of Operations). Sales of instruments to distributors include a license to import and resell the instruments. The Company has determined these distributor licenses are part of a combined performance obligation with the instrument as the distributor only benefits from the combination of the instrument and ability to resell it. +Instrument sales may also be bundled with assays and other consumables, training, and/or an extended service warranty, each of which is considered a separate performance obligation. +Product revenues for direct instrument sales to customers are recognized upon completion of the instrument’s installation. For instrument sales to distributors, revenue is recognized based on the agreed upon shipping terms (either upon shipment or delivery) as that is when title passes to the customer. +Service Revenue +Service revenues are composed of contract research services, initial year of service-type warranties, extended services warranty contracts, repair services, and other services such as training. Contract research services are provided through the Company’s Accelerator Laboratory and generally consist of fixed fee contracts. +Revenues from contract research services are recognized at the point in time when the Company completes and delivers its research results on each individually completed study, or over time if the contractual provisions allow for the collection of transaction consideration for costs incurred plus a reasonable margin through the period of performance of the services. For contract research services recognized over time, the Company uses the output method based on the number of completed results. Revenues from warranties and service contracts are recognized ratably over the contract service period. +F-11 +Table of Cont ents +Collaboration and License Revenue +Collaboration and license revenues are composed of revenue associated with licensing the Company’s technology, intellectual property, and know-how associated with the Company's instruments to third parties and for related services. License arrangements consist of sales or usage-based fees and/or future royalties. Revenues are recognized at the point in time the license is delivered as the underlying license is considered functional intellectual property since the customer has the right to use it when it is received. Royalty revenues that are sales or usage-based are recognized at the later of when the sales or usage occurs and the satisfaction (or partial satisfaction) of the performance obligation to which the royalty has been allocated. +Contract Assets and Liabilities +Accounts Receivable and Allowance for Credit Losses +The Company is exposed to credit losses primarily through accounts receivable from sales of its products and services. Accounts receivable includes amounts billed and currently due from customers. Since the only condition for payment of the Company’s invoices is the passage of time, the Company records a receivable on the date the invoice is issued. Also included in accounts receivable are unbilled amounts resulting from revenue exceeding the amount billed to the customer, where the right to payment is unconditional. If the right to payment for services performed was conditional on something other than the passage of time, the unbilled amount would be recorded as a separate contract asset. +The Company’s expected loss allowance methodology is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers’ accounts receivable. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company monitors changes to the receivables balance on a timely basis, and balances are written off as they are determined to be uncollectible after collection efforts have been exhausted. +Generally, the Company’s contracts are non-cancellable. For contracts that are cancellable by the customer, the Company does not record a receivable when it issues an invoice. The Company records accounts receivable on these contracts only up to the amount of revenue recognized but not yet collected. +The Company’s payment terms vary by the type and location of the customer and the products or services offered. Payment from customers is generally required 30 to 45 days from date of shipment or satisfaction of the performance obligation. The Company does not provide financing arrangements to its customers. +Deferred Revenue +The Company refers to contract liabilities as deferred revenue on the Consolidated Balance Sheets and consists of billings in excess of revenue recognized. +Costs to Obtain Contracts +The Company capitalizes commissions paid to its sales representatives and related fringe benefit costs that are incremental to obtaining customer contracts. Capitalized commissions are recorded in prepaid expenses and other current assets and other non-current assets on the Consolidated Balance Sheets. These commissions are amortized over the life of the contract and are recorded in cost of goods sold and selling, general and administrative expense on the Consolidated Statements of Operations. The Company has elected the practical expedient allowing commissions with an amortization period of one year or less to be expensed as incurred. +Commissions associated with instrument sales are generally earned when installation is complete and title to the instrument has transferred. Commissions associated with consumables sales are earned when title to the product transfers. Commissions associated with warranty and extended service contracts are earned upon booking. +F-12 +Table of Cont ents +Warranties +For instruments sold directly to customers, the Company provides an initial year of service-type warranty and also sells extended warranty contracts for additional periods beyond the initial year. The service-type warranty guarantees that the Company's instruments are free from material defects in workmanship and materials, excluding normal wear and tear, and includes maintenance services. Under ASC 606, the Company concluded that the initial year service-type warranty is considered a separate performance obligation since a customer could benefit from it independently with readily available resources and is capable of being sold on its own. The Company defers revenue associated with these service-types warranties and recognizes them ratably over the service period. +For products sold to distributors, the Company provides an initial year of assurance-type warranty which guarantees that the products conform to the Company's published specifications. Assurance-type warranties do not create a separate performance obligation under ASC 606. Under ASC Topic 460 – Guarantees , the Company establishes an accrual for estimated assurance-type warranty expense and records the expense in cost of product revenue on the Consolidated Statements of Operations. Amounts recognized during the years ended December 31, 2024, 2023, and 2022 were not material. +Grant Revenue +Accounting for grants does not fall under ASC 606, as the grantor will not benefit directly from the Company’s expansion or product development, and no products or services are transferred to the grantor. As there is no authoritative guidance under U.S. GAAP on accounting for grants to for profit business entities from government entities, the Company accounts for grants by analogy to International Accounting Standards Topic 20, Accounting for Government Grants and Disclosure of Government Assistance (“IAS 20”) and ASC Topic 958, Not for-Profit Entities (“ASC 958”). The decision to account for a grant under IAS 20 or ASC 958 is based on whether the grantor is a government entity. +The Company records grants related to assets as a deduction in calculating the carrying value of the asset, and records grants related to income separately on the Consolidated Statements of Operations on a gross basis as grant revenue. The related expenses are recorded on a gross basis within operating expenses. These methods are elections an entity can make under both IAS 20 and ASC 958. +The Company recognizes grant revenue as the Company performs services under the arrangement when the funding is committed and as each grant’s activities are performed. The timing of revenue recognition and receipt of funding varies by grant and can be independent from performance of the related activities, such as an upfront payment of the award value, or subsequent to the Company’s requests for reimbursement for already performed activities (subject to the approval of the granting organization). +Cost of Goods Sold and Services +Cost of Product Revenue +Cost of product revenue consists of manufacturing and assembly costs for instruments, related reagents, other consumables, contract manufacturer costs, personnel costs, overhead, and other direct costs related to product sales. Raw material part costs include inbound shipping and handling costs associated with purchased goods, contract manufacturer costs, personnel costs, overhead and other direct costs related to product sales. Additionally included in cost of product revenue are royalty fees due to third parties from revenue generated by collaboration or license deals. +Cost of Service and Other Revenue +Cost of services and other revenue consists of direct costs associated with operating the Company’s Accelerator Laboratory on behalf of its customers, including raw materials, personnel costs, royalties, allocated overhead costs that include facility and other related costs, and other direct costs. Additional costs include costs related to warranties, and other costs of servicing equipment at customer sites. +F-13 +Table of Cont ents +Research and Development Expenses +Research and development expense consists primarily of personnel costs, research supplies, third-party development costs for new products, materials for prototypes, quality assurance, and allocated overhead costs that include facility and other related costs. The Company accounts for nonrefundable advance payments for products and services that will be used in future research and development activities as expense when the service has been performed or when the products have been received. +For arrangements in which the Company receives funding from third parties for research and development activities (excluding government sponsored arrangements), the Company assesses whether the arrangement is within the scope of ASC 730 – Research and Development . When the Company is entitled to receive reimbursements, does not have an obligation to repay, does not transfer products or services, and is the primary beneficiary of the activities, the Company records the reimbursable amounts as a reduction to research and development expense. Amounts reimbursed in excess of the cost incurred by the Company are recorded within other income (expense), net on the Consolidated Statements of Operations. +Reimbursable amounts recorded as a reduction to research and development expenses were $ 0.3 million during the year ended December 31, 2024 and were not material during the year ended December 31, 2023. The amount reimbursed in excess of costs incurred by the Company related to activities funded by third parties was $ 0.4 million in both the years ended December 31, 2024 and 2023. No reimbursable amounts were received during the year ended December 31, 2022. +Selling, General and Administrative Expenses +Selling, general and administrative expense consists primarily of personnel costs for our sales and marketing, finance, legal, human resources, and general management teams, shipping and handling for product sales, other general and administrative costs, as well as professional services costs, such as marketing, advertising, legal and accounting services, and allocated overhead costs that include facility and other related costs. The classification of shipping and handling costs for product sales as selling, general and administrative expenses varies from company to company with some companies recording these as selling, general and administrative expenses and others recording such expenses within costs of goods sold for products. To the extent the classification of the Company's shipping and handling costs differs from the reporting approach used by other companies, the Company’s gross margins may not be comparable with those reported by such other companies. +Net Loss Per Share +Basic net loss per common share attributable to common stockholders is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted net loss per common share attributable to common stockholders is calculated under the treasury stock method by dividing the loss attributable to common stockholders by the diluted weighted-average number of common shares outstanding. Diluted weighted-average shares outstanding reflect the dilutive effect, if any, of potential common shares issued, such as unvested common stock, unvested restricted stock units (“RSUs”), common stock options, and shares estimated to be purchased under the Company’s employee stock purchase plan (“ESPP”). During periods when the Company is in a net loss position, these potential common shares are excluded from the diluted net loss per common share attributable to common stockholders because their effect would be anti-dilutive. Accordingly, basic and diluted net loss per common share attributable to common stockholders were the same for all periods presented. +F-14 +Table of Cont ents +Cash and Cash Equivalents +Cash and cash equivalents consist of cash deposits and short-term, highly liquid marketable securities that are readily convertible into cash, with original maturities of three months or less. Cash and cash equivalents consist of the following (in thousands): +As of December 31, +2024 2023 +Cash $ 12,283 $ 12,162 +Money market funds 44,426 155,367 +Marketable securities — 6,893 +Total cash and cash equivalents $ 56,709 $ 174,422 +Restricted Cash +The following table summarizes the period ending cash and cash equivalents as presented on the Consolidated Balance Sheets and the total cash, cash equivalents, and restricted cash as presented on the Consolidated Statements of Cash Flows (in thousands): +As of December 31, +2024 2023 +Cash and cash equivalents $ 56,709 $ 174,422 +Restricted cash 2,610 2,604 +Cash, cash equivalents, and restricted cash $ 59,319 $ 177,026 +Restricted cash consists of collateral for a letter of credit issued as security for two of the Company’s leased facilities and to secure the Company’s corporate credit card program. The short-term or long-term classification is determined in accordance with the expiration of the underlying letter of credit and security. +Marketable Securities +The Company’s current portfolio of marketable securities is entirely debt securities and may at any time include commercial paper, U.S. Treasuries, corporate notes and bonds, U.S. Government agency bonds, certificates of deposit, and similar types of debt securities. Marketable debt securities with original maturities of three months or less at the time of purchase are recorded in cash equivalents on the Consolidated Balance Sheets as they are considered highly liquid and readily convertible into cash. All other marketable securities, including those with maturities beyond one year, are recorded as current assets on the Consolidated Balance Sheets based on their highly liquid nature and because such securities are available for use in current operations. +The Company classifies its marketable securities as either held to maturity, available-for-sale, or trading at the time of purchase and re-evaluates such classification at each balance sheet date. All of the Company’s marketable securities are currently classified as available-for-sale as it may use them in current operations. Available-for-sale securities are recorded at fair value (refer to Note 6 - Fair Value of Financial Instruments ). +Unrealized gains and losses (other than impairment or credit related losses) are recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity on the Consolidated Balance Sheets. Realized gains and losses are determined using the specific identification method and are recorded in other income (expense), net on the Consolidated Statements of Operations. +F-15 +Table of Cont ents +At least quarterly, the Company monitors its marketable securities for impairment. In the event a security’s fair value is less than its amortized cost basis, the Company evaluates whether an impairment exists and if the impairment is a result of credit loss or other factors. For a security in an unrealized loss position, if the Company intends to sell the security in an unrealized loss position, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, an impairment loss equal to the difference between the security’s fair value and amortized cost basis is recorded in other income (expense), net on the Consolidated Statement of Operations. Additionally, the Company determines if a credit loss exists by considering information about the collectability of the security, current market conditions, and the issuer’s financial condition. If a decline in fair value is a result of a credit loss, an allowance for credit losses is recorded in other income (expense), net on the Consolidated Statement of Operations, limited to the portion attributed to the credit loss. +The Company has also elected the practical expedient to separately present accrued interest receivable from its marketable securities balance. Such accrued interest is recorded in prepaid expenses and other current assets on the Consolidated Balance Sheets and is not included in the assessment and measurement of impairment of its marketable securities. +Inventory +Inventory consists of instruments, assays, and the materials required to manufacture instruments and assays. +Inventory is stated at the lower of cost or net realizable value on a first-in, first-out (“FIFO”) basis and includes the cost of materials, labor, and manufacturing overhead. The Company analyzes its inventory levels on each reporting date for slow-moving, excess, and obsolete inventory, and inventory expected to expire prior to being used. These analyses require judgment and are based on factors including, but not limited to, recent historical activity, anticipated or forecasted demand for the Company’s products (developed through its planning and sales and marketing inputs, scientific data supporting the estimated life of materials that expire and market conditions). If the Company identifies adverse conditions exist, such as unfavorable changes in estimated customer demand, the lives of materials that expire, or actual market conditions that may differ from its projections, the carrying value of the inventory is reduced to its estimated net realizable value by providing estimated reserves for excess or obsolete inventory. +Property and Equipment +Property and equipment, including leasehold improvements, are stated at cost, net of accumulated depreciation. These assets are depreciated over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred, whereas significant expenditures that extend the useful lives of existing assets are capitalized as additions to property and equipment. +Depreciation is calculated based upon the following estimated useful lives: +Estimated Useful Life +Laboratory and manufacturing equipment 5 years +Furniture and fixtures 7 years +Computers and software 3 years +Leasehold improvements Shorter of asset's life or remaining lease term +The Company develops and modifies software related to the operation of some of its instruments and internal use software supporting the Company’s operations. Certain costs incurred during the application development stage including external direct costs of services used in the development or internal personnel costs for employees directly associated with the development are capitalized. These capitalized software development costs are recorded in property and equipment on the Consolidated Balance Sheets. The Company begins depreciating these costs over the life of the related asset upon completion of a working model or when it is ready for its intended use. Costs incurred during the preliminary project stage and post-configuration stages are expensed as incurred. +F-16 +Table of Cont ents +Cloud Computing Costs +For cloud computing arrangements that include a software license or software-as-a-service contracts, certain implementation costs incurred are capitalized and recorded in prepaid expenses and other current assets, and other non-current assets on the Consolidated Balance Sheets. These costs are amortized over the noncancellable term of the cloud computing service contract, plus any optional renewal periods that are reasonably certain to be exercised, once the service is ready for its intended use. As of December 31, 2024, the Company capitalized $ 1.2 million of cloud computing implementation costs. Amounts capitalized as of December 31, 2023 and expensed during the years ended December 31, 2024, 2023 and 2022 were not material. +Leases +The Company enters into operating leases for office, laboratory, and manufacturing spaces, as well as office equipment, and determines whether an arrangement is a lease at inception of the arrangement. The Company accounts for a lease when it has the right to control the leased asset for a period of time, while obtaining substantially all of the assets’ economic benefits. Leases are recorded on the Consolidated Balance Sheets as operating lease right-of-use (“ROU”) assets and current or non-current operating lease liabilities. All of the Company’s leases are classified as operating leases. +Operating lease ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the future minimum lease payments over the lease term and any initial direct costs incurred. Initial direct costs are incremental costs of a lease that would not have been incurred had the lease not been executed. The discount rate used to determine the present value of the lease payments is the Company’s incremental borrowing rate on a collateralized basis for a similar term and amount, as generally an implicit rate in the lease is not readily determinable. To estimate its incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have an agency-based credit rating. +The Company’s lease agreements can contain lease and non-lease components. The Company accounts for the lease and fixed payments for non-lease components as a single lease component under ASC 842 – Leases , which increases the amount of the ROU assets and lease liabilities. Most of the Company’s lease agreements also contain variable payments, primarily maintenance, utility, and other-related costs, which are expensed as incurred and not included in the measurement of the ROU assets and lease liabilities. +Some of the Company’s leases contain options to extend or terminate the lease. When determining the lease term, these options are included in the measurement and recognition of the Company’s ROU assets and lease liabilities when it is reasonably certain that the Company will exercise the option(s). The Company considers various economic factors when making this determination, including, but not limited to, the significance of leasehold improvements incurred in the leased space, the difficulty in replacing the asset, underlying contractual obligations, and specific characteristics unique to a particular lease. Subsequent to entering into a lease arrangement, the Company reassesses the certainty of exercising options to extend or terminate a lease. When it becomes reasonably certain that the Company will exercise an option that was not included in the lease term, the Company accounts for the change in circumstances as a lease modification, which results in the remeasurement of the ROU asset and lease liability as of the modification date. +Leases with a term of 12 months or less upon commencement are not recorded on the Consolidated Balance Sheets and are recorded to expense on a straight-line basis over the lease term. +Impairment of Goodwill +The Company assesses goodwill for impairment at the reporting unit level annually and whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such events or circumstances could include the occurrence of operating losses, a significant decline in earnings, or significant changes in or restructuring of the business. The impairment test is first performed at the reporting unit level using a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying value. If the reporting unit does not pass the qualitative assessment, the reporting unit’s carrying value is compared to its fair value, using estimates including forecasts of discounted future cash flows and peer market multiples. An impairment charge is recorded equal to the excess of the reporting unit’s carrying value over its fair value. +The Company recorded an impairment charge on its entire goodwill balance during the year ended December 31, 2022 (refer to Note 18 - Restructuring ) and had no goodwill recorded at December 31, 2024 or 2023. +F-17 +Table of Cont ents +Impairment of Long-Lived Assets +The Company’s long-lived assets consist of operating lease ROU assets, property and equipment, and intangible assets. The Company reviews the carrying amount of its long-lived assets for impairment whenever events or circumstances indicate that the estimated useful lives may warrant revision, or that the carrying amount of the assets may not be fully recoverable. To assess whether a long-lived asset or group of assets has been impaired, the estimated undiscounted and discounted future cash flows for the estimated remaining useful life or estimated lease term, of the asset (or the primary asset in the asset group) are compared to their carrying values. Significant judgment is required to estimate future cash flows, including, but not limited to, the expected use of the asset (group), historical customer retention rates, technology roadmaps, customer awareness, trademark and trade name history, contractual provisions that could limit or extend an asset's useful life, market data, discount rates, potential sublease opportunities including rent and rent escalation rates, time to sublease, and free rent periods. To the extent that the future cash flows are less than the carrying value, the asset(s) are impaired and written down to estimated fair value. +Fair Value of Financial Instruments +The carrying amount reflected on the Consolidated Balance Sheets for cash, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued compensation and benefits, and accrued expenses and other current liabilities approximate their fair values due to their short-term nature. +Additionally, the Company has certain financial assets that are required to be measured at fair value on a recurring basis including cash equivalents and marketable securities. Pursuant to the accounting standards for fair value measurements, the fair values of these financial assets are classified as Level 1, 2, or 3 within the fair value hierarchy as follows: +• Level 1: Observable inputs based on unadjusted quoted prices in active markets for identical assets. +• Level 2: Inputs, other than Level 1 inputs, that are observable either directly or indirectly, such as quoted prices for similar assets, quoted prices in markets that are not active, other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets. +• Level 3: Unobservable inputs for which there is little or no market data and such inputs are significant to the fair value of the assets. These inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset. +To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. +Income Taxes +The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Consolidated Financial Statements or tax returns. Deferred tax assets and liabilities are determined based on differences between the carrying amount and the tax basis of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. +The Company accounts for uncertain tax positions using a more likely than not threshold for recognizing uncertain tax positions, in accordance with ASC 740 – Income Taxes . The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity, and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on an ongoing basis and adjusts any liability recorded to reflect subsequent changes in the relevant facts surrounding the uncertain positions. Amounts recorded for uncertain tax positions, including interest and penalties, are recorded in income tax (expense) benefit on the Consolidated Statement of Operations. +F-18 +Table of Cont ents +Credit, Product, and Supplier Concentrations, and Off-Balance-Sheet Risk +Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash, cash equivalents, marketable securities, and accounts receivable. The Company limits its risk exposure by having its cash, cash equivalents, and marketable securities held at large commercial banks and investing in highly rated marketable securities. Maximum exposure to losses related to cash, cash equivalents, marketable securities, and accounts receivable are limited to their carrying amounts. +As of December 31, 2024, no customer accounted for greater than 10 % of the Company's gross accounts receivable. As of December 31, 2023, one customer with $ 3.6 million of receivables accounted for greater than 10 % of the Company's gross accounts receivable. Customers outside the United States represented 40 % and 38 % of the Company’s gross accounts receivable balance as of December 31, 2024 and 2023, respectively. +For the year ended December 31, 2024, no customers accounted for greater than 10 % of the Company’s total revenue. For the year ended December 31, 2023, one customer of approximately $ 14.0 million revenue accounted for greater than 10 % of the Company’s total revenue. For the year ended December 31, 2022, one customer of approximately $ 13.7 million revenue accounted for greater than 10 % of the Company’s total revenue. +The Company is also subject to supply chain risks related to outsourced manufacturing of some of its instruments. Although there are a limited number of manufacturers for its instruments, the Company believes that other suppliers could provide similar manufacturing on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. In addition to outsourced manufacturing of some of its instruments, the Company also purchases antibodies through a number of different suppliers. Although a disruption in service from any one of its antibody suppliers is possible, the Company believes that it would be able to find an adequate supply from alternative suppliers. +Stock-Based Compensation +The Company measures and recognizes stock-based compensation expense by calculating the estimated fair value of stock options, RSUs, or purchase rights issued under the Company’s ESPP on the grant date. The Company generally issues new common shares upon exercise of options and vesting of RSUs. Awards granted by the Company are routine in nature including new hire, annual, and promotion grants. +The fair value of stock options and purchase rights under the ESPP is estimated using the Black-Scholes option-pricing model. The Black-Scholes model requires the Company to make assumptions about the expected or contractual term of the option or purchase right, the expected volatility, risk-free interest rates, and expected dividend yield. The Company estimates the expected term of options granted to employees utilizing historical exercise data. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. During 2024 and 2023, the expected volatility was based on the Company’s historical volatility. Prior to 2023, the expected volatility was estimated based on both the Company’s volatility and the average volatility for comparable publicly traded companies over a period equal to the expected term of the related stock-based awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected term. The expected dividend yield is zero as the Company has never paid dividends and has no current plans to pay any dividends on common stock. +The fair value of RSUs is determined using the closing market price of the Company’s common stock on the grant date. +The Company recognizes stock-based compensation expense on a straight-line basis over an award’s requisite service period, which is the vesting period for stock options and RSUs, and the offering period for purchase rights under the ESPP. The Company recognizes forfeitures as they occur. +Advertising +The Company expenses the cost of advertising as incurred and records them in selling, general and administrative expense on the Consolidated Statements of Operations. Advertising expense was $ 0.5 million, $ 0.3 million, and $ 0.3 million for the years ended December 31, 2024, 2023, and 2022, respectively. +F-19 +Table of Cont ents +Recent Accounting Pronouncements +Recently Adopted Accounting Standards +In November 2023, the FASB issued ASC Update No. 2023-07, Segment Reporting (Topic 280) : Improvement to Reportable Segment Disclosures (“ASU 2023-07”). This update requires single reportable segment entities to comply with all disclosure requirements within Topic 280. This update also enhances reportable segment disclosure requirements by requiring public entities to provide disclosures of significant segment expense categories and amounts that are regularly reviewed by the chief operating decision maker, and other segment items, as well as disclosures about, and a reconciliation to, a reportable segment’s profit or loss. The new standard became effective for the Company’s annual financial statements for the period beginning on January 1, 2024 and is applicable for interim financial statements for the periods beginning on January 1, 2025. The Company adopted this standard on a retrospective basis to all periods presented and such adoption did not have a material impact on the Company’s Consolidated Financial Statements or related disclosures. +In June 2022, the FASB issued ASC Update No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . This update clarifies the guidance in Topic 820 related to measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, as well as introduces new disclosure requirements for these types of equity securities. The new standard became effective for the Company on January 1, 2024. The Company adopted this standard on a prospective basis and such adoption did not have a material impact on the Company’s Consolidated Financial Statements or related disclosures. +Recent Accounting Standards To Be Adopted +In December 2024, the FASB issued ASC Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update enhances income tax disclosure requirements by requiring public entities to provide additional information in its tax rate reconciliation and additional disclosures about income taxes paid. The update is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance and the amendments in this update should be applied prospectively, but entities have the option to apply it retrospectively. The Company is currently evaluating the impact that the standard will have on its Consolidated Financial Statements. +In November 2024, the FASB issued ASC Update No. 2024-03, Reporting Comprehensive Income (Topic 220): Expense Disaggregation Disclosures. This update enhances disclosure of an entity's expenses, primarily through additional disaggregation of income statement expenses. The update also requires entities to disclose qualitative descriptions of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively. The amendments in this update should be applied prospectively, but entities have the option to apply it retrospectively. The new standard will be effective for the Company’s annual financial statements for the period beginning on January 1, 2027, and interim reporting periods beginning January 1, 2028. The Company is currently evaluating the impact that the adoption of this standard will have on financial disclosures. +Note 3. Revenue and Related Matters +Revenue from Contracts with Customers +The Company’s customers primarily consist of entities engaged in the life sciences research that pursue the discovery and development of new drugs for a variety of neurologic, oncologic, cardiovascular, infectious disease, and other protein biomarkers associated with diseases. The Company’s customer base includes pharmaceutical, biotechnology, contract research organizations, academic, and government institutions. +F-20 +Table of Cont ents +Disaggregated Revenue +When disaggregating revenue, the Company considers all of the economic factors that may affect its revenues. The following tables disaggregate the Company’s revenue from contracts with customers by geography, based on the location products and services are consumed, and revenue type (in thousands): +Year Ended December 31, 2024 +North America EMEA Asia Pacific Total +Product revenue: +Instruments $ 3,924 $ 3,857 $ 2,699 $ 10,480 +Consumable and other products 39,794 20,760 8,706 69,260 +Total $ 43,718 $ 24,617 $ 11,405 $ 79,740 +Service revenue: +Research services $ 31,252 $ 5,833 $ 913 $ 37,998 +Service-type warranties 6,319 3,490 798 10,607 +Other services 1,618 976 45 2,639 +Total $ 39,189 $ 10,299 $ 1,756 $ 51,244 +Collaboration and license revenue: $ 3,681 $ — $ 771 $ 4,452 +Total $ 3,681 $ — $ 771 $ 4,452 +Year Ended December 31, 2023 +North America EMEA Asia Pacific Total +Product revenue: +Instruments $ 6,374 $ 4,384 $ 4,947 $ 15,705 +Consumable and other products 35,122 21,216 7,627 63,965 +Total $ 41,496 $ 25,600 $ 12,574 $ 79,670 +Service and other revenues: +Research services $ 24,706 $ 2,000 $ 1,122 $ 27,828 +Service-type warranties 6,265 3,001 613 9,879 +Other services 1,436 951 ( 5 ) 2,382 +Total $ 32,407 $ 5,952 $ 1,730 $ 40,089 +Collaboration and license revenue: $ 1,380 $ — $ — $ 1,380 +Total $ 1,380 $ — $ — $ 1,380 +F-21 +Table of Cont ents +Year Ended December 31, 2022 +North America EMEA Asia Pacific Total +Product revenue: +Instruments $ 9,254 $ 8,362 $ 7,388 $ 25,004 +Consumable and other products 25,894 14,514 4,396 44,804 +Total $ 35,148 $ 22,876 $ 11,784 $ 69,808 +Service and other revenue: +Research services $ 22,493 $ 1,013 $ 147 $ 23,653 +Service-type warranties 5,581 2,779 480 8,840 +Other services 1,144 722 136 2,002 +Total $ 29,218 $ 4,514 $ 763 $ 34,495 +Collaboration and license revenue: $ 274 $ 323 $ 52 $ 649 +Total $ 274 $ 323 $ 52 $ 649 +UltraDx Product Sales Agreement +On May 26, 2022, the Company and UltraDx Limited (“UltraDx”), a company formed by ARCH Venture Partners (“ARCH”), entered into an agreement (the “UltraDx Agreement”). Under the UltraDx Agreement, the Company agreed to supply UltraDx with HD-X instruments (both fully assembled and disassembled), assays and assay components, and granted a co-exclusive license to manufacture, seek Chinese regulatory approval of (including performance of any necessary research and development activities), and commercialize, HD-X instruments assembled in China and related assays in the Chinese in vitro diagnostic (“IVD”) market. Refer to Note 16 - Related Party Transactions for a discussion of the related party relationships between Quanterix and these entities. +Under the UltraDx Agreement, the consideration due to the Company included cash proceeds and contingent, non-cash consideration in the form of ordinary shares of UltraDx with a deemed fair value of $ 1.0 million. The issuance of the shares was contingent on UltraDx completing a preferred share financing under the terms and conditions in the UltraDx Agreement. Given the uncertainty of the completion of the preferred share financing, the Company concluded that the non-cash consideration related to the ordinary shares was variable consideration that was fully constrained at contract inception. +In the second quarter of 2023, UltraDx completed the qualified preferred share financing and issued to the Company 1.0 million ordinary shares. Refer to Note 6 - Fair Value of Financial Instruments for the Company’s disclosures related to determining the fair value of the shares received and Note 20 - Variable Interest Entities for the Company's evaluation under the VIE guidance of investments in other entities. +During the years ended December 31, 2024, 2023, and 2022, the Company recognized $ 1.1 million, $ 1.8 million, and $ 1.9 million, respectively, of revenue from UltraDx. The amount recognized during the year ended December 31, 2023 includes the one-time revenue from the receipt of the UltraDx shares. +Eli Lilly and Company Service Revenue Agreements +On February 25, 2022, the Company entered into a Master Collaboration Agreement with Eli Lilly and Company (“Lilly”) establishing a framework for future projects focused on the development of Simoa immunoassays (the “Lilly Collaboration Agreement”). The Company also entered into an initial statement of work (the “SOW”) under the Lilly Collaboration Agreement to perform assay research and development services within the field of Alzheimer’s disease. Under the SOW, the Company received $ 1.5 million per calendar quarter, which began in the first quarter of 2022. The initial SOW automatically renewed on a quarterly basis. +During the second quarter of 2024, Lilly launched its CertuitAD test. As a result, on May 14, 2024, Lilly provided notice to terminate the SOW in accordance with the terms of the Lilly Collaboration Agreement, effective August 22, 2024. Under the terms of the SOW, the Company received a final quarterly payment of $ 1.5 million in the third quarter of 2024. The Lilly Collaboration Agreement remains in effect and the Company continues to provide products and services to Lilly under other contractual arrangements. +F-22 +Table of Cont ents +Concurrent with the execution of the Lilly Collaboration Agreement, the Company entered into a Technology License Agreement (the “Lilly License”) under which Lilly granted the Company a non-exclusive license to Lilly’s proprietary p-Tau 217 antibody technology for use in research use only products and services and future IVD applications within the field of Alzheimer’s disease. In consideration of the Lilly License, the Company paid an upfront fee, is required to make milestone payments based on the achievement of predetermined regulatory and commercial events, and will pay royalties on net sales of licensed products. In the third quarter of 2024, the Company announced that it will offer research use only instrumentation and consumables to develop p-Tau 217 blood tests and services using the p-Tau 217 antibody technology licensed from Lilly. +During the years ended December 31, 2024, 2023, and 2022, the Company recognized $ 4.5 million, $ 6.0 million, and $ 10.9 million, respectively, of revenue from the Lilly Collaboration Agreement. +Contract Assets +There were no contract assets as of December 31, 2024 or December 31, 2023. +Deferred Revenue +During the years ended December 31, 2024 and 2023, the Company recognized $ 7.9 million and $ 7.7 million of revenue, respectively, related to its deferred revenue balance at January 1 of each such period. +Remaining Performance Obligations +As of December 31, 2024, the aggregate amount of transaction prices allocated to performance obligations that were not yet satisfied, or were partially satisfied, was $ 9.9 million. Of the performance obligations not yet satisfied or partially satisfied, $ 8.8 million is expected to be recognized as revenue in the next 12 months, with the remainder expected to be recognized thereafter. The $ 9.9 million primarily consists of amounts billed for undelivered services related to initial and extended service-type warranties and research services. +Costs to Obtain a Contract +Changes in costs to obtain a contract were as follows (in thousands): +2024 2023 2022 +Balance at December 31 of prior year $ 288 $ 377 $ 440 +Capitalization of costs to obtain a contract 362 528 1,387 +Recognition of costs to obtain a contract ( 358 ) ( 617 ) ( 1,450 ) +Balance at December 31 $ 292 $ 288 $ 377 +The Company evaluates potential impairment of these amounts at each balance sheet date, and no related impairments were recorded during the years ended December 31, 2024, 2023, and 2022, respectively. +Grant Revenue +All of the Company's grant revenue is generated within North America. Grant revenue for the years ended December 31, 2024, 2023, and 2022 was $ 2.0 million, $ 1.2 million, and $ 0.6 million, respectively. +NIH Grant +On September 21, 2022, the Company and the National Institutes of Health (the “NIH”), an agency of the U.S. Department of Health and Human Services, entered into a contract (the “NIH Grant”) with a total award value of $ 1.7 million. The NIH granted the Company funding in support of the development of certain point-of-care diagnostic technologies through collaborative efforts. Grant funding is to be used solely for activities related to the point-of-care diagnostic device development project and the contract period runs through August 2025. Receipt of the award value occurs throughout the term of the contract period and after the Company submits for reimbursement of activities related to the grant. As of December 31, 2024, the Company had received $ 1.1 million of the award value. +F-23 +Table of Cont ents +During the years ended December 31, 2024 and 2023, grant revenue recognized was $ 0.8 million and $ 0.7 million, respectively, and research and development expenses incurred were $ 0.8 million and $ 0.6 million , respectively . During the year ended December 31, 2022, grant revenue recognized and research and development expenses incurred were not material. +ADDF Grant +On March 24, 2022, the Company and the Alzheimer’s Drug Discovery Foundation (the “ADDF”) entered into a contract (the “ADDF Grant”) with a total funding value of $ 2.3 million. The ADDF is a charitable venture philanthropy entity that granted the Company funding in support of certain activities for the development of an IVD test for early detection of Alzheimer's disease. The ADDF Grant restricts the Company’s use of the granted funds solely for activities related to the Company’s Alzheimer’s diagnostic test development project and the contract period runs through June 2024. Receipt of the contract funding was subject to achievement of pre-defined milestones, and as of December 31, 2023, the Company had received the total funding value of $ 2.3 million. +During the years ended December 31, 2024, 2023, and 2022, grant revenue recognized was $ 1.1 million, $ 0.5 million, and $ 0.6 million, respectively, and research and development expenses incurred were $ 1.1 million, $ 0.5 million, and $ 0.6 million, respectively. As of December 31, 2024, the Company had no remaining deferred revenue related to the ADDF Grant. +Note 4. Allowance for Credit Losses +The change in the allowance for credit losses on accounts receivable is summarized as follows (in thousands): +2024 2023 2022 +Balance at December 31 of prior year $ 454 $ 118 $ 419 +Provision for expected credit losses 712 729 752 +Write-offs and recoveries collected ( 124 ) ( 393 ) ( 1,053 ) +Balance at December 31 $ 1,042 $ 454 $ 118 +F-24 +Table of Cont ents +Note 5. Marketable Securities +The amortized cost, gross unrealized gains, gross unrealized losses, and fair value of the Company’s marketable securities by major security type were as follows (in thousands): +As of December 31, 2024 +Amortized cost Unrealized Gains Unrealized Losses Fair Value +Commercial paper $ 1,494 $ — $ — $ 1,494 +U.S. Treasuries 61,891 19 ( 53 ) 61,857 +U.S. Government agency bonds 93,987 89 ( 98 ) 93,978 +Corporate bonds 74,937 148 ( 1 ) 75,084 +Total marketable securities $ 232,309 $ 256 $ ( 152 ) $ 232,413 +Marketable securities are reported in the following Consolidated Balance Sheets captions: +Marketable securities $ 232,413 +Total marketable securities $ 232,413 +As of December 31, 2023 +Amortized Cost Unrealized Gains Unrealized Losses Fair Value +Commercial paper $ 53,482 $ 23 $ ( 12 ) $ 53,493 +U.S. Treasuries 4,896 1 — 4,897 +U.S. Government agency bonds 28,366 39 ( 7 ) 28,398 +Corporate bonds 66,726 289 ( 8 ) 67,007 +Total marketable securities $ 153,470 $ 352 $ ( 27 ) $ 153,795 +Marketable securities are recorded in the following Consolidated Balance Sheets captions: +Cash and cash equivalents $ 6,893 +Marketable securities 146,902 +Total marketable securities $ 153,795 +The following table shows the fair value and gross unrealized losses of the Company’s available-for-sale securities with unrealized losses that are not deemed to be other-than-temporary, aggregated by major security type and length of time that the individual securities have been in a continuous unrealized loss position (in thousands): +Less Than 12 Months +As of December 31, 2024 Fair Value Unrealized Losses +U.S. Treasuries $ 35,085 $ ( 53 ) +U.S. Government agency bonds 32,148 ( 98 ) +Corporate bonds 7,415 ( 1 ) +Total $ 74,648 $ ( 152 ) +Less Than 12 Months +As of December 31, 2023 Fair Value Unrealized Losses +Commercial paper $ 32,137 $ ( 12 ) +U.S. Government agency bonds 15,861 ( 7 ) +Corporate bonds 8,367 ( 8 ) +Total $ 56,365 $ ( 27 ) +F-25 +Table of Cont ents +The Company did not have any individual securities in a continuous loss position for greater than 12 months, and there were no individual securities that were in a significant unrealized loss position as of December 31, 2024 or 2023. For marketable securities in an unrealized loss position, the Company does not intend to sell them before recovery of their amortized cost bases, it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost bases, and the unrealized losses are not credit related. Accordingly, the Company has not recorded any impairment losses or a credit loss allowance. +The Company did not sell any marketable securities or record any realized gains or losses for the years ended December 31, 2024 and 2023. At December 31, 2024 and 2023, the Company had $ 1.6 million and $ 1.0 million of accrued interest receivable on its marketable securities, respectively. +The following table summarizes the contractual maturities of the Company’s marketable securities (in thousands): +As of December 31, 2024 As of December 31, 2023 +Amortized cost Fair Value Amortized Cost Fair Value +Due within one year $ 197,141 $ 197,306 $ 95,188 $ 95,232 +Due in one to two years 35,168 35,107 58,282 58,563 +Total $ 232,309 $ 232,413 $ 153,470 $ 153,795 +Note 6. Fair Value of Financial Instruments +Recurring Fair Value Measurements +The following tables present the Company’s fair value hierarchy for its financial assets that are measured at fair value on a recurring basis (in thousands): +As of December 31, 2024 Total Quoted prices in active markets (Level 1) Significant other observable inputs +(Level 2) Significant unobservable inputs +(Level 3) +Financial assets: +Cash equivalents: (1) +Money market funds $ 44,426 $ 44,426 $ — $ — +Total cash equivalents $ 44,426 $ 44,426 $ — $ — +Marketable securities: +Commercial paper $ 1,494 $ — $ 1,494 $ — +U.S. Treasuries 61,857 — 61,857 — +U.S. Government agency bonds 93,978 — 93,978 — +Corporate bonds 75,084 — 75,084 — +Total marketable securities 232,413 — 232,413 — +Total financial assets $ 276,839 $ 44,426 $ 232,413 $ — +F-26 +Table of Cont ents +As of December 31, 2023 Total Quoted prices in active markets (Level 1) +Significant other observable inputs +(Level 2) +Significant unobservable inputs +(Level 3) +Financial assets: +Cash equivalents: (1) +Money market funds $ 155,367 $ 155,367 $ — $ — +Commercial paper 1,996 — 1,996 — +U.S. Treasuries 4,897 — 4,897 — +Total cash equivalents $ 162,260 $ 155,367 $ 6,893 $ — +Marketable securities: +Commercial paper $ 51,498 $ — $ 51,498 $ — +U.S. Government agency bonds 28,398 — 28,398 — +Corporate bonds 67,006 — 67,006 — +Total marketable securities 146,902 — 146,902 — +Total financial assets $ 309,162 $ 155,367 $ 153,795 $ — +(1) Included in cash and cash equivalents on the Consolidated Balance Sheets. +Cash equivalents and marketable securities classified as Level 2 financial assets are initially valued at their purchase price and subsequently valued at the end of each reporting period utilizing third party pricing services or other observable data. The pricing services utilize industry standard valuation methods, including both income and market-based approaches, and observable market inputs to determine the fair value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates, and other industry and economic events. +Nonrecurring Fair Value Measurements +In the second quarter of 2023, the Company received 1.0 million ordinary shares in UltraDx under the UltraDx Agreement (refer to Note 3 - Revenue and Related Matters ). As UltraDx is a privately held entity, there is minimal market activity or other financial information available to determine the fair value of UltraDx’s shares and therefore this investment is considered a Level 3 financial asset. +Pursuant to ASC 321 – Investments – Equity Securities , the Company uses the measurement alternative for equity investments without readily determinable fair values and recognizes its equity investment in UltraDx at cost, less any impairment, and adjusted for any observable price changes in orderly transactions. The ordinary shares received were valued at $ 0.8 million upon receipt, primarily using the third-party purchase price of similar interests issued during UltraDx’s financing that closed in the second quarter of 2023. Changes in the inputs and assumptions used would have resulted in a higher or lower fair value measurement. +The Company’s non-marketable equity investment in UltraDx contains certain restrictions related to the sale or transfer of the securities. The restrictions are in place indefinitely and cannot lapse. No adjustment to the fair value was required as a result of adopting ASU 2022-03 on January 1, 2024. +During the year ended December 31, 2024, the Company did not record adjustments to the fair value of its non-marketable equity investment. To date, the cumulative fair value adjustments have not been material. As of both December 31, 2024 and December 31, 2023, the carrying value of the Company’s Level 3 financial asset was $ 0.8 million and is included in other non-current assets on the Consolidated Balance Sheets. Refer to Note 20 - Variable Interest Entities for the Company's evaluation under the VIE guidance of investments in other entities. +Other Fair Value Disclosures +During the years ended December 31, 2024 and 2023, the Company did not transfer financial assets between levels of the fair value hierarchy. Additionally, there have been no changes to the valuation techniques for Level 2 or Level 3 financial assets. +F-27 +Table of Cont ents +Note 7. Inventory +Inventory, net of inventory reserves, consisted of the following (in thousands): +As of December 31, +2024 2023 +Raw materials $ 7,215 $ 5,114 +Work in process 7,980 5,439 +Finished goods 17,580 15,570 +Total inventory $ 32,775 $ 26,123 +Note 8. Property and Equipment +Property and equipment consisted of the following (in thousands): +As of December 31, +2024 2023 +Laboratory and manufacturing equipment $ 14,648 $ 13,141 +Furniture and fixtures 1,999 1,905 +Computers and software 6,036 3,927 +Leasehold improvements 13,291 13,074 +Total cost 35,974 32,047 +Less: accumulated depreciation ( 18,824 ) ( 14,121 ) +Property and equipment, net $ 17,150 $ 17,926 +The Company incurred depreciation expense of $ 4.8 million, $ 4.7 million, and $ 3.5 million for the years ended December 31, 2024, 2023, and 2022, respectively. Substantially all of the Company’s property and equipment is located in North America. +During the year ended December 31, 2023, the Company had $ 0.8 million of disposals related to equipment no longer being used by the Company. There were no material disposals during the years ended December 31, 2024, and 2022. +For the year ended December 31, 2024, the Company did not record any impairments related to property and equipment. For the years ended December 31, 2023 and 2022, except for the impairments related to leasehold improvements associated with two leased facilities that were not being used at the time (refer to Note 14 - Leases) , impairments related to property and equipment were not material. +As of December 31, 2024 and 2023, total gross capitalized software development costs were $ 4.3 million and $ 1.1 million, respectively. Depreciation of capitalized software costs was $ 0.8 million for the year ended December 31, 2024 and was not material for the years ended December 31, 2023 and 2022. +Note 9. Accrued Expenses and Other Current Liabilities +Accrued expenses and other current liabilities consisted of the following (in thousands): +As of December 31, +2024 2023 +Accrued professional services $ 4,897 $ 1,596 +Accrued royalties 1,361 1,689 +Accrued tax liabilities 1,018 822 +Other accrued expenses 1,575 1,948 +Total accrued expenses and other current liabilities $ 8,851 $ 6,055 +F-28 +Table of Cont ents +Note 10. Stock-Based Compensation +Stock-Based Compensation Plans +In December 2017, the Company adopted the 2017 Employee, Director and Consultant Equity Incentive Plan (the “2017 Plan”), under which it may grant incentive stock options, non-qualified stock options, RSUs, and other stock-based awards. As of December 31, 2017, the 2017 Plan allowed for the issuance of (1) up to 1.0 million shares of common stock and (2) up to 2.5 million shares of common stock represented by awards granted under the 2007 Stock Option and Grant Plan (which was terminated upon completion of the Company’s initial public offering) that were forfeited, expired, or cancelled without delivery of shares or which result in the forfeiture of shares of common stock back to the Company on or after the date the 2017 Plan became effective. The 2017 Plan contains an “evergreen” provision, which allows for an annual increase in the number of shares of common stock available for issuance under the 2017 Plan on the first day of each fiscal year during the period beginning in 2019 and ending in 2027. The annual increase is equal to the lowest of (1) 4 % of the number of shares of common stock outstanding as of such date and (2) an amount determined by the Company’s Board of Directors or Compensation Committee. As of December 31, 2024, 4.6 million shares were outstanding and there were 3.8 million shares available for grant under the 2017 Plan. +In December 2017, the Company adopted the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). As of December 31, 2019, the 2017 ESPP allowed for the issuance of up to 0.6 million shares of common stock. The 2017 ESPP contains an “evergreen” provision, which allows for an increase in the number of shares under the plan on the first day of each fiscal year beginning with 2018 and ending in 2027. The increase is equal to the lowest of: (1) 1 % of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year and (2) an amount determined by the Company’s Board of Directors or Compensation Committee. As of December 31, 2024, 2.0 million shares were available for grant under the 2017 ESPP. +The 2017 ESPP provides for six-month offering periods commencing and ending on March 1 through August 31, and September 1 through February 28. During the years ended December 31, 2024, 2023, and 2022, employees purchased 78 thousand, 121 thousand, and 57 thousand shares, respectively, of the Company’s common stock pursuant to the 2017 ESPP. +Stock Options +Under the 2017 Plan, stock options may not be granted with exercise prices of less than fair market value on the date of the grant. Options generally vest ratably over a four-year period with 25 % vesting on the first anniversary and the remaining 75 % vesting ratably on a monthly basis over the remaining three years . These options expire ten years after the grant date. +Stock option activity for the year ended December 31, 2024 is presented below (in thousands, except per share and contractual life amounts): +Number of options Weighted-average +exercise price per share Weighted-average remaining contractual +life (in years) Aggregate +intrinsic value +Outstanding at December 31, 2023 2,774 $ 19.62 7.9 $ 26,941 +Granted 1,584 20.46 +Exercised ( 159 ) 11.71 +Forfeited/expired ( 636 ) 21.89 +Outstanding at December 31, 2024 3,563 $ 19.94 7.7 $ 678 +Exercisable at December 31, 2024 1,511 $ 21.18 6.3 $ 549 +Vested and expected to vest at December 31, 2024 3,563 $ 19.94 7.7 $ 678 +The total intrinsic value of stock options exercised was $ 1.9 million in 2024, $ 1.9 million in 2023, and $ 3.4 million in 2022. +F-29 +Table of Cont ents +Restricted Stock Units +RSUs represent the right to receive shares of common stock upon meeting specified vesting requirements. Shares are delivered to the grantee upon vesting, less shares for the payment of withholding taxes. RSU activity for the year ended December 31, 2024 is presented below (in thousands, except per share amounts): +Number of shares Weighted-average grant +date fair value per share +Unvested as of December 31, 2023 1,328 $ 17.87 +Granted 611 21.51 +Vested ( 522 ) 19.79 +Forfeited ( 302 ) 19.42 +Unvested as of December 31, 2024 1,115 $ 18.55 +Expected to convert at December 31, 2024 1,115 $ 18.55 +The weighted average grant-date fair value per share of awards granted was $ 21.51 in 2024, $ 15.90 in 2023, and $ 18.32 in 2022.The total fair value of shares that vested was $ 10.3 million in 2024, $ 10.4 million in 2023, and $ 9.8 million in 2022. +Stock-Based Compensation Expense +Stock-based compensation expense was recorded in the following categories on the Consolidated Statements of Operations (in thousands): +Year Ended December 31, +2024 2023 2022 +Cost of product revenue $ 1,132 $ 839 $ 596 +Cost of service and other revenue 1,142 1,124 819 +Research and development 2,117 1,713 1,629 +Selling, general and administrative 15,596 13,147 12,339 +Total stock-based compensation $ 19,987 $ 16,823 $ 15,383 +As of December 31, 2024, there was $ 40.1 million of total unrecognized stock-based compensation expense related to unvested RSUs and stock options, which is expected to be recognized over the remaining weighted-average vesting period of 2.7 years. +F-30 +Table of Cont ents +The fair value of the Company’s stock options granted and purchase rights to the ESPP were estimated using the Black-Scholes valuation model with the following assumptions: +Year Ended December 31, +2024 2023 2022 +Stock Options: +Risk-free interest rate +3.4 % - 4.6 % +3.5 % - 4.7 % +1.4 % - 4.1 % +Expected dividend yield None None None +Expected term (in years) +5.3 - 5.4 +5.0 - 5.2 +5.0 - 5.8 +Expected volatility +81.4 % - 83.1 % +71.1 % - 83.1 % +55.0 % - 70.8 % +Weighted-average grant date fair value per share $ 14.43 $ 10.63 $ 9.88 +Employee Stock Purchase Plan: +Risk-free interest rate +4.3 % - 4.9 % +5.2 % - 5.5 % +0.7 % - 3.9 % +Expected dividend yield None None None +Expected term (in years) 0.5 0.5 0.5 +Expected volatility +54.9 % - 66.0 % +72.8 % - 82.5 % +51.9 % - 117.3 % +Weighted-average grant date fair value per share $ 3.84 $ 3.19 $ 3.53 +Note 11. Net Loss Per Share +The following table presents the computation of basic and diluted net loss per share (in thousands, except per share data): +Year Ended December 31, +2024 2023 2022 +Numerator: +Net loss $ ( 38,531 ) $ ( 28,354 ) $ ( 99,574 ) +Denominator: +Weighted average common shares outstanding, basic and diluted 38,367 37,594 36,991 +Net loss per share, basic and diluted $ ( 1.00 ) $ ( 0.75 ) $ ( 2.69 ) +As the Company was in a net loss position for all periods, the following common share equivalents were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive (in thousands): +Year Ended December 31, +2024 2023 2022 +Stock options 3,561 2,783 2,432 +Common stock and RSUs 1,341 1,513 908 +Estimated ESPP purchases 8 23 52 +Total dilutive shares 4,910 4,319 3,392 +F-31 +Table of Cont ents +Note 12. Income Taxes +The following table presents the components of loss before income taxes (in thousands): +Year Ended December 31, +2024 2023 2022 +United States $ ( 39,968 ) $ ( 30,355 ) $ ( 92,360 ) +Foreign 1,871 2,720 ( 7,050 ) +Total loss before income taxes $ ( 38,097 ) $ ( 27,635 ) $ ( 99,410 ) +The following table summarizes income tax (expense) benefit (in thousands): +Year Ended December 31, +2024 2023 2022 +Current: +United States +Federal $ — $ — $ — +State ( 37 ) ( 161 ) ( 87 ) +Foreign ( 683 ) ( 850 ) ( 372 ) +Total current income tax provision ( 720 ) ( 1,011 ) ( 459 ) +Deferred +United States +Federal — — 10 +State — — 13 +Foreign 286 292 272 +Total deferred income tax benefit 286 292 295 +Total income tax expense $ ( 434 ) $ ( 719 ) $ ( 164 ) +A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: +Year Ended December 31, +2024 2023 2022 +Federal statutory income tax rate 21.0 % 21.0 % 21.0 % +Non-deductible executive compensation ( 3.2 ) % ( 2.6 ) % — % +State taxes, net of federal benefit 2.7 % ( 0.3 %) 2.8 % +Tax credits 4.0 % 4.9 % 1.3 % +Stock-based compensation ( 2.4 ) % ( 1.6 ) % ( 2.4 %) +Permanent items ( 0.3 ) % ( 0.6 ) % ( 0.3 ) % +Change in valuation allowance ( 22.5 ) % ( 24.3 ) % ( 20.8 ) % +Impairment of goodwill — % — % ( 1.6 %) +Other ( 0.4 %) 0.9 % ( 0.2 ) % +Effective income tax rate ( 1.1 ) % ( 2.6 ) % ( 0.2 %) +The effective income tax rate differs from the U.S. federal statutory rate of 21.0 % primarily as a result of the valuation allowance maintained against the Company’s net deferred tax assets. +F-32 +Table of Cont ents +Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): +As of December 31, +2024 2023 +Deferred tax assets: +Net operating loss carryforwards $ 80,541 $ 77,731 +Tax credits 10,178 8,645 +Deferred revenue 2,412 2,568 +Amortization 645 727 +Stock-based compensation 3,808 3,186 +Inventory 1,069 1,391 +Capitalized R&D Costs 13,753 9,353 +Lease liability 9,093 9,948 +Other deferred tax assets 497 198 +Accrual and reserves 1,876 2,159 +Total deferred tax assets 123,872 115,906 +Less: valuation allowances ( 118,663 ) ( 110,082 ) +Net deferred tax assets $ 5,209 $ 5,824 +Deferred tax liabilities: +Right-of-Use Assets $ ( 3,970 ) $ ( 4,372 ) +Depreciation ( 1,137 ) ( 1,307 ) +Amortization acquired intangibles ( 831 ) ( 1,253 ) +Other deferred tax liabilities ( 71 ) ( 69 ) +Net deferred tax (liability) asset $ ( 800 ) $ ( 1,177 ) +The Company records deferred tax liabilities in other non-current liabilities on the Consolidated Balance Sheets. +The Company’s change in its valuation allowance account related to deferred tax assets was as follows (in thousands): +2024 2023 +Balance at December 31 of prior year $ 110,082 $ 103,372 +Change in valuation allowance 8,581 6,710 +Balance at December 31 $ 118,663 $ 110,082 +The valuation allowance increased during the year ended December 31, 2024 primarily as a result of the U.S. operating losses incurred. +In determining the need for a valuation allowance, the Company considers the cumulative book income and loss positions of each of its entities as well as its worldwide cumulative loss position. The Company has assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carry back net operating losses (“NOLs”), the existence of reversing taxable temporary differences, the availability of tax planning strategies, and forecasted future taxable income. At December 31, 2024, the Company maintained a full valuation allowance against its worldwide net deferred tax assets, as it concluded that it was more likely than not that the deferred assets will not be utilized. +As of December 31, 2024, the Company had U.S. federal net operating losses (“NOLs”) of approximately $ 320.0 million. U.S. federal NOLs generated through December 31, 2017 of approximately $ 108.5 million expire at various dates through 2037, and U.S. federal NOLs generated after December 31, 2017 of approximately $ 211.5 million do not expire. As of December 31, 2024, the Company had U.S. federal tax credit carryforwards of approximately $ 7.7 million that expire at various dates through 2044. +F-33 +Table of Cont ents +As of December 31, 2024, the Company had $ 224.7 million of state NOLs, approximately $ 210.8 million of which expire at various dates through 2044, and approximately $ 13.9 million of which do not expire. As of December 31, 2024, the Company had U.S. state tax credit carryforwards of approximately $ 3.1 million that expire at various dates through 2039. +Under Sections 382 and 383 of the U.S. Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-ownership change NOLs and other pre-ownership change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an ownership change occurs if there is a cumulative change in an entity’s ownership by 5% stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under U.S. state tax laws. Under the Tax Cuts and Jobs Act of 2017 (“TCJA”), the use of federal NOLs arising in taxable years beginning after December 31, 2017 is limited to 80% of current year taxable income and NOLs arising in taxable years ending after December 31, 2017 may not be carried back (though any such NOLs may be carried forward indefinitely). +The Company may have experienced an ownership change in the past and may experience ownership changes in the future as a result of future transactions in its share capital, some of which may be outside of the control of the Company. As a result, if the Company earns net taxable income, its ability to use its pre-ownership change NOLs, or other pre-ownership change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to significant limitations. +For the years ended December 31, 2024, 2023, and 2022, the Company had no tax reserves accrued for uncertain tax positions. +The Company is subject to taxation in the United States as well as the Netherlands, Sweden, and China. At December 31, 2024, the Company is generally no longer subject to examination by taxing authorities in the United States for years prior to 2021. However, NOLs and tax credits in the United States may be subject to adjustments by taxing authorities in future years in which they are utilized. The Company’s foreign subsidiaries remain open to examination by taxing authorities from 2018 onward. +As of December 31, 2024, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $ 3.4 million and the amount of tax due on remittance would not be material. The Company intends to indefinitely reinvest these earnings and expects future U.S. cash generation to be sufficient to meet future U.S. cash needs. +Note 13. Intangible Assets +Acquired intangible assets consisted of the following (in thousands, except useful life and weighted average life amounts): +As of December 31, 2024 +Estimated +Useful +Life (in years) Gross Carrying +Value Accumulated +Amortization Cumulative +Translation +Adjustment Net Carrying +Value Weighted Average +Life Remaining (in years) +Know-how 8.5 $ 13,000 $ ( 7,057 ) $ ( 2,093 ) $ 3,850 3.0 +Developed technology 7 1,650 ( 1,645 ) — 5 0.1 +Customer relationships +8.5 - 10 +1,360 ( 1,166 ) ( 18 ) 176 3.1 +Non-compete agreements 5.5 340 ( 285 ) ( 55 ) — — +Trade names 3 50 ( 50 ) — — — +Total $ 16,400 $ ( 10,203 ) $ ( 2,166 ) $ 4,031 +F-34 +Table of Cont ents +As of December 31, 2023 +Estimated +Useful +Life (in years) Gross Carrying +Value Accumulated +Amortization Cumulative +Translation +Adjustment Net Carrying +Value Weighted Average +Life Remaining (in years) +Know-how 8.5 $ 13,000 $ ( 6,326 ) $ ( 1,050 ) $ 5,624 4.0 +Developed technology 7 1,650 ( 1,581 ) — 69 1.1 +Customer relationships +8.5 - 10 +1,360 ( 1,067 ) ( 9 ) 284 4.1 +Non-compete agreements 5.5 340 ( 256 ) ( 27 ) 57 1.0 +Trade names 3 50 ( 50 ) — — — +Total $ 16,400 $ ( 9,280 ) $ ( 1,086 ) $ 6,034 +The Company recorded amortization expense of $ 1.6 million for both years ended December 31, 2024 and 2023 and $ 1.8 million for the year ended December 31, 2022. Amortization of know-how is recorded in cost of goods sold; amortization of developed technology is recorded in research and development expenses; and amortization of customer relationships, non-compete agreements and trade names are recorded in selling, general and administrative expenses on the Consolidated Statements of Operations. +Future estimated amortization expense is as follows (amounts in thousands): +As of December 31, 2024 +2025 $ 1,369 +2026 1,341 +2027 1,319 +2028 2 +2029 — +Thereafter — +Total amortization expense $ 4,031 +Note 14. Leases +As part of the Restructuring Plan in the third quarter of 2022 (refer to Note 18 - Restructuring ), the Company decided not to use two leased facilities in its operations and attempted to sublease the vacant space to recover a portion of the total lease costs. The Company’s decision to not use the leased facilities moved the related ROU assets and leasehold improvements into their own asset groups and triggered an impairment assessment over those asset groups. The impairment assessments, along with continued quarterly reassessments, resulted in the Company recording impairment charges to the related ROU assets and leasehold improvements during the years ended December 31, 2023 and 2022 as further described in Note 18 - Restructuring. +During the fourth quarter of 2024, the Company began to utilize one of these two leased facilities, while the other unused facility remained its own asset group. The Company continued to reassess the ROU asset and leasehold improvements from the unused facility and there were no impairments recorded in 2024. +The carrying value of ROU assets and leasehold improvements for facilities not being used as of December 31, 2024 and 2023 were $ 0.8 million and $ 10.1 million, respectively. +Substantially all of the Company’s leases are located in North America. +F-35 +Table of Cont ents +The components of the lease costs and supplemental cash flow information relating to the Company's leases were as follows (in thousands): +Year Ended December 31, +2024 2023 2022 +Operating lease cost $ 4,949 $ 5,209 $ 5,488 +Short-term and variable lease cost 4,359 3,996 3,417 +Total lease cost $ 9,308 $ 9,205 $ 8,905 +Year Ended December 31, +2024 2023 +Cash paid for amounts included in the measurement of operating lease liabilities $ 8,554 $ 8,935 +Weighted average remaining lease term - operating leases (years) 5.8 6.8 +Weighted average discount rate - operating leases 7.92 % 7.86 % +The undiscounted future lease payments for non-cancelable operating leases were as follows (in thousands): +Maturity of lease liabilities As of December 31, 2024 +2025 $ 7,296 +2026 7,450 +2027 7,684 +2028 7,923 +2029 8,143 +Thereafter 7,615 +Total lease payments 46,111 +Less: imputed interest ( 8,740 ) +Total operating lease liabilities $ 37,371 +Operating lease balances presented on the Consolidated Balance Sheets were as follows (in thousands): +As of December 31, 2024 +Operating lease ROU assets $ 16,339 +Operating lease liabilities $ 4,756 +Operating lease liabilities, net of current portion 32,615 +Total operating lease liabilities $ 37,371 +Note 15. Commitments and Contingencies +Purchase Commitments +The Company’s non-cancellable purchase commitments primarily consist of purchases of raw materials for manufacturing operations under annual and multi-year agreements, some of which have minimum quantity requirements. The Company’s total purchase commitments under these agreements as of December 31, 2024 was $ 1.4 million, most of which the Company expects to incur in the year ending December 31, 2025. +F-36 +Table of Cont ents +License Agreements +Harvard University +In August 2022, the Company and Harvard University (“Harvard”) entered into an exclusive license agreement (the “Harvard License Agreement”) for certain intellectual property owned by Harvard. Pursuant to the Harvard License Agreement, the Company paid an upfront fee of $ 0.6 million, which was recorded in research and development expenses on the Consolidated Statements of Operations. Under this license, the Company is required to pay Harvard low single-digit royalties on net sales of products and services using the licensed technology, as well as a portion of its applicable sublicense revenues. The Company incurred no royalty expense under the Harvard License Agreement for the years ended December 31, 2024 and 2023. +Refer to Note 16 - Related Party Transactions for a discussion of a related party relationship with Harvard. +Tufts University +In June 2007, the Company and Tufts University (“Tufts”) entered into a license agreement (the “Tufts License Agreement”) for certain intellectual property owned by Tufts. The Tufts License Agreement, which was subsequently amended, is exclusive and sub-licensable, and will continue in effect on a country by country basis as long as there is a valid claim of a licensed patent in a country. The Company is contractually obligated to pay license and maintenance fees that are creditable against royalties, in addition to low single-digit royalties on direct sales and services, and a royalty on sublicense income. The Company incurred royalty expenses related to the Tufts License Agreement of $ 2.1 million, $ 1.7 million, and $ 1.4 million, during the years ended December 31, 2024, 2023, and 2022, respectively, which was recorded in cost of product revenue on the Consolidated Statements of Operations. +Refer to Note 16 - Related Party Transactions for a discussion of a related party relationship with Tufts. +Legal Contingencies +The Company is subject to claims in the ordinary course of business; however, the Company is not currently a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or results of operations. The Company accrues for contingent liabilities when losses are probable and estimable. If an estimate of a probable loss is a range and no amount within the range is more likely than any other amount in the range, the Company accrues the minimum amount of the range. +Note 16. Related Party Transactions +In August 2022, the Company entered into the Harvard License Agreement for certain intellectual property owned by Harvard (refer to Note 15 − Commitments and Contingencies ). Harvard is obligated to pay a portion of the payments received from the Company under the Harvard License Agreement to a member of the Company’s Board of Directors. A member of the Company’s Board of Directors is also affiliated with Harvard and Mass General Brigham. Revenue recorded from sales of products and services to Harvard and its affiliates and to Mass General Brigham and its affiliates totaled $ 2.2 million, $ 1.3 million, and $ 0.7 million for the years ended December 31, 2024, 2023, and 2022, respectively. Cost of product revenue and operating expenses with Harvard and its affiliates and Mass General Brigham and its affiliates was $ 0.3 million and $ 0.3 million for the year ended December 31, 2024 and December 31, 2023, respectively, and was not material for the year ended 2022. At December 31, 2024 and 2023, open payables to and receivable balances from Harvard and Mass General Brigham were $ 0.7 million and not material, respectively. +In June 2007, the Company entered into the Tufts License Agreement for certain intellectual property owned by Tufts (refer to Note 15 - Commitments and Contingencies ). A member of the Company’s Board of Directors was previously affiliated with Tufts. This Board member continues to receive compensation from Tufts on a formulaic basis based on royalties and license payments the Company makes to Tufts. At December 31, 2024 and 2023, open payable balances to Tufts were not material. +As discussed in Note 3 - Revenue and Related Matters , on May 26, 2022, the Company and UltraDx, a company formed by ARCH, entered into the UltraDx Agreement to supply certain instruments and to grant certain licenses. At contract inception, the Company determined that UltraDx was a related party because a member of the Company’s Board of Directors was affiliated with ARCH and UltraDx. As of June 7, 2023, this individual was no longer a member of the +F-37 +Table of Cont ents +Company’s Board of Directors. Cost of product revenue with UltraDx was not material, $ 0.3 million, and $ 0.7 million for the years ended December 31, 2024, 2023, and 2022, respectively. At December 31, 2024 and 2023, there were no open payable balances to UltraDx and open receivable balances from UltraDx were not material. +Note 17. Segment Reporting +Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker (“CODM”), in deciding how to allocate resources and assess performance. The Company’s CODM is the chief executive officer, who reviews the Company's operations and manages its business as a single operating segment as of December 31, 2024. +The Company’s proprietary digital “Simoa” detection technology is used across all parts of the business to derive revenues through the sale of instruments, consumables, Accelerator Laboratory and LDT services, and warranties. The Company’s accounting policies apply in the same manner across the business. +The Company utilizes consolidated net loss as the measure of segment profitability (loss) as required by ASU 2023-07. The CODM uses this measure, along with the significant revenue and expense lines included below, when analyzing the Company’s operations and performance and determining how to allocate resources. These measures are consistently used by the CODM in comparing budgeted results versus actuals, in determining when or where to invest resources into specific areas of the business, and for decision on strategic initiatives. +The following table presents the reconciliation of significant segment information reviewed by the CODM to consolidated net loss: +Year Ended December 31, +2024 2023 2022 +Revenues: +Revenue from contracts with customers (Note 3) +$ 135,436 $ 121,139 $ 104,952 +Grant revenue 1,985 1,229 570 +Total revenues $ 137,421 $ 122,368 $ 105,522 +Less: +Costs of goods sold and services, including shipping and handling costs $ 62,430 $ 56,290 $ 68,082 +Certain operating expenses, excluding shipping and handling costs (1) 124,587 107,029 110,737 +Other segment items (2) ( 11,065 ) ( 12,597 ) 26,277 +Consolidated net loss $ 38,531 $ 28,354 $ 99,574 +(1) Expenses consist of research and development and selling, general and administrative expenses from the Consolidated Statements of Operations and exclude shipping and handling costs. +(2) Other segment items represent discrete events, non-recurring transactions, or insignificant items that are not used by the CODM to evaluate the Company’s performance or allocate resources, and include: +a. Impairment and restructuring – charges recorded as a result of the Restructuring Plan (refer to Note 18 - Restructuring) , including impairment of the Company's goodwill and a portion of the Company's long-lived assets; +b. Other lease costs – amortization of operating lease right-of-use assets and other facility operating expenses from leased facilities the Company is not using; +c. Interest income - interest earned on cash, cash equivalents, and marketable securities, and the accretion of discounts on marketable securities; +d. Other income (expense), net – gains and losses on foreign currency, and other non-recurring items that are not a part of the Company’s core business operations; and +e. Income tax benefit (expense) – income taxes related to federal, state, and foreign jurisdictions in which the Company conducts business. +The CODM reviews cash usage as part of evaluating the Company’s performance but does not review or evaluate any other assets. +There have been no changes to the methods used to determine segment profit or loss, or the significant segment captions, across any of the periods presented. +F-38 +Table of Cont ents +Note 18. Restructuring +Following a strategic review and assessment of the Company’s operations and cost structure, on August 8, 2022, the Company announced a plan of restructuring and strategic re-alignment plan (the “Restructuring Plan”). As part of the Restructuring Plan, the Company began an assay redevelopment program with the ultimate objective of improving its ability to manufacture and deliver high-quality assays at scale. The Restructuring Plan aligned the Company’s investments to best serve the needs of its customers, focused the Company’s innovation efforts on key platforms, and provided a foundation for the Company’s entry into translational pharma and clinical markets. In accordance with the Restructuring Plan, the Company implemented a workforce reduction, which was substantially completed by the end of the third quarter of 2022. The Restructuring Plan included the elimination of 119 positions and other cost-saving measures. +During the year ended December 31, 2022, the Company incurred approximately $ 3.8 million of expenses related to the Restructuring Plan, which represents the total amount expected to be incurred and the amount incurred to date. These costs were recorded in impairment and restructuring on the Consolidated Statements of Operations and were substantially for cash payments of severance and employee benefits, $ 3.5 million of which was paid by December 31, 2022. +As a result of the Restructuring Plan, the Company performed an impairment assessment of its goodwill, long-lived assets, including ROU assets and related leasehold improvements, and intangibles. The assessments resulted in the Company recording an impairment charge of $ 25.6 million during the year ended December 31, 2022, which was recorded in impairment and restructuring on the Consolidated Statements of Operations. The impairment charge included (1) $ 8.2 million of goodwill, (2) $ 16.3 million associated with the ROU assets and related leasehold improvements at two leased facilities not being used (refer to Note 14 - Leases ), and (3) $ 1.1 million for software costs related to projects that were rationalized as part of the Restructuring Plan or the related exit and disposal costs. During the year ended December 31, 2023, the Company recorded an additional impairment of $ 1.3 million associated with the ROU asset and related leasehold improvements at the leased facilities not being used. +The Company did not have any additional restructuring activities during the years ended December 31, 2024 and 2023. +Note 19. Employee Benefit Plans +The Company sponsors a 401(k) savings plan for employees and may make discretionary contributions. During the years ended December 31, 2024, 2023, and 2022, the Company made contributions of $ 2.4 million, $ 0.8 million, and $ 1.2 million, respectively. The increase during the year ended December 31, 2024 was due to a change in the Company's employer contribution rate. +Note 20. Variable Interest Entities +As discussed in Note 3 - Revenue and Related Matters , during the second quarter of 2023 the Company received one million ordinary shares of UltraDx under the UltraDx Agreement. Primarily due to having less than a 5 % ownership interest in UltraDx, the Company concluded that it does not have the power to direct activities impacting UltraDx’s economic performance and therefore the Company is not the primary beneficiary of the VIE. Since the Company does not have a controlling financial interest in the VIE, it did not consolidate the VIE into its Consolidated Financial Statements during the years ended December 31, 2024 and 2023. +As of both December 31, 2024 and 2023, the carrying value of the Company’s investment in the VIE was $ 0.8 million, which was recorded in other non-current assets on the Consolidated Balance Sheets. Refer to Note 6 - Fair Value of Financial Instruments for the Company’s related valuation disclosures. Maximum exposure to losses related to the VIE is limited to its carrying value and the Company does not have any future funding commitments to the VIE. +F-39 +Table of Cont ents +Note 21. Subsequent Events +Agreement to Acquire Akoya Biosciences, Inc. +On January 9, 2025, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Akoya Biosciences, Inc., a Delaware corporation (“Akoya”), and Wellfleet Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Quanterix (“Merger Sub”), in which Merger Sub will merge with and into Akoya (the “Merger”), with Akoya surviving such Merger as a wholly owned subsidiary of Quanterix. Akoya is based in Marlborough, Massachusetts and is a life sciences technology company delivering spatial biology solutions focused on transforming discovery, clinical research and diagnostics. Spatial phenotyping refers to technology that enables academic and biopharma scientists to detect and map the distribution of cell types and biomarkers across whole tissue samples at single-cell resolution, enabling advancements in understanding of disease progression and patient response to therapy. The transaction is part of the Company's plans to establish the first fully integrated technology ecosystem to identify and measure biomarkers across tissue and blood, expand its technology offerings into oncology and immunology, and expand its portfolio of lab service offerings. +Under the Merger Agreement, each share of common stock, par value $ 0.00001 per share, of Akoya (the “Akoya Common Stock”) outstanding immediately prior to the merger will be converted into the right to receive 0.318 (the “Exchange Ratio”) of a fully paid and nonassessable share of common stock, par value $ 0.001 per share, of Quanterix and, if applicable, cash in lieu of fractional shares, subject to any applicable withholding. +Each restricted stock unit in respect of shares of Akoya Common Stock and each option to acquire shares of Akoya Common Stock that is outstanding immediately prior to the merger will automatically be converted into a number of restricted stock units and options to acquire shares of Quanterix Common Stock, respectively, based on the Exchange Ratio. +The closing of the Merger is subject to a number of conditions, including: (i) approval of the issuance of shares of the Company's common stock in the Merger by its stockholders; (ii) approval of the Merger by Akoya stockholders; (iii) the effectiveness of the registration statement on Form S-4 filed with the SEC in connection with the Merger; (iv) the absence of any order issued or entered, or any law enacted or promulgated having the effect of restraining, enjoining, making illegal or otherwise prohibiting the consummation of the Merger; (v) the Company's submission to Nasdaq of a notification of shares of the Company's common stock to be issued in connection with the Merger; (vi) performance by each party of its respective obligations under the Merger Agreement; and (vii) the absence of a material adverse effect with respect to each of Akoya and Quanterix. +The Company and Akoya have also agreed to use their respective reasonable best efforts to cooperate in good faith to enter into one or more agreements pursuant to which Quanterix would provide Akoya with bridge financing. Any such financing would be in the form of subordinated convertible note(s) in an aggregate principal amount not to exceed $ 30.0 million, subject to Akoya having obtained any required consents and satisfied any other conditions with respect thereto under Akoya’s existing credit facility As of the date of filing of this Annual Report on Form 10-K, the Company is negotiating the potential terms of such financing. +Acquisition of Emission Inc. +On January 8, 2025, the Company completed the acquisition of Emission Inc. (“Emission”). Emission is based in Georgetown, Texas and manufactures large-scale, highly-uniform dye-encapsulating magnetic beads designed for low and mid-plex assays and a mid-plex platform that reads its proprietary beads. The transaction is part of the Company's plans to secure the use of Emission’s highly controlled beads in the Company's next generation instruments and expansion into a new multi-plex segment targeting third-party original equipment manufacturer customers. +Pursuant to the Share Purchase Agreement, the Company acquired all of the issued and outstanding shares of capital stock of Emission for an upfront payment of $ 10.0 million, with an additional $ 10.0 million payable upon completion of certain technical milestones. Additionally, the Emission shareholders may receive up to an additional $ 50.0 million in earnout payments through December 31, 2029, contingent upon the achievement of certain performance milestones. +F-40 +Table of Cont ents +In connection with the closing, the Company and Emission entered into a call option agreement, in which the Emission shareholders have the right to repurchase all of the outstanding capital stock of Emission for $ 10.0 million after five years from the closing date if Emission’s revenues do not exceed $ 5.0 million in any one year during such five-year period. If the Emission shareholders exercise the right to repurchase Emission and consummate the repurchase, the Company will retain a perpetual, fully-paid, irrevocable license to all Emission intellectual property required to continue to manufacture and commercialize the Company's products. +The initial accounting for the acquisition was not complete at the time of filing of this Annual Report on Form 10-K due to the timing of the acquisition. As a result, the full disclosures required under ASC 805-10-50 – Business Combination s cannot be made at this time. +Acquisition costs incurred during the year ended December 31, 2024 related to the Emission acquisition were not material. +F-41 \ No newline at end of file diff --git a/raw/filings/0001503274/2024/0001503274-25-000031/filing_metadata.csv b/raw/filings/0001503274/2024/0001503274-25-000031/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..2404ada6d598416fd2227aa8105826eb891f514d --- /dev/null +++ b/raw/filings/0001503274/2024/0001503274-25-000031/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001503274,QTRX,Quanterix Corp,10-K,2025-03-17,2024-12-31,2025-03-17T20:44:38.000Z,0001503274-25-000031,qtrx-20241231.htm,10-K,11570543,1,1,https://www.sec.gov/Archives/edgar/data/1503274/000150327425000031/qtrx-20241231.htm,https://www.sec.gov/Archives/edgar/data/1503274/000150327425000031/,2024,2024,1 diff --git a/raw/filings/0001503274/2024/0001503274-25-000031/item1.txt b/raw/filings/0001503274/2024/0001503274-25-000031/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..4792b2983151b798e66ec8d55c6cf7cd126ce0e3 --- /dev/null +++ b/raw/filings/0001503274/2024/0001503274-25-000031/item1.txt @@ -0,0 +1,208 @@ +ITEM 1. BUSINESS +Overview +We are a life sciences company that develops and commercializes next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “ Simoa ” detection technology and enable customers to reliably detect protein biomarkers at ultra-low concentrations in blood, serum and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies. The ability of our Simoa platforms to detect proteins in the femtomolar range enables the development of novel therapies and diagnostics and has the potential to identify early-stage disease markers before symptoms appear to facilitate a paradigm shift in healthcare from an emphasis on later-stage treatment to a focus on earlier detection, monitoring, prognosis, and, ultimately, prevention. Our Simoa platforms have achieved significant commercial adoption with an installed base of over 1,000 instruments, and scientific validation with citations in more than 3,200 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology and immunology, and inflammation. +We sell our proprietary instruments and related consumables worldwide to research laboratories, contract research organizations (“CROs”), academic institutions and bio-pharmaceutical companies. In addition, we provide assay development and sample testing services, including four Laboratory Developed Tests (“LDT”), using our proprietary technology through our Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified Accelerator Laboratory (the “Accelerator Laboratory”) located in Billerica, Massachusetts. +Recent Developments +Acquisition of Emission, Inc. +On January 8, 2025, we acquired all of the issued and outstanding shares of capital stock of Emission, Inc. (“Emission”) for an upfront payment of $10.0 million, with an additional $10.0 million payable upon completion of certain technical milestones. Additionally, the shareholders of Emission (collectively, the “Emission Shareholders”) may receive up to an additional $50.0 million in earnout payments through December 31, 2029, contingent upon the achievement of certain performance milestones. Emission is based in Georgetown, Texas and manufactures large-scale, highly-uniform dye-encapsulating magnetic beads designed for low and mid-plex assays and a mid-plex platform that reads its proprietary beads. In connection with the closing, the parties entered into a call option agreement (the “Option Agreement”), pursuant to which the Emission Shareholders have the right to repurchase all of the outstanding capital stock of Emission for $10.0 million after five years if Emission’s revenues do not exceed $5.0 million in any one year during such five-year period. If the Emission Shareholders exercise the right to repurchase Emission under the Option Agreement and consummate the repurchase, we will retain a perpetual, fully-paid, irrevocable license to all Emission intellectual property required to continue to manufacture and commercialize our products. The acquisition of Emission allows us to secure the supply of highly controlled beads for use in our next generation Simoa ONE instrument that we expect to launch by the end of 2025. It also allows us to develop a new multi-plex segment targeting third-party OEM customers for these beads, which we have branded as Nova Beads. +Agreement to Acquire Akoya Biosciences, Inc. +On January 9, 2025, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire Akoya Biosciences, Inc. (“Akoya”), a life sciences technology company delivering spatial biology solutions through the power of spatial phenotyping. Spatial phenotyping refers to a rapidly evolving technology that enables academic and biopharma scientists to detect and map the distribution of cell types and biomarkers across whole tissue samples at single-cell resolution, enabling advancements in their understanding of disease progression and patient response to therapy. Akoya commercializes proprietary instrument platforms, reagents, software, and services that offer end-to-end solutions to perform tissue analysis and spatial phenotyping from discovery through translational and clinical research and diagnostics. +Pursuant to the Merger Agreement, a newly formed, wholly owned subsidiary of Quanterix will merge with and into Akoya, with Akoya continuing as the surviving corporation and becoming a wholly owned subsidiary of Quanterix (the “Merger”). Upon completion of the Merger, each issued and outstanding share of common stock of Akoya will be converted into 0.318 of a share of our common stock. The closing of the Merger is subject to a number of conditions, +1 +Table of Cont ents +including: (i) approval of the issuance of shares of our common stock in the Merger by our stockholders; (ii) approval of the Merger by Akoya stockholders; (iii) the effectiveness of the registration statement on Form S-4 filed with the SEC in connection with the Merger; (iv) the absence of any order issued or entered, or any law enacted or promulgated having the effect of restraining, enjoining, making illegal or otherwise prohibiting the consummation of the Merger; (v) our submission to Nasdaq of a notification of shares of our common stock to be issued in connection with the Merger; (vi) performance by each party of its respective obligations under the Merger Agreement; and (vii) the absence of a material adverse effect with respect to each of Akoya and us. Subject to fulfillment or waiver of the closing conditions, we expect that the Merger will close in the second quarter of 2025. +We and Akoya have also agreed to use our respective reasonable best efforts to cooperate in good faith to enter into one or more agreements pursuant to which we would provide Akoya with bridge financing. Any such financing would be in the form of subordinated convertible note(s) in an aggregate principal amount not to exceed $30.0 million, subject to Akoya having obtained any required consents and satisfied any other conditions under Akoya’s existing credit facility. As of the date of filing of this annual report, we are negotiating the potential terms of such financing. +Industry Background +Proteins are versatile macromolecules that serve critical functions in nearly all biological processes. Proteins are analytes that are highly relevant physiologically, providing real-time pictures of disease, and researchers and clinicians rely extensively on protein biomarkers for use in research and as clinical and diagnostic tools. However, normal physiological levels of many proteins are not detectable in easily accessible blood samples using conventional, analog immunoassay technologies, and many of these technologies can only detect proteins once they have reached levels that reflect more advanced disease or injury. For many other low abundance proteins, these technologies cannot detect proteins even at disease- or injury-elevated levels. +Enzyme-linked immunosorbent assay ( “ ELISA ” ) technology has been the most widely used method of sensitive detection of proteins for more than 50 years. In simple terms, ELISA involves using a plate coated with an antibody that binds to the target molecule. If the target is present in the sample, it attaches to the plate via the antibody. Then, a second molecule, often an enzyme-linked antibody, is added, binding to the target. The enzyme produces a detectable signal (like fluorescence or a color change) when a specific substrate is added, indicating the presence and quantity of the target molecule in the sample. Although ELISA is widely used in medical diagnostics and research, it has very significant limitations, including limited sensitivity and narrow dynamic range (i.e., the range of concentration of proteins being detected). Efforts to increase the sensitivity of conventional ELISA have had limited success due to procedural complexity and length. +Our Simoa Technology +Our Simoa bead-based and planar array technologies are based on traditional ELISA technology but significantly advance conventional ELISA technology and are capable of substantially greater protein detection sensitivity. We believe that our Simoa platforms are among the most sensitive commercially available multiplex protein detection platforms. +Simoa Bead-Based Technology +Simoa bead-based digital immunoassays utilize the basic principles of conventional bead-based sandwich ELISA. However, unlike ELISA, which runs the enzyme-substrate reaction on all molecules in one well, Simoa bead-based reactions are run on individual molecules in tiny microwells, 40 trillionths of a milliliter, that are 2.5 billion times smaller than traditional ELISA wells. In traditional analog ELISA measurements, the detected signal increases in intensity as the concentration of a sample increases. In Simoa bead-based digital technology measurements, however, the detected signal relies on a binary signal/no signal readout, enabling single molecule detection, and analytical sensitivity in the femtomolar range compared with nanomolar and picomolar levels of detection in conventional ELISA. +Simoa Planar Array Technology +Simoa planar array immunoassays utilize the basic principles of conventional microplate-based sandwich ELISA. However, unlike ELISA, which runs the enzyme-substrate reaction on all molecules coating the entire bottom surface in one well, Simoa planar array reactions are run on spatially segregated micro-spots within the bottom of microtiter plate wells that concentrate the signal to a surface area 1,000 times smaller than a traditional ELISA. The small spot size and spatial segregation of each spot enables multiplexing up to 12 different assays within a single sample well. +2 +Table of Cont ents +Our Strategy +Our commercial strategy is based on three core growth vectors: (i) G row menu; (ii) E xpand into adjacencies; and (iii) T ranslate into diagnostics. Our plans to achieve this GET strategy include: +• Growing through rapid internal menu expansion. In August 2022, we initiated an assay redevelopment program with the objective of improving our ability to manufacture and deliver high-quality assays at scale. This program was substantially completed in the fourth quarter of 2023, and in 2024, we launched 20 new assays that were developed using improved protocols, manufacturing efficiencies and reagent improvements to provide more consistent results and improved lot-to-lot consistency. Following the assay redevelopment program, assay development time has been reduced from more than 18 months to less than six months. +• Continuing to grow our leadership position in the measurement of neuro-based biomarkers . We intend to leverage the growing importance of neurological biomarkers to advance the development of therapeutics and diagnostics for neurodegenerative conditions, including Alzheimer’s disease. The importance of neurological biomarkers, such as neurofilament light chain ( “ NfL ” ), p-Tau 181, p-Tau 217 and glial fibrillary acidic protein ( “ GFAP ” ), has increased significantly in recent years, and our ultra-sensitive Simoa platforms have allowed research of neurological disorders, previously limited primarily to cerebrospinal fluid ( “ CSF ” ), to expand significantly. +• Growing menu through strategic acquisitions. We intend to strategically acquire businesses and technologies to grow our operations and strengthen our market position, as evidenced by our recent acquisition of Emission and our proposed acquisition of Akoya. We expect that acquisitions may continue to be an important part of our strategy to increase scale, and we intend to strategically pursue acquisitions to expand product menu, add technologies, and/or provide access to complementary or strategic growth areas. +• Expanding further into indications beyond neurology . Although we intend to continue to extend our leadership position in measuring neuro-based biomarkers, the ability of our Simoa technology to detect and quantify low abundance proteins with exquisite sensitivity is a distinct advantage in detecting disease earlier in other indications, in particular oncology and immunology. There are over 950 scientific publications that reference Simoa technologies in non-neurology indications. We have announced our intent to launch Simoa ONE, a new instrument, by the end of 2025. Simoa ONE is expected to enable up to a 10-fold increase in sensitivity over current Simoa platforms and to allow a substantial increase in plexing and specificity. The Simoa ONE is also expected to have a simple and efficient workflow. We expect these attributes to be particularly attractive to researchers and clinicians in oncology and immunology. In addition, many cancers begin in tissue before they move and migrate to blood. With the proposed acquisition of Akoya, we believe we will be able to combine Akoya’s biomarker detection capability in tissue with our ultra-sensitive biomarker detection in blood to drive development of faster, better testing tools for monitoring and detection in oncology and immunology. +• Expanding our presence in diagnostics . Our ultra-sensitive Simoa platforms have enabled the development of a new category of less-invasive diagnostic tests and tools based on blood, serum, saliva and other fluids that could replace current invasive, expensive, and inconvenient diagnostic methods, including spinal tap, diagnostic imaging and biopsy. We currently offer four neurological LDTs through our Accelerator Laboratory. +• Helping to build the global infrastructure for Alzheimer’s disease testing and diagnosis . There are over 55 million people living with Alzheimer’s disease, a number that is expected to double by 2050. We believe our ultrasensitive technology can enable earlier detection. We are helping to build the global infrastructure for Alzheimer’s testing in two ways. First, we are enabling partners by providing Simoa technology to a number of the top prescribing hospital networks and reference labs globally. We entered into 12 of these partnerships in 2024 and intend to continue to grow this network in 2025. Second, through our Lucent Diagnostics brand, we are offering best-in-class diagnostic testing through our LucentAD Complete test, which was launched in November 2024. +3 +Table of Cont ents +Our Products and Services +Instruments +We currently offer the following three Simoa instruments, which we believe are among the most sensitive multiplex protein detection platforms commercially available today: +HD-X +We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument, which was launched in January 2014) that was designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X is based on our bead-based technology, and assays run on the HD-X are fully automated. By the end of 2024, approximately 84% of the HD installed base were HD-X instruments. +SR-X +We commercially launched our SR-X instrument in December 2017 as a compact benchtop instrument with a lower price point, more flexible assay preparation, and a wider range of applications. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X. In contrast to the fully automated workflow of the HD-X, the assay incubation and washing steps for the SR-X are performed outside of the instrument using conventional liquid handling methods. The offline sample prep provides additional flexibility to enable researchers to apply Simoa detection in an expanded range of applications. +SP-X +We commercially launched the SP-X instrument in April 2019. The SP-X uses the Simoa planar array technology developed initially by Aushon Biosystems (Aushon), which we acquired in 2018, for multiplex chemiluminescent immunoassay measurement, which we refined by leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms to provide sensitivity similar to that found in our Simoa bead-based platform. +Simoa Assays and Consumables +Recurring revenue is derived through the sale of consumables used to run assays on our instruments and from our growing menu of Simoa digital biomarker assays. The current menu of approximately 65 analyte-specific single-plex and multi-plex assay kits for our bead-based instruments includes assays for biomarkers in the areas of neurology, infectious disease, immunology and oncology for both human and mouse samples. The current menu of assay kits for the planar array instrument includes approximately 45 biomarkers ranging from 1-10 analytes per assay in the areas of immunology and oncology research. +In addition to the assays we have developed, the Simoa platforms allow ease and flexibility in assay design, enabling our customers to develop their own proprietary in-house assays, called homebrew assays, using our homebrew assay kits. These kits include all components required for customers to run tests using their own antibodies. Our consumables portfolio for our bead-based platform also includes our proprietary Simoa disks that are unique to our bead-based platform, as well as cuvettes and disposable tips. +4 +Table of Cont ents +Nova Beads +In January 2025, we acquired Emission, a manufacturer of large-scale, highly-uniform dye-encapsulating magnetic beads designed for low and mid-plex assays. These proprietary beads are engineered for consistency, scalability, and reliability. This acquisition allows us to secure the supply of these highly controlled beads for use in our next generation Simoa ONE instrument. It also allows us to develop a new multi-plex segment targeting third-party OEM customers for these beads, which we have branded as Nova Beads. +NfL Antibodies and NfL ELISA Kits +In August 2019, we acquired UmanDiagnostics AB ( “ Uman ” ), a company located in Umeå, Sweden, that commercializes proprietary NfL antibodies and NfL ELISA kits. Uman’s NfL antibodies are used by researchers and biopharmaceutical and diagnostics companies to detect NfL to advance the development of therapeutics and diagnostics for certain neurodegenerative conditions. Since we commercially launched the first assay that could reliably measure NfL in blood using Uman’s antibodies and our Simoa technology in 2017, NfL has seen dramatic growth as a neurological biomarker. Through Uman, we sell proprietary NfL capture and detection antibodies, as well as two NfL ELISA kits for CSF, one of which is CE-certified in Europe, and one RUO NfL ELISA kit for serum. +Services +Through our CLIA-certified Accelerator Laboratory, we provide customers a contract research option. The Accelerator Laboratory supports multiple projects and services, including: +• Sample Testing. Utilizing commercially available Simoa kits, we have run large studies for customers with thousands of specimens and small experiments with just a few samples. We have extensive experience testing many different sample types where biomarkers may be present at very low levels. +• Homebrew Assay Development. Utilizing proprietary or commercially available reagents in combination with our homebrew assay kits, we can rapidly develop a prototype assay exhibiting improved sensitivity compared to traditional ELISA. The Accelerator Laboratory can also be used to screen reagents to identify the optimal assay format or expand prototype efforts for further assay optimization to ultimately deliver the highest level of performance. +• Custom Assay Development. After identifying the optimal assay and conditions, the Accelerator Laboratory can be used to generate qualified bulk reagents or custom assay kits, providing customer access to kits for assays not yet commercially available on the Simoa platform. +• LDT Testing . We currently offer the following four LDTs through our Accelerator Laboratory: +1. LucentAD p-Tau 181 : an LDT to quantitatively measure p-Tau 181 in plasma as an aid in diagnosis of Alzheimer’s disease. +2. Simoa NfL LDT : an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage. +3. LucentAD p-Tau 217 : an LDT to quantitatively measure p-Tau 217 in plasma to aid in diagnosis of Alzheimer’s disease. +4. LucentAD Complete : a multi-marker (p-Tau 217, amyloid β 42 ( “ Aβ42 ” ), amyloid β 40 ( “ Aβ40 ” ), NfL, and GFAP) algorithmic LDT for high accuracy plasma detection of amyloid pathology to aid in diagnostic evaluation of patients with cognitive issues who may have Alzheimer’s disease. By using a proprietary algorithm to score five AD-related biomarkers, LucentAD Complete provides significantly better amyloid classification compared to single-marker tests alone and has lowered the intermediate zone of a single-marker test from 30% to 10%, while maintaining high sensitivity, specificity and accuracy. +5 +Table of Cont ents +• Lucent Diagnostics. In July 2023, we launched Lucent Diagnostics, a neurology healthcare provider-facing portal, with testing services initially focused on Alzheimer’s disease. To support a streamlined provider workflow, Lucent Diagnostics includes a web portal where healthcare providers can order sample collection materials, order a test, track the status of a test and retrieve the test report. The process for testing involves a healthcare provider drawing a blood sample from an individual and shipping the sample to our Accelerator Laboratory to analyze the sample and communicate the result back to the provider. Healthcare providers can currently order the following tests through Lucent Diagnostics: LucentAD p-Tau 181, LucentAD p-Tau 217 and LucentAD Complete . +Extended Warranty and Service Contracts +We also generate revenues through extended-warranty and service contracts for our installed base of instruments. +Research and Development +We continue to seek to improve our platform and technology to enable more sensitive detection and measurement of biological molecules. This evaluation includes examining new assay formats and instrumentation improvements and upgrades to increase the performance of our Simoa assays and instruments. We intend to expand our assay menu to extend the scope of applications for our platform to biomarkers of significant interest to the scientific community. +Simoa ONE +Using breakthrough technology licensed from the laboratory of our co-founder, David Walt, we are developing Simoa ONE, a new instrument that we expect to launch by the end of 2025. Simoa ONE is expected to enable up to a 10-fold increase in sensitivity over current Simoa platforms. The instrument is based on optically encoded barcodes and proprietary beads developed by Emission to allow a substantial increase in plexing and specificity of Simoa measurements. Simoa ONE is based on simple instrumentation and assay workflow to efficiently deliver high throughput, quantitative results. +Our Key Focus Areas +We have focused the application of our Simoa technology on areas of high growth and high unmet need and where existing platforms have significant shortcomings that our technology addresses, including neurology, oncology and immunology, as well as inflammation . +Neurology +The ability of Simoa technology to detect neurological biomarkers in blood at ultra-low levels, combined with our multiplexing capability, has significantly advanced neurology research, drug development, and diagnostics test development. Prior to the launch of our p-Tau 181 LDT for clinical use in July 2022, the brain was the only organ in the body for which there was not a blood-based diagnostic test. The challenge with developing blood-based tests for the brain is that the blood-brain barrier, which is formed by endothelial cells lining the cerebral microvasculature, is very tight and severely restricts the movement of proteins and other substances between these endothelial cells and into blood circulation. Accordingly, diagnosis of brain disease and injury has traditionally required either brain imaging or a spinal tap to collect CSF. The sensitivity of Simoa technology has enabled researchers to discover that extremely small amounts of critical neural biomarkers diffuse through the blood brain barrier and are released into the blood during injury and in connection with many neurodegenerative brain diseases. However, the concentrations of many of these neural biomarkers in the blood can be so low that they are difficult to detect by conventional, analog immunoassay technologies. Furthermore, neurological pathophysiology is complex, and it has become clear that no single biomarker is sufficient to serve as comprehensive indicator of these processes. For this reason, the capability of Simoa to multiplex blood-based tests for multiple neural biomarkers into a single test has emerged as useful to facilitate biomarker profiling of neurological disorders. This capability has materially contributed to rapid research progress, notably in the Alzheimer’s disease landscape. +Developments on the Alzheimer’s Disease Landscape +The FDA approval of Leqembi and Kisunla as disease-modifying treatments for Alzheimer’s disease has underscored an urgent need for non-invasive widely available blood tests to facilitate diagnosis in the early stages of the +6 +Table of Cont ents +disease to identify patients for treatment when therapeutic intervention is most likely to provide clinical benefit. Currently established biomarker- based approaches to diagnostic workup for Alzheimer’s include positron emission tomography ( “ PET ” ) imaging and CSF biomarkers for amyloid and phosphorylated tau, both of which are invasive, expensive, and may not be widely available. A Rand Corporation study on the readiness of the U.S. health care system infrastructure for an Alzheimer’s treatment highlighted a dire situation of unpreparedness and where key bottlenecks lie. The model assumed annual mild cognitive impairment screening for adults leading to 7.5 million referrals to a diagnostic phase in a secondary specialist setting, which is well beyond the country’s capacity. Of these referrals, 6.7 million were assumed to require CSF biomarker or amyloid PET testing for biomarker- based diagnosis of Alzheimer’s disease at an estimated cost of $20.1 billion. Of the amyloid positive subjects, 80% (2.4 million) were assumed to fit the criteria for therapeutic intervention. Assessing the effectiveness of an anti-amyloid Alzheimer’s therapy by testing for amyloid plaque reduction over the course of treatment would potentially involve serial testing of each subject with CSF analysis or PET imaging at a significant cost with currently available detection modalities. The availability of a simple blood test for amyloid positivity has the potential to alleviate bottleneck and cost burdens and facilitate the accessibility of Alzheimer’s therapeutic intervention for patients. We believe our Simoa technology is well-suited to meet this critical need. +High Accuracy Simoa p-Tau 217 Test +The Alzheimer’s field has converged to a consensus on the most desirable single blood-based biomarker at present: plasma p-Tau 217. This biomarker has been shown to out-perform all the other plasma biomarker candidates for Alzheimer’s diagnostics and disease progression monitoring. The biomarker also has the distinction of being low abundance in blood and difficult to measure by conventional means. We provide multiple assays for robustly measuring p-Tau 217 in plasma and helping to establish the clinical evidence through a body of peer reviewed publications demonstrating the superiority of this biomarker relative to other biomarkers. While p-Tau 217 has demonstrated superiority over other plasma neural biomarkers, the strength of the data across a number of other biomarker candidates (p-Tau 181, amyloid β 42/40 ratio, GFAP, NfL) is such that all these biomarkers were included in the recently published “ Revised criteria for diagnosis and staging of Alzheimer’s disease: Alzheimer’s Association Workgroup. ” However, only p-Tau 217 was recommended as being sufficiently accurate as a single biomarker to enable a diagnostic use case. We have launched the LucentAD p-Tau217 LDT for clinical use. This test was robustly validated across two independent cohorts (873 samples), and the diagnostic accuracy of the test was shown to meet or exceed the recommendation of the Alzheimer’s Association Workgroup (≥90% accuracy, sensitivity and specificity ≥90%). Thus, the LucentAD p-Tau 217 test meets or exceeds the diagnostic performance criteria for a plasma-based test for Alzheimer’s disease. +Simoa Multi-Marker Algorithmic Test +Leveraging both the multiplexing and high sensitivity capability of Simoa, we have developed a multi-marker algorithmic test that combines five biomarkers (p-Tau 217, Aβ42, Aβ 40, NfL, and GFAP) and uses a proprietary algorithm for high accuracy plasma detection of amyloid pathology. Researchers have extensively studied these biomarkers to advance the understanding of how blood-based biomarkers reflect different aspects of Alzheimer’s pathology, to both further the basic knowledge of the disease pathophysiology, and to explore the potential of these biomarkers to predict disease state, severity, and progression. This work has resulted in a large body of published evidence that has advanced the understanding of the disease and facilitated drug development through the use of these biomarkers as exploratory indicators of drug target engagement. From a diagnostic test standpoint, a central concept has emerged: since these biomarkers reflect different aspects of Alzheimer’s pathology, combining their signals through logistic regression can enhance overall test accuracy. This information, together with clinical evaluations and cognitive testing, can help determine whether cognitive symptoms are the result of Alzheimer’s disease, or another type of dementia. We have partnered with the Alzheimer’s Drug Discovery Foundation to develop and clinically implement a multi-marker blood test to aid Alzheimer’s diagnosis and differential diagnosis of patients presenting with cognitive symptoms of uncertain origin. Validation data for the clinical performance of the test for amyloid detection was presented at the Clinical Trials on Alzheimer’s Disease annual meeting late 2024. The data across over 1,000 patients showed that the test delivered best-in-class performance for amyloid detection accuracy as well as reduced uncertainty in borderline cases. We launched this multi-marker algorithmic test as an LDT in November 2024 under the brand name LucentAD Complete. The test has also received Breakthrough Device designation by the FDA, and clinical trials to support a regulatory filing are in progress. +Other Neurological Conditions +Our ultra-sensitive Simoa technology has also been instrumental in advancing research into other neurological conditions, such as multiple sclerosis and traumatic brain injury ( “ TBI ” ). Evidence of the potential clinical utility of NfL as a biomarker in multiple sclerosis has progressed rapidly, and Simoa’s role in that progression has been foundational. In +7 +Table of Cont ents +April 2022, the FDA granted our Simoa NfL serum test Breakthrough Device designation as a prognostic aid in assessing the risk of disease activity in patients diagnosed with relapsing-remitting multiple sclerosis ( “ RRMS ” ). The test has shown promise to be used in conjunction with clinical, imaging and laboratory findings as an aid in identifying RRMS patients who are at lower or higher risk for relapse within four years. We believe this prognostic information could be clinically useful in tailoring the therapeutic approach to more effectively treat the disease. +Current methods of TBI diagnosis involve CT scans that fail to diagnose approximately 90% of mild TBI. Simoa technology has demonstrated the sensitivity to identify relevant neurological biomarkers, such as NfL, tau, GFAP and UCH-L1, to more adequately aid in diagnosis of TBIs and overall brain health. Researchers in neurology have used Simoa technology to study biomarkers in the blood of athletes after concussion in many high-impact sports. Simoa can measure critical neural biomarkers in blood that correlate repeated head trauma from both concussions and subconcussive events with poor patient outcomes, including the potential development of Chronic Traumatic Encephalopathy, which currently can only be diagnosed after death via a brain autopsy. +Additional assays for blood-based biomarkers with potential utility in Alzheimer’s research and diagnostics have either been launched or are in development. These include brain-derived Tau, p-Tau 231, p-Tau 212, sTREM2, and PSD95. +Oncology and Immunology +Our ultra-sensitive Simoa technology has the potential to detect increased levels of oncology biomarkers during the very early stages in disease development. Biomarkers can be useful tools for diagnostics, prognostics and predictive cancer detection. However, many traditional assay technologies can only detect these biomarkers after the disease has progressed and the patient has become symptomatic. Simoa’s highly sensitive detection capability has the potential to enable earlier detection, better monitoring and treatment and improved prognoses for patients. Additionally, Simoa technology has shown early promise as a liquid biopsy alternative to more invasive diagnostic procedures. +Cancer immunotherapy is a promising new area that is significantly affecting cancer remission rates. One challenge of immunotherapy approaches is that the elicited immune responses are not always predictable and can vary from person to person and protocol to protocol. There exists a significant need to develop biomarker tools to monitor these drugs and their effects. Circulating (serum and plasma) protein biomarkers have the potential to be used in the field of health-oncology to stratify patients, predict response, predict recurrence, reveal mechanism of action and monitor for adverse effects. One technical challenge facing the health-oncology drug development process has been the availability of immunoassays with sufficient sensitivity to measure immunomodulatory biomarkers directly in serum and plasma. We have developed a number of tumor biomarker and immune modulation assays (cytokines and chemokines) that can be used to monitor tumor proliferation and host immune response. In particular key immune regulatory cells (T-regs, dendritic cells, macrophages) secrete very low amounts of the protein Interferon gamma ( “ IFN-gamma ” ) and these levels cannot be reliably measured in serum and plasma using conventional, immunoassay technology, however they can be tracked with our Simoa IFN-gamma assay. Additionally, we have developed an ultra-sensitive assay for IL-6, which is one of the cytokines commonly measured for monitoring cytokine release syndrome as an adverse effect in immunotherapies. Several studies have shown that our ultrasensitive assays can be valuable tools for monitoring health-oncology drugs and protocols. +We believe that our Simoa ONE instrument, which is expected to be launched by the end of 2025, with its increased sensitivity, increased plexing ability and simple and efficient workflow will be well suited for oncology and immunology indications. +Inflammation +Inflammation underlies the response of the body to injury in a variety of diseases. Simoa assays can measure inflammatory and anti-inflammatory molecules in serum and plasma with unprecedented sensitivity. This has the potential to enable new discoveries into the role of inflammation in the biology of health and disease. Our Simoa technology measures low levels of inflammatory proteins, including cytokines and chemokines, that characterize a range of inflammatory diseases, including Crohn’s disease, asthma, rheumatoid arthritis and neuro-inflammation. We believe the sensitivity of Simoa technology can provide a clearer picture of the underlying state of the immune response and disease progression. +Our Simoa technology also has the potential to be used by companies developing anti-inflammatory drugs to quantify the effect a drug has on a particular inflammatory cytokine and to monitor therapeutic efficacy. We believe that a better understanding of the inflammatory response will be critical to future opportunities for wellness screening and disease +8 +Table of Cont ents +response monitoring. Anti-inflammatory drugs are expensive and can have serious side effects, such as increased risk of infection. By monitoring biomarkers indicative of response, clinicians may be able to adjust dose to reduce side effects or increase efficacy. +Sales and Marketing +We distribute our Simoa instruments and consumables via direct field sales and support organizations located in North America and Europe and through a combination of our own sales force and third-party distributors in additional countries, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and UAE. In addition, we sell Uman’s NfL antibodies and NfL ELISA kits directly and in conjunction with a distributor worldwide. +As of December 31, 2024, we had 136 employees in sales, sales support and marketing, including technical field application scientists and field service personnel. This staff is primarily located in North America and Europe. We expect we will expand our sales, support, and marketing efforts in the future by expanding our direct footprint in Europe as well as developing a comprehensive distribution and support network in China and other Asia-Pacific region countries where significant new opportunities exist. +Manufacturing and Supply +We outsource the manufacturing of our Simoa bead-based instruments to third-party manufacturers, and we manufacture our planar array instrument and all assay kits in our own facilities. +Instruments +The HD-X instrument is supplied by STRATEC, based in Birkenfeld, Germany, and is manufactured and shipped from its Birkenfeld and Beringen, Switzerland facilities. The SR-X is supplied by Paramit, based in Morgan Hill, California, and is shipped to our global customers by Paramit. See the section titled “ — Key Agreements ” for a description of our agreements with STRATEC and Paramit. Installation of, and training on, our instruments is provided by our employees where we conduct direct sales, and by distributors where sales are conducted through distributors. +We believe this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for the HD-X or the SR-X, we could experience additional costs, delays and difficulties in doing so, and our business could be harmed. +The SP-X instruments are manufactured, tested, shipped and supported by us from our Billerica, Massachusetts facility. All internal components are sourced domestically except one significant component that is sourced in Germany. These components are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply SP-X instruments on a timely basis. +Consumables +We assemble our assay kits for our bead-based platform in our Billerica, Massachusetts facility. Our bead-based assays include all components required to run an enzyme-based immunoassay, such as beads, capture and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. As part of our assay redevelopment program, we have increased the shelf life of our bead-based assays to 18 months and believe we are able to mitigate this supplier risk through inventory control. +Simoa disks for our bead-based platform are supplied through a single source supplier pursuant to a long-term supply agreement with STRATEC Consumables GmbH, a subsidiary of STRATEC. We believe that this agreement provides for a sufficient notification period to allow for supply continuity and the identification and tech transfer to a new supplier in the event either party wishes to terminate the relationship. Our cuvettes for our bead-based platform are single sourced through STRATEC, and the disposable tips used in our bead-based platform are commercially available. +9 +Table of Cont ents +We assemble our 96-well sample plate kits for our planar array platform in our Billerica, Massachusetts facility. Reagents for our planar array assays include all components required to run an enzyme-based chemiluminescent immunoassay, such as capture antibody printed plates and detector reagents, enzyme reagents and enzyme substrate. These reagents are sourced from a limited number of suppliers, including certain single-source suppliers. Although we believe that alternatives would be available, it would take time to identify and validate replacement reagents for our assay kits, which could negatively affect our ability to supply assay kits on a timely basis. Because our planar array assays have a shelf life of 12 months, we believe we are able to mitigate this risk through inventory control. +Nova Beads +Through our wholly owned subsidiary, Emission, based in Georgetown, Texas, we manufacture these proprietary, next generation monodisperse microspheres (i.e. beads) entirely in-house from readily available materials, which consist of monomers, stabilizers, and surfactants. In the event current suppliers of raw materials are unable to fill orders, we believe there are many alternative suppliers as all the materials are widely commercially available. +NfL antibodies and NfL ELISA Kits +The storage of Uman’s proprietary NfL antibody producing hybridomas, as well as the cultivation and purification of the antibodies, is outsourced to a contract manufacturer, and bulk material of purified antibodies is delivered to Uman’s site in Umeå, Sweden. Functional testing and verification of concentration are performed at Uman before the material is approved for use in production activities. The antibodies can be aliquoted and sold as single reagents or used for the production of Uman’s NfL ELISA kits. The contract manufacturer of antibodies is audited regularly, and we have entered into a written supply agreement with the contract manufacturer. The current shelf-life of the antibodies is 18 months. +All components in Uman’s NfL ELISA kits are manufactured in-house at Uman from starting materials sourced from suppliers that have been evaluated and approved. Uman has entered into supply agreements with critical suppliers. The kit components include buffers (sample diluents and wash solutions), ELISA 96-well plates coated with a capture antibody, detector antibodies, streptavidine conjugates, substrates (TMB) and stop reagents. The final ELISA kit products are subject to quality control procedures, which include testing of human CSF or human serum quality control samples to assure a high batch consistency. After testing and batch record review, the material is released to market. The current shelf-life of the kits is 18 months (NF-light ELISA (CSF)) or 13 months (NF-light Serum ELISA). +Key Agreements +Development Agreement and Supply Agreement with STRATEC +In August 2011, we entered into a Strategic Development Services and Equity Participation Agreement with STRATEC, pursuant to which STRATEC undertook the development of the Simoa HD instrument. In September 2011, we also entered into a Supply and Manufacturing Agreement with STRATEC (the “STRATEC Supply Agreement”), pursuant to which STRATEC agreed to supply HD instruments to us, and we agreed to procure those instruments exclusively from STRATEC, subject to STRATEC’s ability to supply the instruments. We are responsible for obtaining any regulatory approval necessary to sell the instruments. The instrument price stipulated in the STRATEC Supply Agreement was established based on certain specified assumptions and is subject to certain adjustments. +The STRATEC Supply Agreement is terminable by either party on 12 months’ notice to the other party. The STRATEC Supply Agreement may also be terminated on the insolvency of a party or the uncured material breach of a party, or, by us, on a change of control of our company (subject to certain obligations to compensate STRATEC on such termination). On termination by us for STRATEC’s insolvency or uncured material breach or termination by STRATEC for convenience, we are granted a nonexclusive royalty free license of STRATEC intellectual property to manufacture the instruments. In certain of these circumstances, we could be obligated to issue warrants to purchase our common stock. +Paramit Manufacturing Services Agreement +In November 2016, we entered into a Manufacturing Services Agreement (the “Paramit Agreement”) with Paramit to produce and test our SR-X instrument on an as-ordered basis. We also engaged Paramit to supply spare parts for the SR-X instrument. Paramit has no obligation to maintain inventory in excess of any open purchase orders or materials in excess of the amount Paramit reasonably determines will be consumed within 90 days or within the lead time of manufacturing our instrument, whichever is greater. We have an obligation to purchase any material or instruments deemed in excess +10 +Table of Cont ents +pursuant to the Paramit Agreement. The price is determined according to a mutually agreed-upon pricing formula. The parties agreed to review the pricing methodology yearly or upon a material change in cost. +The Paramit Agreement had an initial three-year term with automatic one year extensions. It is terminable by either party for convenience with written notice to the other party given at least nine months prior to the end of the then-current term. The agreement may also be terminated by us with three months’ notice to Paramit upon the occurrence of (i) a failure of Paramit to obtain any necessary governmental licenses, registrations or approvals required to manufacture our instrument or (ii) an assignment by Paramit of its rights or obligations under the agreement without our consent. The Paramit Agreement is terminable by Paramit with 30 days’ notice to us in the event of a material breach after written notice and a 60-day opportunity to cure the breach. +Competition +We compete with both established and development-stage life science companies that design, manufacture and market instruments for proteomics discovery and clinical research applications. For example, companies such as Bio-Techne, MesoScale Discovery, Gyros, SEER, MilliporeSigma, Bio-Rad Laboratories, Thermo Fisher Scientific, Alamar, C2N Diagnostics, and others, have products for protein measurements in biofluids that compete in certain segments of the market in which we sell our products. Our Accelerator Laboratory competes with other research laboratories such as LabCorp, Covance, Q2 Solutions, Rules Based Medicine, Monogram Biosciences, Frontage, PPD Laboratories, and others, some of which are customers of ours. In addition, as we or our partners expand the applications for our products to include diagnostics, we expect to compete with companies such as Siemens, Abbott, Roche, Fujirebio, DiaSorin, Ortho Clinical Diagnostics and Thermo Fisher Scientific. Furthermore, our technology and products are showing promise for non-invasive early disease detection, and in the future, we could experience competition from companies that develop and market imaging and other molecular detection technologies. In addition, a number of other companies and academic groups are in the process of developing novel technologies for life science research and diagnostics. Many of the companies with which we compete or will compete have substantially greater resources than we have. +The life science instrumentation and lab services industries are highly competitive and expected to grow more competitive with the increasing knowledge gained from ongoing research and development. we believe the principal competitive factors for us include: +• sensitivity; +• cost of instruments and consumables; +• reputation among customers and key opinion leaders; +• innovation in product offerings; +• accuracy and reproducibility of results; and +• customer support infrastructure. +We believe that we are well positioned with respect to these competitive factors and expect to enhance our position through ongoing global expansion, innovative new product introductions and ongoing collaborations, and partnerships with key opinion leaders. +Intellectual Property +Our success depends in part on our ability to obtain and maintain intellectual property protection for our products and technology. We use a variety of intellectual property protection strategies, including patents, trademarks, trade secrets, and other methods of protecting proprietary information. +Our patent strategy is multilayered, providing coverage of aspects of the core technology as well as specific uses and applications. The first layer is based on protecting the fundamental methods for detecting single molecules independent of the specific analyte to be detected. The second layer covers embodiments of the core technology directed to the detection of specific analytes. The third layer protects novel instrumentation, consumables, and manufacturing processes used in applying the invention to certain commercial products or future product opportunities. The fourth layer is concerned with +11 +Table of Cont ents +specific uses of the core technology (e.g., biomarkers and diagnostics). Our patent strategy is both offensive and defensive in nature, seeking to protect not only technology we currently practice but also alternative, related embodiments. +As of December 31, 2024, we owned or exclusively licensed more than 100 issued patents and patent applications worldwide. Our owned or exclusively licensed patents and patent applications, if issued, are expected to expire between 2025 and 2042, in each case without taking into account any possible patent term adjustments or extensions and assuming payment of all appropriate maintenance, renewal, annuity or other governmental fees. +Our core Simoa bead-based technology, directed to general methods and devices for single molecule detection, originated at Tufts, in the laboratory of Professor David Walt, who is the founder of Quanterix and a current member of our Board. Professor Walt and his students pioneered the single molecule array technology, including technologies that enabled the detection of single enzyme labels in arrays of microwells, thereby facilitating ultra-sensitive detection. We have exclusively licensed from Tufts the relevant patent rights related to these technologies (see the section titled “— License Agreement with Tufts University ” below). +In addition to our reliance on patent protection for our inventions, products and technologies, we also rely on trade secrets, know-how, confidentiality agreements, and continuing technological innovation to develop and maintain our competitive position. For example, some elements of our manufacturing processes, analytics techniques and processes, as well as computational-biological algorithms, and related processes and software, are based on unpatented trade secrets and know-how that are not publicly disclosed. Although we take steps to protect our proprietary information and trade secrets, including through contractual means with our employees, advisors and consultants, these agreements may be breached or may be unenforceable and we may not have adequate remedies. In addition, third parties may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. As a result, we may not be able to meaningfully protect our intellectual property. For further discussion of the risks relating to our intellectual property, see the section titled “ Risk Factors — Risks Related to our Intellectual Property .” +License Agreement with Tufts University +In June 2007, as amended in April 2013, August 2017, and September 2020, we entered into a license agreement with Tufts, pursuant to which we obtained an exclusive, worldwide license to all patent rights to the Simoa bead-based technology owned by Tufts, as well as a non-exclusive license to related know-how. The rights licensed to us are for all fields of use and are sublicensable. +Under the terms of the agreement, as amended, we paid a one-time, non-refundable upfront fee and issued Tufts shares of our stock. We are required to pay Tufts low single-digit royalties on all net sales of products and services that use the licensed technology, as well as a portion of any sublicensing revenues. We are also obligated to pay annual maintenance fees, which are fully creditable against any royalty payments made by us, and a milestone payment upon any sublicense by us. We were also required to reimburse Tufts for all patent prosecution costs. +The term of the license agreement will continue on a country-by-country basis so long as there is a valid claim of a licensed patent in such country. Tufts may terminate the agreement or convert to a non-exclusive license in the event (1) we fail to pay any undisputed amount when required and fail to cure such non-payment within 60 days after receipt of notice from Tufts, (2) we are in breach of any material provision of the agreement and fail to remedy such breach within 60 days after receipt of notice from Tufts, (3) we do not demonstrate diligent efforts to develop a product incorporating the licensed technology, (4) we are found on five separate audits to have underpaid pursuant to the terms of the agreement, (5) we cease to carry on the business related to the licensed technology either directly or indirectly, or (6) we are adjudged insolvent, make an assignment for the benefit of creditors or have a petition in bankruptcy filed for or against us that is not removed within 60 days. We may terminate the agreement at any time upon at least 60 days’ written notice. Upon termination of the agreement, all rights revert to Tufts. +Government Regulation +The majority of our products are currently intended for RUO applications, although our customers may use our products to develop their own products that are subject to regulation by the FDA or CMS. Although in vitro diagnostic products intended for RUO are not currently required to obtain premarket clearance or approval by the FDA, products labeled as RUO are subject to the FDA’s premarket review requirements if they are determined to be intended for use for clinical rather than non-clinical research purposes. Consequently, other than our four LDTs intended for clinical testing, our products are labeled and intended “For Research Use Only. Not for Diagnostic Procedures.” +12 +Table of Cont ents +The FDA has issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (the “RUO/IUO Guidance”). The purpose of this FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for investigational use only (“IUO”) and when products labeled RUO or IUO will be viewed by the FDA as intended for clinical use. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s premarket notification and clearance process (510(k)), premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. We believe that our labeling and promotion of our products, including the custom assay RUO products developed by the Accelerator Laboratory, is consistent with the RUO/IUO Guidance because we have not promoted our products for clinical use in humans. +IVD tests that are commercially distributed and intended for clinical diagnostic use are regulated by the FDA as medical devices, however, the FDA has traditionally not regulated most laboratory tests referred to as LDTs (as discussed further below). The FDA defines a medical device in part as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article which is intended for the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease in man. We currently offer four LDTs through our CLIA-certified laboratory: (1) an LDT to quantitatively measure p-Tau 181 in plasma as an aid in diagnostic evaluation of Alzheimer’s disease; (2) an LDT to quantitatively measure NfL in serum as an aid in the evaluation of individuals for possible neurodegenerative conditions or other causes of neuronal or central nervous system damage; (3) an LDT to quantitatively measure p-Tau 217 in plasma to aid in the diagnosis of Alzheimer’s disease; and (4) a multi-marker (p-Tau 217, Aβ42, Aβ40, NfL, and GFAP) algorithmic LDT, under the brand name LucentAD Complete, for high accuracy plasma detection of amyloid pathology to aid in diagnostic evaluation of patients with cognitive issues who may have Alzheimer’s disease . +Clinical Laboratory Improvement Amendments of 1988, Regulation of LDTs and State Regulation +We own and operate a CLIA-certified laboratory. The CLIA are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of research testing that does not report patient specific results). A clinical laboratory is defined by CLIA as any facility that performs examinations of specimens obtained from humans for the purpose of providing information for the diagnosis, prevention, or treatment of any disease or impairment of, or the assessment of health of, human beings. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. +In addition, CLIA requires certified laboratories to enroll in an approved proficiency testing program for each of the specialties and subspecialties for which it is certified. If a laboratory fails to achieve a passing score on a proficiency test, then its CLIA certificate may be suspended, limited or revoked, or other sanctions may be imposed. +As a condition of CLIA certification, laboratories are subject to survey and inspection every other year (except laboratories with only a certificate of waiver or certificate of provider-performed microscopy procedures are not subject to biennial inspections), in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or a CMS-approved accreditation organization. +High complexity, CLIA-certified laboratories, such as our, frequently develop testing procedures to provide diagnostic results to customers. These tests have been offered by high-complexity laboratories for the last few decades as LDTs, the validation and performance of which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs under the agency’s medical device authorities, but historically has not exercised enforcement with respect to most LDTs when they meet FDA’s definition of an LDT. FDA defines an LDT as an in vitro diagnostic that is intended for clinical use and is designed, manufactured, and used within a single high-complexity, CLIA- certified laboratory. In October 2023, FDA issued a proposed rule regarding LDTs that would establish that in vitro diagnostic products are devices under the Federal Food, Drug, and Cosmetic Act, including when the +13 +Table of Cont ents +manufacturer is a laboratory. FDA finalized this rule in April 2024. Under the Final Rule, FDA will provide greater oversight of LDTs by phasing out its general enforcement discretion approach for most LDTs, and phase in medical device regulation, for most LDTs over a period of four years. FDA intends to continue to exercise general enforcement discretion from all requirements under the FDCA for five categories of LDTs: (1) 1976-Type LDTs; (2) human leucocyte antigen (HLA) tests used for organ, stem cell, and tissue transplantation; (3) tests manufactured and used within the Department of Defense (DoD) or the Veterans Health Administration (VHA); (4) forensic (law enforcement) tests; and (5) public health surveillance tests. LDTs that do not fall into any of these five categories are subject to a phase-out of FDA’s previous enforcement discretion approach and a phase-in of medical device regulation over a period of four years and in five stages. However, FDA intends to exercise continued enforcement discretion from certain aspects of medical device regulation for certain types of LDTs. For example, FDA intends to exercise regulatory discretion to not require premarket review or most quality system requirements for “currently marketed” LDTs, which include LDTs that were offered as of May 6, 2024, which is the date the FDA’s rule was finalized. Similarly, FDA intends to exercise regulatory discretion to not require premarket review or most quality system requirements for certain tests offered within integrated health systems. In addition, FDA will exercise regulatory enforcement discretion to not require premarket review for tests first offered after May 6, 2024, but which have been subject to review and approval by the New York State Department of Health’s Clinical Laboratory Evaluation Program (NYS CLEP). Finally, FDA intends to exercise regulatory enforcement discretion and generally not enforce premarket review requirements for certain modifications made to 510(k)-cleared and De Novo- authorized tests by CLIA-certified, high-complexity laboratories, even if that 510(k) clearance or De Novo authorization is held by a different manufacturer. +Certain groups have challenged the legality of FDA’s Final Rule regarding LDTs, asserting (among other things) that the rule exceeds FDA’s statutory authority to regulate medical devices. That lawsuit is pending, with a decision from the District Court expected sometime in 2025. It is also possible that the federal government will modify, delay, or revoke the Final Rule. If the Final Rule is not modified, delayed, revoked, or invalidated when the requirements of the rule go into effect, the rule will result in an increased regulatory burden, including additional costs and delays in introducing new LDTs, and could result in tests being removed from the market. +If a laboratory is out of compliance with state laws or regulations governing licensed laboratories or with CLIA, it may be subject to enforcement actions that may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory’s CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third-party payors. +When we perform clinical diagnostic testing, we may be subject to HIPAA, depending on the types of transactions we engage in, as well as additional federal and state laws that impose a variety of fraud and abuse prohibitions on healthcare providers, including clinical laboratories. +Europe/Rest of World Government Regulation +We must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of our product for clinical diagnostic use in those countries. The regulations in other jurisdictions vary from those in the U.S. and may be easier or more difficult to satisfy and are subject to change. For example, in the E.U. new regulations recently entered into force that introduce greater regulation of medical devices and IVDs. The IVD regulation is significantly different from the IVD Directive that it replaces in that it ensures that the new requirements apply uniformly and on the same schedule across the member states, includes a risk-based classification system and increases the requirements for conformity assessment. +The CE registration for the NfL ELISA assay kit of our subsidiary Uman was approved in March 2014 under the IVD Directive. Under the IVD Directive, the assay is classified as a general IVD product and required self-certification with no involvement of a notified body/authority. The IVD Regulation introduces a new classification system for IVDs and assessment by a notified body is required for class B, C and D products. Uman’s NfL ELISA assay kit is classified as a class B product and must fully comply with (and have a CE mark issued under) the IVD Regulation by May 2027 (subject to extension of the transitional periods in the IVD Regulation). The new requirements include an ISO 13485 certification of the quality system (which Uman received in July 2018) and increased technical evidence and follow-up of performance of the specific product (e.g., clinical evidence and post-market activities). The work to evaluate and to meet the new technical requirements is on-going. When all requirements are met, a notified body will be contacted, and the certification initiated. +14 +Table of Cont ents +The NF-light Serum ELISA is currently sold only as a RUO product (not intended for diagnostic use). Work is on-going to prepare a technical file compliant with the IVD Regulation for this product as well. +Other Governmental Regulation +Privacy and Data Security Laws and Regulations +As a business with a global footprint, compliance with evolving regulations and standards in privacy and data security has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of increased regulatory enforcement activity. Our business relies on various safeguards to secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce. +For example, in the U.S., the collection, maintenance, protection, use, transmission, disclosure, and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international, and industry levels. U.S. federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by health care providers. Privacy and Security Rules under HIPAA, as amended by HITECH, govern the use, disclosure, and security of protected health information by “Covered Entities,” (which include health care providers that submit electronic claims, health plans, and health care clearinghouses) and by their “Business Associates” (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the Covered Entity’s workforce). Rules under HIPAA and HITECH include specific security standards and breach notification requirements. The U.S. Department of Health and Human Services (through the Office for Civil Rights) has direct civil enforcement authority against Covered Entities and Business Associates with regard to both the Security and Privacy Rules. The U.S. Department of Justice has criminal enforcement authority against Covered Entities, Business Associates, and certain other entities and individuals. In addition, State Attorneys General may bring enforcement actions under HIPAA. Generally we are not a Covered Entity, however, we may operate as a Business Associate to Covered Entities under certain circumstances. +In addition, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for personal information, such as comprehensive state privacy laws that govern the use, disclosure and protection of personal information, such as certain health information, Social Security numbers, and credit card account data. State consumer protection laws and consumer health privacy laws also establish privacy and security standards for use and management of personal information or consumer health data, including information related to consumers and care providers. +Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. Legal requirements in foreign countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the E.U., stringent data protection and privacy rules which substantially impact the use of patient data across the healthcare industry became effective in May 2018. The GDPR applies uniformly across the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals residing in the E.U. to comply with E.U. privacy and data protection rules. In the area of health data, the GDPR is supplemented by national laws and regulations that are less harmonized. +Because data privacy laws and regulations continue to expand, differ from jurisdiction to jurisdiction, and are subject to evolving (and at times inconsistent) governmental interpretation, compliance with these laws and regulations may require significant additional expenditures or changes in products or business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities. +Environmental Health and Safety Laws +We are subject to federal, state, and local laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation, storage and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (“OSHA”), has established extensive requirements relating specifically to workplace safety for healthcare employers in the +15 +Table of Cont ents +U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. OSHA also regulates the use of hazardous chemicals in the workplace. Likewise, we are subject to the U.S. Environmental Protection Agency and state requirements relating to the management and disposal of hazardous waste, and state requirements relating to the disposal of regulated medical waste. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials that we may use during our research and services. +Employees and Human Capital +As of December 31, 2024, we had 471 full-time employees, of which 136 worked in sales, sales support, field service, and marketing, 27 worked in engineering and research and development, 240 worked in manufacturing and operations and 68 worked in general and administration. Of our 471 full-time employees, 411 were located in the United States and 60 were located in 12 foreign countries. None of our employees is represented by a labor union or subject to a collective bargaining agreement. Our culture emphasizes the impact our work has on the detection of neurological and other critical disorders. +Our success depends upon our ability to attract and retain highly qualified employees. Talent management is critical to our ability to execute our long-term growth strategy, and we seek to cultivate a high performing pool of talent by providing career growth, on-the-job learning opportunities and competitive total rewards. +Workforce Compensation and Pay Equity +We provide competitive compensation and benefits programs to help recruit and retain our high performing employees. We utilize third party benchmark compensation data to assist in the evaluation of market wages. Our compensation is designed to attract, retain, and motivate employees to achieve results while balancing short- and long-term company performance. All our employees are eligible for an annual bonus and/or commission plan, a matching 401(k) Plan (in the case of U.S. employees), healthcare and insurance benefits, paid time off, family leave, employee assistance programs, and behavioral health services. Additionally, all our employees are eligible for annual equity-based grants with vesting conditions designed to award our employees’ performance and encourage retention. +Company Culture +We are committed to an inclusive culture which is grounded on our values of integrity, respect, and equality. In support of our inclusive culture, we sponsor an internal group of culture champions who are focused on diversity, equity, and inclusion. These champions are comprised of employees and executives whose mission is to provide respectful workplace training and awareness to strengthen employee understanding and knowledge of key topics focused on diversity and inclusion. As of December 31, 2024, approximately 47% of our employees were women and approximately 37% of our employees were people of color. +We expect all personnel working at Quanterix, employees, interns, and contractors, to observe the highest levels of business ethics, integrity, and mutual respect. Our employee handbook and Corporate Code of Conduct and Ethics set forth policies that reflect our values and provide guidance for registering complaints in the event of any violation of our policies. An “open door” policy is maintained at all levels of the organization, and any form of retaliation against an employee is strictly prohibited. +Employee Engagement and Wellness +The success of our business is dependent on the physical and mental well-being of our employees. Accordingly, we are committed to creating a safe and healthy workplace for all personnel. We provide our employees with a wide range of policies and practices to ensure an environment of physical and psychological safety and well-being. +16 +Table of Cont ents +Corporate Information +We were incorporated under the laws of the State of Delaware in April 2007 under the name “Digital Genomics, Inc.” In August 2007, we changed our name to “Quanterix Corporation.” Our principal executive offices are located at 900 Middlesex Turnpike, Billerica, Massachusetts 01821, and our telephone number is (617) 301-9400. +Information Available on the Internet +Our Internet website address is www.quanterix.com . The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). We make these reports available through the “Investors—Financial Information—SEC Filings” section of our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. Our electronically filed reports and other information that we file with the SEC can be viewed on the SEC’s website at www.sec.gov . +17 +Table of Cont ents \ No newline at end of file diff --git a/raw/filings/0001503274/2024/0001503274-25-000031/item13.txt b/raw/filings/0001503274/2024/0001503274-25-000031/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..19a923969ef16c09c62e017b6ecc31d51fbb1f5a --- /dev/null +++ b/raw/filings/0001503274/2024/0001503274-25-000031/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this Item will be set forth in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2024 and is incorporated into this Annual Report on Form 10-K by reference. \ No newline at end of file diff --git a/raw/filings/0001503274/2024/0001503274-25-000031/item9a.txt b/raw/filings/0001503274/2024/0001503274-25-000031/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..1374ee6c569c5a0d3eeecd3939ee4d0ff5923c4b --- /dev/null +++ b/raw/filings/0001503274/2024/0001503274-25-000031/item9a.txt @@ -0,0 +1,64 @@ +ITEM 9A. CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2024. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2024, due to the material weaknesses described below in Management’s Report on Internal Control over Financial Reporting. +Management’s Report on Internal Control over Financial Reporting +Introduction +Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. +Previously Identified Material Weaknesses +In the section titled “Part II, Item 9A. Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 6, 2023, we identified four material weaknesses in our internal control over financial reporting relating to the operating effectiveness of our internal controls associated with: (i) the accounting for inventory, including excess and obsolescence reserves (the “Inventory MW”), (ii) the accounting for salaries and commissions expense (the “Compensation MW”), (iii) the financial statement close process, including financial reporting, share-based compensation and non-recurring transactions such as impairment of assets and accounting for leases (the “Financial Statement Close Process MW”), and (iv) the accounting for property and equipment, net (the “Property and Equipment MW”). +In our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, originally filed with the SEC on February 29, 2024 (the “2023 Original Report”), our management concluded that the Financial Statement Close Process MW and Compensation MW were remediated as of December 31, 2023. Our management also concluded that control deficiencies for to a portion of the Inventory MW related to the valuation of our inventory, including excess and obsolescence reserves, (“the Inventory Valuation MW”) and the Property and Equipment MW continued to constitute material weaknesses in our internal control over financial reporting. +Subsequent to the filing of the 2023 Original Report, in the section titled “Part II, Item 9A. Controls and Procedures” of Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2023, as filed with the SEC on December 26, 2024 (the “Amended Annual Report on Form 10-K/A”), our management concluded that the restatement of our previously issued financial statements in the Amended Annual Report on Form 10-K/A was a result of a newly identified design deficiency associated with the Inventory Valuation MW, related to the Company's internal controls over the capitalization of labor and overhead costs. +62 +Table of Cont ents +Remediation of Previously Identified Material Weaknesses +During 2024, we took a number of actions designed to improve our internal control over financial reporting and in furtherance of remediating the Inventory Valuation MW and Property and Equipment MW. We incurred expenses of approximately $5.7 million to remediate these material weaknesses. Based on our efforts and after demonstrating the operating effectiveness of the related internal controls for a sufficient period of time, management has concluded that the Property and Equipment MW was remediated as of December 31, 2024. +Evaluation of Controls and Procedures +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2024, based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 Framework”). Based on our evaluation under the 2013 Framework, management concluded that our internal control over financing reporting was not effective at the reasonable assurance level as of December 31, 2024 due to the material weaknesses described below: +• Management concluded the Inventory Valuation MW continued to exist in light of the restatement of our previously issued financial statements included in our Amended Annual Report on Form 10-K/A, and the lack of time available to implement remediation efforts covering both the design and operating effectiveness over the identified control deficiencies. +• Management identified a material weakness in the operating effectiveness of our internal controls associated with the accounting for Accelerator Laboratory revenue, a component of our service and other revenue (the “Accelerator Revenue MW”). The primary cause of the Accelerator Revenue MW was our reliance on manual controls and processes, including insufficient documentation of reviews of the information used to record Accelerator Laboratory revenue. +Nevertheless, based on a number of factors, including the performance of additional procedures by our management designed to ensure the reliability of our financial reporting, we believe that the Consolidated Financial Statements and Notes to Consolidated Financial Statements in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP. +If not remediated, or if we identify further material weaknesses in our internal control, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our consolidated financial statements or a failure to meet our reporting and financial obligations. +The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. +Remediation Efforts +Our management, with oversight from the Audit Committee of our Board of Directors, is taking steps to remediate the control deficiencies that resulted in the Inventory Valuation MW and the Accelerator Revenue MW described above by implementing changes to our internal control over financial reporting. Our remediation activities undertaken to date and additional planned actions include, but are not limited to, the efforts summarized below: +• we have hired a Vice President, SOX Transformation and have begun hiring an internal SOX Transformation team to: +◦ oversee the remediation of our material weaknesses and drive further improvements across our internal controls; +◦ continue evaluating and designing effective and scalable internal controls and to strengthen the documentation of our existing controls; +◦ establish new internal controls evaluating the accounting for inventory and enhance inventory valuation review procedures; +63 +Table of Cont ents +◦ enhance and expand our existing revenue recognition control procedures and attributes to sufficiently document our assessment of, and reviews over, information used to record Accelerator Laboratory revenue; +◦ provide trainings on a regular basis related to internal control over financial reporting for all control owners; and +◦ identify opportunities to enhance our use of our systems through automating certain controls and processes. +• we have engaged accounting advisory consultants to implement new software solutions to automate key manual inventory valuation processes and outputs; +• we have implemented a new analysis of labor and overhead cost capitalization, including related controls; +• we continue to implement additional compensating controls and will continue to do so throughout the remainder of fiscal year 2025; +• we continue to execute controls that we worked to improve during fiscal year 2024 that did not have a sufficient period of time to demonstrate operating effectiveness as of December 31, 2024; +• we continue to evaluate, enhance, and add personnel in the finance organization with a focus on the requisite experience in the areas of accounting, SEC financial reporting, and internal control compliance; and +• we continue to supplement our team with accounting consultants to provide additional depth and breadth in our period end closes, financial reporting capabilities, and internal controls compliance until we have filled key additions or vacancies on our team with qualified personnel for a sufficient period of overlap to ensure successful transition of responsibilities. +We expect to continue our efforts to remediate the Inventory Valuation MW and Accelerator Revenue MW through fiscal year 2025. We believe that the implementation of the above steps will allow us to address the deficient controls within our internal control environment, which will facilitate the remediation of the Inventory Valuation MW and Accelerator Revenue MW. As we continue to evaluate and work to improve our internal control over financial reporting, we will take additional measures to address control deficiencies and we may modify certain of the remediation measures described above. Following our design and implementation of our remediation efforts, we will need to demonstrate their operating effectiveness. We will not be able to consider the Inventory Valuation MW or the Accelerator Revenue MW remediated until the applicable remedial controls operate for a sufficient period of time and our management has concluded, through testing, that our controls are operating effectively. +Changes in Internal Control over Financial Reporting +Other than the changes outlined related to the remediation of the material weaknesses described above, there have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +64 +Table of Cont ents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of Quanterix Corporation +Opinion on Internal Control Over Financial Reporting +We have audited Quanterix Corporation’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Quanterix Corporation (the Company) has not maintained effective internal control over financial reporting as of December 31, 2024, based on the COSO criteria. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in controls related to the valuation of inventory, including excess and obsolescence reserves and the capitalization of labor and overhead costs, and the accounting for Accelerator Laboratory revenue. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2024 consolidated financial statements, and this report does not affect our report dated March 17, 2025 which expressed an unqualified opinion thereon. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +65 +Table of Cont ents +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ Ernst & Young LLP +Boston, Massachusetts +March 17, 2025 +66 +Table of Cont ents \ No newline at end of file diff --git a/raw/filings/0001503274/2024/0001503274-25-000031/rp_note.txt b/raw/filings/0001503274/2024/0001503274-25-000031/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..52bfe7b4f736c1fb209b58d876094ea24e4198cb --- /dev/null +++ b/raw/filings/0001503274/2024/0001503274-25-000031/rp_note.txt @@ -0,0 +1,7 @@ +Note 16. Related Party Transactions +In August 2022, the Company entered into the Harvard License Agreement for certain intellectual property owned by Harvard (refer to Note 15 − Commitments and Contingencies ). Harvard is obligated to pay a portion of the payments received from the Company under the Harvard License Agreement to a member of the Company’s Board of Directors. A member of the Company’s Board of Directors is also affiliated with Harvard and Mass General Brigham. Revenue recorded from sales of products and services to Harvard and its affiliates and to Mass General Brigham and its affiliates totaled $ 2.2 million, $ 1.3 million, and $ 0.7 million for the years ended December 31, 2024, 2023, and 2022, respectively. Cost of product revenue and operating expenses with Harvard and its affiliates and Mass General Brigham and its affiliates was $ 0.3 million and $ 0.3 million for the year ended December 31, 2024 and December 31, 2023, respectively, and was not material for the year ended 2022. At December 31, 2024 and 2023, open payables to and receivable balances from Harvard and Mass General Brigham were $ 0.7 million and not material, respectively. +In June 2007, the Company entered into the Tufts License Agreement for certain intellectual property owned by Tufts (refer to Note 15 - Commitments and Contingencies ). A member of the Company’s Board of Directors was previously affiliated with Tufts. This Board member continues to receive compensation from Tufts on a formulaic basis based on royalties and license payments the Company makes to Tufts. At December 31, 2024 and 2023, open payable balances to Tufts were not material. +As discussed in Note 3 - Revenue and Related Matters , on May 26, 2022, the Company and UltraDx, a company formed by ARCH, entered into the UltraDx Agreement to supply certain instruments and to grant certain licenses. At contract inception, the Company determined that UltraDx was a related party because a member of the Company’s Board of Directors was affiliated with ARCH and UltraDx. As of June 7, 2023, this individual was no longer a member of the +F-37 +Table of Cont ents +Company’s Board of Directors. Cost of product revenue with UltraDx was not material, $ 0.3 million, and $ 0.7 million for the years ended December 31, 2024, 2023, and 2022, respectively. At December 31, 2024 and 2023, there were no open payable balances to UltraDx and open receivable balances from UltraDx were not material. \ No newline at end of file diff --git a/raw/filings/0001503274/2024/0001503274-25-000031/rpt_disclosure.txt b/raw/filings/0001503274/2024/0001503274-25-000031/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4de1f8e487c37724eae8690fde552ea9cc7b76fe --- /dev/null +++ b/raw/filings/0001503274/2024/0001503274-25-000031/rpt_disclosure.txt @@ -0,0 +1,12 @@ +CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS +Since January 1, 2024, we have engaged in the following transactions with our directors, executive officers and holders of more than 5% of our Common Stock, which we refer to as our principal stockholders, and affiliates, immediate family members, or other related entities of our directors, executive officers and principal stockholders. We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties. +We entered into a license agreement with Tufts University in 2007, as amended in 2013, 2017 and 2020, pursuant to which we obtained an exclusive, worldwide license to our core SIMOA technology, and have entered into additional license agreements with Tufts to certain related technology. David R. Walt, Ph.D., one of our directors, founding scientist and an inventor of the SIMOA technology, previously served as a professor at Tufts University. Under these licenses, we are required to pay Tufts University royalties on net sales of licensed products and services as well as a portion of our applicable sublicense revenues. During the year ended December 31, 2024, we recorded royalty expense of approximately $2.1 million under these licenses. Tufts University pays a portion of the royalties and license payments received from us to Dr. Walt pursuant to an arrangement between Tufts University and Dr. Walt, the amount of which is determined on a formulaic basis. +In August 2022, we entered into a license agreement with Harvard University related to immunoassay technology developed by Dr. Walt at Harvard and Brigham and Women’s Hospital. In connection with entering into this agreement, we paid Harvard an upfront fee of $625,000 in 2022. Under this license, we are required to pay Harvard royalties on net sales of licensed products and services as well as a portion of our applicable sublicense revenues. During the year ended December 31, 2024, we recorded no royalty expense under this license. Harvard is obligated to pay a portion of the payments received from us to Dr. Walt pursuant to an arrangement between Harvard and Dr. Walt. We also sell products and services to laboratories affiliated with Harvard and Brigham and Women’s Hospital that are overseen by Dr. Walt. During the year ended December 31, 2024, we recorded revenue from these sales of approximately $2.2 million. +Indemnification Agreements with Officers and Directors and Directors’ and Officers’ Liability Insurance +We have entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements, our Charter and our Bylaws require us to indemnify our directors to the fullest extent not prohibited by Delaware law. Subject to certain limitations, our Bylaws also require us to advance expenses incurred by our directors and officers. +The 2007 Plan and the 2017 Equity Incentive Plan also provide that our directors (and in the case of the 2017 Equity Incentive Plan, our employees) will not be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the respective plan, and the members of our Board and any committee administering the plan will be entitled to indemnification and reimbursement by us in respect of any claim, loss, damage or expense (including reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors’ and officers’ liability insurance coverage which may be in effect from time to time. +We also maintain a general liability insurance policy which covers certain liabilities of directors and officers of the Company arising out of claims based on acts or omissions in their capacities as directors or officers. +Policies and Procedures for Related Party Transactions +Pursuant to its charter, our Audit Committee is responsible for reviewing and approving, prior to our entry into any such transaction, all transactions reportable by us under Item 404 of Regulation S-K in which we are a participant and in which any parties related to us, including our executive officers, our directors, beneficial owners of more than 5% of our securities, immediate family members of the foregoing persons and any other persons whom our Board determines may be considered related persons under Item 404 of Regulation S-K, has or is expected to have a direct or indirect material interest. +In reviewing and approving such transactions, the Audit Committee will obtain, or will direct our management to obtain on its behalf, all information that the Audit Committee believes to be relevant and +59 \ No newline at end of file diff --git a/raw/filings/0001641614/2015/0001558370-16-004343/filing.txt b/raw/filings/0001641614/2015/0001558370-16-004343/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..412c6f559fb059a50db4c2df8cacb7855808f02a --- /dev/null +++ b/raw/filings/0001641614/2015/0001558370-16-004343/filing.txt @@ -0,0 +1,4492 @@ +10-K +1 +pmts-20151231x10k.htm +10-K +pmts_Current_Folio_10K +Table of Contents +UNITED STATES SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☑ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31, 2015 +Or +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10368 West Centennial Road +Littleton, CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code (303) 973-9311 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, $0.001 par value +NASDAQ Global Select Market +Securities registered pursuant to section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ☐       No ☑ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +Yes ☐       No ☑ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑       No ☐ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑       No ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☐ +Non-accelerated filer ☑ +Smaller reporting Company ☐ +(Do not check if a smaller reporting company) +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐       No ☑ +The registrant did not have a class of registered equity securities outstanding on June 30, 2015. +The number of shares of the registrant’s common stock outstanding as of March 4, 2016 was 56,542,116 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +3 +Item 1A +Risk Factors +11 +Item 1B +Unresolved Staff Comments +29 +Item 2 +Properties +29 +Item 3 +Legal Proceedings +29 +Item 4 +Mine Safety Disclosures +30 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +30 +Item 6 +Selected Financial Data +30 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +34 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +57 +Item 8 +Financial Statements and Supplementary Data +F- 1 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +59 +Item 9A +Controls and Procedures +59 +Item 9B +Other Information +60 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +61 +Item 11 +Executive Compensation +61 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +61 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +61 +Item 14 +Principal Accountant Fees and Services +61 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +62 +Signatures +63 +Index To Exhibits +65 +1 +Table of Contents +CAUTIONARY STATEMENT REGARDIN G FORWARD-LOOKING INFORMATION +Certain statements and information in this Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). The words “believe,” “estimate”, “project”, “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated. Such factors include, but are not limited to: material breaches in the security of our systems; market acceptance of developing technologies that make Financial Payment Cards less relevant; a slower or less widespread adoption of EMV and dual-i nterface EMV technology than we anticipate; difficulties in our production processes; defects in our software; our failure to operate our business in accordance with the PCI security standards or other industry standards such as Payment Card Brand certification standards; extension of card expiration cycles; a decline in U.S. and global market and economic conditions; failure to identify, attract and retain new customers or a failure to maintain our relationships with our major customers; our substantial indebtedness; infringement on our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; failure to meet our customers’ demands in a timely manner; competition and/or price erosion in the payment card industry; our dependence on licensing arrangements; inability to renew leases for our facilities; interruptions in our IT systems or production capabilities; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; non-compliance with, and changes in, laws in foreign jurisdictions in which we operate and sell our products; challenges related to our acquisition strategy; our dependence on specialized equipment from third party suppliers; and other risks that are described in Part I, Item 1A – Risk Factors and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +MARKET DATA +This Annual Report on Form 10-K includes statistical data extracted from a market research report prepared by First Annapolis Consulting, Inc. ("First Annapolis"), which was commissioned by us and was issued in May 2015. First Annapolis provides consulting and investment banking services with a focus on payments-based industries. Unless otherwise indicated, all market data presented in this Annual Report on Form 10-K is derived from data estimated and reported by First Annapolis or estimated by us using such data as the primary source. The data presented in this Annual Report on Form 10-K, including data provided by First Annapolis, involves a number of assumptions and limitations and contains projections and are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions and estimates. Some data contained in this Annual Report on Form 10-K is also based on our good faith estimates, which are derived from management's knowledge of the industry and independent sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable; however, we have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. In addition, statements as to our market position and projections, assumptions and estimates of our future performance are based on data currently available to us, and such estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed in Part 1, Item 1A – "Risk Factors" in this Annual Report on Form 10-K. +2 +Table of Contents +PART I +Item 1. Busines s +As used herein, “CPI”, “we”, “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a leading provider of comprehensive Financial Payment Card solutions in North America. We define “ Financial Payment Cards ” as credit, debit and Prepaid Debit Cards issued on the networks of the “ Payment Card Brands ” (Visa, MasterCard, American Express and Discover) and Interac (in Canada). In 201 5 , we produced over 156.6 million EMV Financial Payment Cards and provided integrated card services to over 3,250 card - issuing banks. We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this growing subsector of the financial technology market. Our customers are pri marily leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “ Group Service Providers ” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process) and card processors. We serve a diverse set of over 4,000 direct and indirect customers, including many of the largest North American issuers of debit and credit cards such as JPMorgan Chase, B ank of America and Wells Fargo, the largest global managers of Prepaid Debit Card programs, including InComm, Green Dot, Blackhawk Network and American Express, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of ten production and card services facilities, including eight high - security facilities in North America , each of which is certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the Payment Card Industry Security Standards Council (the “ PCI Security Standards Council ”) . We have the largest such network of high - security production facilities in North America, allowing us to optimize our solutions offerings to serve the needs of our diverse and long - term customer base. +We estimate that we produce approximately 35 % of all Finan cial Payment Cards in the United States, which we believe gives us the #1 market position by unit volume. We believe we have: +· +the #1 position in the U.S. prepaid debit market (which represents the fastest growing subset of the Financial Payment Card m arket in the United States), serving the top five U.S. Prepaid Debit Card program managers; +· +a leading position in the U.S. large issuer market, serving the majority of the top 20 U.S. debit and credit card issuers; and +· +the #1 position in the highly attractive U.S. small issuer market, which includes independent community banks and credit unions, driven by our strong relationships, capabilitie s and technologies. +We have grown our business significantly over the past decade, both organically and through acquisitions. Over that time period, we have completed six acquisitions, significantly increasing our geographic and market coverage, solutions offerings and capacity. On March 9, 2010, we purchased certain assets of Premier Card Solutions, a leading provider of Financial Payment Cards, data personalization services and tamper - evident security packaging for Prepaid Debit Cards that utilize the payment networks of the Payment Card Brands. The Premier Card Solutions transaction significantly enhanced our offering to Prepaid Debit Card customers. On September 2, 2014, we acquired EFT Source, a recognized leader in the financial technology industry that was named to American Banker and Bank Administration Institute’s FinTech Forward 100 in 2013 , 2014 and 201 5 . The acquisition of EFT Source significantly enhanced our card services offering, added Card@Once ® to our instant issuance card offering and expanded our end - to - end Financial Payment Card solutions. +3 +Table of Contents +In addition to our eight North American facilities, we have two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards , that are not issued on the networks of the Payment Card Brands, and personalization services. +In 2015, we generated : +· +Net sales of $ 374. 1 million, wh ich represented an increase of 43. 3 % compared to the prior year , +· +Net income from continuing operations of $31.3 million, which re presented an increase of 95.7 % compared to the prior year, +· +Adjusted EBITDA of $ 9 6.2 million, wh ich represented an increase of 77.5 % compared to the prior year , +· +N et income from continuing operations and Adjusted EBITDA margins of 8.4 % and 25.7 %, respectively. +Our 2014 results include four months of results from EFT Source. Adjusted EBITDA and Adjusted EBITDA margin are financial measures not presented in accordance with generally accepted accounting principles (“GAAP”). For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income from continuing operations, the mos t comparable GAAP measure, see Part III, Item 6, Selected Financial Data . +Our business consists of the following reportable segments : U.S. Debit and Credit , which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States; U.S. Prepaid Debit , which primarily provides integrated card services to Prepaid Debit Card issuers in the United States; and U.K. Limited , which primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe, and which are not certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council . Businesses not considered part of these segments are categorized as "Other" and include our operations in Ontario, Canada and Petersfield, United Kingdom . In August 2015, we completed the shut down and closure of our operations at our Petersfield , United Kingdom facility. The Petersfield , United Kingdom facility is not material to our business. Also included in “Other” is our corporate headquarters. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 19 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Leading Market Position with Long - Term Customer Relationships. As a market leader, we have long - standing trust - based relationships with our key customers and often deep process and technology integration, particularly in the case of customers who utilize our card services and instant issuance systems and services. The solutions that we provide require strict data integrity, and generally card issuers are reluctant to switch away from trusted providers due to the requirements for high - security and access to highly - sensitive cardholder information. As a result, our customers are selective about the partners with which they work and typically seek out partners who have a well - established reputation for trust and quality and are able to meet their service requirements. +We have long - standing relationships with our customers, many of whom we have served for decades and provide a differentiated level of service, as evidenced by our strong net pro moter score, a customer satisfaction metric developed through customer satisfaction surveys conducted by an independent market research firm. We also maintain important relationships with the Payment Card Brands to ensure our facilities and processes consistently meet their standards. +· +Well Positioned for EMV Conversion in the United States. As a leading provider of integrated credit, debit and Prepaid Debit Card solutions in North America, we are well - positioned to capitalize on the U.S. market conversion to the Europay, Mastercard and Visa (“ EMV ”) chip technology. EMV is a global, technical standard, mainta ined by EMV Co for smart payment cards , and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic stripes . EMV cards c an be contact cards that must be physically inserted (or “ dipped”) into a reader, contactless cards +4 +Table of Contents +that can be read over a short distance using radio-frequency identification (“RFID”) technology, or cards with both contact and contactless functionality (“dual-interface EMV cards”) . We serve our customers through a network of ten production and card services facilities, including eight high - security facilities in North America that are each certified by one or more of the Payment Card Brands, Interac (in Canada) and, w here required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. We have made significant investments in our physical infrastructure and equipment platform to prepare for the EMV conversion , including opening a dedicated EMV technology center in Colorado for EMV Financial Payment Card production and personalization , and significant information technology, human capital and equipment upgrades across our network of facilities. +· +Comprehensive End - to - End Card Solutions Drive Deep Customer Integration. The foundation of our strong market position is our comprehensive end - to - end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the stringent security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end - to - end offering of card data personalization and card services that are deeply integrated within our customers ’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require extensive technology integration, such as secure data links to transfer highly sensitive cardholder information. Similarly, our installed base of instant issuance systems at bank and credit union branches across the United States require comparable levels of customer integration , as our Card@Once ® instant issuance system utilizes only our secure technology to instantly personalize cards. Certain customers have also integrated our proprietary software into their customer - facing websites to offer card design and customization to their cardholders. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost - effective manner instead of managing multiple suppliers across a complex value chain. We believe our customers choose and retain us for these critical functions, which typically require integrations that are costly and complex , due to our reputation as a trusted partner, our high levels of service and proven execution. +· +Certified Network of North American High - Security Facilities. Our eight high - security North American facilities are each certified by one or more of the Payment Card Brands and Interac (in Canada), forming the largest network of certified production facilities in North America. The Payment Card Brand certifications allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. Additionally, many of our facilities are also certified to be in compliance with the standards of the PCI Security Standards Council . These certification processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain this designation, which are regularly verified by both the Payment Card Brands and our customers. +· +Industry Experience and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed extensive technological, engineering and operational expertise that we believe has made us a leader in our industry for product and process know - how. We believe that our technological and operational know - how, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage and fosters a culture of innovation. We have developed and acquired significant intellectual property over our operating history and hold 19 U.S. patents, as well as 30 pending U.S. and foreign patent applications, on our Financial Payment Card solutions, including patents on our instant issuance offering , and patents on our tamper - evident security packaging used by our customers that have Prepaid Debit Card offerings . We also hold exclusive production rights to certain products the Company has developed , as well as patented software solutions such as our MYCA™ offering, which is integrated into the websites of over 300 card issuing banks and other customers. +· +Strong Management Team. We have built a strong management team led by Steven Montross, our CEO and President. Mr. Montross has led CPI for seven years and under his leadership we have completed three strategic acquisitions and we have experienced significant growth . Our management team has established a track record of recognizing and capitalizing on growth opportunities across the markets we serve. Management identified and drove our expansion into Prepaid Debit Card services during the early market adoption period of this card product. Similarly, our management team devised and executed on a strategy to develop our card services offering, which was accelerated by our acquisition of EFT Source. +5 +Table of Contents +Our Growth Strategy +The key components of our strategy include: +· +Capitalize on U.S. EMV Conversion. The conversion to the EMV standard in the United States , which is expected to significantly increase the size of the Financial Payment Card market, is driven primarily by the increasing levels of card fraud in the United States, the Payment Card Brands’ coordinated EMV conversion plan, including the liability shift which occurred on October 1, 2015, and the desire for a single global interoperable standard of card acceptance. The conversion of Financial Paym ent Cards in the United States from magnetic stripe technology to the EMV standard began in earnest in the second half of 2014 and is expected to continue over the next several years, with full adoption in the credit and bank debit card markets expected to be largely complete by the end of 2017 and increasing levels of adoption of Prepaid Debit Cards and “ Private Label Credit Cards” (credit cards issued by an individual merchant for their exclusive use) beyond 2017 . In anticipation of the EMV conversion , and subsequently the expected further adoption of the more complex and higher priced d ual - i nterface EMV cards, we invested significantly in our network of facilities, technological infrastructure and human capital resources. We believe our comprehensive solutions offering and proven track record ideally positions us to be our customers’ partner of choice to successfully complete the EMV conversion. +· +Capitalize on Growth in Prepaid Debit Market. We believe we are well positioned to capitalize on the expected growth of the Prepaid Debit Card market due to our market leading position, supported by our industry expertise , patents and comprehensive end - to - end card solutions. We have driven our leading market position through trust - based relationships with the largest global managers of Prepaid Debit Card programs, including InComm, Green Dot, Blackhawk Network , American Express and NetSpend . Additionally, we have further developed proprietary production techniques which provide us a cost advantage and additional flexibility to meet customer demands. +· +Capitalize on Growth in Instant Issuance Systems and Services Market. We acquired our instant card issuance system, Card@Once ® , through the acquisition of EFT Source in 2014 and have continued to drive significant growth in sales of our instant issuance systems and related services revenue. We plan to continue to grow our installed base of instant issuance systems in bank branches across the U.S. to increase our opportunity for continued recurring revenue streams from card personalization which is delivered through our software as a service offering. We believe the U.S. market is in the early stages of instant issuance adoption as, according to First Annapolis, only approximately 20% of U.S. bank branches are equipped with instant issuance solutions. +· +Cross - Sell Expanded Services Offering Across Customer Base. We believe our leading market position in Financial Payment C ard production in North America, combined with recent enhancements to our card services platform, including our acquisition of EFT Source, represents a significant opportunity to cross - sell services across our customer base by offering comprehensive end - to - end card solution s . W e believe that providing our existing customers this complete end - to - end solution represents a substantial revenue opportunity and means to further deepen our existing customer relationships. Through our strong track record in card services , we believe we have established a reputation as a trusted partner and advisor to our customers with the ability to securely manage significant amounts of sensitive and confidential customer data throughout our network. Due to the high costs of failure, such as a data breach, we expect that customers will continue to choose trusted vendors such as CPI that can provide high levels of security, service and certainty to manage these critical functions. +· +Continued Execution on Strategic Acquisitions. We have a strong track record of acquiring and integrating complementary businesses, completing six acquisitions since 2008, all of which have enhanced our market share, capabilities and capacity. We expect to continue to opportunistically execute strategic acquisitions that give us access to new markets and capabilities while providing a reasonable value proposition to our stockholders. +6 +Table of Contents +Our Products and Services +EMV Financial Payment Cards (Contact and Dual - Interface) +We pr oduce c ontact EMV cards, which feature a n integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV - enabled pay ment terminal. We also produce d ual - i nterface EMV cards, which feature both the contact EMV technology and a RFID antenna that utilizes near field communications (“NFC”) technology to allow transactions to also be processed on a contactless basis when the card is brought within the requisite proximity to a NFC enabled payment terminal. +Non - EMV Financial Payme nt Cards and Retail Gift Cards +We produce non - EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology and cards that include both magnetic stripes and NFC technology. In addition, we produce retail gift cards (which are not issued on the network of the Payment Card Brands) primarily in the U.K. and Canada. +Card Data Personalization +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in EMV and non - EMV card formats. Our personalization services are technology - driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. Finally, we have the capabilities to provide Trusted Service Manager services, leveraging our existing data connectivity with processors and other customers to offer a trusted, high - security solution for facilitating mobile payments. +Tamper - Eviden t Security Packaging Solutions +We offer specialized and innovative tamper - evident security packaging products and services to customers with a Prepaid Debit Card offering that reduce fraud for Prepaid Debit Cards sold through the retail channel. The majority of the tamper - evident security packaging we produce is protected by our patents. In certain cases, we also manage the fulfillment of fully - completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once ® , our proprietary and patented instant card issuance system and services, which provide our card issuing bank customers the ability to issue a completely personalized permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud - based software that securely transfers data from our servers to the card branch to encode either a magnetic stripe or an EMV card, and personalize the card on a desktop output terminal in a process which is certified by MasterCard and Visa. Our instant issuance system generates both system sales and recurring revenue from software as a service, card personalization and sales of cards and consumables. In addition, we provide instant issuance of debit cards to large financial institutions whereby we provide fully - personalized temporary debit cards which are issued to card holders upon opening a new account, and we manage the fulfillment and replenishment of these fully personalized cards directly to thousands of individual bank branches. +Suppliers +The most important component of our products is the EMV microchip, which we expect to become even more significant as EMV cards comprise an increasing percentage of the cards we ship. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in South Korea, France, the United States and Singapore, primarily on a purchase order basis. Our main suppliers +7 +Table of Contents +of EMV microchips are five leading manufacturers: KONA I Co. Ltd, Smart Packaging Solutions, NXP Semiconductors USA, Inc., Inside Secure and Multos International. Substantially all of our purchased EMV microchips for the year ended Dec ember 31, 2015 came from these five main suppliers. The other key components for our products are substrates (such as PVC), antennas and inlays which we also source from multiple suppliers. We continuously monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. +Customers +In the United States, we categorize our customers as follows: large issuers, prepaid debit issuers , program managers and small issuers. Our diverse customer base of over 4,000 direct and indirect customers includes many of the largest issuers of credit and debit cards in the United States and the five largest global managers of Prepaid Debit Card programs. Our top five customers represented approximately 31.5 % of our net sales for the year ended December 31, 201 5 . Our top five customers in 201 5 , who we have been serving for an average of greater than 10 years, were InComm, First Data Corporation, Barclays , Wells Fargo and PSCU . +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into purchase order or other short - term arrangements that define the prices and the quantities of products to be delivered and services rendered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long - term basis. +Production and Services +Our production and services strategy has several key facets. We have a large network of integrated high - security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high - volume, low - cost production runs that allow us to meet the competitive price points of large orders; +· +execute lower - volume, highly personalized customized runs that allow us to meet the high - service and quick - turn needs of smaller orders; and +· +meet the specific needs of our Prepaid Debit Card customers. +We operate approximately 498,000 square feet of facilities in the United States, Canada and the United Kingdom, where we focus on Financial Payment Card production and personalization services. See Part I, Item 2, “ Propert ies” of this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver products to our banking customers. Due to the high - security nature of the products we provide to our banking customers, product must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we utilize the U.S., Canadian and U.K. postal services to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +CPI has continued to expand its digital services to issuers focus ing on enabling payments for the growing e-commerce and mobile market place. Our digital services are primarily hosted solutions , which are designed to scale quickly to efficiently support a growing number of issuers and end users. CPI’s e-Services encompass a variety of secure hosted solutions, which enable improved customer service and efficiencies for our customers, including online card re-orders, order status, inventory management, EMV key management, and finished goods fulfillment. We also offer other innovative mobile services, such as CPI Mobile™ , where we are able to provide solution s to digitize, encrypt and deliver payment credentials to mobile phones. The platform provides secure provisioning of tokenized credentials to phones , and is compliant with all the security mechanisms accepted by the payment networks (cloud-based Host Card +8 +Table of Contents +Emulation, Trusted Execution Environment, and hardware secure element). The production environment is PCI-DSS and EMVCo compliant for security, and can support NFC and secure barcode mobile payments. +Sales and Marketing +We market our products and services to national and regional banks, independent community banks, credit unions, managers of prepaid programs, Group Service Providers and card processors. We have approximately 2 5 field - based sales representatives that give us a wide geographic reach across North America, Western Europe and Canada. Our sales representatives offer a complete end - to - end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers, providing a differentiated offer that includes cross - selling expanded services. We leverage the strength of our full - service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer groups, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications focused on thought leadership that include industry publications, editorial white papers, conferences and trade shows, print and digital advertisements and educational webinars designed to introduce our existing customers and new customers to innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do and have substantial flexibility in competing with us, including through the use of integrated product offerings and competitive pricing. Competitive factors for our business include product quality, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features and price. We believe that we compete favorably in each of these categories. +Our products and services compete with other card manufacturers and card solutions providers. We believe our primary competitors are Oberthur Technologies S.A., Giesecke & Devrient GmbH, Valid S.A. and Gemalto NV. Certain existing and potential financial institution customers also have the ability to personalize Financial Payment Cards in - house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own and control various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, trade names, copyrights and applications. We are also party to certain patent cross - license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31 , 2015, we had 27 registered U.S. and foreign trademarks, 1 9 existing U.S. patents, as well as 30 pending U.S. and foreign patent applications. Our patents have an average remaining maturity of 1 3 .5 years, and our trademarks will be due for renewal for additional ten or fifteen - year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We believe that we are in material compliance with environmental requirements and that environmental matters will not have a material adverse effect on our business, although resolution of any item in any particular year or quarter could be material to the results of operations or liquidity for that period. +9 +Table of Contents +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, addresses, card account numbers and expiration dates. In some cases, we receive a cardholder’s PIN number. As a service provider to financial institutions in the United States, we comply with the privacy provisions of Gramm ‑Leach ‑Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with various other federal, state and foreign privacy statutes and regulations, and the PCI Security Standards Council’s Data Security Standards, each of which is subject to change at any time. We may only use and disclose the personal information we receive on behalf of our customers for the purposes for which it was provided to us and in a manner that is consistent with each financial institution’s and processor’s own data privacy and security obligations. +In order to comply with our obligations under the GLBA, applicable state laws and our contractual agreements with our customers, we are required to safeguard and protect the privacy of personally identifiable information we receive. As part of their compliance with these requirements, each of our U.S. customers is expected to have a program in place for responding to unauthorized access to, or use of, consumer information that could result in substantial harm or inconvenience to consumers. A majority of U.S. states have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, which could result in significant costs to us and significant damage to our reputation. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations. +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve certification that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive checklists with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining these certifications, and have invested significant capital to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly certification process serves as a significant barrier to new entrants to our market. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter - agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution clients to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, independent auditors annually review many of our operations to provide internal control evaluations for our clients’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations including those relating to the movement of money. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with licensing and reporting requirements, to implement operating policies and procedures to comply with anti - money laundering laws, to protect the privacy and security of our clients ’ information and to undergo periodic audits and examinations. +In 2010, the Dodd - Frank Act was enacted. The Dodd - Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation +10 +Table of Contents +practices; and require significant rule - making. The Dodd - Frank Act has generated numerous new regulations that have imposed compliance costs and, in some cases, limited revenue sources for us and our clients. The Dodd - Frank Act established the Consumer Financial Protection Bureau ( “ CFPB ” ) which is empowered to conduct rule - making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, to CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments and/or limit our fees or other revenue sources. We do not currently anticipate a materially adverse impact on our business, results of operations or financial condition due to these regulations, but it is difficult to predict with certainty the extent to which the Dodd - Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential clients over the long term. +Employees and Labor +As of December 31, 2015, our businesses employed 1,386 employees, all of whom are full time employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, Colorado, 80127, telephone (303) 973-9311. The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. +Item 1A. Risk Factor s +Risks Related to Our Business +Material breaches in the security of our systems may have a significant effect on our business. +The reliability and security of our information technology (IT) infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. Our handling of personally identifiable information of cardholders, including cardholder names, account numbers and similar information, makes us a potential target of cyber attacks and threats to our secure IT systems. We may face attempts by others to penetrate our computer systems and networks to misappropriate this information or interrupt our business. Any system or network disruption could result in a loss of our intellectual property, the release of sensitive cardholder information, customer or employee personal data, or the loss of production capabilities at one or more of our production facilities. The protective measures we have implemented may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. +In addition, our encryption systems are at risk of being breached or decoded. Smart cards are equipped with keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, whether caused by cyber attacks, security breaches or otherwise, which could ultimately have an adverse effect on our business, financial condition and results of operations. In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +11 +Table of Contents +New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business could be adversely affected. +The markets for our products and services are subject to technological changes, frequent introductions of new products and services and evolving industry standards. In particular, the rise in the adoption in wireless payment systems or mobile payments may make physical cards less attractive as a method of payment. Although to date we have not seen any reduction in card ‑based payments resulting from the emergence of mobile payment applications, mobile payments offer consumers an alternative method to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services, or our new services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. We continually engage in significant efforts to innovate and upgrade our products and services. If we are unsuccessful in completing or gaining market acceptance of new products, services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or attract new ones. +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +• effectively identify and capitalize upon opportunities in new and emerging geographical and product markets; +• invest resources in innovation and research and development; +• complete and introduce new products and integrated services solutions in a timely manner; +• license any required third ‑party technology or intellectual property rights; +• qualify for and obtain required industry certification for our products; and +• comply with applicable data protection regulations. +Opportunities to combine or package products and service offerings and the ability to cross ‑sell products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross ‑sell our products and services, our financial condition could be negatively impacted. Furthermore, if we are unable to develop and introduce new and innovative products in a cost ‑effective and timely manner, our product and service offerings could be rendered obsolete, which could have an adverse effect on our business, financial condition and results of operations. +The adoption of EMV technology and dual ‑interface capability in the United States may not be as rapid or widespread as we anticipate, which could adversely affect our growth. +We have made significant investments in our North American EMV card production capabilities. In particular, in 2014, we opened a 50,000 square foot technology center in Colorado dedicated to EMV card production and personalization and enhanced our EMV card production capabilities across our network. Our ability to grow depends significantly on U.S. card issuing banks’ continued adoption of EMV technology as part of their new technological standards and, in the fu ture, whether such banks issue dual ‑i nterface EMV cards. We estimate that, as of December 31, 2015, approximately 25% of debit cards and less than 50% of credit cards in the United States have been converted to EMV. Banks may be delayed in transitioning t o the issuance of EMV cards or dual ‑i nterface EMV cards due to increased costs and other factors. If these entities do not continue to deploy EMV and d ual ‑ i nterface EMV technology or +12 +Table of Contents +deploy such technology less quickly and/or completely than we expect, the consequence could have an adverse effect on our business, financial condition and results of operations. +Our business could suffer from production problems. +We produce our products using processes that are highly complex, require advanced and costly equipment and must continually be modified to improve yields and performance. Difficulties in the production process can reduce yields or interrupt production and, as a result of such problems, we may on occasion not be able to deliver products or do so in a timely or cost ‑effective manner. As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. We may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures, or as a result of external factors beyond our control, such as interruption of our electrical service or a natural disaster. Any such event could have an adverse effect on our business, financial condition and results of operations. +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brand certification standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and manufacturers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated if we fail to comply with these standards and criteria. +We make significant investments to our network of North American high ‑security facilities in order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have constituted in the past an important part of our revenues and profitability. For the year ended December 31, 2015, the vast majority of the products we produced and services we provided were subject to certification with one or more of the Payment Card Brands. If we were to lose our certification from one or more of the Payment Card Brands, Interac (in Canada) or PCI certification for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the networks of the Payment Card Brands. If we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers and our financial condition and results of operations would be adversely affected. +The continued adoption of EMV technology may cause our customers to extend their expiration cycles, which could reduce the volume of cards they purchase from us. +We estimate that, on average, bank debit cards and general purpose credit cards have historically been renewed every three years due to fixed expiration dates, and this regular renewal cycle is a significant driver of demand for Financial Payment Cards. Initial research by First Annapolis in 2015 indicated that a large number of issuers of bank debit cards and general purpose credit cards planned to extend the length of time that each card may be active prior to expiration to four or five years in order to reduce the costs associated with issuing more expensive EMV cards. Updated research conducted in 2016 showed that few issuers ultimately extended card reissuance cycles during 2015 (actual and planned 2016 EMV conversions). If however, financial card issuers do extend the reissuance cycle in the future, we may experience a decreased demand for bank debit cards and general purpose credit cards. If the reissuance cycle is significantly extended beyond historical averages, demand from our customers for our products may decrease significantly and our business, financial condition and results of operations could be materially and adversely affected. +Demand for credit cards may be adversely impacted by U.S. and global market and economic conditions. +For the foreseeable future, we expect to continue to derive most of our revenue from products and services we provide to the financial services industry. Given this concentration, we are exposed to the economic conditions affecting the financial services industry in North Americ a . In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. A prolonged poor economic environment could result in significant decreases in demand by current and potential customers for our +13 +Table of Contents +products and services, which could have a material adverse effect on our business, results of operations and financial condition. +Failure to identify, attract and retain new customers or a failure to maintain our relationships with our major customers could adversely affect our business. +Our business is dependent upon our ability to identify, attract and retain new customers and to maintain our relationships with our existing customers. A decline in the business of our large customers or a failure to retain such customers may adversely affect our business, financial condition and results of operations. +A substantial portion of our net sales is derived from several large customers. Our top five customers as of December 31, 2015 accounted for approximately 31.5% of our net sales for the year ended December 31, 2015. Our continued business relationship with these customers, and the renewal of key contracts by major customers, may be impacted by several factors beyond our control, including more attractive product offerings from our competitors, pricing pressures or the financial health of these customers. Many of our key customers operate in competitive businesses, and their demand and market positions may vary considerably. These customers depend on favorable macroeconomic conditions and are impacted by the availability of affordable credit and capital, the level and volatility of interest rates, inflation, employment levels and consumer confidence, among other factors. +We generally enter into master agreements that govern the general terms and conditions of our commercial relationships. We then enter into purchase order or other short ‑term agreements that define the prices and the quantities of products to be delivered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Therefore, we may not be able to maintain our market share with our key customers, which in turn could affect the revenue streams upon which we currently rely. Furthermore, there is no guarantee that we will be able to renew or win significant contracts in a given year. If we were to lose important programs for our products with any of our key customers, or if any key customer were to reduce or change its contract, seek alternate suppliers, increase its product returns or become unable or otherwise fail to meet its payment obligations, our business, financial condition and results of operations could be materially adversely affected. +Our outstanding indebtedness may impact our business and may restrict our growth and results of operations. +As of December 31, 2015, we had $309.0 million of total indebtedness outstanding, net of unamortized discount and deferred financing costs of $12.5 million, includ ing $300.0 million outstanding, net of unamortized discount and deferred financing costs, under our First Lien Term Loan Facility. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”. +We may incur additional indebtedness in the future to help fund the growth of our business, subject to market and other conditions. Our substantial indebtedness and interest expense could have important consequences to us, including: +• limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, capital expenditures and other general business activities, because we must dedicate a substantial portion of these funds to service our debt; +• requiring us to seek to incur further indebtedness in order to make the capital expenditures and other expenses or investments planned by us to the extent our future cash flows are insufficient; +• limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our growth strategy, and other expenses or investments planned by us; +• limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +• limiting our ability to satisfy our obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +14 +Table of Contents +• increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; +• placing us at a competitive disadvantage as compared to our competitors that are less leveraged; and +• limiting our ability, or increasing the costs, to refinance indebtedness. +The limitations described above could have a material adverse effect on our business, financial condition, results of operations, prospects, and ability to satisfy our obligations under our indebtedness. +We may be required to defend against alleged infringement of the intellectual property rights of others and/or may be unable to adequately protect or enforce our own intellectual property rights. +Companies in our industry aggressively protect and pursue their intellectual property rights. Our products may contain technology provided to us by other parties such as suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. From time to time, we receive notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Additionally, we receive notices that challenge the validity of our patents. Intellectual property litigation can be expensive, time consuming and distracting to management. An adverse determination in any of these types of disputes could prevent us from producing or offering some of our products and services or could prevent us from enforcing our intellectual property rights. Furthermore, settlements can involve royalty or other payments that could reduce our profit margins and adversely affect our financial results. Our suppliers, customers and licensors may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages. Any of these claims or litigation may materially and adversely affect our business, financial condition and results of operations. +We may also be required to indemnify some customers and strategic partners under our agreements if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another party’s proprietary rights. Indemnification provisions may, in some circumstances, extend our liability beyond the products we provide and may include consequential damages and/or lost profits. Even if claims or litigation against us are not valid or successfully asserted, these claims could result in significant costs and the diversion of the attention of management and other key employees to defend. +Furthermore, our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We depend on patents and other intellectual property rights to protect our products, proprietary designs and technological processes against misappropriation by others. We may in the future have difficulty obtaining patents and other intellectual property protection, and the patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes, or confidential employee, customer or supplier data. Any of our existing or future patents may be challenged, invalidated or circumvented. We engage in litigation to enforce or defend our intellectual property rights, protect our trade secrets and determine the validity and scope of the proprietary rights of others, including our customers. We also enter into confidentiality agreements with our consultants and strategic partners and control access to and distribution of our technologies, documentation and other proprietary information; however, such agreements may not be enforceable or provide us with an adequate remedy. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization. If we cannot adequately protect our technology, our competitors may be able to offer certain products and/or services similar to ours. +Our software may be derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. In addition to risks related to license requirements, usage of open source software can lead to greater risks than the use of third ‑party commercial +15 +Table of Contents +software, as open source licensors generally do not provide warranties, controls on the origin or development of the software, or remedies against the licensors. Many of the risks associated with usage of open source software cannot be eliminated and could adversely affect our business. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. Although we actively seek to protect our proprietary rights, nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary. Identifying unauthorized use of our products and technologies is difficult and time consuming. The initiation of litigation as a result of the misappropriation or infringement of our intellectual property may adversely affect our relationships and agreements with certain customers that have a stake in the outcome of the litigation proceedings. Litigation is very expensive and may divert the attention of management and other key employees from the operation of our business, all of which could have an adverse effect on our business, financial condition and results of operations. +If we fail to meet customer demands in a timely manner, we could lose certain critical business relationships. +Our ability to provide products and services and meet very high quality standards in a timely manner is critical to our business success. For example, one of the key services that we offer our customers is the prompt and timely production and delivery of replacement bank cards. Orders for replacement bank cards are often placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a timely manner or due to software malfunction, logistical impediments at any of our facilities, or economic, social, political or other challenges impacting the industry as a whole, our relationships with our customers may be adversely affected and we may lose major contracts, all of which could have an adverse effect on our business, financial condition and results of operations. +We face competition that may result in a loss of our market share and/or a decline in our profitability. +We expect our marketplace to continue to be highly competitive as new product markets develop, industry standards become well known and other competitors attempt to enter the markets in which we operate. In addition, we expect to encounter further consolidation in the markets in which we operate. +Some of our competitors have longer operating histories, and, when viewed globally, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other capabilities than we do. These competitors may be able to adapt more quickly to new or emerging technological requirements and changes in customer and/or regulatory requirements. They may also be able to devote greater resources to the promotion and sale of their products and services. We also face competition from newly established competitors, suppliers of products and customers who choose to develop their own products and services. +Existing or new competitors may develop products, technologies or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. Additionally, mobile payment technology could develop to replace the products and services we offer, which could render our offerings dated or obsolete, or existing alternative standards of secured mobile payment technology could gain widespread market acceptance, which could have an adverse impact on our business. As the technological sophistication of our competitors and the size of the market increase, competing low ‑cost producers could emerge and grow stronger. If our customers prefer low ‑cost alternatives to our products, our revenues and profitability could be adversely affected. Increased competition has historically resulted in, and is likely to continue to result in, declining average selling prices and reduced gross margins in certain of our businesses and the loss of market share in certain markets. We may not be able to continue to compete successfully against current or new competitors. If we fail to compete successfully, we may lose market share in our existing markets, which could have an adverse effect on our business, financial condition and results of operations. +The financial payment card industry may be subject to price erosion, which could have an adverse effect on our business. +One of the results of the rapid innovation in the financial payment card industry is that pricing pressure can be intense, in particular for large credit and debit card issuers and large card processors. Our large credit and debit card issuer customers face continued competitive pressure. As these issuers seek to reduce their expenses, we, in turn, may experience a decline in the prices at which our products can be sold and at which such services can be offered. In such +16 +Table of Contents +instances, in order to continue to supply these products and services at competitive prices, we must reduce our production costs. Typically, we are able to accomplish this through leveraging our scale and production efficiencies. However, if we cannot continue to improve our efficiencies to a degree sufficient for maintaining the required margins, we may no longer be able to generate a profit from the sale of these products and services. Moreover, we may not be able to cease production of such products, either due to our ongoing contractual obligations or the risk of losing our existing customer relationships, and as a result may be required to bear a loss on such products. Further competition in our core product and service markets may lead to price erosion, lower revenue growth rates and lower margins in the future. Should reductions in our production costs fail to keep pace with reductions in market prices for the products we sell, there could be an adverse effect on our business, financial condition and results of operations. +Our business may be adversely affected by costs relating to product defects, and we could be faced with product liability and warranty claims. +We offer highly complex services and products and, accordingly, there is a risk that defects may occur in any of our services or products. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory and the loss of potential sales. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we release defective products in the market, our reputation could suffer and we may lose sales opportunities and incur liability for damages, including damage claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be an adverse effect to our business, financial condition and results of operations. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could adversely affect our business. +Many of our products integrate third ‑party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with, among other benefits, access to technology owned by third parties. For example, we license Java card technology from Oracle and Multos card technology from Multos International, a subsidiary of a competitor, for use in certain of our products, including in EMV cards. This Java and Multos card technology provides a secure environment for applications on smart cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements with Oracle and Multos International for the continued use of these platforms. Oracle and Multos International may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross ‑licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios. If we are unable to continue to successfully renew these agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products, which could adversely affect our operations. +Most of our facilities are leased, in whole or in part, and our inability to renew our leases on commercially acceptable terms or at all may adversely affect our results of operations. +Most of our facilities are located, in whole or in part, on leased property. We may be unable to renew such leases on commercially acceptable terms or at all. Our inability to renew our leases, or a renewal of our leases with a rental rate higher than the prevailing rate under the applicable lease prior to expiration, may have an adverse impact on our operations, including disrupting our operations or increasing our cost of operations. In addition, in the event of non ‑renewal of any of our leases, we may be unable to locate suitable replacement properties for our facilities or we may experience delays in relocation that could lead to a disruption in our operations. Any disruption in our operations could have an adverse effect on our financial condition and results of operation. +The chip operating systems developed by our competitors may put us at a competitive disadvantage . +Certain of our competitors have internally developed their own chip operating systems. Ownership of these internal operating systems may give our competitors a cost advantage over us, as we utilize the chip operating systems designed by our chip suppliers for use on their respective chips . If our competitors are able to reduce the prices of their products and services as a result of the cost savings they might realize from using their own internally developed +17 +Table of Contents +operating system, our profitability may be adversely affected. Additionally, customers may prefer the operating systems of our competitors over the operating systems that we utilize in our EMV cards. If customers are more attracted to our competitors’ internally developed operating systems, demand for our products and services may be reduced, thereby adversely affecting our results of operations. +Interruptions in our IT systems could adversely affect our business. +We rely on the efficient and uninterrupted operation of complex IT applications, systems and networks to operate our business. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. Any significant interruption in our business applications, systems or networks, including, but not limited to, new system implementations, facility issues or energy blackouts, could have a material adverse impact on our operations, sales and operating results. +Not only would we suffer damage to our reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties. Some of our contractual agreements with financial institutions require the payment of penalties if our systems do not meet certain operating standards. In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. The protective measures we have adopted to avoid system or network disruptions may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have an adverse effect on our business, financial condition and results of operations. +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +Our services are based on sophisticated software and computing systems, and the software underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our clients. Defects in our software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of clients, negative publicity or exposure to liability claims. Although we attempt to limit our potential liability through disclaimers and limitation of liability provisions in our license and client agreements, we cannot be certain that these measures will successfully limit our liability. +Our business depends on the continued viability of the card networks of the Payment Card Brands. +The vast majority of cards we produce and the services we provide are associated with one of the Payment Card Brands. As a result, we depend on the continued viability of the card networks of the Payment Card Brands, including their authorization, clearing and settlement systems. If one or more of the Payment Card Brands were to discontinue their services or otherwise experience a decline in the volume of cards bearing their brands, our results of operations could be adversely affected. +The terms of our First Lien Credit Facility restrict, and covenants contained in agreements governing indebtedness in the future may restrict, our ability to operate our business and to pursue our business strategies. +Our First Lien Credit Facility contains, and any future indebtedness of ours may contain, a number of restrictive covenants that impose customary operating and financial restrictions on us. Our First Lien Credit Facility places certain restrictions or limitations on our ability and the ability of our restricted subsidiaries, among other things, to: +• incur additional debt or contingent liabilities; +• declare or pay dividends, redeem stock, or make other distributions to stockholders; +• make loans, advances, guarantees or other investments; +• create liens or use assets as security in other transactions; +• merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; +• enter into transactions with affiliates; and +18 +Table of Contents +• enter into certain asset sale transactions or other dispositions of assets. +In addition, as of the last day of any fiscal quarter, if the amount we have drawn under the First Lien Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, we are required to maintain a first lien net leverage ratio not in excess of 7.0x. Our failure to comply with any of these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the First Lien Credit Facility. +We are dependent on key executives, the loss of whom could adversely affect our business. +Our future success depends to a significant extent on the efforts of our senior management. We believe there are only a limited number of available and qualified executives with substantial experience in our industry. Accordingly, the loss of the services of one or more of the members of our senior management could delay or prevent us from fully implementing our business strategy and, consequently, significantly and negatively affect our business. +If any member of senior management dies or becomes incapacitated, or leaves the company to pursue employment opportunities elsewhere, we would need to locate an adequate replacement. To the extent that we are unable to locate an adequate replacement , or are unable to do so within a reasonable period of time, our business may be significantly and negatively affected. +We rely on the timely supply of materials and products and our business could suffer if our suppliers fail to meet their delivery obligations or raise their prices. +Our production operations depend on deliveries of microchips and other materials in a timely manner and, in some cases, on a just ‑in ‑time basis. From time to time, suppliers may extend lead times, limit the amounts supplied to us or increase prices due to capacity constraints or other factors. We may not be able to meet the demands of our customers in a timely manner, or at all, due to shortages in the supply of critical materials. Additionally, certain product materials required in our production operations are only available from a limited number of suppliers, and we may not be able to find an adequate replacement for such materials if our suppliers are unable to meet their delivery obligations to us. In particular, we rely on a small group of suppliers for the provision of EMV microchips that we use in our Financial Payment Cards. For the year ended December 31, 2015, we obtained substantially all of our total purchased EMV microchips from five main suppliers. If any one of these EMV microchip suppliers, or any supplier of our other raw materials, fails to deliver our requirements, our production could be disrupted. In addition, as a result of a shortage, we may be compelled to delay shipments of our products, or devote additional resources to maintaining higher levels of inventory. Consequently, we may experience substantial period ‑to ‑period fluctuations in our cost of revenues and, therefore, in our future results of operations. If we are unable to obtain adequate supplies of quality materials in a timely manner or if there are significant increases in the cost of these materials, our business, financial condition and results of operations could be adversely affected. +We are required to comply with laws and regulations in other countries and are exposed to business risks associated with our international operations. +For the years ended December 31, 2015, 2014 and 2013, we derived 15.5%, 24.7%, and 31.0%, respectively, of our net sales from outside the United States, primarily in Canada and the United Kingdom. As a result, we are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. We are also required to obtain environmental permits and other authorizations or licenses from governmental authorities for certain of our operations and must protect our intellectual property worldwide. In the jurisdictions in which we operate, we need to comply with various standards and practices of different regulatory, tax, judicial and administrative bodies. +There are a number of risks associated with international business operations, including political instability (e.g., the threat of war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect our employees, reputation, business or financial results as well as our ability to meet our objectives, including the following international business risks: +19 +Table of Contents +• negative economic developments in economies around the world and the instability of governments, or the downgrades in the debt ratings of certain major economies; +• social and political instability; +• complex regulations governing certain of our products; +• potential terrorist attacks; +• adverse changes in governmental policies, especially those affecting trade and investment; +• foreign currency exchange, particularly with respect to the Canadian Dollar and British Pound Sterling; and +• threats that our operations or property could be subject to nationalization and expropriation. +We may not be in full compliance at all times with the laws and regulations to which we are subject. Likewise, we may not have obtained or may not be able to obtain the permits and other authorizations or licenses that we need. If we violate or fail to comply with laws, regulations, permits, health and safety regulations or other authorizations or licenses, we could be fined or otherwise sanctioned by regulators. In such a case, or if any of these international business risks were to materialize, our business, financial condition and results of operations could be adversely affected. +Changes in laws, regulations and enforcement activities relating to the financial services industry may adversely affect the products, services and markets in which we operate. +We and our customers are subject to laws and regulations that affect the financial services industry in the many countries in which our products and services are used. In particular, our customers are subject to numerous laws and regulations applicable to banks, financial institutions and card issuers in the United States, Europe and other regions. The U.S. Government, for instance, has increased its scrutiny of a number of credit and debit card practices, from which some of our customers derive significant revenue. Regulation of the payments industry, including the Dodd ‑Frank Wall Street Reform and Consumer Protection Act (the “Dodd ‑Frank Act”), privacy and data security regulations such as the GLBA, and other regulations applicable to us and our customers, has increased significantly in recent years. Our failure to comply with the laws and regulations applicable to our business may result in the suspension or revocation of our licenses or registrations, the limitation, suspension or termination of our services, and/or the imposition of consent orders or civil and criminal penalties, including fines, which could have an adverse effect on our business, financial condition and results of operations. +Environmental, health and safety laws and regulations expose us to liability and any such liability may adversely affect our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, our products and the raw materials we use in our production processes are subject to numerous environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We may not have been, nor may we be able to be at all times, in full compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or operate real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liability on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +20 +Table of Contents +The scientific examination of, political attention to, and rules and regulations on issues surrounding the existence and extent of climate change may result in an increase in our cost of production due to increases in the price of energy and/or the introduction of energy or carbon taxes. A variety of regulatory developments have been introduced that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gasses. Companies such as ours may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. These developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in environmental regulations could increase our production costs, which could adversely affect our business, financial condition and results of operations. +Certain natural disasters, such as flooding, earthquakes, nuclear disasters, certain weather conditions and other catastrophic events, such as fire, may negatively impact our business. +The occurrence of severe weather events, such as rain, snow, wind, storms, hurricanes or other natural disasters, such as flooding, earthquakes, nuclear disasters, fire or a combination thereof, may negatively impact our business. If certain natural disasters, extreme weather conditions or other events such as fire were to directly damage, destroy or disrupt our production facilities, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. Even if our production facilities are not directly damaged, a large natural disaster or fire may result in disruptions in distribution channels or supply chains and significantly increase the prices of the raw materials we use in our production processes. The impact of any such natural disasters, weather changes or other disasters such as fire depends on the specific geographic circumstances but could be significant, and we cannot predict the economic impact, if any, of natural disasters or climate change. Any such disruptions could have an adverse effect on our business, financial condition and results of operations. +Our revenue may be adversely affected by fluctuations in currency exchange rates. +A portion of our revenues, costs, assets and liabilities are denominated in foreign currencies, including the British Pound Sterling and Canadian Dollar. However, we report our financial condition and results of operations in U.S. dollars. As a result, our results of operations and, in some cases, cash flows may in the future be adversely affected by certain movements in exchange rates. For example, a hypothetical ten percent change in the British Pound Sterling and Canadian Dollar would have impacted our 2015 net sales by approximately $ 5.2 million . Though we may choose to hedge our exposure to foreign currency exchange rate changes in the future, there is no guarantee such hedging, if undertaken, will be successful. +Our insurance may be inadequate to cover future liabilities and our insurance premiums may increase substantially. +We may be subject to significant losses from claims, liabilities, hazards and disasters. While we currently maintain insurance which we believe is adequate and consistent with industry practice, we may experience losses in excess of our insurance coverage or claims not covered by our insurance. Furthermore, we may not be able to obtain insurance coverage in the future on acceptable terms, or at all. Any such losses not covered by insurance may have a material adverse effect on our business, financial condition and results of operations. +We face risks associated with our acquisition strategy. +Our future success may depend on acquiring businesses and technologies, making investments or forming joint ventures that complement, enhance or expand our current portfolio or otherwise offer us growth opportunities. The expansion of our business through acquisitions allows us to complement our existing product offerings and enhance our technological capabilities. +We face a number of challenges associated with our acquisition strategy that could disrupt our ongoing business and distract our management team, including: +• lower gross margins, revenues and operating income than originally anticipated at the time of acquisition and other financial challenges; +• delays in the timing and successful integration of an acquired company’s technologies; +• the loss of key personnel; and +21 +Table of Contents +• becoming subject to intellectual property, antitrust or other litigation. +Acquisitions can result in increased debt or contingent liabilities. Acquisitions can also result in adverse tax consequences, warranty or product liability exposure related to acquired assets, additional stock ‑based compensation expense, the write ‑up of acquired inventory to fair value, and the recording and later amortization of amounts related to certain purchased intangible assets, all of which can adversely affect our reported results. In addition, we have in the past and may in the future record goodwill and other purchased intangible assets in connection with an acquisition and incur impairment charges. +A failure to implement our acquisition strategy, obtain sufficient financing or integrate acquired businesses successfully could adversely affect our business, financial condition and results of operations. +Goodwill and other identifiable intangible assets represent a significant portion of our total assets, and we may never realize the full value of our intangible assets. +We have recorded a significant amount of goodwill. Total goodwill was $73.1 million as of December 31, 2015, or 26.1% of our total assets. +We perform goodwill impairment testing on an annual basis on October 1 of each year. If we were to conclude that a future write ‑down of our goodwill is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write ‑down of our goodwill may result from, among other things, deterioration in our performance and a decline in expected future cash flows and could have an adverse effect on our business, financial condition and results of operations. +The ability to recruit, retain and develop qualified personnel is critical to our success and growth. +Our business functions are complex and require wide ‑ranging expertise and intellectual capital. For us to successfully compete and grow, we must retain, recruit and develop personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. In addition, we must develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Our efforts to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. Our key personnel may not continue to be employed or we may be unable to attract and retain qualified personnel in the future. Such a failure to retain or attract key personnel could have an adverse effect on our business, financial condition and results of operations. +Our operating results may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations or guidance. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability or lead to significant variability in our operating results. These factors include, among others, the cyclicality of the financial card and electronic payment industries, capital requirements, inventory management, the availability of funding, competition, new product developments, technological changes and production problems. For example, if anticipated sales or shipments do not occur when expected, expenses and inventory levels in a given quarter can be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, may be adversely affected. In addition, our effective tax rate currently takes into consideration certain favorable tax rates and incentives which, in the future, may not be available to us. +A number of other factors could lead to fluctuations in quarterly and annual operating results, including: +• order cancellations or rescheduling by customers; +• restructuring and impairment charges; +• fluctuations in currency exchange rates, particularly between the U.S. dollar and the Canadian Dollar and British Pound Sterling; +• intellectual property developments; +• changes in distribution and sales arrangements; +• the failure to win new projects; +22 +Table of Contents +• production performance and yields; +• product liability or warranty claims; +• litigation; +• taxation; +• acquisitions or divestitures; +• problems in obtaining adequate raw materials or production equipment on a timely basis; +• property loss or damage or interruptions to our business, including as a result of fire, natural disasters or other disturbances at our facilities or those of our customers and suppliers that may exceed the amounts recoverable under our insurance policies; and +• changes in the market value or yield of the financial instruments in which we invest our liquidity. +Unfavorable changes related to certain of the above factors have in the past and any of the above factors may in the future adversely affect our operating results. Furthermore, in periods of industry overcapacity or when our key customers encounter difficulties in their end ‑markets, orders are more exposed to cancellations, reductions, price renegotiations or postponements, which in turn reduce our management’s ability to forecast the next quarter or full ‑year production levels, net sales and margins. For these reasons, our net sales and operating results may differ materially from our expectations or guidance as visibility is reduced and have an adverse effect on our business, financial condition and results of operations. +Consolidations in the banking, financial services and card processing industry could eliminate existing or potential clients. +Failures, mergers and consolidations of financial institutions and card processors may reduce the number of our clients and potential clients, which could adversely affect our net sales. Further, if our clients fail, merge with or are acquired by other entities that are not our clients, or that use fewer of our services, they may discontinue or reduce their use of our services. It is also possible that the larger financial institutions and card processors that result from mergers or consolidations would have greater leverage in negotiating terms with us or could decide to perform in ‑house some or all of the services which we currently provide or could provide. Any of these developments could have an adverse effect on our business, results of operations and financial condition. +We are subject to the credit risk that our customers may be unable to satisfy their obligations to us. +A significant portion of our net sales are on an open credit basis, with typical payment terms of 30 days, and up to 60 days in some cases, and we are subject to the credit risk of our customers being unable to make payments to us. If any of our customers experience a bankruptcy or are otherwise unable to satisfy their payment obligations to us, any related losses, if incurred, could harm our business and have an adverse effect on our operating results and financial condition if they significantly exceed our reserve for losses on our balance sheet. +Our business depends upon our ability to obtain specialized equipment from third ‑party suppliers, and we may be subject to delayed deliveries and future price increases. +Our production processes depend on specialized equipment that we purchase and/or lease from third party suppliers. At times during the business cycle, there may be high demand for such equipment, with extended lead times to obtain such equipment. Further, there are a limited number of suppliers that manufacture and service the equipment we use. Should our current suppliers be unable or unwilling to provide the necessary equipment or otherwise fail to deliver or service such equipment in a timely manner, any resulting delays in our production processes could have an adverse effect on our business, financial condition, results of operations. In addition, the prices of the equipment we use may rise in the future, and any future price increases for this type of equipment could negatively impact our ability to purchase new equipment or to service existing equipment. +23 +Table of Contents +We have identified a material weakness in our internal controls over financial reporting. If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected. +As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. A material weakness is a deficiency, or a combination of deficiencies, in financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be presented or detected on a timely basis. Section 404 of the Sarbanes ‑Oxley Act of 2002 (the “Sarbanes ‑Oxley Act”) requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with our annual report for the fiscal year ending December 31, 2016, provide a management report on the internal controls over financial reporting. Although as an “emerging growth company” (as defined by the JOBS Act) we are not currently required to obtain an attestation from our independent public accounting firm on our management report on internal controls over financial reporting, we will be required to obtain such an attestation when we are no lo nger an emerging growth company . +In connection with our preparation for our initial public offering, we identified a material weakness in our internal controls over financial reporting related to a current lack of finance expertise that could result in a failure to properly account for non ‑routine and complex transactions in accordance with GAAP. With the oversight of senior management, we are taking steps to remediate the underlying causes of this material weakness, primarily through the development and implementation of formal policies and improved processes, and the hiring of additional finance personnel , including the appointment of our current Chief Financial Officer in June 2015 and Chief Accounting Officer in March 2016, both of whom are certified public accountants, and are familiar with the rules and regulations applicable to public companies, including the requirements of the Sarbanes-Oxley Act, from their previous experience in substantive financial roles with other public companies . Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in remediating this material weakness. +If we are unable to remediate this material weakness, or if we identify other material weaknesses in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. In addition, if we are unable to comply with the requirements of Section 404 of the Sarbanes ‑Oxley Act in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is not required to express an opinion due to the provisions of the JOBS Act or is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our common stock is listed, the SEC, or other regulatory authorities, which could require additional financial and management resources. +The requirements of being a public company have increased certain of our costs and require significant management focus. +As a public company, our legal, accounting and other expenses associated with compliance related and other activities have increased. For example, in connection with our initial public offering, we created new board committees and appointed independent directors to comply with the corporate governance requirements of the NASDAQ Global Select Market (“NASDAQ”) and Toronto Stock Exchange (“TSX”). In addition, our management team and board of directors have limited experience implementing public company compliance requirements, and therefore, since our initial public offering, our management and other personnel have diverted attention from operational and other business matters to devote substantial time to such efforts. In particular, we will incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company. We have hired additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and may establish an internal audit function. Costs to obtain director and officer liability insurance also contribute to our increased costs. As a result of the associated liability, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements, which could further increase our compliance costs. +24 +Table of Contents +We are an “emerging growth company” and we cannot be certain if the reduced disclosure and other requirements applicable to emerging growth companies will make our common stock less attractive to investors. +We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes ‑Oxley Act with respect to our internal control over financial reporting, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non ‑binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an emerging growth company upon the earliest to occur of (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we become a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non ‑affiliates exceeds $700 million as of the last day of our then most recently completed second fiscal quarter and (ii) the date on which we have issued more than $1.0 billion in non ‑convertible debt during the prior three ‑year period. We may choose to take advantage of some but not all of these reduced reporting and other burdens. To the extent we take advantage of any of the reduced reporting burdens in our periodic filings, the information that we provide our security holders may be different than the information such holders might get from other public companies in which they hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. +In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Stated another way, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to “opt out” of such extended transition period, however, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non ‑emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. +Risks Related to Ownership of Our Common Stock +The price of our common stock may fluctuate significantly, and you could lose all or part of your investment. +Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for them. The market price for our common stock could fluctuate significantly for various reasons, including: +• our operating and financial performance and prospects; +• our quarterly or annual earnings or those of other companies in our industry; +• the public’s reaction to our press releases, our other public announcements and our filings with the SEC; +• changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry; +• the failure of research analysts to cover our common stock; +• general economic, industry and market conditions; +• strategic actions by us, our customers or our competitors, such as acquisitions or restructurings; +• new laws or regulations or new interpretations of existing laws or regulations applicable to our business; +25 +Table of Contents +• changes in accounting standards, policies, guidance, interpretations or principles; +• material litigation or government investigations; +• changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events; +• changes in key personnel; +• sales of common stock by us, our principal stockholders or members of our management team; +• termination of lock ‑up agreements with our management team and principal stockholders; +• the granting or exercise of employee stock options; +• volume of trading in our common stock; and +• impact of the facts described elsewhere in “Risk Factors.” +In addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially reduce our share price. +Our majority stockholders have the ability to control significant corporate activities +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital), own approximately 36.5% and 21.6% of our common stock, respectively. As a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to control decision ‑making with respect to our business direction and policies. +Matters over which the Tricor Funds, directly or indirectly, exercise control include: +• election of directors; +• mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; +• other acquisitions or dispositions of businesses or assets; +• incurrence of indebtedness and the issuance of equity securities; +• repurchases of stock and payment of dividends; and +• the issuance of shares to management under our incentive plans. +Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial portion of our board of directors. +Messrs. Seaman, Peters and Rowntree, who are officers or affiliates of Parallel49 Equity (and its predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly +26 +Table of Contents +competing with us. As a result of these relationships, when conflicts between the interests of Parallel49 Equity, on the one hand, and of other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors. +Our ability to pay ongoing regular dividends to our stockholders is subject to the discretion of our board of directors and may be limited by our holding company structure and applicable provisions of Delaware law. +We intend to pay ongoing regular cash dividends on our common stock. However, our board of directors may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. In addition, because we are a holding company with no material direct operations, we are dependent on dividends and other payments from our operating subsidiaries to generate the funds necessary to pay dividends on our common stock. We expect to cause our subsidiaries to make distributions to us in an amount sufficient for us to pay dividends. However, their ability to make such distributions will be subject to their operating results, cash requirements and financial condition, the applicable provisions of Delaware law that may limit the amount of funds available for distribution and our ability to pay cash dividends, and compliance with covenants and financial ratios related to existing or future indebtedness and other agreements with third parties. In addition, each of the companies in our corporate chain must manage its assets, liabilities and working capital in order to meet all of its cash obligations, including the payment of dividends or distributions. As a consequence of these various limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common stock. Any change in the level of our dividends or the suspension of the payment thereof could adversely affect the market price of our common stock. +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +• the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +• following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors; +• advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings; +• following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, removal of directors only for cause, and only upon the affirmative vote of 75% of our outstanding voting stock at a meeting of our stockholders called for that purpose; +• allowing only our board of directors to fill vacancies on our board of directors; and +27 +Table of Contents +• following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, super ‑majority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation. +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law (the “DGCL”), an anti ‑takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti ‑takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock. +Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium over the market price, and adversely affect the market price and the voting and other rights of the holders of our common stock. +Our business and stock price may suffer as a result of our lack of public company operating experience. In addition, if securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline. +We are a newly public company. Our lack of public company operating experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business strategy, either as a result of our inability to effectively manage our business in a public company environment or for any other reason, our business, prospects, financial condition and results of operations may be harmed. In addition, as a new public company we have begun to obtain research coverage by securities and industry analysts. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely +28 +Table of Contents +decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline. +Item 1B. Unresolved Staff Comment s +None. +Item 2. Propertie s +We maintain a network of ten facilities. Information regarding each of our facilities is set forth below. +Location (1) +Operations +Square Footage +Owned/Leased +Littleton, Colorado (Centennial) +Financial Payment Card production and corporate headquarters +65,000 +Leased +Littleton, Colorado (Midway) +Finan cial Payment Card production, card personalization and fulfillment services +50,000 +Leased +Roseville, Minnesota ( 3 facilities) +Financial Payment Card production, card personalization, card packaging and secure fulfillment services +164,000 +Leased +Fort Wayne, Indiana +Financial Payment Card production +36,000 +Leased +Nashville, Tennessee +Financial Payment Card personalization and fulfillment services +49,000 +Leased +Toronto, Ontario +Financial Payment Card and retail gift card production, card personalization and fulfillment services +67,000 +Leased +Colchester, United Kingdom +Retail gift card production +37,000 +Owned and Leased +Liverpool, United Kingdom +Retail gift card personalization , packaging and fulfillment services +30,000 +Owned +(1) +We also leased a facility in Petersfield, United Kingdom. In August 2015, we completed the shut down and closure of our operations at our Petersfield facility. +Item 3. Legal Proceeding s +In previous filings, the Company highlighted that its industry is highly competitive and characterized by frequent intellectual property disputes. In October 2015, Gemalto S.A. filed a suit against the Company in the United States District Court for the Western District of Texas. The complaint alleges that the Company infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. Gemalto’s patent will expire in 2017. The Company successfully moved to transfer the lawsuit to the District of Colorado, where it is currently pending. On January 28, 2016, the Company answered the complaint and filed counterclaims that the asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. Discovery and motion practice is ongoing. On March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all EMV-compliant products infringe—only accuses CPI products that incorporate microchips supplied by two specific vendors. +No trial date has been set. Management believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend the suit vigorously. However, no assurance can be given that this matter will be resolved in our favor, and if determined adversely, whether indemnification will be received. Accordingly, it is not yet possible to reliably determine any potential liability that could result from this matter in the event of an adverse determination. +In addition to the matter described above, we are subject to routine legal proceedings in the ordinary course of business. We believe that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. +29 +Table of Contents +Item 4. Mine Safety Disclosure s +Not applicable. +PART I I +Item 5. Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market Information for Common Stock +Our common stock has been listed on the NASDAQ under the symbol “PMTS”, and the TSX under the symbol “PNT” since October 9, 2015. Prior to our initial public offering, there was no public market for our common stock. +The following table sets forth for the indicated periods the high and low sales prices of our common stock as reported on the NASDAQ and TSX. +NASDAQ ($) +Toronto Stock Exchange (CDN$) +High +Low +High +Low +Fourth Quarter (from October 9, 2015) +$ +13.50 +$ +8.42 +$ +17.23 +$ +11.50 +Holders +There were 30 stockholders of record as of March 4 , 2016. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies . +Dividend +On February 24, 2016, the Board of Directors approved a quarterly dividend of $0.045 per share. This dividend is payable on April 7, 2016, to shareholders of record as of the close of business on March 17, 2016. The amount, declaration and payment of any future dividends will be subject to the discretion of the Company’s Board of Directors who will evaluate the Company’s dividend program from time to time based on factors it deems relevant. +Item 6. Selected Financial Dat a +The financial information in this Annual Report on Form 10-K is presented on a consolidated basis and includes the accounts of the Company and our majority-owned subsidiaries. The consolidated statement of income data for the years ended December 31, 2015, 2014, and 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of income and consolidated balance sheet data as of and for the year ended December 31, 2012 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our selected historical financial data are not necessarily indicative of our future financial condition, future results of operations or future cash flows. +30 +Table of Contents +You should read the information set forth below in conjunction with our historical consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. +Year Ended December 31, +Statement of Income Data (1) : +2015 +2014 +2013 +2012 +(in thousands except share and per share data) +Net sales +Products +$ +241,609 +$ +159,220 +$ +101,360 +$ +98,969 +Services +132,501 +101,786 +95,010 +84,817 +Total net sales +374,110 +261,006 +196,370 +183,786 +Cost of sales +238,289 +179,279 +136,874 +130,897 +Gross profit +135,821 +81,727 +59,496 +52,889 +Operating expenses +68,101 +47,255 +33,347 +32,985 +Income from operations +67,720 +34,472 +26,149 +19,904 +Other income (expense) +Interest, net (2) +(18,328) +(7,508) +(7,838) +(5,765) +Foreign currency gain (loss) +59 +(124) +(142) +(279) +Loss on debt modification and early extinguishment +(703) +(476) +— +— +Gain on purchase of ID Data +— +— +— +604 +Other income (expense) +359 +(101) +18 +171 +Income before income taxes +49,107 +26,263 +18,187 +14,635 +Provision for income taxes +(17,846) +(10,291) +(6,988) +(5,909) +Net income from continuing operations +31,261 +15,972 +11,199 +8,726 +Loss from discontinued operations, net of taxes (3) +(606) +(2,670) +(2,612) +(3,796) +Gain on sale of discontinued operation, net of taxes (3) +208 +— +— +— +Net income +$ +30,863 +$ +13,302 +$ +8,587 +$ +4,930 +Net loss per share:(4) +Basic and Diluted—Continuing Operations +$ +(0.03) +$ +(0.69) +$ +(0.59) +$ +(0.67) +Basic and Diluted—Discontinued Operations +(0.01) +(0.07) +(0.06) +(0.09) +Total +$ +(0.04) +$ +(0.76) +$ +(0.65) +$ +(0.76) +Weighted average shares outstanding: +Basic and Diluted +45,816,263 +41,199,246 +41,072,350 +41,264,828 +Other Financial Data: +Depreciation and amortization +$ +15,966 +$ +13,252 +$ +11,595 +$ +10,514 +Capital expenditures +18,670 +15,568 +10,628 +9,113 +EBITDA (5) +83,401 +47,023 +37,620 +30,914 +Adjusted EBITDA (5) +96,218 +54,219 +38,372 +30,589 +As of December 31, +Consolidated Balance Sheet Data: +2015 +2014 +2013 +(in thousands) +Cash and cash equivalents +$ +13,606 +$ +12,941 +$ +9,702 +Total current assets +101,019 +88,719 +65,958 +Net property, equipment and leasehold improvements +52,113 +44,772 +36,650 +Total assets +280,353 +266,010 +171,867 +Total debt +309,000 +178,810 +122,306 +Total stockholders’ deficit +(86,610) +(21,694) +(36,896) +(1) +Statement of income data includes results from our acquisition of EFT Source from September 2, 2014. +(2) +Interest expense in 2015 includes $4.7 million of amortization of debt issuance cost and discount related to the early debt repayment of $112.5 million using proceeds from our IPO, and an additional fourth quarter debt repayment of $10.0 million. +(3) +We sold our operating segment located in Nevada in January 2015. This operating segment primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, our consolidated balance sheets, statements of operations and comprehensive income, and statements of cash flows have been reclassified to present this operating segment as a discontinued operation as of and for the years ended +31 +Table of Contents +December 31, 2015, 2014, 2013 and 2 012. See Note 4 “ Discont inued Operation and Disposition” in Part II, Item 8. “ Financial Statements and Supplementary Data” in this Annual Report on Form 10-K . +(4) +For a computation of historical basic and diluted earnings per share attributable to continuing and discon tinued operations, see Note 14 “Earnings per Share” in Part II, Item 8. “ Financial Statements and Supplementary Data” in this Annual Report on Form 10-K . +(5) +EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus adjustments for restructuring and other charges, non - cash compensation expense related to our phantom stock plan that was terminated in connection with our IPO and other stock-based compensation expenses, performance bonuses in connection with the EFT Source acquisition , loss on debt modification and early extinguishment, investment banking and related fees , foreign currency gain or loss, and gain on purchase of ID Data . EBITDA and Adjusted EBITDA are non - GAAP financial measures that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. EBITDA and Adjusted EBITDA (collectively, the “Non - GAAP Financial Measures ” ) are the primary measures used by our management to evaluate operating performance. We believe the Non - GAAP Financial Measures are useful to investors because they provide a means to evaluate our operating performance on an ongoing basis using criteria that are used by our internal decision makers and because they are frequently used by investors and other interested parties when comparing companies in our industry that have different financing and capital structures and/or tax rates. We believe the Non - GAAP Financial Measures are meaningful measures because they present a transparent view of our recurring operating performance and allow management to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. The Non - GAAP Financial Measures, however, are not measures of our liquidity or financial performance under GAAP and should not be considered as an alternative to net income (loss), income from operations, or any other performance measure derived in accordance with GAAP or as an alternative to cash provided by operating activities as a measure of our liquidity. The use of the Non - GAAP Financial Measures instead of net income (loss) has limitations as an analytical tool, including : they do not reflect our capital expenditures, or future requirements for capital expenditures or contractual commitments; they do not reflect changes in, or cash requirements for our working capital needs; they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt; although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and the non-GAAP Financial Measures do not reflect any cash requirements for such replacements; they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; and other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures . The Non - GAAP Financial Measures are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation. +The following is a reconciliation of net income from continuing operations to EBITDA and Adjusted EBITDA: +Year Ended December 31, +2015 +2014 +2013 +2012 +(in thousands) +Net income from continuing operations +$ +31,261 +$ +15,972 +$ +11,199 +$ +8,726 +Depreciation and amortization +15,966 +13,252 +11,595 +10,514 +Interest, net +18,328 +7,508 +7,838 +5,765 +Provision for income taxes +17,846 +10,291 +6,988 +5,909 +EBITDA +$ +83,401 +$ +47,023 +$ +37,620 +$ +30,914 +Restructuring and other charges (a) +1,131 +— +— +— +Non-cash compensation expense (b) +9,633 +4,534 +610 +— +EFT Source performance bonuses (c) +1,000 +— +— +— +Loss on debt modification and early extinguishment (d) +703 +476 +— +— +Investment banking and related fees (e) +409 +2,062 +— +— +Foreign currency (gain) loss +(59) +124 +142 +279 +Gain on purchase of ID Data (f) +— +— +— +(604) +Adjusted EBITDA +$ +96,218 +$ +54,219 +$ +38,372 +$ +30,589 +32 +Table of Contents +(a) +Represents facility contract termination costs in connection with the shut down and closure of our Petersfield, United Kingdom operation. +(b) +Represents compensation expense incurred in connection with the Company’s phantom stock plan and other stock-based compensation plans. See Note 17 “Stock Option Plan s ” and Note 18 “Phantom Stock Plan” in Part II, Item 8 “ Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. +(c) +Represents performance bonuses earned in connection with the acquisition of EFT Source. +(d) +Represents loss on the modification of the Company’s Senior Term Loan dated September 2, 2014 in connection with the acquisition of EFT Source . In 2015, an additional loss on debt modification and early extinguishment was incurred when the Senior Term Loan was repaid in full using a portion of the proceeds from the $435.0 million First Lien Term Loan on August 17, 2015. +(e) +Includes investment banking, advisory and related professional fees and expenses incurred in connection with the EFT Source acquisition and our consideration of liquidity alternatives. +(f) +R epresents gain on our purchase of certain assets of ID Data, Limited. +33 +Table of Contents +Item 7. Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K . This discussion and analysis contains forward - looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward - looking statements as a result of certain factors, including, but not limited to, those which are not within our control. See "Risk Factors" and “Forward - Looking Statements. ” Our 2014 reported results include four mo nths of results from EFT Source . +Company Overview +We are a leading provider of comprehensive Financial Payment Card solutions in North America . In 201 5 , we sold more than 156.6 million EMV Financial Payment Cards and provided integrated card services to over 3,250 c ard - issuing banks and Prepaid Debit Card issuers. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this growing subsector of the financial technology market. Our customers are primarily leading national and regional banks, independent community banks, credit unions, managers of P repaid D ebit Card programs, Group Service Providers and card processors. We serve a diverse set of over 4,000 direct and indirect customers, including many of the largest North American issuers of debit and credit cards such as JPMorgan Chase, Bank of America, and Wells Fargo, the largest global managers of Prepaid Debit Card programs, including InComm, Green Dot, Blackhawk Network and American Express, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of ten production and card services facilities, including eight high - security facilities in North America that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. We have the largest such network of high - security production facilities in North America, allowing us to optimize our solutions offerings to serve the needs of our diverse and long - term customer base. +In addition to our eight North American facilities, we have two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards that are not issued on the networks of the Payment Card Brands, as well as provide personalization , packaging and fulfillment services. +2015 Highlights ; Factors and Trends Affecting Financial Performance +During the year ended December 31, 2015, net sales increased 43.3% from 2014, to $ 374.1 million, and income from operations increased 96.4% from 2014, to $ 67.7 million. The operating profit margin for the year ended December 31, 2015 was 18.1% , an increase of 490 basis points from 13.2 % in 2014. +For the year ended December 31, 2015, we generated $ 96.2 million of Adjusted EBITDA, which represented an increase of 77.5 % compared to the prior year, and net income from continuing operations and Adjusted EBITDA margins of 8.4% and 25.7 %, respectively. Our 2014 reported results include four months of results from EFT Source. Adjusted EBITDA and Adjusted EBITDA margin are Non - GAAP Financial Measures. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income from continuing operations, the most comparable GAAP measure, see “—Key Performance Indicators—EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin.” +During 201 5 , we produced and shipped 156.6 million EMV cards compared to 65.3 million in 2014 . We anticipate the continuation of the EMV conversion in the United States to drive continued strong demand for EMV c ards. The upgrade by our customers from magnetic stripe and contactless Financial Payment Cards to EMV Financial Payment Cards has resulted in significant changes to our financial profile , including increased net sales, cost of goods sold, gross profit and gross profit margin, and increased working capital investments to support increased net sales. EMV cards have a higher sales price than comparable magnetic stripe cards, but are also more expensive to produce, as EMV cards include an integrated circuit chip assembly and may also include an RFID in lay assembly, in the case of a d ual - i nterface EMV card . +On August 17, 2015, we entered into a first lien credit agreement ("First Lien Credit Facility") with a syndicate of lenders providing for a $435.0 million first lien term loan facility ("First Lien Term Loan") and a $40.0 million revolving credit facility ("Revolving Credit Facility"). We used proceeds from the First Lien Credit Facility to pay off +34 +Table of Contents +the outstanding balance on our p revious credit facility of $158.4 million , and to redeem 62,140 shares of Series A Preferred Stock for an aggregate price of $276.7 million. We incurred $17. 8 million of origination costs and associated discounts in conjunction with the establishment of the First Lien Credit Facility. As of December 31, 2015, we had $ 300.0 million of outstanding indebtedness , net of unamortized debt and unamortized deferred financing costs of $12.5 million, under the First Lien Credit Facility. +On October 15, 2015, we completed our IPO, issuing 15,000,000 shares of common stock at a price of $10.00 per share. The net proceeds of $142.5 million from the IPO, after issuance costs, were utilized to (i) redeem all of our remaining Series A Preferred Stock for a total redemption price of $11.9 million, (ii) repay $112.5 million of the amount outstanding under the First Lien Term Loan, and (iii) terminate and settle all outstanding obligations due under the Phantom Stock Plan of $13.3 million. Deferred offering expenses of $7.2 million were included in capital deficiency. +Segment Overview +Our business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and U.K. Limited. +U.S. Debit and Credit Segment +Our U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card - issuing banks in the United States. Products manufactured by this segment primarily include EMV and non - EMV credit cards , d ebit cards and Prepaid Debit Cards issued on the networks of the Payment Card Brands ( including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards ), Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands , and instant issuance systems. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment includes our operations in Colorado, Indiana and Tennessee, which are each certified by multiple global Payment Card Brands and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. +U.S. Prepaid Debit Segment +Our U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card issuers in the United States. Services provided include tamper - evident security packaging services and card personalization and fulfillment services. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper - evident security packages mentioned above. The U.S. Prepaid Debit segment includes our operation in Minnesota which is certified by multiple global Payment Card Brands , and is certified to be in compliance with the standards of the PCI Security Standards Council. +U.K. Limited Segment +Our U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization , packaging and fulfillment services. The U.K. Limited segment includes our operations in Colchester, United Kingdom and Liverpool, United Kingdom. Neither of our operations in this segment is certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council. +Other +Our operations in Ontario, Canada and Petersfield, United Kingdom , and our corporate headquarters are reflected in “Other”. In July 2015, we ceased operations at our Petersfield facility. The Petersfield facility is not material to our business. See Note 19 “ Segment Reporting ” in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for certain additional information regarding our operating segments. +35 +Table of Contents +Key Performance Indicators +To evaluate the performance of our business, in addition to our results of operations, we utilize a variety of financial and performance measures that we refer to as key performance indicators. These key performance indicators include EMV Financial Payment Card Shipments, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin. +EMV Financial Payment Card Shipments +EMV Financial Payment Card Shipments represent the total number of EMV Financial Payment Cards we ship during the period. We expect EMV Financial Payment Card shipments to increase due to the growth in the market for Financial Payment Cards and the continued conversion from non-EMV cards to be upgraded to EMV cards in the United States. +EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin +We use EBITDA, Adjusted EBITDA and Adjusted EBITDA margin as supplemental measure s of our performance. Adjusted EBITDA is also the basis for financial performance evaluation under our executive compensation programs. EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus adjustments for restructuring charges, stock-based compensation expense, performance bonus charges in connection with the EFT Source acquisition , loss on debt modification and early extinguishment , investment banking and related fees , and foreign exchange gain or loss . We believe that Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to ongoing business performance. We also evaluate Adjusted EBITDA margin, which is Adjusted EBITDA as a percentage of net sales. We use Adjusted EBITDA and Adjusted EBITDA margin measures to benchmark our performance versus prior periods and our annual operating plan. +EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are Non - GAAP Financial Measures. The Non - GAAP Financial Measures as presented in this Annual Report on Form 10-K are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. The Non - GAAP Financial Measures should not be considered as a substitute for GAAP metrics such as net income or any other performance measures derived in accordance with GAAP. Also, in the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA and Adjusted EBITDA margin. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. See Part II, Item 6, Selected Financial Data , in this Annual Report on Form 10-K for more information regarding our use of Non-GAAP Financial Measures. +Year Ended +December 31, +2015 +2014 +2013 +EMV Financial Payment Card Shipments +156,617 +65,290 +6,769 +EBITDA (1) +$ +83,401 +$ +47,023 +$ +37,620 +Adjusted EBITDA (1) +96,218 +54,219 +38,372 +Adjusted EBITDA margin +25.7 +% +20.8 +% +19.5 +% +(1) +The following is a reconciliation of net income from continuing operations to EBITDA and Adjusted EBITDA. +36 +Table of Contents +Year Ended December 31, +2015 +2014 +2013 +Net income from continuing operations +$ +31,261 +$ +15,972 +$ +11,199 +Interest, net +18,328 +7,508 +7,838 +Provision for income taxes +17,846 +10,291 +6,988 +Depreciation and amortization +15,966 +13,252 +11,595 +EBITDA +83,401 +47,023 +37,620 +Restructuring and other charges (a) +1,131 +— +— +Non-cash compensation expense (b) +9,633 +4,534 +610 +Loss on debt modification and early extinguishment (c) +703 +476 +— +EFT performance bonuses (d) +1,000 +— +— +Investment banking and related fees (e) +409 +2,062 +— +Foreign currency (gain) loss +(59) +124 +142 +Adjusted EBITDA +$ +96,218 +$ +54,219 +$ +38,372 +(a) +Represents facility contract termination costs in connection with the shut down and closure of our Petersfield, United Kingdom operation. +(b) +Represents compensation expense incurred in connection with the Company’s phantom stock plan and other stock-based compensation plans. See Note 17 “Stock Option Plan s ” and Note 18 “Phantom Stock Plan” in Part II, Item 8 “ Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. +(c) +Represents loss on the modification of the Company’s Senior Term Loan dated September 2, 2014 in connection with the acquisition of EFT Source . In 2015, an additional loss on debt modification and early extinguishment was incurred when the Senior Term Loan was repaid in full using a portion of the proceeds from the $435.0 million First Lien Term Loan on August 17, 2015. +(d) +Represents performance bonuses earned in connection with the acquisition of EFT Source. +(e) +Includes investment banking, advisory and related professional fees and expenses incurred in connection with the EFT Source acquisition and our consideration of liquidity alternatives. +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive income. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of Financial Payment Cards in contact EMV, d ual - i nterface EMV, contactless and magnetic stripe formats. We also generate product revenue from the sale of our Card@Once ® instant issuance systems, Private Label Credit C ards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper - evident security packaging, providing fulfillment services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance debit cards. We also generate service revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click - fees generated from our patented MYCA ™ software. +Generally, we recognize net sales related to products upon shipment and services upon the provision of the service, when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. See “—Critical Accounting Policies and Estimates—Revenue Recognition.” +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including mic rochip s in the case of EMV cards and, additionally, RFID assemblies in the case of d ual - i nterface EMV cards, labor costs, material costs, equipment and facilities costs, operation overhead, depreciation, leases and rental charges and transport costs. Product costs also include desktop card +37 +Table of Contents +personalization terminals in the case of Card@Once ® instant issuance system sales. Services costs include the cost of labor, raw materials in the case of tamper - evident security packaging, and equipment and facilities costs, operation overhead, depreciation, leases and rental charges and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, promotional activity and employee relations. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service, human resources and administrative personnel, including payroll, benefits and stock - based compensation expense, and outside legal and other advisory fees. Operating expense also includes depreciation and amortization expense, including the amortization of tangible and intangible assets. We anticipate increases in SG&A as we incur the costs of compliance associated with being a public company, including audit and consulting fees. +Income from Operations and Operating Margin +Income from operations consists of our gross profit less our operating expenses. Operating margin is income from operations as a percentage of net sales. +Other Income (Expense) +Other income (expense) consists primarily of interest expense and foreign currency gains and losses. +Net Income from Continuing Operations +Net income from continuing operations consists of our income from operations , plus other income or ( expense ) and provision for income tax es . +38 +Table of Contents +Results of Operations +Year Ended December 31, 2015 Compared With Year Ended December 31, 2014 +The table below presents our results of operations for t he years ended December 31, 2015 and 201 4 : +Year Ended December 31, +2015 +2014 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +241,609 +$ +159,220 +$ +82,389 +51.7 +% +Services +132,501 +101,786 +30,715 +30.2 +% +Total net sales +374,110 +261,006 +113,104 +43.3 +% +Cost of sales +238,289 +179,279 +59,010 +32.9 +% +Gross profit +135,821 +81,727 +54,094 +66.2 +% +Operating expenses +68,101 +47,255 +20,846 +44.1 +% +Income from operations +67,720 +34,472 +33,248 +96.4 +% +Other income (expense): +Interest, net +(18,328) +(7,508) +(10,820) +144.1 +% +Foreign exchange gain (loss) +59 +(124) +183 +* +Loss on debt modification and early extinguishment +(703) +(476) +(227) +* +Other (expense) income +359 +(101) +460 +* +Income before taxes +49,107 +26,263 +22,844 +87.0 +% +Provision for income taxes +(17,846) +(10,291) +(7,555) +73.4 +% +Net income from continuing operations +31,261 +15,972 +15,289 +95.7 +% +Loss from a discontinued operation +(398) +(2,670) +2,272 +(85.1) +% +Net income +$ +30,863 +$ +13,302 +$ +17,561 +132.0 +% +* Not meaningful +Net Sales +Year Ended December 31, +2015 +2014 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +U.S. Debit and Credit segment—Products +$ +217,863 +$ +132,975 +$ +84,888 +63.8 +% +U.S. Debit and Credit segment—Services +45,805 +20,040 +25,765 +128.6 +% +U.S. Debit and Credit segment—Total +263,668 +153,015 +110,653 +72.3 +% +U.S. Prepaid Debit segment—Products +— +— +— +— +U.S. Prepaid Debit segment—Services +65,878 +59,271 +6,607 +11.1 +% +U.S. Prepaid Debit segment—Total +65,878 +59,271 +6,607 +11.1 +% +U.K. Limited segment—Products +22,211 +24,623 +(2,412) +(9.8) +% +U.K. Limited segment—Services +12,150 +10,540 +1,610 +15.3 +% +U.K. Limited segment—Total +34,361 +35,163 +(802) +(2.3) +% +Other—Products +9,321 +11,682 +(2,361) +(20.2) +% +Other—Services +8,099 +12,226 +(4,127) +(33.8) +% +Other—Total +17,420 +23,908 +(6,488) +(27.1) +% +Inter-company eliminations +(7,217) +(10,351) +3,134 +(30.3) +% +Total +$ +374,110 +$ +261,006 +$ +113,104 +43.3 +% +39 +Table of Contents +Net sales for the year ended December 31, 2015 increased $ 113.1 million, or 43.3 %, to $ 374.1 million compared to $ 261.0 million for the year ended December 31, 2014. The increase in net sales during 2015 was due to growth in our U.S. Debit and Credit segment and U.S. Prepaid Debit s egment net sales of 72.3 % and 11.1 %, respectively, offset by a 2.3 % decline in our U. K . Limited segment net sales compared to 2014. +U.S. Debit and Credit +Net sales for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased $ 110.7 million, or 72.3 %, to $ 263.7 million compared to $ 153.0 million for the year ended December 31, 2014. The increase in net sales was driven by an increase in EMV related revenue of $ 79.0 million, a nd an increase in net sales of $ 57.2 million from the EFT Source business acquired in September 2014, partially offset by a decrease in magnetic stripe card sales of $25.5 mil lion. +The increase in EMV revenue of $ 79.0 million was driven by our card issuing bank customers or end - users adopting EMV technology for debit and credit cards as the conversion of the United States market from magnetic stripe F inancial P ayment C ards to EMV cards continues . For the year ended December 31, 2015, we sold 154.7 million EMV cards at an average selling price of $ 0.94 per card compared to 63.8 million EMV cards at an average selling price of $ 1.04 per card for the year ended December 31, 2014. +Of t he $57.2 million increase in revenue related to our EFT Source business, $45.6 million was attributed to a full year of sales being reflected in our 2015 results, while in 2014, sales were included from the September 2, 2014 acquisition date through December 31, 2014. The remaining growth of $11.6 million was driven by increased customer activity in our card personalization and fulfillment services, including continued growth of Card@Once ® in 2015 . The $ 25.5 million decline in magnetic stripe revenue was driven by the ongoing shift of our card issuing bank customers from magnetic stripe cards to EMV cards. +U.S. Prepaid Debit +Net sales for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $ 6.6 million, or 11.1 %, to $ 65.9 million compared to $ 59.3 million for the year ended December 31, 2014. The increase was driven by our largest customer for this segment refreshing its packaging designs in the first quarter of 2015. This customer activity produced a significant increase in net sales in the first quarter of 2015, with buying patterns returning to normal levels for the remainder of the year ended December 31, 2015. +U.K. Limited +Net sales for the U.K. Limited segment for the year ended December 31, 2015 de creased $ 0.8 million, or 2.3 %, to $ 34.4 million compared to $ 35.2 million for the year ended December 31, 2014. Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a reduction to revenues for the year ended December 31, 2015 of $2.5 million over the previous year. +Other +Net sales in Other decreased $6.5 million, or 27.1%, from 201 4 to 201 5 . +Net sales for our Canada operations decreased $2.4 million for the year ended December 31, 2015 compared to 2014, driven by fluctuations in foreign currency exchange rate s . Fluctuations in the exchange rate between the United States dollar and the Canadian Dollar resulted in a reduction to revenues for the year ended December 31, 2015 of $2.1 million over the previous year. Our Petersfield U.K. operation was shut down in August 2015 which primarily drove the remaining $4. 1 million decrease in Other net sales year over year. +40 +Table of Contents +Cost of Sales +Year Ended December 31, +2015 +2014 +$ Change +% Change +(dollars in thousands) +Cost of sales by segment: +U.S. Debit and Credit segment +$ +166,551 +$ +103,555 +$ +62,996 +60.8 +% +U.S. Prepaid Debit segment +39,498 +38,249 +1,249 +3.3 +% +U.K. Limited segment +25,234 +26,992 +(1,758) +(6.5) +% +Other +14,427 +20,926 +(6,499) +(31.1) +% +Eliminations +(7,421) +(10,443) +3,022 +(28.9) +% +Total +$ +238,289 +$ +179,279 +$ +59,010 +32.9 +% +Cost of sales for the year ended December 31, 2015 increased $ 59.0 million, or 32.9 %, to $ 238.3 million compared to $ 179.3 million for the year ended December 31, 2014. +U.S. Debit and Credit +Cost of sales for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased $ 63.0 million, or 60.8 %, to $ 166.6 million compared to $ 103.6 million for the year ended December 31, 2014. The increase in cost of sales was primarily attributable to a $ 26.9 million increase in technology materials (primarily EMV microchips ), a $ 12.1 million increase in other materials, a $ 12.7 million increase in overhead, a n $ 8.6 million increase in labor and benefits costs and a $ 3.0 million increase in depreciation and amortization. +The $ 26.9 million increase in technology materials was driven by the increased number of EMV cards sold, as noted above , and is a direct result of U.S. card issuing banks upgrading debit and credit cards to EMV which include an integrated circuit chip assembly and in certain cases may also include an RFID inlay assembly. The $ 12.1 million increase in other materials and the $ 12.7 million increase in overhead expenses were driven primarily by the continued integration of the EFT Source business and , to a lesser extent , by our new secure EMV production and card services facility that became operational in 2014. The $ 8.6 million increase in labor costs was driven by the additional employees we added from the acquisition of EFT Source and additional labor costs associated with the production of EMV cards , which are more complex than non - EMV cards and therefore have a higher labor component. Finally, increases in depreciation and amortization expense were driven by the EFT Source acquisition and the new secure EMV production and card services facility noted above. +U.S. Prepaid Debit +Cost of sales for the U.S. Prepaid Debit segment for the year ended December 31, 2015 in creased $ 1.2 million, or 3.3 %, to $ 39.5 million compared to $ 38.2 million for the year ended December 31, 2014. The increase in cost of sales was related to the increased level of net sales referenced above , partially offset by more efficient operations . +U.K. Limited +Cost of sales for the U.K. Limited segment for the year ended December 31, 2015 de creased $ 1.8 million, or 6.5 %, to $ 25.2 million compared to $ 27.0 million for the year ended December 31, 2014. The decrease in cost of sales was driven by foreign currency exchange rate flu ctuations, as discussed above . +Other +Other cost of sales decreased by $6.5 million, or 31.1%, to $14.4 million compared to $20.9 million in 2014. The decrease was primarily related to a decrease of $4.1 million in cost of sales related to our Petersfield, U.K. operation, shut down in August 2015, as discussed above and decreases related to our Canada operation of $2.2 million. The decrease in cost of sales in Canada was driven by foreign currency exchange rate flu ctuations, discussed above . +41 +Table of Contents +Gross Profit and Gross Profit Margin +Year Ended December 31, +% of +% of +2015 +net sales +2014 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +U.S. Debit and Credit segment +$ +97,117 +36.8 +% +$ +49,460 +32.3 +% +$ +47,657 +96.4 +% +U.S. Prepaid Debit segment +26,380 +40.0 +% +21,022 +35.5 +% +5,358 +25.5 +% +U.K. Limited segment +9,127 +26.6 +% +8,171 +23.2 +% +956 +11.7 +% +Other +3,197 +18.4 +% +3,074 +12.9 +% +123 +4.0 +% +Total +$ +135,821 +36.3 +% +$ +81,727 +31.3 +% +$ +54,094 +66.2 +% +Gross profit for the year ended December 31, 2015 increased $ 54.1 million, or 66.2 %, to $ 135.8 million compared to $ 81.7 million for the year ended December 31, 2014. Gross profit margin for the year ended December 31, 2015 increased to 36.3 % compared to 31.3 % for the year ended December 31, 2014. +U.S. Debit and Credit +Gross profit for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased $ 47.7 million, or 96.4 %, to $ 97.1 million compared to $ 49.5 million for the year ended December 31, 2014. Increases in gross profit were driven by a $ 30.3 million contribution from increased EMV volumes (net of reduced gross profit from non - EMV cards) and a $ 17.4 million increase from the EFT Source acquisition . EFT Source gross profit increased $16.2 million due to EFT Source results being reflected for the full year in 2015 and from September 2, 2014 through December 31, 2014 during the prior year, with the remaining increase of $1.2 million due to year over year growth . Gross profit margin for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased to 36.8 % compared to 32.3 % for the year ended December 31, 2014 due to the continued conversion of the United States market to EMV cards, discussed above . +U.S. Prepaid Debit +Gross profit for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $ 5.4 million, or 25.5 %, to $ 26.4 million compared to $ 21.0 million for the year ended December 31, 2014. Gross profit margin for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased to 40.0 % compared to 35.5 % for the year ended December 31, 2014. The increase in gross profit and gross profit margin were primarily driven by increased net sales referenced above and the improved operating efficiencies in this segment. +U.K. Limited +Gross profit for the U.K. Limited segment for the year ended December 31, 2015 increased $ 1.0 million, or 11.7 %, to $ 9.1 million compared to $ 8.2 million for the year ended December 31, 2014. Gross profit margin for the U.K. Limited segment for the year ended December 31, 2015 increased to 26.6 % compared to 23.2 % for the year ended December 31, 2014. The increase was driven by the effect of foreign currency exchange rate fluctuations discussed above, and to a lesser extent, more efficient production . +Other +Gross profit in Other increased 4.0% in 2015 to $3.2 million from $3.1 million in 2014, and was primarily related to the Canada operation. +42 +Table of Contents +Operating Expenses +Year Ended December 31, +2015 +2014 +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +U.S. Debit and Credit segment +$ +25,562 +$ +15,053 +$ +10,509 +69.8 +% +U.S. Prepaid Debit segment +5,679 +5,266 +413 +7.8 +% +U.K. Limited segment +6,417 +6,396 +21 +0.3 +% +Other +30,443 +20,540 +9,903 +48.2 +% +Total +$ +68,101 +$ +47,255 +$ +20,846 +44.1 +% +Operating expenses for the year ended December 31, 2015 increased $ 20.8 million, or 44.1 %, to $ 68.1 million compared to $ 47.3 million for the year ended December 31, 2014. The increase in operating expenses was driven primarily by a $ 10.5 million increase in the U.S. Debit and Credit segment and a $ 9.9 million increase in our corporate expenses. +The $ 10.5 million increase in the U.S. Debit an d Credit segment was driven by an $ 8.7 million increase related to the EFT Source acquisition , and the remaining increase was primarily attributable to additional SG&A expenses related to the elevated levels of segment net sales discussed above. +Other operating expenses includes an increase of $4.2 million in connection with the settlement of our obligation under the phantom stock plan in conjunction with our IPO, $ 1.8 million in increased depreciation and amortization expense, $1.0 million related to accrued performance bonuses in connection with the EFT Source acquisition, a restructuring charge of $0.7 million related to the closure of our Petersfield U.K. facility, $0.4 million of transaction costs, and a $1. 8 million increase in corporate salaries, consulting fees, legal, and other SG&A expense . +Excluding charges of $8.7 million and $4.5 million for the years ended December 31, 2015 and 2014, respectively, related to our phantom stock plan, $0.4 million of transaction costs for the year ended December 31, 2015 and $1.0 million of accrued performance bonus charges in connection with the EFT Source acquisition in the year ended December 31, 2015, operating expenses for the year ended December 31, 2015 increased $15.2 million, or 35.6%, compared to the year ended December 31, 2014. +Income from Operations and Operating Margin +Year Ended December 31, +% of +% of +2015 +net sales +2014 +net sales +$ Change +% Change +(dollars in thousands) +Income from operations by segment: +U.S. Debit and Credit segment +$ +71,555 +27.1 +% +$ +34,407 +22.5 +% +$ +37,148 +108.0 +% +U.S. Prepaid Debit segment +20,701 +31.4 +% +15,756 +26.6 +% +4,945 +31.4 +% +U.K. Limited segment +2,710 +7.9 +% +1,775 +5.0 +% +935 +52.7 +% +Other +(27,246) +* +(17,466) +* +(9,780) +56.0 +% +Total +$ +67,720 +18.1 +% +$ +34,472 +13.2 +% +$ +33,248 +96.4 +% +* Not meaningful +Income from operations for the year ended December 31, 2015 increased $33.2 million, or 96.4%, to $67.7 million compared to $34.5 million for the year ended December 31, 2014. Operating margins for the year ended December 31, 2015 increased to 18.1% compared to 13.2% for the year ended December 31, 2014. +U.S. Debit and Credit +Income from operations for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased $37.1 million, or 108.0%, to $71.6 million compared to $34.4 million for the year ended December 31, 2014. Operating +43 +Table of Contents +income benefi ted by $7.7 million from the inclusion of the EFT Source acquisition for a full year in 2015 (results from EFT Source were included from September 2, 2014 through December 31, 2014). Operating margins for the year ended December 31, 2015 increased to 27.1% compared to 22.5% for the year ended December 31, 2014 due primarily to the higher sales volumes of EMV cards, as discussed above. +U.S. Prepaid Debit +Income from operations for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $4.9 million, or 31.4%, to $20.7 million compared to $15.8 million for the year ended December 31, 2014 due primarily to the hig her sales levels and more efficient operations, as discussed above . +U.K. Limited +Income from operations for the U.K. Limited segment for the year ended December 31, 2015 increased $0.9 million, or 52.7%, to $2.7 million compared to $1.8 million for the year ended December 31, 2014 d ue to more efficient production . Operating margins for the year ended December 31, 2015 increased to 7.9% compared to 5.0% for the year ended December 31, 2014 for the reasons discussed above. +Interest , net +Interest expense for the year ended December 31, 2015 increased $ 10.8 million, or 144.1 %, to $ 18.3 million compared to $ 7.5 million for the year ended December 31, 2014. The increase in interest expense was driven by higher average debt balances outstanding relating to the $435.0 million First Lien Term Loan that we put in place in August 2015. Interest expense also includes $4.7 million of amortization of debt issuance cost and discount related to the early debt repayment of $112.5 million using proceeds from our IPO, and an additional fourth quarter debt repayment of $10.0 million. +Loss on debt modification and early extinguishment +Loss on debt modification and early extinguishment for the year ended December 31, 2015 was $0. 7 million related to unamortized deferred financing costs and discount on our Senior Term Loan dated September 2, 2014, which was repaid with proceeds from our $435.0 million First Lien Term Loan . Refer to Note 10 “Long-Term Debt and Credit Facility”, in Part III, Item 8 “ Financial Statements and Supplementary Data ” of this Annual Report on Form 10-K. +Provision for income taxes +The provision for income taxes for the year ended December 31, 2015 increased $ 7.5 million, to $ 17.8 million, compared to $ 10.3 million for the year ended December 31, 2014 driven by the incre ase in income before taxes of $ 22.8 million. The effective tax rate was 36.3% and 39.1% for the years ended December 31, 2015 and 2014, respectively. The tax rate was lower in 2015 compared to 2014 as a result of discrete adjustments. +Fourth Quarter +Our net sales grew by 6.5% in the fourth quarter 2015 compared to same quarter in 2014. Net sales for our U.S. Debit & Credit segment grew by 11.2% in the fourth quarter of 2015 compared to fourth quarter of 2014 due to the continued conversion of F inancial P ayment C ards from magnetic stripe to EMV chip technology . +Net sales for our U.S. Prepaid Debit segment increased by 1.4% in the fourth quarter of 2015 compared to the fourth quarter of 2014 as growth in our retail prepaid sales across the customer base was offset by significant fourth quarter 2014 product launches and refreshes for two large customers, which were not replicated in the fourth quarter of 2015. +Net sales for our U.K. Limited segment decreased 2.3 % in the fourth quarter of 2015 compared to the fourth quarter of 2014, due primarily to foreign currency exchange rates. Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a reduction to revenues for the three months ended December 31, 2015 of $0.5 million compared to the same period in the previous year. +44 +Table of Contents +Adjusted EBITDA m argins in the fourth quarter of 2015 continued to improve over the fourth quarter of 2014 due to increased operating leverage driven by increased net sales. The increases in net sales have been primarily driven by an increase in the shipment of EMV Financial Payment Cards, which generally have higher selling prices and gross profits than the non - EMV Financial Payment Cards that they are replacing. +Year Ended December 31, 2014 Compared With Year Ended December 31, 2013 +The table below presents our results of operations for the years ended December 31, 2014 and 2013: +Year Ended December 31, +2014 +2013 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +159,220 +$ +101,360 +$ +57,860 +57.1 +% +Services +101,786 +95,010 +6,776 +7.1 +% +Total net sales +261,006 +196,370 +64,636 +32.9 +% +Cost of sales +179,279 +136,874 +42,405 +31.0 +% +Gross profit +81,727 +59,496 +22,231 +37.4 +% +Operating expenses +47,255 +33,347 +13,908 +41.7 +% +Income from operations +34,472 +26,149 +8,323 +31.8 +% +Other income (expense): +Interest, net +(7,508) +(7,838) +330 +4.2 +% +Foreign exchange gain (loss) +(124) +(142) +18 +12.7 +% +Loss on debt modification and early extinguishment +(476) +— +(476) +— +Other (expense) income +(101) +18 +(119) +(661.1) +% +Income before taxes +26,263 +18,187 +8,076 +44.4 +% +Provision for income taxes +(10,291) +(6,988) +(3,303) +(47.3) +% +Net income from continuing operations +15,972 +11,199 +4,773 +42.6 +% +Loss from discontinued operations +(2,670) +(2,612) +(58) +(2.2) +% +Net income +$ +13,302 +$ +8,587 +$ +4,715 +54.9 +% +45 +Table of Contents +Net Sales +Year Ended December 31, +2014 +2013 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +U.S. Debit and Credit segment—Products +$ +132,975 +$ +86,302 +$ +46,673 +54.1 +% +U.S. Debit and Credit segment—Services +20,040 +5,324 +14,716 +276.4 +% +U.S. Debit and Credit segment—Total +153,015 +91,626 +61,389 +67.0 +% +U.S. Prepaid Debit segment—Products +— +— +— +— +U.S. Prepaid Debit segment—Services +59,271 +65,895 +(6,624) +(10.1) +% +U.S. Prepaid Debit segment—Total +59,271 +65,895 +(6,624) +(10.1) +% +U.K. Limited segment—Products +24,623 +22,238 +2,385 +10.7 +% +U.K. Limited segment—Services +10,540 +11,004 +(464) +(4.2) +% +U.K. Limited segment—Total +35,163 +33,242 +1,921 +5.8 +% +Other—Products +11,682 +10,907 +775 +7.1 +% +Other—Services +12,226 +13,771 +(1,545) +(11.2) +% +Other—Total +23,908 +24,678 +(770) +(3.1) +% +Inter-company eliminations +(10,351) +(19,071) +8,720 +(45.7) +% +Total +$ +261,006 +$ +196,370 +$ +64,636 +32.9 +% +Net sales for the year ended December 31, 2014 increased $64.6 million, or 32.9%, to $261.0 million compared to $196.4 million for the year ended December 31, 2013. The increase in net sales during 2014 was due to growth in net sales of 67.0% and 5.8% in our U.S. Debit and Credit segment and U.K. Limited segment, respectively, offset by a 10.1% decline in our U.S. Prepaid Debit segment as compared to 2013. +U.S. Debit and Credit +Net sales for the U.S. Debit and Credit segment for the year ended December 31, 2014 increased $61.4 million, or 67.0%, to $153.0 million compared to $91.6 million for the year ended December 31, 2013. The increase in net sales was driven by an increase in EMV related revenue of $58.2 million, a $14.7 million increase in card services revenue, a $7.4 million increase in instant issuance revenue and various other items, offset by declines in magnetic stripe card revenue of $12.0 million and contactless card revenue of $2.4 million. The increase in EMV revenue of $58.2 million was driven by our card issuing bank customers or end - users adopting EMV technology for debit and credit cards. For the year ended December 31, 2014, we sold 62.5 million EMV cards (ap proximately 5.7% of which were dual-i nterface EMV) at a n average selling price of $1.04 per card compared to 5.6 million EMV cards (app roximately 12.7% of which were dual-i nterface EMV) at an average selling price of $1.28 per card for the year ended December 31, 2013. The increase in card services revenue of $14.7 million was driven primarily by the impact of our acquisition of EFT Source on September 2, 2014, including new personalization customers coming onto our acquired service platform and services related to debit and credit cards reissued in response to data breaches at large U.S. retailers. Likewise, the $7.4 million growth in instant issuance revenue was also driven by the acquisition of EFT Source, as well as continued growth of Card@Once ® in 2014. The $12.0 million decline in magnetic stripe revenue and the $2.4 million decline in contactless revenue were primarily driven by our card issuing bank customers upgrading from magnetic stripe cards and contactless cards to EMV cards. +U.S. Prepaid Debit +Net sales for the U.S. Prepaid Debit segment for the year ended December 31, 2014 decreased $6.6 million, or 10.1%, to $59.3 million compared to $65.9 million for the year ended December 31, 2013. The decline was driven primarily by our largest customer for this segment drawing down inventory levels. +U.K. Limited +46 +Table of Contents +Net sales for the U.K. Limited segment for the year ended December 31, 2014 increased $1.9 million, or 5.8%, to $35.2 million compared to $33.2 million for the year ended December 31, 2013. The increase in sales was primarily driven by a $1.9 million increase in retail gift and loyalty card product and services revenue. +Cost of Sales +Year Ended December 31, +2014 +2013 +$ Change +% Change +(dollars in thousands) +Cost of sales by segment: +U.S. Debit and Credit segment +$ +103,555 +$ +66,585 +$ +36,970 +55.5 +% +U.S. Prepaid Debit segment +38,249 +43,010 +(4,761) +(11.1) +% +U.K. Limited segment +26,992 +25,576 +1,416 +5.5 +% +Other +20,926 +21,718 +(792) +(3.6) +% +Eliminations +(10,443) +(20,015) +9,572 +47.8 +% +Total +$ +179,279 +$ +136,874 +$ +42,405 +31.0 +% +Cost of sales for the year ended December 31, 2014 increased $42.4 million, or 31.0%, to $179.3 million compared to $136.9 million for the year ended December 31, 2013. +U.S. Debit and Credit +Cost of sales for the U.S. Debit and Credit segment for the year ended December 31, 2014 increased $37.0 million, or 55.5%, to $103.6 million compared to $66.6 million for the year ended December 31, 2013. The increases in cost of sales were driven by a $21.2 million increase in technology materials (primarily EMV chip assemblies), a $4.4 million increase in other materials, a $6.8 million increase in overhead, a $5.3 million increase in labor and benefits costs and a $1.1 million increase in depreciation and amortization. +The $21.2 million increase in technology materials was driven by the increased number of EMV cards shipped as noted above and is a direct result of U.S. card issuing banks upgrading debit and credit cards to EMV which include an integrated circuit chip assembly and in certain cases may also include an RFID inlay assembly. The $6.8 million increase in overhead expenses and the $4.4 million increase in other materials were driven primarily by the EFT Source acquisition and to a lesser extent by our new secure EMV production and card services facility that became operational in 2014. The $5.3 million increase in labor costs was driven by the acquisition of EFT Source and additional labor costs associated with the production of EMV cards which are more complex than non - EMV cards and therefore have a higher labor component. Finally, increases in depreciation and amortization expense were driven by the EFT Source acquisition and the new secure EMV production and card services facility noted above. +U.S. Prepaid Debit +Cost of sales for the U.S. Prepaid Debit segment for the year ended December 31, 2014 decreased $4.8 million, or 11.1%, to $38.2 million compared to $43.0 million for the year ended December 31, 2013. The decrease in cost of sales was driven by the reduced level of net sales referenced above and more efficient operations , partially offset by increased depreciation from elevated levels of capital investment during 2013 and 2014 to expand our tamper - evident security packaging capacity. +U.K. Limited +Cost of sales for the U.K. Limited segment for the year ended December 31, 2014 increased $1.4 million, or 5.5%, to $27.0 million compared to $25.6 million for the year ended December 31, 2013. Increases in cost of sales was driven by a $0.9 million increase in labor costs and a $0.7 million increase in materials costs which were partially offset by a decrease in depreciation and amortization. The increase in labor and material expense was driven by the increased level of net sales in 2014, as compared to 2013, noted above. +47 +Table of Contents +Gross Profit and Gross Profit Margin +Year Ended December 31, +% of +% of +2014 +net sales +2013 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +U.S. Debit and Credit segment +$ +49,460 +32.3 +% +$ +25,041 +27.3 +% +$ +24,419 +97.5 +% +U.S. Prepaid Debit segment +21,022 +35.5 +% +22,885 +34.7 +% +(1,863) +(8.1) +% +U.K. Limited segment +8,171 +23.2 +% +7,666 +23.1 +% +505 +6.6 +% +Other +3,074 +12.9 +% +3,904 +15.8 +% +(830) +(21.3) +% +Total +$ +81,727 +31.3 +% +$ +59,496 +30.3 +% +$ +22,231 +37.4 +% +Gross profit for the year ended December 31, 2014 increased $22.2 million, or 37.4%, to $81.7 million compared to $59.5 million for the year ended December 31, 2013. Gross profit margin for the year ended December 31, 2014 increased to 31.3% compared to 30.3% for the year ended December 31, 2013. +U.S. Debit and Credit +Gross profit for the U.S. Debit and Credit segment for the year ended December 31, 2014 increased $24.4 million, or 97.5%, to $49.5 million compared to $25.0 million for the year ended December 31, 2013. Gross profit margin for the U.S. Debit and Credit segment for the year ended December 31, 2014 increased to 32.3% compared to 27.3% for the year ended December 31, 2013. Increases in gross profit were driven by a $14.0 million contribution from increased EMV volumes (net of reduced gross profit from non - EMV cards) and a $10.5 million increase from the EFT Source acquisition. +U.S. Prepaid Debit +Gross profit for the U.S. Prepaid Debit segment for the year ended December 31, 2014 decreased $1.9 million, or 8.1%, to $21.0 million compared to $22.9 million for the year ended December 31, 2013. The decrease in gross profit was primarily driven by a reduced level of net sales referenced above, partially offset by the improved operating efficiencies at this segment. Gross profit margin for the U.S. Prepaid Debit segment for the year ended December 31, 2014 increased to 35.5% compared to 34.7% for the year ended December 31, 2013. +U.K. Limited +Gross profit for the U.K. Limited segment for the year ended December 31, 2014 increased $0.5 million, or 6.6%, to $8.2 million compared to $7.7 million for the year ended December 31, 2013. Gross profit margin for the U.K. Limited segment for the year ended December 31, 2014 increased to 23.2% compared to 23.1% for the year ended December 31, 2013. Increases in gross profit were driven by increased retail gift and loyalty card product and services revenue. +Operating Expenses +Year Ended December 31, +2014 +2013 +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +U.S. Debit and Credit segment +$ +15,053 +$ +9,730 +$ +5,323 +54.7 +% +U.S. Prepaid Debit segment +5,266 +4,976 +290 +5.8 +% +U.K. Limited segment +6,396 +6,301 +95 +1.5 +% +Other +20,540 +12,340 +8,200 +66.5 +% +Total +$ +47,255 +$ +33,347 +$ +13,908 +41.7 +% +48 +Table of Contents +Operating expenses for the year ended December 31, 2014 increased $13.9 million, or 41.7%, to $47.2 million compared to $33.3 million for the year ended December 31, 2013. Excluding charges of $4.5 million and $0.6 million, in 2014 and 2013, respectively, related to our phantom stock plan and investment banking, advisory and related professional fees in 2014 of $2.1 million, operating expenses for the year ended December 31, 2014 increased $7.9 million, or 24.1%. +The increase in operating expenses was driven primarily by a $5.3 million increase in the U.S. Debit and Credit segment and an $8. 2 million increase in other expenses. The $5.3 million increase in the U.S. Debit and Credit segment was driven by a $4.1 million increase related to the EFT Source acquisition and the remaining increase was primarily attributable to additional selling, salary and other expenses related to the elevated levels of segment net sales discussed above. +The $8. 2 million increase in other expenses was primarily driven by the $4.5 million charge related to our phantom stock plan, $2.1 million related to investment banking, advisory and related professional fees, and a $1.3 million increase in corporate salaries and management incentive payments. +Income from Operations and Operating Margin +Year Ended December 31, +% of +% of +2014 +net sales +2013 +net sales +$ Change +% Change +(dollars in thousands) +Income from operations by segment: +U.S. Debit and Credit segment +$ +34,407 +22.5 +% +$ +15,311 +16.7 +% +$ +19,096 +124.7 +% +U.S. Prepaid Debit segment +15,756 +26.6 +% +17,909 +27.2 +% +(2,153) +(12.0) +% +U.K. Limited segment +1,775 +5.0 +% +1,365 +4.1 +% +410 +30.0 +% +Other +(17,466) +* +(8,436) +* +(9,030) +(107.0) +% +Total +$ +34,472 +13.2 +% +$ +26,149 +13.3 +% +$ +8,323 +31.8 +% +* Not meaningful +Income from operations for the year ended December 31, 2014 increased $8.3 million, or 31.8%, to $34.5 million compared to $26.2 million for the year ended December 31, 2013. Excluding the 2014 and 2013 charges of $4.5 million and $0.6 million, respectively, related to our phantom stock plan and investment banking, advisory and related professional fees in 2014 of $2.1 million, income from operations for the year ended December 31, 2014 increased $14.3 million, or 53.3%, relative to the year ended December 31, 2013. Operating margins for the year ended December 31, 2014 decreased to 13.2% compared to 13.3% for the year ended December 31, 2013. Excluding the 2014 and 2013 charges related to our phantom stock plan and investment banking, advisory and related professional fees discussed above, operating margins for the year ended December 31, 2014 increased to 15.7% compared to 13.6% for the year ended December 31, 2013. +U.S. Debit and Credit +Income from operations for the U.S. Debit and Credit segment for the year ended December 31, 2014 increased $19.1 million, or 124.7%, to $34.4 million compared to $15.3 million for the year ended December 31, 2013. Operating margins for the year ended December 31, 2014 increased to 22.5% compared to 16.7% for the year ended December 31, 2013. +U.S. Prepaid Debit +Income from operations for the U.S. Prepaid Debit segment for the year ended December 31, 2014 decreased $2.2 million, or 12.0%, to $15.8 million compared to $17.9 million for the year ended December 31, 2013. Operating margins for the year ended December 31, 2014 decreased to 26.6% compared to 27.2% for the year ended December 31, 2013. +49 +Table of Contents +U.K. Limited +Income from operations for the U.K. Limited segment for the year ended December 31, 2014 increased $0.4 million, or 30.0%, to $1.8 million compared to $1.4 million for the year ended December 31, 2013. Operating margins for the year ended December 31, 2014 increased to 5.0% compared to 4.1% for the year ended December 31, 2013. +Interest income (expense) +Interest expense for the year ended December 31, 2014 decreased $0.3 million, or 4.2%, to $7.5 million compared to $7.8 million for the year ended December 31, 2013. The decrease in interest expense was driven by a reduction in borrowing rates negotiated with our lenders in September 2014 which was partially offset by additional interest expense related to incremental indebtedness incurred in September 2014 in connection with the acquisition of EFT Source. +Loss on debt modif ication and early extinguishment +Loss on debt modification and early extinguishment for the year ended December 31, 2014 was $0.5 million driven by a write - off of capitalized debt expense in connection with the debt modification described above. +Provision for income taxes +The provision for income taxes for the year ended December 31, 2014 increased $3.3 million, to $10.3 million, compared to $7.0 million for the year ended December 31, 2013 driven by the increase in income before taxes of $8.1 million. +Fourth Quarter +Net sales for our U.S. Debit & Credit segment grew by 186.3% in the fourth quarter of 2014 versus a decline of 5.3% in the fourth quarter of 2013, compared to the prior year. Net sales for our U.S. Prepaid Debit segment declined by 14.8% in the fourth quarter of 2014 , and 33.1 % in the fourth quarter of 2013 compared to the prior year . Net sales for our U.K. Limited segment grew by 11.3% in the fourth quarter of 2014 and 0.4% in the fourth quarter of 2013, compared to the prior year. +Adjusted EBITDA margins in the fourth quarter of 2014 continued to improve over the fourth quarter of 2013 due to increased operating leverage driven by increased net sales. The increases in net sales have been primarily driven by an increase in the shipment of EMV Financial Payment Cards, which generally have higher selling prices and gross profits than the non - EMV Financial Payment Cards that they are replacing. +The fourth quarter of 2014 benefited from the EFT Source acquisition on September 2, 2014, which became part of our U.S. Debit and Credit segment. The fourth quarter of 2014 also benefited from a sharp increase in the shipment of EMV Financial Payment Cards as U.S. debit and credit card issuers began the process of upgrading non - EMV Financial Payment Cards to EMV Financial Payment Cards. +Liquidity and Capital Resources +As of December 31, 2015, we had $ 13.6 million of cash and cash equivalents. Of this amount, $ 3.0 million was held in accounts outside of the United States. +On August 17, 2015, we entered into a new First Lien Credit Facility with a syndicate of lenders, consisting of the $435.0 million First Lien Term Loan and the $40.0 million Revolving Credit Facility. The First Lien Term Loan and Revolving Credit Facility mature on August 17, 2022 and August 17, 2020, respectively. +At the Company's election, interest rates under the First Lien Credit Facility are based on either a Eurodollar rate plus a margin of 4.50% or a base rate plus a margin of 3.50%. Letters of credit are subject to a 0.125% fronting fee payable to the issuing bank and a fee payable to the revolving lenders equal to the margin applicable to Eurodollar revolving loans. In addition, we are required to pay an unused commitment fee ranging from 0.50% per annum to +50 +Table of Contents +0.375% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as our total net leverage ratio declines. +The First Lien Credit Facility contains customary covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders , asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our assets, and affiliate transactions. We may also be required to make repayments on the First Lien Term Loans in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement, beginning with the year ended December 31, 2016, with any payments due after the issuance of our annual financial statements in 2017. +During the year ended December 31, 2015, we redeemed a total of 64,809 shares of Series A Preferred Stock at prices ranging between $3,950.33 and $4,610.68 per share for a total of $288.6 million. +At December 31, 2015, we had total borrowings of $309.0 million, including $300.0 million of outstanding borrowings under our First Lien Term Loan, net of unamortized debt and unamortized deferred financing costs of $12.5 million, and we have $ 39.9 million of availability under the Revolving Credit Facility. +On February 24, 2016, our Board of Directors declared a dividend of $0.045 per common share, payable in April 2016. While we expect to pay dividends on a quarterly basis, any future dividends will be subject to the discretion of our Board of Directors who will evaluate our dividend program from time to time given factors it deems relevant. +We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, dividend payments, capital expenditures, lease obligations, and working capital for at least the next 12 months. +Operating Activities +Cash provided by operating activities for the year ended December 31, 2015 was $ 43.9 million compared to $26.6 million during the year ended December 31, 2014 . The increase in cash provided by operating activities was driven by an increase in net income of $17.6 million, partially offset by increased working capital investments during the year. Included in net income were non-cash charges of $33.0 million and $19.8 million, during the years ended December 31, 2015 and 2014, respectively, which decreased net income with no corresponding decrease to cash provided by operating activities. +Cash provided by operating activities for the year ended December 31, 2014 was $26.6 million, compared to $23.6 million for the year ended December 31, 2013. Cash provided by operating activities increased during the year s ended December 31, 2014 primarily due to a $ 4 .7 million increase in net income , partially offset by increased working capital investments . Included in net income were non-cash charges of $19.8 million and $14.9 million, during the years ended December 31, 2014 and 2013, respectively, which decreased net income with no corresponding decrease to cash provided by operating activities but did not decrease cash provided by operating activities. +Investing Activities +Cash used in investing activities for the year ended December 31, 2015 was $13.7 million, which included capital expenditures of $18.7 million, partially offset by $5.0 million of cash provided from the sale of our Nevada operation during the year ended December 31, 2015 . In 2014, net cash used in investing activities was $71.8 million, driven primarily by the cash used to purchase EFT Source of $54.9 million. Capital expenditures were $1.7 million higher in the year ended December 31, 2015 compared to 2014 because of elevated capital spending in conjunction with the U.S. EMV conversion and increased investment in our services business . +Cash used in investing activities for the year ended December 31, 2014 was $71.8 million, compared to $9.2 million for the year ended December 31, 2013. Cash used in investing activities increased by $54.9 million primarily due to the EFT Source acquisition, and $7.7 million due to increased acquisition of plant, equipment and leasehold improvements primarily related to elevated capital spending to prepare for the U.S. EMV conversion. Cash used by investing activities for the year ended Dec ember 31, 2013 was $9.2 million which related entirely to capital expenditures . +51 +Table of Contents +Financing Activities +Cash used in financing activities for the year ended December 31, 2015 was $ 29.4 million, driven by our redemption of preferred stock of $58.3 million, a dividend distribution on Series A Preferred Stock , of $230.3 million , the repayment of outstanding borrowings under our Senior Term Loan dated September 2, 2014 of $170.9 million, and the repayment of First Lien Term Loan borrowings of $122.5 million. The payments on the First Lien Term Loans were made with $112.5 million of cash proceeds from our IPO and an additional $10.0 million in the fourth quarter with available cash on hand. Partially offsetting the above disbursements were proceeds from our IPO totaling $135.3 million, net of $7.2 million of offering costs, and $417.2 million generated in connection with borrowings under our $435.0 million First Lien Credit Facility, net of $17.8 million of loan issuance costs. +Cash provided from financing activities for the year ended December 31, 2014 was $48.5 million, compared to $12.1 million of cash used by financing activities for the year ended December 31, 2013. C ash provided from financing activities was driven by proceeds of $60. 0 million under our Senior Term Loan dated September 2, 2014, offset by repayments of $11.0 million and loan issuance costs of $0.4 million on the same Senior Term Loans . The net cash used in 2013 was driven by payments on long–term debt of $7.1 million and our line of credit of $14.8 million, offset by proceeds from our line of credit of $9.8 million. +Working Capital +Our working capita l as of December 31, 2015 was $59.0 million compared to $ 52.1 million as of December 31, 2014. The $ 6.9 million increase in working capital during the year ended December 31, 2015 wa s the result of recognizing a $5.0 million income tax receivable related to the write - off of tax deductible goodwill and intangible assets assoc iated with our Nevada operation . Additionally, the net balance of accounts receivable, inventories, accounts payable and accrued expenses increased $10.8 million during the year, reflecting an increase in the growth in the net sales of the Company. Primarily o ff setting these increases were a $5.9 million decrease in the current assets of discontinued operation, resulting from the sale of our Nevada operatio n during the period, and a $2.7 million increase in current maturities on our long–term debt driven by our Sellers’ Note of $9.0 million which matures in September 2016. Current maturities of long-term debt as of December 31, 2014 were $6.3 million, related to current maturities of our Senior Term Loans dated September 2, 2014. +Our working capital as of December 31, 2014 was $ 52.1 million compared to $28.1 million as of December 31, 2013. The $ 24.0 million increase in working capital was primarily driven by a $7.2 million increase in investment s in working capital from operating activities, $7.6 million of working capital acquired in the EFT Source acquisition and a $2.9 million increase from the reclassification of fixed assets to current assets of a discontinued operation. +Contractual Obligations +The following table summarizes our material contractual obligations as of December 31, 2015: +Payments due by period—December 31, 2015 +(in thousands) +Less than +More than +Total +1 year +1 - 3 Years +3 - 5 Years +5 Years +Long-term debts (1) +$ +309,000 +$ +9,000 +$ +— +$ +— +$ +300,000 +Operating leases +13,776 +4,309 +6,171 +2,275 +1,021 +Interest payments (2) +114,209 +17,488 +34,375 +34,375 +27,971 +Non-cancellable purchase obligations +3,047 +3,047 +— +— +— +Total contractual obligations +$ +440,032 +$ +33,844 +$ +40,546 +$ +36,650 +$ +328,992 +(1) Principal payments only. +(2) Amounts are based on currently applicable interest rates in the case of variable interest rate debt. +Cyclical and Seasonal Nature of Business +Financial Payment Cards and Private Label Credit Cards are generally influenced by broader cyclical changes in the economy, with economic downturns resulting in decreases in the demand for our products and services. In +52 +Table of Contents +particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. Additionally, we generate higher net sales in the third and fourth quarters of the year, as our sales of Prepaid Debit Card solutions and retail gift cards are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season. +Off - Balance Sheet Arrangements +We had no off - balance sheet ar rangements at December 31, 2015 and 2014 . +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenues, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty, and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +Revenue Recognition +Generally, we recognize revenue related to sales of our products upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured. A provision for payment discounts, product return allowances and uncollectable accounts, which is estimated based upon our historical performance, management’s experience and current economic trends, is recorded as a reduction of sales in the same period that the revenue is recognized. +In certain cases, at the customer’s request, we enter into bill - and - hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. We recognize revenue associated with bill - and - hold arrangements when the product is complete and ready to ship, hold criteria have been met, the amount due from the customer is fixed, and collectability of the related receivable is reasonably assured. All of the foregoing requires us to apply our judgment. Bill - and - hold arrangements most often occur when customers request that we ship complete tamper - evident security packages containing a Prepaid Debit Card to our secure fulfillment center until they provide us further instructions at a later date to ship those packages to numerous individual retail locations or distribution centers. +Multiple - Element Arrangements +We enter into warehouse, fulfillment and distribution service agreements with several customers, where we are engaged to store and handle completed cards and tamper - evident security packages on their behalf. For the sales arrangements that contain multiple deliverables, the arrangement is split into separate units of accounting and individually delivered elements have value to the customer on a standalone basis. When separate units of accounting exist, revenue is allocated to each element based on our best estimate of competitive market prices. At the point in which completed cards and packages are shipped to our warehouse, the product is billed and the revenue is recognized in accordance with our revenue recognition policy. Warehousing services are recognized monthly based on volume and handling requirements; fulfillment services are recognized when the product is handled in the manner specified by the customer for a unit or handling fee. All of the foregoing requires us to apply our judgment. Multiple - element arrangements most often occur when customers request that we ship complete tamper - evident security packages containing a Prepaid Debit Card to our secure fulfillment center until they provide us further instructions at a later date to ship those packages to numerous individual retail locations or distribution centers. +53 +Table of Contents +Impairment Assessments of Goodwill and Long - Lived Assets +A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations. We account for business combinations using the acquisition method and allocate the acquisition price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The difference between the acquisition price and the fair value of the net assets acquired is recorded as goodwill. +In determining the fair value of assets acquired and liabilities assumed in business combinations and for determining fair values in impairment tests, we use one of the following recognized valuation methods: the income approach (including discounted cash flows), the market approach or the cost approach. Our significant estimates in those fair value measurements include identifying business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and earnings multiples. Further, when measuring fair value based on discounted cash flows, we make assumptions about risk adjusted discount rates, future price levels, rates of increase in revenue, cost of revenue and operating expenses, weighted average cost of capital, rates of long term growth and income tax rates. Valuations are performed by management or third party valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values assigned to the assets acquired and liabilities assumed and for determining fair value in business combinations and impairment tests are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates. Goodwill is allocated to our reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it no longer retains its identification with a particular acquisition and becomes identified with the reporting unit in its entirety. Accordingly, the fair value of the reporting unit as a whole is available to support the recoverability of its goodwill. +We evaluate goodwill for impairment annually on October 1 st or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. We have the option to assess goodwill for impairment by first performing a qualitative assessment to determine whether it is more - likely - than - not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more - likely - than - not that the fair value of a reporting unit is less than its carrying amount, then the two - step goodwill impairment test is not required to be performed. If we determine that it is more - likely - than - not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform the two - step goodwill impairment test. In the first step, the fair value of the reporting unit is compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is not impaired and no further analysis is necessary. If the fair value of the reporting unit is less than its book value, there is an indication of potential impairment and a second step is performed. When required, the second step of testing involves calculating the implied fair value of goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of its net assets and identifiable intangible assets as if the reporting unit had been acquired. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For reporting units with a negative book value (i.e., excess of liabilities over assets), we evaluate qualitative factors to determine whether it is necessary to perform the second step of the goodwill impairment test. As of December 31 , 2015, the goodwill on our balance sheet was $73. 1 million. +Long - lived assets, such as property, equipment and software, and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Plant, equipment, and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight - line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for equipment, furniture, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. If circumstances require that a long - lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that long - lived asset or asset group to its carrying amount. If the carrying amount of the long - lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. +Future changes in our assumptions or the interrelationship of those assumptions may negatively impact future valuations. In future measurements of fair value, adverse changes in assumptions could result in an impairment of +54 +Table of Contents +goodwill or long - lived assets that would require a non - cash charge to the consolidated statements of operations and may have a material effect on our financial condition and operating results. +Inventory Valuation +Raw materials, work - in - process and finished goods inventories are valued at the lower of cost or market, with c ost determined using a weighted- average method. Cost is calculated based upon the price paid for an item at the time it is received by us, and also includes the capitalization of labor, overhead and other expenses in the case of work - in - process and finished goods inventory. This net inventory cost is recognized through cost of sales when the inventory is sold. It is impractical for us to assign specific allocated overhead costs to individual units of inventory. As such, to match net inventory costs against the related revenues, we estimate the net inventory costs to be deferred and recognized each period as the inventory is sold. Also, we must exercise significant judgment in the case of work - in - process inventory to allocate the appropriate costs to this unfinished product. +Stock-Based Compensation +In connection with the IPO, we adopted the CPI Card Group Inc. Omnibus Incentive Plan (“Omnibus Plan”) and granted stock options to certain employees during the year ended December 31, 2015. We estimate the fair value of option awards using a Black-Scholes option pricing model. Option-pricing models require us to estimate a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rat e. The most subjective estimate is the expected volatility of the underlying stock when determining the fair market value of an option granted. Based on the limited amount of trading history of our common stock, we utilized a peer group to estimate the volatility assumption when calculating the fair value of stock options granted during 2015 . Our volatility assumption could be significantly different going forward than what we have estimated for our 2015 grants , which could impact our stock-based compensation expense in future periods. +Prior to the adoption of the Omnibus Plan, we maintained the 2007 Stock Option Plan under which stock options and restricted stock awards were granted to employees. We recognize compensation expense for option and restricted stock awards based on the fair value of the award on a straight-line basis over the vesting period of the award based on the estimated portion of the award that is expected to vest. The fair value of the award is based on the valuation of our common stock on the date of grant. Because there was no public market for our common stock prior to our IPO, we were required to exercise significant judgment in valuing the fair value of the awards under this plan. The fair value of our equity was historically estimated by our management and approved by our board. In estimating the fair value of our common stock, management and the board considered factors it believed were material to the valuation process including the process, rights, preferences and privileges of our preferred stock relative to the common stock, our actual and projected financial results, current business conditions and projections, the principal amount of our indebtedness, net of cash and the trading multiples of comparable companies. +A 10% change in our stock-based compensation expense for the year ended December 31, 2015 , would have affected pre-tax income by approximately $ 0.1 million . We include stock-based compensation expense in selling, general and administrative expenses in our consolidated statement of operations and comprehensive income. +Income Taxes +We record income tax expense using the liability method for taxes and are subject to income tax in many jurisdictions, including the United States, various states and localities, the United Kingdom, and Canada. A current tax asset or liability is recognized for the estimated taxes refundable or payable on the tax returns for the current year and a deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and carry forwards . Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. In evaluating our ability to realize our deferred tax asset, we considered the following sources of future taxable income: +· +future reversals of existing taxable temporary differences; +55 +Table of Contents +· +future taxable income, exclusive of reversing temporary differences and carryforwards; +· +taxable income in prior carryback years; and +· +tax - planning strategies. +Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. Our forecast of future profitability represents our best estimate of these future events. After conducting this assessment, the valuation allowance recorded, net of federal benefit, against our deferred tax assets was $ 3.7 and $ 4.1 million as of December 31, 201 5 and December 31, 201 4 , respectively. If actual results differ from estimated results, or if we adjust these assumptions in the future, we may need to adjust our deferred tax assets or liabilities, which could impact our effective tax rate. +The amount of income taxes we pay could be subject to possible audits in the taxing jurisdictions in which we operate. In the event of these possible audits, the taxing authorities might challenge items on our tax returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. We recognize tax benefits for uncertain positions only to the extent that we believe it is more likely than not that the tax position will be sustained. Our future results may include favorable or unfavorable adjustments to our unrecognized tax benefits due to closure of income tax audits, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis. +Internal Control Over Financial Reporting +Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process. As a newly public company, we were not required to make a formal assessment of the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act for the year ended December 31, 2015. Further, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting. However, we have identified a material weakness related to a lack of finance expertise that could result in a failure to properly account for non-routine and complex transactions. With the oversight of senior management, we are taking steps to remediate the underlying causes of this material weakness, primarily through the development and implementation of formal policies and improved processes , and the hiring of additional finance personnel , including the appointment of our current Chief Financial Officer in June 2015 and Chief Accounting Officer in March 2016, both of whom are certified public accountants, and are familiar with the rules and regulations applicable to public companies, including the requirements of the Sarbanes-Oxley Act , from their previous experience in substantive financial roles with other public companies. . Although we are in the process of addressing this material weakness, we cannot estimate when the remediation process will be completed. See Part 1, Item 1A “ Risk Factors—Risks Related to Our Business—We have identified a material weakness in our internal controls over financial reporting. If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected .” +For the year ending December 31, 2016, pursuant to Section 404 of the Sarbanes-Oxley Act, management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. Although as an “emerging growth company” (as defined by the JOBS Act), we are not currently required to obtain an attestation from our independent public accounting firm on our management report on internal controls over financial reporting, we will be required to obtain such an attestation when we are no longer an emerging growth company. We will continue to be an emerging growth company at least for the year ended December 31, 2016, and potentially for as long as five years from the date of our IPO, although we may lose that status under certain circumstances. See Part 1, Item 1A “ Risk Factors—Risks Related to Our Business—We are an “emerging growth company” and we cannot be certain if the reduced disclosure and other requirements applicable to emerging growth companies will make our common stock less attractive to investors. ” +56 +Table of Contents +Recent Accounting Pronouncements +The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers , in May 2014. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. We plan to implement the provisions of ASU 2014-09 as of January 1, 2018. We are in the process of determining the method of adoption and assessing the impact of ASU 2014-09 on our results of operations, financial position and consolidated financial statements. +The FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs , in April 2015. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The new standard is effective for public entities annual reporting periods beginning after December 15, 2015. Early adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not been previously issued. We have elected to early adopt this standard in 2015 . Accordingly, we recorded a reduction of $8.0 million to Long Term Debt in our Consolidated Balance Sheet a s of December 31, 2015, and reclassified $ 0.6 million from “ Capitalized Loan Fees ” to “ Long-Term Debt ” in the Company’s Consolidated Balance Sheet as of December 31, 2014. +The FASB issued ASU 2015-11, Inventory— Simplifying the Measurement of Inventory , in July 2015. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016. We plan to implement the provisions of ASU 2015-11 as of January 1, 2017. We are in the process of assessing the impact of ASU 2015-11 on our results of operations, financial position and consolidated financial statements. +In November 2015, t he FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes . ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016, with early adoption permitted, and the guidance may be applied either prospectively or retrospectively. We elected to early adopt this standard in 2015 prospectively. The impact to our financial position was immaterial. +In February 2016, the FASB issued ASU No. 2016-02 , Leases , which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (our fiscal year 2019) with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. We are in the process of assessing the impact of ASU 20 16 - 02 on our results of operations, financial position and consolidated financial statements. +Item 7A. Quantitative and Qualitative Disclosures about Market Ris k +Key Input Price Risks +Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including EMV microchips, polyvinyl chloride (“PVC”), energy and other commodities. We have been able to offset cost increases, which have historically not been significant, by making operational adjustments that increase productivity. However, substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be offset by selling price increases. +Labor and Benefits Costs +We are exposed to inflation in wage and benefits costs which represented 27.2 % of net sales for the year ended December 31, 2015. Due to the high - security nature of our business, the availability of potential applicants is limited by +57 +Table of Contents +the security and other requirements of the Payment Card Brands , and applicants are required to undergo a rigorous background screening process. Due to these factors, we have historically provided a starting wage that is above the minimum wage in place for the particular states or provinces in which we do business to attract qualified applicants. We further believe that this enables us to attract a higher caliber employee , which translates directly to higher quality and productivity. There can be no assurance that we will generate sales growth in an amount sufficient to offset increases in minimum wage or other inflationary pressures. +Interest Rate Risk +We are exposed to interest rate risk through fluctua tions in interest rates on our term l oan obligations. Our New Revolving Credit Facility and New Term Loan Facility carry interest at a floating rate. We seek to manage exposure to adverse interest rate changes through our normal operating and financing activities. As of December 31, 2015, we had $300.0 million in outstanding floating rate debt obligations under our First Lien Term Loan , net of unamortized debt and unamortized deferred financing costs of $12.5 million . Each quarter point increase or decrease in the interest rate on our First Lien Term Loan would change our annual interest expense by approximately $ 0.8 million. If our Revolving Credit Facility was fully - drawn, each quarter point increase or decrease in the interest rate on our New Revolving Credit Facility would change our annual interest expense by approximately $0.1 million. +Foreign Currency Exchange Risk +We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the British Pound Sterling and the Canadian Dollar. Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in foreign currency rates against the U.S. Dollar. A hypothetical ten percent change in the British Pound Sterling and Canadian Dollar would have impacted our 2015 net sales by approximately $ 5.2 million , with the impact to income from operations being immaterial . Approximately 84.5% of net sales for the year ended December 31, 2015 were in U.S. dollar functional currency subsidiaries, not subject to such foreign currency risk. +Pricing Risk +While we have been able to partially offset historical pricing pressure and other changes in the price of our products and services by offering higher - value added products and services, cross - selling additional products and services, selectively implementing pricing increases, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our pricing flexibility and macroeconomic conditions could increase pricing pressure. There can be no assurance that future pricing pressure can be offset by our ability to reduce our costs. In addition, there can be no assurance that we will generate sales growth in an amount sufficient to offset pricing pressures. +58 +Table of Contents +Item 8. Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 201 5 and 201 4 and for the years e nded December 31, 2015, 2014, and 2013 +Report of Independent Registered Public Accounting Firm +F - 2 +Consolidated Balance Sheets +F - 3 +Consolidated Statements of Operations and Comprehensive Income +F - 4 +Consolidated Statements of Stockholders’ Deficit +F - 5 +Consolidated Statements of Cash Flows +F - 6 +Notes to Consolidated Financial Statements +F - 7 +F- 1 +Table of Contents +Report of Independent Registered Public Accounting Fir m +The Board of Directors and Stockholders +CPI Card Group Inc.: +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subs idiaries as of December 31, 2015 and 2014 , and the related consolidated statements of operations and comprehensive income , stockholders’ deficit, and cash flows for each of the years in the three- yea r period ended December 31, 2015 . These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CPI Card Group Inc. and subs idiaries as of December 31, 2015 and 201 4 , and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 201 5 , in conformity with U.S. generally accepted accounting principles. +/s/ KPMG LLP +March 24, 2016 +Denver, Colorado +F- 2 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(Dollars in Thousands, Except Shares and Per Share Amounts) +December 31, +2015 +2014 +Assets +Current assets: +Cash and cash equivalents +$ +13,606 +$ +12,941 +Accounts receivable, net of allowances of $212 and $272 , respectively +52,538 +43,548 +Inventories +25,640 +21,605 +Prepaid expenses and other current assets +4,260 +4,129 +Income taxes receivable +4,975 +— +Deferred income taxes +— +634 +Current assets of a discontinued operation +— +5,862 +Total current assets +101,019 +88,719 +Plant, equipment and leasehold improvements, net +52,113 +44,772 +Intangible assets, net +53,988 +58,703 +Goodwill +73,123 +73,801 +Other assets +110 +15 +Total assets +$ +280,353 +$ +266,010 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +17,832 +$ +16,289 +Accrued expenses +11,315 +10,591 +Deferred revenue and customer deposits +3,874 +3,382 +Current maturities of long-term debt +9,000 +6,326 +Total current liabilities +42,021 +36,588 +Long-term debt, net of current maturities +300,000 +163,484 +Sellers' Note +— +9,000 +Deferred income taxes +24,073 +13,810 +Other long-term liabilities +869 +6,572 +Total liabilities +366,963 +229,454 +Commitments and contingencies +Series A Preferred Stock; $0.001 par value— 100,000 shares authorized; 86,407 shares issued and no shares outstanding and 86,407 shares issued and 64,809 shares outstanding; liquidation preference of $0 and $256,017 at December 31, 2015 and 2014, respectively +— +58,250 +Stockholders’ deficit: +Common Stock; $0.001 par value— 100,000,000 shares authorized; 56,542,116 shares issued and outstanding and 44,840,576 shares issued and 41,371,220 shares outstanding at December 31, 2015 and 2014, respectively +56 +41 +Capital deficiency +(119,028) +(24,841) +Accumulated earnings +36,661 +5,798 +Accumulated other comprehensive loss +(4,299) +(2,584) +Employee notes receivable +— +(108) +Total stockholders’ deficit +(86,610) +(21,694) +Total liabilities and stockholders’ deficit +$ +280,353 +$ +266,010 +See accompanying notes to consolidated financial statements +F- 3 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive Incom e +(Dollars in Thousands, Except Per Share Amounts) +Year Ended December 31, +2015 +2014 +2013 +Net sales: +Products +$ +241,609 +$ +159,220 +$ +101,360 +Services +132,501 +101,786 +95,010 +Total net sales +374,110 +261,006 +196,370 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +155,516 +113,399 +66,154 +Services (exclusive of depreciation and amortization shown below) +73,111 +57,233 +63,054 +Depreciation and amortization +9,662 +8,647 +7,666 +Total cost of sales +238,289 +179,279 +136,874 +Gross profit +135,821 +81,727 +59,496 +Operating expenses: +Selling, general and administrative (exclusive of depreciation and amortization shown below) +61,116 +42,650 +29,418 +Depreciation and amortization +6,304 +4,605 +3,929 +Restructuring charges +681 +— +— +Total operating expenses +68,101 +47,255 +33,347 +Income from operations +67,720 +34,472 +26,149 +Other income (expense): +Interest, net +(18,328) +(7,508) +(7,838) +Foreign currency gain (loss) +59 +(124) +(142) +Loss on debt modification and early extinguishment +(703) +(476) +— +Other income (expense), net +359 +(101) +18 +Total other expense +(18,613) +(8,209) +(7,962) +Income before income taxes +49,107 +26,263 +18,187 +Provision for income taxes +(17,846) +(10,291) +(6,988) +Net income from continuing operations +31,261 +15,972 +11,199 +Discontinued operations: +Loss from a discontinued operation, net of taxes (Note 4) +(606) +(2,670) +(2,612) +Gain on sale of a discontinued operation, net of taxes +208 +— +— +Net income +$ +30,863 +$ +13,302 +$ +8,587 +Preferred stock dividends +(32,548) +(44,477) +(35,268) +Loss from continuing operations attributable to common stockholders +$ +(1,685) +$ +(31,175) +$ +(26,681) +Basic and diluted loss per share: +Continued operations +$ +(0.03) +$ +(0.69) +$ +(0.59) +Discontinued operation +(0.01) +(0.07) +(0.06) +$ +(0.04) +$ +(0.76) +$ +(0.65) +Comprehensive Income +Net Income +30,863 +13,302 +8,587 +Currency translation adjustment +(1,715) +(1,064) +(261) +Total comprehensive income +$ +29,148 +$ +12,238 +$ +8,326 +See accompanying notes to consolidated financial statements +F- 4 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statement s of Stockholders’ Deficit +(Dollars in Thousands, Except Share Amounts) +Accumulated +Accumulated +other +Employee +Common Shares +Capital +earnings +comprehensive +notes +Shares +Amount +deficiency +(deficit) +loss +receivable +Total +January 1, 2013 +41,268,898 +$ +41 +$ +(27,786) +$ +(16,091) +$ +(1,259) +$ +(137) +$ +(45,232) +Issuance of common stock, net of issuance costs +123,112 +— +— +— +— +— +— +Redemption of common stock +(278,058) +— +— +— +— +— +— +Repayment of employee note +— +— +— +— +— +10 +10 +Components of comprehensive income: +Net income +— +— +— +8,587 +— +— +8,587 +Currency translation adjustment +— +— +— +— +(261) +— +(261) +December 31, 2013 +41,113,952 +$ +41 +$ +(27,786) +$ +(7,504) +$ +(1,520) +$ +(127) +$ +(36,896) +Issuance of common stock, net of issuance costs +257,268 +— +2,945 +— +— +— +2,945 +Repayment of employee note +— +— +— +— +— +19 +19 +Components of comprehensive income: +Net income +— +— +— +13,302 +— +— +13,302 +Currency translation adjustment +— +— +— +— +(1,064) +— +(1,064) +December 31, 2014 +41,371,220 +$ +41 +$ +(24,841) +$ +5,798 +$ +(2,584) +$ +(108) +$ +(21,694) +Issuance of common stock upon public offering, net of offering costs +15,000,000 +15 +135,289 +— +— +— +135,304 +Shares issued under stock-based compensation plans +257,664 +— +— +— +— +— +— +Stock-based compensation +— +— +885 +— +— +— +885 +Redemption of common stock +(86,768) +— +(46) +— +— +— +(46) +Dividend distribution on Series A Preferred Stock +— +— +(230,315) +— +— +— +(230,315) +Repayment of employee note +— +— +— +— +— +108 +108 +Components of comprehensive income: +Net income +— +— +— +30,863 +— +— +30,863 +Currency translation adjustment +— +— +— +— +(1,715) +— +(1,715) +December 31, 2015 +56,542,116 +$ +56 +$ +(119,028) +$ +36,661 +$ +(4,299) +$ +— +$ +(86,610) +See accompanying notes to consolidated financial statements +F- 5 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(Dollars in Thousands) +Year Ended December 31, +2015 +2014 +2013 +Operating activities +Net income +$ +30,863 +$ +13,302 +$ +8,587 +Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: +Depreciation and amortization expense +15,995 +14,198 +14,295 +Stock-based compensation expense +9,633 +4,534 +610 +Amortization of debt issuance costs and debt discount +5,648 +591 +— +Loss on debt modification and extinguishment +703 +476 +— +Loss on sale of a discontinued operation +1,039 +— +— +Deferred income tax +10,914 +(1,433) +1,960 +Other, net +(45) +(124) +(67) +Changes in operating assets and liabilities: +Accounts receivable +(9,556) +(7,003) +4,368 +Inventories +(4,416) +(5,763) +5,705 +Prepaid expenses and other current assets +(714) +(8,473) +572 +Income taxes +(4,975) +3,061 +(1,013) +Accounts payable +1,663 +1,466 +(9,006) +Accrued expenses +915 +12,665 +(2,192) +Deferred revenue and customer deposits +699 +(772) +(197) +Other liabilities +(14,444) +(98) +— +Cash provided by operating activities +43,922 +26,627 +23,622 +Investing activities +Proceeds from sale of a discontinued operation +5,000 +— +— +Acquisition of EFT Source, Inc +— +(54,859) +— +Acquisitions of plant, equipment and leasehold improvements +(18,670) +(16,956) +(9,240) +Cash used in investing activities +(13,670) +(71,815) +(9,240) +Financing activities +Proceeds from sale of Company stock, net of issuance costs +135,304 +— +50 +Proceeds from Senior Term Loan +— +60,000 +— +Payment on Senior Term Loan +(170,929) +(11,045) +(7,122) +Proceeds from First Lien Term Loan +435,000 +— +— +Payment on First Lien Term Loan +(122,500) +— +— +Proceeds from line of credit +— +19,300 +9,750 +Payment on line of credit +— +(19,300) +(14,750) +Loan issuance costs +(17,773) +(440) +— +Proceeds from employee note receivable +108 +19 +10 +Dividend distribution on Series A Preferred Stock +(230,315) +— +— +Redemption of preferred and common stock +(58,296) +— +(48) +Cash (used in) provided by financing activities +(29,401) +48,534 +(12,110) +Effect of exchange rates on cash +(186) +(107) +37 +Net increase in cash and cash equivalents: +665 +3,239 +2,309 +Cash and cash equivalents, beginning of period +12,941 +9,702 +7,393 +Cash and cash equivalents, end of period +$ +13,606 +$ +12,941 +$ +9,702 +Supplemental disclosures of cash flow information +Cash paid during the period for: +Interest +$ +11,986 +$ +6,793 +$ +7,248 +Income taxes +$ +10,136 +$ +3,219 +$ +4,680 +See accompanying notes to consolidated financial statements +F- 6 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated) +1. Business +CPI Card Group Inc., formerly known as CPI Holdings I, Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards which the Company defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express, Discover and Interac (in Canada)) in the United States, Europe and Canada. The Company also is engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards (primarily in Europe and Canada). +As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be certified by one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers. +The Company’s business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and U.K. Limited. +· +U.S. Debit and Credit Segment. The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card - issuing banks in the United States. Products manufactured by this segment primarily include EMV and non - EMV credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands, Private Label Credit Cards, defined as credit cards that an individual merchant issues for exclusive use in its own stores, and that are not issued on the networks of the Payment Cards Brands, and instant issuance systems. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment includes the Company’s operations in Colorado, Indiana and Tennessee, which are each certified by multiple global Payment Card Brands, and where requi red by the Company’s customers, certified to be in compliance with the standards of the PCI Security Standards Council. +· +U.S. Prepaid Debit Segment. The U.S. Prepaid Debit segment primarily provides integrated card services to prepaid debit card issuers in the United States. Services provided include tamper - evident security packaging services and card personalization and fulfillment services. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper - evident security packages mentioned above. The U.S. Prepaid Debit segment includes the Company ’ s operation in Minnesota which is certified by multiple global Payment Card Brands , and is certified to be in compliance with the standards of the PCI Security Standards Council. +· +U.K. Limited Segment. The U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization , packaging and fulfillment services. The U.K. Limited segment includes the Company’s operations in Colchester, United Kingdom and Liverpool, United Kingdom. Neither of the Company’s operations in this segment is certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council. +The Company also has an operation in Ontario, Canada that provides EMV and Prepaid Debit Cards and card services in Canada, which is reflected in “Other” . See Note 19 “Segment Reporting”. +The Company applied acquisition accounting for the acquisition of EFT Source, Inc. (the “EFT Acquisition”) in accordance with Accounting Standards Codification (ASC) 805, Business Combinations . As such, the acquired assets and assumed liabilities were recorded at fair value as of the acquisition date. See Note 3 “EFT Source Acquisition”. +F- 7 +Table of Contents +The Company sold its non - secure operation located in Nevada on January 12, 2015 (the “ Nevada Sale ” ) under an asset purchase agreement for $5,000 in cash. The Nevada operation primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, the Company’s Consolidated Balance Sheets and Statements of Operations and Comprehensive Income have been reclassified to present the Nevada operation as a discontinued operation for the years ended December 31, 2015, 2014 and 2013. See Note 4 “Discontinued Operation and Disposition”. +In August 2015, the Company completed the shut down and closure of its operation in Petersfield, United Kingdom. Petersfield primarily produced retail gift cards that are not issued on networks of the Payment Card Brands. In connection with the shut down and closure of the Petersfield, United Kingdom operation, the Company accrued facility contract termination costs of $681 during the year ended December 31, 2015. +On August 17, 2015, the Company entered into a first lien credit agreement ("First Lien Credit Facility") with a syndicate of lenders providing for a $435,000 first lien term loan facility ("F irst Lien Term Loan") and a $40,000 revolving credit facility ("Revolving Credit Facility"). The Company used proceeds from the First Lien Credit Facility to pay off the outstanding balance on our p revious credit facility of $158,420 , and to redeem 62,140 shares of Series A Preferred Stock for an aggregate price of $276,688 . See Note 10 “Long-Term Debt and Credit Facility” and Note 12 “Series A Preferred Stock”. +On October 15, 2015, the Company completed its initial public offering (“IPO”) issuing 15,000,000 shares of common stock at a price of $10.00 per share. The net proceeds from the IPO, after issuance costs, were utilized to (i) redeem all of our remaining Series A Preferred Stock for a total redemption price of $11,877 , (ii) repay $112,500 of the amount outstanding under the First Lien Term Loan (as defined herein), and (iii) terminate and settle all outstanding obligations due under the Phantom Stock Plan (as defined herein) of $13, 268 . The proceeds of the IPO were net of deferred offering expenses of $7,196 and are reflected in “Capital deficiency” in the Company’s Consolidated Balance Sheet and Consolidated Statement of Stockholders’ Deficit. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements include the Company and its wholly - owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +Subsequent to the issuance of the Company’s Consolidated Financial Statements as of and for the year ended December 31, 2014, the Company identified an immaterial error in the classification of Cost of Sales between services and products. To align the Company’s presentation of Cost of Sales from services and products with the associated Net Sales from services and products, the classification has been corrected in the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2014 to decrease Cost of Sales for services by $7,819 and increase Cost of Sales for products by $7,819. +Certain other prior year amounts were reclassified to conform to the current year presentation. +Revenue Recognition +Generally, the Company recognizes revenue related to sales of its products upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectability is reasonably assured. +In certain cases, at the customer’s request, the Company enters into bill - and - hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. The Company recognizes revenue associated with bill - and - hold arrangements when the product is complete and ready to ship, hold criteria have been met, the amount due from the customer is fixed and collectability of the related receivable is reasonably assured. +Freight revenue totaling $ 3,882 , $4,249 , $4,278 is included in net sales during the years ended December 31, 2015, 2014, and 2013, respectively. The related freight costs are included in cost of sales. +F- 8 +Table of Contents +Multiple - Element Arrangements +The Company enters into warehouse, fulfillment and distribution service agreements where customers engage the Company to store and handle completed cards and packages on their behalf. For the sales arrangements that contain multiple deliverables, the arrangement is split into separate units of accounting, and individually delivered elements have value to the customer on a standalone basis. When separate units of accounting exist, revenue is allocated to each element based on the Company’s best estimate of competitive market prices. At the point in which completed cards and packages are shipped to the Company’s warehouse, the product is billed and the revenue is recognized in accordance with the Company’s revenue recognition policy. Warehousing services revenue is recognized monthly based on volume and handling requirements; fulfillment services revenue is recognized when the product is handled in the manner specified by the customer for a unit or handling fee. +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it becomes probable collection will not occur. The allowance for bad debt and credit activity for the years ended December 31, 2015 and 2014 is summarized as follows: +Balance as of December 31, 2013 +$ +1,365 +Bad debt expense +(100) +Write-off of uncollectible accounts +(986) +Currency translation adjustments +(7) +Balance as of December 31, 2014 +$ +272 +Bad debt expense +28 +Write-off of uncollectible accounts +(81) +Currency translation adjustments +(7) +Balance as of December 31, 2015 +$ +212 +For the year ended December 31, 2015, the Company did not have sales to a single customer that exceeded 10% of consolidated net sales. For the year ended December 31, 2014, the Company had sales to a single customer of $29,523 (11.3% of consolidated net sales), and the Company had sales to a different customer for the year ended December 31, 2013 of $31,924 (16.3% of consolidated net sales). +Inventories +Inventories consist of raw materials, work - in - process and finished goods and are valued at the lower - of - cost (determined on the first - in, first - out or specific identification basis) or market. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight - line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for equipment, furniture and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. For the Company’s continuing operations, amounts charged to expense for the depreciation of plant, equipment and leasehold improvements were $11, 389 , $10,359 , and $9,560 for the years ended December 31, 2015, 2014 and 2013, respectively. +Long - lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such +F- 9 +Table of Contents +reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write - down to fair value is required. Based upon the Company ’ s analysis, it concluded that there was no impairment of its long - lived assets for the years ended December 31, 2015, 2014, and 2013. +Goodwill and Intangible Assets +Goodwill and other indefinite - lived intangible assets are not amortized, but instead are tested for impairment at least annually on October 1. Testing is done in accordance with ASC 350, Intangibles—Goodwill and Other and ASC 820, Fair Value Measurements and Disclosures . For impairment evaluations, the Company or a third - party firm first makes a qualitative assessment with respect to both goodwill and other indefinite - lived intangibles. In the case of goodwill, if it is more likely than not that a reporting unit’s fair value is less than its carrying value, the fair value of the reporting unit is compared to its respective carrying amount. If the carrying value of a reporting unit were to exceed its fair value, any excess of the carrying amount over the fair value would be charged to operations as an impairment loss. With respect to indefinite - lived intangible assets, if it is more - likely - than - not that the fair value of an indefinite - lived intangible asset is less than its carrying value, any excess of the carrying value over the fair value of the indefinite - lived intangible asset is also charged to operations as an impairment loss. +For the years ended December 31, 2015, 2014 and 2013 the Company determined goodwill and other indefinite - lived intangibles were not impaired. As of December 31, 2015 and 2014, $6,352 and $24,377 of goodwill was tax - deductible, respectively. +Acquired finite - lived intangible assets are amortized on a straight - line basis over the estimated useful lives of the assets. Acquired indefinite - lived intangible assets related to trademarks are capitalized and subject to impairment. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s provision for income taxes in the period in which this determination is made. +The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of provision for income taxes. +Stock - Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 17 “Stock Option Plans” for additional discussion regarding details of the Company's stock-based compensation plans. +Advertising Costs +Advertising costs are expensed as incurred. Advertising costs during the years ended December 31, 2015, 2014 and 2013 were $764 , $392 , and $144 , respectively. +F- 10 +Table of Contents +Use of Estimates +Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, inventories, deferred taxes, and valuation of stock - based awards. Actual results could differ from those estimates. +Foreign Currency Translation +Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted - average exchange rate for each reporting period for revenues, expenses, gains and losses. Translation adjustments are recorded as a component of Other Comprehensive Income in the accompanying financial statements. +Foreign currency transaction gains and losses resulting from the process of re - measurement are recorded in “Foreign currency gain (loss)” in the accompanying Consolidated Statements of Operations and Comprehensive Income. For the years ended December 31, 2015, 2014 and 2013 there were $59 , $(124) , and $(142) of such foreign currency gains (losses), respectively. +Recently Issued Accounting Pronouncements +The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers , in May 2014. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09 as of January 1, 2018. The Company is in the process of determining the method of adoption and assessing the impact of ASU 2014-09 on its results of operations, financial position and consolidated financial statements. +The FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs , in April 2015. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The new standard is effective for public entities annual reporting periods beginning after December 15, 2015. Early adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not been previously issued. The Company adopted this standard in 2015. Accordingly, the Company recorded a reduction of $8,041 to “Long-term debt” in the Company’s Consolidated Balance Sheet as of December 31, 2015, and reclassified $614 from “Capitalized loan fees” to “Long-term debt” in the Company’s Consolidated Balance Sheet as of December 31, 2014. +In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes . ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016, with early adoption permitted, and the guidance may be applied either prospectively or retrospectively. The Company has elected to early adopt this standard in 2015 prospectively. The impact to the Company’s Consolidated Balance Sheet was immaterial. +The FASB issued ASU 2015-11, Inventory— Simplifying the Measurement of Inventory , in July 2015. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016. The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company is in the process of assessing the impact of ASU 2015-11 on its results of operations, financial position and consolidated financial statements. +F- 11 +Table of Contents +In February 2016, the FASB issued ASU 2016-02, Leases , which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements. +3. EFT Source Acquisition +On September 2, 2014, CPI Card Group Inc., through its wholly - owned subsidiary, CPI Acquisition, Inc., purchased EFT Source, Inc. (“EFT Source”) headquartered in Nashville, Tennessee. EFT Source is a provider of Financial Payment Card services such as data personalization and fulfillment in the U.S. market. The primary reasons for the acquisition were to extend the Company’s existing product lines, expand its markets and increase revenue. +Purchase Price +Total consideration for the EFT Acquisition of $68,859 was paid in cash of $54,859 , a note payable to the previous owners of EFT Source, payable on September 2, 2016 (“Sellers Note”) of $9,000 and the issuance of $5,000 of CPI Card Group Inc. preferred and common stock. +Allocation of Purchase Price +The EFT Acquisition was accounted for in accordance with ASC 805, Business Combinations . As such, the acquired assets and assumed liabilities have been recorded at their estimated acquisition date fair values. +The allocation of purchase price to the assets acquired and liabilities assumed at the EFT Acquisition date is presented below: +Cash and cash equivalents +$ +381 +Accounts receivable +5,837 +Inventory +1,724 +Prepaid expenses +1,426 +Other current assets +645 +Property, equipment and leasehold improvements +6,460 +Goodwill +33,619 +Intangible assets subject to amortization (a) +31,100 +Trademarks (indefinite-lived) +4,400 +Other assets +13 +Deferred tax liability +(14,751) +Other current liabilities +(1,995) +Total purchase price +$ +68,859 +(a) +Amounts primarily include intangible assets related to customer relationships. At September 2, 2014, the weighted average useful life of EFT Source customer relationships was 15 years. +The fair value of the intangible assets acquired was primarily determined based upon the present value of expected future cash flows, utilizing a risk - adjusted discount rate. The customer relationships were valued based on a “ multi - period excess earnings approach. ” The “ multi - period excess earnings approach ” measures an asset’s value as the present value of cash flows generated by the asset adjusted for contributory charges for other assets which contribute to the cash flows. The non - compete agreements were valued based on a “ with and without ” approach. The “ with and without ” method measures an asset value by estimating the difference in cash flows generated by the business with the asset in - use versus without the asset. The difference in cash flows is attributable to incremental earnings or cost savings associated with the asset. The trademark and trade names were valued based on a “relief from royalty” approach. The “relief from royalty” method is based on the premise that a third party would be willing to pay a royalty to use the trade name or trademark asset owned by the subject company. The projected royalties are converted into their present value equivalents through the application of a risk adjusted discount rate. +F- 12 +Table of Contents +The Company recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is not deductible for tax purposes. The goodwill of $33,619 related to the EFT Acquisition, is attributable to current and future market share and assembled workforce, +The assets and liabilities assumed in the acquisition and the results of EFT Source operations were included in the Company’s Consolidated Financial Statements as of September 2, 2014. +Pro Forma Information +The following unaudited pro forma consolidated operating results give effect to the EFT Acquisition as if it had been completed on January 1, 2013. These pro forma amounts are not necessarily indicative of the operating results that would have occurred if these transactions had occurred on such date. The pro forma adjustments are based on certain assumptions that the Company considers to be reasonable. +December 31, +2014 +2013 +Revenue—Continuing Operations +$ +291,302 +$ +233,360 +Net Income—Continuing Operations +16,916 +10,186 +Basic and Diluted Loss Per Share from Continuing Operations +$ +(0.67) +$ +(0.60) +The Company’s Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2014 includes revenue and net income from operations of $21,999 and $4,446 respectively, attributable to EFT Source. +4. Discontinued Operation and Disposition +On January 12, 2015, the Company sold its Nevada non - secure operation under an asset purchase agreement for $5,000 in cash. The Nevada operation was primarily engaged in the design, production, data personalization, packaging and daily fulfillment of retail gift and loyalty cards for customers in the United States and was not certified by any of the Payment Card Brands. The net carrying values of the assets classified as a discontinued operation include inventory and plant, equipment and leasehold improvements of $3,129 and $2,910 respectively. The Company recognized a gain on the sale of discontinued operations of $208 , which is included in “Gain on sale of a discontinued operation”, net of an income tax benefit of $1, 247 in the Company’s Consolidated Statement of Operations and Comprehensive Income. +During the years ended December 31, 2015, 2014 and 2013, the Nevada operation recognized losses of $606 , $2,670 and $2,612 , respectively, included in “Loss from a discontinued operation”, net of income tax benefits of $404 , $1,421 and $1,398 in the Company’s Consolidated Statements of Operations and Comprehensive Income. +After the Nevada Sale, CPI retained no continuing involvement in the Nevada operations other than a 180 day transition of services agreement, which expired on July 11, 2015. As a result of the Nevada Sale, the Company expects to take a tax deduction of $32,128 related to the tax deductible goodwill and intangible assets of the Nevada operations, of which $4,190 of the tax deductible goodwill resulted in the recognition of an income tax benefit of $1,510 during the year ended December 31, 2015. +5. Inventories +Inventories are summarized below: +December 31, +2015 +2014 +Raw materials +$ +10,549 +$ +10,217 +Work-in-process +11,460 +8,222 +Finished goods +3,631 +3,166 +$ +25,640 +$ +21,605 +F- 13 +Table of Contents +6. Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements consist of the following: +December 31, +2015 +2014 +Buildings +$ +2,565 +$ +2,486 +Machinery and equipment +57,482 +47,792 +Furniture and fixtures +4,440 +4,203 +Leasehold improvements +15,856 +12,593 +Construction in progress +2,373 +3,448 +82,716 +70,522 +Less accumulated depreciation and amortization +(30,603) +(25,750) +$ +52,113 +$ +44,772 +7. Goodwill and Other Intangible Assets +The Company’s goodwill at December 31, 2015 and 2014 relates to the U.S. Debit and Credit and U.K. Limited reporting segments. +Goodwill activity is summarized as follows: +Balance as of January 1, 2014 +$ +40,818 +EFT Acquisition +33,619 +Currency translation +(636) +Balance as of December 31, 2014 +$ +73,801 +Currency translation +(678) +Balance as of December 31, 2015 +$ +73,123 +The Company completed its evaluation of the carrying value of goodwill as of October 1, 2015 and 2014 and determined there was no impairment to the recorded value of goodwill. In order to identify potential impairments, CPI compared the fair value of its reporting units with their carrying amounts, including goodwill. As the fair value of the reporting units exceeded their carrying amounts, the Company was not required to complete the second step of the process which would measure the amount of any impairment. +CPI’s intangible assets consist of customer relationships, technology and software, non-compete agreements, favorable leases and trademarks. Total intangible assets are being amortized over a weighted - average useful life of 16 years. Intangible amortization expense totaled $4,577 , $2,893 and $2,035 , for the years ended December 31, 2015, 2014 and 2013, respectively. +Intangible assets consist of the following: +December 31, 2015 +December 31, 2014 +Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +12 to 20 +$ +59,612 +$ +(17,747) +$ +41,865 +$ +59,871 +$ +(14,304) +$ +45,567 +Technology and software +7 to 10 +7,101 +(1,238) +5,863 +7,101 +(310) +6,791 +Noncompete agreements +5 to 8 +491 +(270) +221 +491 +(198) +293 +Favorable leases +9.5 +111 +(101) +10 +111 +(88) +23 +Intangible assets subject to amortization +67,315 +(19,356) +47,959 +67,574 +(14,900) +52,674 +Trademarks (indefinite-lived) +6,029 +— +6,029 +6,029 +— +6,029 +$ +73,344 +$ +(19,356) +$ +53,988 +$ +73,603 +$ +(14,900) +$ +58,703 +F- 14 +Table of Contents +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2015 is as follows: +2016 +$ +4,572 +2017 +4,561 +2018 +4,548 +2019 +4,548 +2020 +4,548 +Thereafter +25,182 +$ +47,959 +8. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +· +Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +· +Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +· +Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +The Company’s financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows: +Fair Value Measurement at +Fair Value as of +December 31, 2015 +December 31, +(Using Fair Value Hierarchy) +2015 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +309,375 +$ +— +$ +309,375 +$ +— +Sellers Note +$ +9,000 +$ +— +$ +— +$ +9,000 +Fair Value Measurement at +Fair Value as of +December 31, 2014 +December 31, +(Using Fair Value Hierarchy) +2014 +Level 1 +Level 2 +Level 3 +Liabilities: +Senior Term Loan dated September 2, 2014 +$ +170,866 +$ +— +$ +170,866 +$ +— +Sellers Note +$ +9,000 +$ +— +$ +— +$ +9,000 +The fair value measurements associated with the EFT Acquisition are based on significant unobservable Level 3 inputs, which require significant management judgment and estimation (see Note 3 “EFT Source Acquisition” for additional information). A discount rate of 11.9% was utilized in determining the fair value of acquired customer relationship intangible assets related to the EFT Acquisition. +The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities. The aggregate fair value of the Company's First Lien Term Loan was based on bank quotes. The fair value of the Sellers’ N ote approximates its carrying value as market interest rates have not changed signi ficantly from its date of issuance. +F- 15 +Table of Contents +The carrying value of the Senior Term Loan dated September 2, 2014 on December 31, 2014, approximates the fair value based on the Company’s floating rate note which did not change significantly from the amended and restated Credit Agreement of September 2, 2014. +9. Related - Party Transactions +The Company leases its operating facility in Indiana from an entity that is owned by a stockholder, who was a member of the Company’s Board of Directors until August 7, 2015. The lease expires in January 2018 and requires the Company to pay property taxes, insurance and normal maintenance costs. The Company paid rent of $108 from January 1, 2015 through August 7, 2015, the date on which the former member of the Company’s Board of Directors resigned, and was therefore no longer considered a related party. During each of the years ended December 31, 2014 and 2013, the Company paid rent of $175 . +In conjunction with certain officer and non - officer Company employees acquiring Series A Preferred and Common Stock during 2013 and 2012, the Company obtained notes receivable from the employees that were paid in full on August 17, 2015 and are no longer outstanding as of December 31, 2015. See Note 13 “Stockholders’ Equity” for further discussion. +10. Long - Term Debt and Credit Facility +Long - term debt consists of the following: +Interest +December 31, +December 31, +Rate +2015 +2014 +First Lien Term Loan (a) +5.50% +$ +312,500 +$ +— +Senior term loan dated September 2, 2014 (b) +3.91% +— +170,866 +Sellers Note (a) +5.00% +9,000 +9,000 +Unamortized discount +(4,459) +(442) +Unamortized deferred financing costs +(8,041) +(614) +Total long-term debt +309,000 +178,810 +Less current maturities +(9,000) +(6,326) +Long-term debt, net of current maturities +$ +300,000 +$ +172,484 +(a) +Interest rate on December 31, 2015 +(b) +Interest rate on December 31, 2014 +First Lien Credit Facility +On August 17, 2015, the Company entered into the First Lien Credit Facility with a syndicate of lenders providing for the $435,000 First Lien Term Loan and the $40,000 Revolving Credit Facility. The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively. +The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company's assets constituting equipment, inventory, receivables, cash and other tangible and intangible property. +Interest rates under the First Lien Credit Facility are based, at the Company's election, on a Eurodollar rate , subject to an interest rate floor of 1.0% , plus a margin of 4.50% or a base rate plus a margin of 3.50% . Letters of credit are subject to a 0.125% fronting fee payable to the issuing bank and a fee payable to the revolving lenders equal to the margin applicable to Eurodollar revolving loans. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company's total net leverage ratio declines. +The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity +F- 16 +Table of Contents +holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company's assets and affiliate transactions. The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including the completion of a qualified initial public offering, and based on an annual Excess Cash Flow calculation, pursuant to the terms of the agreement, beginning as of the year ended December 31, 2016, with any payments due after the issuance of the Company’s annual financial statements in 2017. The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage not in excess of 7.0 times. +In accordance with the terms of the First Lien Credit Facility, the Company repaid $112,500 of the First Lien Term Loan on October 15, 2015 in conjunction with the completion of its initial public offering ("IPO"), and an additional $10,000 during the fourth quarter of 2015. See Note 1 “Business”. The Company recognized additional interest expense of $4,687 during the year ended December 31, 2015 related to accelerated amortization of deferred financing costs and discount in connection with these repayments. +As of December 31, 2015, the Company did not have any outstanding amounts under the Revolving Credit Facility. +Senior Term Loan dated September 2, 2014 +At December 31, 2015, there were no amounts outstanding on the Senior Term Loan dated November 8, 2012, and amended September 2, 2014, and the related revolver with a maturity of September 30, 2016. The outstanding balance of $158,420 on the Senior Term Loan was repaid in full on August 17, 2015 using a portion of the proceeds from the new $435,000 First Lien Term Loan. In conjunction with the repayment of the Senior Term Loan, the Company recognized a $703 loss on early extinguishment related to the unamortized deferred financing costs and discount on the Senior Term Loan in “Loss on debt modification and early extinguishment” in the Consolidated Statement of Operations and Comprehensive Income . The Company accounted for the debt refinancing in accordance with ASC 470 - 50 - 40 - 6, Modifications and Exchanges. +In conjunction with the Company’s initial refinancing of Senior Term Loan on September 2, 2014, the Company recognized a $476 loss on extinguishment reflected in “Loss on debt modification and early extinguishment” in the Consolidated Statement of Operations and Comprehensive Income. The primary purpose of this refinancing was to finance the cash portion of the acquisition consideration of EFT Source. Refer to Note 3 “EFT Source Acquisition” for additional information. +Sellers Note +The Company entered into a subordinated, unsecured promissory note for $9,000 with certain sellers of EFT Source as part of the EFT Source acquisition. Interest on the Sellers Note accrues at 5.0% per annum and is paid quarterly. The Sellers Note principal and unpaid interest is due at the earlier of September 2, 2016 or with the occurrence of certain specific events as outlined in the Sellers Note. The Sellers Note is included in “Current maturities of long-term debt” at December 31, 2015, as the maturity date of the loan is within twelve months from December 31, 2015. +Letters of Credit +As of December 31, 2015, the Company has two outstanding letters of credit for the security deposits on two real property lease agreements. These letters of credit are for a total of $100 , reducing the borrowing capacity under the Revolving Credit Facility to $39,900 . The Company pays a fee on the outstanding letters of credit at the applicable margin, which was 4.50% as of December 31, 2015, in addition to a fronting fee of 0.125% per annum. +Deferred Financing Costs +Certain costs incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective - interest rate method. +F- 17 +Table of Contents +Maturities of long - term debt as of December 31, 2015 consist of the following: +Year ending December 31: +2016 +$ +9,000 +2017 +— +2018 +— +2019 +— +2020 +— +Thereafter +312,500 +$ +321,500 +11. Income Taxes +Income tax expense from continuing operations and effective income tax rates consist of the following: +December 31, +2015 +2014 +2013 +Current taxes: +Domestic +$ +16,036 +$ +8,424 +$ +4,982 +Foreign +254 +— +6 +16,290 +8,424 +4,988 +Deferred taxes: +Domestic +1,656 +2,238 +2,347 +Foreign +(100) +(371) +(347) +1,556 +1,867 +2,000 +Provision for income taxes +$ +17,846 +$ +10,291 +$ +6,988 +Income before income taxes +Domestic +$ +50,692 +$ +27,984 +$ +19,954 +Foreign +(1,585) +(1,721) +(1,767) +Total +$ +49,107 +$ +26,263 +$ +18,187 +Effective income tax rate +36.3 +% +39.1 +% +38.4 +% +The effective income tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2015 +2014 +2013 +Tax at federal statutory rate +35.0 +% +35.0 +% +34.0 +% +Permanent differences +(1.6) +(2.9) +(1.7) +State income taxes +2.0 +3.1 +4.8 +Foreign taxes +0.3 +2.5 +(1.6) +Other +0.6 +1.4 +2.9 +Effective income tax rate +36.3 +% +39.1 +% +38.4 +% +F- 18 +Table of Contents +The components of the deferred tax assets and liabilities are as follows: +December 31, +2015 +2014 +Deferred tax assets: +Allowance for doubtful accounts +$ +28 +$ +65 +Inventory valuation +279 +607 +Accrued expense +927 +372 +Unrealized foreign exchange loss +652 +634 +Net operating loss carryforward +1,999 +2,148 +Goodwill +— +2,159 +Deferred financing costs +1,564 +— +Asset retirement obligation +179 +292 +Stock compensation +322 +1,853 +Total gross deferred tax assets +5,950 +8,130 +Valuation allowance +(3,717) +(4,120) +Net deferred tax assets +2,233 +4,010 +Deferred tax liabilities: +Plant, property and leasehold improvements +(5,881) +(4,238) +Intangibles +(18,962) +(11,903) +Prepaid expense +(1,463) +(1,045) +Total gross deferred tax liabilities +(26,306) +(17,186) +Net deferred tax liabilities +$ +(24,073) +$ +(13,176) +The net deferred tax assets and liabilities are reflected in the consolidated balance sheets as follows: +December 31, +2015 +2014 +Current deferred tax assets +$ +— +$ +634 +Long-term deferred tax liabilities +(24,073) +(13,810) +Net deferred tax (liabilities) +$ +(24,073) +$ +(13,176) +The net change in the valuation allowance was a decrease of $403 and an increase $678 for the years ended December 31, 2015 and 2014, respectively. The change in the year ended December 31, 2015 related to foreign currency exchange rate fluctuations, partially offset by a change in net operating losses of foreign locations,. The change in the year ended December 31, 2014 related to net operating losses of a foreign location. +The Company has potential tax benefits associated with $1,999 of foreign operating loss carryforwards, which expire at various dates from 2024 through 2033. Due to the uncertainty of being able to recognize these loss carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit. +At December 31, 2015, no provision has been made for U.S. federal and state taxes on cumulative foreign earnings from CPI Card Group-Europe Limited operations of approximately $2, 707 , which are expected to be indefinitely reinvested outside of the U.S. T he U.S. deferred tax liability associated with indefinitely reinvested earnings and profits is not material . +The Company has analyzed its filing positions in all of the jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions, and based upon its review, determined there are no uncertain tax positions as of December 31, 2015 and 2014. +The Company is generally subject to potential federal and state examinations for the tax years after December 31, 2010 for federal purposes and December 31, 2009 for state purposes. +F- 19 +Table of Contents +12. Series A Preferred Stock +Series A Preferred Stock has a par value of $0.001 per share. The original Series A Preferred Stock has an initial liquidation preference equal to $1,000 per outstanding share. In addition, the Series A Preferred Stock liquidation preference earns a dividend of 20% per share per annum, payable when declared by the Board of Directors. Such dividends accrue on each share from the date of original issuance and accrue on a daily basis, whether or not declared. Such dividends are cumulative so that if such dividend in respect of any previous or current annual dividend period, at the annual 20% rate, has not been paid, the deficiency shall first be fully paid before any dividend or other distribution shall be paid or declared and set apart for the Common Stock. In the event of any liquidation, dissolution, or winding up of the Company, the Series A Preferred Stock holders shall be entitled to receive, prior and in preference to any distributions of any of the Company’s assets to the Common Stock holders, the value of the liquidation preference. If the distribution of such assets is insufficient to permit the payment to such holders, the distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the amount of such stock owned by each holder. The Series A Preferred Stock had no voting rights. +During the year ended December 31, 2015, the Company redeemed a total of 64,809 shares of Series A Preferred Stock at prices ranging between $3,950.33 and $4,610.68 per share, including the redemption of 62,140 shares of the Series A Preferred Stock for $276,688 , or $4,446.70 per share, on August 17, 2015 with proceeds from the Company’s First Lien Credit Facility (see Note 10 “Long-Term Debt and Credit Facility”), and the redemption of 2,576 shares of the Series A Preferred Stock for $11,877 , or $4,610.68 per share, using proceeds from the Company’s IPO (see Note 1 “Business”). Of the $288,565 redemption amount during the year ended December 31, 2015, $58,250 was treated as a return of capital and $230,315 was treated as a dividend. There were no outstanding shares of Series A Preferred Stock as of December 31, 2015. +During the year ended December 31, 2014, the Company issued 549 shares of Series A Preferred Stock at an estimated value of $3,733.88 per share as part of the payment consideration for the EFT Acquisition. The Company did not redeem any shares of Series A Preferred Stock during the year ended December 31, 2014. +13. Stockholders’ Equity +Common Stock +Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. +On September 3, 2015, the Company's Board of Directors approved a 22-for-1 stock split of our common stock and increased the number of authorized shares of common stock to 100,000,000 . Upon the effective date of the stock split, each outstanding share of common stock and restricted common stock was divided into 22 shares of common stock or restricted common stock, as applicable. Shares of common stock available for issuance under the 2007 Stock Option Plan were increased accordingly. All of the share numbers, share prices and exercise prices have been retroactively adjusted to reflect the stock split in the Consolidated Financial Statements and these notes. +On October 15, 2015, the Company completed its IPO issuing 15,000,000 shares of common stock at a price of $10.00 per share. The net proceeds from the IPO, after issuance costs, were utilized to (i) redeem all of our remaining Series A Preferred Stock for a total redemption price of $11,877 (see Note 12 “Series A Preferred Stock”), (ii) repay $112,500 of the amount outstanding under the First Lien Term Loan (see Note 10 “Long-Term Debt”), and (iii) terminate and settle all outstanding obligations due under the Phantom Stock Plan of $ 13,268 (see Note 18 “Phantom Stock Plan”). The proceeds of the IPO were net of deferred offering expenses of $7,196 and are reflected in “Capital deficiency” in the Company’s Consolidated Balance Sheets. +F- 20 +Table of Contents +Employee Notes Receivable +Included in “Stockholders’ Deficit” in the Consolidated Balance Sheets are promissory notes received in connection with equity issuances of Series A Preferred Stock and Common Stock to certain employees made during 2011 and earlier years. The notes receivable accrued interest at 5% per annum and were paid in bimonthly installments. The principal balances of the notes were due upon the employee’s termination, the sale of the Company, upon any distributions, or at such time that the employee failed to own the underlying shares. +During the years ended December 31, 2015, 2014 and 2013, the Company did not issue any new Employee notes, and $108, $19 and $10 of employee notes were repaid, respectively. As of December 31, 2015 there were no outstanding employee notes receivable, as they were all repaid during the year. As of December 31, 2014, $108 of employee notes receivable were outstanding. +14. Earnings per Share +Basic or diluted earnings (loss) per share is computed by dividing net earnings or loss by the weighted-average number of ordinary shares outstanding during the period. +The following table sets forth the computation of basic and diluted EPS attributable to continuing and discontinued operations: +December 31, +2015 +2014 +2013 +Numerator: +Net income from continuing operations +$ +31,261 +$ +15,972 +$ +11,199 +Preferred stock dividends +(32,548) +(44,477) +(35,268) +Loss from continuing operations attributable to common stockholders +(1,287) +(28,505) +(24,069) +Loss from a discontinued operation, net of taxes +(398) +(2,670) +(2,612) +Net loss attributable to common stockholders +$ +(1,685) +$ +(31,175) +$ +(26,681) +Denominator: +Basic EPS—weighted average common shares outstanding +44,816,263 +41,199,246 +41,072,350 +Diluted EPS—weighted average common shares outstanding +44,816,263 +41,199,246 +41,072,350 +Basic and Diluted EPS: +Loss from continuing operations +$ +(0.03) +$ +(0.69) +$ +(0.59) +Loss from a discontinued operation, net of taxes +(0.01) +(0.07) +(0.06) +Net loss +$ +(0.04) +$ +(0.76) +$ +(0.65) +The potentially dilutive effect of the outstanding stock options of 1,257,450 , 627,000 and 649,000 shares as of December 31, 2015, 2014 and 2013, respectively, have been excluded from the weighted average number of shares of common stock outstanding as their inclusion would be antidilutive. As further described in Note 1 “Business”, the cumulative dividends in arrears related to Series A Preferred Stock were paid in conjunction with the Company’s IPO. As of December 31, 2014, cumulative dividends in arrears related to the Series A Preferred Stock in aggregate was $191,208 . +15. Commitments and Contingencies +Commitments +The Company leases real property for its facilities under noncancelable operating lease agreements. Land and facility leases expire at various dates between 2016 and 2023 and contain various provisions for rental adjustments and renewals. All of these leases require the Company to pay property taxes, insurance and normal maintenance costs. +During the normal course of business, the Company also enters into non - cancellable agreements to purchase goods and services, including production equipment and information technology systems. +F- 21 +Table of Contents +Future cash payments with respect to operating leases and purchase obligations as of December 31, 2015 are as follows: +Operating +Purchase +Leases +Obligations +2016 +$ +4,309 +$ +3,047 +2017 +3,745 +— +2018 +2,426 +— +2019 +1,327 +— +2020 +948 +— +Thereafter +1,021 +— +Total +$ +13,776 +$ +3,047 +The Company incurred rent expense under non - cancellable operating leases during the years ended December 31, 2015, 2014 and 2013, totaling $3,518 , $3,320 and $3,096 , respectively. +Asset retirement obligations relate to legal obligations associated with the removal of all leasehold improvements at the end of the lease term. The Company records all asset retirement obligations, which primarily relate to “make - good ” clauses in operating leases, for its leased property containing leasehold improvements. The liability, reported within other long - term liabilities, is accreted through charges to operating expenses. If the asset retirement obligation is settled for an amount other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement. The Company incurred accretion expense during the years ended December 31, 2015, 2014 and 2013 totaling $29 , $53 and $55 , respectively. As of December 31, 2015 and 2014, the Company’s asset retirement obligations included in “Other long - term liabilities” in the Consolidated Balance Sheets were $613 and $911 , respectively. +Contingencies +In October 2015, Gemalto S.A. filed a suit alleging that the Company infringes on a Gemalto patent by incorporating microchips into the Company’s products. Gemalto’s patent will expire in 2017. Discovery and motion practice is ongoing. The Company believes Gemalto’s claims are without merit and it has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend the suit vigorously. Due to the current stage of the matter, the Company has concluded the risk of loss is not reasonably possible or estimable and no accrual has been recognized as of December 31, 2015. +In addition to the matter described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. +16. Employee Benefit Plan +The Company maintains a qualified defined - contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment accounts. The Company matches 100% of the participant’s first 3% of deferrals and 50% of the next 2% deferral percentage. The Company’s portion is 100% vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $1,049 , $824 and $908 for the years ended December 31, 2015, 2014 and 2013, respectively. +F- 22 +Table of Contents +17. Stock Option Plans +CPI Card Group Inc. Omnibus Plan +In conjunction with the completion of the IPO, the Company adopted the Omnibus Plan pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company has reserved 4,000,000 shares of common stock for issuance under the Omnibus Plan. During the year ended December 31, 2015, the Company granted awards of stock options for 795,450 shares of common stock at an exercise price of $10 per share, including 770,450 options granted in connection with the IPO. The options will generally vest 33.4% , 33.3% , and 33.3% on the second, third and fourth anniversary dates following the grant date. +Outstanding and exercisable stock options under the Omnibus Plan are as follows: +Weighted- +Weighted- +Average +Average +Remaining +Exercise +Contractual Term +Options +Price +(in Years) +Outstanding as of December 31, 2014 +— +$ +— +— +Granted +795,450 +10.00 +10.00 +Forfeited +— +— +— +Outstanding as of December 31, 2015 +795,450 +$ +10.00 +9.80 +Unvested options as of December 31, 2015, vest as follows: +2016 +— +2017 +265,150 +2018 +265,150 +2019 +265,150 +Total unvested options as of December 31, 2015 +795,450 +Compensation expense for the Omnibus Plan for the year ended December 31, 2015 was $239 . As of December 31, 2015, the total unrecognized compensation expense related to unvested options was $2,470 , which the Company expects to recognize over an estimated weighted average period of 2.8 years. The aggregate intrinsic value of stock option awards outstanding under the Omnibus Plan as of December 31, 2015 was $525 . +The fair value of the stock options granted under the Omnibus Plan was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions: +Year +ended +December +31, 2015 +Expected term in years +6.5 +Volatility +36.7 +% +Risk-free interest rate +1.8 +% +Dividend yield +1.3 +% +Expected term – The Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. +Volatility – The expected volatility percentage of 36.7% was based on a peer group average historical volatility over the expected option term. The peer group was based on financial technology companies that completed an initial public offering of common stock from 2007 through 2014. +F- 23 +Table of Contents +Risk-free interest rate – The risk-free interest rate of 1.8% was determined by using the United States Treasury rate for the period that coincided with the expected option term described above. +Dividend yield – The Company’s expected annual dividend yield in the current year was determined based on an estimated annual dividend divided by the expected share price for the Company’s common stock on the initial public offering date. +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan +In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options and restricted stock awards may be granted to employees, directors, and consultants at an exercise price greater than or equal to the fair market value of a share on the date the option is granted. +As a result of the Company’s adoption of its Omnibus Plan in conjunction with its IPO, as further described above, no further awards will be made under the Option Plan. The outstanding stock options have a 10 -year life and vest, as noted, in each respective grant letter. All stock options are nonqualified. +Outstanding and exercisable stock options under the Option Plan are as follows: +Weighted- +Weighted- +Average +Average +Remaining +Exercise +Contractual Term +Options +Price +(in Years) +Outstanding as of January 1, 2013 +528,000 +$ +0.0004 +7.48 +Granted +165,000 +0.0005 +Forfeited +(44,000) +0.0005 +Outstanding as of December 31, 2013 +649,000 +$ +0.0004 +7.35 +Forfeited +(22,000) +0.0001 +Outstanding as of December 31, 2014 +627,000 +$ +0.0004 +6.44 +Exercised +(66,000) +0.0005 +Forfeited +(99,000) +0.0003 +Outstanding as of December 31, 2015 +462,000 +$ +0.0003 +5.57 +Exercisable as of December 31, 2015 +421,667 +$ +0.0004 +5.48 +Unvested options as of December 31, 2015 vest as follows: +2016 +40,333 +Total +40,333 +Compensation expense and unrecorded compensation expense related to options previously granted under the Option Plan, for the years ended December 31, 2015, 2014 and 2013, were de minimis . The aggregate intrinsic value of stock option awards outstanding and exercisable under the Option Plan as of December 31, 2015 was $4,925 and $4 ,495 , respectively . +During the year ended December 31, 2015, the Company issued 191,664 restricted shares of common stock to executives of the Company. The awards contain conditions associated with continued employment or service. The terms of the non-vested restricted shares of common stock provide voting and regular dividend rights to the holders of the restricted shares of common stock, and accordingly are included in weighted-average shares outstanding in the Company’s basic earnings per share calculation. See Note 14 “Earnings per Share”. Upon vesting, the restrictions lapse and the shares are considered issued and outstanding. The restricted shares vest over one to three year periods. +F- 24 +Table of Contents +The following table summarizes the changes in the number of outstanding restricted shares of common stock for the year ended December 31, 2015: +Weighted- +Average +Grant Date +Shares +Fair Value +Outstanding as of December 31, 2014 +— +$ +— +Granted +191,664 +9.48 +Vested +— +— +Forfeited +— +— +Outstanding as of December 31, 2015 +191,664 +$ +9.48 +Total compensation expense related to the unvested restricted shares of common stock awards was $646 for the year ended December 31, 2015. As of December 31, 2015, there was $1,171 of total remaining unrecognized compensation expense related to non-vested restricted shares of common stock that will be recognized over a weighted average period of 1.24 years. +18. Phantom Stock Plan +Effective January 1, 2012, the Company’s Board of Directors adopted the CPI Acquisition, Inc. Phantom Stock Plan (“Phantom Stock Plan”) to provide incentive compensation to certain key employees. In conjunction with the Company’s IPO, the Phantom Stock Plan was terminated and all outstanding liabilities were settled under the plan. . During the year ended December 31, 2015, payments of $13,892 were made under the plan , and no liability existed as of December 31, 2015. As of December 31, 2014, the liability reported in “Other long-term liabilities” in the Consolidated Balance Sheet was $5,144 . +Under the terms of the Phantom Stock Plan, holders of an award were entitled to a cash payment equal to the difference between the fair market value of the award, as defined in the agreement, at the time of exercise and the award’s exercise price. The Company measured the liability at intrinsic value, with changes in the intrinsic value of the liability recognized as expense each year in the Consolidated Statements of Operations and Comprehensive Income. +During the years ended December 31, 2015, 2014 and 2013, the Company recognized compensation expense of $ 8,748 , $4,534 and $610 , respectively, related to this plan. +19. Segment Reporting +The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, EBITDA (as defined below), or total assets or subsidiaries which the Company believes information about the segment would be useful to the readers of the financial statements from a qualitative perspective. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures such as revenue and EBITDA. +EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available U.S. GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments. +As of December 31, 2015, the Company’s reportable segments are as follows: +· +U.S. Debit and Credit +F- 25 +Table of Contents +· +U.S. Prepaid Debit +· +U.K. Limited +The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card - issuing banks in the United States. Products manufactured by this segment primarily include EMV and non - EMV credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands, private label credit cards that are not issued on the networks of the Payment Cards Brands (including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards), and instant issuance systems. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment includes the Company’s operations in Colorado, Indiana and Tennessee, which are each certified by multiple global Payment Card Brands and, where required by the Company’s customers , certified to be in compliance with the standards of the PCI Security Standards Council. These operating segments have been aggregated into a single reportable segment due to similarities in the nature of the products and services sold by these subsidiaries, a common customer base, the substantial degree of integration and redundancy across the segments, and utilization of centrally shared sales, marketing, quality and planning departments. Separate information about these segments would not be useful to the readers of the financial statements. +The U.S. Prepaid Debit segment primarily provides integrated card services to prepaid debit card issuers in the United States. Services provided include tamper - evident security packaging services and card personalization and fulfillment services. This segment also produces financial payment cards issued on the networks of the Payment Card Brands that are included in the tamper - evident security packages mentioned above. The U.S. Prepaid Debit segment includes the Company’s operation in Minnesota which is certified by multiple global Payment Card Brands , and is certified to be in compliance with the standards of the PCI Security Standards Council. +The U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization , packaging and fulfillment services. The U.K. Limited segment includes the Company’s operations in Colchester, United Kingdom and Liverpool, United Kingdom. Neither of the Company’s operations in this segment is certified by any of the Payment Card Brands, nor are they PCI certified. +The “Other” category includes the Company’s corporate headquarters and less significant operating segments that derive their revenue from the production of Financial Payment Cards and retail gift cards in Canada (CPI—Canada) and the U.K. (CPI—Petersfield). For additional information regarding the Company’s decision to shut down the CPI—Petersfield facility during the third quarter of 2015, see Note 1 “Business”. +Performance Measures of Reportable Segments +Revenue and EBITDA of the Company’s reportable segments for the years ended December 31, 2015, 2014 and 2013 were as follows: +Revenue +EBITDA +December 31, +December 31, +2015 +2014 +2013 +2015 +2014 +2013 +U.S. Debit and Credit (a) +$ +263,668 +$ +153,015 +$ +91,626 +$ +78,981 +$ +37,547 +$ +18,871 +U.S. Prepaid Debit +65,878 +59,271 +65,895 +22,993 +18,654 +20,438 +U.K Limited +34,361 +35,163 +33,242 +3,572 +2,943 +2,801 +Other +17,420 +23,908 +24,678 +(22,145) +(12,121) +(4,491) +Intersegment eliminations (b) +(7,217) +(10,351) +(19,071) +— +— +— +Total: +$ +374,110 +$ +261,006 +$ +196,370 +$ +83,401 +$ +47,023 +$ +37,620 +(a) +Amounts for 2014 include the post - acquisition revenue and EBITDA of EFT Source from September 2, 2014 through December 31, 2014. +F- 26 +Table of Contents +(b) +Amounts include the revenue from sales between the U.S. Debit and Credit segment, U.K. Limited segment, and “Other” category and are eliminated upon consolidation. +The following table provides a reconciliation of total segment EBITDA to “Net income from continuing operations” for the years ended December 31, 2015, 2014 and 2013: +December 31, +2015 +2014 +2013 +Total segment EBITDA from continuing operations +$ +83,401 +$ +47,023 +$ +37,620 +Interest, net +(18,328) +(7,508) +(7,838) +Provision for income taxes +(17,846) +(10,291) +(6,988) +Depreciation and amortization +(15,966) +(13,252) +(11,595) +Net Income from continuing operations +$ +31,261 +$ +15,972 +$ +11,199 +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2013 and 2014 were as follows: +December 31, +2015 +2014 +U.S. Debit and Credit +$ +221,274 +$ +199,968 +U.S. Prepaid Debit +20,960 +19,395 +U.K. Limited +25,897 +29,167 +Other +12,222 +11,618 +Total continuing operations: +280,353 +260,148 +Discontinued operation (a) : +— +5,862 +Total assets: +$ +280,353 +$ +266,010 +(a) +As of December 31, 2014, certain assets of the Nevada operation sold on January 12, 2015, see Note 4 “Discontinued Operation and Disposition”, are presented in “Current assets of a discontinued operation” in the Company’s Consolidated Balance Sheet. +F- 27 +Table of Contents +Plant, Equipment and Leasehold Improvement Additions of Geographic Locations +Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the years ended December 31, 2015, 2014 and 2013 were as follows: +December 31, +2015 +2014 +2013 +U.S. +$ +19,129 +$ +15,082 +$ +9,679 +Canada +275 +32 +125 +Total North America +19,404 +15,114 +9,804 +U.K. +659 +454 +824 +Total plant, equipment and leasehold improvement additions +$ +20,063 +$ +15,568 +$ +10,628 +Net Sales of Geographic Locations +Net sales of the Company’s geographic locations for the years ended December 31, 2015, 2014 and 2013 were as follows: +December 31, +2015 +2014 +2013 +U.S. (a) +$ +316,111 +$ +196,418 +$ +135,525 +Canada +12,541 +16,133 +17,661 +Total North America +328,652 +212,551 +153,186 +U.K. +36,954 +36,682 +32,448 +Other (b) +8,504 +11,773 +10,736 +Total revenue +$ +374,110 +$ +261,006 +$ +196,370 +(a) +Amounts for 2014 include the post - acquisition net sales of EFT Source from September 2, 2014 through December 31, 2014. +(b) +Amounts in other include sales to various countries that individually are not material. +Long - Lived Assets of Geographic Segments +Long - lived assets of the Company ’ s geographic segments as of December 31, 2015 and 2014 were as follows: +December 31, +2015 +2014 +U.S. +$ +164,377 +$ +160,144 +Canada +2,254 +2,525 +Total North America: +166,631 +162,669 +U.K. +12,593 +14,607 +Total long-lived assets +$ +179,224 +$ +177,276 +Net Sales by Product and Services +Net sales from products and services sold by the Company for the years ended December 31, 2015, 2014 and 2013 were as follows: +December 31, +2015 +2014 +2013 +Product net sales (a) +$ +241,609 +$ +159,220 +$ +101,360 +Services net sales (b) +132,501 +101,786 +95,010 +Total net sales: +$ +374,110 +$ +261,006 +$ +196,370 +F- 28 +Table of Contents +(a) +Product net sales include the design and production of Financial Payment Cards, in contact EMV, d ual - i nterface EMV, contactless and magnetic stripe formats. The Company also generates product revenue from the sale of Card@Once ® instant issuance systems, Private Label Credit Cards, and retail gift cards. +(b) +Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper - evident security packaging, providing fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates service revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click - fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. +20. Quarterly Financial Information (Unaudited) +Summarized quarterly results for the years ended December 31, 2015 and 2014 were as follows: +Year Ended +December 31, +2015 by Quarter: +Q1 +Q2 +Q3 +Q4 +2015 +Net sales +$ +77,310 +$ +95,536 +$ +107,697 +$ +93,567 +$ +374,110 +Gross profit +25,508 +35,835 +43,049 +31,429 +135,821 +Income (loss) from continuing operations +5,960 +12,155 +14,760 +(1,615) +31,261 +Income (loss) from discontinued operation, net of taxes +281 +- +- +(679) +(398) +Net income (loss) +6,242 +12,155 +14,760 +(2,294) +30,863 +Preferred stock dividends +(12,611) +(12,747) +(7,096) +(94) +(32,548) +Net (loss) income attributable to common shareholders +$ +(6,369) +$ +(592) +$ +7,664 +$ +(2,388) +$ +(1,685) +Basic and diluted (loss) earnings per share: +Continuing operations +$ +(0.16) +$ +(0.02) +$ +0.19 +$ +(0.03) +$ +(0.03) +Discontinued operation +0.01 +- +- +(0.01) +(0.01) +$ +(0.15) +$ +(0.02) +$ +0.19 +$ +(0.04) +$ +(0.04) +Year Ended +December 31, +2014 by Quarter: +Q1 +Q2 +Q3 +Q4 +2014 +Net sales +$ +42,531 +$ +53,236 +$ +77,374 +$ +87,865 +$ +261,006 +Gross profit +10,244 +15,554 +26,663 +29,266 +81,727 +Income from continuing operations +496 +3,070 +6,768 +5,638 +15,972 +(Loss) income from discontinued operation, net of taxes +(1,596) +(1,167) +699 +(606) +(2,670) +Net (loss) income +(1,100) +1,903 +7,467 +5,032 +13,302 +Preferred stock dividends +(10,432) +(10,548) +(10,692) +(12,805) +(44,477) +Net loss attributable to common shareholders +$ +(11,532) +$ +(8,645) +$ +(3,225) +$ +(7,773) +$ +(31,175) +Basic and diluted (loss) earnings per share: +Continuing operations +$ +(0.24) +$ +(0.18) +$ +(0.10) +$ +(0.17) +$ +(0.69) +Discontinued operation +(0.04) +(0.03) +0.02 +(0.01) +(0.07) +$ +(0.28) +$ +(0.21) +$ +(0.08) +$ +(0.18) +$ +(0.76) +The immaterial errors further described in Note 2 “Summary of Significant Accounting Policies” resulted in an increase (decrease) to our previously reported Cost of Sales from products and an associated ( increase ) decrease to our previously reported Cost of Sales from services of $4,349, $(1,146) , and $(508) for the quarter-to-date periods ended September 30, June 30, and March 31, respectively, and $2,695, $(1,654), and $(508) for the year-to-date periods ended September 30, June 30, and March 31, 2015, respectively, and an increase (decrease) to our previously reported Cost of Sales from products and an associated ( increase ) decrease to our previously reported Cost of Sales from services of $1,124, ($806), ($1,400) for the quarter-to-date periods ended September 30, June 30, and March 31, 2014, respectively, and ($1,082), ($2,206), and ($1,400) for the year-to-date periods ended September 30, June 30, and March 31, 2014, respectively. +F- 29 +Table of Contents +21. Subsequent Events +On February 24, 2016, the Board of Directors approved a dividend of $0.045 per share. This dividend is payable on April 7, 2016, to stockholders of record as of the close of business on March 17, 2016. +On March 2, 2016, the Company granted awards of stock options and restricted stock units under the Omnibus Plan for 400,000 and 23 2,912 shares of common stock, respectively. The stock option awards have an exercise price of $10 per share and vest 33.4% on October 9, 2017, 33.3% on October 9, 2018 and 33.3% on October 9, 2019. The restricted stock unit awards contain conditions associated with continued employment or service. The restrictions lapse on the vesting date, at which time shares of common stock will be issued to the award recipients. The restricted stock unit awards have a grant date fair value of $7.91 per share and vest on March 2, 2017. +F- 30 +Table of Contents +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of December 31, 2015 due to the unremediated material weakness in our internal controls over financial reporting described below. Notwithstanding the identified material weakness, management believes the consolidated financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +Changes in Internal Control Over Financial Reporting +As previously reported on our Form S-1 effective October 8, 2015 and quarterly report on Form 10-Q for the quarter ended September 30, 2015, we have identified material weaknesses in our internal control over financial reporting related to a current lack of finance expertise that could result in a failure to properly account for non-routine and complex transactions in accordance with GAAP. With the oversight of senior management, we have taken steps to remediate the underlying causes of these material weaknesses, primarily through the development and implementation of +59 +Table of Contents +formal policies, improved processes, as well as the hiring of additional finance personnel , including the appointment of our current Chief Financial Officer in June 2015 and Chief Accounting Officer in March 2016, both of whom are certified public accountants, and are familiar with the rules and regulations applicable to public companies, including the requirements of the Sarbanes-Oxley Act, from their previous experience in substantive financial roles with other public companies. We will continue to monitor the effectiveness of these remediation efforts as we consider in future reporting periods whether such control deficiencies have been fully remediated. +Except for the continued remediation efforts described herein, there has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Informatio n +None. +60 +Table of Contents +PART II I +Item 10. Directors, Executiv e Officers and Corporate Governance +The information required by this Item is expected to be in our definitive Proxy Statement for the 2016 Annual Meeting of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended December 31, 2015 and is incorporated herein by reference. +Item 11. Executive Compensatio n +Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy Statement. +Item 12. Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement. +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. +Item 14. Principal Accountant Fees and Service s +Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement. +61 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Income +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this report, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). +62 +Table of Contents +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ David Brush +David Brush +Chief Financial Officer +March 2 4 , 2016 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint Steve Montross and David Brush, and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubsitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the 1934 Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +63 +Table of Contents +Name +Title +Date +/s/ Steven Montross +President, Chief Executive +March 2 4 , 2016 +Steven Montross +Officer and Director +(Principal Executive Officer) +/s/ David Brush +Chief Financial Officer +March 2 4 , 2016 +David Brush +(Principal Financial Officer) +/s/ Chris Bakke +Chief Accounting Officer +March 2 4 , 2016 +Chris Bakke +(Principal Accounting Officer) +/s/ Bradley Seaman +Chairman of the Board +March 2 4 , 2016 +Bradley Seaman +/s/ Diane Fulton +Director +March 2 4 , 2016 +Diane Fulton +/s/ Doug Pearce +Director +March 24 , 2016 +Doug Pearce +/s/ Nicholas Peters +Director +March 24 , 2016 +Nicholas Peters +/s/ Robert Pearce +Director +March 24 , 2016 +Robert Pearce +/s/ David Rowntree +Director +March 24 , 2016 +David Rowntree +64 +Table of Contents +INDEX TO EXHIBIT S +Exhibit No. +Exhibit Description +2.1 +Purchase and Sale Agreement, dated as of August 22, 2014, by and among William S. Dinker, Katherine S. Nevill, Bobby Smith and Tom Hedrich, William S. Dinker 2012 Trust for Edward McCullough Dinker, William S. Dinker 2012 Trust for John Walsh Dinker and William S. Dinker 2012 Trust for William S. Dinker III, EFT Source, Inc., CPI Acquisition, Inc. and William S. Dinker, as Sellers' Representative (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +3.1 +Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +3.2 +Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.1** +Employment and Non-Competition Agreement, dated April 22, 2009, between CPI Acquisition, Inc. and Steven Montross (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.2** +Employment and Non-Competition Agreement, dated October 1, 2008, between Metaca Corporation and Anna Rossetti (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.3** +Termination Letter, dated May 5, 2015 between CPI Acquisition, Inc. and Marvin Press (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.4** +CPI Card Group Inc. Omnibus Incentive Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.5** +Form of Stock Option Award Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6** +CPI Acquisition, Inc. Phantom Stock Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.7** +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.8** +Employment and Non-Competition Agreement, effective June 22, 2015, between CPI Acquisition, Inc. and David Brush (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.9 +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.10 +First Lien Credit Agreement, dated as of August 17, 2015, by and among CPI Card Group Inc., CPI Acquisition Inc., the lenders from time to time party thereto and the Bank of Nova Scotia, as Administrative Agent and Collateral Agent (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +65 +Table of Contents +10.11 +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.12 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +24.1* +Power of Attorney (included on the signature pages hereto). +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* Filed herewith. +** Management contract or compensatory plan or arrangement. +66 \ No newline at end of file diff --git a/raw/filings/0001641614/2015/0001558370-16-004343/filing_metadata.csv b/raw/filings/0001641614/2015/0001558370-16-004343/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..a557143a5fab098bad4b9f807083efb626c8bcc0 --- /dev/null +++ b/raw/filings/0001641614/2015/0001558370-16-004343/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001641614,PMTS,CPI Card Group Inc.,10-K,2016-03-24,2015-12-31,2016-03-24T12:04:39.000Z,0001558370-16-004343,pmts-20151231x10k.htm,10-K,13620039,1,0,https://www.sec.gov/Archives/edgar/data/1641614/000155837016004343/pmts-20151231x10k.htm,https://www.sec.gov/Archives/edgar/data/1641614/000155837016004343/,2015,2015,1 diff --git a/raw/filings/0001641614/2015/0001558370-16-004343/item1.txt b/raw/filings/0001641614/2015/0001558370-16-004343/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..ab62788c2aa7656bb21b8eb40bf5fd1d418d3d64 --- /dev/null +++ b/raw/filings/0001641614/2015/0001558370-16-004343/item1.txt @@ -0,0 +1,123 @@ +Item 1. Busines s +As used herein, “CPI”, “we”, “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a leading provider of comprehensive Financial Payment Card solutions in North America. We define “ Financial Payment Cards ” as credit, debit and Prepaid Debit Cards issued on the networks of the “ Payment Card Brands ” (Visa, MasterCard, American Express and Discover) and Interac (in Canada). In 201 5 , we produced over 156.6 million EMV Financial Payment Cards and provided integrated card services to over 3,250 card - issuing banks. We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this growing subsector of the financial technology market. Our customers are pri marily leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “ Group Service Providers ” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process) and card processors. We serve a diverse set of over 4,000 direct and indirect customers, including many of the largest North American issuers of debit and credit cards such as JPMorgan Chase, B ank of America and Wells Fargo, the largest global managers of Prepaid Debit Card programs, including InComm, Green Dot, Blackhawk Network and American Express, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of ten production and card services facilities, including eight high - security facilities in North America , each of which is certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the Payment Card Industry Security Standards Council (the “ PCI Security Standards Council ”) . We have the largest such network of high - security production facilities in North America, allowing us to optimize our solutions offerings to serve the needs of our diverse and long - term customer base. +We estimate that we produce approximately 35 % of all Finan cial Payment Cards in the United States, which we believe gives us the #1 market position by unit volume. We believe we have: +· +the #1 position in the U.S. prepaid debit market (which represents the fastest growing subset of the Financial Payment Card m arket in the United States), serving the top five U.S. Prepaid Debit Card program managers; +· +a leading position in the U.S. large issuer market, serving the majority of the top 20 U.S. debit and credit card issuers; and +· +the #1 position in the highly attractive U.S. small issuer market, which includes independent community banks and credit unions, driven by our strong relationships, capabilitie s and technologies. +We have grown our business significantly over the past decade, both organically and through acquisitions. Over that time period, we have completed six acquisitions, significantly increasing our geographic and market coverage, solutions offerings and capacity. On March 9, 2010, we purchased certain assets of Premier Card Solutions, a leading provider of Financial Payment Cards, data personalization services and tamper - evident security packaging for Prepaid Debit Cards that utilize the payment networks of the Payment Card Brands. The Premier Card Solutions transaction significantly enhanced our offering to Prepaid Debit Card customers. On September 2, 2014, we acquired EFT Source, a recognized leader in the financial technology industry that was named to American Banker and Bank Administration Institute’s FinTech Forward 100 in 2013 , 2014 and 201 5 . The acquisition of EFT Source significantly enhanced our card services offering, added Card@Once ® to our instant issuance card offering and expanded our end - to - end Financial Payment Card solutions. +3 +Table of Contents +In addition to our eight North American facilities, we have two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards , that are not issued on the networks of the Payment Card Brands, and personalization services. +In 2015, we generated : +· +Net sales of $ 374. 1 million, wh ich represented an increase of 43. 3 % compared to the prior year , +· +Net income from continuing operations of $31.3 million, which re presented an increase of 95.7 % compared to the prior year, +· +Adjusted EBITDA of $ 9 6.2 million, wh ich represented an increase of 77.5 % compared to the prior year , +· +N et income from continuing operations and Adjusted EBITDA margins of 8.4 % and 25.7 %, respectively. +Our 2014 results include four months of results from EFT Source. Adjusted EBITDA and Adjusted EBITDA margin are financial measures not presented in accordance with generally accepted accounting principles (“GAAP”). For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income from continuing operations, the mos t comparable GAAP measure, see Part III, Item 6, Selected Financial Data . +Our business consists of the following reportable segments : U.S. Debit and Credit , which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States; U.S. Prepaid Debit , which primarily provides integrated card services to Prepaid Debit Card issuers in the United States; and U.K. Limited , which primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe, and which are not certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council . Businesses not considered part of these segments are categorized as "Other" and include our operations in Ontario, Canada and Petersfield, United Kingdom . In August 2015, we completed the shut down and closure of our operations at our Petersfield , United Kingdom facility. The Petersfield , United Kingdom facility is not material to our business. Also included in “Other” is our corporate headquarters. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 19 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Leading Market Position with Long - Term Customer Relationships. As a market leader, we have long - standing trust - based relationships with our key customers and often deep process and technology integration, particularly in the case of customers who utilize our card services and instant issuance systems and services. The solutions that we provide require strict data integrity, and generally card issuers are reluctant to switch away from trusted providers due to the requirements for high - security and access to highly - sensitive cardholder information. As a result, our customers are selective about the partners with which they work and typically seek out partners who have a well - established reputation for trust and quality and are able to meet their service requirements. +We have long - standing relationships with our customers, many of whom we have served for decades and provide a differentiated level of service, as evidenced by our strong net pro moter score, a customer satisfaction metric developed through customer satisfaction surveys conducted by an independent market research firm. We also maintain important relationships with the Payment Card Brands to ensure our facilities and processes consistently meet their standards. +· +Well Positioned for EMV Conversion in the United States. As a leading provider of integrated credit, debit and Prepaid Debit Card solutions in North America, we are well - positioned to capitalize on the U.S. market conversion to the Europay, Mastercard and Visa (“ EMV ”) chip technology. EMV is a global, technical standard, mainta ined by EMV Co for smart payment cards , and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic stripes . EMV cards c an be contact cards that must be physically inserted (or “ dipped”) into a reader, contactless cards +4 +Table of Contents +that can be read over a short distance using radio-frequency identification (“RFID”) technology, or cards with both contact and contactless functionality (“dual-interface EMV cards”) . We serve our customers through a network of ten production and card services facilities, including eight high - security facilities in North America that are each certified by one or more of the Payment Card Brands, Interac (in Canada) and, w here required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. We have made significant investments in our physical infrastructure and equipment platform to prepare for the EMV conversion , including opening a dedicated EMV technology center in Colorado for EMV Financial Payment Card production and personalization , and significant information technology, human capital and equipment upgrades across our network of facilities. +· +Comprehensive End - to - End Card Solutions Drive Deep Customer Integration. The foundation of our strong market position is our comprehensive end - to - end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the stringent security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end - to - end offering of card data personalization and card services that are deeply integrated within our customers ’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require extensive technology integration, such as secure data links to transfer highly sensitive cardholder information. Similarly, our installed base of instant issuance systems at bank and credit union branches across the United States require comparable levels of customer integration , as our Card@Once ® instant issuance system utilizes only our secure technology to instantly personalize cards. Certain customers have also integrated our proprietary software into their customer - facing websites to offer card design and customization to their cardholders. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost - effective manner instead of managing multiple suppliers across a complex value chain. We believe our customers choose and retain us for these critical functions, which typically require integrations that are costly and complex , due to our reputation as a trusted partner, our high levels of service and proven execution. +· +Certified Network of North American High - Security Facilities. Our eight high - security North American facilities are each certified by one or more of the Payment Card Brands and Interac (in Canada), forming the largest network of certified production facilities in North America. The Payment Card Brand certifications allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. Additionally, many of our facilities are also certified to be in compliance with the standards of the PCI Security Standards Council . These certification processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain this designation, which are regularly verified by both the Payment Card Brands and our customers. +· +Industry Experience and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed extensive technological, engineering and operational expertise that we believe has made us a leader in our industry for product and process know - how. We believe that our technological and operational know - how, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage and fosters a culture of innovation. We have developed and acquired significant intellectual property over our operating history and hold 19 U.S. patents, as well as 30 pending U.S. and foreign patent applications, on our Financial Payment Card solutions, including patents on our instant issuance offering , and patents on our tamper - evident security packaging used by our customers that have Prepaid Debit Card offerings . We also hold exclusive production rights to certain products the Company has developed , as well as patented software solutions such as our MYCA™ offering, which is integrated into the websites of over 300 card issuing banks and other customers. +· +Strong Management Team. We have built a strong management team led by Steven Montross, our CEO and President. Mr. Montross has led CPI for seven years and under his leadership we have completed three strategic acquisitions and we have experienced significant growth . Our management team has established a track record of recognizing and capitalizing on growth opportunities across the markets we serve. Management identified and drove our expansion into Prepaid Debit Card services during the early market adoption period of this card product. Similarly, our management team devised and executed on a strategy to develop our card services offering, which was accelerated by our acquisition of EFT Source. +5 +Table of Contents +Our Growth Strategy +The key components of our strategy include: +· +Capitalize on U.S. EMV Conversion. The conversion to the EMV standard in the United States , which is expected to significantly increase the size of the Financial Payment Card market, is driven primarily by the increasing levels of card fraud in the United States, the Payment Card Brands’ coordinated EMV conversion plan, including the liability shift which occurred on October 1, 2015, and the desire for a single global interoperable standard of card acceptance. The conversion of Financial Paym ent Cards in the United States from magnetic stripe technology to the EMV standard began in earnest in the second half of 2014 and is expected to continue over the next several years, with full adoption in the credit and bank debit card markets expected to be largely complete by the end of 2017 and increasing levels of adoption of Prepaid Debit Cards and “ Private Label Credit Cards” (credit cards issued by an individual merchant for their exclusive use) beyond 2017 . In anticipation of the EMV conversion , and subsequently the expected further adoption of the more complex and higher priced d ual - i nterface EMV cards, we invested significantly in our network of facilities, technological infrastructure and human capital resources. We believe our comprehensive solutions offering and proven track record ideally positions us to be our customers’ partner of choice to successfully complete the EMV conversion. +· +Capitalize on Growth in Prepaid Debit Market. We believe we are well positioned to capitalize on the expected growth of the Prepaid Debit Card market due to our market leading position, supported by our industry expertise , patents and comprehensive end - to - end card solutions. We have driven our leading market position through trust - based relationships with the largest global managers of Prepaid Debit Card programs, including InComm, Green Dot, Blackhawk Network , American Express and NetSpend . Additionally, we have further developed proprietary production techniques which provide us a cost advantage and additional flexibility to meet customer demands. +· +Capitalize on Growth in Instant Issuance Systems and Services Market. We acquired our instant card issuance system, Card@Once ® , through the acquisition of EFT Source in 2014 and have continued to drive significant growth in sales of our instant issuance systems and related services revenue. We plan to continue to grow our installed base of instant issuance systems in bank branches across the U.S. to increase our opportunity for continued recurring revenue streams from card personalization which is delivered through our software as a service offering. We believe the U.S. market is in the early stages of instant issuance adoption as, according to First Annapolis, only approximately 20% of U.S. bank branches are equipped with instant issuance solutions. +· +Cross - Sell Expanded Services Offering Across Customer Base. We believe our leading market position in Financial Payment C ard production in North America, combined with recent enhancements to our card services platform, including our acquisition of EFT Source, represents a significant opportunity to cross - sell services across our customer base by offering comprehensive end - to - end card solution s . W e believe that providing our existing customers this complete end - to - end solution represents a substantial revenue opportunity and means to further deepen our existing customer relationships. Through our strong track record in card services , we believe we have established a reputation as a trusted partner and advisor to our customers with the ability to securely manage significant amounts of sensitive and confidential customer data throughout our network. Due to the high costs of failure, such as a data breach, we expect that customers will continue to choose trusted vendors such as CPI that can provide high levels of security, service and certainty to manage these critical functions. +· +Continued Execution on Strategic Acquisitions. We have a strong track record of acquiring and integrating complementary businesses, completing six acquisitions since 2008, all of which have enhanced our market share, capabilities and capacity. We expect to continue to opportunistically execute strategic acquisitions that give us access to new markets and capabilities while providing a reasonable value proposition to our stockholders. +6 +Table of Contents +Our Products and Services +EMV Financial Payment Cards (Contact and Dual - Interface) +We pr oduce c ontact EMV cards, which feature a n integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV - enabled pay ment terminal. We also produce d ual - i nterface EMV cards, which feature both the contact EMV technology and a RFID antenna that utilizes near field communications (“NFC”) technology to allow transactions to also be processed on a contactless basis when the card is brought within the requisite proximity to a NFC enabled payment terminal. +Non - EMV Financial Payme nt Cards and Retail Gift Cards +We produce non - EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology and cards that include both magnetic stripes and NFC technology. In addition, we produce retail gift cards (which are not issued on the network of the Payment Card Brands) primarily in the U.K. and Canada. +Card Data Personalization +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in EMV and non - EMV card formats. Our personalization services are technology - driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. Finally, we have the capabilities to provide Trusted Service Manager services, leveraging our existing data connectivity with processors and other customers to offer a trusted, high - security solution for facilitating mobile payments. +Tamper - Eviden t Security Packaging Solutions +We offer specialized and innovative tamper - evident security packaging products and services to customers with a Prepaid Debit Card offering that reduce fraud for Prepaid Debit Cards sold through the retail channel. The majority of the tamper - evident security packaging we produce is protected by our patents. In certain cases, we also manage the fulfillment of fully - completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once ® , our proprietary and patented instant card issuance system and services, which provide our card issuing bank customers the ability to issue a completely personalized permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud - based software that securely transfers data from our servers to the card branch to encode either a magnetic stripe or an EMV card, and personalize the card on a desktop output terminal in a process which is certified by MasterCard and Visa. Our instant issuance system generates both system sales and recurring revenue from software as a service, card personalization and sales of cards and consumables. In addition, we provide instant issuance of debit cards to large financial institutions whereby we provide fully - personalized temporary debit cards which are issued to card holders upon opening a new account, and we manage the fulfillment and replenishment of these fully personalized cards directly to thousands of individual bank branches. +Suppliers +The most important component of our products is the EMV microchip, which we expect to become even more significant as EMV cards comprise an increasing percentage of the cards we ship. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in South Korea, France, the United States and Singapore, primarily on a purchase order basis. Our main suppliers +7 +Table of Contents +of EMV microchips are five leading manufacturers: KONA I Co. Ltd, Smart Packaging Solutions, NXP Semiconductors USA, Inc., Inside Secure and Multos International. Substantially all of our purchased EMV microchips for the year ended Dec ember 31, 2015 came from these five main suppliers. The other key components for our products are substrates (such as PVC), antennas and inlays which we also source from multiple suppliers. We continuously monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. +Customers +In the United States, we categorize our customers as follows: large issuers, prepaid debit issuers , program managers and small issuers. Our diverse customer base of over 4,000 direct and indirect customers includes many of the largest issuers of credit and debit cards in the United States and the five largest global managers of Prepaid Debit Card programs. Our top five customers represented approximately 31.5 % of our net sales for the year ended December 31, 201 5 . Our top five customers in 201 5 , who we have been serving for an average of greater than 10 years, were InComm, First Data Corporation, Barclays , Wells Fargo and PSCU . +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into purchase order or other short - term arrangements that define the prices and the quantities of products to be delivered and services rendered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long - term basis. +Production and Services +Our production and services strategy has several key facets. We have a large network of integrated high - security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high - volume, low - cost production runs that allow us to meet the competitive price points of large orders; +· +execute lower - volume, highly personalized customized runs that allow us to meet the high - service and quick - turn needs of smaller orders; and +· +meet the specific needs of our Prepaid Debit Card customers. +We operate approximately 498,000 square feet of facilities in the United States, Canada and the United Kingdom, where we focus on Financial Payment Card production and personalization services. See Part I, Item 2, “ Propert ies” of this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver products to our banking customers. Due to the high - security nature of the products we provide to our banking customers, product must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we utilize the U.S., Canadian and U.K. postal services to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +CPI has continued to expand its digital services to issuers focus ing on enabling payments for the growing e-commerce and mobile market place. Our digital services are primarily hosted solutions , which are designed to scale quickly to efficiently support a growing number of issuers and end users. CPI’s e-Services encompass a variety of secure hosted solutions, which enable improved customer service and efficiencies for our customers, including online card re-orders, order status, inventory management, EMV key management, and finished goods fulfillment. We also offer other innovative mobile services, such as CPI Mobile™ , where we are able to provide solution s to digitize, encrypt and deliver payment credentials to mobile phones. The platform provides secure provisioning of tokenized credentials to phones , and is compliant with all the security mechanisms accepted by the payment networks (cloud-based Host Card +8 +Table of Contents +Emulation, Trusted Execution Environment, and hardware secure element). The production environment is PCI-DSS and EMVCo compliant for security, and can support NFC and secure barcode mobile payments. +Sales and Marketing +We market our products and services to national and regional banks, independent community banks, credit unions, managers of prepaid programs, Group Service Providers and card processors. We have approximately 2 5 field - based sales representatives that give us a wide geographic reach across North America, Western Europe and Canada. Our sales representatives offer a complete end - to - end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers, providing a differentiated offer that includes cross - selling expanded services. We leverage the strength of our full - service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer groups, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications focused on thought leadership that include industry publications, editorial white papers, conferences and trade shows, print and digital advertisements and educational webinars designed to introduce our existing customers and new customers to innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do and have substantial flexibility in competing with us, including through the use of integrated product offerings and competitive pricing. Competitive factors for our business include product quality, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features and price. We believe that we compete favorably in each of these categories. +Our products and services compete with other card manufacturers and card solutions providers. We believe our primary competitors are Oberthur Technologies S.A., Giesecke & Devrient GmbH, Valid S.A. and Gemalto NV. Certain existing and potential financial institution customers also have the ability to personalize Financial Payment Cards in - house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own and control various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, trade names, copyrights and applications. We are also party to certain patent cross - license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31 , 2015, we had 27 registered U.S. and foreign trademarks, 1 9 existing U.S. patents, as well as 30 pending U.S. and foreign patent applications. Our patents have an average remaining maturity of 1 3 .5 years, and our trademarks will be due for renewal for additional ten or fifteen - year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We believe that we are in material compliance with environmental requirements and that environmental matters will not have a material adverse effect on our business, although resolution of any item in any particular year or quarter could be material to the results of operations or liquidity for that period. +9 +Table of Contents +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, addresses, card account numbers and expiration dates. In some cases, we receive a cardholder’s PIN number. As a service provider to financial institutions in the United States, we comply with the privacy provisions of Gramm ‑Leach ‑Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with various other federal, state and foreign privacy statutes and regulations, and the PCI Security Standards Council’s Data Security Standards, each of which is subject to change at any time. We may only use and disclose the personal information we receive on behalf of our customers for the purposes for which it was provided to us and in a manner that is consistent with each financial institution’s and processor’s own data privacy and security obligations. +In order to comply with our obligations under the GLBA, applicable state laws and our contractual agreements with our customers, we are required to safeguard and protect the privacy of personally identifiable information we receive. As part of their compliance with these requirements, each of our U.S. customers is expected to have a program in place for responding to unauthorized access to, or use of, consumer information that could result in substantial harm or inconvenience to consumers. A majority of U.S. states have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, which could result in significant costs to us and significant damage to our reputation. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations. +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve certification that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive checklists with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining these certifications, and have invested significant capital to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly certification process serves as a significant barrier to new entrants to our market. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter - agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution clients to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, independent auditors annually review many of our operations to provide internal control evaluations for our clients’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations including those relating to the movement of money. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with licensing and reporting requirements, to implement operating policies and procedures to comply with anti - money laundering laws, to protect the privacy and security of our clients ’ information and to undergo periodic audits and examinations. +In 2010, the Dodd - Frank Act was enacted. The Dodd - Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation +10 +Table of Contents +practices; and require significant rule - making. The Dodd - Frank Act has generated numerous new regulations that have imposed compliance costs and, in some cases, limited revenue sources for us and our clients. The Dodd - Frank Act established the Consumer Financial Protection Bureau ( “ CFPB ” ) which is empowered to conduct rule - making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, to CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments and/or limit our fees or other revenue sources. We do not currently anticipate a materially adverse impact on our business, results of operations or financial condition due to these regulations, but it is difficult to predict with certainty the extent to which the Dodd - Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential clients over the long term. +Employees and Labor +As of December 31, 2015, our businesses employed 1,386 employees, all of whom are full time employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, Colorado, 80127, telephone (303) 973-9311. The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. \ No newline at end of file diff --git a/raw/filings/0001641614/2015/0001558370-16-004343/item13.txt b/raw/filings/0001641614/2015/0001558370-16-004343/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c23eaf069f58452092de9649aa5850bcb0478b34 --- /dev/null +++ b/raw/filings/0001641614/2015/0001558370-16-004343/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001641614/2015/0001558370-16-004343/item9a.txt b/raw/filings/0001641614/2015/0001558370-16-004343/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..b6414cc0f059f71b7af94e6dd0f2b61dbe4da4bd --- /dev/null +++ b/raw/filings/0001641614/2015/0001558370-16-004343/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of December 31, 2015 due to the unremediated material weakness in our internal controls over financial reporting described below. Notwithstanding the identified material weakness, management believes the consolidated financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +Changes in Internal Control Over Financial Reporting +As previously reported on our Form S-1 effective October 8, 2015 and quarterly report on Form 10-Q for the quarter ended September 30, 2015, we have identified material weaknesses in our internal control over financial reporting related to a current lack of finance expertise that could result in a failure to properly account for non-routine and complex transactions in accordance with GAAP. With the oversight of senior management, we have taken steps to remediate the underlying causes of these material weaknesses, primarily through the development and implementation of +59 +Table of Contents +formal policies, improved processes, as well as the hiring of additional finance personnel , including the appointment of our current Chief Financial Officer in June 2015 and Chief Accounting Officer in March 2016, both of whom are certified public accountants, and are familiar with the rules and regulations applicable to public companies, including the requirements of the Sarbanes-Oxley Act, from their previous experience in substantive financial roles with other public companies. We will continue to monitor the effectiveness of these remediation efforts as we consider in future reporting periods whether such control deficiencies have been fully remediated. +Except for the continued remediation efforts described herein, there has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001641614/2015/0001558370-16-004343/rp_note.txt b/raw/filings/0001641614/2015/0001558370-16-004343/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..57b202c655d38b25b09380cdf44db352b43d6a05 --- /dev/null +++ b/raw/filings/0001641614/2015/0001558370-16-004343/rp_note.txt @@ -0,0 +1,3 @@ +9. Related - Party Transactions +The Company leases its operating facility in Indiana from an entity that is owned by a stockholder, who was a member of the Company’s Board of Directors until August 7, 2015. The lease expires in January 2018 and requires the Company to pay property taxes, insurance and normal maintenance costs. The Company paid rent of $108 from January 1, 2015 through August 7, 2015, the date on which the former member of the Company’s Board of Directors resigned, and was therefore no longer considered a related party. During each of the years ended December 31, 2014 and 2013, the Company paid rent of $175 . +In conjunction with certain officer and non - officer Company employees acquiring Series A Preferred and Common Stock during 2013 and 2012, the Company obtained notes receivable from the employees that were paid in full on August 17, 2015 and are no longer outstanding as of December 31, 2015. See Note 13 “Stockholders’ Equity” for further discussion. \ No newline at end of file diff --git a/raw/filings/0001641614/2015/0001558370-16-004343/rpt_disclosure.txt b/raw/filings/0001641614/2015/0001558370-16-004343/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..da39d2e7a236e66f935bfd4a6cfd4e62c07d89cd --- /dev/null +++ b/raw/filings/0001641614/2015/0001558370-16-004343/rpt_disclosure.txt @@ -0,0 +1,46 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2015 to which we have been a party in which the amount involved exceeded or will exceed $120,000 within any fiscal year and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them had or will have a direct or indirect material interest. +Stockholders Agreement +Prior to our initial public offering, the Company was party to a Stockholders Agreement with the Tricor Funds and the other holders of the Company’s capital stock. The Stockholders Agreement set forth certain rights and obligations of the Company’s stockholders with respect to the Company’s board of directors, share transfer restrictions, sale transactions and stock issuances and repurchases. The Stockholders Agreement was terminated in October 2015 in connection with the Company’s initial public offering. +Loans to Executive Officers +In connection with investments in shares of our common and preferred stock by certain of our executive officers, we previously made loans to such officers to fund the purchase of shares. Each of the loans to our executive officers was repaid in full in August 2015 prior to our initial public offering. Information concerning these loans is set forth below. +Aggregate +Amount +Principal +Paid +Amount +During +Interest +Executive Officer +of Loan +2015 +Rate +Steven Montross +$ +225,574 +$ +49,277 +5% per annum +Jerry Dreiling +$ +37,056 +$ +19,333 +5% per annum +Acquisition of EFT Source, Inc. +On September 2, 2014, we acquired all of the outstanding capital stock of EFT Source (now known as CPI Card Group – Tennessee, Inc.). One of our executive officers, William Dinker, together with trusts for the benefit of certain of his family members, owned approximately 75% of EFT Source. Mr. Dinker did not have any relationship with the Company at the time of the acquisition. The purchase price for the acquisition of EFT Source was $68.9 million, consisting of $54.9 million in cash, a $9.0 million subordinated unsecured promissory note (the “Seller Note”) and the issuance of $5.0 million of the Company’s preferred and common stock. The Seller Note bears interest at a rate of 5% per annum and matures on the earlier of (i) September 2, 2016, (ii) twelve months following the consummation of an initial public offering or (iii) the occurrence of certain change of control events. +In connection with the EFT Source acquisition, we entered into an Employment and Non-Competition Agreement with Mr. Dinker. Pursuant to this agreement, if EFT Source achieves certain EBITDA targets prior to December 31, 2016, Mr. Dinker will be entitled to bonus payments in an amount up to $666,667. +Lease of Indiana Facility +We lease our Fort Wayne, Indiana facility from an entity owned by James Galliher, a stockholder and former member of our board of directors who resigned from our board in August 2015. We paid $175,000 under the lease for the year ended December 31, 2015. +Registration Rights Agreement +In connection with our initial public offering, we entered into a registration rights agreement with the Tricor Funds (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Tricor Funds are entitled to request that we register shares of our common stock on a long-form or short-form registration statement on one or more +- 26 - +Table of Contents +occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. The Tricor Funds also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay the Tricor Funds’ expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our common stock held by the Tricor Funds as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the common stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization, or certain other corporate transactions, and (iii) any of our common stock owned or acquired following the closing of our initial public offering by the Tricor Funds (“Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. +Director Nomination Agreement +In connection with our initial public offering, we entered into a Director Nomination Agreement with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our Board of Directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our Board of Directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds shall be entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. In addition, for so long as the Tricor Funds collectively beneficially own 10% or more of the total number of shares of our common stock then outstanding, the Tricor Funds shall also have the right to have their designees participate on committees of our Board of Directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding common stock. +Policies and Procedures for Related Party Transactions +In connection with our initial public offering, our board of directors adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving us in which the aggregate amount involved exceeds or may be expected to exceed $120,000 and in which a related person has or will have a direct or indirect material interest. For purposes of this policy, a related person is defined as a director, executive officer, nominee for director, or a greater than 5% beneficial owner of our common stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider the material facts of the transaction, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction. +All related party transactions described in this section were not subject to the approval and review procedures set forth in such policy, as certain transactions were entered into prior to our initial public offering and prior to the adoption of such policy. +- 27 - +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2016/0001558370-17-001271/filing.txt b/raw/filings/0001641614/2016/0001558370-17-001271/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..7df04bbe723b79d1b2c6b46fe99f96d97e81f779 --- /dev/null +++ b/raw/filings/0001641614/2016/0001558370-17-001271/filing.txt @@ -0,0 +1,4603 @@ +10-K +1 +pmts-20161231x10k.htm +10-K +pmts_Current_Folio_10K +Table of Contents +UNITED STATES SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☑ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31, 2016 +Or +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10026 West San Juan Way +Littleton, CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code (303) 973-9311 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, $0.001 par value +NASDAQ Global Select Market +Securities registered pursuant to section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ☐   No ☑ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +Yes ☐   No ☑ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑   No ☐ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑   No ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☑ +Non-accelerated filer ☐ +Smaller reporting Company ☐ +(Do not check if a smaller reporting company) +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☑ +The aggregate market value of the Registrant’s common stock held by non-affiliates was $97.2 million on June 30, 2016 computed based on the closing sale price of the Registrant’s common stock of $5.01 on Nasdaq on that date. +As of February 20, 2017, the number of shares outstanding of the Registrant’s common stock was 55,359,251. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +3 +Item 1A +Risk Factors +11 +Item 1B +Unresolved Staff Comments +30 +Item 2 +Properties +31 +Item 3 +Legal Proceedings +31 +Item 4 +Mine Safety Disclosures +32 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +33 +Item 6 +Selected Financial Data +33 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +37 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +60 +Item 8 +Financial Statements and Supplementary Data +F-1 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +61 +Item 9A +Controls and Procedures +61 +Item 9B +Other Information +62 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +63 +Item 11 +Executive Compensation +63 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +63 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +63 +Item 14 +Principal Accountant Fees and Services +63 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +64 +Signatures +65 +Index To Exhibits +67 +1 +Table of Contents +CAUTIONARY STATEMENT REGARDIN G FORWARD-LOOKING INFORMATION +Certain statements and information in this Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). The words “believe,” “estimate”, “project”, “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us, and other information currently available. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated. Such factors include, but are not limited to: material breaches in the security of our systems; market acceptance of developing technologies that make Financial Payment Cards less relevant; a slower or less widespread adoption of EMV® and dual-interface EMV technology than we anticipate; difficulties in production quality and process; defects in our software; our failure to operate our business in accordance with the PCI security standards or other industry standards such as Payment Card Brand certification standards; extension of card expiration cycles; a decline in U.S. and global market and economic conditions; failure to identify, attract and retain new customers or a failure to maintain our relationships with our major customers; our substantial indebtedness; infringement on our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; failure to meet our customers’ demands in a timely manner; competition and/or price erosion in the payment card industry; our dependence on licensing arrangements; inability to renew leases for our facilities; interruptions in our IT systems or production capabilities; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; non-compliance with, and changes in, laws in foreign jurisdictions in which we operate and sell our products; challenges related to our acquisition strategy; our dependence on specialized equipment from third party suppliers; and other risks that are described in Part I, Item 1A – Risk Factors and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +EMV® is a registered trademark or trademark of EMVCo LLC in the United States and other countries. +2 +Table of Contents +PART I +Item 1. Busines s +As used herein, “CPI”, “we”, “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, MasterCard, American Express and Discover) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this growing subsector of the financial technology market. Our customers are primarily leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process) and card processors. We serve a diverse set of over 4,000 direct and indirect customers, including many of the largest issuers of debit and credit cards in the United States and Canada, and largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of ten production and card services facilities, including eight high-security facilities in the United States and Canada, each of which is certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”). We have a leading network of high-security production facilities in the United States and Canada, allowing us to optimize our solutions offerings to serve the needs of our diverse and long-term customer base. +We believe we have a leading position in: +· +the U.S. prepaid debit market (which represents the fastest growing subset of the Financial Payment Card market in the United States), serving several of the top U.S. Prepaid Debit Card program managers; +· +the U.S. large issuer market, serving many of the largest U.S. debit and credit card issuers; and +· +the U.S. small issuer market, which includes independent community banks and credit unions, driven by our strong relationships, capabilities and technologies. +In addition to our eight facilities in the United States and Canada, we have two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, that are not issued on the networks of the Payment Card Brands, as well as provide personalization, packaging and fulfillment services. +We have grown our business significantly over the past decade, both organically and through acquisitions. Since 2008, we have completed six acquisitions, significantly increasing our geographic and market coverage, solutions offerings and capacity. Our most significant acquisitions occurred in March 2010 and September 2014. On March 9, 2010, we purchased certain assets of Premier Card Solutions, a leading provider of Financial Payment Cards, data personalization services and tamper-evident security packaging for Prepaid Debit Cards that utilize the payment networks of the Payment Card Brands. The Premier Card Solutions transaction significantly enhanced our offering to Prepaid Debit Card customers. On September 2, 2014, we acquired EFT Source, a recognized leader in the financial technology industry. The acquisition of EFT Source significantly enhanced our card services offering, added Card@Once ® to our instant issuance card offering and expanded our end-to-end Financial Payment Card solutions. We intend to continue to explore strategic acquisition opportunities. +In 2016, we generated: +· +Net sales of $308.7 million, which represented a decrease of 17.5% compared to the prior year, +3 +Table of Contents +· +Net income from continuing operations of $5.4 million, which represented a decrease of 82.7% compared to the prior year, and +· +Adjusted EBITDA of $57.2 million, which represented a decrease of 40.6% compared to the prior year. +Adjusted EBITDA is a financial measure not presented in accordance with generally accepted accounting principles (“GAAP”). For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income from continuing operations, the most comparable GAAP measure, see Part II, Item 6, Selected Financial Data . +Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States; U.S. Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card issuers in the United States; and U.K. Limited, which primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe, and which are not certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. Businesses not considered part of these segments are categorized as "Other" and include our operations in Ontario, Canada and Petersfield, United Kingdom . In August 2015, we completed the shut-down and closure of our operations at our Petersfield, United Kingdom facility. The Petersfield, United Kingdom facility is not material to our business. Also included in “Other” are corporate activities. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 18 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Leading Market Position with Long-Term Customer Relationships. As a market leader, we have long-standing trust-based relationships with our key customers, many of whom we have served for decades. Our customer relationships often involve deep process and technology integration, particularly in the case of customers who utilize our card services and instant issuance systems and services. The solutions that we provide require strict data integrity, and generally card issuers are reluctant to switch away from trusted providers due to the requirements for high-security and access to highly-sensitive cardholder information. As a result, our customers are selective about the partners with which they work and typically seek out partners who have a well-established reputation for trust and quality and are able to meet their service requirements. We take pride in our efforts to provide a differentiated level of service to our customer base. Our strong net promoter score, a customer satisfaction metric developed through surveys conducted by an independent market research firm, is evidence of our ability to provide this differentiated level of service. We also maintain important relationships with the Payment Card Brands to ensure our facilities and processes consistently meet their standards. +· +Well Positioned to Capitalize on Growth in Financial Payment Card Market and Remaining EMV Conversion in the United States. With the significant past investments made to our physical infrastructure and equipment platform in preparation for the EMV conversion, including information technology, human capital and equipment upgrades across our network of facilities, we believe that we continue to be well-positioned to capitalize on the continued growth in the Financial Payment Card market, and the U.S. market conversion to the Europay, Mastercard and Visa (“EMV”) chip technology, which began in earnest in the second half of 2014 and is expected to continue over the next several years. EMV is a global, technical standard, maintained by EMVCo for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic stripes. EMV cards can be contact cards that must be physically inserted (or “dipped”) into a reader, contactless cards that can be read over a short distance using radio-frequency identification (“RFID”) technology, or cards with both contact and contactless functionality (“dual-interface EMV cards”). We serve our customers through a network of ten production and card services facilities, including eight high-security facilities in the United States and Canada that are each certified by one or more of the Payment +4 +Table of Contents +Card Brands, Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. +· +Comprehensive End-to-End Card Solutions Drive Deep Customer Integration. The foundation of our strong market position is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the stringent security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are deeply integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require extensive technology integration, such as secure data links to transfer highly sensitive cardholder information. Similarly, our installed base of instant issuance systems at bank and credit union branches across the United States require comparable levels of customer integration, as our Card@Once ® instant issuance system utilizes only our secure technology to instantly personalize cards. Certain customers have also integrated our proprietary software into their customer-facing websites to offer card design and customization to their cardholders. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. We believe our customers choose and retain us for these critical functions, which typically require integrations that are costly and complex, due to our reputation as a trusted partner, our high levels of service and proven execution. +· +Certified Network of High-Security Facilities. Our eight high-security facilities are each certified by one or more of the Payment Card Brands and Interac (in Canada), forming a leading network of certified production facilities in in the United States and Canada. The Payment Card Brand certifications allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. Additionally, many of our facilities are also certified to be in compliance with the standards of the PCI Security Standards Council. These certification processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain this designation, which are regularly verified by both the Payment Card Brands and our customers. +· +Industry Experience and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed extensive technological, engineering and operational expertise that we believe has made us a leader in our industry for product and process know-how. We believe that our technological and operational know-how, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage and fosters a culture of innovation. We have developed and acquired significant intellectual property over our operating history and hold 18 U.S. patents, 14 foreign patents, as well as 13 pending U.S. and foreign patent applications, on our Financial Payment Card solutions, including patents on our instant issuance offering, and patents on our tamper-evident security packaging used by our customers that have Prepaid Debit Card offerings. We also hold exclusive production rights to certain products the Company has developed, as well as patented software solutions such as our MYCA™ offering, which is integrated into the websites of over 300 card issuing banks and other customers. +· +Experienced Management Team. We have built an experienced management team, and have strengthened the team during 2016 with the addition of key executives with distinguished records of accomplishments. The leadership, depth of experience and relevant market knowledge the management team brings will be invaluable as we execute on our plans moving forward. +Our Strategy +The key components of our strategy include: +Drive Growth in the Core Financial Markets: +· +Continue to Capitalize on Growth in Financial Payment Card Market and the U.S. EMV Conversion, Including Dual-Interface EMV Cards. We expect future growth in the U.S. Financial Payment Card market as card-based payments continue to replace payments made with cash and checks, along with the recurring nature of demand for Financial Payment Cards in the United States, including the regular renewal +5 +Table of Contents +of cards every three to five years, replacing lost or stolen cards due to fraudulent usage, and portfolio churn as cardholders move from one program to another. In addition, the conversion of Financial Payment Cards in the United States from magnetic stripe technology to the EMV standard began in earnest in the second half of 2014 and is expected to continue over the next several years. In anticipation of the EMV conversion, and subsequently the expected further adoption of the more complex and higher priced dual-interface EMV cards, we invested significantly in our network of facilities, technological infrastructure and human capital resources. We believe our comprehensive solutions offering and proven track record ideally positions us to be our customers’ partner of choice for their ongoing Financial Payment Card needs, and to successfully complete their EMV conversions. +· +Capitalize on Growth in Prepaid Debit Market. We believe we are well positioned to capitalize on the expected growth of the Prepaid Debit Card market due to our market leading position, supported by our industry expertise, comprehensive end-to-end card solutions and patents. We have a leading market position and have been doing business with the largest U.S. Prepaid Debit Card program managers. Additionally, we have further developed proprietary production techniques which provide us additional flexibility to meet customer demands. +· +Cross-Sell Expanded Services Offering Across Customer Base. We believe our leading market position in Financial Payment Card production and our card services capabilities in the United States and Canada, presents an opportunity to cross-sell services across our customer base by offering comprehensive end-to-end card solutions. We believe that providing our existing customers this complete end-to-end solution creates a revenue opportunity and means to further deepen our existing customer relationships. Through our strong track record in card services, we believe we have established a reputation as a trusted partner and advisor to our customers with the ability to securely manage sensitive and confidential customer data throughout our network. Due to the high costs of failure, such as a data breach, we believe that that we are well positioned to meet the needs of our customers, who expect their vendors to provide high levels of security, service and certainty to manage these critical functions. +· +Continued Exploration of Strategic Acquisitions. We have a strong track record of acquiring and integrating complementary businesses, completing six acquisitions since 2008, which have enhanced our market share, capabilities and capacity. We expect to continue to explore strategic acquisitions that give us access to new markets and capabilities. +Provide New and Innovative Products and Services in the Markets We Serve: +· +Capitalize on Growth in Instant Issuance Systems and Services Market. We acquired our instant card issuance system, Card@Once ® , through the acquisition of EFT Source in 2014 and have continued to drive growth in sales of our instant issuance systems and related services revenue. We plan to continue to grow our installed base of instant issuance systems in bank branches across the United States to increase our opportunity for continued recurring revenue streams from card personalization which is delivered through our software as a service offering. +· +Develop New Products and Services to Deepen Existing Customer Relationships and Attract New Customers. In addition, t hrough our recently added Print on Demand capabilities, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on demand, basis for our U.S. Prepaid Debit customers, enabling individualized offerings and reducing waste. We believe this will enable us to further penetrate new, fast growing, verticals of the prepaid market including payroll, corporate incentives and benefits. In addition, w e recently announced new products, including a metal card offering for the credit card markets, and dual-interface or “tap-and-go” EMV cards, both of which represent important opportunities to add to the growth of the business. +· +Capitalize on the Emerging Digital Services Market. We have continued to expand our digital services capabilities, focusing on enabling payments for the growing e-commerce and mobile market place, including online card design and card re-orders, order status, inventory management, EMV key management, and fulfillment of plastic and virtual payment cards, including our patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. While not currently +6 +Table of Contents +significant to our financial results, we also offer other innovative mobile services, such as CPI Mobile™, where we, through technology partners, are able to provide solutions to digitize, encrypt and deliver payment credentials to mobile devices. +Execute Quality, Process Excellence & Efficiency Initiatives: +· +Drive Quality, Process Excellence and Cost Efficiencies. We are focused on driving high quality products and services for our customers through our process excellence initiatives, and on reducing costs through our continued efforts to drive efficiencies in our business. For example, CPI has developed a successful continuous improvement framework that drives tangible cost savings and enables re-investment in critical areas of the business. +Our Products and Services +EMV Financial Payment Cards (Contact and Dual-Interface) +We produce contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce dual-interface EMV cards, which feature both the contact EMV technology and an RFID antenna that utilizes near field communications (“NFC”) technology to allow transactions to also be processed on a contactless basis when the card is brought within the requisite proximity to a NFC-enabled payment terminal. +Non-EMV Financial Payment Cards and Retail Gift Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology and cards that include both magnetic stripes and NFC technology. In addition, we produce retail gift cards (which are not issued on the network of the Payment Card Brands) primarily in the U.K. and Canada. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in EMV and non-EMV card formats. Our personalization services are technology-driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. Finally, we have the capabilities to provide Trusted Service Manager services, leveraging our existing data connectivity with processors and other customers to offer a trusted, high-security solution for facilitating mobile payments. +Tamper-Evident Security Packaging Solutions +We offer specialized and innovative tamper-evident security packaging products and services to customers with a Prepaid Debit Card offering that reduce fraud for Prepaid Debit Cards sold through the retail channel. The majority of the tamper-evident security packaging we produce is protected by our patents. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once ® , our proprietary and patented instant card issuance system and services, which provide our card issuing bank customers the ability to issue a completely personalized permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode either a magnetic stripe or an EMV card, and personalize the card on a desktop output terminal in a process which is certified by MasterCard and Visa. Our instant issuance system generates both system sales and recurring revenue from software as a service, card personalization and +7 +Table of Contents +sales of cards and consumables. In addition, we provide instant issuance of debit cards to large financial institutions whereby we provide fully-personalized temporary debit cards which are issued to card holders upon opening a new account, and we manage the fulfillment and replenishment of these fully personalized cards directly to thousands of individual bank branches. +Print on Demand Prepaid Solutions +We recently launched our new Print on Demand solution, which can deliver significant flexibility to prepaid program managers and financial institutions. Through our Print on Demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on demand, basis for our customers, enabling individualized offerings and reducing waste. While not significant to our 2016 financial results, the Print on Demand solution enables us to further penetrate new, fast growing, business-to-business and business-to-consumer verticals of the prepaid market including payroll, corporate incentives and benefits. +Suppliers +One of the most important components of our products is the EMV microchip, which we expect to become even more significant as EMV cards comprise an increasing percentage of the cards we produce. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in South Korea, France, the United States and Singapore, primarily on a purchase order basis. Our main suppliers of EMV microchips are four leading international manufacturers, including one supplier that is also owned by a competitor. Over 90% of our purchased EMV microchips for the year ended December 31, 2016 came from these four main suppliers. The other key components for our products are substrates (such as PVC), antennas and inlays which we also source from multiple suppliers. We continuously monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers, prepaid debit issuers and program managers. Our diverse customer base includes many of the largest issuers of credit and debit cards in the United States and the largest U.S. Prepaid Debit Card program managers. Our top five customers represented approximately 29.4% of our net sales for the year ended December 31, 2016, and we have been serving these customers for an average of greater than 10 years. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into purchase order or other short-term arrangements that define the prices and the quantities of products to be delivered and services rendered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +Our production and services strategy has several key facets. We have a large network of integrated high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high-volume production runs that allow us to meet the competitive price points of large orders; +· +execute lower-volume, highly personalized customized runs that allow us to meet the high-service and quick-turn needs of smaller orders; and +· +meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and our significant expertise and capabilities specifically designed for this retail prepaid +8 +Table of Contents +market, as well as on demand solutions for the business-to-business and business-to-consumer prepaid markets. +Our digital services are designed to scale quickly to efficiently support a growing number of issuers and end users. These services encompass a variety of secure hosted solutions, which enable improved customer service and efficiencies for our customers. +We operate approximately 500,000 square feet of facilities in the United States, Canada and the United Kingdom, where we focus on Financial Payment Card production and personalization services. See Part I, Item 2, “Properties” of this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver products to our banking customers. Due to the high-security nature of the products we provide to our banking customers, product must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we utilize the U.S., Canadian and U.K. postal services to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +Sales and Marketing +We market our products and services to large issuers, small to mid-sized issuers, prepaid debit issuers and program managers. We have approximately 30 field-based sales representatives that give us a wide geographic reach across the United States, Western Europe and Canada. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers, providing a differentiated offer that includes cross-selling expanded services. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer groups, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications focused on thought leadership that include industry publications, editorial white papers, conferences and trade shows, print and digital advertisements and educational webinars designed to introduce our existing customers and new customers to innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings and competitive pricing. Competitive factors for our business include product quality, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features and price. We believe that we compete favorably in each of these categories. +Our products and services compete with other card manufacturers and card solutions providers. We believe our primary competitors are Oberthur Technologies S.A., Giesecke & Devrient GmbH, Valid S.A., Gemalto NV and Multi Packaging Solutions, Inc. Certain existing and potential customers also have the ability to personalize Financial Payment Cards in-house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own and control various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are also a party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31, 2016, we had 30 U.S. and foreign trademark registrations and applications, 18 existing U.S. patents, 14 foreign patents, as well as 13 pending U.S. and foreign patent +9 +Table of Contents +applications. Our patents have an average remaining maturity of 12.5 years, and our trademarks will be due for renewal for additional ten or fifteen-year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We believe that we are in compliance with environmental requirements, however, the unfavorable resolution of any environmental matter could have a material adverse effect on our business, financial condition and result of operations. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, addresses, card account numbers and expiration dates. In some cases, we receive a cardholder’s PIN number. As a service provider to financial institutions in the United States, we comply with the privacy provisions of Gramm‑Leach‑Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with various other federal, state and foreign privacy statutes and regulations, and the PCI Security Standards Council’s Data Security Standards, each of which is subject to change at any time. We may only use and disclose the personal information we receive on behalf of our customers for the purposes for which it was provided to us and in a manner that is consistent with each financial institution’s and processor’s own data privacy and security obligations. +In order to comply with our obligations under the GLBA, applicable state laws and our contractual agreements with our customers, we are required to safeguard and protect the privacy of personally identifiable information we receive. As part of their compliance with these requirements, each of our U.S. customers is expected to have a program in place for responding to unauthorized access to, or use of, consumer information that could result in substantial harm or inconvenience to consumers. A majority of U.S. states have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, which could result in significant costs to us and significant damage to our reputation. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations. +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve certification that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining these certifications, and have invested significant capital to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly certification process serves as a significant barrier to new entrants to our market. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution clients to include certain provisions in their contracts with service providers like us and +10 +Table of Contents +to conduct ongoing monitoring and risk management for third party relationships. In addition, independent auditors annually review many of our operations to provide internal control evaluations for our clients’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations including those relating to the movement of money. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with licensing and reporting requirements, to implement operating policies and procedures to comply with anti-money laundering laws, to protect the privacy and security of our clients’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs and, in some cases, limited revenue sources for us and our clients. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, to CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments and/or limit our fees or other revenue sources. We do not currently anticipate a materially adverse impact on our business, results of operations or financial condition due to these regulations, but it is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential clients. +Employees and Labor +As of December 31, 2016, our businesses employed 1,308 employees, all of whom are full time employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10026 W. San Juan Way – Suite 200, Littleton, CO 80127 , telephone (303) 973-9311. The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. +Item 1A. Risk Factor s +Risks Related to Our Business +System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, disrupt our internal operations and harm public perception of our products, which could significantly adversely affect our business. +The reliability and security of our information technology (IT) infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. Our handling of personally identifiable information of cardholders, including cardholder names, account numbers and similar information, makes us a potential target of cyber-attacks and threats to our secure IT systems. We face attempts by others to penetrate our computer systems and networks to misappropriate this information or interrupt our business. Any system or network disruption could result in a loss of our intellectual property, the release of sensitive cardholder information, customer or employee personal data, or the loss of production capabilities at one or more of our production +11 +Table of Contents +facilities. The protective measures we have implemented may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. +In addition, our encryption systems are at risk of being breached or decoded. Smart cards are equipped with keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, whether caused by cyber attacks, security breaches or otherwise, which could ultimately have an adverse effect on our business, financial condition and results of operations. In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business could be adversely affected. +The markets for our products and services are subject to technological changes, frequent introductions of new products and services and evolving industry standards. In particular, the rise in the adoption in wireless payment systems or mobile payments may make physical cards less attractive as a method of payment. Although to date we have not seen a meaningful reduction in card‑based payments resulting from the emergence of mobile payment applications, mobile payments offer consumers an alternative method to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services, or our new services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. We continually engage in significant efforts to innovate and upgrade our products and services. If we are unsuccessful in completing or gaining market acceptance of new products, services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or attract new ones. +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +• effectively identify and capitalize upon opportunities in new and emerging product markets; +• invest resources in innovation and research and development; +• complete and introduce new products and integrated services solutions in a timely manner; +• license any required third‑party technology or intellectual property rights; +• qualify for and obtain required industry certification for our products; and +• comply with applicable data protection regulations. +Opportunities to combine or package products and service offerings and the ability to cross‑sell products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross‑sell our products and services, our financial condition could be negatively +12 +Table of Contents +impacted. Furthermore, if we are unable to develop and introduce new and innovative products in a cost‑effective and timely manner, our product and service offerings could be rendered obsolete, which could have an adverse effect on our business, financial condition and results of operations. +The continued adoption of contact and dual‑interface EMV technology and capability in the United States may not be as rapid or widespread as we anticipate, which could adversely affect our growth. +We have made significant investments in our EMV card production and personalization capabilities in the United States and Canada. Our ability to grow depends significantly on U.S. card issuing banks’ continued adoption of EMV technology as part of their new technological standards and, in the future, whether such banks issue dual‑interface EMV cards. The conversion of Financial Payment Cards in the United States from magnetic stripe technology to the EMV standard began in earnest in the second half of 2014 and is expected to continue over the next several years. Banks may be delayed in transitioning to the issuance of EMV cards or dual‑interface EMV cards due to increased costs and other factors. If these entities do not continue to deploy EMV and dual‑interface EMV technology or deploy such technology less quickly and/or completely than we expect, the consequence could have an adverse effect on our business, financial condition and results of operations. +Failure to identify, attract and retain new customers or a failure to maintain our relationships with our major customers could adversely affect our business. +Our business is dependent upon our ability to identify, attract and retain new customers and to maintain our relationships with our existing customers. A decline in the business of our large customers or a failure to retain such customers may adversely affect our business, financial condition and results of operations. +A substantial portion of our net sales is derived from several large customers. Our top five customers as of December 31, 2016 accounted for approximately 29.4% of our net sales for the year ended December 31, 2016. Our continued business relationship with these customers, and the renewal of key contracts by major customers, may be impacted by several factors beyond our control, including more attractive product offerings from our competitors, pricing pressures or the financial health of these customers. Many of our key customers operate in competitive businesses, and their demand and market positions may vary considerably. These customers depend on favorable macroeconomic conditions and are impacted by the availability of affordable credit and capital, the level and volatility of interest rates, inflation, employment levels and consumer confidence, among other factors. +We generally enter into master agreements that govern the general terms and conditions of our commercial relationships. We then enter into purchase order or other short‑term agreements that define the prices and the quantities of products to be delivered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Therefore, we may not be able to maintain our market share with our key customers, which could have an adverse effect on our business, financial condition and results of operations. Furthermore, there is no guarantee that we will be able to renew or win significant contracts in a given year. If we were to lose important programs for our products with any of our key customers, or if any key customer were to reduce or change its contract, seek alternate suppliers, increase its product returns or become unable or otherwise fail to meet its payment obligations, our business, financial condition and results of operations could be materially adversely affected. +We face competition that may result in a loss of our market share and/or a decline in our profitability. +We expect our marketplace to continue to be highly competitive as new product markets develop, industry standards become well known and other competitors attempt to enter the markets in which we operate. In addition, we expect to encounter further consolidation in the markets in which we operate. +Some of our competitors have longer operating histories, and, when viewed globally, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other capabilities than we do. These competitors may be able to adapt more quickly to new or emerging technological requirements and changes in customer and/or regulatory requirements. They may also be able to devote greater resources to the promotion and sale of their products and services. We also face competition from newly established competitors, suppliers of products and customers who choose to develop their own products and services. +13 +Table of Contents +Existing or new competitors may develop products, technologies or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. Additionally, mobile payment technology could develop to replace the products and services we offer, which could render our offerings dated or obsolete, or existing alternative standards of secured mobile payment technology could gain widespread market acceptance, which could have an adverse impact on our business. As the technological sophistication of our competitors and the size of the market increase, competing low‑cost producers could emerge and grow stronger. If our customers prefer low‑cost alternatives to our products, our revenue and profitability could be adversely affected. Increased competition has historically resulted in, and is likely to continue to result in, declining average selling prices and reduced gross margins in certain of our businesses and the loss of market share in certain markets. We may not be able to continue to compete successfully against current or new competitors. If we fail to compete successfully, we may lose market share in our existing markets, which could have an adverse effect on our business, financial condition and results of operations. +The financial payment card industry may be subject to price erosion, which could have an adverse effect on our business. +One of the results of the rapid innovation in the financial payment card industry is that pricing pressure can be intense, in particular for large credit and debit card issuers and large card processors. Our large credit and debit card issuer customers face continued competitive pressure. As these issuers seek to reduce their expenses, we, in turn, may experience a decline in the prices at which our products can be sold and at which such services can be offered. In such instances, in order to continue to supply these products and services at competitive prices, we must reduce our production costs. Typically, we are able to accomplish this through leveraging our scale and production efficiencies. However, if we cannot continue to improve our efficiencies to a degree sufficient for maintaining the required margins, we may no longer be able to generate a profit from the sale of these products and services. Moreover, we may not be able to cease production of such products, either due to our ongoing contractual obligations or the risk of losing our existing customer relationships, and as a result may be required to bear a loss on such products. Further competition in our core product and service markets may lead to price erosion, lower revenue growth rates and lower margins in the future. Should reductions in our production costs fail to keep pace with reductions in market prices for the products we sell, there could be an adverse effect on our business, financial condition and results of operations. +If we fail to accurately project demand for our products and services, we may encounter problems of inadequate supply or oversupply, which would materially and adversely affect our financial condition and results of operations, as well as damage our reputation and brand. +Our customers typically order our products and services on a purchase-order basis. We project product demand based on, among other things, addressable market size, estimated anticipated conversion to EMV technology, pricing pressure and competition. However, the emerging nature of our industry, our lack of significant order backlog and the varying sales and purchasing cycles of our customers make it difficult for us to accurately forecast demand. +If we overestimate demand, we may have higher raw material or product component inventory levels than required. If we underestimate demand, our third-party suppliers may have inadequate raw material or product component inventories , which could interrupt our manufacturing and delay shipments, and could result in lost sales. In particular, we are seeking to manage our procurement and inventory costs by matching our inventories closely with our projected manufacturing needs and by, from time to time, deferring our purchase of raw materials and components in anticipation of supplier price reductions. As we seek to balance inventory costs and production flexibility, we may fail to accurately forecast demand to predict and maintain appropriate levels of inventory reserve, which could cause uneven and unpredictable flow or could affect our ability to coordinate our procurement and production to meet demand on a timely basis. Our inability to accurately predict or timely meet demand could materially and adversely affect our financial conditions and results of operations as well as damage our reputation and brand. +The continued adoption of EMV technology may cause our customers to extend their expiration cycles, which could reduce the volume of cards they purchase from us. +We estimate that, on average, bank debit cards and general purpose credit cards have historically been renewed every three years due to fixed expiration dates, and this regular renewal cycle is a significant driver of demand for Financial Payment Cards. Issuers of bank debit cards and general purpose credit cards could extend the length of time that each card may be active prior to expiration to four or five years in order to reduce the costs associated with issuing +14 +Table of Contents +more expensive EMV cards. While some of our Financial Payment Card issuer customers have extended the expiration cycles on their EMV cards during 2016, we believe this continues to be the exception rather than the norm, and the majority of our Financial Payment Card issuer customers have maintained three-year expiration cycles. If however, Financial Payment Card issuers do extend the reissuance cycle in the future, we may experience a decreased demand for bank debit cards and general purpose credit cards. If the reissuance cycle is significantly extended beyond historical averages, demand from our customers for our products may decrease significantly and our business, financial condition and results of operations could be materially and adversely affected. +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brand certification standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and manufacturers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated if we fail to comply with these standards and criteria. +We make significant investments to our network of high‑security facilities in the United States and Canada in order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have constituted in the past an important part of our revenue and profitability. For the year ended December 31, 2016, the vast majority of the products we produced and services we provided were subject to certification with one or more of the Payment Card Brands. If we were to lose our certification from one or more of the Payment Card Brands, Interac (in Canada) or PCI certification for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the networks of the Payment Card Brands. If we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers and our financial condition and results of operations would be adversely affected. +We may be required to defend against alleged infringement of the intellectual property rights of others and/or may be unable to adequately protect or enforce our own intellectual property rights. +Companies in our industry aggressively protect and pursue their intellectual property rights. Our products may contain technology provided to us by other parties such as suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. From time to time, we receive notices or are named in litigation, and are currently subject to various actions that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Additionally, we receive notices that challenge the validity of our patents. Intellectual property litigation can be expensive, time consuming and distracting to management. An adverse determination in any of these types of disputes could prevent us from producing or offering some of our products and services or could prevent us from enforcing our intellectual property rights. Furthermore, settlements can involve royalty or other payments that could reduce our profit margins and adversely affect our financial results. Our suppliers, customers and licensors may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages. Any of these claims or litigation may materially and adversely affect our business, financial condition and results of operations. +We may also be required to indemnify some customers and strategic partners under our agreements if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another party’s proprietary rights. Indemnification provisions may, in some circumstances, extend our liability beyond the products we provide and may include consequential damages and/or lost profits. Even if claims or litigation against us are not valid or successfully asserted, these claims could, and often do, result in significant costs and the diversion of the attention of management and other key employees to defend. +Furthermore, our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We depend on patents and other intellectual property rights to protect our products, proprietary designs and technological processes against misappropriation by others. We may in the future have difficulty obtaining patents and other intellectual property protection, and the patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Effective patent, trademark, service +15 +Table of Contents +mark, copyright and trade secret protection may not be available in every country in which our services are made available. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes, or confidential employee, customer or supplier data. Any of our existing or future patents may be challenged, invalidated or circumvented. We engage, and are currently engaged, in litigation to enforce or defend our intellectual property rights, protect our trade secrets and determine the validity and scope of the proprietary rights of others, including our customers. We also enter into confidentiality agreements with our consultants and strategic partners and control access to and distribution of our technologies, documentation and other proprietary information; however, such agreements may not be enforceable or provide us with an adequate remedy. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization. If we cannot adequately protect our technology, our competitors may be able to offer certain products and/or services similar to ours. +Our software may be derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. In addition to risks related to license requirements, usage of open source software can lead to greater risks than the use of third‑party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software, or remedies against the licensors. Many of the risks associated with usage of open source software cannot be eliminated and could adversely affect our business. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. Although we actively seek to protect our proprietary rights, nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary. Identifying unauthorized use of our products and technologies is difficult and time consuming. The initiation of litigation as a result of the misappropriation or infringement of our intellectual property may adversely affect our relationships and agreements with certain customers that have a stake in the outcome of the litigation proceedings. Litigation is very expensive and may divert the attention of management and other key employees from the operation of our business, all of which could have an adverse effect on our business, financial condition and results of operations. +Our business could suffer from problems in production quality and process. +We produce our products using processes that are highly complex, require advanced and costly equipment and must continually be modified to improve yields and performance. Difficulties in the production process can reduce product yields, reduce product quality or interrupt production altogether. As a result of such problems, we may not be able to deliver products, or may be able to deliver products, but in a less timely or cost‑effective manner or at a lower than expected quality level, or we may be required to rework or replace products. As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our production processes at the market rate, we may experience a lower production quality than the market standard. We may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures, or as a result of external factors beyond our control, such as interruption of our electrical service or a natural disaster. Any such event could have an adverse effect on our business, financial condition and results of operations. +16 +Table of Contents +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +Our services are based on sophisticated software and computing systems, and the software underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our clients. Defects in our software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of clients, negative publicity or exposure to liability claims. Although we attempt to limit our potential liability through disclaimers and limitation of liability provisions in our license and client agreements, we cannot be certain that these measures will successfully limit our liability. +Demand for Financial Payment Cards may be adversely impacted by U.S. and global market and economic conditions. +For the foreseeable future, we expect to continue to derive most of our revenue from products and services we provide to the financial services industry. Given this concentration, we are exposed to the economic conditions affecting the financial services industry in the United States and Canada. For example, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. A prolonged poor economic environment could result in significant decreases in demand by current and potential customers for our products and services, which could have a material adverse effect on our business, results of operations and financial condition. +Our outstanding indebtedness may impact our business and may restrict our growth and results of operations, and future EBITDA declines, should they occur, could make it difficult or impossible to refinance our debt when it comes due. +As of December 31, 2016, we had $301.9 million of total indebtedness outstanding, net of unamortized discount and deferred financing costs of $10.6 million under our First Lien Term Loan Facility. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”. +We may incur additional indebtedness in the future to help fund the growth of our business, subject to market and other conditions. Our substantial indebtedness and interest expense could have important consequences to us, including: +• limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, capital expenditures and other general business activities, because we must dedicate a substantial portion of these funds to service our debt; +• our First Lien Credit Facility is entirely floating rate debt, and rising interest rates could have a material impact on our cash flows, results of operations and financial condition; +• requiring us to seek to incur further indebtedness in order to make the capital expenditures and other expenses or investments planned by us to the extent our future cash flows are insufficient; +• limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our growth strategy, and other expenses or investments planned by us; +• limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +• limiting our ability to satisfy our obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +• increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; +17 +Table of Contents +• placing us at a competitive disadvantage as compared to our competitors that are less leveraged; and +• limiting our ability, or increasing the costs, to refinance indebtedness, when our First Lien Term Loan matures on August 17, 2022, and our Revolving Credit Facility matures on August 17, 2020. +The limitations described above could have a material adverse effect on our business, financial condition, results of operations, prospects, and ability to satisfy our obligations under our indebtedness. +If we fail to meet customer demands in a timely manner, we could lose certain critical business relationships. +Our ability to provide products and services and meet very high quality standards in a timely manner is critical to our business success. For example, one of the key services that we offer our customers is the prompt and timely production and delivery of replacement debit or credit cards. Orders for replacement debit or credit cards are often placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a timely manner or due to software malfunction, logistical impediments at any of our facilities, or economic, social, political or other challenges impacting the industry as a whole, our relationships with our customers may be adversely affected and we may lose major contracts, all of which could have an adverse effect on our business, financial condition and results of operations. +If the recently elected United States government puts significant tariffs or other restrictions on goods imported into the United States, our revenue and results of operations may be materially harmed. +The United States government may restrict trade with certain countries and/or impose tariffs on imports from certain countries. Most of our chips are imported from companies located outside of the United States. If any such restrictions or tariffs are imposed on products that we import from our overseas suppliers, we may be required to raise our prices or find alternative suppliers, which may not be possible at the same cost or quality, which could adversely impact our business, financial condition and results of operations. +Economic conditions and regulatory changes leading up to and following the United Kingdom’s likely exit from the +European Union could have a material adverse effect on our business and results of operations. +On June 23, 2016, the United Kingdom (the “U.K.”) held a referendum in which voters approved an exit from the European Union (the “E.U.”), commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s withdrawal from the E.U. in 2017. Brexit could adversely affect European or worldwide economic or market conditions and could contribute to instability in global financial markets. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. There is also uncertainty on the type of trade agreement that will exist with the E.U. after the U.K.’s withdrawal. Any of the foregoing could adversely impact our U.K. operations, which accounted for 9.6% and 9.2% of our net sales for the years ended December 31, 2016 and 2015, respectively. +The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business, including the British Pound. Brexit has also caused other members of the E.U. to consider exit as well, which could lead to further disruptions and uncertainty with respect to our business operations. The strengthening of the U.S. dollar relative to other currencies may adversely affect our operating results. +Our business may be adversely affected by costs relating to product defects, and we could be faced with product liability and warranty claims. +We offer highly complex services and products and, accordingly, there is a risk that defects may occur in any of our services or products. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory, the loss of potential sales and claims by third parties. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we release defective products in the market, our reputation could suffer and we may lose sales opportunities and incur liability for damages, including damage claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their +18 +Table of Contents +products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be an adverse effect to our business, financial condition and results of operations. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could adversely affect our business. +Many of our products integrate third‑party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with, among other benefits, access to technology owned by third parties. For example, we license Java card technology from Oracle and Multos card technology from Multos International, a subsidiary of a competitor, for use in certain of our products, including in EMV cards. This Java and Multos card technology provides a secure environment for applications on smart cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements with Oracle and Multos International for the continued use of these platforms. Oracle and Multos International may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross‑licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios. If we are unable to continue to successfully renew these agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products, which could adversely affect our operations. +Most of our facilities are leased, in whole or in part, and our inability to renew our leases on commercially acceptable terms or at all may adversely affect our results of operations. +Most of our facilities are located, in whole or in part, on leased property. We may be unable to renew such leases on commercially acceptable terms or at all. Our inability to renew our leases, or a renewal of our leases with a rental rate higher than the prevailing rate under the applicable lease prior to expiration, may have an adverse impact on our operations, including disrupting our operations or increasing our cost of operations. In addition, in the event of non‑renewal of any of our leases, we may be unable to locate suitable replacement properties for our facilities or we may experience delays in relocation that could lead to a disruption in our operations. Any disruption in our operations could have an adverse effect on our financial condition and results of operation. +Interruptions in our IT systems could adversely affect our business. +We rely on the efficient and uninterrupted operation of complex IT applications, systems and networks to operate our business. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. Any significant interruption in our business applications, systems or networks, including, but not limited to, new system implementations, facility issues or energy blackouts, could have a material adverse impact on our operations, sales and operating results. +Not only would we suffer damage to our reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties. Some of our contractual agreements with financial institutions require the payment of penalties if our systems do not meet certain operating standards. In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. The protective measures we have adopted to avoid system or network disruptions may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have an adverse effect on our business, financial condition and results of operations. +The terms of our First Lien Credit Facility restrict, and covenants contained in agreements governing indebtedness in the future may restrict, our ability to operate our business and to pursue our business strategies. +Our First Lien Credit Facility contains, and any future indebtedness of ours may contain, a number of restrictive covenants that impose customary operating and financial restrictions on us. Our First Lien Credit Facility places certain restrictions or limitations on our ability and the ability of our restricted subsidiaries, among other things, to: +• incur additional debt or contingent liabilities; +19 +Table of Contents +• declare or pay dividends, redeem stock, or make other distributions to stockholders; +• make loans, advances, guarantees or other investments; +• create liens or use assets as security in other transactions; +• merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; +• enter into transactions with affiliates; and +• enter into certain asset sale transactions or other dispositions of assets. +In addition, as of the last day of any fiscal quarter, if the amount we have drawn under the First Lien Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, we are required to maintain a first lien net leverage ratio not in excess of 7.0x. Our failure to comply with any of these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the First Lien Credit Facility. +We are required to comply with laws and regulations in other countries and are exposed to business risks associated with our international operations. +For the years ended December 31, 2016, 2015 and 2014, we derived 15.0%, 15.5%, and 24.7%, respectively, of our net sales from outside the United States, primarily in Canada and the United Kingdom. As a result, we are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. We are also required to obtain environmental permits and other authorizations or licenses from governmental authorities for certain of our operations and must protect our intellectual property worldwide. In the jurisdictions in which we operate, we need to comply with various standards and practices of different regulatory, tax, judicial and administrative bodies. +There are a number of risks associated with international business operations, including political instability (e.g., the threat of war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect our employees, reputation, business or financial results as well as our ability to meet our objectives, including the following international business risks: +• negative economic developments in economies around the world and the instability of governments, or the downgrades in the debt ratings of certain major economies; +• social and political instability; +• complex regulations governing certain of our products; +• potential terrorist attacks; +• adverse changes in governmental policies, especially those affecting trade and investment; +• foreign currency exchange, particularly with respect to the Canadian Dollar and British Pound Sterling; and +• threats that our operations or property could be subject to nationalization and expropriation. +We may not be in full compliance at all times with the laws and regulations to which we are subject. Likewise, we may not have obtained or may not be able to obtain the permits and other authorizations or licenses that we need. If we violate or fail to comply with laws, regulations, permits, health and safety regulations or other authorizations or licenses, we could be fined or otherwise sanctioned by regulators. In such a case, or if any of these international business risks were to materialize, our business, financial condition and results of operations could be adversely affected. +20 +Table of Contents +We face risks associated with our acquisition strategy. +Our future success may depend on acquiring businesses and technologies, making investments or forming joint ventures that complement, enhance or expand our current portfolio or otherwise offer us growth opportunities. The expansion of our business through acquisitions allows us to complement our existing product offerings and enhance our technological capabilities. +We face a number of challenges associated with our acquisition strategy that could disrupt our ongoing business and distract our management team, including: +• lower gross margins, revenue and operating income than originally anticipated at the time of acquisition and other financial challenges; +• delays in the timing and successful integration of an acquired company’s technologies; +• the loss of key personnel; and +• becoming subject to intellectual property, antitrust or other litigation. +Acquisitions can result in increased debt or contingent liabilities. Acquisitions can also result in adverse tax consequences, warranty or product liability exposure related to acquired assets, additional stock‑based compensation expense, the write‑up of acquired inventory to fair value, and the recording and later amortization of amounts related to certain purchased intangible assets, all of which can adversely affect our reported results. In addition, we have in the past and may in the future record goodwill and other purchased intangible assets in connection with an acquisition and incur impairment charges. +A failure to implement our acquisition strategy, obtain sufficient financing or integrate acquired businesses successfully could adversely affect our business, financial condition and results of operations. +Our business depends upon our ability to obtain specialized equipment from third‑party suppliers, and we may be subject to delayed deliveries and future price increases. +Our production processes depend on specialized equipment that we purchase and/or lease from third party suppliers. At times during the business cycle, there may be high demand for such equipment, with extended lead times to obtain such equipment. Further, there are a limited number of suppliers that manufacture and service the equipment we use. Should our current suppliers be unable or unwilling to provide the necessary equipment or otherwise fail to deliver or service such equipment in a timely manner, any resulting delays in our production processes could have an adverse effect on our business, financial condition, results of operations. In addition, the prices of the equipment we use may rise in the future, and any future price increases for this type of equipment could negatively impact our ability to purchase new equipment or to service existing equipment. +The chip operating systems developed by our competitors may put us at a competitive disadvantage . +Certain of our competitors have internally developed their own chip operating systems, including for use in EMV cards. Ownership of these internal operating systems may give our competitors a cost advantage over us, as we utilize the chip operating systems designed by our chip suppliers for use on their respective chips. If our competitors are able to reduce the prices of their products and services as a result of the cost savings they might realize from using their own internally developed operating system, our profitability may be adversely affected. Additionally, customers may prefer the operating systems of our competitors over the operating systems that we utilize in our EMV cards. If customers are more attracted to our competitors’ internally developed operating systems, demand for our products and services may be reduced, thereby adversely affecting our results of operations. +Our business depends on the continued viability of the card networks of the Payment Card Brands. +The vast majority of cards we produce and the services we provide are associated with one of the Payment Card Brands. As a result, we depend on the continued viability of the card networks of the Payment Card Brands, including their authorization, clearing and settlement systems. If one or more of the Payment Card Brands were to discontinue their services or otherwise experience a decline in the volume of cards bearing their brands, our results of operations could be adversely affected. +21 +Table of Contents +We are dependent on key executives, the loss of whom could adversely affect our business. +Our future success depends to a significant extent on the efforts of our senior management. We believe there are only a limited number of available and qualified executives with substantial experience in our industry. Accordingly, the loss of the services of one or more of the members of our senior management could delay or prevent us from fully implementing our business strategy and, consequently, significantly and negatively affect our business. +If any member of senior management dies or becomes incapacitated, or leaves the Company to pursue employment opportunities elsewhere, we would need to locate an adequate replacement. To the extent that we are unable to locate an adequate replacement, or are unable to do so within a reasonable period of time, our business may be significantly and negatively affected. +We rely on the timely supply of materials and products and our business could suffer if our suppliers fail to meet their delivery obligations or raise their prices. +Our production operations depend on deliveries of microchips and other materials in a timely manner and, in some cases, on a just‑in‑time basis. From time to time, suppliers may extend lead times, limit the amounts supplied to us or increase prices due to capacity constraints or other factors. We may not be able to meet the demands of our customers in a timely manner, or at all, due to shortages in the supply of critical materials. The supplies we purchase could also have latent quality issues, causing quality problems with the products we produce, increased costs due to scrap or rework, or delays to our delivery timelines. Additionally, certain product materials required in our production operations are only available from a limited number of suppliers, and we may not be able to find an adequate replacement for such materials if our suppliers are unable to meet their delivery obligations to us. In particular, we rely on a small group of suppliers for the provision of EMV microchips that we use in our Financial Payment Cards. For the year ended December 31, 2016, we obtained over 90% of our total purchased EMV microchips from four main suppliers. If any one of these EMV microchip suppliers, or any supplier of our other raw materials, fails to deliver our requirements, our production could be disrupted. In addition, as a result of a shortage, we may be compelled to delay shipments of our products, or devote additional resources to maintaining higher levels of inventory. Consequently, we may experience substantial period‑to‑period fluctuations in our cost of sales and, therefore, in our future results of operations. If we are unable to obtain adequate supplies of quality materials in a timely manner or if there are significant increases in the cost of these materials, our business, financial condition and results of operations could be adversely affected. +Changes in laws, regulations and enforcement activities relating to the financial services industry may adversely affect the products, services and markets in which we operate. +We and our customers are subject to laws and regulations that affect the financial services industry in the many countries in which our products and services are used. In particular, our customers are subject to numerous laws and regulations applicable to banks, financial institutions and card issuers in the United States, Europe and other regions. The U.S. Government, for instance, has increased its scrutiny of a number of credit and debit card practices, from which some of our customers derive significant revenue. Regulation of the payments industry, including the Dodd‑Frank Wall Street Reform and Consumer Protection Act (the “Dodd‑Frank Act”), privacy and data security regulations such as the GLBA, and other regulations applicable to us and our customers, has increased significantly in recent years. Our failure to comply with the laws and regulations applicable to our business may result in the suspension or revocation of our licenses or registrations, the limitation, suspension or termination of our services, and/or the imposition of consent orders or civil and criminal penalties, including fines, which could have an adverse effect on our business, financial condition and results of operations. +Environmental, health and safety laws and regulations expose us to liability and any such liability may adversely affect our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, our products and the raw materials we use in our production processes are subject to numerous environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We may not be able to be at all times, in full compliance with such laws, regulations and +22 +Table of Contents +permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or operate real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liability on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +The scientific examination of, political attention to, and rules and regulations on issues surrounding the existence and extent of climate change may result in an increase in our cost of production due to increases in the price of energy and/or the introduction of energy or carbon taxes. A variety of regulatory developments have been introduced that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gasses. Companies such as ours may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. These developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in environmental regulations could increase our production costs, which could adversely affect our business, financial condition and results of operations. +Certain natural disasters, such as flooding, earthquakes, nuclear disasters, certain weather conditions and other catastrophic events, such as fire, may negatively impact our business. +The occurrence of severe weather events, such as rain, snow, wind, storms, hurricanes or other natural disasters, such as flooding, earthquakes, nuclear disasters, fire or a combination thereof, may negatively impact our business. If certain natural disasters, extreme weather conditions or other events such as fire were to directly damage, destroy or disrupt our production facilities, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. Even if our production facilities are not directly damaged, a large natural disaster or fire may result in disruptions in distribution channels or supply chains and significantly increase the prices of the raw materials we use in our production processes. The impact of any such natural disasters, weather changes or other disasters such as fire depends on the specific geographic circumstances but could be significant, and we cannot predict the economic impact, if any, of natural disasters or climate change. Any such disruptions could have an adverse effect on our business, financial condition and results of operations. +Our insurance may be inadequate to cover future liabilities and our insurance premiums may increase substantially. +We may be subject to significant losses from claims, liabilities, hazards and disasters. While we currently maintain insurance which we believe is adequate and consistent with industry practice, we may experience losses in excess of our insurance coverage or claims not covered by our insurance. Furthermore, we may not be able to obtain insurance coverage in the future on acceptable terms, or at all. Any such losses not covered by insurance may have a material adverse effect on our business, financial condition and results of operations. +Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value. +Our long-lived assets recorded as of December 31, 2016 were $171.8 million, representing 64% of our total assets, of which we have recorded plant, equipment and leasehold improvements of $53.4 million as our operation requires significant investments in machinery and equipment. +We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we were to conclude that an additional future write‑down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write‑down of our long-lived assets may result from, among other things, deterioration in our performance and a +23 +Table of Contents +decline in expected future cash flows and could have an adverse effect on our business, financial condition and results of operations. +During the fourth quarter of 2016, based on the goodwill and other indefinite-lived intangible assets impairment test performed annually as of October 1, we recorded an impairment charge of $2.7 million related to a trademark acquired in the EFT Source acquisition. The impairment was a result of the Company’s plans to discontinue its use of the trademark in its sales, marketing and other business practices. See Part II, Item 8, Financial Statements and Supplementary Data , Note 7 “Goodwill and Other Intangible Assets,” in this Annual Report on Form 10-K for more information. +The ability to recruit, retain and develop qualified personnel is critical to our success and growth. +Our business functions are complex and require wide‑ranging expertise and intellectual capital. For us to successfully compete and grow, we must retain, recruit and develop personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. In addition, we must develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Our efforts to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. Our key personnel may not continue to be employed or we may be unable to attract and retain qualified personnel in the future. Such a failure to retain or attract key personnel could have an adverse effect on our business, financial condition and results of operations. +Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations or guidance. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue and profitability or lead to significant variability in our operating results. These factors include, among others, the cyclicality of the financial card and electronic payment industries, capital requirements, inventory management, the availability of funding, competition, new product developments, technological changes and production problems. For example, if anticipated sales or shipments do not occur when expected, expenses and inventory levels in a given quarter can be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, may be adversely affected. In addition, our effective tax rate currently takes into consideration certain favorable tax rates and incentives which, in the future, may not be available to us. +A number of other factors could lead to fluctuations in quarterly and annual operating results, including: +• order cancellations or rescheduling by customers; +• unpredictable ordering patterns by customers; +• the adoption of EMV technology by customers may be more uneven or unpredictable than we anticipate; +• restructuring and impairment charges; +• fluctuations in currency exchange rates, particularly between the U.S. dollar and the Canadian Dollar and British Pound Sterling; +• intellectual property developments; +• changes in distribution and sales arrangements; +• the failure to win new projects; +• production performance and yields; +• product liability or warranty claims; +• litigation; +• taxation; +• acquisitions or divestitures; +24 +Table of Contents +• obtaining adequate raw materials or production equipment on a timely basis; +• changing raw material prices; +• property loss or damage or interruptions to our business, including as a result of fire, natural disasters or other disturbances at our facilities or those of our customers and suppliers that may exceed the amounts recoverable under our insurance policies; and +• changes in the market value or yield of the financial instruments in which we invest our liquidity. +Unfavorable changes related to certain of the above factors have in the past and any of the above factors may in the future adversely affect our operating results. Furthermore, in periods of industry overcapacity or when our key customers encounter difficulties in their end‑markets, orders are more exposed to cancellations, reductions, price renegotiations or postponements, which in turn reduce our management’s ability to forecast the next quarter or full‑year production levels, net sales and margins. For these reasons, our net sales and operating results may differ materially from our expectations or guidance as visibility is reduced and have an adverse effect on our business, financial condition and results of operations. +Consolidations in the banking, financial services and card processing industry could eliminate existing or potential clients. +Failures, mergers and consolidations of financial institutions and card processors may reduce the number of our clients and potential clients, which could adversely affect our net sales. Further, if our clients fail, merge with or are acquired by other entities that are not our clients, or that use fewer of our services, they may discontinue or reduce their use of our services. It is also possible that the larger financial institutions and card processors that result from mergers or consolidations would have greater leverage in negotiating terms with us or could decide to perform in‑house some or all of the services which we currently provide or could provide. Any of these developments could have an adverse effect on our business, results of operations and financial condition. +We are subject to the credit risk that our customers may be unable to satisfy their obligations to us. +A significant portion of our net sales are on an open credit basis, with typical payment terms of 30 days, and up to 60 days in some cases, and we are subject to the credit risk of our customers being unable to make payments to us. If any of our customers experience a bankruptcy or are otherwise unable to satisfy their payment obligations to us, any related losses, if incurred, could harm our business and have an adverse effect on our operating results and financial condition if they significantly exceed our reserve for losses on our balance sheet. +If we are unable to implement and maintain effective internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected. +As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes‑Oxley Act of 2002 (the “Sarbanes‑Oxley Act”) requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with this Annual Report on Form 10-K, provide a management report on the internal controls over financial reporting. As an “emerging growth company” (as defined by the JOBS Act) we are not currently required to obtain an attestation from our independent public accounting firm on our management report on internal controls over financial reporting. However, we will be required to obtain such an attestation when we are no longer an emerging growth company. +We previously identified and disclosed a material weakness in our internal controls over financial reporting related to the lack of finance expertise that we believed could have resulted in a failure to properly account for non-routine and complex transactions in accordance with GAAP. We believe we have since remediated the previously disclosed material weakness, and that we are in compliance with the Sarbanes‑Oxley Act requirements. However, from time to time, we may discover areas of our internal controls that need improvement. If we or our independent registered public accounting firm discover a material weakness in the future, the disclosure of that fact, even if quickly remediated, could reduce the market’s confidence in our financial statements and harm our stock price. We may not be able to +25 +Table of Contents +effectively and timely implement necessary control changes and employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. If we fail to maintain effective internal controls, we could be subject to regulatory scrutiny and sanctions and investors could lose confidence in the accuracy and completeness of our financial reports. +Changes in accounting standards could materially affect how we report our financial condition and results of operations. +From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of such standards that govern the preparation of our external financial statements. These changes are beyond our control, can be difficult to predict, may require extraordinary efforts or additional costs to implement and could materially impact how we report our financial condition and results of operations. It is possible that we may not be prepared to implement a new accounting standard when it is required to be implemented, which may lead to our financial statements being materially misstated, or to our identifying a material weakness in our internal controls over financial reporting. Additionally, the adoption of new standards could require changes to our business and accounting processes, systems and controls to support recognition and disclosure under the new guidance. This could also lead to investors losing confidence in the accuracy and completeness of our financial reports, and the market price of our common stock being negatively affected, and we could become the subject to investigations by the stock exchange on which our common stock is listed, the SEC, or other regulatory authorities, which could require additional financial and management resources. +The requirements of being a public company have increased certain of our costs and require significant management focus. +As a public company, our legal, accounting and other expenses associated with compliance related and other activities have increased significantly, and therefore, since our initial public offering, our management and other personnel have diverted attention from operational and other business matters to devote substantial time to implementing public company compliance requirements. In particular, we have incurred significant expenses and devoted substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company. We have hired additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and may establish an internal audit function. Costs to obtain director and officer liability insurance also contribute to our increased costs. As a result of the associated liability, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements, which could further increase our compliance costs. +We are an “emerging growth company” and we cannot be certain if the reduced disclosure and other requirements applicable to emerging growth companies will make our common stock less attractive to investors. +We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes‑Oxley Act with respect to our internal control over financial reporting, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non‑binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an emerging growth company upon the earliest to occur of (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we become a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non‑affiliates exceeds $700 million as of the last day of our then most recently completed second fiscal quarter and (ii) the date on which we have issued more than $1.0 billion in non‑convertible debt during the prior three‑year period. We may choose to take advantage of some but not all of these reduced reporting and other burdens. To the extent we take advantage of any of the reduced reporting burdens in our periodic filings, the information that we provide our security holders may be different than the information such holders might get from other public companies in which they hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less +26 +Table of Contents +attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. +In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Stated another way, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to “opt out” of such extended transition period, however, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non‑emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. +Risks Related to Ownership of Our Common Stock +The price of our common stock may fluctuate significantly, and you could lose all or part of your investment. +Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for them. The market price for our common stock could fluctuate significantly for various reasons, including: +• our operating and financial performance and prospects; +• our quarterly or annual earnings or those of other companies in our industry; +• the public’s reaction to our press releases, our other public announcements and our filings with the SEC; +• changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry; +• the failure of research analysts to cover our common stock; +• general economic, industry and market conditions; +• strategic actions by us, our customers or our competitors, such as acquisitions or restructurings; +• new laws or regulations or new interpretations of existing laws or regulations applicable to our business; +• changes in accounting standards, policies, guidance, interpretations or principles; +• material litigation or government investigations; +• changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events; +• changes in key personnel; +• sales of common stock by us, our principal stockholders or members of our management team; +• termination of lock‑up agreements with our management team and principal stockholders; +• the granting or exercise of employee stock options; +• volume of trading in our common stock; and +• impact of the facts described elsewhere in “Risk Factors.” +27 +Table of Contents +In addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially reduce our share price. +Our majority stockholders have the ability to control significant corporate activities +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital), own approximately 37.3% and 22.0% of our common stock, respectively, as of December 31, 2016. As a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to control decision‑making with respect to our business direction and policies. +Matters over which the Tricor Funds, directly or indirectly, exercise control include: +• election of directors; +• mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; +• other acquisitions or dispositions of businesses or assets; +• incurrence of indebtedness and the issuance of equity securities; +• repurchases of stock and payment of dividends; and +• the issuance of shares to management under our incentive plans. +Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial portion of our board of directors. +Messrs. Bradley Seaman, Nicholas Peters and David Rowntree, who are officers or affiliates of Parallel49 Equity (and its predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49 Equity, on the one hand, and of other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors. +There can be no assurances that we will pay ongoing regular dividends to our stockholders or effect stock repurchases under our stock repurchase program. +Since the first quarter of 2016, our Board of Directors has declared a quarterly dividend of $0.045 per share, including with respect to the most recent completed quarter when our Board of Directors approved a dividend on March +28 +Table of Contents +1, 2017, payable on April 7, 2017 to stockholders of record at the close of business on March 17, 2017. In addition, in the second quarter of fiscal year 2016, our board of directors approved a stock repurchase program that authorizes repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of 2,827,105 shares, prior to May 11, 2017. However, our board of directors may, in its sole discretion, change the amount or frequency of dividends and stock repurchases, or discontinue the payment of dividends and stock repurchases entirely. In addition, because we are a holding company with no material direct operations, we are dependent on dividends and other payments from our operating subsidiaries to generate the funds necessary to pay dividends on our common stock. We expect to cause our subsidiaries to make distributions to us in an amount sufficient for us to pay dividends and/or make stock repurchases. However, their ability to make such distributions will be subject to their operating results, cash requirements and financial condition, the applicable provisions of Delaware law that may limit the amount of funds available for distribution and our ability to pay cash dividends, and compliance with covenants and financial ratios related to existing or future indebtedness and other agreements with third parties. In addition, each of the companies in our corporate chain must manage its assets, liabilities and working capital in order to meet all of its cash obligations, including the payment of dividends or distributions. As a consequence of these various limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common stock and/or stock repurchases. Any change in the level of our dividends or the suspension of the payment thereof or change in the level of our stock repurchases or the suspension of the ability to make stock repurchases could adversely affect the market price of our common stock. +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +• the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +• following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors; +• advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings; +• following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, removal of directors only for cause, and only upon the affirmative vote of 75% of our outstanding voting stock at a meeting of our stockholders called for that purpose; +• allowing only our board of directors to fill vacancies on our board of directors; and +• following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, super‑majority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation. +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term +29 +Table of Contents +regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law (the “DGCL”), an anti‑takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti‑takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock. +Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium over the market price, and adversely affect the market price and the voting and other rights of the holders of our common stock. +Our business and stock price may suffer while our public company processes continue to mature. In addition, if securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline. +We are a newly public company. While our public company processes continue to mature, we may face difficulty in forecasting and evaluating our future prospects. If we are unable to execute our business strategy, either as a result of our inability to effectively manage our business in a public company environment or for any other reason, our business, prospects, financial condition and results of operations may be harmed. In addition, as a new public company we have begun to obtain research coverage by securities and industry analysts. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline. +Item 1B. Unresolved Staff Comment s +None. +30 +Table of Contents +Item 2. Propertie s +Information regarding each of our facilities is set forth below. +Location +Operations +Square Footage +Owned/Leased +Littleton, Colorado (Corporate) +Corporate headquarters facility +12,000 +Leased +Littleton, Colorado (Centennial) +Financial Payment Card production +65,000 +Leased +Littleton, Colorado (Midway) +Financial Payment Card production and card personalization services +50,000 +Leased +Roseville, Minnesota (3 facilities) +Financial Payment Card production, card personalization, card packaging services and secure fulfillment center +164,000 +Leased +Fort Wayne, Indiana +Financial Payment Card production +36,000 +Leased +Nashville, Tennessee +Financial Payment Card personalization services and fulfillment +66,000 +Leased +Toronto, Ontario +Financial Payment Card and retail gift card production and card personalization services and fulfillment +67,000 +Leased +Colchester, United Kingdom +Retail gift card production +37,000 +Owned and Leased +Liverpool, United Kingdom +Retail gift card personalization services +30,000 +Owned +Derby, United Kingdom +Design and innovation office +300 +Leased +Item 3. Legal Proceeding s +CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.) +On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 IPO. The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among other things, damages and costs. In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ending December 31, 2015. The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. +On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (“PSLRA”). On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in the EMV market. +On November 16, 2016, the Company filed a motion to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of that motion. +The Company believes these claims are without merit and intends to defend the action vigorously. +31 +Table of Contents +Gemalto S.A. v. CPI Card Group Inc. (2 cases) +First case. This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. Gemalto’s patent will expire in March 2017. The Company successfully moved to transfer the lawsuit to the District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips supplied by two specific vendors. +On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. In light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The PTAB granted the Company’s petition as to all of the independent claims of Gemalto’s patent on November 9, 2016. The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The Company has asked the PTAB to institute reexamination on the remaining dependent claims by way of a reconsideration petition. The district court litigation remains stayed. +Second case. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. Gemalto’s patent will expire in 2018. On May 25, 2016, the Company moved to dismiss Gemalto's case because the patent's claims are not patentable under 35 U.S.C. section 101. The Company’s motion to stay the litigation in light of its pending motion to dismiss was denied on September 2, 2016. The Company’s motion to dismiss remains pending. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. The parties are presently engaged in claim construction activities and are attempting to schedule the deposition of the patent-in-suit’s named inventor. +With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend these suits vigorously. However, the Company may incur material legal expenses, and no assurance can be given that these matters will be resolved in our favor, and if determined adversely, whether indemnification will be received. Accordingly, it is not yet possible to reliably determine any potential liability that could result from these matters in the event of an adverse determination. +CPI Card Group Inc. v. Multi Packaging Solutions, Inc. +On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado. The complaint asserts that MPS ultrasecure gift card packages sold to at least one customer infringe a Company patent on ultrasecure gift card packages. The Company’s patent will expire in 2028. MPS has answered the complaint and counterclaimed for invalidity and noninfringement. The Company’s preliminary injunction request was denied without prejudice after MPS represented that it had voluntarily ceased using the accused technology and will notify CPI before it re-starts. Discovery is ongoing. The Company intends to vigorously assert its intellectual property rights in connection with this litigation . +In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. +Item 4. Mine Safety Disclosure s +Not applicable. +32 +Table of Contents +PART I I +Item 5. Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market Information for Common Stock +Our common stock has been listed on the NASDAQ and the TSX under the symbol “PMTS”. Prior to our initial public offering on October 9, 2015, there was no public market for our common stock. +The following table sets forth for the indicated periods dividends declared and the high and low prices of our common stock as reported on the NASDAQ and TSX. +Cash Dividends +NASDAQ ($) +Toronto Stock Exchange (CAD$) +2016 +Declared +High +Low +High +Low +First Quarter +$ +0.045 +$ +11.10 +$ +7.34 +$ +15.60 +$ +9.90 +Second Quarter +$ +0.045 +$ +9.25 +$ +3.38 +$ +11.90 +$ +4.51 +Third Quarter +$ +0.045 +$ +6.15 +$ +4.16 +$ +8.05 +$ +5.54 +Fourth Quarter +$ +0.045 +$ +6.41 +$ +3.25 +$ +8.18 +$ +4.40 +2015 +Fourth Quarter (from October 9, 2015) +$ +— +$ +13.50 +$ +8.42 +$ +17.23 +$ +11.50 +Holders +There were 12 stockholders of record as of February 20, 2017. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. +Dividend +On March 1, 2017, the Board of Directors approved a quarterly dividend of $0.045 per share. This dividend is payable on April 7, 2017, to shareholders of record as of the close of business on March 17, 2017. The amount, declaration and payment of any future dividends will be subject to the discretion of the Company’s Board of Directors who will evaluate the Company’s dividend program from time to time based on factors it deems relevant. +Issuer Purchases of Equity Securities +In the second quarter of fiscal year 2016, the Company’s Board of Directors approved a stock repurchase program that authorizes repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of 2,827,105 shares. The Company’s repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share repurchase programs or other transactions. Our board of directors may, in its sole discretion, change the amount or frequency of stock repurchases or discontinue stock repurchases entirely. +During the year ended December 31, 2016, we repurchased 1,439,422 shares for $6.0 million. Up to an additional $14.0 million remained available for repurchase under the publicly announced program prior to May 11, 2017, limited to 1,387,683 common shares. +Item 6. Selected Financial Dat a +The financial information in this Annual Report on Form 10-K is presented on a consolidated basis and includes the accounts of the Company and our majority-owned subsidiaries. The consolidated statement of income data for the years ended December 31, 2016, 2015, and 2014 and the consolidated balance sheet data as of December 31, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of income data for the years ended December 31, 2013 and 2012, and the consolidated +33 +Table of Contents +balance sheet data as of December 31, 2014 and 2013 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our selected historical financial data are not necessarily indicative of our future financial condition, future results of operations or future cash flows. +You should read the information set forth below in conjunction with our historical consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. +Year Ended December 31, +Statement of Income Data (1) : +2016 +2015 +2014 +2013 +2012 +(in thousands except share and per share data) +Net sales +Products +$ +168,510 +$ +241,609 +$ +159,220 +$ +101,360 +$ +98,969 +Services +140,190 +132,501 +101,786 +95,010 +84,817 +Total net sales +308,700 +374,110 +261,006 +196,370 +183,786 +Cost of sales +206,802 +238,289 +179,279 +136,874 +130,897 +Gross profit +101,898 +135,821 +81,727 +59,496 +52,889 +Operating expenses +72,916 +68,101 +47,255 +33,347 +32,985 +Income from operations +28,982 +67,720 +34,472 +26,149 +19,904 +Other expense, net +Interest, net (2) +(20,044) +(18,328) +(7,508) +(7,838) +(5,765) +Foreign currency (loss) gain +(417) +59 +(124) +(142) +(279) +Loss on debt modification and early extinguishment +— +(703) +(476) +— +— +Gain on purchase of ID Data +— +— +— +— +604 +Other income (expense), net +20 +359 +(101) +18 +171 +Income before income taxes +8,541 +49,107 +26,263 +18,187 +14,635 +Income tax expense +(3,142) +(17,846) +(10,291) +(6,988) +(5,909) +Net income from continuing operations +5,399 +31,261 +15,972 +11,199 +8,726 +Loss from discontinued operations, net of taxes (3) +— +(606) +(2,670) +(2,612) +(3,796) +Gain on sale of discontinued operation, net of taxes (3) +— +208 +— +— +— +Net income +$ +5,399 +$ +30,863 +$ +13,302 +$ +8,587 +$ +4,930 +Basic and Diluted earnings (loss) per share: (4) +Continuing Operations +$ +0.10 +$ +(0.03) +$ +(0.69) +$ +(0.59) +(0.67) +Discontinued Operations +— +(0.01) +(0.07) +(0.06) +(0.09) +$ +0.10 +$ +(0.04) +$ +(0.76) +$ +(0.65) +$ +(0.76) +Weighted average shares outstanding: +Basic +55,827,409 +45,816,263 +41,199,246 +41,072,350 +41,264,828 +Diluted +56,203,789 +45,816,263 +41,199,246 +41,072,350 +41,264,828 +Other Financial Data: +Depreciation and amortization +$ +16,927 +$ +15,995 +$ +14,198 +$ +11,595 +$ +10,514 +Cash flow provided by operating activities +59,958 +43,922 +26,627 +23,622 +21,325 +Capital expenditures +$ +14,294 +$ +18,670 +$ +16,956 +$ +10,628 +$ +9,113 +December 31, +Consolidated Balance Sheet Data: +2016 +2015 +2014 +2013 +Cash and cash equivalents +$ +36,955 +$ +13,606 +$ +12,941 +$ +9,702 +Total current assets +92,417 +101,019 +88,719 +65,958 +Plant, equipment and leasehold improvements, net +53,419 +52,113 +44,772 +36,650 +Total assets +264,420 +280,353 +266,010 +171,867 +Total debt +301,922 +309,000 +178,810 +122,306 +Total stockholders’ deficit +$ +(95,273) +$ +(86,610) +$ +(21,694) +$ +(36,896) +(1) +Statement of income data includes results from our acquisition of EFT Source from September 2, 2014. +34 +Table of Contents +(2) +Interest expense in 2015 includes $4.7 million of amortization of debt issuance cost and discount related to the early debt repayment of $112.5 million using proceeds from our IPO, and an additional fourth quarter debt repayment of $10.0 million. +(3) +We sold our operating segment located in Nevada in January 2015. This operating segment primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, our consolidated balance sheets, statements of operations and comprehensive income, and statements of cash flows have been reclassified to present this operating segment as a discontinued operation as of and for the years ended December 31, 2015, 2014, 2013 and 2012. See Note 4 “Discontinued Operation and Disposition” in Part II, Item 8. “ Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. +(4) +For a computation of historical basic and diluted earnings per share attributable to continuing and discontinued operations, see Note 14 “Earnings per Share” in Part II, Item 8. “ Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. +Key Performance Indicators +To evaluate the performance of our business, in addition to our results of operations, we utilize a variety of financial and performance measures that we refer to as key performance indicators. These key performance indicators include EMV Financial Payment Card Sales, EBITDA and Adjusted EBITDA. +U.S. Debit and Credit EMV Financial Payment Card Sales +U.S. Debit and Credit EMV Financial Payment Card Sales represent the total number of EMV Financial Payment Cards we sold during the period through our U.S. Debit and Credit Segment. We continue to expect EMV Financial Payment Card Sales to increase due to the growth in the market for Financial Payment Cards and the continued conversion from non-EMV cards to be upgraded to EMV cards in the United States. +Free Cash Flow +We define Free Cash Flow as cash flow from operations less capital expenditures, and we use this metric in analyzing our ability to service and repay our debt. Free Cash Flow is also used as a basis for financial performance under our executive compensation programs. However, this measure does not represent funds available for investment or other discretionary uses since it does not deduct cash used to service our debt. +EBITDA and Adjusted EBITDA +We use EBITDA and Adjusted EBITDA as supplemental measures of our performance. Adjusted EBITDA and Cash Flow Provided by Operating Activities is also a basis for financial performance evaluation under our executive compensation programs. EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for stock-based compensation expense, litigation and related charges, impairments of intangible assets, performance bonus charges in connection with the EFT Source acquisition, restructuring and other charges including severance for employee terminations, foreign currency gain or loss, and other items that are unusual in nature, infrequently occurring or not considered part of our core operations. EBITDA and Adjusted EBITDA are Non-GAAP Financial Measures. The Non-GAAP Financial Measures as presented in this Annual Report on Form 10-K are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. The Non-GAAP Financial Measures should not be considered as a substitute for GAAP metrics such as net income or any other performance measures derived in accordance with GAAP. Also, in the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. EBITDA and Adjusted EBITDA (collectively, the “Non-GAAP Financial Measures”) are the primary measures used by our management to evaluate operating performance. We believe the Non-GAAP Financial Measures are useful to investors because they provide a means to evaluate our operating performance on an ongoing basis using criteria that are used by our internal decision makers and because they are frequently used by investors and other interested parties when comparing companies in our industry that have different financing and capital structures and/or tax rates. We believe the Non-GAAP Financial Measures are meaningful measures because they present a transparent view of our recurring operating performance and allow management to readily view operating +35 +Table of Contents +trends, perform analytical comparisons and identify strategies to improve operating performance. The Non-GAAP Financial Measures, however, are not measures of our liquidity or financial performance under GAAP and should not be considered as an alternative to net income (loss), income from operations, or any other performance measure derived in accordance with GAAP or as an alternative to cash provided by operating activities as a measure of our liquidity. The use of the Non-GAAP Financial Measures instead of net income (loss) has limitations as an analytical tool, including: they do not reflect our capital expenditures, or future requirements for capital expenditures or contractual commitments; they do not reflect changes in, or cash requirements for our working capital needs; they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt; although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and the non-GAAP Financial Measures do not reflect any cash requirements for such replacements; they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; and other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures. The Non-GAAP Financial Measures are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation. +The following table presents our key performance indicators, and a reconciliation of net income from continuing operations to EBITDA and Adjusted EBITDA: +Year Ended December 31, +2016 +2015 +2014 +2013 +(in thousands) +Financial Payment Card Sales +U.S. Debit and Credit EMV card sales +104,488 +154,735 +63,777 +5,588 +Year Ended December 31, +2016 +2015 +2014 +2013 +2012 +(in thousands) +Net income from continuing operations +$ +5,399 +$ +31,261 +$ +15,972 +$ +11,199 +$ +8,726 +Depreciation and amortization +16,927 +15,966 +13,252 +11,595 +10,514 +Interest, net +20,044 +18,328 +7,508 +7,838 +5,765 +Income tax expense +3,142 +17,846 +10,291 +6,988 +5,909 +EBITDA +$ +45,512 +$ +83,401 +$ +47,023 +$ +37,620 +$ +30,914 +Stock-based compensation expense (a) +3,579 +9,633 +4,534 +610 +— +Litigation and related charges (b) +3,543 +— +— +— +— +Impairment of intangible asset (c) +2,700 +— +— +— +— +EFT Source performance bonuses (d) +1,000 +1,000 +— +— +— +Restructuring and other charges (e) +428 +1,131 +— +— +— +Foreign currency (gain) loss +417 +(59) +124 +142 +279 +Loss on debt modification and early extinguishment (f) +— +703 +476 +— +— +Professional fees (g) +— +409 +2,062 +— +— +Gain on purchase of ID Data (h) +— +— +— +— +(604) +Adjusted EBITDA +$ +57,179 +$ +96,218 +$ +54,219 +$ +38,372 +$ +30,589 +Cash Flow Information +Cash flow provided by operating activities +$ +59,958 +$ +43,922 +$ +26,627 +$ +23,622 +$ +21,325 +Capital expenditures +14,294 +18,670 +16,956 +10,628 +9,113 +Free cash flow (i) +$ +45,664 +$ +25,252 +$ +9,671 +$ +12,994 +$ +12,212 +(a) +Represents compensation expense incurred in connection with the Company’s phantom stock plan and other stock-based compensation plans. See Note 17 “Stock Option Plans” in Part II, Item 8 “ Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. +(b) +Represents legal costs incurred in connection with certain patent and shareholder litigation. +(c) +Represents an impairment of a trademark, as a result of the Company’s plans to discontinue its use of the trademark in its sales, marketing and other business practices . +(d) +Represents performance bonuses earned by Company employees in connection with the acquisition of EFT Source. +(e) +In 2016, represents employee termination costs incurred primarily in connection with the elimination of a production shift at one of our facilities. In 2015, represents facility contract termination costs in connection with the shut-down and closure of our Petersfield, United Kingdom operation. +36 +Table of Contents +(f) +Represents loss on the modification of the Company’s Senior Term Loan dated September 2, 2014 in connection with the acquisition of EFT Source. In 2015, an additional loss on debt modification and early extinguishment was incurred when the Senior Term Loan was repaid in full using a portion of the proceeds from the $435.0 million First Lien Term Loan on August 17, 2015. +(g) +Includes investment banking, advisory and related professional fees and expenses incurred in connection with the EFT Source acquisition and our consideration of liquidity alternatives. +(h) +Represents gain on our purchase of certain assets of ID Data, Limited. +(i) +In 2015, amount is net of a $13.9 million payment related to the settlement of the Company’s Phantom Stock Plan. +Item 7. Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control. See "Risk Factors" and “Forward-Looking Statements.” Our 2014 reported results include four months of results from EFT Source. +Company Overview +We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this growing subsector of the financial technology market. Our customers are primarily leading national and regional banks, independent community banks, credit unions, Prepaid Debit Card program managers, Group Service Providers and card transaction processors. We serve a diverse set of over 4,000 direct and indirect customers, including many of the largest issuers of debit and credit cards in the United States and Canada, the largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card transaction processors. +We serve our customers through a network of ten production and card services facilities, including eight high-security facilities in the United States and Canada that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. We have a leading network of high-security production facilities in the United States and Canada, allowing us to optimize our solutions offerings to serve the needs of our diverse and long-term customer base. +In addition to our eight facilities in the United States and Canada, we have two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards that are not issued on the networks of the Payment Card Brands, as well as provide personalization, packaging and fulfillment services. +2016 Summary of Financial Performance +During the year ended December 31, 2016, net sales decreased 17.5% from 2015, to $308.7 million, and income from operations decreased 57.2% from 2015, to $29.0 million. The operating profit margin for the year ended December 31, 2016 was 9.4%, a decrease from 18.1% in 2015. +For the year ended December 31, 2016, we generated net income from continuing operations of $5.4 million, which represented a decrease of 82.7% from 2015, and $57.2 million of Adjusted EBITDA, a decrease of 40.6% compared to the prior year. Adjusted EBITDA is a Non-GAAP Financial Measure. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income from continuing operations, the most comparable GAAP measure, see “Key Performance Indicators—EBITDA and Adjusted EBITDA.” +37 +Table of Contents +Segment Overview +Our business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and U.K. Limited. +U.S. Debit and Credit Segment +Our U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and Prepaid Debit Cards issued on the networks of the Payment Card Brands and Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands (including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards). This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. +U.S. Prepaid Debit Segment +Our U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card issuers in the United States. Services provided include tamper-evident security packaging services, card personalization and fulfillment services and our recently launched Print on Demand services, where we are able to produce all images, personalized payment cards and related collateral on a one-by-one, on demand, basis for our customers, enabling individualized offerings and reducing waste. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages mentioned above. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. +U.K. Limited Segment +Our U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment services. Neither of our operations in this segment are certified by the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. +Other +Our operations in Ontario, Canada and Petersfield, United Kingdom, and our corporate activities are reflected in “Other”. In August 2015, we completed the shut-down of the operations at our Petersfield facility. The Petersfield facility is not material to our business. See Note 18 “Segment Reporting” in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for certain additional information regarding our reporting segments. +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive income. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of Financial Payment Cards in contact EMV, dual-interface EMV, contactless and magnetic stripe formats. We also generate product revenue from the sale of our Card@Once ® instant issuance systems, Private Label Credit Cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper-evident security packaging, fulfillment services and Print on Demand services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance Financial +38 +Table of Contents +Payment cards. We also generate services revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click-fees generated from our patented MYCA™ software. +Generally, we recognize net sales related to products upon shipment and services upon the provision of the service, when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. See “Critical Accounting Policies and Estimates—Revenue Recognition.” +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including microchips in the case of EMV cards and, additionally, RFID assemblies in the case of dual-interface EMV cards, labor costs, material costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Product costs also include desktop card personalization terminals in the case of Card@Once ® instant issuance system sales. Services costs include the cost of labor, raw materials in the case of tamper-evident security packaging, and equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, promotional activity and employee relations. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service, human resources and administrative personnel, including payroll, benefits and stock-based compensation expense, and outside legal and other advisory fees, including audit, tax advisory and consulting fees. Operating expense also includes depreciation and amortization expense, and impairment charges on tangible and intangible assets. +Income from Operations and Operating Margin +Income from operations consists of our gross profit less our operating expenses. Operating margin is income from operations as a percentage of net sales. +Other Expense, net +Other expense, net consists primarily of interest expense and foreign currency gains and losses. +Net Income from Continuing Operations +Net income from continuing operations consists of our income from operations, less other expense, net and income tax expense. +39 +Table of Contents +Results of Operations +Year Ended December 31, 2016 Compared With Year Ended December 31, 2015 +The table below presents our results of operations for the years ended December 31, 2016 and 2015: +Year Ended December 31, +2016 +2015 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +168,510 +$ +241,609 +$ +(73,099) +(30.3) +% +Services +140,190 +132,501 +7,689 +5.8 +% +Total net sales +308,700 +374,110 +(65,410) +(17.5) +% +Cost of sales +206,802 +238,289 +(31,487) +(13.2) +% +Gross profit +101,898 +135,821 +(33,923) +(25.0) +% +Operating expenses +72,916 +68,101 +4,815 +7.1 +% +Income from operations +28,982 +67,720 +(38,738) +(57.2) +% +Other expense, net: +Interest, net +(20,044) +(18,328) +(1,716) +9.4 +% +Foreign exchange (loss) gain +(417) +59 +(476) +* +% +Loss on debt modification and early extinguishment +— +(703) +703 +(100.0) +% +Other income (expense) +20 +359 +(339) +(94.4) +% +Income before income taxes +8,541 +49,107 +(40,566) +(82.6) +% +Income tax expense +(3,142) +(17,846) +14,704 +* +% +Net income from continuing operations +5,399 +31,261 +(25,862) +(82.7) +% +Loss from a discontinued operation +— +(398) +398 +(100.0) +% +Net income +$ +5,399 +$ +30,863 +$ +(25,464) +(82.5) +% +* Not meaningful +Net Sales +Year Ended December 31, +2016 +2015 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +U.S. Debit and Credit—Products +$ +146,333 +$ +217,863 +$ +(71,530) +(32.8) +% +U.S. Debit and Credit—Services +62,462 +45,805 +16,657 +36.4 +% +U.S. Debit and Credit—Total +208,795 +263,668 +(54,873) +(20.8) +% +U.S. Prepaid Debit—Products +— +— +— +— +U.S. Prepaid Debit—Services +60,065 +65,878 +(5,813) +(8.8) +% +U.S. Prepaid Debit—Total +60,065 +65,878 +(5,813) +(8.8) +% +U.K. Limited—Products +17,468 +22,211 +(4,743) +(21.4) +% +U.K. Limited—Services +12,221 +12,150 +71 +0.6 +% +U.K. Limited—Total +29,689 +34,361 +(4,672) +(13.6) +% +Other—Products +6,950 +9,321 +(2,371) +(25.4) +% +Other—Services +6,160 +8,099 +(1,939) +(23.9) +% +Other—Total +13,110 +17,420 +(4,310) +(24.7) +% +Eliminations +(2,959) +(7,217) +4,258 +* +% +Total +$ +308,700 +$ +374,110 +$ +(65,410) +(17.5) +% +* Not meaningful +40 +Table of Contents +Net sales for the year ended December 31, 2016 decreased $65.4 million, or 17.5%, to $308.7 million compared to $374.1 million for the year ended December 31, 2015. The decrease in net sales during 2016 was due to a 20.8% decrease in U.S. Debit and Credit, an 8.8% decrease in U.S. Prepaid Debit, a 13.6% decrease in U.K. Limited and a 24.7% decrease in Other. +U.S. Debit and Credit +Net sales for U.S. Debit and Credit for the year ended December 31, 2016 decreased $54.9 million, or 20.8%, to $208.8 million compared to $263.7 million for the year ended December 31, 2015. The decrease in net sales was driven by a $46.1 million decrease in EMV related revenue, a $24.9 million decrease in magnetic stripe card and other sales due to the ongoing shift of card issuing bank customers from magnetic stripe cards to EMV cards, partially offset by a $16.1 million net sales increase in card personalization, fulfillment and other services. +The decrease in EMV revenue is the result of continued softness in demand for EMV cards, particularly with large issuer and processor customers. For the year ended December 31, 2016, we sold 104.5 million EMV cards at an average selling price of $0.95 per card compared to 154.7 million EMV cards at an average selling price of $0.94 per card for the year ended December 31, 2015. The increase in ASP for EMV cards during the year ended December 31, 2016 compared to 2015 is primarily due to customer mix. +U.S. Prepaid Debit +Net sales for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $5.8 million, or 8.8%, to $60.1 million compared to $65.9 million for the year ended December 31, 2015. The decrease was due to net reductions in volumes, and lower average prices on our tamper-evident secured packaging services. The decrease in volumes included the impact of a large customer shifting some of its business to a competitor, who we believe was infringing on a Company patent, as further described in Part I, Item 3, “Legal Proceedings” of this Annual Report on Form 10-K. +U.K. Limited +Net sales for U.K. Limited for the year ended December 31, 2016 decreased $4.7 million, or 13.6%, to $29.7 million compared to $34.4 million for the year ended December 31, 2015. The decrease was primarily attributable to f luctuations in the exchange rate between the United States dollar and the British Pound, which resulted in a reduction to net sales for the year ended December 31, 2016 of $4.0 million compared to the previous year. A decrease in card sales also contributed to the decline. +Other +Net sales in Other decreased $4.3 million, or 24.7%, from the year ended 2016 to 2015. The decrease related primarily to the shut-down of the Petersfield, U.K. operation in August 2015, which contributed $4.1 million in net sales during the year ended December 31, 2015. Net sales in Canada decreased $0.2 million during the year ended December 31, 2016 compared 2015, as the impact of foreign currency exchange rates during the year more than offset an increase in sales of manufactured EMV cards and card personalization in Canada. +41 +Table of Contents +Cost of Sales +Year Ended December 31, +2016 +2015 +$ Change +% Change +(dollars in thousands) +Cost of sales by segment: +U.S. Debit and Credit +$ +138,939 +$ +166,551 +$ +(27,612) +(16.6) +% +U.S. Prepaid Debit +39,017 +39,498 +(481) +(1.2) +% +U.K. Limited +21,713 +25,234 +(3,521) +(14.0) +% +Other +10,007 +14,427 +(4,420) +(30.6) +% +Eliminations +(2,874) +(7,421) +4,547 +* +% +Total +$ +206,802 +$ +238,289 +$ +(31,487) +(13.2) +% +* Not meaningful +Cost of sales for the year ended December 31, 2016 decreased $31.5 million, or 13.2%, to $206.8 million compared to $238.3 million for the year ended December 31, 2015. The decrease in cost of sales was due to a 16.6% decrease in U.S. Debit and Credit, a 1.2% decrease in U.S. Prepaid Debit, a 14.0% decrease in U.K. Limited and a 30.6% decrease in Other. +U.S. Debit and Credit +Cost of sales for U.S. Debit and Credit for the year ended December 31, 2016 decreased $27.6 million, or 16.6%, to $138.9 million compared to $166.6 million for the year ended December 31, 2015. The decrease was driven by lower EMV chip and magnetic stripe card sales volumes resulting in lower corresponding manufacturing costs. Lower per unit EMV chip prices also contributed to the decreased cost of sales. Higher costs of sales from growth in card personalization, fulfillment and other services partially offset the above decreases. +U.S. Prepaid Debit +Cost of sales for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $0.5 million, or 1.2%, to $39.0 million compared to $39.5 million for the year ended December 31, 2015. The decrease was primarily due to a decrease in materials, corresponding to the decrease in net sales described above, partially offset by increased labor and overhead costs incurred during the three months ended December 31, 2016, including costs to ramp up Print on Demand services capabilities. +U.K. Limited +Cost of sales for U.K. Limited for the year ended December 31, 2016 decreased $3.5 million, or 14.0%, to $21.7 million compared to $25.2 million for the year ended December 31, 2015. The decrease in cost of sales was primarily due to foreign currency exchange rate fluctuations of $2.9 million and a decrease in cards sold , as discussed above. +Other +Other cost of sales decreased by $4.4 million, or 30.6%, to $10.0 million compared to $14.4 million in 2015. The decrease was primarily related to our Petersfield, U.K. operation, shut-down in August 2015, which incurred $4.1 million in cost of sales during the year ended December 31, 2015. Increased cost of sales related increased sales of manufactured EMV cards and card personalization in Canada, was offset by the impact of foreign currency exchange rate fluctuations. +42 +Table of Contents +Gross Profit and Gross Profit Margin +Year Ended December 31, +% of +% of +2016 +net sales +2015 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +U.S. Debit and Credit +$ +69,856 +33.5 +% +$ +97,117 +36.8 +% +$ +(27,261) +(28.1) +% +U.S. Prepaid Debit +21,048 +35.0 +% +26,380 +40.0 +% +(5,332) +(20.2) +% +U.K. Limited +7,976 +26.9 +% +9,127 +26.6 +% +(1,151) +(12.6) +% +Other +3,018 +23.0 +% +3,197 +18.4 +% +(179) +(5.6) +% +Total +$ +101,898 +33.0 +% +$ +135,821 +36.3 +% +$ +(33,923) +(25.0) +% +Gross profit for the year ended December 31, 2016 decreased $33.9 million, or 25.0%, to $101.9 million compared to $135.8 million for the year ended December 31, 2015. Gross profit margin for the year ended December 31, 2016 decreased to 33.0% compared to 36.3% for the year ended December 31, 2015. +U.S. Debit and Credit +Gross profit for U.S. Debit and Credit for the year ended December 31, 2016 decreased $27.3 million, or 28.1%, to $69.9 million compared to $97.1 million for the year ended December 31, 2015. The decrease in gross profit was primarily a result of decreased EMV net sales offset by growth in our card personalization and fulfillment services. Gross profit margin for U.S. Debit and Credit for the year ended December 31, 2016 decreased to 33.5% compared to 36.8% for the year ended December 31, 2015 due to lower overhead cost absorption attributed to reduced sales volumes. +U.S. Prepaid Debit +Gross profit for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $5.3 million, or 20.2%, to $21.0 million compared to $26.4 million for the year ended December 31, 2015. Gross profit margin for U.S. Prepaid Debit for the year ended December 31, 2016 decreased to 35.0% compared to 40.0% for the year ended December 31, 2015. The decreases in gross profit and gross profit margin were primarily due to decreased net sales, from net reductions in volumes, lower average prices on our tamper-evident secured packaging services, and increased fourth quarter labor and overhead costs, including costs to ramp up Print on Demand capabilities. +U.K. Limited +Gross profit for U.K. Limited for the year ended December 31, 2016 decreased $1.2 million, or 12.6%, to $8.0 million compared to $9.1 million for the year ended December 31, 2015, primarily due to foreign currency exchange rate fluctuations of $1.1 million. Gross profit margin for the U.K. Limited segment for the year ended December 31, 2016 increased to 26.9% compared to 26.6% for the year ended December 31, 2015. +Other +Gross profit in Other decreased 5.6% in 2016 to $3.0 million from $3.2 million in 2015. The decrease was primarily related to the impact of foreign currency exchange rate fluctuations. +43 +Table of Contents +Operating Expenses +Year Ended December 31, +2016 +2015 +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +U.S. Debit and Credit +$ +26,100 +$ +25,562 +$ +538 +2.1 +% +U.S. Prepaid Debit +4,837 +5,679 +(842) +(14.8) +% +U.K. Limited +5,572 +6,417 +(845) +(13.2) +% +Other +36,407 +30,443 +5,964 +19.6 +% +Total +$ +72,916 +$ +68,101 +$ +4,815 +7.1 +% +Operating expenses for the year ended December 31, 2016 increased $4.8 million, or 7.1%, to $72.9 million compared to $68.1 million for the year ended December 31, 2015. The increase in operating expenses was due to a 19.6% increase in Other and a 2.1% increase in U.S. Debit and Credit, partially offset by a 14.8% decrease in U.S. Prepaid Debit and a 13.2% decrease in U.K. Limited. +U.S. Debit and Credit increased $0.5 million, primarily due to increased salaries and benefits to support growth in the card personalization business. +U.S. Prepaid Debit decreased $0.8 million, primarily due to cost reductions in sales and administrative salaries. +U.K. Limited decreased $0.8 million, primarily due to the impact of foreign currency exchange rate fluctuations of $0.7 million. +The $6.0 million increase in Other was primarily due to public company costs of $5.5 million, patent and shareholder litigation and related charges of $3.5 million, a $2.7 million intangible asset impairment charge related to the Company’s plans to discontinue the use of a trademark in its sales, marketing and other business practices, and a $1.5 million increase of other corporate expenses (primarily related to increases in insurance and information technology expenses). These cost increases were partially offset by a $6.1 million decrease in stock-based compensation expense, a $0.7 million reduction of expenses relating to the prior year restructuring charge due to shut-down of the Petersfield, U.K. operation, and a reduction of $0.4 million related to IPO transaction expenses. Stock-based compensation expense during the year ended December 31, 2015 included an $8.7 million charge in connection with the settlement of our obligation under the phantom stock plan in conjunction with our IPO. +Public company costs included $1.6 million of legal and insurance costs, $1.5 million of accounting, reporting and public filing costs, and $2.4 million in salaries and benefits, board fees, contract labor and hiring expenses. +Income from Operations and Operating Margin +Year Ended December 31, +% of +% of +2016 +net sales +2015 +net sales +$ Change +% Change +(dollars in thousands) +Income from operations by segment: +U.S. Debit and Credit +$ +43,756 +21.0 +% +$ +71,555 +27.1 +% +$ +(27,799) +(38.8) +% +U.S. Prepaid Debit +16,211 +27.0 +% +20,701 +31.4 +% +(4,490) +(21.7) +% +U.K. Limited +2,404 +8.1 +% +2,710 +7.9 +% +(306) +(11.3) +% +Other +(33,389) +* +(27,246) +* +(6,143) +* +% +Total +$ +28,982 +9.4 +% +$ +67,720 +18.1 +% +$ +(38,738) +(57.2) +% +* Not meaningful +44 +Table of Contents +Income from operations for the year ended December 31, 2016 decreased $38.7 million, or 57.2%, to $29.0 million compared to $67.7 million for the year ended December 31, 2015. Operating margins for the year ended December 31, 2016 decreased to 9.4% compared to 18.1% for the year ended December 31, 2015. +U.S. Debit and Credit +Income from operations for U.S. Debit and Credit for the year ended December 31, 2016 decreased $27.8 million, or 38.8%, to $43.8 million compared to $71.6 million for the year ended December 31, 2015. Operating margins for the year ended December 31, 2016 decreased to 21.0% compared to 27.1% for the year ended December 31, 2015 due primarily to the lower sales, lower overhead cost absorption attributed to the reduced sales volumes and increased salaries and benefits to support growth in the card personalization business, as discussed above. +U.S. Prepaid Debit +Income from operations for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $4.5 million, or 21.7%, to $16.2 million compared to $20.7 million for the year ended December 31, 2015. Operating margins for the year ended December 31, 2016 decreased to 27.0% compared to 31.4% in 2015. The decrease in income from operations and operating margins was due to decreased net sales, and increased fourth quarter labor and overhead costs, partially offset by the decreased operating expenses, as discussed above. +U.K. Limited +Income from operations for the U.K. Limited segment for the year ended December 31, 2016 decreased $0.3 million, or 11.3%, to $2.4 million compared to $2.7 million for the year ended December 31, 2015 due primarily to the impact of foreign currency exchange rate fluctuations. +Other +Loss from operations in Other of $33.4 million represented an increase of $6.1 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. The additional loss was driven primarily by the higher operating expenses discussed above. +Interest, net +Interest expense for the year ended December 31, 2016 increased $1.7 million, or 9.4%, to $20.0 million compared to $18.3 million for the year ended December 31, 2015. The increase in interest expense was driven by higher average debt balances outstanding relating to the $435.0 million First Lien Term Loan that we put in place in August 2015 in conjunction with the partial redemption of the Series A Preferred Stock. Interest expense in 2015 also includes $4.7 million of amortization of debt issuance cost and discount related to the early debt repayment of $112.5 million using proceeds from our IPO, and an additional fourth quarter debt repayment of $10.0 million. +Loss on debt modification and early extinguishment +Loss on debt modification and early extinguishment for the year ended December 31, 2015 was $0.7 million related to unamortized deferred financing costs and discount on our Senior Term Loan dated September 2, 2014, which was repaid with proceeds from our $435.0 million First Lien Term Loan. Refer to Note 10 “Long-Term Debt and Credit Facility”, in Part II, Item 8 “ Financial Statements and Supplementary Data ” of this Annual Report on Form 10-K. +Income tax expense +Income tax expense for the year ended December 31, 2016 decreased $14.7 million, to $3.1 million, compared to $17.8 million for the year ended December 31, 2015 driven by the decrease in income before taxes of $40.6 million. The effective tax rate increased to 36.8% during the year ended December 31, 2016 from 36.3% for the year ended December 31, 2015 due primarily to the impact of state income taxes. +45 +Table of Contents +Net income +Net income for the year ended December 31, 2016 decreased $25.5 million, to $5.4 million, compared to $30.9 million for the year ended December 31, 2015. The decrease in net income was driven by several factors, including lower net sales and gross profit, and higher operating expenses and interest cost, as described above. +Fourth Quarter +Our net sales decreased 28.0% in the fourth quarter 2016 compared to the fourth quarter of 2015. Net sales for our U.S. Debit and Credit segment decreased 35.2% in the fourth quarter of 2016 compared to fourth quarter of 2015 due to the continued decline in demand of EMV chip cards. +Net sales for our U.S. Prepaid Debit segment increased 2.0% in the fourth quarter of 2016 compared to the fourth quarter of 2015 as a result of net sales volume increases across our retail prepaid customer base, partially offset by a large customer shifting some of its business to a competitor, as previously discussed. +Net sales for our U.K. Limited segment decreased 27.7% in the fourth quarter of 2016 compared to the fourth quarter of 2015, due primarily to foreign currency exchange rates. Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a reduction to net sales for the three months ended December 31, 2016 of $1.7 million compared to the same period in the previous year. Also contributing to the decrease was a decline in cards sold. +During the fourth quarter of 2016 there was a loss from operations of $0.9 million compared to income from operations of $10.0 million in the fourth quarter of 2015. The decrease in income from operations during the three months ended December 31, 2016 compared to 2015 is primarily due to decreased net sales in U.S. Debit and Credit. The decrease in net sales has been primarily due to continued softness in demand for EMV cards, particularly with large issuer customers. Additionally, included in the loss from operations during the three months ended December 31, 2016 was a $2.7 million impairment charge for a Company trademark resulting from the Company’s plans to discontinue its use of the trademark in its sales, marketing and other business practices. +46 +Table of Contents +Year Ended December 31, 2015 Compared With Year Ended December 31, 2014 +The table below presents our results of operations for the years ended December 31, 2015 and 2014: +Year Ended December 31, +2015 +2014 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +241,609 +$ +159,220 +$ +82,389 +51.7 +% +Services +132,501 +101,786 +30,715 +30.2 +% +Total net sales +374,110 +261,006 +113,104 +43.3 +% +Cost of sales +238,289 +179,279 +59,010 +32.9 +% +Gross profit +135,821 +81,727 +54,094 +66.2 +% +Operating expenses +68,101 +47,255 +20,846 +44.1 +% +Income from operations +67,720 +34,472 +33,248 +96.4 +% +Other expense, net: +Interest, net +(18,328) +(7,508) +(10,820) +144.1 +% +Foreign exchange gain (loss) +59 +(124) +183 +* +Loss on debt modification and early extinguishment +(703) +(476) +(227) +* +Other income (expense) +359 +(101) +460 +* +Income before income taxes +49,107 +26,263 +22,844 +87.0 +% +Income tax expense +(17,846) +(10,291) +(7,555) +73.4 +% +Net income from continuing operations +31,261 +15,972 +15,289 +95.7 +% +Loss from discontinued operations +(398) +(2,670) +2,272 +(85.1) +% +Net income +$ +30,863 +$ +13,302 +$ +17,561 +132.0 +% +* Not meaningful +Net Sales +Year Ended December 31, +2015 +2014 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +U.S. Debit and Credit—Products +$ +217,863 +$ +132,975 +$ +84,888 +63.8 +% +U.S. Debit and Credit—Services +45,805 +20,040 +25,765 +128.6 +% +U.S. Debit and Credit—Total +263,668 +153,015 +110,653 +72.3 +% +U.S. Prepaid Debit—Products +— +— +— +— +U.S. Prepaid Debit—Services +65,878 +59,271 +6,607 +11.1 +% +U.S. Prepaid Debit—Total +65,878 +59,271 +6,607 +11.1 +% +U.K. Limited—Products +22,211 +24,623 +(2,412) +(9.8) +% +U.K. Limited—Services +12,150 +10,540 +1,610 +15.3 +% +U.K. Limited—Total +34,361 +35,163 +(802) +(2.3) +% +Other—Products +9,321 +11,682 +(2,361) +(20.2) +% +Other—Services +8,099 +12,226 +(4,127) +(33.8) +% +Other—Total +17,420 +23,908 +(6,488) +(27.1) +% +Eliminations +(7,217) +(10,351) +3,134 +(30.3) +% +Total +$ +374,110 +$ +261,006 +$ +113,104 +43.3 +% +Net sales for the year ended December 31, 2015 increased $113.1 million, or 43.3%, to $374.1 million compared to $261.0 million for the year ended December 31, 2014. The increase in net sales during 2015 was due to +47 +Table of Contents +growth in our U.S. Debit and Credit segment and U.S. Prepaid Debit segment net sales of 72.3% and 11.1%, respectively, offset by a 2.3% decline in our U.K. Limited segment net sales compared to 2014. +U.S. Debit and Credit +Net sales for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased $110.7 million, or 72.3%, to $263.7 million compared to $153.0 million for the year ended December 31, 2014. The increase in net sales was driven by an increase in EMV related revenue of $79.0 million, and an increase in net sales of $57.2 million from the EFT Source business acquired in September 2014, partially offset by a decrease in magnetic stripe card sales of $25.5 million. +The increase in EMV revenue of $79.0 million was driven by our card issuing bank customers or end-users adopting EMV technology for debit and credit cards as the conversion of the United States market from magnetic stripe Financial Payment Cards to EMV cards continues. For the year ended December 31, 2015, we sold 154.7 million EMV cards at an average selling price of $0.94 per card compared to 63.8 million EMV cards at an average selling price of $1.04 per card for the year ended December 31, 2014. +Of the $57.2 million increase in revenue related to our EFT Source business, $45.6 million was attributed to a full year of sales being reflected in our 2015 results, while in 2014, sales were included from the September 2, 2014 acquisition date through December 31, 2014. The remaining growth of $11.6 million was driven by increased customer activity in our card personalization and fulfillment services, including continued growth of Card@Once ® in 2015. The $25.5 million decline in magnetic stripe revenue was driven by the ongoing shift of our card issuing bank customers from magnetic stripe cards to EMV cards. +U.S. Prepaid Debit +Net sales for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $6.6 million, or 11.1%, to $65.9 million compared to $59.3 million for the year ended December 31, 2014. The increase was driven by our largest customer for this segment refreshing its packaging designs in the first quarter of 2015. This customer activity produced a significant increase in net sales in the first quarter of 2015, with buying patterns returning to normal levels for the remainder of the year ended December 31, 2015. +U.K. Limited +Net sales for the U.K. Limited segment for the year ended December 31, 2015 decreased $0.8 million, or 2.3%, to $34.4 million compared to $35.2 million for the year ended December 31, 2014. Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a reduction to net sales for the year ended December 31, 2015 of $2.5 million over the previous year. +Other +Net sales in Other decreased $6.5 million, or 27.1%, from 2014 to 2015. +Net sales for our Canada operations decreased $2.4 million for the year ended December 31, 2015 compared to 2014, driven by fluctuations in foreign currency exchange rates. Fluctuations in the exchange rate between the United States dollar and the Canadian Dollar resulted in a reduction to net sales for the year ended December 31, 2015 of $2.1 million over the previous year. Our Petersfield, U.K. operation was shut-down in August 2015 which primarily drove the remaining $4.1 million decrease in Other net sales year over year. +48 +Table of Contents +Cost of Sales +Year Ended December 31, +2015 +2014 +$ Change +% Change +(dollars in thousands) +Cost of sales by segment: +U.S. Debit and Credit +$ +166,551 +$ +103,555 +$ +62,996 +60.8 +% +U.S. Prepaid Debit +39,498 +38,249 +1,249 +3.3 +% +U.K. Limited +25,234 +26,992 +(1,758) +(6.5) +% +Other +14,427 +20,926 +(6,499) +(31.1) +% +Eliminations +(7,421) +(10,443) +3,022 +* +% +Total +$ +238,289 +$ +179,279 +$ +59,010 +32.9 +% +* Not meaningful +Cost of sales for the year ended December 31, 2015 increased $59.0 million, or 32.9%, to $238.3 million compared to $179.3 million for the year ended December 31, 2014. +U.S. Debit and Credit +Cost of sales for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased $63.0 million, or 60.8%, to $166.6 million compared to $103.6 million for the year ended December 31, 2014. The increase in cost of sales was primarily attributable to a $26.9 million increase in technology materials (primarily EMV microchips), a $12.1 million increase in other materials, a $12.7 million increase in overhead, an $8.6 million increase in labor and benefits costs and a $3.0 million increase in depreciation and amortization. +The $26.9 million increase in technology materials was driven by the increased number of EMV cards sold, as noted above, and is a direct result of U.S. card issuing banks upgrading debit and credit cards to EMV which include an integrated circuit chip assembly and in certain cases may also include an RFID inlay assembly. The $12.1 million increase in other materials and the $12.7 million increase in overhead expenses were driven primarily by the continued integration of the EFT Source business and, to a lesser extent, by our new secure EMV production and card services facility that became operational in 2014. The $8.6 million increase in labor costs was driven by the additional employees we added from the acquisition of EFT Source and additional labor costs associated with the production of EMV cards, which are more complex than non-EMV cards and therefore have a higher labor component. Finally, increases in depreciation and amortization expense were driven by the EFT Source acquisition and the new secure EMV production and card services facility noted above. +U.S. Prepaid Debit +Cost of sales for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $1.2 million, or 3.3%, to $39.5 million compared to $38.2 million for the year ended December 31, 2014. The increase in cost of sales was related to the increased level of net sales referenced above, partially offset by more efficient operations. +U.K. Limited +Cost of sales for the U.K. Limited segment for the year ended December 31, 2015 decreased $1.8 million, or 6.5%, to $25.2 million compared to $27.0 million for the year ended December 31, 2014. The decrease in cost of sales was driven by foreign currency exchange rate fluctuations, as discussed above. +Other +Other cost of sales decreased by $6.5 million, or 31.1%, to $14.4 million compared to $20.9 million in 2014. The decrease was primarily related to a decrease of $4.1 million in cost of sales related to our Petersfield, U.K. operation, shut-down in August 2015, as discussed above and decreases related to our Canada operation of $2.2 million. The decrease in cost of sales in Canada was driven by foreign currency exchange rate fluctuations, discussed above. +49 +Table of Contents +Gross Profit and Gross Profit Margin +Year Ended December 31, +% of +% of +2015 +net sales +2014 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +U.S. Debit and Credit +$ +97,117 +36.8 +% +$ +49,460 +32.3 +% +$ +47,657 +96.4 +% +U.S. Prepaid Debit +26,380 +40.0 +% +21,022 +35.5 +% +5,358 +25.5 +% +U.K. Limited +9,127 +26.6 +% +8,171 +23.2 +% +956 +11.7 +% +Other +3,197 +18.4 +% +3,074 +12.9 +% +123 +4.0 +% +Total +$ +135,821 +36.3 +% +$ +81,727 +31.3 +% +$ +54,094 +66.2 +% +Gross profit for the year ended December 31, 2015 increased $54.1 million, or 66.2%, to $135.8 million compared to $81.7 million for the year ended December 31, 2014. Gross profit margin for the year ended December 31, 2015 increased to 36.3% compared to 31.3% for the year ended December 31, 2014. +U.S. Debit and Credit +Gross profit for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased $47.7 million, or 96.4%, to $97.1 million compared to $49.5 million for the year ended December 31, 2014. Increases in gross profit were driven by a $30.3 million contribution from increased EMV volumes (net of reduced gross profit from non-EMV cards) and a $17.4 million increase in personalization and fulfillment services, of which $16.2 million increased due to EFT Source results being reflected for the full year in 2015 and from September 2, 2014 through December 31, 2014 during the prior year, with the remaining increase of $1.2 million due to year over year growth. Gross profit margin for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased to 36.8% compared to 32.3% for the year ended December 31, 2014 due to the continued conversion of the United States market to EMV cards, discussed above. +U.S. Prepaid Debit +Gross profit for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $5.4 million, or 25.5%, to $26.4 million compared to $21.0 million for the year ended December 31, 2014. Gross profit margin for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased to 40.0% compared to 35.5% for the year ended December 31, 2014. The increase in gross profit and gross profit margin were primarily driven by increased net sales referenced above and the improved operating efficiencies in this segment. +U.K. Limited +Gross profit for the U.K. Limited segment for the year ended December 31, 2015 increased $1.0 million, or 11.7%, to $9.1 million compared to $8.2 million for the year ended December 31, 2014. Gross profit margin for the U.K. Limited segment for the year ended December 31, 2015 increased to 26.6% compared to 23.2% for the year ended December 31, 2014. The increase was driven by the effect of foreign currency exchange rate fluctuations discussed above, and to a lesser extent, more efficient production. +Other +Gross profit in Other increased 4.0% in 2015 to $3.2 million from $3.1 million in 2014, and was primarily related to the Canada operation. +50 +Table of Contents +Operating Expenses +Year Ended December 31, +2015 +2014 +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +U.S. Debit and Credit +$ +25,562 +$ +15,053 +$ +10,509 +69.8 +% +U.S. Prepaid Debit +5,679 +5,266 +413 +7.8 +% +U.K. Limited +6,417 +6,396 +21 +0.3 +% +Other +30,443 +20,540 +9,903 +48.2 +% +Total +$ +68,101 +$ +47,255 +$ +20,846 +44.1 +% +Operating expenses for the year ended December 31, 2015 increased $20.8 million, or 44.1%, to $68.1 million compared to $47.3 million for the year ended December 31, 2014. The increase in operating expenses was driven primarily by a $10.5 million increase in the U.S. Debit and Credit segment and a $9.9 million increase in our corporate expenses. +The $10.5 million increase in the U.S. Debit and Credit segment was driven by an $8.7 million increase related to the EFT Source acquisition, and the remaining increase was primarily attributable to additional SG&A expenses related to the elevated levels of segment net sales discussed above. +Other operating expenses includes an increase of $4.2 million in connection with the settlement of our obligation under the phantom stock plan in conjunction with our IPO, $1.8 million in increased depreciation and amortization expense, $1.0 million related to accrued performance bonuses in connection with the EFT Source acquisition, a restructuring charge of $0.7 million related to the closure of our Petersfield, U.K. facility, $0.4 million of transaction costs, and a $1.8 million increase in corporate salaries, consulting fees, legal, and other SG&A expense. +Excluding charges of $8.7 million and $4.5 million for the years ended December 31, 2015 and 2014, respectively, related to our phantom stock plan, $0.4 million of transaction costs for the year ended December 31, 2015 and $1.0 million of accrued performance bonus charges in connection with the EFT Source acquisition in the year ended December 31, 2015, operating expenses for the year ended December 31, 2015 increased $15.2 million, or 35.6%, compared to the year ended December 31, 2014. +Income from Operations and Operating Margin +Year Ended December 31, +% of +% of +2015 +net sales +2014 +net sales +$ Change +% Change +(dollars in thousands) +Income from operations by segment: +U.S. Debit and Credit +$ +71,555 +27.1 +% +$ +34,407 +22.5 +% +$ +37,148 +108.0 +% +U.S. Prepaid Debit +20,701 +31.4 +% +15,756 +26.6 +% +4,945 +31.4 +% +U.K. Limited +2,710 +7.9 +% +1,775 +5.0 +% +935 +52.7 +% +Other +(27,246) +* +(17,466) +* +(9,780) +56.0 +% +Total +$ +67,720 +18.1 +% +$ +34,472 +13.2 +% +$ +33,248 +96.4 +% +* Not meaningful +Income from operations for the year ended December 31, 2015 increased $33.2 million, or 96.4%, to $67.7 million compared to $34.5 million for the year ended December 31, 2014. Operating margins for the year ended December 31, 2015 increased to 18.1% compared to 13.2% for the year ended December 31, 2014. +51 +Table of Contents +U.S. Debit and Credit +Income from operations for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased $37.1 million, or 108.0%, to $71.6 million compared to $34.4 million for the year ended December 31, 2014. Operating income benefited by $7.7 million from the inclusion of the EFT Source acquisition for a full year in 2015 (results from EFT Source were included from September 2, 2014 through December 31, 2014). Operating margins for the year ended December 31, 2015 increased to 27.1% compared to 22.5% for the year ended December 31, 2014 due primarily to the higher sales volumes of EMV cards, as discussed above. +U.S. Prepaid Debit +Income from operations for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $4.9 million, or 31.4%, to $20.7 million compared to $15.8 million for the year ended December 31, 2014 due primarily to the higher sales levels and more efficient operations, as discussed above. +U.K. Limited +Income from operations for the U.K. Limited segment for the year ended December 31, 2015 increased $0.9 million, or 52.7%, to $2.7 million compared to $1.8 million for the year ended December 31, 2014 due to more efficient production. Operating margins for the year ended December 31, 2015 increased to 7.9% compared to 5.0% for the year ended December 31, 2014 for the reasons discussed above. +Interest, net +Interest expense for the year ended December 31, 2015 increased $10.8 million, or 144.1%, to $18.3 million compared to $7.5 million for the year ended December 31, 2014. The increase in interest expense was driven by higher average debt balances outstanding relating to the $435.0 million First Lien Term Loan that we put in place in August 2015. Interest expense also includes $4.7 million of amortization of debt issuance cost and discount related to the early debt repayment of $112.5 million using proceeds from our IPO, and an additional fourth quarter debt repayment of $10.0 million. +Loss on debt modification and early extinguishment +Loss on debt modification and early extinguishment for the year ended December 31, 2015 was $0.7 million related to unamortized deferred financing costs and discount on our Senior Term Loan dated September 2, 2014, which was repaid with proceeds from our $435.0 million First Lien Term Loan. Refer to Note 10 “Long-Term Debt and Credit Facility”, in Part III, Item 8 “ Financial Statements and Supplementary Data ” of this Annual Report on Form 10-K. +Income tax expense +Income tax expense for the year ended December 31, 2015 increased $7.5 million, to $17.8 million, compared to $10.3 million for the year ended December 31, 2014 driven by the increase in income before taxes of $22.8 million. The effective tax rate was 36.3% and 39.1% for the years ended December 31, 2015 and 2014, respectively. The tax rate was lower in 2015 compared to 2014 as a result of discrete adjustments. +Fourth Quarter +Our net sales grew by 6.5% in the fourth quarter 2015 compared to same quarter in 2014. Net sales for our U.S. Debit and Credit segment grew by 11.2% in the fourth quarter of 2015 compared to fourth quarter of 2014 due to the continued conversion of Financial Payment Cards from magnetic stripe to EMV chip technology. +Net sales for our U.S. Prepaid Debit segment increased by 1.4% in the fourth quarter of 2015 compared to the fourth quarter of 2014 as growth in our retail prepaid sales across the customer base was offset by significant fourth quarter 2014 product launches and refreshes for two large customers, which were not replicated in the fourth quarter of 2015. +52 +Table of Contents +Net sales for our U.K. Limited segment decreased 2.3% in the fourth quarter of 2015 compared to the fourth quarter of 2014, due primarily to foreign currency exchange rates. Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a reduction to net sales for the three months ended December 31, 2015 of $0.5 million compared to the same period in the previous year. +Income from operations and operating income margins in the fourth quarter of 2015 continued to improve over the fourth quarter of 2014 due to increased operating leverage driven by increased net sales. The increases in net sales have been primarily driven by an increase in the shipment of EMV Financial Payment Cards, which generally have higher selling prices and gross profits than the non-EMV Financial Payment Cards that they are replacing. +Liquidity and Capital Resources +As of December 31, 2016, we had $37.0 million of cash and cash equivalents. Of this amount, $6.8 million was held in accounts outside of the United States. +Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, and return capital to shareholders through dividends and share repurchases, while maintaining strong liquidity will depend on our ability to continue to generate excess operating cash flows through our operating subsidiaries. We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, dividend payments and share repurchases, lease obligations, and working capital needs. +At December 31, 2016, there was $312.5 million outstanding under the First Lien Term Loan, and we had $40.0 million of availability under the Revolving Credit Facility. The First Lien Term Loan and Revolving Credit Facility (collectively, “First Lien Credit Facility”) mature on August 17, 2022 and August 17, 2020, respectively. +Interest rates under the First Lien Term Loan, at the Company's election, are based on either a Eurodollar rate plus a margin of 4.50% or a base rate plus a margin of 3.50%. As of December 31, 2016, the interest rate on our First Lien Term Loan was 5.50%, and increased to 5.83% as the interest rate was reset on the First Lien Term Loan during January 2017. +The First Lien Credit Facility contains customary covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our assets, and affiliate transactions. We may also be required to make repayments on the First Lien Term Loan in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement. As of December 31, 2016, we were in compliance with all covenants under the First Lien Credit Facility. +We had a $9.0 million subordinated, unsecured promissory note with certain sellers of EFT Source which we fully repaid when it became due on September 2, 2016. +During the year ended December 31, 2016, the Board of Directors approved a stock repurchase program that authorizes repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of 2,827,105 shares, prior to May 11, 2017. At December 31, 2016, up to $14.0 million remained available under the share repurchase authorization, limited to 1,387,683 shares. Our board of directors may, in its sole discretion, change the amount or frequency of stock repurchases, or discontinue stock repurchases entirely. +On March 1, 2017, our Board of Directors approved a dividend of $0.045 per share. This dividend is payable on April 7, 2017, to stockholders of record as of the close of business on March 17, 2017. On November 4, 2016, our Board of Directors declared a dividend of $0.045 per common share. The dividend was paid on January 12, 2017. The accrued dividend of $2.5 million is reflected in “Accrued expenses” in our consolidated balance sheet as of December 31, 2016. Our current quarterly cash dividend rate is $0.045 per share, or $0.18 per share on an annualized basis. The declaration and payment of any future dividends will be subject to the discretion of our Board of Directors, who will evaluate our dividend program from time to time given factors it deems relevant. +53 +Table of Contents +Operating Activities +Cash provided by operating activities for the year ended December 31, 2016 was $60.0 million compared to $43.9 million during the year ended December 31, 2015. The increase in cash provided by operating activities was due to a net increase in cash flows from working capital, particularly from decreases to accounts receivable and inventories, partially offset by lower net income during the year ended December 31, 2016 compared to 2015. +Cash provided by operating activities for the year ended December 31, 2015 was $43.9 million, compared to $26.6 million for the year ended December 31, 2014. The increase in cash provided by operating activities was driven by an increase in net income of $17.6 million, partially offset by increased working capital investments during the year . +Investing Activities +Cash used in investing activities for the year ended December 31, 2016 was $14.3 million, all relating to capital expenditures. Capital expenditures during the year ended December 31, 2016 were lower than during the year ended December 31, 2015 ($18.7 million) as we had elevated capital spending in 2015 in conjunction with the U.S. EMV conversion and increased investment in our services business. We also received $5.0 million in cash from investing activities during the year ended December 31, 2015 from the sale of our Nevada operation. +Cash used in investing activities for the year ended December 31, 2015 was $13.7 million, which included capital expenditures of $18.7 million, partially offset by $5.0 million of cash provided from the sale of our Nevada operation during the year ended December 31, 2015. In 2014, net cash used in investing activities was $71.8 million, driven primarily by the cash used to purchase EFT Source of $54.9 million. Capital expenditures were $1.7 million higher in the year ended December 31, 2015 compared to 2014 because of elevated capital spending in conjunction with the U.S. EMV conversion and increased investment in our services business. +Financing Activities +Cash used in financing activities for the year ended December 31, 2016 was $21.9 million, which primarily included the repayment of the $9.0 million subordinated, unsecured promissory note with certain sellers of EFT Source, $6.0 million of common stock repurchased under our stock repurchase program, and $7.5 million of dividends paid on our common stock. +Cash used in financing activities for the year ended December 31, 2015 was $29.4 million, due to the redemption of Series A Preferred Stock and related dividends of $58.3 million and $230.3 million, respectively, the repayment of outstanding borrowings under our previous credit facility of $170.9 million, the payment of $17.8 million in loan issuance costs in connection with our First Lien Credit Facility, and the repayment of First Lien Term Loan borrowings of $122.5 million. The payments on the First Lien Term Loan were made with $112.5 million of cash proceeds from our IPO and an additional $10.0 million in the fourth quarter with available cash on hand. Partially offsetting the above disbursements were proceeds from our IPO totaling $135.3 million, net of $7.2 million of offering costs, and $435.0 million generated in connection with borrowings under our First Lien Credit Facility. +Cash provided from financing activities for the year ended December 31, 2014 was $48.5 million. Cash provided from financing activities was driven by proceeds of $60.0 million under our Senior Term Loan dated September 2, 2014, offset by repayments of $11.0 million and loan issuance costs of $0.4 million on the same Senior Term Loans. +Working Capital +Our working capital as of December 31, 2016 was $57.1 million compared to $59.0 million as of December 31, 2015. During the year ended December 31, 2016, our cash balance increased $23.3 million. Offsetting the increased cash were the $9.0 million principal payment made to certain sellers of EFT Source, and net decreases in other working capital accounts, primarily accounts receivable and inventories, reflecting the decline in the net sales from the prior year. +Our working capital as of December 31, 2015 was $59.0 million compared to $52.1 million as of December 31, 2014. The $6.9 million increase in working capital during the year ended December 31, 2015 was the result of recognizing a $5.0 million income tax receivable related to the write-off of tax deductible goodwill and intangible assets +54 +Table of Contents +associated with our Nevada operation. Additionally, the net balance of accounts receivable, inventories, accounts payable and accrued expenses increased $10.8 million during the year, reflecting an increase in the growth in the net sales of the Company. Primarily offsetting these increases were a $5.9 million decrease in the current assets of discontinued operation, resulting from the sale of our Nevada operation during the period, and a $2.7 million increase in current maturities on our long–term debt driven by our Sellers’ Note of $9.0 million which matures in September 2016. Current maturities of long-term debt as of December 31, 2014 were $6.3 million, related to current maturities of our Senior Term Loans dated September 2, 2014. +Contractual Obligations +The following table summarizes our material contractual obligations as of December 31, 2016: +Payments due by period—December 31, 2016 +(in thousands) +Less than +More than +Total +1 year +1 - 3 Years +3 - 5 Years +5 Years +Long-term debts (1) +$ +312,500 +$ +— +$ +— +$ +— +$ +312,500 +Operating leases +16,105 +4,350 +5,802 +3,843 +2,110 +Interest payments (2) +98,063 +17,426 +34,852 +34,852 +10,933 +Non-cancellable purchase obligations +7,042 +7,042 +— +— +— +Total contractual obligations +$ +433,710 +$ +28,818 +$ +40,654 +$ +38,695 +$ +325,543 +(1) Principal payments only. +(2) Amounts are based on the applicable interest rate as of December 31, 2016, in the case of variable interest rate debt. +Cyclical and Seasonal Nature of Business +Financial Payment Cards and Private Label Credit Cards are generally influenced by broader cyclical changes in the economy, with economic downturns resulting in decreases in the demand for our products and services. In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. Additionally, we generate higher net sales in the third and fourth quarters of the year, as our sales of Prepaid Debit Card solutions and retail gift cards are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season. +Off-Balance Sheet Arrangements +We had no off-balance sheet arrangements at December 31, 2016 and 2015. +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenue, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty, and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +Revenue Recognition +Generally, we recognize revenue related to sales of our products upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and +55 +Table of Contents +collectability is reasonably assured. A provision for payment discounts, product return allowances and uncollectable accounts, which is estimated based upon our historical performance, management’s experience and current economic trends, is recorded as a reduction of sales in the same period that the revenue is recognized. +In certain cases, at the customer’s request, we enter into bill-and-hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. We recognize revenue associated with bill-and-hold arrangements when the product is complete and ready to ship, hold criteria have been met, the amount due from the customer is fixed, and collectability of the related receivable is reasonably assured. All of the foregoing requires us to apply our judgment. Bill-and-hold arrangements most often occur when customers request that we ship complete tamper-evident security packages containing a Prepaid Debit Card to our secure fulfillment center until they provide us further instructions at a later date to ship those packages to numerous individual retail locations or distribution centers. +Multiple-Element Arrangements +We enter into warehouse, fulfillment and distribution service agreements with several customers, where we are engaged to store and handle completed cards and tamper-evident security packages on their behalf. For the sales arrangements that contain multiple deliverables, the arrangement is split into separate units of accounting and individually delivered elements have value to the customer on a standalone basis. When separate units of accounting exist, revenue is allocated to each element based on our best estimate of competitive market prices. At the point in which completed cards and packages are shipped to our warehouse, the product is billed and the revenue is recognized in accordance with our revenue recognition policy. Warehousing services are recognized monthly based on volume and handling requirements; fulfillment services are recognized when the product is handled in the manner specified by the customer for a unit or handling fee. All of the foregoing requires us to apply our judgment. Multiple-element arrangements most often occur when customers request that we ship complete tamper-evident security packages containing a Prepaid Debit Card to our secure fulfillment center until they provide us further instructions at a later date to ship those packages to numerous individual retail locations or distribution centers. +Impairment Assessments of Goodwill and Long-Lived Assets +A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations. We account for business combinations using the acquisition method and allocate the acquisition price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The difference between the acquisition price and the fair value of the net assets acquired is recorded as goodwill. +In determining the fair value of assets acquired and liabilities assumed in business combinations and for determining fair values in impairment tests, we use one of the following recognized valuation methods: the income approach (including discounted cash flows), the market approach or the cost approach. Our significant estimates in those fair value measurements include identifying business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and earnings multiples. Further, when measuring fair value based on discounted cash flows, we make assumptions about future price levels, rates of increase in revenue, cost of revenue and operating expenses, weighted average cost of capital, rates of long term growth and income tax rates. We also consider our market capitalization, adjusted for unallocated monetary assets such as cash, debt, a control premium and other factors determined by management. Valuations are performed by management or third party valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values assigned to the assets acquired and liabilities assumed and for determining fair value in business combinations and impairment tests are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates. Changes to or a failure to achieve our projected business assumptions, including growth and profitability, could result in a valuation that would trigger an impairment of goodwill. +Goodwill is allocated to our reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it no longer retains its identification with a particular acquisition and becomes identified with the reporting unit in its entirety. Accordingly, the fair value of the reporting unit as a whole is available to support the recoverability of its goodwill. Goodwill of $72.0 million as of December 31, 2016 is attributable to the Company’s reportable segments as follows: U.S. Debit and Credit $64.3 million, U.K. Limited $5.9 million, and Other $1.8 million. +56 +Table of Contents +We evaluate goodwill and our indefinite-lived intangible assets for impairment annually on October 1st or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. We have the option to assess goodwill for impairment by first performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the two-step goodwill impairment test is not required to be performed. If we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform the two-step goodwill impairment test. In the first step, the fair value of the reporting unit is compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is not impaired and no further analysis is necessary. If the fair value of the reporting unit is less than its book value, there is an indication of potential impairment and a second step is performed. When required, the second step of testing involves calculating the implied fair value of goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of its net assets and identifiable intangible assets as if the reporting unit had been acquired. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For reporting units with a negative book value (i.e., excess of liabilities over assets), we evaluate qualitative factors to determine whether it is necessary to perform the second step of the goodwill impairment test. +Certain trademark intangible assets are expected to have indefinite lives and are tested for impairment by comparing the book values of each asset to the estimated fair value. We determine the fair value based on an income approach model, where the present value of future cash flows associated with the trademark are discounted at a risk adjusted rate. Management judgment is necessary to estimate future cash flows used to measure fair value and to evaluate our plans with respect to supporting trademarks . The Company completed its evaluation of the carrying values of its indefinite lived intangible assets as of October 1, 2016, and identified an impairment of $2.7 million related to a trademark acquired in the EFT Source acquisition based on the Company’s plans to discontinue the use of the trademark in its sales, marketing and other business practices. During 2016, the Company evaluated the future utilization of its trademarks and updated its estimate to amortize these assets over lives ranging from 7.5 to 10 years. +Long-lived assets, such as property, equipment and software, and amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Plant, equipment, and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for equipment, furniture, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. If circumstances require that a long-lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. +Future changes in our assumptions or the interrelationship of those assumptions may negatively impact future valuations. In future measurements of fair value, adverse changes in assumptions could result in an impairment of goodwill or long-lived assets that would require a non-cash charge to the consolidated statements of operations and may have a material effect on our financial condition and operating results. +Inventory Valuation +Raw materials, work-in-process and finished goods inventories are valued at the lower of cost or market, with cost determined using a weighted-average method. Cost is calculated based upon the price paid for an item at the time it is received by us, and also includes the capitalization of labor, overhead and other expenses in the case of work-in-process and finished goods inventory. This net inventory cost is recognized through cost of sales when the inventory is sold. It is impractical for us to assign specific allocated overhead costs to individual units of inventory. As such, to match net inventory costs against the related revenue, we estimate the net inventory costs to be deferred and recognized each period as the inventory is sold. Also, we must exercise significant judgment in the case of work-in-process inventory to allocate the appropriate costs to this unfinished product. +57 +Table of Contents +Stock-Based Compensation +In connection with the IPO, we adopted the CPI Card Group Inc. Omnibus Incentive Plan (“Omnibus Plan”) and granted stock options to certain employees during the years ended December 31, 2016 and 2015. We estimate the fair value of option awards using a Black-Scholes option pricing model or other option pricing models, as we deem appropriate. Option-pricing models require us to estimate a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. The most subjective estimate is the expected volatility of the underlying stock when determining the fair market value of an option granted. Based on the limited amount of trading history of our common stock, we utilized a peer group to estimate the volatility assumption when calculating the fair value of stock options granted during 2016 and 2015. As we obtain more trading history on our own common stock, our specific trading history, and associated volatility will gradually replace the peer group volatility assumption. As such, our volatility assumption in the future could be significantly different going forward than what we have estimated for our 2016 and 2015 grants, which could impact our stock-based compensation expense in future periods. +Prior to the adoption of the Omnibus Plan, we maintained the 2007 Stock Option Plan under which stock options and restricted stock awards were granted to employees. We recognize compensation expense for option and restricted stock awards based on the fair value of the award on a straight-line basis over the vesting period of the award based on the estimated portion of the award that is expected to vest. The fair value of the award is based on the valuation of our common stock on the date of grant. Because there was no public market for our common stock prior to our IPO, we were required to exercise significant judgment in valuing the fair value of the awards under this plan. The fair value of our equity was historically estimated by our management and approved by our board. In estimating the fair value of our common stock, management and the board considered factors it believed were material to the valuation process including the process, rights, preferences and privileges of our preferred stock relative to the common stock, our actual and projected financial results, current business conditions and projections, the principal amount of our indebtedness, net of cash and the trading multiples of comparable companies. +A 10% change in our stock-based compensation expense for the year ended December 31, 2016, would have affected pre-tax income by approximately $0.4 million. We include stock-based compensation expense in selling, general and administrative expenses in our consolidated statement of operations and comprehensive income. +Income Taxes +We record income tax expense using the liability method for taxes and are subject to income tax in many jurisdictions, including the United States, various states and localities, the United Kingdom, and Canada. A current tax asset or liability is recognized for the estimated taxes refundable or payable on the tax returns for the current year and a deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. In evaluating our ability to realize our deferred tax asset, we considered the following sources of future taxable income: +· +future reversals of existing taxable temporary differences; +· +future taxable income, exclusive of reversing temporary differences and carryforwards; +· +taxable income in prior carryback years; and +· +tax-planning strategies. +Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. Our forecast of future profitability represents our best estimate of these future events. After conducting this assessment, the valuation allowance recorded, net of federal benefit, against our deferred tax assets +58 +Table of Contents +was $4.9 and $3.7 million as of December 31, 2016 and December 31, 2015, respectively. If actual results differ from estimated results, or if we adjust these assumptions in the future, we may need to adjust our deferred tax assets or liabilities, which could impact our effective tax rate. +The amount of income taxes we pay could be subject to possible audits in the taxing jurisdictions in which we operate. In the event of these possible audits, the taxing authorities might challenge items on our tax returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. We recognize tax benefits for uncertain positions only to the extent that we believe it is more likely than not that the tax position will be sustained. Our future results may include favorable or unfavorable adjustments to our unrecognized tax benefits due to closure of income tax audits, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis. +Recent Accounting Pronouncements +The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers , in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09 as of January 1, 2018, but has not determined what transition method it will use. The Company is in the process of assessing the impact of ASU 2014-09 on its consolidated financial statements. The Company is currently analyzing its customer contracts and the nature of these arrangements, has documented its draft accounting policies in accordance with the new guidance, and assessing associated implementation considerations. This assessment includes an evaluation of whether certain performance obligations will be recognized over time as opposed to a point in time. As the Company finalizes its conclusions, it may need to make changes to its business and accounting processes, systems and controls to support recognition and disclosures under the new standard. +The FASB issued ASU 2015-11, Inventory— Simplifying the Measurement of Inventory , in July 2015. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016. The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company does not expect ASU 2015-11 to have a material effect on its financial statements. +In February 2016, the FASB issued ASU 2016-02, Leases , which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements. +In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting , which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for forfeitures, statutory withholding requirements, and classification in the statement of cash flows. In addition, excess tax benefits recorded to equity under existing accounting guidance will be recognized in income tax expense under the new standard. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 (the Company’s fiscal year 2017), with early adoption permitted. The Company is in the process of assessing the impact of ASU 2016-09 on its consolidated financial statements, including the determination of the method of adoption and an accounting policy election regarding forfeitures. +59 +Table of Contents +Item 7A. Quantitative and Qualitative Disclosures about Market Ris k +Key Input Price Risks +Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including EMV microchips, polyvinyl chloride (“PVC”), energy and other commodities. We have been able to offset cost increases, which have historically not been significant, by making operational adjustments that increase productivity. However, substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be offset by selling price increases. +Labor and Benefits Costs +We are exposed to inflation in wage and benefits costs which represented 31.4% of net sales for the year ended December 31, 2016. Due to the high-security nature of our business, the availability of potential applicants is limited by the security and other requirements of the Payment Card Brands, and applicants are required to undergo a rigorous background screening process. Due to these factors, we have historically provided a starting wage that is above the minimum wage in place for the particular states or provinces in which we do business to attract qualified applicants. We further believe that this enables us to attract a higher caliber employee, which translates directly to higher quality and productivity. There can be no assurance that we will generate sales growth in an amount sufficient to offset increases in minimum wage or other inflationary pressures. +Interest Rate Risk +We are exposed to interest rate risk through fluctuations in interest rates on our term loan obligations. Our Revolving Credit Facility and our First Lien Term Loan carry interest at a floating rate. We seek to manage exposure to adverse interest rate changes through our normal operating and financing activities. As of December 31, 2016, we had $312.5 million in outstanding floating rate debt obligations under our First Lien Term Loan. Net of unamortized debt and unamortized deferred financing costs of $10.6 million, our recorded debt balance was $301.9 million at December 31, 2016. Each quarter point increase or decrease in the interest rate on our First Lien Term Loan would change our annual interest expense by approximately $0.8 million. If our Revolving Credit Facility was fully-drawn, each quarter point increase or decrease in the interest rate on our Revolving Credit Facility would change our annual interest expense by approximately $0.1 million. +Foreign Currency Exchange Risk +We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the British Pound Sterling and the Canadian Dollar. Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in foreign currency rates against the U.S. Dollar. A hypothetical ten percent change in the British Pound Sterling and Canadian Dollar would have impacted our 2016 net sales by approximately $4.3 million, with the impact to income from operations being immaterial. Approximately 85.0% of net sales for the year ended December 31, 2016 were in U.S. dollar functional currency subsidiaries, not subject to such foreign currency risk. +Pricing Risk +While we have been able to partially offset historical pricing pressure and other changes in the price of our products and services by offering higher-value added products and services, cross-selling additional products and services, selectively implementing pricing increases, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our pricing flexibility and macroeconomic conditions could increase pricing pressure. There can be no assurance that future pricing pressure can be offset by our ability to reduce our costs. In addition, there can be no assurance that we will generate sales growth in an amount sufficient to offset pricing pressures. +60 +Table of Contents +Item 8. Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015, and 2014 +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations and Comprehensive Income +F-4 +Consolidated Statements of Stockholders’ Deficit +F-5 +Consolidated Statements of Cash Flows +F-6 +Notes to Consolidated Financial Statements +F-7 +F-1 +Table of Contents +Report of Independent Registered Public Accounting Fir m +The Board of Directors and Stockholders +CPI Card Group Inc.: +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CPI Card Group Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. +/s/ KPMG LLP +Denver, Colorado +March 1, 2017 +F-2 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(Dollars in Thousands, Except Shares and Per Share Amounts) +December 31, +2016 +2015 +Assets +Current assets: +Cash and cash equivalents +$ +36,955 +$ +13,606 +Accounts receivable, net of allowances of $126 and $212, respectively +31,492 +52,538 +Inventories +19,369 +25,640 +Prepaid expenses and other current assets +4,601 +4,260 +Income taxes receivable +— +4,975 +Total current assets +92,417 +101,019 +Plant, equipment and leasehold improvements, net +53,419 +52,113 +Intangible assets, net +46,348 +53,988 +Goodwill +71,996 +73,123 +Other assets +240 +110 +Total assets +$ +264,420 +$ +280,353 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +10,996 +$ +17,832 +Accrued expenses +17,487 +11,315 +Income taxes payable +64 +— +Deferred revenue and customer deposits +6,729 +3,874 +Current maturities of long-term debt +— +9,000 +Total current liabilities +35,276 +42,021 +Long-term debt, net of current maturities +301,922 +300,000 +Deferred income taxes +21,261 +24,073 +Other long-term liabilities +1,234 +869 +Total liabilities +359,693 +366,963 +Commitments and contingencies (Note 15) +Stockholders’ deficit: +Common Stock; $0.001 par value—100,000,000 shares authorized; 55,359,251 shares issued and outstanding and 56,542,116 shares issued and outstanding at December 31, 2016 and 2015, respectively +55 +56 +Capital deficiency +(114,881) +(119,028) +Accumulated earnings +25,968 +36,661 +Accumulated other comprehensive loss +(6,415) +(4,299) +Total stockholders’ deficit +(95,273) +(86,610) +Total liabilities and stockholders’ deficit +$ +264,420 +$ +280,353 +See accompanying notes to consolidated financial statements +F-3 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive Incom e +(Dollars in Thousands, Except Per Share Amounts) +Year Ended December 31, +2016 +2015 +2014 +Net sales: +Products +$ +168,510 +$ +241,609 +$ +159,220 +Services +140,190 +132,501 +101,786 +Total net sales +308,700 +374,110 +261,006 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +111,627 +155,516 +113,399 +Services (exclusive of depreciation and amortization shown below) +84,453 +73,111 +57,233 +Depreciation and amortization +10,722 +9,662 +8,647 +Total cost of sales +206,802 +238,289 +179,279 +Gross profit +101,898 +135,821 +81,727 +Operating expenses: +Selling, general and administrative (exclusive of depreciation and amortization shown below) +66,711 +61,116 +42,650 +Depreciation and amortization +6,205 +6,304 +4,605 +Restructuring charges +— +681 +— +Total operating expenses +72,916 +68,101 +47,255 +Income from operations +28,982 +67,720 +34,472 +Other expense, net: +Interest, net +(20,044) +(18,328) +(7,508) +Foreign currency (loss) gain +(417) +59 +(124) +Loss on debt modification and early extinguishment +— +(703) +(476) +Other income (expense), net +20 +359 +(101) +Total other expense, net +(20,441) +(18,613) +(8,209) +Income before income taxes +8,541 +49,107 +26,263 +Income tax expense +(3,142) +(17,846) +(10,291) +Net income from continuing operations +5,399 +31,261 +15,972 +Discontinued operations: +Loss from a discontinued operation, net of taxes (Note 4) +— +(606) +(2,670) +Gain on sale of a discontinued operation, net of taxes +— +208 +— +Net income +$ +5,399 +$ +30,863 +$ +13,302 +Preferred stock dividends +— +(32,548) +(44,477) +Net income (loss) attributable to common stockholders +$ +5,399 +$ +(1,685) +$ +(31,175) +Basic and diluted earnings (loss) per share: +Continuing operations +$ +0.10 +$ +(0.03) +$ +(0.69) +Discontinued operation +— +(0.01) +(0.07) +$ +0.10 +$ +(0.04) +$ +(0.76) +Dividends declared per common share +$ +0.18 +$ +— +$ +— +Comprehensive Income +Net Income +5,399 +30,863 +13,302 +Currency translation adjustment +(2,116) +(1,715) +(1,064) +Total comprehensive income +$ +3,283 +$ +29,148 +$ +12,238 +See accompanying notes to consolidated financial statements +F-4 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Stockholders’ Deficit +(Dollars in Thousands, Except Share Amounts) +Accumulated +Accumulated +other +Employee +Common Shares +Capital +earnings +comprehensive +notes +Shares +Amount +deficiency +(deficit) +loss +receivable +Total +January 1, 2014 +41,113,952 +$ +41 +$ +(27,786) +$ +(7,504) +$ +(1,520) +$ +(127) +$ +(36,896) +Issuance of common stock, net of issuance costs +257,268 +— +2,945 +— +— +— +2,945 +Repayment of employee note +— +— +— +— +— +19 +19 +Components of comprehensive income: +Net income +— +— +— +13,302 +— +— +13,302 +Currency translation adjustment +— +— +— +— +(1,064) +— +(1,064) +December 31, 2014 +41,371,220 +$ +41 +$ +(24,841) +$ +5,798 +$ +(2,584) +$ +(108) +$ +(21,694) +Issuance of common stock upon public offering, net of offering costs +15,000,000 +15 +135,289 +— +— +— +135,304 +Shares issued under stock-based compensation plans +257,664 +— +— +— +— +— +— +Stock-based compensation +— +— +885 +— +— +— +885 +Redemption of common stock +(86,768) +— +(46) +— +— +— +(46) +Dividend distribution on Series A Preferred Stock +— +— +(230,315) +— +— +— +(230,315) +Repayment of employee note +— +— +— +— +— +108 +108 +Components of comprehensive income: +— +Net income +— +— +— +30,863 +— +— +30,863 +Currency translation adjustment +— +— +— +— +(1,715) +— +(1,715) +December 31, 2015 +56,542,116 +$ +56 +$ +(119,028) +$ +36,661 +$ +(4,299) +$ +— +$ +(86,610) +Common stock dividends +— +— +— +(10,049) +— +— +(10,049) +Common stock repurchased +(1,439,422) +(1) +— +(6,007) +— +— +(6,008) +Shares issued under stock-based compensation plans +256,557 +— +— +(36) +— +— +(36) +Stock-based compensation +— +— +3,579 +— +— +— +3,579 +Tax benefit attributable to stock-based compensation and other +— +— +568 +— +— +— +568 +Components of comprehensive income: +— +Net income +— +— +— +5,399 +— +— +5,399 +Currency translation adjustment +— +— +— +— +(2,116) +— +(2,116) +December 31, 2016 +55,359,251 +$ +55 +$ +(114,881) +$ +25,968 +$ +(6,415) +$ +— +$ +(95,273) +See accompanying notes to consolidated financial statements +F-5 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(Dollars in Thousands) +Year Ended December 31, +2016 +2015 +2014 +Operating activities +Net income +$ +5,399 +$ +30,863 +$ +13,302 +Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: +Depreciation and amortization expense +16,927 +15,995 +14,198 +Stock-based compensation expense +3,579 +9,633 +4,534 +Impairment of intangible asset +2,700 +— +— +Amortization of debt issuance costs and debt discount +1,922 +5,648 +591 +Loss on debt modification and extinguishment +— +703 +476 +Loss on sale of a discontinued operation +— +1,039 +— +Excess tax benefits from stock-based compensation +(611) +— +— +Deferred income tax +(1,829) +10,914 +(1,433) +Other, net +448 +(45) +(124) +Changes in operating assets and liabilities: +Accounts receivable +19,847 +(9,556) +(7,003) +Inventories +5,793 +(4,416) +(5,763) +Prepaid expenses and other assets +(527) +(714) +(8,473) +Income taxes +5,429 +(4,975) +3,061 +Accounts payable +(6,394) +1,663 +1,466 +Accrued expenses +3,841 +915 +12,665 +Deferred revenue and customer deposits +3,037 +699 +(772) +Other liabilities +397 +(14,444) +(98) +Cash provided by operating activities +59,958 +43,922 +26,627 +Investing activities +Acquisitions of plant, equipment and leasehold improvements +(14,294) +(18,670) +(16,956) +Proceeds from sale of a discontinued operation +— +5,000 +— +Acquisition of EFT Source, Inc. +— +— +(54,859) +Cash used in investing activities +(14,294) +(13,670) +(71,815) +Financing activities +Payment of Sellers Note +(9,000) +— +— +Dividends paid on common stock +(7,519) +— +— +Common stock repurchased +(6,008) +— +— +Net proceeds from an initial public offering of common stock +— +135,304 +— +Proceeds from First Lien Term Loan +— +435,000 +— +Payments on First Lien Term Loan +— +(122,500) +— +Proceeds from long-term debt +— +— +60,000 +Payments on long-term debt +— +(170,929) +(11,045) +Loan issuance costs +— +(17,773) +(440) +Dividend distribution on Series A Preferred Stock +— +(230,315) +— +Redemption of preferred and common stock +— +(58,296) +— +Proceeds from employee note receivable +— +108 +19 +Excess tax benefits from stock-based compensation +611 +— +— +Cash (used in) provided by financing activities +(21,916) +(29,401) +48,534 +Effect of exchange rates on cash +(399) +(186) +(107) +Net increase in cash and cash equivalents: +23,349 +665 +3,239 +Cash and cash equivalents, beginning of period +13,606 +12,941 +9,702 +Cash and cash equivalents, end of period +$ +36,955 +$ +13,606 +$ +12,941 +Supplemental disclosures of cash flow information +Cash paid (refunded) during the period for: +Interest +$ +15,071 +$ +11,986 +$ +6,793 +Income taxes +$ +(468) +$ +10,136 +$ +3,219 +See accompanying notes to consolidated financial statements +F-6 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated) +1. Business +CPI Card Group Inc., formerly known as CPI Holdings I, Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards which the Company defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express, Discover and Interac (in Canada)) in the United States and Canada. The Company also is engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards (primarily in Europe and Canada). +As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be certified by one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers. +The Company’s business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and U.K. Limited. +· +U.S. Debit and Credit Segment. The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands, Private Label Credit Cards, defined as credit cards that an individual merchant issues for exclusive use in its own stores, and that are not issued on the networks of the Payment Cards Brands, and instant issuance systems. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands, and where required by the Company’s customers, certified to be in compliance with the standards of the PCI Security Standards Council. +· +U.S. Prepaid Debit Segment. The U.S. Prepaid Debit segment primarily provides integrated card services to prepaid debit card issuers in the United States. Services provided include tamper-evident security packaging services and card personalization and fulfillment services. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages mentioned above. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. +· +U.K. Limited Segment. The U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment services. Neither of the Company’s operations in this segment is certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. +The Company also has an operation in Ontario, Canada that provides EMV and Prepaid Debit Cards and card services in Canada, which is reflected in “Other” . See Note 18 “Segment Reporting”. +The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) under an asset purchase agreement for $5,000 in cash. The Nevada operation primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, the Company’s Consolidated Balance Sheet as of December 31, 2015, and Statements of Operations and Comprehensive Income for the years ended December 31, 2015 and 2014 have been reclassified to present the Nevada operation as a discontinued operation. See Note 4 “Discontinued Operation and Disposition”. +F-7 +Table of Contents +In August 2015, the Company completed the shut-down and closure of its operation in Petersfield, United Kingdom. Petersfield primarily produced retail gift cards that are not issued on networks of the Payment Card Brands. In connection with the shut-down and closure of the Petersfield, United Kingdom operation, the Company accrued facility contract termination costs of $681 during the year ended December 31, 2015. +On August 17, 2015, the Company entered into a first lien credit agreement ("First Lien Credit Facility") with a syndicate of lenders providing for a $435,000 first lien term loan facility ("First Lien Term Loan") and a $40,000 revolving credit facility ("Revolving Credit Facility"). The Company used proceeds from the First Lien Credit Facility to pay off the outstanding balance on our previous credit facility of $158,420, and to redeem 62,140 shares of Series A Preferred Stock for an aggregate price of $276,688. See Note 10 “Long-Term Debt and Credit Facility” and Note 12 “Series A Preferred Stock”. +On October 15, 2015, the Company completed its initial public offering (“IPO”) issuing 15,000,000 shares of common stock at a price of $10.00 per share. The net proceeds from the IPO, after issuance costs, were utilized to (i) redeem all of our remaining Series A Preferred Stock for a total redemption price of $11,877, (ii) repay $112,500 of the amount outstanding under the First Lien Term Loan (as defined herein), and (iii) terminate and settle all outstanding obligations due under the Phantom Stock Plan (as defined herein) of $13, 268 . The proceeds of the IPO were net of deferred offering expenses of $7,196 and are reflected in “Capital deficiency” in the Company’s Consolidated Balance Sheet and Consolidated Statement of Stockholders’ Deficit. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +Revenue Recognition +Generally, the Company recognizes revenue related to sales of its products upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectability is reasonably assured. +In certain cases, at the customer’s request, the Company enters into bill-and-hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. The Company recognizes revenue associated with bill-and-hold arrangements when the product is complete and ready to ship, hold criteria have been met, the amount due from the customer is fixed and collectability of the related receivable is reasonably assured. +Freight revenue totaling $4,651, $3,882, $4,249 is included in net sales during the years ended December 31, 2016, 2015, and 2014, respectively. The related freight costs are included in cost of sales. +Multiple-Element Arrangements +The Company enters into warehouse, fulfillment and distribution service agreements where customers engage the Company to store and handle completed cards and packages on their behalf. For the sales arrangements that contain multiple deliverables, the arrangement is split into separate units of accounting, and individually delivered elements have value to the customer on a standalone basis. When separate units of accounting exist, revenue is allocated to each element based on the Company’s best estimate of competitive market prices. At the point in which completed cards and packages are shipped to the Company’s warehouses or secure vaults, the product is billed and the revenue is recognized in accordance with the Company’s revenue recognition policy. Warehousing services revenue is recognized monthly based on volume and handling requirements; fulfillment services revenue is recognized when the product is handled in the manner specified by the customer for a unit or handling fee. +F-8 +Table of Contents +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it becomes probable collection will not occur. The allowance for bad debt and credit activity for the years ended December 31, 2016 and 2015 is summarized as follows: +Balance as of December 31, 2014 +$ +272 +Bad debt expense +28 +Write-off of uncollectible accounts +(81) +Currency translation adjustments +(7) +Balance as of December 31, 2015 +$ +212 +Bad debt expense +12 +Write-off of uncollectible accounts +(90) +Currency translation adjustments +(8) +Balance as of December 31, 2016 +$ +126 +For the years ended December 31, 2016 and 2015, the Company did not have sales to a single customer that exceeded 10% of consolidated net sales. For the year ended December 31, 2014, the Company had sales to a single customer of $29,523 (11.3% of consolidated net sales). +Inventories +Inventories consist of raw materials, work-in-process and finished goods and are valued at the lower-of-cost (determined on the first-in, first-out or specific identification basis) or market. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. For the Company’s continuing operations, amounts charged to expense for the depreciation of plant, equipment and leasehold improvements were $12,295, $11,389, and $10,359 for the years ended December 31, 2016, 2015 and 2014, respectively. +Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required. Based upon the Company’s analysis, it concluded that there was no impairment of its long-lived assets for the years ended December 31, 2016, 2015, and 2014. +Goodwill and Intangible Assets +Goodwill and other indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually on October 1. Testing is done in accordance with ASC 350, Intangibles—Goodwill and Other and ASC 820, Fair Value Measurements and Disclosures . For impairment evaluations, the Company first makes a qualitative assessment with respect to both goodwill and other indefinite-lived intangibles. In the case of goodwill, if it is more likely than not that a reporting unit’s fair value is less than its carrying value, the fair value of the reporting unit is compared to its respective carrying amount. If the carrying value of a reporting unit were to exceed its fair value, any +F-9 +Table of Contents +excess of the carrying amount over the fair value would be charged to operations as an impairment loss. For the years ended December 31, 2016, 2015 and 2014 the Company determined there were no impairments to goodwill. As of December 31, 2016 and 2015, $5,450 and $6,352 of goodwill was tax-deductible, respectively. +With respect to indefinite-lived intangible assets, if it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying value, any excess of the carrying value over the fair value of the indefinite-lived intangible asset is charged to operations as an impairment loss. +Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required. Based upon the Company’s analysis, it concluded that there was no impairment of its acquired finite-lived intangible assets for the years ended December 31, 2016, 2015, and 2014. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made. +The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Stock-Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 17 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans. +Advertising Costs +Advertising costs are expensed as incurred. Advertising costs during the years ended December 31, 2016, 2015 and 2014 were $ 801, $764, and $392, respectively. +Use of Estimates +Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, valuation allowances for inventories and deferred taxes, debt and stock-based compensation expense. Actual results could differ from those estimates. +F-10 +Table of Contents +Foreign Currency Translation +Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted-average exchange rate for each reporting period for revenue, expenses, gains and losses. Translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss in the accompanying financial statements. +Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in “Foreign currency gain (loss)” in the accompanying Consolidated Statements of Operations and Comprehensive Income. For the years ended December 31, 2016, 2015 and 2014 there were $(417), $59, and $(124) of such foreign currency gains (losses), respectively. +Recently Issued Accounting Pronouncements +The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers , in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09 as of January 1, 2018, but has not determined what transition method it will use. The Company is in the process of assessing the impact of ASU 2014-09 on its consolidated financial statements. The Company is currently analyzing its customer contracts and the nature of these arrangements, has documented its draft accounting policies in accordance with the new guidance, and assessing associated implementation considerations. This assessment includes an evaluation of whether certain performance obligations will be recognized over time as opposed to a point in time. As the Company finalizes its conclusions, it may need to make changes to its business and accounting processes, systems and controls to support recognition and disclosures under the new standard. +The FASB issued ASU 2015-11, Inventory— Simplifying the Measurement of Inventory , in July 2015. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016. The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company does not expect ASU 2015-11 to have a material effect on its financial statements. +In February 2016, the FASB issued ASU 2016-02, Leases , which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements. +In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting , which simplifies several aspects of the accounting for employee share based payment transactions, including the accounting for forfeitures, statutory withholding requirements, and classification in the statement of cash flows. In addition, excess tax benefits recorded to equity under existing accounting guidance will be recognized in income tax expense under the new standard. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 (the Company’s fiscal year 2017), with early adoption permitted. The Company is in the process of assessing the impact of ASU 2016-09 on its consolidated financial statements, including the determination of the method of adoption and an accounting policy election regarding forfeitures. +F-11 +Table of Contents +3. EFT Source Acquisition +On September 2, 2014, CPI Card Group Inc., through its wholly-owned subsidiary, CPI Acquisition, Inc., purchased EFT Source, Inc. (“EFT Source”) headquartered in Nashville, Tennessee for $68,859, of which $54,859 was paid in cash, $9,000 was paid in the form of a note payable to the previous owners of EFT Source, and $5,000 was paid through the issuance of CPI Card Group Inc. preferred and common stock. The note payable was fully repaid on September 2, 2016 in accordance with the terms of the purchase agreement. +EFT Source, subsequently renamed CPI Card Group Tennessee, is a provider of Financial Payment Card services such as data personalization and fulfillment in the U.S. market. The results of EFT Source operations were included in the Company’s Consolidated Financial Statements as of September 2, 2014. +Pro Forma Information +The following unaudited pro forma consolidated operating results give effect to the EFT Source acquisition as if it had been completed on January 1, 2014. These pro forma amounts are not necessarily indicative of the operating results that would have occurred if these transactions had occurred on such date. The pro forma adjustments are based on certain assumptions that the Company considers to be reasonable. +December 31, +2014 +Revenue—Continuing Operations +$ +291,302 +Net Income—Continuing Operations +16,916 +Basic and Diluted Loss Per Share from Continuing Operations +$ +(0.67) +The Company’s Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2014 includes revenue and net income from operations of $21,999 and $4,446 respectively, attributable to EFT Source. +4. Discontinued Operation and Disposition +On January 12, 2015, the Company sold its Nevada non-secure operation under an asset purchase agreement for $5,000 in cash. The Nevada operation was primarily engaged in the design, production, data personalization, packaging and daily fulfillment of retail gift and loyalty cards for customers in the United States and was not certified by any of the Payment Card Brands. At the date of sale, the net carrying values of the assets classified as a discontinued operation included inventory and plant, equipment and leasehold improvements of $3,129 and $2,910, respectively. For the year ended December 31, 2015, the Company recognized a gain on the sale of the discontinued operation of $208, which is included in “Gain on sale of a discontinued operation”, net of an income tax benefit of $1,247, in the Company’s Consolidated Statement of Operations and Comprehensive Income. +During the years ended December 31, 2015, and 2014, the Nevada operation recognized losses of $606, and $2,670, respectively, as included in “Loss from a discontinued operation, net of taxes” in the Company’s Consolidated Statements of Operations and Comprehensive Income. These amounts are net of income tax benefits of $404, and $1,421, for the years ended December 31, 2015, and 2014, respectively. There was no financial impact related to Nevada for the year ended December 31, 2016. +After the Nevada Sale, CPI retained no continuing involvement in the Nevada operations other than a 180 day transition of services agreement, which expired on July 11, 2015. As a result of the Nevada Sale, the Company made a tax deduction of $32,128 related to the tax deductible goodwill and intangible assets of the Nevada operations, of which $4,190 of the tax deductible goodwill resulted in the recognition of an income tax benefit of $1,510 during the year ended December 31, 2015. +F-12 +Table of Contents +5. Inventories +Inventories are summarized below: +December 31, +2016 +2015 +Raw materials +$ +8,206 +$ +10,549 +Work-in-process +6,340 +11,460 +Finished goods +4,823 +3,631 +$ +19,369 +$ +25,640 +6. Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements consist of the following: +December 31, +2016 +2015 +Buildings +$ +2,077 +$ +2,565 +Machinery and equipment +59,464 +57,482 +Furniture, fixtures and computer equipment +6,634 +4,440 +Leasehold improvements +18,655 +15,856 +Construction in progress +1,136 +2,373 +87,966 +82,716 +Less accumulated depreciation and amortization +(34,547) +(30,603) +$ +53,419 +$ +52,113 +7. Goodwill and Other Intangible Assets +The Company’s goodwill by reportable segment at December 31, 2016 and 2015 is as follows: +December 31, +2016 +2015 +U.S. Debit and Credit +$ +64,330 +$ +64,330 +U.K. Limited +5,908 +7,089 +Other +1,758 +1,704 +$ +71,996 +$ +73,123 +Goodwill activity is summarized as follows: +Balance as of January 1, 2015 +$ +73,801 +Currency translation +(678) +Balance as of December 31, 2015 +$ +73,123 +Currency translation +(1,127) +Balance as of December 31, 2016 +$ +71,996 +The Company completed its evaluation of the carrying value of goodwill as of October 1, 2016 and 2015 and determined there was no impairment to goodwill. In order to identify potential impairments, CPI compared the fair value of its reporting units with their carrying amounts, including goodwill. As the fair value of the reporting units exceeded their carrying amounts, the Company was not required to complete the second step of the process which would measure the amount of any impairment. +The Company completed its evaluation of the carrying values of its indefinite lived intangible assets as of October 1, 2016 and identified a $2,700 impairment related to a trademark acquired in the EFT Source acquisition. The impairment was a result of the Company’s plans to discontinue its use of the trademark in its sales, marketing and other business practices. Accordingly, the trademark was written down to its fair value of zero. Refer to Note 8 “Fair Value of Financial Instruments” for further definition of valuation inputs. The impaired asset is included in the U.S. Debit and Credit reportable segment, and the impairment charge is recorded in “Selling, general and administrative” expenses +F-13 +Table of Contents +within the Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2016. There was no impairment of indefinite-lived intangible assets for the years ended December 31, 2015, and 2014. +During 2016, the Company evaluated the future utilization of its trademarks and updated its estimate to amortize these assets over lives ranging from 7.5 to 10 years. +CPI’s other amortizable intangible assets consist of customer relationships, technology and software, non-compete agreements, and favorable leases. Total intangible assets are being amortized over a weighted-average useful life of 15.6 years. Intangible amortization expense totaled $4,632, $4,577 and $2,893, for the years ended December 31, 2016, 2015 and 2014, respectively. +Intangible assets consist of the following: +December 31, 2016 +December 31, 2015 +Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +12 to 20 +$ +58,994 +$ +(20,972) +$ +38,022 +$ +59,612 +$ +(17,747) +$ +41,865 +Technology and software +7 to 10 +7,101 +(2,167) +4,934 +7,101 +(1,238) +5,863 +Noncompete agreements +5 to 8 +491 +(331) +160 +491 +(270) +221 +Favorable leases +9.5 +111 +(111) +— +111 +(101) +10 +Trademarks +7.5 to 10 +3,330 +(98) +3,232 +6,029 +— +6,029 +Intangible assets subject to amortization +$ +70,027 +$ +(23,679) +$ +46,348 +$ +73,344 +$ +(19,356) +$ +53,988 +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2016 is as follows: +2017 +$ +4,893 +2018 +4,893 +2019 +4,873 +2020 +4,833 +2021 +4,579 +Thereafter +22,277 +$ +46,348 +8. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +· +Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +· +Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +· +Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +F-14 +Table of Contents +The Company’s financial assets and liabilities that are not required to be remeasured at fair value in the Consolidated Balance Sheets are as follows: +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2016 +December 31, +December 31, +(Using Fair Value Hierarchy) +2016 +2016 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +290,625 +$ +— +$ +290,625 +$ +— +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2015 +December 31, +December 31, +(Using Fair Value Hierarchy) +2015 +2015 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +309,375 +$ +— +$ +307,375 +$ +— +Sellers' Note +$ +9,000 +$ +9,000 +$ +— +$ +— +$ +9,000 +The aggregate fair value of the Company's First Lien Term Loan was based on bank quotes. +The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities. +Nonrecurring fair value measurements include the trademark intangible asset impairment assessment completed as of October 1, 2016 as determined based on unobservable Level 3 inputs. Refer to Note 7, “Goodwill and Other Intangible Assets”. +9. Related-Party Transactions +In conjunction with certain officer and non-officer Company employees acquiring Series A Preferred and Common Stock during 2013 and 2012, the Company obtained notes receivable from the employees that were paid in full on August 17, 2015 and were no longer outstanding as of December 31, 2015. +10. Long-Term Debt and Credit Facility +Long-term debt consists of the following: +Interest +December 31, +December 31, +Rate +2016 +2015 +First Lien Term Loan (a) +5.50% +$ +312,500 +$ +312,500 +Sellers' Note (b) +5.00% +— +9,000 +Unamortized discount +(3,795) +(4,459) +Unamortized deferred financing costs +(6,783) +(8,041) +Total long-term debt +301,922 +309,000 +Less current maturities +- +(9,000) +Long-term debt, net of current maturities +$ +301,922 +$ +300,000 +(a) +Interest rate on December 31, 2016 +(b) +Interest rate on December 31, 2015 +First Lien Credit Facility +On August 17, 2015, the Company entered into the First Lien Credit Facility with a syndicate of lenders providing for the $435,000 First Lien Term Loan and the $40,000 Revolving Credit Facility. The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively. +F-15 +Table of Contents +The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company's assets constituting equipment, inventory, receivables, cash and other tangible and intangible property. +Interest rates under the First Lien Credit Facility are based, at the Company's election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50% or a base rate plus a margin of 3.50%. +The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company's assets and affiliate transactions. The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage not in excess of 7.0 times Adjusted EBITDA, as defined in the agreement. As of December 31, 2016, the Company was in compliance with all covenants under the First Lien Credit Facility. +The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including the completion of a qualified initial public offering, and based on an annual Excess Cash Flow calculation, pursuant to the terms of the agreement, beginning as of the year ended December 31, 2016. +In accordance with the terms of the First Lien Credit Facility, the Company repaid $112,500 of the First Lien Term Loan on October 15, 2015 in conjunction with the completion of its initial public offering, and an additional $10,000 during the fourth quarter of 2015. See Note 1 “Business”. The Company recognized additional interest expense of $4,687 during the year ended December 31, 2015 related to accelerated amortization of deferred financing costs and discount in connection with these repayments. +As of December 31, 2016, the Company did not have any outstanding amounts under the Revolving Credit Facility, and has $39,950 of borrowing capacity under the Revolving Credit Facility. The Company has one outstanding letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the applicable margin, which was 4.50% as of December 31, 2016 and 2015, in addition to a fronting fee of 0.125% per annum. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company's total net leverage ratio declines. +Senior Term Loan dated September 2, 2014 +At December 31, 2015, there were no amounts outstanding on the Senior Term Loan dated November 8, 2012, and amended September 2, 2014, and the related revolver that had a maturity of September 30, 2016. The outstanding balance of $158,420 on the Senior Term Loan was repaid in full on August 17, 2015 using a portion of the proceeds from the new $435,000 First Lien Term Loan. In conjunction with the repayment of the Senior Term Loan, the Company recognized a $703 loss on early extinguishment related to the unamortized deferred financing costs and discount on the Senior Term Loan in “Loss on debt modification and early extinguishment” in the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2015. The Company accounted for the debt refinancing in accordance with ASC 470-50-40-6, Modifications and Exchanges. +In conjunction with the Company’s initial refinancing of Senior Term Loan on September 2, 2014, the Company recognized a $476 loss on extinguishment reflected in “Loss on debt modification and early extinguishment” in the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2014. The primary purpose of this refinancing was to finance the cash portion of the acquisition consideration of EFT Source. Refer to Note 3 “EFT Source Acquisition” for additional information. +Sellers Note +The Company entered into a subordinated, unsecured promissory note for $9,000 with certain sellers of EFT Source as part of the EFT Source acquisition, which was fully repaid on September 2, 2016. Interest on the Sellers Note accrued at 5.0% per annum and was paid quarterly. The Sellers Note is included in “Current maturities of long-term debt” at December 31, 2015. +F-16 +Table of Contents +Deferred Financing Costs +Certain costs incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. +As of December 31, 2016, long-term debt of $312,500 matures in 2022. +11. Income Taxes +Income tax expense from continuing operations and effective income tax rates consist of the following: +December 31, +2016 +2015 +2014 +Current taxes: +Domestic +$ +4,944 +$ +16,036 +$ +8,424 +Foreign +27 +254 +— +4,971 +16,290 +8,424 +Deferred taxes: +Domestic +(1,830) +1,656 +2,238 +Foreign +1 +(100) +(371) +(1,829) +1,556 +1,867 +Income tax expense +$ +3,142 +$ +17,846 +$ +10,291 +Income before income taxes +Domestic +$ +7,437 +$ +50,692 +$ +27,984 +Foreign +1,104 +(1,585) +(1,721) +Total +$ +8,541 +$ +49,107 +$ +26,263 +Effective income tax rate +36.8 +% +36.3 +% +39.1 +% +The effective income tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2016 +2015 +2014 +Tax at federal statutory rate +35.0 +% +35.0 +% +35.0 +% +Permanent differences +(2.9) +(1.6) +(2.9) +State income taxes +6.3 +2.0 +3.1 +Foreign taxes +(1.9) +0.3 +2.5 +Other +0.3 +0.6 +1.4 +Effective income tax rate +36.8 +% +36.3 +% +39.1 +% +F-17 +Table of Contents +The components of the deferred tax assets and liabilities are as follows: +December 31, +2016 +2015 +Deferred tax assets: +Accrued expense +1,089 +927 +Unrealized foreign exchange loss +1,426 +652 +Net operating loss carryforward +3,066 +1,999 +Deferred financing costs +1,355 +1,564 +Stock compensation +1,166 +322 +Other +555 +486 +Total gross deferred tax assets +8,657 +5,950 +Valuation allowance +(4,930) +(3,717) +Net deferred tax assets +3,727 +2,233 +Deferred tax liabilities: +Plant, equipment and leasehold improvements +(6,393) +(5,881) +Intangible assets +(17,159) +(18,962) +Prepaid expenses +(1,436) +(1,463) +Total gross deferred tax liabilities +(24,988) +(26,306) +Net deferred tax liabilities +$ +(21,261) +$ +(24,073) +The net deferred tax liabilities are reflected in the consolidated balance sheets as follows: +December 31, +2016 +2015 +Long-term deferred tax liabilities +$ +(21,261) +$ +(24,073) +The net change in the valuation allowance was an increase of $1,213 and a decrease $403 for the years ended December 31, 2016 and 2015, respectively. The change in the year ended December 31, 2016 related to foreign currency exchange rate fluctuations and changes in net operating losses of foreign locations. +The Company has potential tax benefits associated with $3,066 of foreign operating loss carryforwards, which expire at various dates from 2024 through 2032. Due to the uncertainty of being able to recognize these loss carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit. +At December 31, 2016, no provision has been made for U.S. federal and state taxes on cumulative foreign earnings from CPI Card Group-Europe Limited operations of approximately $3,810, which are expected to be indefinitely reinvested outside of the U.S. The U.S. deferred tax liability associated with indefinitely reinvested earnings and profits is not material. +The Company has analyzed its filing positions in all of the jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions, and based upon its review, determined there are no uncertain tax positions as of December 31, 2016 and 2015. +The Company is generally subject to potential federal and state examinations for the tax years after December 31, 2013 for federal purposes and December 31, 2012 for state purposes. +12. Series A Preferred Stock +There were no outstanding shares of Series A Preferred Stock as of December 31, 2016 or December 31, 2015. +During the year ended December 31, 2015, the Company redeemed a total of 64,809 shares of Series A Preferred Stock at prices ranging between $3,950.33 and $4,610.68 per share, including the redemption of 62,140 shares of the Series A Preferred Stock for $276,688, or $4,446.70 per share, on August 17, 2015 with proceeds from the Company’s First Lien Credit Facility (see Note 10 “Long-Term Debt and Credit Facility”), and the redemption of 2,576 shares of the Series A Preferred Stock for $11,877, or $4,610.68 per share, using proceeds from the Company’s IPO (see +F-18 +Table of Contents +Note 1 “Business”). Of the $288,565 redemption amount during the year ended December 31, 2015, $58,250 was treated as a return of capital and $230,315 was treated as a dividend. +During the year ended December 31, 2014, the Company issued 549 shares of Series A Preferred Stock at an estimated value of $3,733.88 per share as part of the payment consideration for the EFT Acquisition. The Company did not redeem any shares of Series A Preferred Stock during the year ended December 31, 2014. +13. Stockholders’ Equity +Common Stock +Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. +During the year ended December 31, 2016, the Company paid dividends of $7,519, representing $0.135 per share. Additionally, on November 9, 2016, the Board of Directors approved a dividend of $0.045 per share, payable on January 12, 2017 to stockholders of record as of the close of business on December 16, 2016. The accrued dividend of $2,491 is reflected in “Accrued expenses” in the Consolidated Balance Sheet as of December 31, 2016. For the year ended December 31, 2016, the Company declared aggregate dividends of $0.18 per share. +On May 11, 2016, the Board of Directors approved a stock repurchase program that authorizes repurchases of the Company’s common stock up to $20,000, limited to a maximum of 2,827,105 shares, prior to May 11, 2017. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share repurchase programs or other transactions. During the year ended December 31, 2016, there were 1,439,422 common shares repurchased for $6,008, at an average cost of $4.17 per share. The repurchases have been accounted for as a share retirement. At December 31, 2016, up to $13,992 remained available under the share repurchase authorization, limited to 1,387,683 shares. +On September 3, 2015, the Company's Board of Directors approved a 22-for-1 stock split of its common stock and increased the number of authorized shares of common stock to 100,000,000. Upon the effective date of the stock split, each outstanding share of common stock and restricted common stock was divided into 22 shares of common stock or restricted common stock, as applicable. Shares of common stock available for issuance under the Option Plan (as hereinafter defined) were increased accordingly. All of the share numbers, share prices and exercise prices have been retroactively adjusted to reflect the stock split in this Annual Report on Form 10-K, including the accompanying Consolidated Financial Statements and these notes. +14. Earnings per Share +Basic or diluted earnings (loss) per share is computed by dividing net earnings or loss by the weighted-average number of ordinary shares outstanding during the period. +F-19 +Table of Contents +The following table sets forth the computation of basic and diluted earnings per share attributable to continuing and discontinued operations: +December 31, +2016 +2015 +2014 +Numerator: +Net income from continuing operations +$ +5,399 +$ +31,261 +$ +15,972 +Preferred stock dividends +— +(32,548) +(44,477) +Income (loss) from continuing operations attributable to common stockholders +5,399 +(1,287) +(28,505) +Loss from a discontinued operation, net of taxes +— +(398) +(2,670) +Net income (loss) attributable to common stockholders +$ +5,399 +$ +(1,685) +$ +(31,175) +Denominator: +Basic EPS—weighted average common shares outstanding +55,827,409 +44,816,263 +41,199,246 +Diluted EPS—weighted average common shares outstanding +56,203,789 +44,816,263 +41,199,246 +Basic and Diluted EPS: +Earnings (loss) per share from continuing operations +$ +0.10 +$ +(0.03) +$ +(0.69) +Loss from a discontinued operation, net of taxes +— +(0.01) +(0.07) +Earnings (loss) per share +$ +0.10 +$ +(0.04) +$ +(0.76) +The potentially dilutive effect of 1,327,818, 1,257,450, and 627,000 stock options as of December 31, 2016, 2015, and 2014, respectively, have been excluded from the computation of diluted earnings per share as their inclusion would be anti-dilutive. The cumulative dividends in arrears related to Series A Preferred Stock were paid in conjunction with the Company’s IPO. +15. Commitments and Contingencies +Commitments +The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2017 and 2024 and contain various provisions for rental adjustments and renewals. All of these leases require the Company to pay property taxes, insurance and normal maintenance costs. +During the normal course of business, the Company also enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. +Future cash payments with respect to operating leases and purchase obligations as of December 31, 2016 are as follows: +Operating +Purchase +Leases +Obligations +2017 +$ +4,350 +$ +7,042 +2018 +3,352 +— +2019 +2,450 +— +2020 +2,074 +— +2021 +1,769 +— +Thereafter +2,110 +— +Total +$ +16,105 +$ +7,042 +The Company incurred rent expense under non-cancellable operating leases during the years ended December 31, 2016, 2015 and 2014, totaling $3,467, $3,518 and $3,320, respectively. +Asset retirement obligations relate to legal obligations associated with the removal of all leasehold improvements at the end of the lease term. The Company records all asset retirement obligations, which primarily relate to “make-good” clauses in operating leases, for its leased property containing leasehold improvements. The liability is accreted through charges to operating expenses. If the asset retirement obligation is settled for an amount other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement. The Company’s accretion expense +F-20 +Table of Contents +incurred during the years ended December 31, 2016, 2015 and 2014 was immaterial. As of December 31, 2016 and 2015, the Company’s asset retirement obligations included in “Other long-term liabilities” in the Consolidated Balance Sheets were $602 and $613, respectively. +Contingencies +CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.) +On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al. v.CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 IPO. The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among other things, damages and costs. In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ending December 31, 2015. The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. +On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (“PSLRA”). On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in the EMV market. +On November 16, 2016, the Company filed a motion to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of that motion. +The Company believes these claims are without merit and intends to defend the actions vigorously. Given the current stage of these matters, the range of any potential loss is not probable or estimable and no accrual has been recognized as of December 31, 2016. +Gemalto S.A. v. CPI Card Group Inc. (2 cases) +First case. This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. Gemalto’s patent will expire in March 2017. The Company successfully moved to transfer the lawsuit to the District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips supplied by two specific vendors. +On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. In light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The PTAB granted the Company’s petition as to all of the independent claims of Gemalto’s patent on November 9, 2016. The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The Company has asked the PTAB to institute +F-21 +Table of Contents +reexamination on the remaining dependent claims by way of a reconsideration petition. The district court litigation remains stayed. +Second case. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. Gemalto’s patent will expire in 2018. On May 25, 2016, the Company moved to dismiss Gemalto's case because the patent's claims are not patentable under 35 U.S.C. section 101. The Company’s motion to stay the litigation in light of its pending motion to dismiss was denied on September 2, 2016. The Company’s motion to dismiss remains pending. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. The parties are presently engaged in claim construction activities and are attempting to schedule the deposition of the patent-in-suit’s named inventor. +With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend these suits vigorously. While a risk of loss is reasonably possible, given the current stage of these matters, as well as the aforementioned defenses, counterclaims and indemnity rights, the range of potential loss is not estimable and no accrual has been recognized as of December 31, 2016 and 2015. +In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of such matters will not have a material adverse effect on our business, financial condition or results of operations. +16. Employee Benefit Plan +The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment accounts. The Company matches 100% of the participant’s first 3% of deferrals and 50% of the next 2% deferral percentage. The Company’s portion is 100% vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $1,382, $1,049 and $824 for the years ended December 31, 2016, 2015 and 2014, respectively. +F-22 +Table of Contents +17. Stock Based Compensation +CPI Card Group Inc. Omnibus Incentive Plan +During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company has reserved 4,000,000 shares of common stock for issuance under the Omnibus Plan. As of December 31, 2016, there were 2,281,135 shares available for grant under the Omnibus Plan. +During the year ended December 31, 2016, the Company granted awards of non-qualified stock options under the Omnibus Plan for 785,058 shares of common stock. The options have a 10 year term and will generally vest ratably over either a three year period beginning on the first anniversary of the grant date, or a four year period beginning on the second anniversary of the grant date. +Outstanding and exercisable stock options under the Omnibus Plan are as follows: +Weighted- +Weighted- +Average +Average +Remaining +Exercise +Contractual Term +Options +Price +(in Years) +Outstanding as of December 31, 2014 +— +$ +— +Granted +795,450 +10.00 +Outstanding as of December 31, 2015 +795,450 +$ +10.00 +Granted +785,058 +7.38 +Forfeited +(143,000) +10.00 +Outstanding as of December 31, 2016 +1,437,508 +$ +8.62 +8.98 +Unvested options as of December 31, 2016, vest as follows: +2017 +379,643 +2018 +469,627 +2019 +469,352 +2020 +118,886 +Total unvested options as of December 31, 2016 +1,437,508 +Stock options were granted under the Omnibus Plan at various times during the year ended December 31, 2016. The fair value of stock option awards was determined at the date of grant using either a Monte Carlo simulation, or a Black-Scholes option-pricing model with the following average assumptions: +Year ended +December 31, 2016 +Expected term in years +6.3 +Volatility +35.4 +% +Risk-free interest rate +1.5 +% +Dividend yield +3.3 +% +Expected term – For option grants valued using a Black-Scholes option-pricing model, the Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. Certain other stock options were granted with an exercise price of $10 per share, and were valued using a Monte Carlo simulation. The Monte Carlo model simulates many future stock price paths, and assumes the exercise of vested options will occur uniformly once the options are projected to be in-the money. +F-23 +Table of Contents +Volatility – The expected volatility percentage was based on a peer group average historical volatility over the expected option term. The peer group was based on financial technology companies that completed an initial public offering of common stock within the last 10 years. +Risk-free interest rate – The risk-free interest rate was determined by using the United States Treasury rate for the period that coincided with the expected option term. +Dividend yield – The estimated dividend yield is based on the Company’s recent historical dividend practice and the market value of its common stock. +During the year ended December 31, 2016, the Company granted awards of restricted stock units for 305,234 shares of common stock. The restricted stock unit awards contain conditions associated with continued employment or service, and generally vest one year from the date of grant. On the vesting dates, shares of common stock will be issued to the award recipients. +The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2016: +Weighted- +Average +Grant Date +Shares +Fair Value +Outstanding as of December 31, 2015 +— +$ +— +Granted +305,234 +7.22 +Vested +(15,803) +7.91 +Forfeited +(18,965) +7.91 +Outstanding as of December 31, 2016 +270,466 +$ +7.13 +Compensation expense for the Omnibus Plan for the years ended December 31, 2016 and December 31, 2015 was $2,770 and $239, respectively. As of December 31, 2016, the total unrecognized compensation expense related to unvested options and restricted stock units under the Omnibus Plan was $2,467, which the Company expects to recognize over an estimated weighted average period of 1.6 years. There was no aggregate intrinsic value of stock option awards outstanding under the Omnibus Plan as of December 31, 2016. +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan +In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted. +As a result of the Company’s adoption of its Omnibus Plan, as further described above, no further awards will be made under the Option Plan. The outstanding stock options have a 10-year life and vest as noted in each respective grant letter. All stock options are nonqualified. No stock options were granted during the years ended December 31, 2016, 2015 and 2014. +Outstanding and exercisable stock options under the Option Plan are as follows: +F-24 +Table of Contents +Weighted- +Weighted- +Average +Average +Remaining +Exercise +Contractual Term +Options +Price +(in Years) +Outstanding as of January 1, 2014 +649,000 +$ +0.0004 +Forfeited +(22,000) +0.0001 +Outstanding as of December 31, 2014 +627,000 +$ +0.0004 +Exercised +(66,000) +0.0005 +Forfeited +(99,000) +0.0003 +Outstanding as of December 31, 2015 +462,000 +$ +0.0003 +Exercised +(245,666) +0.0003 +Outstanding as of December 31, 2016 +216,334 +$ +0.0004 +5.34 +Exercisable as of December 31, 2016 +216,334 +$ +0.0004 +5.34 +Compensation expense and unrecorded compensation expense related to options previously granted under the Option Plan, for the years ended December 31, 2016, 2015 and 2014, were de minimis. The aggregate intrinsic value of stock option awards outstanding and exercisable under the Option Plan as of December 31, 2016 was $898. +Other Stock-Based Compensation Awards +During June 2015, the Company issued 191,664 restricted shares of common stock to executives of the Company. The awards contain conditions associated with continued employment or service. The terms of the unvested restricted shares of common stock provide voting and regular dividend rights to the holders of the restricted shares of common stock, and accordingly are included in weighted-average shares outstanding in the Company’s basic earnings per share calculation. See Note 14 “Earnings per Share”. The remaining unvested restricted shares vest over a three year period from the original grant date. +The following table summarizes the changes in the number of outstanding restricted shares of common stock: +Weighted- +Average +Grant Date +Shares +Fair Value +Outstanding as of December 31, 2014 +— +$ +— +Granted +191,664 +9.48 +Outstanding as of December 31, 2015 +191,664 +$ +9.48 +Vested +(96,800) +9.48 +Outstanding as of December 31, 2016 +94,864 +$ +9.48 +Total compensation expense related to the restricted shares of common stock awards was $809 and $646 for the years ended December 31, 2016 and December 31, 2015, respectively. As of December 31, 2016, there was $326 of total remaining unrecognized compensation expense related to the unvested restricted shares of common stock that will be recognized over a weighted average period of 1.15 years. +Phantom Stock Plan +Effective January 1, 2012, the Company’s Board of Directors adopted the CPI Acquisition, Inc. Phantom Stock Plan (“Phantom Stock Plan”) to provide incentive compensation to certain key employees. In conjunction with the Company’s IPO, the Phantom Stock Plan was terminated and all outstanding liabilities under the plan were settled. During the year ended December 31, 2015, payments of $13,892 were made under the plan, and no liability existed as of December 31, 2015. +Under the terms of the Phantom Stock Plan, holders of an award were entitled to a cash payment equal to the difference between the fair market value of the award, as defined in the agreement, at the time of exercise and the +F-25 +Table of Contents +award’s exercise price. The Company measured the liability at intrinsic value, with changes in the intrinsic value of the liability recognized as expense each year in the Consolidated Statements of Operations and Comprehensive Income. +During the years ended December 31, 2015 and 2014, the Company recognized compensation expense of $8,748 and $4,534 respectively, related to this plan. +18. Segment Reporting +The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, EBITDA (as defined below), or total assets or subsidiaries which the Company believes information about the segment would be useful to the readers of the financial statements from a qualitative perspective. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures such as revenue and EBITDA. +EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments. +As of December 31, 2016, the Company’s reportable segments are as follows: +· +U.S. Debit and Credit +· +U.S. Prepaid Debit +· +U.K. Limited +The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands, private label credit cards that are not issued on the networks of the Payment Cards Brands (including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards), and instant issuance systems. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands and, where required by the Company’s customers, certified to be in compliance with the standards of the PCI Security Standards Council. These operating segments have been aggregated into a single reportable segment due to similarities in the nature of the products and services sold by these subsidiaries, a common customer base, the substantial degree of integration and redundancy across the segments, and utilization of centrally shared sales, marketing, quality and planning departments. Separate information about these segments would not be useful to the readers of the financial statements. +The U.S. Prepaid Debit segment primarily provides integrated card services to prepaid debit card issuers in the United States. Services provided include tamper-evident security packaging services and card personalization and fulfillment services. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages mentioned above. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. +The U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment services. The U.K. Limited segment operations are not certified by the Payment Card Brands, nor are they PCI certified, but are certified to be in compliance with ISO 27001 standards. +F-26 +Table of Contents +The “Other” category includes the Company’s corporate activities and less significant operating segments that derive their revenue from the production of Financial Payment Cards and retail gift cards in Canada (CPI—Canada) and the U.K. (CPI—Petersfield). For additional information regarding the Company’s decision to shut-down the CPI—Petersfield facility during the third quarter of 2015, see Note 1 “Business”. +Performance Measures of Reportable Segments +Revenue and EBITDA of the Company’s reportable segments for the years ended December 31, 2016, 2015 and 2014 were as follows: +Revenue +EBITDA +December 31, +December 31, +2016 +2015 +2014 +2016 +2015 +2014 +U.S. Debit and Credit (a) +$ +208,795 +$ +263,668 +$ +153,015 +$ +52,090 +$ +78,981 +$ +37,547 +U.S. Prepaid Debit +60,065 +65,878 +59,271 +18,646 +22,993 +18,654 +U.K Limited +29,689 +34,361 +35,163 +2,839 +3,572 +2,943 +Other +13,110 +17,420 +23,908 +(28,063) +(22,145) +(12,121) +Intersegment eliminations (b) +(2,959) +(7,217) +(10,351) +— +— +— +Total: +$ +308,700 +$ +374,110 +$ +261,006 +$ +45,512 +$ +83,401 +$ +47,023 +(a) +Amounts for 2014 include the post-acquisition revenue and EBITDA of EFT Source from September 2, 2014 through December 31, 2014. +(b) +Amounts include the revenue from sales between segments and are eliminated upon consolidation. +The following table provides a reconciliation of total segment EBITDA to “Net income from continuing operations” for the years ended December 31, 2016, 2015 and 2014: +December 31, +2016 +2015 +2014 +Total segment EBITDA from continuing operations +$ +45,512 +$ +83,401 +$ +47,023 +Interest, net +(20,044) +(18,328) +(7,508) +Income tax expense +(3,142) +(17,846) +(10,291) +Depreciation and amortization +(16,927) +(15,966) +(13,252) +Net Income from continuing operations +$ +5,399 +$ +31,261 +$ +15,972 +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2016 and 2015 were as follows: +December 31, +2016 +2015 +U.S. Debit and Credit +$ +205,417 +$ +221,274 +U.S. Prepaid Debit +23,509 +20,960 +U.K. Limited +26,060 +25,897 +Other +9,434 +12,222 +Total assets: +$ +264,420 +$ +280,353 +F-27 +Table of Contents +Plant, Equipment and Leasehold Improvement Additions of Geographic Locations +Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the years ended December 31, 2016, 2015 and 2014 were as follows: +December 31, +2016 +2015 +2014 +U.S. +$ +13,169 +$ +19,129 +$ +15,082 +Canada +263 +275 +32 +Total North America +13,432 +19,404 +15,114 +U.K. +1,447 +659 +454 +Total plant, equipment and leasehold improvement additions +$ +14,879 +$ +20,063 +$ +15,568 +Net Sales of Geographic Locations +Net sales of the Company’s geographic locations for the years ended December 31, 2016, 2015 and 2014 were as follows: +December 31, +2016 +2015 +2014 +U.S. (a) +$ +262,544 +$ +316,111 +$ +196,418 +Canada +11,998 +12,541 +16,133 +Total North America +274,542 +328,652 +212,551 +U.K. +25,705 +36,954 +36,682 +Other (b) +8,453 +8,504 +11,773 +Total revenue +$ +308,700 +$ +374,110 +$ +261,006 +(a) +Amounts for 2014 include the post-acquisition net sales of EFT Source from September 2, 2014 through December 31, 2014. +(b) +Amounts in other include sales to various countries that individually are not material. +Long-Lived Assets of Geographic Segments +Long-lived assets of the Company’s geographic segments as of December 31, 2016 and 2015 were as follows: +December 31, +2016 +2015 +U.S. +$ +157,773 +$ +164,377 +Canada +2,899 +2,254 +Total North America: +160,672 +166,631 +U.K. +11,091 +12,593 +Total long-lived assets +$ +171,763 +$ +179,224 +Net Sales by Product and Services +Net sales from products and services sold by the Company for the years ended December 31, 2016, 2015 and 2014 were as follows: +December 31, +2016 +2015 +2014 +Product net sales (a) +$ +168,510 +$ +241,609 +$ +159,220 +Services net sales (b) +140,190 +132,501 +101,786 +Total net sales: +$ +308,700 +$ +374,110 +$ +261,006 +F-28 +Table of Contents +(a) +Product net sales include the design and production of Financial Payment Cards, in contact EMV, dual-interface EMV, contactless and magnetic stripe formats. The Company also generates product revenue from the sale of Card@Once ® instant issuance systems, Private Label Credit Cards, and retail gift cards. It is impracticable to split the products described into dollar amounts in the table above. +(b) +Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper-evident security packaging, providing fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates services revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click-fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. It is impracticable to split the services described into dollar amounts in the table above. +19. Quarterly Financial Information (Unaudited) +Summarized quarterly results for the years ended December 31, 2016 and 2015 were as follows: +Year Ended +December 31, +2016 by Quarter: +Q1 +Q2 +Q3 +Q4 +2016 +Net sales +$ +86,393 +$ +73,725 +$ +81,202 +$ +67,380 +$ +308,700 +Gross profit +29,692 +22,707 +29,063 +20,436 +101,898 +Income (loss) from continuing operations +5,714 +(328) +4,026 +(4,013) +5,399 +Net income (loss) +5,714 +(328) +4,026 +(4,013) +5,399 +Net income (loss) attributable to common stockholders +$ +5,714 +$ +(328) +$ +4,026 +$ +(4,013) +$ +5,399 +Basic and diluted earnings (loss) per share: +Continuing operations +$ +0.10 +$ +(0.01) +$ +0.07 +$ +(0.07) +$ +0.10 +$ +0.10 +$ +(0.01) +$ +0.07 +$ +(0.07) +$ +0.10 +Year Ended +December 31, +2015 by Quarter: +Q1 +Q2 +Q3 +Q4 +2015 +Net sales +$ +77,310 +$ +95,536 +$ +107,697 +$ +93,567 +$ +374,110 +Gross profit +25,508 +35,835 +43,049 +31,429 +135,821 +Income (loss) from continuing operations +5,960 +12,155 +14,760 +(1,615) +31,261 +Income (Loss) from discontinued operation, net of taxes +281 +— +— +(679) +(398) +Net income (loss) +6,241 +12,155 +14,760 +(2,294) +30,863 +Preferred stock dividends +(12,611) +(12,747) +(7,096) +(94) +(32,548) +Net (loss) income attributable to common stockholders +$ +(6,370) +$ +(592) +$ +7,664 +$ +(2,388) +$ +(1,685) +Basic and diluted (loss) earnings per share: +Continuing operations +$ +(0.16) +$ +(0.02) +$ +0.19 +$ +(0.03) +$ +(0.03) +Discontinued operation +0.01 +— +— +(0.01) +(0.01) +$ +(0.15) +$ +(0.02) +$ +0.19 +$ +(0.04) +$ +(0.04) +20. Subsequent Events +On March 1, 2017, the Board of Directors approved a dividend of $0.045 per share. This dividend is payable on April 7, 2017, to stockholders of record as of the close of business on March 17, 2017. +F-29 +Table of Contents +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2016, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2016, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +61 +Table of Contents +Changes in Internal Control Over Financial Reporting +The Company took steps to address and remediate the previously disclosed material weakness in our internal control over financial reporting, which included the hiring of additional finance personnel familiar with the rules and regulations applicable to public companies (including the requirements of the Sarbanes-Oxley Act), and the development and implementation of improved policies and processes. Other than these remediation actions, there has been no change in the Company’s internal control over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. +For additional information regarding the Company’s previously disclosed material weakness identified by management, see “Item 4. Controls and Procedures” in the Company’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2016, filed on November 10, 2016 with the Securities and Exchange Commission. +Item 9B. Other Informatio n +None. +62 +Table of Contents +PART II I +Item 10. Directors, Executiv e Officers and Corporate Governance +The information required by this Item is expected to be in our definitive Proxy Statement for the 2017 Annual Meeting of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended December 31, 2016 and is incorporated herein by reference. +Item 11. Executive Compensatio n +Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy Statement. +Item 12. Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement. +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. +Item 14. Principal Accountant Fees and Service s +Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement. +63 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Income +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this report, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). +64 +Table of Contents +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ Lillian Etzkorn +Lillian Etzkorn +Chief Financial Officer +March 2, 2017 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint Steve Montross and Lillian Etzkorn and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubsitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the 1934 Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +65 +Table of Contents +Name +Title +Date +/s/ Steven Montross +President, Chief Executive +March 2, 2017 +Steven Montross +Officer and Director +(Principal Executive Officer) +/s/ Lillian Etzkorn +Chief Financial Officer +March 2, 2017 +Lillian Etzkorn +(Principal Financial Officer) +/s/ Chris Bakke +Chief Accounting Officer +March 2, 2017 +Chris Bakke +(Principal Accounting Officer) +/s/ Bradley Seaman +Chairman of the Board +March 2, 2017 +Bradley Seaman +/s/ Diane Fulton +Director +March 2, 2017 +Diane Fulton +/s/ Douglas Pearce +Director +March 2, 2017 +Douglas Pearce +/s/ Nicholas Peters +Director +March 2, 2017 +Nicholas Peters +/s/ Robert Pearce +Director +March 2, 2017 +Robert Pearce +/s/ David Rowntree +Director +March 2, 2017 +David Rowntree +/s/ Scott Scheirman +Director +March 2, 2017 +Scott Scheirman +/s/ Silvio Tavares +Director +March 2, 2017 +Silvio Tavares +66 +Table of Contents +INDEX TO EXHIBIT S +Exhibit No. +Exhibit Description +2.1 +Purchase and Sale Agreement, dated as of August 22, 2014, by and among William S. Dinker, Katherine S. Nevill, Bobby Smith and Tom Hedrich, William S. Dinker 2012 Trust for Edward McCullough Dinker, William S. Dinker 2012 Trust for John Walsh Dinker and William S. Dinker 2012 Trust for William S. Dinker III, EFT Source, Inc., CPI Acquisition, Inc. and William S. Dinker, as Sellers' Representative (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +3.1 +Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +3.2 +Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.1** +Employment and Non-Competition Agreement, dated April 22, 2009, between CPI Acquisition, Inc. and Steven Montross (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.2** +Employment and Non-Competition Agreement, dated October 1, 2008, between Metaca Corporation and Anna Rossetti (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.3** +Termination Letter, dated May 5, 2015 between CPI Acquisition, Inc. and Marvin Press (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.4** +CPI Card Group Inc. Omnibus Incentive Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.5** +Form of Stock Option Award Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6** +CPI Acquisition, Inc. Phantom Stock Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.7** +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.8** +Employment and Non-Competition Agreement, effective June 22, 2015, between CPI Acquisition, Inc. and David Brush (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.9 +First Amendment to Employment and Non-Competition Agreement, dated as of December 8, 2016, by +and between David Brush and CPI Card Group-Colorado, Inc. (incorporated by reference to the +Company’s Current Report on Form 8-K filed on December 13, 2016). +10.10* +Offer of Employment, dated as of December 5, 2016, by and between Lillian Etzkorn and CPI Card Group-Colorado, Inc. +10.11 +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +67 +Table of Contents +10.12 +First Lien Credit Agreement, dated as of August 17, 2015, by and among CPI Card Group Inc., CPI Acquisition Inc., the lenders from time to time party thereto and the Bank of Nova Scotia, as Administrative Agent and Collateral Agent (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.13 +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.14 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +24.1* +Power of Attorney (included on the signature pages hereto). +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* Filed herewith. +** Management contract or compensatory plan or arrangement. +68 \ No newline at end of file diff --git a/raw/filings/0001641614/2016/0001558370-17-001271/filing_metadata.csv b/raw/filings/0001641614/2016/0001558370-17-001271/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..b78bedeec5c1c172d860cbbaf197c54f71542cda --- /dev/null +++ b/raw/filings/0001641614/2016/0001558370-17-001271/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001641614,PMTS,CPI Card Group Inc.,10-K,2017-03-02,2016-12-31,2017-03-02T01:27:33.000Z,0001558370-17-001271,pmts-20161231x10k.htm,10-K,14213035,1,0,https://www.sec.gov/Archives/edgar/data/1641614/000155837017001271/pmts-20161231x10k.htm,https://www.sec.gov/Archives/edgar/data/1641614/000155837017001271/,2016,2016,1 diff --git a/raw/filings/0001641614/2016/0001558370-17-001271/item1.txt b/raw/filings/0001641614/2016/0001558370-17-001271/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..df62e52ec0a858a3e948286e8053710b99d95f14 --- /dev/null +++ b/raw/filings/0001641614/2016/0001558370-17-001271/item1.txt @@ -0,0 +1,134 @@ +Item 1. Busines s +As used herein, “CPI”, “we”, “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, MasterCard, American Express and Discover) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this growing subsector of the financial technology market. Our customers are primarily leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process) and card processors. We serve a diverse set of over 4,000 direct and indirect customers, including many of the largest issuers of debit and credit cards in the United States and Canada, and largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of ten production and card services facilities, including eight high-security facilities in the United States and Canada, each of which is certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”). We have a leading network of high-security production facilities in the United States and Canada, allowing us to optimize our solutions offerings to serve the needs of our diverse and long-term customer base. +We believe we have a leading position in: +· +the U.S. prepaid debit market (which represents the fastest growing subset of the Financial Payment Card market in the United States), serving several of the top U.S. Prepaid Debit Card program managers; +· +the U.S. large issuer market, serving many of the largest U.S. debit and credit card issuers; and +· +the U.S. small issuer market, which includes independent community banks and credit unions, driven by our strong relationships, capabilities and technologies. +In addition to our eight facilities in the United States and Canada, we have two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, that are not issued on the networks of the Payment Card Brands, as well as provide personalization, packaging and fulfillment services. +We have grown our business significantly over the past decade, both organically and through acquisitions. Since 2008, we have completed six acquisitions, significantly increasing our geographic and market coverage, solutions offerings and capacity. Our most significant acquisitions occurred in March 2010 and September 2014. On March 9, 2010, we purchased certain assets of Premier Card Solutions, a leading provider of Financial Payment Cards, data personalization services and tamper-evident security packaging for Prepaid Debit Cards that utilize the payment networks of the Payment Card Brands. The Premier Card Solutions transaction significantly enhanced our offering to Prepaid Debit Card customers. On September 2, 2014, we acquired EFT Source, a recognized leader in the financial technology industry. The acquisition of EFT Source significantly enhanced our card services offering, added Card@Once ® to our instant issuance card offering and expanded our end-to-end Financial Payment Card solutions. We intend to continue to explore strategic acquisition opportunities. +In 2016, we generated: +· +Net sales of $308.7 million, which represented a decrease of 17.5% compared to the prior year, +3 +Table of Contents +· +Net income from continuing operations of $5.4 million, which represented a decrease of 82.7% compared to the prior year, and +· +Adjusted EBITDA of $57.2 million, which represented a decrease of 40.6% compared to the prior year. +Adjusted EBITDA is a financial measure not presented in accordance with generally accepted accounting principles (“GAAP”). For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income from continuing operations, the most comparable GAAP measure, see Part II, Item 6, Selected Financial Data . +Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States; U.S. Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card issuers in the United States; and U.K. Limited, which primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe, and which are not certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. Businesses not considered part of these segments are categorized as "Other" and include our operations in Ontario, Canada and Petersfield, United Kingdom . In August 2015, we completed the shut-down and closure of our operations at our Petersfield, United Kingdom facility. The Petersfield, United Kingdom facility is not material to our business. Also included in “Other” are corporate activities. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 18 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Leading Market Position with Long-Term Customer Relationships. As a market leader, we have long-standing trust-based relationships with our key customers, many of whom we have served for decades. Our customer relationships often involve deep process and technology integration, particularly in the case of customers who utilize our card services and instant issuance systems and services. The solutions that we provide require strict data integrity, and generally card issuers are reluctant to switch away from trusted providers due to the requirements for high-security and access to highly-sensitive cardholder information. As a result, our customers are selective about the partners with which they work and typically seek out partners who have a well-established reputation for trust and quality and are able to meet their service requirements. We take pride in our efforts to provide a differentiated level of service to our customer base. Our strong net promoter score, a customer satisfaction metric developed through surveys conducted by an independent market research firm, is evidence of our ability to provide this differentiated level of service. We also maintain important relationships with the Payment Card Brands to ensure our facilities and processes consistently meet their standards. +· +Well Positioned to Capitalize on Growth in Financial Payment Card Market and Remaining EMV Conversion in the United States. With the significant past investments made to our physical infrastructure and equipment platform in preparation for the EMV conversion, including information technology, human capital and equipment upgrades across our network of facilities, we believe that we continue to be well-positioned to capitalize on the continued growth in the Financial Payment Card market, and the U.S. market conversion to the Europay, Mastercard and Visa (“EMV”) chip technology, which began in earnest in the second half of 2014 and is expected to continue over the next several years. EMV is a global, technical standard, maintained by EMVCo for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic stripes. EMV cards can be contact cards that must be physically inserted (or “dipped”) into a reader, contactless cards that can be read over a short distance using radio-frequency identification (“RFID”) technology, or cards with both contact and contactless functionality (“dual-interface EMV cards”). We serve our customers through a network of ten production and card services facilities, including eight high-security facilities in the United States and Canada that are each certified by one or more of the Payment +4 +Table of Contents +Card Brands, Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. +· +Comprehensive End-to-End Card Solutions Drive Deep Customer Integration. The foundation of our strong market position is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the stringent security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are deeply integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require extensive technology integration, such as secure data links to transfer highly sensitive cardholder information. Similarly, our installed base of instant issuance systems at bank and credit union branches across the United States require comparable levels of customer integration, as our Card@Once ® instant issuance system utilizes only our secure technology to instantly personalize cards. Certain customers have also integrated our proprietary software into their customer-facing websites to offer card design and customization to their cardholders. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. We believe our customers choose and retain us for these critical functions, which typically require integrations that are costly and complex, due to our reputation as a trusted partner, our high levels of service and proven execution. +· +Certified Network of High-Security Facilities. Our eight high-security facilities are each certified by one or more of the Payment Card Brands and Interac (in Canada), forming a leading network of certified production facilities in in the United States and Canada. The Payment Card Brand certifications allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. Additionally, many of our facilities are also certified to be in compliance with the standards of the PCI Security Standards Council. These certification processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain this designation, which are regularly verified by both the Payment Card Brands and our customers. +· +Industry Experience and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed extensive technological, engineering and operational expertise that we believe has made us a leader in our industry for product and process know-how. We believe that our technological and operational know-how, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage and fosters a culture of innovation. We have developed and acquired significant intellectual property over our operating history and hold 18 U.S. patents, 14 foreign patents, as well as 13 pending U.S. and foreign patent applications, on our Financial Payment Card solutions, including patents on our instant issuance offering, and patents on our tamper-evident security packaging used by our customers that have Prepaid Debit Card offerings. We also hold exclusive production rights to certain products the Company has developed, as well as patented software solutions such as our MYCA™ offering, which is integrated into the websites of over 300 card issuing banks and other customers. +· +Experienced Management Team. We have built an experienced management team, and have strengthened the team during 2016 with the addition of key executives with distinguished records of accomplishments. The leadership, depth of experience and relevant market knowledge the management team brings will be invaluable as we execute on our plans moving forward. +Our Strategy +The key components of our strategy include: +Drive Growth in the Core Financial Markets: +· +Continue to Capitalize on Growth in Financial Payment Card Market and the U.S. EMV Conversion, Including Dual-Interface EMV Cards. We expect future growth in the U.S. Financial Payment Card market as card-based payments continue to replace payments made with cash and checks, along with the recurring nature of demand for Financial Payment Cards in the United States, including the regular renewal +5 +Table of Contents +of cards every three to five years, replacing lost or stolen cards due to fraudulent usage, and portfolio churn as cardholders move from one program to another. In addition, the conversion of Financial Payment Cards in the United States from magnetic stripe technology to the EMV standard began in earnest in the second half of 2014 and is expected to continue over the next several years. In anticipation of the EMV conversion, and subsequently the expected further adoption of the more complex and higher priced dual-interface EMV cards, we invested significantly in our network of facilities, technological infrastructure and human capital resources. We believe our comprehensive solutions offering and proven track record ideally positions us to be our customers’ partner of choice for their ongoing Financial Payment Card needs, and to successfully complete their EMV conversions. +· +Capitalize on Growth in Prepaid Debit Market. We believe we are well positioned to capitalize on the expected growth of the Prepaid Debit Card market due to our market leading position, supported by our industry expertise, comprehensive end-to-end card solutions and patents. We have a leading market position and have been doing business with the largest U.S. Prepaid Debit Card program managers. Additionally, we have further developed proprietary production techniques which provide us additional flexibility to meet customer demands. +· +Cross-Sell Expanded Services Offering Across Customer Base. We believe our leading market position in Financial Payment Card production and our card services capabilities in the United States and Canada, presents an opportunity to cross-sell services across our customer base by offering comprehensive end-to-end card solutions. We believe that providing our existing customers this complete end-to-end solution creates a revenue opportunity and means to further deepen our existing customer relationships. Through our strong track record in card services, we believe we have established a reputation as a trusted partner and advisor to our customers with the ability to securely manage sensitive and confidential customer data throughout our network. Due to the high costs of failure, such as a data breach, we believe that that we are well positioned to meet the needs of our customers, who expect their vendors to provide high levels of security, service and certainty to manage these critical functions. +· +Continued Exploration of Strategic Acquisitions. We have a strong track record of acquiring and integrating complementary businesses, completing six acquisitions since 2008, which have enhanced our market share, capabilities and capacity. We expect to continue to explore strategic acquisitions that give us access to new markets and capabilities. +Provide New and Innovative Products and Services in the Markets We Serve: +· +Capitalize on Growth in Instant Issuance Systems and Services Market. We acquired our instant card issuance system, Card@Once ® , through the acquisition of EFT Source in 2014 and have continued to drive growth in sales of our instant issuance systems and related services revenue. We plan to continue to grow our installed base of instant issuance systems in bank branches across the United States to increase our opportunity for continued recurring revenue streams from card personalization which is delivered through our software as a service offering. +· +Develop New Products and Services to Deepen Existing Customer Relationships and Attract New Customers. In addition, t hrough our recently added Print on Demand capabilities, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on demand, basis for our U.S. Prepaid Debit customers, enabling individualized offerings and reducing waste. We believe this will enable us to further penetrate new, fast growing, verticals of the prepaid market including payroll, corporate incentives and benefits. In addition, w e recently announced new products, including a metal card offering for the credit card markets, and dual-interface or “tap-and-go” EMV cards, both of which represent important opportunities to add to the growth of the business. +· +Capitalize on the Emerging Digital Services Market. We have continued to expand our digital services capabilities, focusing on enabling payments for the growing e-commerce and mobile market place, including online card design and card re-orders, order status, inventory management, EMV key management, and fulfillment of plastic and virtual payment cards, including our patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. While not currently +6 +Table of Contents +significant to our financial results, we also offer other innovative mobile services, such as CPI Mobile™, where we, through technology partners, are able to provide solutions to digitize, encrypt and deliver payment credentials to mobile devices. +Execute Quality, Process Excellence & Efficiency Initiatives: +· +Drive Quality, Process Excellence and Cost Efficiencies. We are focused on driving high quality products and services for our customers through our process excellence initiatives, and on reducing costs through our continued efforts to drive efficiencies in our business. For example, CPI has developed a successful continuous improvement framework that drives tangible cost savings and enables re-investment in critical areas of the business. +Our Products and Services +EMV Financial Payment Cards (Contact and Dual-Interface) +We produce contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce dual-interface EMV cards, which feature both the contact EMV technology and an RFID antenna that utilizes near field communications (“NFC”) technology to allow transactions to also be processed on a contactless basis when the card is brought within the requisite proximity to a NFC-enabled payment terminal. +Non-EMV Financial Payment Cards and Retail Gift Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology and cards that include both magnetic stripes and NFC technology. In addition, we produce retail gift cards (which are not issued on the network of the Payment Card Brands) primarily in the U.K. and Canada. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in EMV and non-EMV card formats. Our personalization services are technology-driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. Finally, we have the capabilities to provide Trusted Service Manager services, leveraging our existing data connectivity with processors and other customers to offer a trusted, high-security solution for facilitating mobile payments. +Tamper-Evident Security Packaging Solutions +We offer specialized and innovative tamper-evident security packaging products and services to customers with a Prepaid Debit Card offering that reduce fraud for Prepaid Debit Cards sold through the retail channel. The majority of the tamper-evident security packaging we produce is protected by our patents. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once ® , our proprietary and patented instant card issuance system and services, which provide our card issuing bank customers the ability to issue a completely personalized permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode either a magnetic stripe or an EMV card, and personalize the card on a desktop output terminal in a process which is certified by MasterCard and Visa. Our instant issuance system generates both system sales and recurring revenue from software as a service, card personalization and +7 +Table of Contents +sales of cards and consumables. In addition, we provide instant issuance of debit cards to large financial institutions whereby we provide fully-personalized temporary debit cards which are issued to card holders upon opening a new account, and we manage the fulfillment and replenishment of these fully personalized cards directly to thousands of individual bank branches. +Print on Demand Prepaid Solutions +We recently launched our new Print on Demand solution, which can deliver significant flexibility to prepaid program managers and financial institutions. Through our Print on Demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on demand, basis for our customers, enabling individualized offerings and reducing waste. While not significant to our 2016 financial results, the Print on Demand solution enables us to further penetrate new, fast growing, business-to-business and business-to-consumer verticals of the prepaid market including payroll, corporate incentives and benefits. +Suppliers +One of the most important components of our products is the EMV microchip, which we expect to become even more significant as EMV cards comprise an increasing percentage of the cards we produce. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in South Korea, France, the United States and Singapore, primarily on a purchase order basis. Our main suppliers of EMV microchips are four leading international manufacturers, including one supplier that is also owned by a competitor. Over 90% of our purchased EMV microchips for the year ended December 31, 2016 came from these four main suppliers. The other key components for our products are substrates (such as PVC), antennas and inlays which we also source from multiple suppliers. We continuously monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers, prepaid debit issuers and program managers. Our diverse customer base includes many of the largest issuers of credit and debit cards in the United States and the largest U.S. Prepaid Debit Card program managers. Our top five customers represented approximately 29.4% of our net sales for the year ended December 31, 2016, and we have been serving these customers for an average of greater than 10 years. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into purchase order or other short-term arrangements that define the prices and the quantities of products to be delivered and services rendered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +Our production and services strategy has several key facets. We have a large network of integrated high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high-volume production runs that allow us to meet the competitive price points of large orders; +· +execute lower-volume, highly personalized customized runs that allow us to meet the high-service and quick-turn needs of smaller orders; and +· +meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and our significant expertise and capabilities specifically designed for this retail prepaid +8 +Table of Contents +market, as well as on demand solutions for the business-to-business and business-to-consumer prepaid markets. +Our digital services are designed to scale quickly to efficiently support a growing number of issuers and end users. These services encompass a variety of secure hosted solutions, which enable improved customer service and efficiencies for our customers. +We operate approximately 500,000 square feet of facilities in the United States, Canada and the United Kingdom, where we focus on Financial Payment Card production and personalization services. See Part I, Item 2, “Properties” of this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver products to our banking customers. Due to the high-security nature of the products we provide to our banking customers, product must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we utilize the U.S., Canadian and U.K. postal services to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +Sales and Marketing +We market our products and services to large issuers, small to mid-sized issuers, prepaid debit issuers and program managers. We have approximately 30 field-based sales representatives that give us a wide geographic reach across the United States, Western Europe and Canada. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers, providing a differentiated offer that includes cross-selling expanded services. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer groups, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications focused on thought leadership that include industry publications, editorial white papers, conferences and trade shows, print and digital advertisements and educational webinars designed to introduce our existing customers and new customers to innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings and competitive pricing. Competitive factors for our business include product quality, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features and price. We believe that we compete favorably in each of these categories. +Our products and services compete with other card manufacturers and card solutions providers. We believe our primary competitors are Oberthur Technologies S.A., Giesecke & Devrient GmbH, Valid S.A., Gemalto NV and Multi Packaging Solutions, Inc. Certain existing and potential customers also have the ability to personalize Financial Payment Cards in-house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own and control various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are also a party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31, 2016, we had 30 U.S. and foreign trademark registrations and applications, 18 existing U.S. patents, 14 foreign patents, as well as 13 pending U.S. and foreign patent +9 +Table of Contents +applications. Our patents have an average remaining maturity of 12.5 years, and our trademarks will be due for renewal for additional ten or fifteen-year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We believe that we are in compliance with environmental requirements, however, the unfavorable resolution of any environmental matter could have a material adverse effect on our business, financial condition and result of operations. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, addresses, card account numbers and expiration dates. In some cases, we receive a cardholder’s PIN number. As a service provider to financial institutions in the United States, we comply with the privacy provisions of Gramm‑Leach‑Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with various other federal, state and foreign privacy statutes and regulations, and the PCI Security Standards Council’s Data Security Standards, each of which is subject to change at any time. We may only use and disclose the personal information we receive on behalf of our customers for the purposes for which it was provided to us and in a manner that is consistent with each financial institution’s and processor’s own data privacy and security obligations. +In order to comply with our obligations under the GLBA, applicable state laws and our contractual agreements with our customers, we are required to safeguard and protect the privacy of personally identifiable information we receive. As part of their compliance with these requirements, each of our U.S. customers is expected to have a program in place for responding to unauthorized access to, or use of, consumer information that could result in substantial harm or inconvenience to consumers. A majority of U.S. states have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, which could result in significant costs to us and significant damage to our reputation. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations. +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve certification that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining these certifications, and have invested significant capital to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly certification process serves as a significant barrier to new entrants to our market. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution clients to include certain provisions in their contracts with service providers like us and +10 +Table of Contents +to conduct ongoing monitoring and risk management for third party relationships. In addition, independent auditors annually review many of our operations to provide internal control evaluations for our clients’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations including those relating to the movement of money. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with licensing and reporting requirements, to implement operating policies and procedures to comply with anti-money laundering laws, to protect the privacy and security of our clients’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs and, in some cases, limited revenue sources for us and our clients. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, to CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments and/or limit our fees or other revenue sources. We do not currently anticipate a materially adverse impact on our business, results of operations or financial condition due to these regulations, but it is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential clients. +Employees and Labor +As of December 31, 2016, our businesses employed 1,308 employees, all of whom are full time employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10026 W. San Juan Way – Suite 200, Littleton, CO 80127 , telephone (303) 973-9311. The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. \ No newline at end of file diff --git a/raw/filings/0001641614/2016/0001558370-17-001271/item13.txt b/raw/filings/0001641614/2016/0001558370-17-001271/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c23eaf069f58452092de9649aa5850bcb0478b34 --- /dev/null +++ b/raw/filings/0001641614/2016/0001558370-17-001271/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001641614/2016/0001558370-17-001271/item9a.txt b/raw/filings/0001641614/2016/0001558370-17-001271/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..60444612a4f2a6e3c863d955bd33a1095e6ab848 --- /dev/null +++ b/raw/filings/0001641614/2016/0001558370-17-001271/item9a.txt @@ -0,0 +1,15 @@ +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2016, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2016, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +61 +Table of Contents +Changes in Internal Control Over Financial Reporting +The Company took steps to address and remediate the previously disclosed material weakness in our internal control over financial reporting, which included the hiring of additional finance personnel familiar with the rules and regulations applicable to public companies (including the requirements of the Sarbanes-Oxley Act), and the development and implementation of improved policies and processes. Other than these remediation actions, there has been no change in the Company’s internal control over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. +For additional information regarding the Company’s previously disclosed material weakness identified by management, see “Item 4. Controls and Procedures” in the Company’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2016, filed on November 10, 2016 with the Securities and Exchange Commission. \ No newline at end of file diff --git a/raw/filings/0001641614/2016/0001558370-17-001271/rp_note.txt b/raw/filings/0001641614/2016/0001558370-17-001271/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..6685e8898d4f25b36c58d49345d889601cf6400b --- /dev/null +++ b/raw/filings/0001641614/2016/0001558370-17-001271/rp_note.txt @@ -0,0 +1,2 @@ +9. Related-Party Transactions +In conjunction with certain officer and non-officer Company employees acquiring Series A Preferred and Common Stock during 2013 and 2012, the Company obtained notes receivable from the employees that were paid in full on August 17, 2015 and were no longer outstanding as of December 31, 2015. \ No newline at end of file diff --git a/raw/filings/0001641614/2016/0001558370-17-001271/rpt_disclosure.txt b/raw/filings/0001641614/2016/0001558370-17-001271/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..550a1426f755ce8bc0bc485bfc9fd867ac413403 --- /dev/null +++ b/raw/filings/0001641614/2016/0001558370-17-001271/rpt_disclosure.txt @@ -0,0 +1,17 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2016 to which we have been a party in which the amount involved exceeded or will exceed $120,000 within any fiscal year and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them had or will have a direct or indirect material interest. +Acquisition of EFT Source, Inc. +On September 2, 2014, we acquired all of the outstanding capital stock of EFT Source (now known as CPI Card Group – Tennessee, Inc.). One of our executive officers, William Dinker, together with trusts for the benefit of certain of his family members, owned approximately 75% of EFT Source. Mr. Dinker did not have any relationship with the Company at the time of the acquisition. The purchase price for the acquisition of EFT Source was $68.9 million, consisting of $54.9 million in cash, a $9.0 million subordinated unsecured promissory note (the “Seller Note”) and the issuance of $5.0 million of the Company’s preferred and common stock. The Seller Note was fully repaid on September 2, 2016 in accordance with the terms of the agreement. Interest on the Seller Note accrued at a rate of 5% per annum and was paid quarterly. +In connection with the EFT Source acquisition, we entered into an Employment and Non-Competition Agreement with Mr. Dinker. Pursuant to this agreement, based on EFT Source achieving certain EBITDA targets during the year ended December 31, 2016, Mr. Dinker earned a bonus of $666,667. +Registration Rights Agreement +In connection with our initial public offering, we entered into a registration rights agreement with the Tricor Funds (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Tricor Funds are entitled to request that we register shares of our common stock on a long-form or short-form registration statement on one or more occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. The Tricor Funds also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay the Tricor Funds’ expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our common stock held by the Tricor Funds as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the common stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization, or certain other corporate transactions, and (iii) any of our common stock owned or acquired following the closing of our initial public offering by the Tricor Funds (“Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. +Director Nomination Agreement +In connection with our initial public offering, we entered into a Director Nomination Agreement with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our Board of Directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our Board of Directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds shall be entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. In addition, for so long as the Tricor Funds collectively beneficially own 10% or more of the total number of shares of our common stock then outstanding, the Tricor Funds shall also have the right to have their designees participate on committees of our Board of Directors, +-27- +Table of Contents +subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding common stock. +Policies and Procedures for Related Party Transactions +In connection with our initial public offering, our board of directors adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving us in which the aggregate amount involved exceeds or may be expected to exceed $120,000 and in which a related person has or will have a direct or indirect material interest. For purposes of this policy, a related person is defined as a director, executive officer, nominee for director, or a greater than 5% beneficial owner of our common stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider the material facts of the transaction, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction. +All related party transactions described in this section were not subject to the approval and review procedures set forth in such policy, as certain transactions were entered into prior to our initial public offering and prior to the adoption of such policy. +-28- +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2017/0001558370-18-001943/filing.txt b/raw/filings/0001641614/2017/0001558370-18-001943/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..ff37a6ac7247541bfe9839fb5dd180775184d22e --- /dev/null +++ b/raw/filings/0001641614/2017/0001558370-18-001943/filing.txt @@ -0,0 +1,4517 @@ +10-K +1 +pmts-20171231x10k.htm +10-K +pmts_Current_Folio_10K +Table of Contents +UNITED STATES SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☑ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31, 2017 +Or +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10026 West San Juan Way +Littleton, CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code (303) 973-9311 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, $0.001 par value +NASDAQ Capital Market +Securities registered pursuant to section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ☐   No ☑ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +Yes ☐   No ☑ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑   No ☐ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑   No ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ◻ +Accelerated filer ☑ +Non-accelerated filer ◻ +Smaller reporting company ◻ +(Do not check if a +smaller reporting company) +Emerging growth company ☑ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☑ +The aggregate market value of the Registrant’s common stock held by non-affiliates was $58.1 million on June 30, 2017 computed based on the closing sale price of the Registrant’s common stock of $14.25 on NASDAQ on that date. +As of February 22, 2018, the number of shares outstanding of the Registrant’s common stock was 11,134,714. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K . +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +3 +Item 1A +Risk Factors +10 +Item 1B +Unresolved Staff Comments +32 +Item 2 +Properties +32 +Item 3 +Legal Proceedings +33 +Item 4 +Mine Safety Disclosures +35 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +35 +Item 6 +Selected Financial Data +36 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +38 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +60 +Item 8 +Financial Statements and Supplementary Data +F-1 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +61 +Item 9A +Controls and Procedures +61 +Item 9B +Other Information +62 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +62 +Item 11 +Executive Compensation +62 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +62 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +62 +Item 14 +Principal Accountant Fees and Services +62 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +63 +Index To Exhibits +63 +Signatures +66 +1 +Table of Contents +Cautionary Statement Regarding Forward-Looking Information +Certain statements and information in this Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us, and other information currently available. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated. These risks and uncertainties include, but are not limited to: system security risks, data protection breaches and cyber-attacks; interruptions in our operations, including our IT systems; defects in our software; failure to identify and attract new customers or to retain our existing customers; problems in production quality and process; failure to meet our customers’ demands in a timely manner; a loss of market share or a decline in profitability resulting from competition; developing technologies that make our existing technology solutions and products less relevant or a failure to introduce new products and services in a timely manner; disruptions relating to the development and execution of our strategy, or a failure to realize the anticipated benefits of such strategy; our inability to sell, exit, reconfigure or consolidate businesses or facilities that no longer meet with our strategy; our inability to develop, introduce and commercialize new products; our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; our limited ability to raise capital in the future; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation or infringement; our dependence on the timely supply of materials, products and specialized equipment from third-party suppliers; a competitive disadvantage resulting from chip operating systems developed by our competitors; price erosion in the financial payment card industry; failure to accurately predict demand for our products and services; quarterly variation in our operating results; the effect of legal and regulatory proceedings; infringement of our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; our inability to realize the full value of our long-lived assets; the impact of U.S. tax reform legislation; our failure to operate our business in accordance with data privacy laws, the PCI Security Standards Council (“PCI”) security standards or other industry standards such as Payment Card Brand certification standards; costs relating to product defects; a decline in U.S. and global market and economic conditions; potential imposition of tariffs and/or trade restrictions on goods imported into the United States; economic conditions and regulatory changes leading up to and following the United Kingdom’s exit from the European Union; our dependence on licensing arrangements; inability to renew leases for our facilities or renew leases at existing terms; dependence on our senior leadership team; inability to recruit, retain and develop qualified personnel; the continued viability of the Payment Card Brands; non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we operate and sell our products; failure to maintain our listing on the NASDAQ and other risks that are described in Part I, Item 1A – Risk Factors and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +EMV® is a registered trademark or trademark of EMVCo LLC in the United States and other countries. +2 +Table of Contents +PART I +Item 1. Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express and Discover) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this attractive subsector of the financial technology market. Our customers include leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process) and card processors. We serve a diverse set of over 4,000 direct and indirect customers, including some of the largest issuers of debit and credit cards in the United States and Canada, and the largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of production and card services facilities, including high-security facilities in the United States and Canada, each of which is certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”). We have a leading network of high-security production facilities in the United States and Canada, allowing us to optimize our solutions offerings to serve the needs of our diverse customer base. +We believe we have: +· +a leading position in the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +· +a leading position in the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions, driven by our strong relationships, capabilities and technologies; and +· +a solid position in the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +In addition to our high-security facilities in the United States and Canada, we have facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, as well as provide personalization, packaging and fulfillment services. Retail cards produced at our facilities in the United Kingdom are not issued on the networks of the Payment Card Brands. +In 2017, we generated: +· +net sales of $254.9 million, which represented a decrease of 17.4% compared to the prior year; +· +net losses of $22.0 million, compared to net income of $5.4 million in the prior year; and +· +cash provided by operating activities of $2.4 million, compared to cash flow provided by operating activities of $60.0 million during 2016. +Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States; U.S. Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card issuers in the United States; and U.K. +3 +Table of Contents +Limited, which primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe, and which are not certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. Businesses not considered part of these segments are categorized as "Other" and include our operations in Ontario, Canada and, through 2015, Petersfield, United Kingdom . +During February 2018, we made the decision to consolidate our three personalization operations in the United States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a cost-competitive business model. We plan to be substantially complete with the transition in the third quarter of 2018. In August 2015, we completed the shut-down and closure of our operations at our Petersfield, United Kingdom facility. The Petersfield, United Kingdom facility was not material to our business. Also included in “Other” are corporate activities. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 16 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Strong Market Position with Long-Term Customer Relationships. We are focused on becoming the partner of choice for our customers by providing market-leading quality products and customer service with a cost-competitive business model. We have long-standing trust-based relationships with customers, many of whom we have served for decades. Our customer relationships, particularly with those who utilize our card services and instant issuance systems and services, often involve process and technology integration. As a result, our customers are selective about working with partners they can trust to deliver the highest quality products and customer service. We strive to put our customers at the center of everything we do. We also maintain important relationships with the Payment Card Brands to ensure our facilities and processes consistently meet their standards. +· +Well Positioned to Capitalize on Expected Growth in Financial Payment Card Market and Remaining EMV ® Conversion in the United States. Europay, Mastercard and Visa (“EMV”) is a global, technical standard, maintained by EMVCo for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic stripes. EMV cards can be contact cards that must be physically inserted into a reader, contactless cards that can be read over a short distance using radio-frequency identification (“RFID”) technology, or cards with both contact and contactless functionality (“dual-interface EMV cards”). With the past investments made to our physical infrastructure and equipment platform in preparation for the EMV conversion, we believe that we continue to be well-positioned to meet future demand in the Financial Payment Card market, the remaining small to mid-sized issuer U.S. market conversion to EMV cards, and the longer-term U.S. market conversion to dual-interface EMV cards. In addition, we have made investments in premium product capabilities, such as our metal card offering, CPI Metals TM , in response to market demand for premium card products. +· +Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small to mid-sized issuer customers is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. Similarly, our installed base of instant issuance systems at bank and credit union branches across the United States require comparable levels of customer integration, as our Card@Once ® instant issuance system utilizes only our secure technology to instantly personalize cards. Certain customers have also integrated our proprietary software into their customer-facing websites to offer card +4 +Table of Contents +design and customization to their cardholders. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +· +Certified Network of High-Security Facilities. Our high-security facilities are each certified by one or more of the Payment Card Brands and Interac (in Canada), forming a leading network of certified production facilities in in the United States and Canada. The Payment Card Brand certifications allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. Additionally, many of our facilities are also certified to be in compliance with the standards of the PCI Security Standards Council. These certification processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain this designation, which are regularly verified by both the Payment Card Brands and our customers. +· +Industry Experience and Proprietary and Patented Solutions. We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage. We have developed and acquired intellectual property over our operating history and hold 20 U.S. patents, including five patents related to our CPI Metals TM card solution, 10 foreign patents, as well as 27 pending U.S. and foreign patent applications, on our Financial Payment Card solutions. We also have patents on our instant issuance offering and on our tamper-evident security packaging used by customers with Prepaid Debit Card offerings, and we hold exclusive production rights to certain products the Company has developed. +· +Experienced Management Team. We have built an experienced management team, and have strengthened the team with the addition of key executives during 2017, including our Chief Executive Officer, Chief Financial Officer and our Chief Legal and Compliance Officer. The leadership, depth of experience and relevant market knowledge our entire management team brings will be invaluable as we execute on our plans moving forward. +Our Strategy +We are a payment technologies company providing end-to-end debit, credit, and prepaid payment solutions delivered physically, digitally, and on-demand. Our strategy is to be the partner of choice by providing market-leading quality products and service, with a cost-competitive business model. Our client is at the center of all that we do. While consumers have a rational and emotional need for the payment transactions that power their lives, our clients are working to be the choice to facilitate those transactions. Our goal is to help our clients foster compelling connections and build their brands with their customers via traditional and next generation solutions that enhance people’s everyday lives. +Our focus is to have platforms and exceptional service that make working with us easy and help redefine experiences that may have traditionally seemed rigid and complex. Providing flexibility in timing, design, product options, and overall utility creates efficiencies, choice and control for our clients. We aim to inspire and delight our clients with market-leading quality and service. By cultivating an environment with dedicated and passionate employees, we deliver superior quality products through collaboration, a laser-focus on service and accountability. +We are determined to build a strong foundation for growth, invest in innovation and quality, and are improving cost efficiencies to achieve profitability through supply chain improvements, an optimized footprint, automation, process enhancements, and inventive ways to cost-effectively produce and deliver high quality premium products. We believe we are well-positioned in the market given our diversified business model, and have scaled a full and expanding suite of catalytic and competitively differentiated products and services. +5 +Table of Contents +Our Products and Services +EMV Financial Payment Cards (Contact and Dual-Interface) +We produce both plastic and metal contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce dual-interface EMV cards, which feature both the contact EMV technology and an RFID antenna that utilizes near field communications (“NFC”) technology to allow transactions to also be processed on a contactless basis when the card is brought within the requisite proximity to a NFC-enabled payment terminal. +Non-EMV Financial Payment Cards and Retail Gift Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology and cards that include both magnetic stripes and NFC technology. In addition, we produce retail gift cards (which are not issued on the network of the Payment Card Brands) primarily in the U.K. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact EMV, dual-interface EMV and non-EMV card formats. Our personalization services are technology-driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. +Tamper-Evident Security Packaging Solutions +We offer specialized and innovative tamper-evident security packaging products and services to customers with a Prepaid Debit Card offering that reduce fraud for Prepaid Debit Cards sold through the retail channel. The majority of the tamper-evident security packaging we produce is protected by our patents. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once ® , our proprietary and patented instant card issuance system and services, which provides our card issuing bank customers the ability to issue a completely personalized permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, an EMV card, or a dual-interface EMV card, and personalizes the card on a desktop output terminal in a process which is certified by Mastercard ® and Visa. Our instant issuance system generates both system sales and recurring revenue from software as a service, card personalization and sales of cards and consumables. In addition, we provide instant issuance of debit cards to large financial institutions whereby we provide fully-personalized temporary debit cards which are issued to card holders upon opening a new account, and we manage the fulfillment and replenishment of these fully personalized cards directly to thousands of individual bank branches. +CPI on Demand TM Solutions +Through our CPI on Demand TM services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on demand basis for our customers, enabling individualized offerings and reducing waste. While not significant to our 2017 financial results, w e believe the CPI on Demand TM solution will further differentiate us with our financial institution customers, and we believe it will enable us to further penetrate new, business-to-business and business-to-consumer verticals of the prepaid market such as healthcare, transit, payroll, corporate incentives, benefits and insurance. +6 +Table of Contents +Digital Services +While not currently significant to our financial results, we are focusing on enabling payments for the emerging digital payment marketplace, including self-service card customization, on demand fulfillment, order lifecycle management, customer inventory management, EMV key management, and other innovative solutions, such as digitizing and securely delivering payment credentials as a virtual payment method. +Suppliers +One of the most important components of our products is the EMV microchip. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in South Korea, France, the United States and Singapore, primarily on a purchase order basis. Our main suppliers of EMV microchips are four leading international manufacturers, including one supplier that is also owned by a competitor. Approximately 90% of our purchased EMV microchips for the year ended December 31, 2017 came from these four main suppliers. The other key components for our products are substrates (such as PVC), antennas and inlays which we also source from multiple suppliers. We continuously monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers, prepaid debit issuers, program managers, Group Service Providers and card processors. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest U.S. Prepaid Debit Card program managers. Our top customer represented 12.4% of our net sales for the year ended December 31, 2017. Our top five customers represented approximately 28.5% of our net sales for the year ended December 31, 2017, and we have been serving these customers for an average of greater than 10 years. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into purchase order or other short-term arrangements that define the prices and the quantities of products to be delivered and services rendered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +Our production and services strategy has several key facets. We have a large network of integrated high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high-volume production runs that allow us to meet the competitive price points of large orders; +· +execute lower-volume, highly customized runs that allow us to meet the high-service and quick-turn needs of smaller orders, as well as on demand solutions; and +· +meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this retail prepaid market. +We operate approximately 500,000 square feet of facilities in the United States, Canada and the United Kingdom, where we focus on Financial Payment Card production and personalization services. See Part I, Item 2, “Properties” of this Annual Report on Form 10-K for information on the operations of each facility. +7 +Table of Contents +We rely on secure ground and secure air freight to deliver products to our banking customers. Due to the high-security nature of the products we provide to our banking customers, product must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we utilize the U.S., Canadian and U.K. postal services to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality and meaningful, innovative products at competitive prices. We work to strategize and collaborate with our customers to bring them valuable and innovative solutions. We have approximately 30 field-based sales representatives that give us a wide geographic reach across the United States, the United Kingdom and Canada. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer groups, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements and educational webinars to introduce our existing customers and new customers to innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings and competitive pricing. Competitive factors for our business include product quality, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features and price. +Our products and services compete with other card manufacturers and card solutions providers. We believe our primary competitors are IDEMIA (formerly known as Oberthur Technologies S.A.), Giesecke & Devrient GmbH, Valid S.A., Gemalto NV, CompoSecure L.L.C., and Multi Packaging Solutions, Inc. Certain existing and potential customers also have the ability to personalize Financial Payment Cards in-house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own and control various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are also a party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31, 2017, we had 35 U.S. and foreign trademark registrations and applications, 20 existing U.S. patents, 10 foreign patents, as well as 27 pending U.S. and foreign patent applications. Our patents have an average remaining maturity of 12 years, and our trademarks will be due for renewal for additional ten or fifteen-year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +8 +Table of Contents +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, addresses, card account numbers and expiration dates. In some cases, we receive a cardholder’s PIN number. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, the privacy provisions of the Gramm‑Leach‑Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with various other federal and state privacy statutes and regulations, and the PCI Security Standards Council’s Data Security Standards, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of numerous countries and jurisdictions, including the General Data Protection Regulation (the “GDPR”) in the European Union. The interpretation and application of these privacy and data protection laws in the United States, Europe and elsewhere are often uncertain and in a state of flux. +In order to comply with our obligations under the GLBA, applicable state laws and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. As part of their compliance with these requirements, each of our U.S. customers is expected to have a program in place for protecting personally identifiable information and responding to unauthorized access to, or use of, personally identifiable information that could result in substantial harm or inconvenience to consumers, as required by law. A majority of U.S. states have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, which could result in significant costs to us and significant damage to our reputation. +In May 2016, the European Union adopted the GDPR, which is a comprehensive general data privacy regulation that will replace the current EU Data Protection Directive and related country-specific legislation. The GDPR will become fully effective in May 2018 . The regulation will impose more stringent operational requirements for processors and controllers of personal data of residents of the European Union, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, mandatory data breach notification requirements and higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. The regulation will also include significant penalties for non-compliance. +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve certification that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining these certifications, and have invested significant capital to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly certification process serves as a significant barrier to new entrants to our market. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations +9 +Table of Contents +require our financial institution clients to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our clients’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations including those relating to the movement of money. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with licensing and reporting requirements, to implement operating policies and procedures to comply with anti-money laundering laws, to protect the privacy and security of our clients’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs and, in some cases, limited revenue sources for us and our clients. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, to CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments and/or limit our fees or other revenue sources. We do not currently anticipate a materially adverse impact on our business, results of operations or financial condition due to these regulations, but it is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential clients. +Employees and Labor +As of December 31, 2017, our businesses employed approximately 1,200 employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10026 W. San Juan Way – Suite 200, Littleton, CO 80127 , telephone (303) 973-9311. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. +Item 1A. Risk Factors +Risks Related to Our Business +System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, disrupt our internal operations and harm perception of our products, which could have a material adverse effect on our business and our reputation. +In operating a Financial Payment Card business, we manage large amounts of personally identifiable information of cardholders, including cardholder names, account numbers and similar information. The reliability and security of our information technology (“IT”) infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. Our handling of such information makes us a potential target of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, phishing attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from unauthorized use of or access to computer systems (including from internal and external sources). Any system or network disruption could result in a loss of our intellectual property, the release of sensitive cardholder information, customer or employee +10 +Table of Contents +personal data, or the loss of production capabilities at one or more of our production facilities. These types of incidents have become more prevalent and pervasive across industries, including in our industry. +In addition, our encryption systems are at risk of being breached or decoded. Smart cards are equipped with keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, whether caused by cyber-attacks, security breaches or otherwise, which could ultimately have a material adverse effect on our business, financial condition and results of operations. +The protective measures we have implemented to protect against data and security breaches and cyber-attacks may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. We regularly evaluate, assess and test our systems and the controls, processes and practices to protect those systems. The evaluations, assessments and testing identify areas of weakness in, and suggested improvements to, the maturity of our systems, processes, and risk management framework as well as vulnerabilities in those areas that could be attacked and exploited to access and acquire proprietary and confidential information. Although cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access are a high priority for us, our activities and investment may not be deployed quickly enough or successfully protect our system or network against disruptions and may be insufficient to prevent or limit the damage from any future security breaches. In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business and reputation. +Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, including the operation of complex IT applications. In addition, a significant portion of the communication between our employees, customers and suppliers around the world depends on our IT systems. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. An interruption in our business applications, systems or networks, including, but not limited to, new system implementations, server downtime, facility issues or energy blackouts, could have a material adverse impact on our operations, sales and operating results. +Not only would we suffer damage to our reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements with financial institutions require the payment of penalties if our systems do not meet certain operating standards, and failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of the certification of our facilities, any of which could have a material adverse effect on our business. In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. We have established certain protective measures in an effort to ensure the continuation of core business operations in the event that normal operations could not be performed due to a catastrophic event. However, these measures may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results of operations. +11 +Table of Contents +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +Our services are based on sophisticated software and computing systems, and the software underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our clients. Defects in our software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of clients, negative publicity or exposure to liability claims. Although we attempt to limit our potential liability through disclaimers and limitation of liability provisions in our license and client agreements, we cannot be certain that these measures will successfully limit our liability. +Failure to identify and attract new customers or a failure to retain our customers could have a material adverse effect on our business. +Our business is dependent upon our ability to identify and attract new customers and to retain our existing customers. Building and maintaining these critical relationships requires us to consistently deliver high-quality products at competitive prices. If our customers experience a decline in their business or Financial Payment Card needs, or if our operations suffer from production, quality, pricing or other issues, we may be unable to attract new customers or retain our existing customers. In addition, any actual or perceived deterioration in our financial condition or loss of our market share may discourage existing or potential customers from doing business with us. If we experience difficulty attracting and retaining customers, our business, financial condition and results of operations may be materially and adversely affected. +A substantial portion of our net sales is derived from several large customers. Our top five customers accounted for approximately 28.5% of our net sales for the year ended December 31, 2017. Our continued business relationship with these customers may be impacted by several factors beyond our control, including more attractive product offerings from our competitors, pricing pressures or the financial health of these customers. Many of our customers operate in competitive businesses, and their demand and market positions may vary considerably. These customers depend on favorable macroeconomic conditions and are impacted by the availability of affordable credit and capital, the level and volatility of interest rates, inflation, employment levels and consumer confidence, among other factors. +We generally enter into master agreements that govern the general terms and conditions of our commercial relationships. We then enter into purchase order or other short‑term agreements that define the prices and the quantities of products to be delivered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +In addition, there is no guarantee that we will be able to renew or win contracts or purchase orders in a given year, or whether we will have the operating capacity or capabilities to deliver on significant new contracts or purchase orders won, which could result in the loss of future business. If we were to lose important programs for our products with any of our customers, or if customers were to reduce or change their buying patterns with us, seek alternate suppliers, increase their product returns or become unable or otherwise fail to meet payment obligations, our business, financial condition and results of operations could be materially adversely affected. +Our business could suffer from problems in production quality and process. +We produce our products using processes that are highly complex, require advanced and costly equipment and must continually be modified to improve yields and performance. Difficulties in the production process can reduce product yields, reduce product quality or interrupt production altogether. As a result of such problems, we may not be able to deliver products, or may be able to deliver products, but in a less timely or cost‑effective manner or at a lower than expected quality level, or we may be required to rework or replace products. As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our production processes at the market rate, we may experience a lower production quality than the market standard. We may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures, or as a result of external factors beyond our control, such as delay of, or quality issues with, materials provided by suppliers, interruption of our electrical service or a natural +12 +Table of Contents +disaster. Any such event could have a material adverse effect on our business, financial condition and results of operations. +If we fail to meet customer demands in a timely manner, we could lose certain critical business relationships. +Our ability to provide products and services and meet very high quality standards in a timely manner is critical to our business success. For example, one of the key services that we offer our customers is the prompt and timely production and delivery of replacement debit or credit cards. Orders for replacement debit or credit cards often are placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a timely manner or due to software malfunction, logistical impediments at any of our facilities, or economic, social, political or other challenges impacting the industry as a whole, our relationships with our customers may be adversely affected and we may lose contracts, all of which could have a material adverse effect on our business, financial condition and results of operations. +We face competition that has resulted in and may continue to result in a loss of our market share and/or a decline in our profitability. +Our marketplace is highly competitive and relatively saturated, and we expect these market dynamics to continue as new product markets develop, companies develop lower-cost production processes and other competitors attempt to enter the markets in which we operate. In addition, we expect to encounter further consolidation in the markets in which we operate. +Some of our competitors have longer operating histories, and, when viewed globally, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other capabilities than we do. These competitors may be able to adapt more quickly to new or emerging technological requirements and changes in customer and/or regulatory requirements and to leverage their scale to develop techniques to lower production costs and, as a result, their prices. They may also be able to devote greater resources to the promotion and sale of their products and services. We also face competition from newly established competitors, suppliers of products and customers who choose to develop their own products and services. +Existing or new competitors may develop products, technologies or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. As the technological sophistication of our competitors and the size of the market increases, competing low‑cost producers could emerge and grow stronger. If our customers prefer low‑cost alternatives to our products, our revenue and profitability could be materially adversely affected. Increased competition has historically resulted in, and is likely to continue to result in, declining average selling prices and reduced gross margins in certain of our businesses, and the loss of market share in certain markets. If we cannot sufficiently reduce our production costs, we may not be able to continue to compete successfully against current or new competitors. If we fail to compete successfully, we may lose market share or continue to lose market share in our existing markets, which could have a material adverse effect on our business, financial condition and results of operations. +New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected. +The markets for our products and services are subject to technological changes, frequent introductions of new products and services and evolving industry standards. In particular, the rise in the adoption in wireless payment systems or mobile payments may make physical cards less attractive as a method of payment. Although to date we have not seen a meaningful reduction in card‑based payments in the U.S. resulting from the emergence of mobile payment applications, mobile payments offer consumers an alternative method to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, +13 +Table of Contents +introduction or marketing of these services, or our new services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. We continually engage in efforts to innovate and upgrade our products and services. If we are unsuccessful in completing or gaining market acceptance of new products, services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or attract new ones. For example, one of our growth opportunities is the potential adoption of dual-interface EMV cards by U.S. card issuing banks. Banks may be delayed in transitioning to the issuance of dual‑interface EMV cards due to increased costs and other factors. If these entities do not deploy dual‑interface EMV technology or do so less quickly and/or completely than we expect, our ability to grow could be significantly impacted which could have a material adverse effect on our business, financial condition and results of operations. +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +· +effectively identify and capitalize upon opportunities in new and emerging product markets; +· +invest resources in innovation and research and development; +· +complete and introduce new products and integrated services solutions in a timely manner; +· +license any required third‑party technology or intellectual property rights; +· +qualify for and obtain required industry certification for our products; +· +comply with applicable data protection regulations; and +· +retain and hire talent experienced in developing new products and services. +Additionally, opportunities to combine or package products and service offerings and the ability to cross‑sell products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross‑sell our products and services, this may have a material adverse effect on our business, financial condition and results of operations. +The process of developing and enhancing our strategies could be disruptive to our operations and have a material adverse effect on our results of operations and financial condition, and we may not realize some or all of the anticipated benefits of this plan in the time frame anticipated or at all. +During our quarterly earnings call on November 7, 2017, the Company announced the commencement of a comprehensive review of our business to assess our strategies. The objective of this review is to enhance our strategies by executing key initiatives, further capitalizing on our addressable market, better serving the needs of our customers and delivering shareholder value. These strategic initiatives may result in actions affecting, among other things, leadership roles and responsibilities, our operational footprint, and the way our organization is structured to sell and market our products to our customers. The execution of our strategic review and initiatives may cause disruptions to our operations, make it difficult to attract or retain employees, result in higher than anticipated charges and otherwise have a material adverse effect on our results of operations and financial condition. In addition, our ability to implement our strategies and achieve the anticipated benefits therefrom within the expected time frame or at all is subject to estimates and assumptions and may vary materially from our expectations, including as a result of factors that are beyond our control. Furthermore, following implementation of our enhanced strategies, our business may not be more efficient or effective. +We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer meet with our strategy or that should be consolidated. +In executing our strategy, we will perform a comprehensive review of our business and operations and may, as a result, consider the consolidation of certain of our facilities and/or the divestiture of one or more of our businesses. +14 +Table of Contents +Any such consolidation or divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position. +We may not be able to realize efficiencies and cost savings from any consolidation activities, and there is no assurance that our efforts will be successful. If we are not able to successfully manage any consolidation activities that we may undertake, expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. +Divestitures have inherent risks, including selling expenses, the possibility that any anticipated sale will not occur, delays in closing any sale, the risk of lower-than-expected proceeds from the sale of the divested business, unexpected costs associated with the separation of the business to be sold from historical information technology and other operating systems, and potential post-closing claims for indemnification. Our ability to dispose of, exit or reconfigure businesses that may no longer be aligned with our strategy will depend on many factors, including the terms and conditions of any purchase and sale agreement, as well as industry, business and economic conditions. We cannot provide any assurance that we will be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of operations or closure, may not be available to us or may be more costly than anticipated. +Our future success depends upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process. We may be unable to commercialize new or improved products we may develop on a timely basis, or at all. +The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological, market and industry trends, as well as precise technical execution. The successful development of new products may require us to undertake time-consuming and costly development activities, and we may experience difficulties or challenging market conditions that could delay or prevent the successful development, commercialization and marketing of these new products, including, for example, limited market acceptance of dual-interface EMV technology in the United States. Before we can commercialize any new products, we may need to expend significant funds in order to conduct substantial research and development. For example, we have been experiencing customer interest in metal cards, however our ability to operationalize this business is progressing more slowly than expected. If we experience limited market opportunities for dual-interface EMV technology or continued difficulty with the production of metal cards, or if we have difficulty producing other innovative products, such as dual-interface EMV cards, there could be a material adverse effect on our revenue, results of operations, reputation and business. +As we develop products, we may need to make significant investments in product development, as well as sales and marketing resources. Furthermore, if we are unable to develop and introduce new and innovative products in a cost‑effective and timely manner, our product and service offerings could be rendered obsolete. In addition, competitors may develop and commercialize competing products faster than we are able to do so. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. +Our outstanding indebtedness may impact our business and our results of operations and may restrict our ability to grow, and future EBITDA declines, should they occur, could make it difficult or impossible to timely make our debt service payments or refinance our debt when it comes due. +As of December 31, 2017, we had $303.9 million of total indebtedness outstanding, net of unamortized discount and deferred financing costs of $8.6 million under our First Lien Term Loan Facility. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” +We may incur additional indebtedness in the future to help fund our business, subject to market and other conditions. Our substantial indebtedness and interest expense could have important consequences to us, including: +· +limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, capital expenditures and other general business activities, because we must dedicate a substantial portion of these funds to pay interest and/or service our debt; +15 +Table of Contents +· +our First Lien Credit Facility is entirely floating rate debt, and rising interest rates could have a material adverse impact on our cash flows, results of operations and financial condition; +· +requiring us to seek to incur further indebtedness in order to make the capital expenditures and other expenses or investments necessary to operate the business to the extent our future cash flows are insufficient; +· +limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; +· +limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +· +limiting our ability to satisfy our obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +· +increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; +· +placing us at a competitive disadvantage as compared to our competitors that are less leveraged; +· +limiting our ability to timely make our debt service payments; +· +limiting our ability, or increasing the costs, to refinance indebtedness, when our Revolving Credit Facility matures on August 17, 2020 and our First Lien Term Loan matures on August 17, 2022; and +· +our inability to retain existing customers and/or attract new customers due to the significant amount of debt and the related implications of such debt. +The limitations described above could have a material adverse effect on our business, financial condition, results of operations and prospects. Further, if we are unable to satisfy our obligations under our indebtedness as they become due, or if we are unable to pay our interest obligations we would be rendered insolvent. +The terms of our First Lien Credit Facility restrict, and covenants contained in agreements governing indebtedness in the future may restrict, our ability to operate our business and to pursue our business strategies. +Our First Lien Credit Facility contains, and any future indebtedness of ours may contain, a number of restrictive covenants that impose customary operating and financial restrictions on us. Our First Lien Credit Facility places certain restrictions or limitations on our ability and the ability of our restricted subsidiaries, among other things, to: +· +incur additional debt or contingent liabilities; +· +declare or pay dividends, redeem stock, or make other distributions to stockholders; +· +make loans, advances, guarantees or other investments; +· +create liens or use assets as security in other transactions; +· +merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; +· +enter into transactions with affiliates; and +· +enter into certain asset sale transactions or other dispositions of assets. +16 +Table of Contents +In addition, as of the last day of any fiscal quarter, if the amount we have drawn under the First Lien Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, we are required to maintain a first lien net leverage ratio not in excess of 7.0x Adjusted EBITDA, as defined in the agreement. Accordingly, as of December 31, 2017, the availability of our undrawn $40.0 million Revolving Credit Facility was limited to $20.0 million as our first lien net leverage ratio was 11.4x Adjusted EBITDA. +Our failure to comply with any of these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the First Lien Credit Facility. +Our ability to raise capital in the future may be limited. +Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. As a result of our financial condition, additional financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. Any failure to achieve adequate funding will delay our product and services innovation and development and could lead to abandonment of one or more of our strategic initiatives. Any of these events could materially harm our business, financial condition and prospects. +We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or infringement, which may have a material adverse effect on our business. +Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We depend on patents and other intellectual property rights to protect our products, proprietary designs and technological processes against misappropriation by others. We may in the future have difficulty obtaining patents and other intellectual property protection, and the patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes, or confidential employee, customer or supplier data. Any of our existing or future patents may be challenged, invalidated or circumvented. We engage, and are currently engaged, in litigation to enforce or defend our intellectual property rights, protect our trade secrets and determine the validity and scope of the proprietary rights of others, including our customers. We also enter into confidentiality agreements with our employees, consultants and strategic partners and control access to and distribution of our technologies, documentation and other proprietary information; however, such agreements may not be enforceable or provide us with an adequate remedy. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our proprietary products, services or technology without our authorization and may use such information to interfere with our customers. In addition, if we cannot adequately protect our technology, our competitors may be able to offer certain products and/or services similar to ours. +Our software may be derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. In addition to risks related to license requirements, usage of open source software can lead to greater risks than the use of third‑party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software, or remedies against the licensors. Many of the risks associated with usage of open source software cannot be eliminated and could have a material adverse effect on our business, financial condition and results of operations. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. Although we actively seek to protect our proprietary rights, nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary. Identifying unauthorized use of our products and technologies is difficult and time consuming. The initiation of litigation as a result of the misappropriation or infringement of our intellectual property may adversely affect our relationships and agreements with certain customers that have a stake in the outcome of the litigation proceedings. Litigation is very expensive and may divert the attention of management and other key employees from the +17 +Table of Contents +operation of our business, all of which could have a material adverse effect on our business, financial condition and results of operations. In addition to litigation costs, infringement on our products by competitors has caused, and may in the future cause, customer loss to parties offering infringing products. +We rely on the timely supply of materials and products and our business could suffer if our suppliers fail to meet their delivery obligations or raise their prices. +Our production operations depend on deliveries of microchips and other materials in a timely manner and, in some cases, on a just‑in‑time basis. From time to time, suppliers may extend lead times, limit the amounts supplied to us or increase prices due to capacity constraints or other factors. We may not be able to meet the demands of our customers in a timely manner, or at all, due to shortages in the supply of critical materials. The supplies we purchase could also have latent quality issues, causing quality problems with the products we produce, increased costs due to scrap or rework, delays to our delivery timelines or loss of business. Additionally, certain product materials required in our production operations are only available from a limited number of suppliers, and we may not be able to find an adequate replacement for such materials if our suppliers are unable to meet their delivery obligations to us. For example, we rely on a small group of suppliers for the provision of EMV microchips that we use in our Financial Payment Cards. For the year ended December 31, 2017, we obtained approximately 90% of our total purchased EMV microchips from four main suppliers. If any one of these EMV microchip suppliers, or any supplier of our other raw materials, fails to deliver our requirements, or ceases supplying such raw materials to us for any reason, our production could be disrupted. In addition, as a result of a shortage, we may be compelled to delay shipments of our products, or devote additional resources to maintaining higher levels of inventory. Consequently, we may experience substantial period‑to‑period fluctuations in our cost of sales and in our future results of operations. If we are unable to obtain adequate supplies of quality materials in a timely manner or if there are significant increases in the cost of these materials, there could be a material adverse effect on our business, financial condition and results of operations. +The chip operating systems developed by our competitors may put us at a competitive disadvantage . +Certain of our competitors have internally developed their own chip operating systems, including for use in EMV cards. Ownership of these internal operating systems may give our competitors a cost advantage over us, as we utilize the chip operating systems designed by our chip suppliers for use on their respective chips. If our competitors are able to reduce the prices of their products and services as a result of the cost savings they might realize from using their own internally developed operating system, our profitability may be materially adversely affected. Additionally, customers may prefer the operating systems of our competitors over the operating systems that we utilize in our EMV cards. If customers are more attracted to our competitors’ internally developed operating systems, demand for our products and services may be reduced, which could have a material adverse effect on our business, financial condition and results of operations. +Our business depends upon our ability to obtain specialized equipment from third‑party suppliers, and we may be subject to delayed deliveries, future price increases, and specialized equipment that does not meet our standards or requirements. +Our production processes depend on specialized equipment that we purchase and/or lease from third party suppliers. At times during the business cycle, there may be high demand for such equipment, with extended lead times to obtain such equipment. Further, there are a limited number of suppliers that manufacture and service the equipment we use. Should our current suppliers be unable or unwilling to provide the necessary equipment, fail to meet quality standards of our customers or otherwise fail to deliver or service such equipment in a timely manner, any resulting delays in our production processes could have a material adverse effect on our business, financial condition and results of operations. In addition, the prices of the equipment we use may rise in the future, and any future price increases for this type of equipment could negatively impact our ability to purchase new equipment or to service existing equipment. +The financial payment card industry has been and may continue to be subject to price erosion, which could have a material adverse effect on our business. +Pricing pressure in the financial payment card industry can be intense, in particular for large credit and debit card issuers and large card processors. Our large credit and debit card issuer customers face continued competitive pressure and, in turn, continually seek to reduce their expenses, including the cost of cards. We may experience a decline in the prices at which our products can be sold and at which such services can be offered. For example, our average selling price on U.S. Debit and Credit segment sales of EMV cards declined from $0.95 during the year ended +18 +Table of Contents +December 31, 2016 to $0.86 during the year ended December 31, 2017. In such instances, in order to continue to supply these products and services at competitive prices, we must reduce our production costs. Typically, we are able to accomplish this through leveraging our scale and production efficiencies. However, if we cannot continue to improve our efficiencies to a degree sufficient for maintaining the required margins, we may no longer be able to generate a profit from the sale of these products and services. Moreover, we may not be able to cease production of such products, either due to our ongoing contractual obligations or the risk of losing our existing customer relationships, and as a result may be required to bear a loss on such products. Further competition in our product and service markets may lead to price erosion, lower revenue and margins in the future. Should reductions in our production costs fail to keep pace with reductions in market prices for the products we sell, there could be a material adverse effect on our business, financial condition and results of operations. +If we fail to accurately project demand for our products and services, we may encounter problems of inadequate supply or oversupply, which would have a material adverse effect on our business, financial condition and results of operations, as well as damage our reputation and brand. +Our customers typically order our products and services on a purchase-order basis. We project product demand based on, among other things, addressable market size, historical experience, customer feedback, pricing pressure and competition. However, the emerging nature of our industry, our lack of significant order backlog and the varying sales and purchasing cycles of our customers make it difficult for us to accurately forecast demand. +If we overestimate demand, we may have higher raw material or product component inventory levels, or may have higher staffing levels than required. If we underestimate demand, our third-party suppliers may have inadequate raw material or product component inventories or we may not have required staffing levels , which could interrupt our manufacturing and delay shipments, and could result in lost sales. In particular, we are seeking to manage our staffing, procurement and inventory costs by matching them closely with our projected manufacturing needs and by, from time to time, deferring our purchase of raw materials and components in anticipation of supplier price reductions. As we seek to balance inventory costs and production flexibility, we may fail to accurately forecast demand to predict and maintain appropriate staffing levels and levels of inventory reserve, which could cause uneven and unpredictable flow or could affect our ability to coordinate our procurement and production to meet demand on a timely basis. Our inability to accurately predict or timely meet demand could have a material adverse effect on our business, financial conditions and results of operations as well as damage our reputation and brand. +Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue and profitability or lead to significant variability in our operating results. These factors include, among others, the cyclicality of the financial card and electronic payment industries, capital requirements, inventory management, the availability of funding, competition, new product developments, technological changes, production problems and other factors. For example, with the adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers , which became effective January 1, 2018, the timing of revenue recognition may change significantly from quarter to quarter, and the net sales and results of operations for a given quarter may be materially higher or lower than our net sales and results of operations under existing rules. In addition, the adoption of tax reform by the U.S. government will have a significant impact on our effective tax rate, and will result in limitations and eliminations of certain favorable tax incentives. +A number of other factors could lead to fluctuations in quarterly and annual operating results, including: +· +order cancellations or rescheduling by customers; +· +the failure to win new projects; +· +unpredictable ordering patterns by customers; +· +the continued adoption of EMV and dual-interface technology by customers may be more uneven or unpredictable than we anticipate; +· +restructuring and impairment charges; +· +litigation; +19 +Table of Contents +· +new product capability development and/or slower than expected demand of new products by customers; +· +fluctuations in currency exchange rates, particularly between the U.S. dollar and the Canadian Dollar and British Pound Sterling; +· +intellectual property developments; +· +changes in distribution and sales arrangements; +· +production performance and yields; +· +product liability or warranty claims; +· +taxation; +· +acquisitions or divestitures; +· +obtaining adequate raw materials or production equipment on a timely basis; +· +production staffing levels; +· +changing raw material prices; +· +property loss or damage or interruptions to our business, including as a result of fire, natural disasters or other disturbances at our facilities or those of our customers and suppliers that may exceed the amounts recoverable under our insurance policies; and +· +changes in the market value or yield of the financial instruments in which we invest our liquidity. +Unfavorable changes related to certain of the above factors have in the past and any of the above factors may in the future have a material adverse effect on our operating results and on our reputation. Furthermore, in periods of industry overcapacity or when our customers encounter difficulties in their end‑markets, orders are more exposed to cancellations, reductions, price renegotiations or postponements, which in turn reduce our management’s ability to forecast the next quarter or full‑year production levels, net sales, profits and cash flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations as visibility is reduced and may have a material adverse effect on our business, financial condition and results of operations. +Our business and financial results may be materially adversely affected by various legal and regulatory proceedings. +We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. The outcome of existing proceedings, lawsuits and claims may differ from our expectations because the outcomes of litigation are often difficult to reliably predict. Various factors or developments can lead us to change current estimates of liabilities and related insurance receivables where applicable, or permit us to make such estimates for matters previously not susceptible to reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our business, operating results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any liability that may be imposed on us. The likelihood of legal claims may be heightened in times of financial hardship. See Part I, Item 3, “Legal Proceedings” of this Annual Report on Form 10-K for information on our currently pending legal proceedings. +We may be required to defend against alleged infringement of the intellectual property rights of others. +Companies in our industry aggressively protect and pursue their intellectual property rights. Our products may contain technology provided to us by other parties such as suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. From time to time, we receive notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Additionally, we receive notices that challenge the validity of our patents. Intellectual property litigation can be expensive, time consuming and distracting to management. An adverse determination in any of +20 +Table of Contents +these types of disputes could prevent us from producing or offering some of our products and services or could prevent us from enforcing our intellectual property rights. Furthermore, settlements can involve royalty or other payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our suppliers, customers and licensors may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages. Any of these claims or litigation may have a material adverse effect on our business, financial condition and results of operations. +We may also be required to indemnify some customers and strategic partners under our agreements if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another party’s proprietary rights. Indemnification provisions may, in some circumstances, extend our liability beyond the products we provide and may include consequential damages and/or lost profits. Even if claims or litigation against us are not valid or successfully asserted, these claims could, and often do, result in significant costs and the diversion of the attention of management and other key employees to defend. +Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value. +Our long-lived assets recorded as of December 31, 2017 were $144.4 million, representing 61.7% of our total assets, of which we have recorded plant, equipment and leasehold improvements of $49.3 million, as our operations require significant investments in machinery and equipment. +We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we were to conclude that an additional future write‑down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write‑down of our long-lived assets may result from, among other things, deterioration in our performance and a decline in expected future cash flows and could have a material adverse effect on our business, financial condition and results of operations. +During the fourth quarter of 2017, based on the goodwill impairment test performed annually as of October 1, we recorded goodwill impairment charges of $19.1 million, of which $17.2 million related to the U.S. Debit and Credit segment resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1.9 million related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. See Part II, Item 8, Financial Statements and Supplementary Data , Note 6 “Goodwill and Other Intangible Assets,” in this Annual Report on Form 10-K for more information. +The adoption of the comprehensive tax reform by the U.S. government may materially adversely impact our financial results. +On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation that includes significant changes to taxation of business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) elimination of deduction for income attributable to domestic production activities and (iv) a partial shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with a transitional rule that taxes certain historic foreign accumulated earnings and certain rules that aim to prevent erosion of U.S. income tax base). The Company is still evaluating the potential impact of the legislation on its financial results. In particular, however, given our substantial indebtedness and related interest expense, our inability to fully deduct our interest expense from our taxable income may result in an increase in the Company’s effective tax rate, thereby having a material adverse effect on our business, financial condition and results of operations. +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brand certification standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and manufacturers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to +21 +Table of Contents +supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated if we fail to comply with these standards and criteria. +We make significant investments to our network of high‑security facilities in the United States and Canada in order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have constituted in the past an important part of our revenue and profitability. For the year ended December 31, 2017, the vast majority of the products we produced and services we provided were subject to certification with one or more of the Payment Card Brands. If we were to lose our certification from one or more of the Payment Card Brands, Interac (in Canada) or PCI certification for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the networks of the Payment Card Brands. If we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations. +Our business may be materially adversely affected by costs relating to product defects, and we could be faced with product liability and warranty claims. +We offer highly complex services and products and, accordingly, from time to time defects have occurred. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory, the loss of potential sales and claims by third parties. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we sell defective products into the market, our reputation could suffer and we may lose sales opportunities and incur liability for damages, including damage claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations. +Demand for Financial Payment Cards may be materially adversely impacted by U.S. and global market and economic conditions. +For the foreseeable future, we expect to continue to derive most of our revenue from products and services we provide to the financial services industry. Given this concentration, we are exposed to the economic conditions affecting the financial services industry in the United States and Canada. For example, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. A prolonged poor economic environment could result in significant decreases in demand by current and potential customers for our products and services, which could have a material adverse effect on our business, results of operations and financial condition. +If the U.S. government puts significant tariffs or other restrictions on goods imported into the United States, our revenue and results of operations may be materially harmed. +Most of our chips, as well as certain other raw materials, are imported from companies located outside of the United States. The U.S. government may restrict trade with certain countries and/or impose tariffs on imports from certain countries. The current U.S. administration has expressed antipathy towards certain existing international trade agreements, including NAFTA, and made comments suggesting that it supports significantly increasing tariffs on goods imported into the United States. As of the date of this Annual Report on Form 10-K, it remains unclear what actions, if any, the United States government will take with respect to NAFTA, other international trade agreements and tariffs on goods imported into the United States. If the United States were to withdraw from or materially modify NAFTA or other international trade agreements to which it is a party, or if tariffs are imposed on products that we import from our overseas suppliers, we may be required to raise our prices or find alternative suppliers, which may not be possible at the same cost or quality, which could have a material adverse effect on our business, financial condition and results of operations. +Economic conditions and regulatory changes leading up to and following the United Kingdom’s exit from the +European Union could have a material adverse effect on our business and results of operations. +22 +Table of Contents +On June 23, 2016, the United Kingdom (the “U.K.”) held a referendum in which voters approved an exit from the European Union (the “E.U.”), commonly referred to as “Brexit.” As a result of the referendum, the negotiation process to determine the future terms of the U.K.’s withdrawal from the E.U. is ongoing, including the terms of trade between the U.K. and E.U. The results of these negotiations could adversely affect European or worldwide economic or market conditions and could contribute to instability in global financial markets. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Furthermore, Brexit may result in additional tariffs both on raw materials imported into the U.K., as well as our products manufactured in the U.K. and sold elsewhere, resulting in competitive pricing pressures. Any of the foregoing could have a material adverse impact our U.K. operations, which accounted for 12.2% and 9.6% of our net sales for the years ended December 31, 2017 and 2016, respectively. +The terms under which the U.K. withdraws from the E.U., or the failure to reach terms that ensure a smooth exit, could cause significant volatility in global stock markets and currency exchange rate fluctuations, which could impact the strength of the U.S. dollar against foreign currencies in which we conduct business, including the British Pound. If other members of the E.U. consider exit as well, we could face further disruptions and uncertainty with respect to our business operations. The strengthening of the U.S. dollar relative to other currencies may materially adversely affect our operating results. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. +Many of our products integrate third‑party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with, among other benefits, access to technology owned by third parties. For example, we license Java card technology from Oracle and Multos card technology from Multos International, a subsidiary of a competitor, for use in certain of our products, including in EMV cards. This Java and Multos card technology provides a secure environment for applications on smart cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements with Oracle and Multos International for the continued use of these platforms. Oracle and Multos International may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross‑licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios. If we are unable to continue to successfully renew these agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products, which could have a material adverse effect on our operations. +Most of our facilities are leased, in whole or in part, and our inability to renew our leases on commercially acceptable terms or at all may have a material adverse effect on our results of operations. +Most of our facilities are located, in whole or in part, on leased property. We may be unable to renew such leases on commercially acceptable terms or at all. Our inability to renew our leases, or a renewal of our leases with a rental rate higher than the prevailing rate under the applicable lease prior to expiration, may have a material adverse effect on our operations, including disrupting our operations or increasing our cost of operations. In the event of non‑renewal of any of our leases, we may be unable to locate suitable replacement properties for our facilities or we may experience delays in relocation that could lead to a disruption in our operations. In addition, if we close a facility, we may not be able to sublease the facility for terms that would cover our existing lease costs, or we may not be able to sublease the facility at all which could have an adverse impact on our operating costs and cash flows. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. +We are dependent on our senior leadership team. +Our future success depends to a significant extent on the efforts of our senior management. We believe there are only a limited number of available and qualified executives with substantial experience in our industry. Furthermore, most members of our senior leadership team have a relatively short tenure in their respective positions with the Company, and additional turnover within the management team in the near term could delay or prevent us from fully implementing our business strategy and, consequently, having a material adverse effect on our business, financial condition and results of operations. +23 +Table of Contents +If any member of senior management dies or becomes incapacitated, or leaves the Company to pursue employment opportunities elsewhere, we may need to locate an adequate replacement. To the extent that we are unable to hire an adequate replacement, or are unable to do so within a reasonable period of time, there could be a material adverse effect on our business. +The ability to recruit, retain and develop qualified personnel is critical to our success and ability to grow. +Our business functions are complex and require wide‑ranging expertise and intellectual capital. For us to successfully compete and grow, we must retain, recruit and develop personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. In addition, we must develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Our efforts to retain and develop personnel may also result in significant additional expenses, which could have a material adverse effect on our profitability. Our key personnel may not continue to be employed or we may be unable to attract and retain qualified personnel in the future. Such a failure to retain or attract key personnel could have a material adverse effect on our business, financial condition and results of operations. +Our business depends on the continued viability of the card networks of the Payment Card Brands. +The vast majority of cards we produce and the services we provide are associated with one of the Payment Card Brands. As a result, we depend on the continued viability of the card networks of the Payment Card Brands, including their authorization, clearing and settlement systems. If one or more of the Payment Card Brands were to discontinue their services or otherwise experience a decline in the volume of cards bearing their brands, there could be a material adverse effect on our business, financial condition, and results of operations. +We are required to comply with laws and regulations in other countries and are exposed to business risks associated with our international operations. +For the years ended December 31, 2017, 2016 and 2015, we derived 16.0%, 15.0%, and 15.5%, respectively, of our net sales from outside the United States, primarily in Canada and the United Kingdom. As a result, we are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. For example, the European Union adopted the General Data Protection Regulation (“GDPR”), which will go into effect in May 2018, and requires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Complying with the GDPR may cause us to incur substantial operational costs or require us to change our business practices. Despite our efforts to bring practices into compliance before the effective date of the GDPR, we may not be successful either due to internal or external factors such as resource allocation limitations or a lack of vendor cooperation. Non-compliance could result in proceedings against us by governmental entities or others and fines up to the greater of €20 million or 4% of annual global revenues. We may also experience difficulty retaining or obtaining new European or multi-national customers due to the compliance cost, potential risk exposure, and uncertainty for these entities. We may find it necessary to establish systems to maintain personal data originating from the European Union in the European Economic Area, which may involve substantial expense and distraction from other aspects of our business. In the meantime, there could be uncertainty as to how to comply with European Union privacy law. +We are also required to obtain environmental permits and other authorizations or licenses from governmental authorities for certain of our operations and must protect our intellectual property worldwide. In the jurisdictions in which we operate, we need to comply with various standards and practices of different regulatory, tax, judicial and administrative bodies. +There are a number of risks associated with international business operations, including political instability (e.g., the threat of war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect our +24 +Table of Contents +employees, reputation, business or financial results as well as our ability to meet our objectives, including the following international business risks: +· +negative economic developments in economies around the world and the instability of governments, or the downgrades in the debt ratings of certain major economies; +· +social and political instability; +· +complex regulations governing certain of our products; +· +potential terrorist attacks; +· +adverse changes in governmental policies, especially those affecting trade and investment; +· +foreign currency exchange, particularly with respect to the Canadian Dollar and British Pound Sterling; and +· +threats that our operations or property could be subject to nationalization and expropriation. +We may not be in full compliance at all times with the laws and regulations to which we are subject. Likewise, we may not have obtained or may not be able to obtain the permits and other authorizations or licenses that we need. If we violate or fail to comply with laws, regulations, permits, health and safety regulations or other authorizations or licenses, we could be fined or otherwise sanctioned by regulators. In such a case, or if any of these international business risks were to materialize, there could be a material adverse effect on our business, financial condition and results of operations. +Changes in laws, regulations and enforcement activities relating to the financial services industry and our industry may adversely affect the products, services and markets in which we operate. +We and our customers are subject to laws and regulations that affect the financial services industry in the many countries in which our products and services are used. In particular, our customers are subject to numerous laws and regulations applicable to banks, financial institutions and card issuers in the United States, Europe and other regions. The U.S. Government, for instance, has increased its scrutiny of a number of credit and debit card practices, from which some of our customers derive significant revenue. Regulation of the payments industry, including the Dodd‑Frank Wall Street Reform and Consumer Protection Act (the “Dodd‑Frank Act”), privacy and data security regulations such as the GLBA, and other regulations applicable to us and our customers, has increased significantly in recent years. Our failure to comply with the laws and regulations applicable to our business may result in the suspension or revocation of our licenses or registrations, the limitation, suspension or termination of our services, and/or the imposition of consent orders or civil and criminal penalties, including fines, which could have a material adverse effect on our business, financial condition and results of operations. +Environmental, health and safety laws and regulations expose us to liability and any such liability may have a material adverse effect on our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, our products and the raw materials we use in our production processes are subject to numerous environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We may not be able to be at all times, in full compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or operate real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liability on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages +25 +Table of Contents +to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +The scientific examination of, political attention to, and rules and regulations on issues surrounding the existence and extent of climate change may result in an increase in our cost of production due to increases in the price of energy and/or the introduction of energy or carbon taxes. A variety of regulatory developments have been introduced that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gasses. Companies such as ours may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. These developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in environmental regulations could increase our production costs, which could have a material adverse effect on our business, financial condition and results of operations. +Certain natural disasters, such as flooding, earthquakes, nuclear disasters, certain weather conditions and other catastrophic events, such as fire, may negatively impact our business. +The occurrence of severe weather events, such as rain, snow, wind, storms, hurricanes or other natural disasters, such as flooding, earthquakes, nuclear disasters, fire or a combination thereof, may negatively impact our business. If certain natural disasters, extreme weather conditions or other events such as fire were to directly damage, destroy or disrupt our production facilities, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. Even if our production facilities are not directly damaged, a large natural disaster or fire may result in disruptions in distribution channels or supply chains and significantly increase the prices of the raw materials we use in our production processes. The impact of any such natural disasters, weather changes or other disasters such as fire depends on the specific geographic circumstances but could be significant, and we cannot predict the economic impact, if any, of natural disasters or climate change. Any such disruptions could have a material adverse effect on our business, financial condition and results of operations. +Our insurance may be inadequate to cover future liabilities and our insurance premiums may increase substantially. +We may be subject to significant losses from claims, liabilities, hazards and disasters. While we currently maintain insurance which we believe is adequate and consistent with industry practice, we may experience losses in excess of our insurance coverage or claims not covered by our insurance. Furthermore, we may not be able to obtain insurance coverage in the future on acceptable terms, or at all. Any such losses not covered by insurance may have a material adverse effect on our business, financial condition and results of operations. +Consolidations in the banking, financial services and card processing industry could eliminate existing or potential clients. +Failures, mergers and consolidations of financial institutions and card processors may reduce the number of our clients and potential clients, which could have a material adverse effect on our net sales. Further, if our clients fail, merge with or are acquired by other entities that are not our clients, or that use fewer of our services, they may discontinue or reduce their use of our services. It is also possible that the larger financial institutions and card processors that result from mergers or consolidations would have greater leverage in negotiating terms with us or could decide to perform in‑house some or all of the services which we currently provide or could provide. Any of these developments could have a material adverse effect on our business, results of operations and financial condition. +We are subject to the credit risk that our customers may be unable to satisfy their obligations to us. +A significant portion of our net sales are on an open credit basis, with typical payment terms of 30 days, and up to 60 days in some cases, and we are subject to the credit risk of our customers being unable to make payments to us. If any of our customers experience a bankruptcy or are otherwise unable to satisfy their payment obligations to us, any related losses, if incurred, could have a material adverse effect on our business, financial condition and results of operations. +26 +Table of Contents +If we are unable to implement and maintain effective internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected. +As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes‑Oxley Act of 2002 (the “Sarbanes‑Oxley Act”) requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on the internal controls over financial reporting. As an “emerging growth company” (as defined by the JOBS Act) we are not currently required to obtain an attestation from our independent public accounting firm on our management report on internal controls over financial reporting. See “ We are an ‘emerging growth company’ and we cannot be certain if the reduced disclosure and other requirements applicable to emerging growth companies will make our common stock less attractive to investors ” for a discussion of emerging growth company status. However, we will be required to obtain such an attestation when we are no longer an emerging growth company. +We have in the past, and may in the future, discover areas of our internal controls that need improvement. If we or our independent registered public accounting firm discover a material weakness in the future, the disclosure of that fact, even if quickly remediated, could reduce the market’s confidence in our financial statements and harm our stock price. We may not be able to effectively and timely implement necessary control changes and employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. If we fail to maintain effective internal controls, we could be subject to regulatory scrutiny and sanctions and investors could lose confidence in the accuracy and completeness of our financial reports. +Changes in accounting standards could materially affect how we report our financial condition and results of operations. +From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of such standards that govern the preparation of our external financial statements. These changes are beyond our control, can be difficult to predict, may require extraordinary efforts or additional costs to implement and could materially impact how we report our financial condition and results of operations. It is possible that we may not be prepared to implement a new accounting standard when it is required to be implemented, which may lead to our financial statements being materially misstated, or to our identifying a material weakness in our internal controls over financial reporting. Additionally, the adoption of new standards could require changes to our business and accounting processes, systems and controls to support recognition and disclosure under the new guidance. This could also lead to investors losing confidence in the accuracy and completeness of our financial reports, and the market price of our common stock being negatively affected, and we could become the subject to investigations by the stock exchange on which our common stock is listed, the SEC, or other regulatory authorities, which could require additional financial and management resources. +The requirements of being a public company have increased certain of our costs and require significant management focus. +As a public company, our legal, accounting and other expenses associated with compliance related and other activities have increased significantly, and therefore, since our initial public offering, our management and other personnel have diverted attention from operational and other business matters to devote substantial time to implementing public company compliance requirements. In particular, we have incurred significant expenses and devoted substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company. We have hired additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and we have established an internal audit function. Costs to obtain director and officer liability insurance also contribute to our increased costs. As a result of the associated liability, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements, which could further increase our compliance costs. +27 +Table of Contents +We are an “emerging growth company” and we cannot be certain if the reduced disclosure and other requirements applicable to emerging growth companies will make our common stock less attractive to investors. +We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes‑Oxley Act with respect to our internal control over financial reporting, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non‑binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an emerging growth company upon the earliest to occur of (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.0 billion (adjusted for inflation) or (c) in which we become a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non‑affiliates exceeds $700 million as of the last day of our then most recently completed second fiscal quarter and (ii) the date on which we have issued more than $1.0 billion in non‑convertible debt during the prior three‑year period. We may choose to take advantage of some but not all of these reduced reporting and other burdens. To the extent we take advantage of any of the reduced reporting burdens in our periodic filings, the information that we provide our security holders may be different than the information such holders might get from other public companies in which they hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. +In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Stated another way, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to “opt out” of such extended transition period, however, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non‑emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. +Risks Related to Ownership of Our Common Stock +The price of our common stock may fluctuate significantly, and you could lose all or part of your investment. +Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for them. The market price for our common stock could fluctuate significantly for various reasons, including: +· +our operating and financial performance and prospects; +· +our quarterly or annual earnings or those of other companies in our industry; +· +the public’s reaction to our press releases, our other public announcements and our filings with the SEC; +· +changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry; +· +the failure of research analysts to cover our common stock; +· +the failure to maintain our listing on NASDAQ; +· +material litigation or government investigations; +28 +Table of Contents +· +general economic, industry and market conditions; +· +strategic actions by us, our customers or our competitors, such as acquisitions or restructurings; +· +new laws or regulations or new interpretations of existing laws or regulations applicable to our business; +· +changes in accounting standards, policies, guidance, interpretations or principles; +· +changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events; +· +changes in key personnel; +· +sales of common stock by our principal stockholders who currently own approximately 59% of our outstanding common stock; +· +sales of common stock by us or members of our management team; +· +the granting or exercise of employee stock options; +· +volume of trading in our common stock; and +· +impact of the facts described elsewhere in “Risk Factors.” +In addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially reduce our share price. +If we fail to meet the continued listing standards of NASDAQ, our common stock may be delisted, which may adversely affect the market price and liquidity of our common stock. +Our common stock is currently traded on the NASDAQ Capital Market (“NASDAQ”). NASDAQ requires us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our common stock, including that we maintain a minimum closing bid price of $1.00 per share. On December 20, 2017, we effected a one-for-five reverse stock split with the intent of increasing the market price per share of our common stock in order to comply with NASDAQ’s continued listing standards related to minimum bid price. In addition, NASDAQ requires satisfaction of additional continued listing standards, including relating to market capitalization and/or profitability. There can be no assurance that we will be able to maintain compliance with the requirements for continued listing our common stock on NASDAQ. If our common stock is delisted and we are unable to list our common stock on another U.S. national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Furthermore, if our common stock were delisted it could adversely affect our ability to obtain financing for the continuation of our operations and/or result in the loss of confidence by investors, customers, suppliers and employees. +Our majority stockholders have the ability to control significant corporate activities +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital), own approximately 37% and 22% of our common stock, respectively, as of December 31, 2017. As a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to control decision‑making with respect to our business direction and policies. +29 +Table of Contents +Matters over which the Tricor Funds, directly or indirectly, exercise control include: +· +election of directors; +· +mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; +· +other acquisitions or dispositions of businesses or assets; +· +incurrence of indebtedness and the issuance of equity securities; +· +repurchases of stock and payment of dividends; and +· +the issuance of shares to management under our incentive plans. +Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial portion of our board of directors. +Messrs. Bradley Seaman, Nicholas Peters and David Rowntree, who are officers or affiliates of Parallel49 Equity (and its predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49 Equity, on the one hand, and of other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors. +Our board of directors has elected to discontinue our quarterly dividend and we do not currently have a stock repurchase program in place. If the board of directors elects to reinstate the dividend or adopt a new stock repurchase program, there can be no assurances that we will pay regular dividends to our stockholders or effect stock repurchases under our stock repurchase program. +During August 2017, the Company discontinued its quarterly dividend. In addition, the Company’s prior stock repurchase program expired in May 2017 and the board of directors has not approved a new stock repurchase plan. If, in the future, the board of directors reinstates the quarterly dividend or approves a new stock repurchase plan, our board may, in its sole discretion, change the amount or frequency of any dividends and stock repurchases, or discontinue the payment of dividends and stock repurchases entirely. In addition, because we are a holding company with no material direct operations, we are dependent on dividends and other payments from our operating subsidiaries to generate the funds necessary to pay any future dividends on our common stock. We expect to cause our subsidiaries to make distributions to us in an amount sufficient for us to pay any future dividends and/or make stock repurchases. However, their ability to make such distributions will be subject to their operating results, cash requirements and financial condition, the applicable provisions of Delaware law that may limit the amount of funds available for distribution and our ability to pay cash dividends, and compliance with covenants and financial ratios related to existing or future indebtedness and other agreements with third parties. In addition, each of the companies in our corporate chain must manage its assets, liabilities and working capital in order to meet all of its cash obligations, including the payment of any future dividends or distributions. As a consequence of these various limitations and restrictions, we may not reinstate, or, if reinstated, we may have to reduce or eliminate the future payment of dividends on our common stock and/or stock +30 +Table of Contents +repurchases. Any change in the level of our dividends or the suspension of the payment thereof or change in the level of our stock repurchases or the suspension of the ability to make stock repurchases could have a material adverse effect the market price of our common stock. +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +· +the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +· +following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors; +· +advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings; +· +following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, removal of directors only for cause, and only upon the affirmative vote of 75% of our outstanding voting stock at a meeting of our stockholders called for that purpose; +· +allowing only our board of directors to fill vacancies on our board of directors; and +· +following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, super‑majority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation. +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law (the “DGCL”), an anti‑takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti‑takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the +31 +Table of Contents +forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock. +Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium over the market price, and adversely affect the market price and the voting and other rights of the holders of our common stock. +If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline. +The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline. +Item 1B. Unresolved Staff Comment s +None. +Item 2. Propertie s +Information regarding each of our facilities is set forth below. +Location +Operations +Square Footage +Owned/Leased +Littleton, Colorado (Corporate) +Corporate headquarters facility +12,000 +Leased +Littleton, Colorado (Centennial) +Financial Payment Card production +65,000 +Leased +Littleton, Colorado (Midway) +Financial Payment Card personalization services +50,000 +Leased +Roseville, Minnesota (3 facilities) +Financial Payment Card production, card personalization, card packaging services and secure fulfillment center +164,000 +Leased +Fort Wayne, Indiana +Financial Payment Card production +36,000 +Leased +Nashville, Tennessee +Financial Payment Card personalization services and fulfillment +66,000 +Leased +Toronto, Ontario +Financial Payment Card and retail gift card production and card personalization services and fulfillment +67,000 +Leased +Colchester, United Kingdom +Retail gift card production +37,000 +Owned and Leased +Liverpool, United Kingdom +Retail gift card personalization services +30,000 +Owned +Derby, United Kingdom +Design and innovation office +300 +Leased +32 +Table of Contents +Item 3. Legal Proceeding s +In Re CPI Card Group Inc. Securities Litigation , Case No. 1:16-CV-04531 (S.D.N.Y.) +On June 15, 2016, two purported CPI stockholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc.,in the United States District Court for the Southern District of New York against CPI, certain of its former officers and current and former directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 initial public offering (“IPO”). The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”) and seek, among other things, damages and costs. In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, Mastercard ® , and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ended December 31, 2015. The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. +On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (the “PSLRA”). On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in the EMV market. +On November 16, 2016, the Company filed a motion to dismiss the amended complaint, which was denied by the court on October 30, 2017. The defendants answered the amended complaint on January 12, 2018, and on January 19, 2018, the parties jointly submitted for the Court’s approval a proposed scheduling order governing the case. +The Company believes these claims are without merit and intends to defend the actions vigorously. +Heckermann v. Montross, et al. , Case No. 1:17-CV-01673 (D. Del.) +On November 20, 2017, a purported CPI stockholder filed a shareholder derivative complaint in the United States District Court for the District of Delaware against certain of CPI’s former officers and current and former directors, along with the sponsors of CPI’s October 2015 IPO (with CPI named as the nominal defendant). The derivative complaint is based principally on the same set of factual allegations underlying In Re CPI Card Group Inc. Securities Litigation , and asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, and for, inter alia , purported breaches of fiduciary duties, unjust enrichment and waste of corporate assets. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements and seeks, among other things, injunctive relief, damages and costs. +The Company and the individual defendants believe these claims are without merit and intend to defend the action vigorously. +33 +Table of Contents +Gemalto S.A. v. CPI Card Group Inc. (2 cases) +First case. This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The complaint alleged that the Company infringed a now-expired Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. The Company successfully moved to transfer the lawsuit to the District of Colorado, answered the complaint, and filed counterclaims that the asserted patent was invalid and unenforceable, and that Gemalto’s lawsuit was a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims in February 2016. In March 2016, Gemalto provided specific infringement contentions, which named CPI products that incorporate microchips supplied by two specific vendors. +On May 31, 2016, the Company filed an Inter Partes Review ("IPR") petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. On July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The petition was granted as to all of the independent claims of Gemalto’s patent on November 9, 2016. The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The PTAB heard oral argument on the IPR on August 4, 2017. +Second case. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleged that the Company infringed a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. Gemalto provided initial infringement contentions to the Company in July 2016, and amended its contentions in October 2016. During May 2017, the Company filed an IPR petition with the PTAB, seeking re-examination of Gemalto’s asserted patent. +On September 28, 2017, the Company reached a settlement with Gemalto to resolve both lawsuits. Under the terms of the settlement, the Company made a one-time payment of $750,000 during the fourth quarter of 2017, which is recorded in “Selling, General and Administrative” expenses in the Consolidated Statement of Operations during the during year ended December 31, 2017. The settlement resulted in the dismissal of both lawsuits with prejudice, and also includes a mutual covenant not to sue for a period of 18 months. +CPI Card Group Inc. v. Multi Packaging Solutions, Inc. +First case. On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado. The complaint asserts that MPS ultrasecure gift card packages sold to at least one customer infringe a Company patent on ultrasecure gift card packages. The Company’s patent will expire in 2028. MPS has answered the complaint and counterclaimed for invalidity and noninfringement. The Company’s preliminary injunction request was denied without prejudice after MPS represented that it had voluntarily ceased using the accused technology and will notify CPI before it re-starts. Discovery is underway. MPS has moved to dismiss on the ground that the wrong Company subsidiary filed the suit, and the Company is moving to amend to add the applicable subsidiary. The case is stayed until that issue is resolved. If the case is dismissed, the Company's subsidiary will promptly re-file. +In June 2017, MPS filed an early motion for summary judgment and sought to stay discovery pending the outcome of that motion. Both motions were denied in August 2017. Also in June 2017, MPS filed an IPR petition with the PTAB. Also, the Company filed its preliminary opposition to the IPR Petition in October 2017. In September 2017, the Company filed a motion to replace the named plaintiff in the litigation with the Company’s wholly owned subsidiary, CPI Card Group-Minnesota, Inc.; MPS sought to dismiss the complaint for lack of standing on the same ground. That issue has been fully briefed and is awaiting decision. The PTAB instituted the IPR on January 9, 2018 and the Company is preparing the response for filing in April 2018. The Company intends to vigorously assert its intellectual property rights in connection with this litigation and the IPR. +Second case . During the summer of 2017, the Company commenced a lawsuit in the District of Minnesota against a former employee, MPS, and two MPS employees (collectively, the Defendants). The former employee was a sales executive who left the Company in 2017 to join MPS. In the lawsuit, the Company alleges that the Defendants misappropriated the Company's trade secrets and confidential information, that the former employee violated his employment agreements with the Company, and that Defendants committed various related business torts. After some +34 +Table of Contents +early discovery, the Company moved for a preliminary injunction, which the Court granted in December, 2017. The litigation is ongoing. +In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. +Item 4. Mine Safety Disclosure s +Not applicable. +PART I I +Item 5. Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market Information for Common Stock +Our common stock is listed on the NASDAQ and the TSX under the symbol “PMTS”. +On December 20, 2017, we effected a one-for-five reverse stock split of our common stock, whereby each lot of five shares of common stock issued and outstanding immediately prior to the reverse stock split was converted into and became one share of common stock. In lieu of issuing any fractional shares, any stockholder entitled to receive less than one share of common stock received cash for such stockholder’s fractional share. Share and per share amounts reflect the one-for-five reverse stock split for all periods presented throughout this Annual Report on Form 10-K and the accompanying consolidated financial statements. +The following table sets forth for the indicated periods dividends declared and the high and low prices of our common stock as reported on the NASDAQ and TSX, as adjusted for the reverse stock split discussed above. +Cash Dividends +NASDAQ ($) +Toronto Stock Exchange (CAD$) +2017 +Declared +High +Low +High +Low +First Quarter +$ +0.225 +$ +24.51 +$ +20.36 +$ +33.50 +$ +27.90 +Second Quarter +$ +0.225 +$ +20.61 +$ +9.32 +$ +28.10 +$ +11.80 +Third Quarter +$ +— +$ +15.75 +$ +4.53 +$ +21.95 +$ +5.50 +Fourth Quarter +$ +— +$ +7.25 +$ +3.44 +$ +9.60 +$ +4.90 +2016 +First Quarter +$ +0.225 +$ +51.89 +$ +35.50 +$ +78.00 +$ +49.50 +Second Quarter +$ +0.225 +$ +42.53 +$ +16.91 +$ +59.50 +$ +22.55 +Third Quarter +$ +0.225 +$ +29.09 +$ +19.83 +$ +40.25 +$ +27.70 +Fourth Quarter +$ +0.225 +$ +30.34 +$ +16.54 +$ +40.90 +$ +22.00 +Holders +There were nine stockholders of record as of February 22, 2018. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. +Dividend +During the year ended December 31, 2017, the Company declared quarterly cash dividends of $0.225 per share payable on April 7 and July 7. The Company discontinued its quarterly dividend during August 2017. During the year +35 +Table of Contents +ended December 31, 2016, the Company declared quarterly cash dividends of $0.225 per share payable on April 7, July 7, October 7 and January 12, 2017. +Issuer Purchases of Equity Securities +There were no shares repurchased under the Company’s stock repurchase plan during the year ended December 31, 2017 and the stock repurchase plan expired by its terms during May 2017. During the year ended December 31, 2016, the Company repurchased 287,883 shares, as adjusted for the reverse stock split, for $6.0 million. +Item 6. Selected Financial Dat a +The financial information in this Annual Report on Form 10-K is presented on a consolidated basis and includes the accounts of the Company and our majority-owned subsidiaries. The consolidated statement of income data for the years ended December 31, 2017, 2016, and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of income data for the years ended December 31, 2014 and 2013, and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our selected historical financial data are not necessarily indicative of our future financial condition, future results of operations or future cash flows. +36 +Table of Contents +You should read the information set forth below in conjunction with our historical consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. +Year Ended December 31, +Statement of Income Data (1) : +2017 +2016 +2015 +2014 +2013 +(in thousands except share and per share data) +Net sales +Products +$ +125,306 +$ +168,510 +$ +241,609 +$ +159,220 +$ +101,360 +Services +129,556 +140,190 +132,501 +101,786 +95,010 +Total net sales +254,862 +308,700 +374,110 +261,006 +196,370 +Cost of sales +179,871 +206,802 +238,289 +179,279 +136,874 +Gross profit +74,991 +101,898 +135,821 +81,727 +59,496 +Operating expenses (2) +93,096 +72,916 +68,101 +47,255 +33,347 +(Loss) Income from operations (2) +(18,105) +28,982 +67,720 +34,472 +26,149 +Other expense, net +Interest, net (3) +(20,848) +(20,044) +(18,328) +(7,508) +(7,838) +Foreign currency gain (loss) +560 +(417) +59 +(124) +(142) +Loss on debt modification and early extinguishment +— +— +(703) +(476) +— +Other income (expense), net +11 +20 +359 +(101) +18 +(Loss) income before income taxes (2) +(38,382) +8,541 +49,107 +26,263 +18,187 +Income tax benefit (expense) +16,372 +(3,142) +(17,846) +(10,291) +(6,988) +Net (loss) income from continuing operations (2) +(22,010) +5,399 +31,261 +15,972 +11,199 +Loss from discontinued operations, net of taxes (4) +— +— +(606) +(2,670) +(2,612) +Gain on sale of discontinued operation, net of taxes (4) +— +— +208 +— +— +Net (loss) income (2) +$ +(22,010) +$ +5,399 +$ +30,863 +$ +13,302 +$ +8,587 +Basic and Diluted (loss) earnings per share: (4)(5) +Continuing Operations +$ +(1.98) +$ +0.48 +$ +(0.15) +$ +(3.45) +$ +(2.95) +Discontinued Operations +— +— +(0.04) +(0.35) +(0.30) +$ +(1.98) +$ +0.48 +$ +(0.19) +$ +(3.80) +$ +(3.25) +Weighted Average Shares Outstanding: (6) +Basic +11,117,454 +11,165,445 +8,963,223 +8,239,822 +8,214,443 +Diluted +11,117,454 +11,240,720 +8,963,223 +8,239,822 +8,214,443 +Other Financial Data: +Depreciation and amortization +$ +18,014 +$ +16,927 +$ +15,966 +$ +14,198 +$ +11,595 +Cash flow provided by operating activities +2,427 +59,958 +43,922 +26,627 +23,622 +Capital expenditures +$ +8,790 +$ +14,294 +$ +18,670 +$ +16,956 +$ +10,628 +December 31, +Consolidated Balance Sheet Data: +2017 +2016 +2015 +2014 +2013 +Cash and cash equivalents +$ +23,205 +$ +36,955 +$ +13,606 +$ +12,941 +$ +9,702 +Total current assets +89,374 +92,417 +101,019 +88,719 +65,958 +Plant, equipment and leasehold improvements, net +49,300 +53,419 +52,113 +44,772 +36,650 +Total assets +234,005 +264,420 +280,353 +266,010 +171,867 +Total debt +303,869 +301,922 +309,000 +178,810 +122,306 +Total stockholders’ deficit +$ +(119,574) +$ +(95,273) +$ +(86,610) +$ +(21,694) +$ +(36,896) +(1) +Statement of income data includes results from our acquisition of EFT Source from September 2, 2014. +(2) +Included in Operating expense during the year ended December 31, 2017 were goodwill and intangible impairment charges of $19.1 million, of which $17.2 million related to U.S. Debit and Credit resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1. 9 million related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business . Also, included in Operating expense during the year ended December 31, 2016 was a $2.7 million impairment related to a trademark acquired in the EFT Source acquisition. The impairment was a result of the Company’s plans to discontinue its use of the trademark in its sales, marketing and other business practices. See Note 6 “Goodwill and Other Intangible Assets” in Part II, Item 8, “Financial Statements and Supplementary Data” and “Critical Accounting Policies and Estimates” in this Annual Report on Form 10-K for additional information. +37 +Table of Contents +(3) +Interest expense in 2015 includes $4.7 million of amortization of debt issuance cost and discount related to the early debt repayment of $112.5 million using proceeds from our IPO, and an additional fourth quarter debt repayment of $10.0 million. +(4) +We sold our operating segment located in Nevada in January 2015. This operating segment primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, our consolidated balance sheets, statements of operations and comprehensive income, and statements of cash flows have been reclassified to present this operating segment as a discontinued operation as of and for the years ended December 31, 2015, 2014 and 2013. See Note 3 “Discontinued Operation and Disposition” in Part II, Item 8. “ Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. +(5) +For a computation of historical basic and diluted earnings per share attributable to continuing and discontinued operations, see Note 12 “Earnings per Share” in Part II, Item 8. “ Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. +(6) +Basic and diluted shares outstanding and earnings (loss) per share for all periods presented reflect the one-for-five reverse stock split effected on December 20, 2017. See Note 2 “Summary of Significant Accounting Policies”, in Part II, Item 8. “ Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. +Item 7. Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control. See "Risk Factors" and “Forward-Looking Statements.” +Company Overview +We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this attractive subsector of the financial technology market. Our customers include leading national and regional banks, independent community banks, credit unions, Prepaid Debit Card program managers, Group Service Providers and card transaction processors. We serve a diverse set of over 4,000 direct and indirect customers, including some of the largest issuers of debit and credit cards in the United States and Canada, the largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card transaction processors. +We serve our customers through a network of production and card services facilities, including high-security facilities in the United States and Canada that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. We have a leading network of high-security production facilities in the United States and Canada, allowing us to optimize our solutions offerings to serve the needs of our diverse customer base. +In addition to our high-security facilities in the United States and Canada, we have facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, as well as provide personalization, packaging and fulfillment services. Retail cards produced at our facilities in the United Kingdom are not issued on the networks of the Payment Card Brands. +2017 Summary of Financial Performance +During the year ended December 31, 2017, net sales decreased 17.4% from 2016, to $254.9 million, and we incurred a loss from operations of $18.1 million compared to $29.0 million of income from operations during 2016. The operating loss margin for the year ended December 31, 2017 was 7.1%, a decrease from operating profit margin of 9.4% in 2016. +38 +Table of Contents +For the year ended December 31, 2017, we generated net loss from continuing operations of $22.0 million, compared to net income of $5.4 million in 2016. +Included in loss from operations and net loss during the year ended December 31, 2017 were goodwill impairment charges of $19.1 million, of which $17.2 million related to the U.S. Debit and Credit segment resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1.9 million related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. See Note 6 “Goodwill and Other Intangible Assets” in Part II, Item 8, “Financial Statements and Supplementary Data” and “Critical Accounting Policies and Estimates” in this Annual Report on Form 10-K for additional information. +Cash provided by operating activities for the year ended December 31, 2017 was $2.4 million, representing a decrease compared to cash provided by operating activities of $60.0 million during 2016. +Segment Overview +Our business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and U.K. Limited. +U.S. Debit and Credit Segment +Our U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and Prepaid Debit Cards issued on the networks of the Payment Card Brands, instant issuance systems and Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands (including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards). This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. +U.S. Prepaid Debit Segment +Our U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States. Services provided include tamper-evident security packaging, card personalization and fulfillment and our CPI on Demand services, where we are able to produce all images, personalized payment cards and related collateral on a one-by-one, on demand basis for our customers, enabling individualized offerings and reducing waste. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages mentioned above. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. +U.K. Limited Segment +Our U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment services. Neither of our operations in this segment are certified by the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. +Other +Our operations in Ontario, Canada and Petersfield, United Kingdom, and our corporate activities are reflected in “Other”. During February 2018 we made the decision to consolidate our three personalization operations in the United States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a cost-competitive business model. We plan to be substantially complete with the transition in the third quarter of 2018. +39 +Table of Contents +In August 2015, we completed the shut-down of the operations at our Petersfield facility. The Petersfield facility is not material to our business. See Note 16 “Segment Reporting” in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for certain additional information regarding our reporting segments. +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive income. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of Financial Payment Cards in contact EMV, dual-interface EMV, contactless and magnetic stripe formats. We also generate product revenue from the sale of our Card@Once ® instant issuance systems, Private Label Credit Cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, including CPI on Demand services, the provision of tamper-evident security packaging, fulfillment services and software as a service personalization of instant issuance Financial Payment cards. We also generate services revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom). +Generally, we recognize net sales related to products upon shipment and services upon the provision of the service, when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers , as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients “ASU 2014-09” was adopted by the Company effective January 1, 2018. In accordance with this new standard, certain of our performance obligations are required to be recognized over time as the goods are produced rather than upon shipment, as required under applicable accounting guidance prior to ASU 2014-09, as those products provide value only to a specified customer, have no alternative use, and we have the right to payment for work completed on such items. This will accelerate the timing of revenue recognition for these arrangements, as revenue will be recognized as goods are produced rather than upon shipment or delivery of goods. See Note 2, “Summary of Significant Accounting Policies” in Part II, Item 8, “ Financial Statements and Supplementary Data ” and “Critical Accounting Policies and Estimates—Revenue Recognition.” in this Annual Report on Form 10-K for additional information. +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including microchips in the case of EMV cards and, additionally, RFID assemblies in the case of dual-interface EMV cards, labor costs, material costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Product costs also include desktop card personalization terminals in the case of Card@Once ® instant issuance system sales. Services costs include the cost of labor, raw materials in the case of tamper-evident security packaging, and equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, promotional activity and employee relations. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service, human resources and administrative personnel, including payroll, benefits and stock-based compensation expense, and outside legal and other advisory fees, including audit, tax advisory and consulting fees. Operating expense also includes depreciation and amortization expense, and impairment charges on tangible and intangible assets. +40 +Table of Contents +(Loss) Income from Operations and Operating Margin +(Loss) income from operations consists of our gross profit less our operating expenses. Operating margin is (loss) income from operations as a percentage of net sales. +Other Expense, net +Other expense, net consists primarily of interest expense and foreign currency gains and losses. +Net (Loss) Income from Continuing Operations +Net (loss) income from continuing operations consists of our income from operations, less other expense, net and income tax expense. +Results of Operations +Year Ended December 31, 2017 Compared With Year Ended December 31, 2016 +The table below presents our results of operations for the years ended December 31, 2017 and 2016: +Year Ended December 31, +2017 +2016 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +125,306 +$ +168,510 +$ +(43,204) +(25.6) +% +Services +129,556 +140,190 +(10,634) +(7.6) +% +Total net sales +254,862 +308,700 +(53,838) +(17.4) +% +Cost of sales +179,871 +206,802 +(26,931) +(13.0) +% +Gross profit +74,991 +101,898 +(26,907) +(26.4) +% +Operating expenses (exclusive of impairments shown below) +74,022 +70,216 +3,806 +5.4 +% +Impairments +19,074 +2,700 +16,374 +* +(Loss) income from operations +(18,105) +28,982 +(47,087) +(162.5) +% +Other expense, net: +Interest, net +(20,848) +(20,044) +(804) +4.0 +% +Foreign exchange gain (loss) +560 +(417) +977 +* +Other income +11 +20 +(9) +(45.0) +% +(Loss) income before income taxes +(38,382) +8,541 +(46,923) +(549.4) +% +Income tax benefit (expense) +16,372 +(3,142) +19,514 +* +Net (loss) income +$ +(22,010) +$ +5,399 +$ +(27,409) +(507.7) +% +* Not meaningful +41 +Table of Contents +Net Sales +Year Ended December 31, +2017 +2016 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +U.S. Debit and Credit—Products +$ +105,465 +$ +146,333 +$ +(40,868) +(27.9) +% +U.S. Debit and Credit—Services +53,434 +62,462 +(9,028) +(14.5) +% +U.S. Debit and Credit—Total +158,899 +208,795 +(49,896) +(23.9) +% +U.S. Prepaid Debit—Products +— +— +— +— +U.S. Prepaid Debit—Services +61,132 +60,065 +1,067 +1.8 +% +U.S. Prepaid Debit—Total +61,132 +60,065 +1,067 +1.8 +% +U.K. Limited—Products +20,600 +17,468 +3,132 +17.9 +% +U.K. Limited—Services +10,519 +12,221 +(1,702) +(13.9) +% +U.K. Limited—Total +31,119 +29,689 +1,430 +4.8 +% +Other—Products +5,954 +6,950 +(996) +(14.3) +% +Other—Services +5,095 +6,160 +(1,065) +(17.3) +% +Other—Total +11,049 +13,110 +(2,061) +(15.7) +% +Eliminations +(7,337) +(2,959) +(4,378) +* +Total +$ +254,862 +$ +308,700 +$ +(53,838) +(17.4) +% +* Not meaningful +Net sales for the year ended December 31, 2017 decreased $53.8 million, or 17.4%, to $254.9 million compared to $308.7 million for the year ended December 31, 2016. The decrease in net sales during 2017 was due to a 23.9% decrease in U.S. Debit and Credit and a 15.7% decrease in Other, partially offset by a 1.8% increase in U.S. Prepaid Debit and a 4.8% increase in U.K. Limited. +U.S. Debit and Credit +Net sales for U.S. Debit and Credit for the year ended December 31, 2017 decreased $49.9 million, or 23.9%, to $158.9 million compared to $208.8 million for the year ended December 31, 2016. The decrease in net sales was driven primarily by a $38.6 million decrease in EMV card revenue, an $8.5 million decrease in card personalization and fulfillment as well as a decrease in non-EMV and other sales. +The decrease in EMV revenue was the result of continued market softness in demand for EMV cards, including price erosion and loss of market share. For the year ended December 31, 2017, we sold 70.3 million EMV cards at an average selling price of $0.86 per card compared to 104.5 million EMV cards at an average selling price of $0.95 per card for the year ended December 31, 2016. The decrease in average selling price during the year ended December 31, 2017 compared to 2016 was due to lower prices across our customer base, including increased competition in the large issuer market, partially offset by favorable net pricing impacts of customer mix. +U.S. Prepaid Debit +Net sales for U.S. Prepaid Debit for the year ended December 31, 2017 increased $1.1 million, or 1.8%, to $61.1 million compared to $60.1 million for the year ended December 31, 2016. The increase in net sales was due primarily to an increase in sales related to our CPI on Demand services, partially offset by lower average selling prices with our retail prepaid debit customers. Retail prepaid volumes were consistent during the year ended December 31, 2017 compared to the year ended December 31, 2016 due to two offsetting factors. Decreased sales activity associated with the delay in the roll out of a packaging design refresh related to one of our large customers was more than offset by net volume increases across the remaining retail prepaid customer base. +U.K. Limited +Net sales for U.K. Limited for the year ended December 31, 2017 increased $1.4 million, or 4.8%, to $31.1 million compared to $29.7 million for the year ended December 31, 2016. Increased sales were driven by an RFID +42 +Table of Contents +loyalty card order produced for a large U.K. retail customer, partially offset by the impact of foreign currency exchange rate fluctuations and decreased sales activity of retail gift and other cards. F luctuations in the exchange rate between the United States dollar and the British Pound resulted in a $1.8 million reduction to net sales for the year ended December 31, 2017 compared to the year ended December 31, 2016. +Other +Net sales in Other decreased $2.1 million, or 15.7%, from the year ended December 31, 2017 compared to the year ended December 31, 2016. During 2016, one of our largest Canadian customers refreshed its card designs which resulted in higher net sales during the year ended December 31, 2016 compared to the year ended December 31, 2017. In addition, there were declines in net sales in Canada related to a few larger customers. These decreases were offset by $0.2 million of foreign currency exchange rate fluctuations between the United States dollar and Canadian dollar. +Cost of Sales +Year Ended December 31, +2017 +2016 +$ Change +% Change +(dollars in thousands) +Cost of sales by segment: +U.S. Debit and Credit +$ +113,278 +$ +138,939 +$ +(25,661) +(18.5) +% +U.S. Prepaid Debit +40,968 +39,017 +1,951 +5.0 +% +U.K. Limited +24,327 +21,713 +2,614 +12.0 +% +Other +8,742 +10,007 +(1,265) +(12.6) +% +Eliminations +(7,444) +(2,874) +(4,570) +* +Total +$ +179,871 +$ +206,802 +$ +(26,931) +(13.0) +% +* Not meaningful +Cost of sales for the year ended December 31, 2017 decreased $26.9 million, or 13.0%, to $179.9 million compared to $206.8 million for the year ended December 31, 2016. The decrease in cost of sales was due to an 18.5% decrease in U.S. Debit and Credit and a 12.6% decrease in Other, partially offset by a 5.0% increase in U.S. Prepaid Debit and a 12.0% increase in U.K. Limited. +U.S. Debit and Credit +Cost of sales for U.S. Debit and Credit for the year ended December 31, 2017 decreased $25.7 million, or 18.5%, to $113.3 million compared to $138.9 million for the year ended December 31, 2016. The decrease was driven by lower EMV chip card sales volumes resulting in lower corresponding EMV manufacturing costs. Lower per unit EMV chip prices and decreases in card personalization and fulfillment sales also contributed to the decrease in cost of sales. +U.S. Prepaid Debit +Cost of sales for U.S. Prepaid Debit for the year ended December 31, 2017 increased $2.0 million, or 5.0%, to $41.0 million compared to $39.0 million for the year ended December 31, 2016. The increase was a result of increased sales volumes and costs related to the continued ramp-up of our CPI on Demand services. +U.K. Limited +Cost of sales for U.K. Limited for the year ended December 31, 2017 increased $2.6 million, or 12.0%, to $24.3 million compared to $21.7 million for the year ended December 31, 2016. The increase in cost of sales related to increased net sales activity resulting in higher manufacturing costs and higher material costs as a percent of sales due to product mix, partially offset by $1.3 million of foreign currency exchange rate fluctuations between the United States dollar and the British Pound. +43 +Table of Contents +Other +Other cost of sales decreased by $1.3 million, or 12.6%, to $8.7 million during the year ended December 31, 2017 compared to $10.0 million in the year ended December 31, 2016 due to lower manufacturing costs corresponding to the decreased net sales, partially offset by by $0.2 million of foreign currency exchange rate fluctuations between the United States dollar and the Canadian dollar. +Gross Profit and Gross Profit Margin +Year Ended December 31, +% of +% of +2017 +net sales +2016 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +U.S. Debit and Credit +$ +45,621 +28.7 +% +$ +69,856 +33.5 +% +$ +(24,235) +(34.7) +% +U.S. Prepaid Debit +20,164 +33.0 +% +21,048 +35.0 +% +(884) +(4.2) +% +U.K. Limited +6,792 +21.8 +% +7,976 +26.9 +% +(1,184) +(14.8) +% +Other +2,414 +21.8 +% +3,018 +23.0 +% +(604) +(20.0) +% +Total +$ +74,991 +29.4 +% +$ +101,898 +33.0 +% +$ +(26,907) +(26.4) +% +Gross profit for the year ended December 31, 2017 decreased $26.9 million, or 26.4%, to $75.0 million compared to $101.9 million for the year ended December 31, 2016. Gross profit margin for the year ended December 31, 2017 decreased to 29.4% compared to 33.0% for the year ended December 31, 2016. +U.S. Debit and Credit +Gross profit for U.S. Debit and Credit for the year ended December 31, 2017 decreased $24.2 million, or 34.7%, to $45.6 million compared to $69.9 million for the year ended December 31, 2016. The decrease in gross profit for U.S. Debit and Credit was primarily a result of decreased EMV revenues and decreased sales from our card personalization and fulfillment services. Gross profit margin for the U.S. Debit and Credit segment for the year ended December 31, 2017 decreased to 28.7% compared to 33.5% for the year ended December 31, 2016 due to lower overhead cost absorption attributed to reduced production volumes. +U.S. Prepaid Debit +Gross profit for U.S. Prepaid Debit for the year ended December 31, 2017 decreased $0.9 million, or 4.2%, to $20.2 million compared to $21.0 million for the year ended December 31, 2016. The decrease in gross profit was primarily due to the decrease in net sales to retail prepaid customers and increased costs to ramp up CPI on Demand services. Gross profit margin for U.S. Prepaid Debit for the year ended December 31, 2017 decreased to 33.0% compared to 35.0% for the year ended December 31, 2016 due to increased costs to ramp up CPI on Demand services and lower overhead cost absorption during the first quarter of 2017. +U.K. Limited +Gross profit for U.K. Limited for the year ended December 31, 2017 decreased $1.2 million, or 14.8%, to $6.8 million compared to $8.0 million for the year ended December 31, 2016. The decrease in gross profit was driven by higher material costs as a percent of sales due to product mix and $0.5 million of foreign currency exchange rate fluctuations, partially offset by the increase in net sales described above. Gross profit margin for U.K. Limited for the year ended December 31, 2017 decreased to 21.8% compared to 26.9% for the year ended December 31, 2016, primarily due to customer mix. +Other +Gross profit in Other decreased 20.0% in 2017 to $2.4 million from $3.0 million in 2016. The decrease was primarily due to decreased net sales in Canada. +44 +Table of Contents +Operating Expenses +Year Ended December 31, +2017 +2016 +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +U.S. Debit and Credit +$ +42,884 +$ +26,100 +$ +16,784 +64.3 +% +U.S. Prepaid Debit +3,847 +4,837 +(990) +(20.5) +% +U.K. Limited +5,382 +5,572 +(190) +(3.4) +% +Other +40,983 +36,407 +4,576 +12.6 +% +Total +$ +93,096 +$ +72,916 +$ +20,180 +27.7 +% +Goodwill Impairments +We perform goodwill impairment testing on an annual basis as of October 1 of each year or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. Based on the goodwill impairment test performed as of October 1, 2017 we recorded an impairment charge of $19.1 million, of which $17.2 million related to U.S. Debit and Credit resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1.9 million related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. +U.S. Debit and Credit +The increase in operating expenses is primarily attributed to the goodwill impairment charge of $17.2 million, partially offset by lower general and administrative expenses. +U.S. Prepaid Debit +The $1.0 million decrease in U.S. Prepaid Debit operating expenses was primarily driven by lower administrative headcount. +U.K. Limited +U.K. Limited operating expenses decreased by $0.2 million, or 3.4%, as $0.3 million of foreign currency exchange rate fluctuations and lower marketing expenses were partially offset by higher labor costs incurred during the year ended December 31, 2017 compared to the year ended December 31, 2016. +Other +Other operating expenses increased $4.6 million due to increased legal costs of $3.4 million, primarily related to increased litigation expenses, $2.4 million of increased software, consulting, and net other expenses, and $1.2 million of increased compensation costs, including CEO transition expenses, partially offset by a decrease of $1.6 million in stock-based compensation expense during the year ended December 31, 2017. Included in Other operating expenses was a $1.9 million goodwill impairment charge during the year ended December 31, 2017 and a $2.7 million intangible asset impairment charge related to a trademark acquired in the EFT Source acquisition during the year ended December 31, 2016. The net impact of these two impairment charges in 2017 and 2016 also partially offset the above increases. +45 +Table of Contents +(Loss) Income from Operations and Operating Margin +Year Ended December 31, +% of +% of +2017 +net sales +2016 +net sales +$ Change +% Change +(dollars in thousands) +(Loss) income from operations by segment: +U.S. Debit and Credit +$ +2,737 +1.7 +% +$ +43,756 +21.0 +% +$ +(41,019) +(93.7) +% +U.S. Prepaid Debit +16,317 +26.7 +% +16,211 +27.0 +% +106 +0.7 +% +U.K. Limited +1,410 +4.5 +% +2,404 +8.1 +% +(994) +(41.3) +% +Other +(38,569) +* +(33,389) +* +(5,180) +* +Total +$ +(18,105) +(7.1) +% +$ +28,982 +9.4 +% +$ +(47,087) +(162.5) +% +* Not meaningful +During the year ended December 31, 2017 we incurred a loss from operations of $18.1 million compared to income of $29.0 million for the year ended December 31, 2016. Included in the loss from operations during the year ended December 31, 2017 were the goodwill impairment charges discussed above, totaling $19.1 million. Operating margins for the year ended December 31, 2017 decreased to (7.1)% compared to 9.4% for the year ended December 31, 2016. +U.S. Debit and Credit +Income from operations for U.S. Debit and Credit for the year ended December 31, 2017 decreased $41.0 million, or 93.7%, to $2.7 million compared to $43.8 million for the year ended December 31, 2016. Operating margins for the year ended December 31, 2017 decreased to 1.7% compared to 21.0% for the year ended December 31, 2016 due primarily to the lower sales, lower overhead cost absorption attributed to the reduced sales volumes and the goodwill impairment charge discussed above. +U.S. Prepaid Debit +Income from operations for U.S. Prepaid Debit for the year ended December 31, 2017 increased $0.1 million, or 0.7%, to $16.3 million compared to $16.2 million for the year ended December 31, 2016. Operating margins for the year ended December 31, 2017 decreased to 26.7% compared to 27.0% in 2016. Increased sales and lower operating expenses were partially offset by costs incurred in connection with the ramp up of CPI on Demand services. Operating margins decreased as CPI on Demand ramp-up costs were partially offset by decreased operating expenses, as discussed above. +U.K. Limited +Income from operations for U.K. Limited during the year ended December 31, 2017 decreased $1.0 million, or 41.3%, to $1.4 million compared to $2.4 million for the year ended December 31, 2016. The decrease in income from operations was primarily due to higher material costs as a percent of sales due to product mix, higher operating expenses and $0.2 million of foreign currency exchange rate fluctuations, partially offset by the increase in net sales. Operating margins decreased to 4.5% during the year ended December 31, 2017 from 8.1% in the year ended December 31, 2016 primarily due to product mix and higher operating expenses, as discussed above. +Other +Loss from operations in Other of $38.6 million represented an increased loss of $5.2 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increased loss was primarily attributable to the higher corporate expenses and the lower sales activity in Canada, partially offset by the net impact of the two impairment charges discussed above. +46 +Table of Contents +Interest, net +Interest expense for the year ended December 31, 2017 increased $0.8 million, or 4.0%, to $20.8 million compared to $20.0 million for the year ended December 31, 2016. The additional interest expense resulting from the higher average interest rate on the First Lien Term Loan during the year ended December 31, 2017 was partially offset by no interest expense associated with the Sellers’ Note related to the EFT Source acquisition, which was repaid during September 2016. +Income tax benefit (expense) +During the year ended December 31, 2017 there was an income tax benefit of $16.4 million compared with an income tax expense of $3.1 million for the year ended December 31, 2016 driven by the decrease in income before taxes of $46.9 million. The effective tax rate increased to 42.7% during the year ended December 31, 2017 from 36.8% for the year ended December 31, 2016. Our effective tax rate was higher during the year ended December 31, 2017 primarily due to the impact of remeasurement of the Company’s deferred tax liability under the new enacted United States federal tax rate of 21% from 35%, and the benefits derived from research and development tax credits. Partially offsetting these increases to our effective tax rate were the impact of $19.1 million of non-deductible goodwill impairment charges and unrecognized tax benefits recorded during the year ended December 31, 2017. +Net (loss) income +Net loss for the year ended December 31, 2017 was $22.0 million, compared to net income of $5.4 million for the year ended December 31, 2016. The decrease in net income was driven by several factors, including lower net sales and gross profit, and higher operating expenses, including the impairment charges described above, and higher interest costs. +Fourth Quarter +Our net sales decreased 3.6% in the fourth quarter of 2017 compared to the fourth quarter of 2016. Net sales for U.S. Debit and Credit decreased 13.4% in the fourth quarter of 2017 compared to fourth quarter of 2016 due to the continued decline in sales and average selling prices of EMV chip cards, and lower card personalization and fulfillment sales. +Net sales for our U.S. Prepaid Debit segment increased $6.3 million or 50.1%, to $19.0 million in the fourth quarter of 2017 compared to $12.6 million in the fourth quarter of 2016 as a result of net sales volume increases across our retail prepaid customer base and increased net sales related to our CPI on Demand services. +Net sales for our U.K. Limited segment decreased 4.1% in the fourth quarter of 2017 compared to the fourth quarter of 2016, due primarily to limited activity with some larger customers during the quarter, partially offset by $0.5 million in foreign currency exchange rates . +During the fourth quarter of 2017 there was a loss from operations of $21.8 million compared to a loss from operations of $0.9 million in the fourth quarter of 2016. The increased loss from operations was primarily due to the goodwill impairment charges of $19.1 million relating to reporting units within U.S. Debit and Credit and Other, as further described above. Decreased net sales in U.S. Debit and Credit were primarily due to the continued decline in EMV chip card demand and average selling prices, and lower sales in Canada contributed to the increased loss. Higher sales activity, with both retail prepaid and CPI on Demand, and lower operating expenses in U.S. Prepaid Debit partially offset these losses. +47 +Table of Contents +Year Ended December 31, 2016 Compared With Year Ended December 31, 2015 +The table below presents our results of operations for the years ended December 31, 2016 and 2015: +Year Ended December 31, +2016 +2015 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +168,510 +$ +241,609 +$ +(73,099) +(30.3) +% +Services +140,190 +132,501 +7,689 +5.8 +% +Total net sales +308,700 +374,110 +(65,410) +(17.5) +% +Cost of sales +206,802 +238,289 +(31,487) +(13.2) +% +Gross profit +101,898 +135,821 +(33,923) +(25.0) +% +Operating expenses +72,916 +68,101 +4,815 +7.1 +% +Income from operations +28,982 +67,720 +(38,738) +(57.2) +% +Other expense, net: +Interest, net +(20,044) +(18,328) +(1,716) +9.4 +% +Foreign exchange gain (loss) +(417) +59 +(476) +* +Loss on debt modification and early extinguishment +— +(703) +703 +* +Other income (expense) +20 +359 +(339) +* +Income before income taxes +8,541 +49,107 +(40,566) +(82.6) +% +Income tax expense +(3,142) +(17,846) +14,704 +(82.4) +% +Net income from continuing operations +5,399 +31,261 +(25,862) +(82.7) +% +Loss from discontinued operations +— +(398) +398 +(100.0) +% +Net income +$ +5,399 +$ +30,863 +$ +(25,464) +(82.5) +% +* Not meaningful +Net Sales +Year Ended December 31, +2016 +2015 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +U.S. Debit and Credit—Products +$ +146,333 +$ +217,863 +$ +(71,530) +(32.8) +% +U.S. Debit and Credit—Services +62,462 +45,805 +16,657 +36.4 +% +U.S. Debit and Credit—Total +208,795 +263,668 +(54,873) +(20.8) +% +U.S. Prepaid Debit—Products +— +— +— +— +U.S. Prepaid Debit—Services +60,065 +65,878 +(5,813) +(8.8) +% +U.S. Prepaid Debit—Total +60,065 +65,878 +(5,813) +(8.8) +% +U.K. Limited—Products +17,468 +22,211 +(4,743) +(21.4) +% +U.K. Limited—Services +12,221 +12,150 +71 +0.6 +% +U.K. Limited—Total +29,689 +34,361 +(4,672) +(13.6) +% +Other—Products +6,950 +9,321 +(2,371) +(25.4) +% +Other—Services +6,160 +8,099 +(1,939) +(23.9) +% +Other—Total +13,110 +17,420 +(4,310) +(24.7) +% +Eliminations +(2,959) +(7,217) +4,258 +(59.0) +% +Total +$ +308,700 +$ +374,110 +$ +(65,410) +(17.5) +% +Net sales for the year ended December 31, 2016 decreased $65.4 million, or 17.5%, to $308.7 million compared to $374.1 million for the year ended December 31, 2016. The decrease in net sales during 2016 was due to a 20.8% decrease in U.S. Debit and Credit, an 8.8% decrease in U.S. Prepaid Debit, a 13.6% decrease in U.K. Limited and a 24.7% decrease in Other. +48 +Table of Contents +U.S. Debit and Credit +Net sales for U.S. Debit and Credit for the year ended December 31, 2016 decreased $54.9 million, or 20.8%, to $208.8 million compared to $263.7 million for the year ended December 31, 2015. The decrease in net sales was driven by a $46.1 million decrease in EMV related revenue, a $24.9 million decrease in magnetic stripe card and other sales due to the ongoing shift of card issuing bank customers from magnetic stripe cards to EMV cards, partially offset by a $16.1 million net sales increase in card personalization, fulfillment and other services. +The decrease in EMV revenue is the result of continued softness in demand for EMV cards, particularly with large issuer and processor customers. For the year ended December 31, 2016, we sold 104.5 million EMV cards at an average selling price of $0.95 per card compared to 154.7 million EMV cards at an average selling price of $0.94 per card for the year ended December 31, 2015. The increase in average selling price for EMV cards during the year ended December 31, 2016 compared to 2015 is primarily due to customer mix. +U.S. Prepaid Debit +Net sales for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $5.8 million, or 8.8%, to $60.1 million compared to $65.9 million for the year ended December 31, 2015. The decrease was due to net reductions in volumes, and lower average prices on our tamper-evident secured packaging services. The decrease in volumes included the impact of a large customer shifting some of its business to a competitor, who we believe was infringing on a Company patent, as further described in Part I, Item 3, “Legal Proceedings” of this Annual Report on Form 10-K. +U.K. Limited +Net sales for U.K. Limited for the year ended December 31, 2016 decreased $4.7 million, or 13.6%, to $29.7 million compared to $34.4 million for the year ended December 31, 2015. The decrease was primarily attributable to f luctuations in the exchange rate between the United States dollar and the British Pound, which resulted in a reduction to net sales for the year ended December 31, 2016 of $4.0 million compared to the previous year. A decrease in card sales also contributed to the decline. +Other +Net sales in Other decreased $4.3 million, or 24.7%, from the year ended 2016 to 2015. The decrease related primarily to the shut-down of the Petersfield, U.K. operation in August 2015, which contributed $4.1 million in net sales during the year ended December 31, 2015. Net sales in Canada decreased $0.2 million during the year ended December 31, 2016 compared 2015, as the impact of foreign currency exchange rates during the year more than offset an increase in sales of manufactured EMV cards and card personalization in Canada. +Cost of Sales +Year Ended December 31, +2016 +2015 +$ Change +% Change +(dollars in thousands) +Cost of sales by segment: +U.S. Debit and Credit +$ +138,939 +$ +166,551 +$ +(27,612) +(16.6) +% +U.S. Prepaid Debit +39,017 +39,498 +(481) +(1.2) +% +U.K. Limited +21,713 +25,234 +(3,521) +(14.0) +% +Other +10,007 +14,427 +(4,420) +(30.6) +% +Eliminations +(2,874) +(7,421) +4,547 +* +Total +$ +206,802 +$ +238,289 +$ +(31,487) +(13.2) +% +* Not meaningful +Cost of sales for the year ended December 31, 2016 decreased $31.5 million, or 13.2%, to $206.8 million compared to $238.3 million for the year ended December 31, 2015. The decrease in cost of sales was due to a 16.6% decrease in U.S. Debit and Credit, a 1.2% decrease in U.S. Prepaid Debit, a 14.0% decrease in U.K. Limited and a 30.6% decrease in Other. +49 +Table of Contents +U.S. Debit and Credit +Cost of sales for U.S. Debit and Credit for the year ended December 31, 2016 decreased $27.6 million, or 16.6%, to $138.9 million compared to $166.6 million for the year ended December 31, 2015. The decrease was driven by lower EMV chip and magnetic stripe card sales volumes resulting in lower corresponding manufacturing costs. Lower per unit EMV chip prices also contributed to the decreased cost of sales. Higher costs of sales from growth in card personalization, fulfillment and other services partially offset the above decreases. +U.S. Prepaid Debit +Cost of sales for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $0.5 million, or 1.2%, to $39.0 million compared to $39.5 million for the year ended December 31, 2015. The decrease was primarily due to a decrease in materials, corresponding to the decrease in net sales described above, partially offset by increased labor and overhead costs incurred during the three months ended December 31, 2016, including costs to ramp up CPI on Demand services capabilities. +U.K. Limited +Cost of sales for U.K. Limited for the year ended December 31, 2016 decreased $3.5 million, or 14.0%, to $21.7 million compared to $25.2 million for the year ended December 31, 2015. The decrease in cost of sales was primarily due to foreign currency exchange rate fluctuations of $2.9 million and a decrease in cards sold , as discussed above. +Other +Other cost of sales decreased by $4.4 million, or 30.6%, to $10.0 million compared to $14.4 million in 2015. The decrease was primarily related to our Petersfield, U.K. operation, shut-down in August 2015, which incurred $4.1 million in cost of sales during the year ended December 31, 2015. Increased cost of sales related increased sales of manufactured EMV cards and card personalization in Canada, was offset by the impact of foreign currency exchange rate fluctuations. +Gross Profit and Gross Profit Margin +Year Ended December 31, +% of +% of +2016 +net sales +2015 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +U.S. Debit and Credit +$ +69,856 +33.5 +% +$ +97,117 +36.8 +% +$ +(27,261) +(28.1) +% +U.S. Prepaid Debit +21,048 +35.0 +% +26,380 +40.0 +% +(5,332) +(20.2) +% +U.K. Limited +7,976 +26.9 +% +9,127 +26.6 +% +(1,151) +(12.6) +% +Other +3,018 +23.0 +% +3,197 +18.4 +% +(179) +(5.6) +% +Total +$ +101,898 +33.0 +% +$ +135,821 +36.3 +% +$ +(33,923) +(25.0) +% +Gross profit for the year ended December 31, 2016 decreased $33.9 million, or 25.0%, to $101.9 million compared to $135.8 million for the year ended December 31, 2015. Gross profit margin for the year ended December 31, 2016 decreased to 33.0% compared to 36.3% for the year ended December 31, 2015. +U.S. Debit and Credit +Gross profit for U.S. Debit and Credit for the year ended December 31, 2016 decreased $27.3 million, or 28.1%, to $69.9 million compared to $97.1 million for the year ended December 31, 2015. The decrease in gross profit was primarily a result of decreased EMV net sales offset by growth in our card personalization and fulfillment services. Gross profit margin for U.S. Debit and Credit for the year ended December 31, 2016 decreased to 33.5% compared to 36.8% for the year ended December 31, 2015 due to lower overhead cost absorption attributed to reduced sales volumes. +50 +Table of Contents +U.S. Prepaid Debit +Gross profit for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $5.3 million, or 20.2%, to $21.0 million compared to $26.4 million for the year ended December 31, 2015. Gross profit margin for U.S. Prepaid Debit for the year ended December 31, 2016 decreased to 35.0% compared to 40.0% for the year ended December 31, 2015. The decreases in gross profit and gross profit margin were primarily due to decreased net sales, from net reductions in volumes, lower average prices on our tamper-evident secured packaging services, and increased fourth quarter labor and overhead costs, including costs to ramp up Print on Demand capabilities. +U.K. Limited +Gross profit for U.K. Limited for the year ended December 31, 2016 decreased $1.2 million, or 12.6%, to $8.0 million compared to $9.1 million for the year ended December 31, 2015, primarily due to foreign currency exchange rate fluctuations of $1.1 million. Gross profit margin for the U.K. Limited segment for the year ended December 31, 2016 increased to 26.9% compared to 26.6% for the year ended December 31, 2015. +Other +Gross profit in Other decreased 5.6% in 2016 to $3.0 million from $3.2 million in 2015. The decrease was primarily related to the impact of foreign currency exchange rate fluctuations. +Operating Expenses +Year Ended December 31, +2016 +2015 +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +U.S. Debit and Credit +$ +26,100 +$ +25,562 +$ +538 +2.1 +% +U.S. Prepaid Debit +4,837 +5,679 +(842) +(14.8) +% +U.K. Limited +5,572 +6,417 +(845) +(13.2) +% +Other +36,407 +30,443 +5,964 +19.6 +% +Total +$ +72,916 +$ +68,101 +$ +4,815 +7.1 +% +U.S. Debit and Credit +Included in Operating expenses for the year ended December 31, 2016 increased $4.8 million, or 7.1%, to $72.9 million compared to $68.1 million for the year ended December 31, 2015. The increase in operating expenses was due to a 19.6% increase in Other and a 2.1% increase in U.S. Debit and Credit, partially offset by a 14.8% decrease in U.S. Prepaid Debit and a 13.2% decrease in U.K. Limited. +U.S. Debit and Credit increased $0.5 million, primarily due to increased salaries and benefits to support growth in the card personalization business. +U.S. Prepaid Debit decreased $0.8 million, primarily due to cost reductions in sales and administrative salaries. +U.K. Limited decreased $0.8 million, primarily due to the impact of foreign currency exchange rate fluctuations of $0.7 million. +The $6.0 million increase in Other was primarily due to public company costs of $5.5 million, patent and shareholder litigation and related charges of $3.5 million, a $2.7 million intangible asset impairment charge related to the Company’s plans to discontinue the use of a trademark in its sales, marketing and other business practices, and a $1.5 million increase of other corporate expenses (primarily related to increases in insurance and information technology expenses). These cost increases were partially offset by a $6.1 million decrease in stock-based compensation expense, a $0.7 million reduction of expenses relating to the prior year restructuring charge due to shut-down of the Petersfield, U.K. operation, and a reduction of $0.4 million related to IPO transaction expenses. Stock-based compensation expense during the year ended December 31, 2015 included an $8.7 million charge in connection with the settlement of our obligation under the phantom stock plan in conjunction with our IPO. +51 +Table of Contents +Public company costs included $1.6 million of legal and insurance costs, $1.5 million of accounting, reporting and public filing costs, and $2.4 million in salaries and benefits, board fees, contract labor and hiring expenses. +Income from Operations and Operating Margin +Year Ended December 31, +% of +% of +2016 +net sales +2015 +net sales +$ Change +% Change +(dollars in thousands) +Income from operations by segment: +U.S. Debit and Credit +$ +43,756 +21.0 +% +$ +71,555 +27.1 +% +$ +(27,799) +(38.8) +% +U.S. Prepaid Debit +16,211 +27.0 +% +20,701 +31.4 +% +(4,490) +(21.7) +% +U.K. Limited +2,404 +8.1 +% +2,710 +7.9 +% +(306) +(11.3) +% +Other +(33,389) +* +(27,246) +* +(6,143) +22.5 +% +Total +$ +28,982 +9.4 +% +$ +67,720 +18.1 +% +$ +(38,738) +(57.2) +% +* Not meaningful +Income from operations for the year ended December 31, 2016 decreased $38.7 million, or 57.2%, to $29.0 million compared to $67.7 million for the year ended December 31, 2015. Operating margins for the year ended December 31, 2016 decreased to 9.4% compared to 18.1% for the year ended December 31, 2015. +U.S. Debit and Credit +Income from operations for U.S. Debit and Credit for the year ended December 31, 2016 decreased $27.8 million, or 38.8%, to $43.8 million compared to $71.6 million for the year ended December 31, 2015. Operating margins for the year ended December 31, 2016 decreased to 21.0% compared to 27.1% for the year ended December 31, 2015 due primarily to the lower sales, lower overhead cost absorption attributed to the reduced sales volumes and increased salaries and benefits to support growth in the card personalization business, as discussed above. +U.S. Prepaid Debit +Income from operations for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $4.5 million, or 21.7%, to $16.2 million compared to $20.7 million for the year ended December 31, 2015. Operating margins for the year ended December 31, 2016 decreased to 27.0% compared to 31.4% in 2015. The decrease in income from operations and operating margins was due to decreased net sales, and increased fourth quarter labor and overhead costs, partially offset by the decreased operating expenses, as discussed above. +U.K. Limited +Income from operations for the U.K. Limited segment for the year ended December 31, 2016 decreased $0.3 million, or 11.3%, to $2.4 million compared to $2.7 million for the year ended December 31, 2015 due primarily to the impact of foreign currency exchange rate fluctuations. +Other +Loss from operations in Other of $33.4 million represented an increase of $6.1 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. The additional loss was driven primarily by the higher operating expenses discussed above. +Interest, net +Interest expense for the year ended December 31, 2016 increased $1.7 million, or 9.4%, to $20.0 million compared to $18.3 million for the year ended December 31, 2015. The increase in interest expense was driven by higher average debt balances outstanding relating to the $435.0 million First Lien Term Loan that we put in place in August 2015 in conjunction with the partial redemption of the Series A Preferred Stock. Interest expense in 2015 also includes $4.7 million of amortization of debt issuance cost and discount related to the early debt repayment of $112.5 million using proceeds from our IPO, and an additional fourth quarter debt repayment of $10.0 million. +52 +Table of Contents +Loss on debt modification and early extinguishment +Loss on debt modification and early extinguishment for the year ended December 31, 2015 was $0.7 million related to unamortized deferred financing costs and discount on our Senior Term Loan dated September 2, 2014, which was repaid with proceeds from our $435.0 million First Lien Term Loan. Refer to Note 8 “Long-Term Debt and Credit Facility”, in Part II, Item 8 “ Financial Statements and Supplementary Data ” of this Annual Report on Form 10-K. +Income tax expense +Income tax expense for the year ended December 31, 2016 decreased $14.7 million, to $3.1 million, compared to $17.8 million for the year ended December 31, 2015 driven by the decrease in income before taxes of $40.6 million. The effective tax rate increased to 36.8% during the year ended December 31, 2016 from 36.3% for the year ended December 31, 2015 due primarily to the impact of state income taxes. +Net income +Net income for the year ended December 31, 2016 decreased $25.5 million, to $5.4 million, compared to $30.9 million for the year ended December 31, 2015. The decrease in net income was driven by several factors, including lower net sales and gross profit, and higher operating expenses and interest cost, as described above. +Fourth Quarter +Our net sales decreased 28.0% in the fourth quarter 2016 compared to the fourth quarter of 2015. Net sales for our U.S. Debit and Credit segment decreased 35.2% in the fourth quarter of 2016 compared to fourth quarter of 2015 due to the continued decline in demand of EMV chip cards. +Net sales for our U.S. Prepaid Debit segment increased 2.0% in the fourth quarter of 2016 compared to the fourth quarter of 2015 as a result of net sales volume increases across our retail prepaid customer base, partially offset by a large customer shifting some of its business to a competitor, as previously discussed. +Net sales for our U.K. Limited segment decreased 27.7% in the fourth quarter of 2016 compared to the fourth quarter of 2015, due primarily to foreign currency exchange rates. Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a reduction to net sales for the three months ended December 31, 2016 of $1.7 million compared to the same period in the previous year. Also contributing to the decrease was a decline in cards sold. +During the fourth quarter of 2016 there was a loss from operations of $0.9 million compared to income from operations of $10.0 million in the fourth quarter of 2015. The decrease in income from operations during the three months ended December 31, 2016 compared to 2015 is primarily due to decreased net sales in U.S. Debit and Credit. The decrease in net sales has been primarily due to continued softness in demand for EMV cards, particularly with large issuer customers. Additionally, included in the loss from operations during the three months ended December 31, 2016 was a $2.7 million impairment charge for a Company trademark resulting from the Company’s plans to discontinue its use of the trademark in its sales, marketing and other business practices. +Liquidity and Capital Resources +As of December 31, 2017, we had $23.2 million of cash and cash equivalents. Of this amount, $3.2 million was held in accounts outside of the United States. +Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs. +53 +Table of Contents +At December 31, 2017, there was $312.5 million outstanding under the First Lien Term Loan, and we had an undrawn $40.0 million Revolving Credit Facility, of which $20.0 million is undrawn and available for borrowing. Additional amounts may be available for borrowing during the term of the Revolving Credit Facility, up to the full $40.0 million, to the extent our net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The First Lien Term Loan and Revolving Credit Facility (collectively, “First Lien Credit Facility”) mature on August 17, 2022 and August 17, 2020, respectively. +Interest rates under the First Lien Term Loan, at the Company’s election, are based on either a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%. As of December 31, 2017, the interest rate on our First Lien Term Loan was 5.96% and increased to 6.36% as the interest rate was reset on the First Lien Term Loan during January 2018. +The First Lien Credit Facility contains customary covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our assets, and affiliate transactions. We may also be required to make repayments on the First Lien Term Loan in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. We do not have a required excess cash flow payment related to 2017, and we were in compliance with all covenants under the First Lien Credit Facility as of December 31, 2017. +During the year ended December 31, 2016, the Board of Directors approved a stock repurchase program authorizing repurchases of the Company’s common stock up to $20.0 million. There were no shares repurchased under this plan during the year ended December 31, 2017 and the stock repurchase plan expired by its terms during May 2017. +During August 2017, the Company discontinued its quarterly dividend of $0.225 per share. The dividend discontinuation was part of the Company’s plan to utilize a greater portion of its available cash to reinvest back into the business to fund growth initiatives and to reduce debt. We remain focused on creating long-term shareholder value by making the strategic investments necessary to position the Company to return to sustainable profitable growth, while also strengthening our balance sheet and maintaining financial flexibility. By discontinuing the dividend, the Company will save approximately $10 million annually providing additional liquidity and financial flexibility. +Operating Activities +Cash provided by operating activities for the year ended December 31, 2017 was $2.4 million compared to cash provided by operating activities of $60.0 million during the year ended December 31, 2016. The year over year decrease was primarily due to net working capital fluctuations, primarily accounts receivable and income taxes, and increased net losses incurred during the year ended December 31, 2017 compared to net income during the year ended December 31, 2016. Included in the $22.0 million net loss during the year ended December 31, 2017 and the $5.4 million of net income during the year ended December 31, 2016 were non-cash impairment charges of $19.2 million and $2.7 million, respectively, which did not impact cash flows from operating activities. +Cash provided by operating activities for the year ended December 31, 2016 was $60.0 million compared to $43.9 million during the year ended December 31, 2015. The increase in cash provided by operating activities was due to a net increase in cash flows from working capital, particularly from decreases to accounts receivable and inventories, partially offset by lower net income during the year ended December 31, 2016 compared to 2015. +Investing Activities +Cash used in investing activities for the year ended December 31, 2017 was $8.8 million, all relating to capital expenditures. Capital expenditures during the year ended December 31, 2017 were $5.5 million lower than during the year ended December 31, 2016 due to decreased capital requirements. +Cash used in investing activities for the year ended December 31, 2016 was $14.3 million, all relating to capital expenditures. Capital expenditures during the year ended December 31, 2016 were lower than during the year ended December 31, 2015 ($18.7 million) as we had elevated capital spending in 2015 in conjunction with the U.S. EMV +54 +Table of Contents +conversion and increased investment in our services business. We also received $5.0 million in cash from investing activities during the year ended December 31, 2015 from the sale of our Nevada operation. +Financing Activities +Cash used in financing activities for the year ended December 31, 2017 was $7.9 million, primarily related to dividend payments of $7.5 million. +Cash used in financing activities for the year ended December 31, 2016 was $21.9 million, which primarily included the repayment of the $9.0 million subordinated, unsecured promissory note with certain sellers of EFT Source, $6.0 million of common stock repurchased under our stock repurchase program, and $7.5 million of dividends paid on our common stock. +Working Capital +Our working capital as of December 31, 2017 was $54.8 million compared to $57.1 million as of December 31, 2016. During the year ended December 31, 2017, our cash balance decreased by $13.7 million. Offsetting the decrease in cash were net increases in other working capital, primarily accounts receivable reflecting the stronger fourth quarter performance of the U.S. Prepaid Debit segment compared to the fourth quarter in 2016 and income taxes receivable as a result of net losses incurred during the year ended December 31, 2017. +Our working capital as of December 31, 2016 was $57.1 million compared to $59.0 million as of December 31, 2015. During the year ended December 31, 2016, our cash balance increased $23.3 million. Offsetting the increased cash were the $9.0 million principal payment made to certain sellers of EFT Source, and net decreases in other working capital accounts, primarily accounts receivable and inventories, reflecting the decline in the net sales from the prior year. +Contractual Obligations +The following table summarizes our material contractual obligations as of December 31, 2017: +Payments due by period—December 31, 2017 +(in thousands) +Less than +More than +Total +1 year +1 - 3 Years +3 - 5 Years +5 Years +Long-term debt (1) +$ +312,500 +$ +— +— +312,500 +— +Operating leases +13,362 +3,613 +5,391 +3,299 +1,059 +Interest payments (2) +86,218 +18,632 +37,264 +30,322 +— +Non-cancellable purchase obligations (4) +14,513 +4,793 +9,720 +(3) +Total contractual obligations +$ +426,593 +$ +27,038 +$ +52,375 +$ +346,121 +$ +1,059 +(1) Principal payments only. +(2) Amounts are based on the applicable interest rate as of December 31, 2017. +(3) Relates to a single contract for the purchase of materials. +(4) This total does not include our unrecognized tax expense of $1.2 million because we are unable to make a reasonably +reliable estimate as to when a cash settlement, if any, with the appropriate taxing authority may occur. +Cyclical and Seasonal Nature of Business +Financial Payment Cards and Private Label Credit Cards are generally influenced by broader cyclical changes in the economy, with economic downturns resulting in decreases in the demand for our products and services. In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. Additionally, we generally generate higher net sales in the third and fourth quarters of the year, as our sales of Prepaid Debit Card solutions and retail gift cards are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season in the United States. +55 +Table of Contents +Off-Balance Sheet Arrangements +We had no off-balance sheet arrangements at December 31, 2017 and 2016. +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenue, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty, and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +Impairment Assessments of Goodwill and Long-Lived Assets +We account for business combinations using the acquisition method and allocate the acquisition price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The difference between the acquisition price and the fair value of the net assets acquired is recorded as goodwill. +In determining the fair value of assets acquired and liabilities assumed in business combinations and for determining fair values in impairment tests, we use one of the following recognized valuation methods: +· +the income approach (including discounted cash flows); +· +the market approach; or +· +the cost approach. +We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in those fair value measurements include identifying business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and earnings multiples. Further, when measuring fair value based on discounted cash flows, we make assumptions about future price levels, rates of increase in revenue, cost of revenue and operating expenses, weighted average cost of capital, rates of long term growth and income tax rates. We also consider our market capitalization, adjusted for unallocated monetary assets such as cash, debt, a control premium and other factors determined by management. Valuations are performed by management or third party valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values assigned to the assets acquired and liabilities assumed and for determining fair value in business combinations and impairment tests are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates. Changes to or a failure to achieve our projected business assumptions, including growth and profitability, could result in a valuation that would trigger an impairment of goodwill. +Goodwill and other indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For impairment evaluations, we first make a qualitative assessment with respect to both goodwill and other indefinite-lived intangibles. In 2017, we adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with our annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +56 +Table of Contents +We completed our goodwill impairment testing as of October 1, 2017, and recorded impairment charges of $19.1 million, of which $17.2 million related to U.S. Debit and Credit resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1.9 million related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. There were no goodwill impairments recognized during the years ended December 31, 2016 and 2015. +Goodwill is allocated to our reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to a reporting unit, it no longer retains its identification with a particular acquisition and becomes identified with that reporting unit. Accordingly, the fair value of the reporting unit as a whole is available to support the recoverability of its goodwill. Goodwill of $53.6 million as of December 31, 2017 is attributable to the Company’s reportable segments as follows: U.S. Debit and Credit: $47.2 million and U.K. Limited: $6.5 million. +During the year ended December 31, 2016, we recognized a $2.7 million impairment related to a trademark acquired in the EFT Source acquisition. The impairment was a result of the Company’s plans to discontinue its use of the trademark in its sales, marketing and other business practices. Accordingly, the trademark was written down to its fair value of zero. The impaired asset is included in the U.S. Debit and Credit reportable segment for the year ended December 31, 2016. Subsequent to this impairment, we evaluated the future utilization of our trademarks and updated our estimate to amortize these assets over lives ranging from 7.5 to 10 years. As a result, the Company has no remaining indefinite lived intangible assets as of December 31, 2017. There were no impairment of indefinite-lived intangible assets for the year ended December 31, 2015. +Refer to Note 6, “Goodwill and Other Intangible Assets” and Note 7 “Fair Value of Financial Instruments” in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for certain additional information on goodwill and intangible asset impairments and for further definition of valuation inputs. +Long-lived assets, such as property, equipment and software, and amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Plant, equipment, and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for equipment, furniture, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. If circumstances require that a long-lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. There were no material long-lived asset impairments recorded for the years ended December 31, 2017, 2016, and 2015. +Future changes in our assumptions or the interrelationship of those assumptions may negatively impact future valuations. In future measurements of fair value, adverse changes in assumptions could result in an impairment of goodwill or long-lived assets that would require a non-cash charge to the consolidated statements of operations and may have a material effect on our financial condition and operating results. +Revenue Recognition +Generally, we recognize revenue related to sales of our products upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured. A provision for payment discounts, product return allowances and uncollectable accounts, which is estimated based upon our historical performance, management’s experience and current economic trends, is recorded as a reduction of sales in the same period that the revenue is recognized. +Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers , as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients “ASU 2014-09” was adopted by the Company effective January 1, 2018. In accordance with this new standard, certain of our performance obligations are required to be recognized over time as goods are produced rather than upon shipment, as required under applicable accounting guidance prior to 2014-09, as those products provide value only to a specified customer, have no alternative use, and we have the right to payment for work completed on such items. This will accelerate the timing of revenue recognition for these arrangements, as revenue will be recognized as goods are produced rather than upon shipment or delivery of +57 +Table of Contents +goods. See Note 2, “Summary of Significant Accounting Policies” in Part II, Item 8, “ Financial Statements and Supplementary Data ” in this Annual Report on Form 10-K for additional information. +Bill and Hold Transactions +In certain cases, at the customer’s request, we enter into bill-and-hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. We recognize revenue associated with bill-and-hold arrangements when the product is complete and ready to ship, hold criteria have been met, the amount due from the customer is fixed, and collectability of the related receivable is reasonably assured. All of the foregoing requires us to apply our judgment. Bill-and-hold arrangements most often occur when customers request that we ship complete tamper-evident security packages containing a Prepaid Debit Card to our secure fulfillment center until they provide us further instructions at a later date to ship those packages to numerous individual retail locations or distribution centers. +Multiple-Element Arrangements +We enter into warehouse, fulfillment and distribution service agreements with several customers, where we are engaged to store and handle completed cards and tamper-evident security packages on their behalf. For the sales arrangements that contain multiple deliverables, the arrangement is split into separate units of accounting and individually delivered elements have value to the customer on a standalone basis. When separate units of accounting exist, revenue is allocated to each element based on our best estimate of competitive market prices. At the point in which completed cards and packages are shipped to our warehouse, the product is billed and the revenue is recognized in accordance with our revenue recognition policy. Warehousing services are recognized monthly based on volume and handling requirements; fulfillment services are recognized when the product is handled in the manner specified by the customer for a unit or handling fee. All of the foregoing requires us to apply our judgment. Multiple-element arrangements most often occur when customers request that we ship complete tamper-evident security packages containing a Prepaid Debit Card to our secure fulfillment center until they provide us further instructions at a later date to ship those packages to numerous individual retail locations or distribution centers. +Inventory Valuation +Raw materials, work-in-process and finished goods inventories are valued at the lower of cost or net realizable value, with cost determined using a first-in, first-out, specific identification or weighted-average method. Cost is calculated based upon the price paid for an item at the time it is received by us, and also includes the capitalization of labor, overhead and other expenses in the case of work-in-process and finished goods inventory. This net inventory cost is recognized through cost of sales when the inventory is sold. It is impractical for us to assign specific allocated overhead costs to individual units of inventory. As such, to match net inventory costs against the related revenue, we estimate the net inventory costs to be deferred and recognized each period as the inventory is sold. Also, we must exercise significant judgment in the case of work-in-process inventory to allocate the appropriate costs to this unfinished product. +Stock-Based Compensation +During October 2015, we adopted the CPI Card Group Inc. Omnibus Incentive Plan (“Omnibus Plan”) and granted stock options to certain employees during the years ended December 31, 2017 and 2016. We estimate the fair value of option awards using a Black-Scholes option pricing model or other option pricing models, as we deem appropriate. Option-pricing models require us to estimate a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. The most subjective estimate is the expected volatility of the underlying stock when determining the fair market value of an option granted. Based on the limited amount of trading history of our common stock, we utilized a peer group to estimate the volatility assumption when calculating the fair value of stock options granted during 2017 and 2016. As we obtain more trading history on our own common stock, our specific trading history, and associated volatility will gradually replace the peer group volatility assumption. As such, our volatility assumption in the future could be significantly different going forward than what we have estimated for our 2017 and 2016 grants, which could impact our stock-based compensation expense in future periods. +58 +Table of Contents +A 10% change in our stock-based compensation expense for the year ended December 31, 2017, would have affected pre-tax income by approximately $0.2 million. We include stock-based compensation expense in selling, general and administrative expenses in our consolidated statement of operations and comprehensive (loss) income. +Income Taxes +We record income tax expense using the liability method for taxes and are subject to income tax in many jurisdictions, including the United States, various states and localities, the United Kingdom, and Canada. A current tax asset or liability is recognized for the estimated taxes refundable or payable on the tax returns for the current year and a deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. In evaluating our ability to realize our deferred tax asset, we considered the following sources of future taxable income: +· +future reversals of existing taxable temporary differences; +· +future taxable income, exclusive of reversing temporary differences and carryforwards; +· +taxable income in prior carryback years; and +· +tax-planning strategies. +Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. Our forecast of future profitability represents our best estimate of these future events. After conducting this assessment, the valuation allowance recorded, net of federal benefit, against our deferred tax assets was $4.7 and $4.9 million as of December 31, 2017 and December 31, 2016, respectively. If actual results differ from estimated results, or if we adjust these assumptions in the future, we may need to adjust our deferred tax assets or liabilities, which could impact our effective tax rate. +The amount of income taxes we pay could be subject to possible audits in the taxing jurisdictions in which we operate. In the event of these possible audits, the taxing authorities might challenge items on our tax returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. We recognize tax benefits for uncertain positions only to the extent that we believe it is more likely than not that the tax position will be sustained. Our future results may include favorable or unfavorable adjustments to our unrecognized tax benefits due to closure of income tax audits, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis. +Recent Accounting Pronouncements +The FASB issued ASU 2014-09, Revenue from Contracts with Customers , in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09, as amended, as of January 1, 2018 using the modified retrospective transition method, with the cumulative effect of initial adoption recognized at the date of initial application. +The Company is finalizing the analysis of the effects of ASU 2014-09 on the consolidated financial statements, and subject to completion of this analysis, the Company expects to record a cumulative effective of adoption adjustment as of January 1, 2018 to increase accumulated earnings by a range of $3 to $4 million, reflecting the earnings the +59 +Table of Contents +Company would have recognized under ASU 2014-09 if applied as of December 31, 2017. The Company does not expect the application of ASU 2014-09 will have a material effect on the Consolidated Statement of Operations. Under the new guidance, the Company expects to recognize certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use, and the Company has the right to payment for work completed on such items. This will accelerate the timing of revenue recognition for these arrangements, as revenue will be recognized as goods are produced rather than upon shipment or delivery of goods. In addition to accelerating the timing of recording revenue, the Company expects corresponding decreases in deferred revenue, work in process and finished goods inventories, and an increase to accounts receivable. The Company is in the process of implementing and refining the required changes to its business and accounting processes, and internal controls to support recognition and disclosures under the new standard. +In February 2016, the FASB issued ASU 2016-02, Leases , which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements. +Item 7A. Quantitative and Qualitative Disclosures about Market Ris k +Key Input Price Risks +Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including EMV microchips, polyvinyl chloride (“PVC”), energy and other commodities. We have been able to generally offset cost increases, which have historically not been significant, by making operational adjustments that increase productivity. However, substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be offset by selling price increases. +Labor and Benefits Costs +We are exposed to inflation in wage and benefits costs which represented 16% of net sales for the year ended December 31, 2017. Due to the high-security nature of our business, the availability of potential applicants is limited by the security and other requirements of the Payment Card Brands, and applicants are required to undergo a background screening process. Due to these factors, we have historically provided a starting wage that is above the minimum wage in place for the particular states or provinces in which we do business to attract qualified applicants. We further believe that this enables us to attract a higher caliber employee, which we believe translates directly to higher quality and productivity. There can be no assurance that we will generate sales growth in an amount sufficient to offset increases in minimum wage or other inflationary pressures. +Interest Rate Risk +We are exposed to interest rate risk through fluctuations in interest rates on our term loan obligations. Our Revolving Credit Facility and our First Lien Term Loan carry interest at a floating rate. As of December 31, 2017, we had $312.5 million in outstanding floating rate debt obligations under our First Lien Term Loan. Net of unamortized debt and unamortized deferred financing costs of $8.6 million, our recorded debt balance was $303.9 million at December 31, 2017. Each quarter point increase or decrease in the interest rate on our First Lien Term Loan would change our annual interest expense by approximately $0.8 million. If $40 million under our Revolving Credit Facility were drawn, each quarter point increase or decrease in the interest rate on our Revolving Credit Facility would change our annual interest expense by approximately $0.1 million. +Foreign Currency Exchange Risk +We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the British Pound Sterling and the Canadian Dollar. Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in foreign currency rates against the U.S. Dollar. A hypothetical 10% change in the British Pound Sterling and Canadian Dollar would have impacted our 2017 net sales by approximately $4.2 million, with the impact to income from operations being immaterial. Approximately 83.5% of net +60 +Table of Contents +sales for the year ended December 31, 2017 were in U.S. dollar functional currency subsidiaries, not subject to such foreign currency risk. +Pricing Risk +While we have been able to partially offset historical pricing pressure and other changes in the price of our products and services by offering higher-value added products and services, cross-selling additional products and services, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our pricing flexibility and macroeconomic conditions could increase pricing pressure. There can be no assurance that future pricing pressure can be offset by our ability to reduce our costs. In addition, there can be no assurance that we will generate sales growth in an amount sufficient to offset pricing pressures. +61 +Table of Contents +Item 8. Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016, and 2015 +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations and Comprehensive (Loss) Income +F-4 +Consolidated Statements of Stockholders’ Deficit +F-5 +Consolidated Statements of Cash Flows +F-6 +Notes to Consolidated Financial Statements +F-7 +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive (loss) income, stockholders’ deficit, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2014. +Denver, Colorado +March 12, 2018 +F-2 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(Dollars in Thousands, Except Shares and Per Share Amounts) +December 31, +2017 +2016 +Assets +Current assets: +Cash and cash equivalents +$ +23,205 +$ +36,955 +Accounts receivable, net of allowances of $53 and $126, respectively +37,537 +31,492 +Inventories +16,237 +19,369 +Prepaid expenses and other current assets +3,960 +4,601 +Income taxes receivable +8,435 +— +Total current assets +89,374 +92,417 +Plant, equipment and leasehold improvements, net +49,300 +53,419 +Intangible assets, net +41,472 +46,348 +Goodwill +53,611 +71,996 +Other assets +248 +240 +Total assets +$ +234,005 +$ +264,420 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +16,545 +$ +10,996 +Accrued expenses +13,820 +17,487 +Income taxes payable +— +64 +Deferred revenue and customer deposits +4,177 +6,729 +Total current liabilities +34,542 +35,276 +Long-term debt, net of current maturities +303,869 +301,922 +Deferred income taxes +12,286 +21,261 +Other long-term liabilities +2,882 +1,234 +Total liabilities +353,579 +359,693 +Commitments and contingencies (Note 13) +Stockholders’ deficit: +Common Stock; $0.001 par value—100,000,000 shares authorized; 11,134,714 shares issued and outstanding and 11,071,813 shares issued and outstanding at December 31, 2017 and 2016, respectively, giving retroactive effect to the 1-for-5 reverse stock split effected on December 20, 2017 +11 +11 +Capital deficiency +(113,081) +(114,837) +Accumulated (loss) earnings +(1,366) +25,968 +Accumulated other comprehensive loss +(5,138) +(6,415) +Total stockholders’ deficit +(119,574) +(95,273) +Total liabilities and stockholders’ deficit +$ +234,005 +$ +264,420 +See accompanying notes to consolidated financial statements +F-3 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive (Loss) Incom e +(Dollars in Thousands, Except Per Share Amounts) +Year Ended December 31, +2017 +2016 +2015 +Net sales: +Products +$ +125,306 +$ +168,510 +$ +241,609 +Services +129,556 +140,190 +132,501 +Total net sales +254,862 +308,700 +374,110 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +87,441 +111,627 +155,516 +Services (exclusive of depreciation and amortization shown below) +81,180 +84,453 +73,111 +Depreciation and amortization +11,250 +10,722 +9,662 +Total cost of sales +179,871 +206,802 +238,289 +Gross profit +74,991 +101,898 +135,821 +Operating expenses: +Selling, general and administrative (exclusive of depreciation, amortization and impairments shown below) +67,258 +64,011 +61,116 +Impairments +19,074 +2,700 +— +Depreciation and amortization +6,764 +6,205 +6,304 +Restructuring charges +— +— +681 +Total operating expenses +93,096 +72,916 +68,101 +(Loss) income from operations +(18,105) +28,982 +67,720 +Other expense, net: +Interest, net +(20,848) +(20,044) +(18,328) +Foreign currency gain (loss) +560 +(417) +59 +Loss on debt modification and early extinguishment +— +— +(703) +Other income, net +11 +20 +359 +Total other expense, net +(20,277) +(20,441) +(18,613) +(Loss) income before income taxes +(38,382) +8,541 +49,107 +Income tax benefit (expense) +16,372 +(3,142) +(17,846) +Net (loss) income from continuing operations +(22,010) +5,399 +31,261 +Discontinued operations: +Loss from a discontinued operation, net of taxes (Note 3) +— +— +(606) +Gain on sale of a discontinued operation, net of taxes +— +— +208 +Net (loss) income +$ +(22,010) +$ +5,399 +$ +30,863 +Preferred stock dividends +— +— +(32,548) +Net (loss) income attributable to common stockholders +$ +(22,010) +$ +5,399 +$ +(1,685) +Basic and diluted (loss) earnings per share: +Continuing operations +$ +(1.98) +$ +0.48 +$ +(0.15) +Discontinued operation +- +— +(0.04) +$ +(1.98) +$ +0.48 +$ +(0.19) +Dividends declared per common share +$ +0.45 +$ +0.90 +$ +— +Comprehensive (loss) income +Net (loss) income +(22,010) +5,399 +30,863 +Currency translation adjustment +1,277 +(2,116) +(1,715) +Total comprehensive (loss) income +$ +(20,733) +$ +3,283 +$ +29,148 +See accompanying notes to consolidated financial statements +F-4 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Stockholders’ Deficit +(Dollars in Thousands, Except Share Amounts) +Accumulated +other +Employee +Common Shares +Capital +Accumulated +comprehensive +notes +Shares (1) +Amount (1) +deficiency +earnings (loss) +loss +receivable +Total +December 31, 2014 +8,274,216 +$ +8 +$ +(24,808) +$ +5,798 +$ +(2,584) +$ +(108) +$ +(21,694) +Issuance of common stock upon public offering, net of offering costs +3,000,000 +3 +135,301 +— +— +— +135,304 +Shares issued under stock-based compensation plans +51,523 +— +— +— +— +— +— +Stock-based compensation +— +— +885 +— +— +— +885 +Redemption of common stock +(17,354) +— +(46) +— +— +— +(46) +Dividend distribution on Series A Preferred Stock +— +— +(230,315) +— +— +— +(230,315) +Repayment of employee note +— +— +— +— +— +108 +108 +Components of comprehensive income (loss): +— +Net income +— +— +— +30,863 +— +— +30,863 +Currency translation adjustment +— +— +— +— +(1,715) +— +(1,715) +December 31, 2015 +11,308,385 +$ +11 +$ +(118,983) +$ +36,661 +$ +(4,299) +$ +— +$ +(86,610) +Common stock dividends +— +— +— +(10,049) +— +— +(10,049) +Common stock repurchased +(287,883) +— +(1) +(6,007) +— +— +(6,008) +Shares issued under stock-based compensation plans +51,311 +— +— +(36) +— +— +(36) +Stock-based compensation +— +— +3,579 +— +— +— +3,579 +Tax benefit attributable to stock-based compensation and other +— +— +568 +— +— +— +568 +Components of comprehensive income (loss): +— +Net income +— +— +— +5,399 +— +— +5,399 +Currency translation adjustment +— +— +— +— +(2,116) +— +(2,116) +December 31, 2016 +11,071,813 +$ +11 +$ +(114,837) +$ +25,968 +$ +(6,415) +$ +— +$ +(95,273) +Adoption of ASU 2016-09 +— +— +(38) +38 +— +— +— +Common stock dividends +— +— +— +(5,021) +— +— +(5,021) +Shares issued under stock-based compensation plans +62,901 +— +— +(341) +— +— +(341) +Stock-based compensation +— +— +1,794 +— +— +— +1,794 +Components of comprehensive (loss) income: +— +Net loss +— +— +— +(22,010) +— +— +(22,010) +Currency translation adjustment +— +— +— +— +1,277 +— +1,277 +December 31, 2017 +11,134,714 +$ +11 +$ +(113,081) +$ +(1,366) +$ +(5,138) +$ +— +$ +(119,574) +(1) Common share and par value amounts have been adjusted to give retroactive effect to the 1-for-5 reverse stock split effected on December 20, 2017. +See accompanying notes to consolidated financial statements +F-5 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(Dollars in Thousands) +Year Ended December 31, +2017 +2016 +2015 +Operating activities +Net (loss) income +$ +(22,010) +$ +5,399 +$ +30,863 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Impairments +19,074 +2,700 +— +Depreciation and amortization expense +18,014 +16,927 +15,995 +Stock-based compensation expense +1,989 +3,579 +9,633 +Amortization of debt issuance costs and debt discount +1,947 +1,922 +5,648 +Loss on debt modification and extinguishment +— +— +703 +Loss on sale of a discontinued operation +— +— +1,039 +Excess tax benefits from stock-based compensation +— +(611) +— +Deferred income tax +(9,095) +(1,829) +10,914 +Other, net +(230) +448 +(45) +Changes in operating assets and liabilities: +Accounts receivable +(5,486) +19,847 +(9,556) +Inventories +3,573 +5,793 +(4,416) +Prepaid expenses and other assets +671 +(527) +(714) +Income taxes +(8,489) +5,429 +(4,975) +Accounts payable +5,319 +(6,394) +1,663 +Accrued expenses +(1,512) +3,841 +915 +Deferred revenue and customer deposits +(2,964) +3,037 +699 +Other liabilities +1,626 +397 +(14,444) +Cash provided by operating activities +2,427 +59,958 +43,922 +Investing activities +Acquisitions of plant, equipment and leasehold improvements +(8,790) +(14,294) +(18,670) +Proceeds from sale of a discontinued operation +— +— +5,000 +Cash used in investing activities +(8,790) +(14,294) +(13,670) +Financing activities +Dividends paid on common stock +(7,540) +(7,519) +— +Payment of Sellers' Note +— +(9,000) +— +Common stock repurchased +— +(6,008) +— +Net proceeds from an initial public offering of common stock +— +— +135,304 +Proceeds from First Lien Term Loan +— +— +435,000 +Payments on First Lien Term Loan +— +— +(122,500) +Payments on long-term debt +— +— +(170,929) +Loan issuance costs +— +— +(17,773) +Dividend distribution on Series A Preferred Stock +— +— +(230,315) +Redemption of preferred and common stock +— +— +(58,296) +Proceeds from employee note receivable +— +— +108 +Taxes withheld and paid on stock-based compensation awards +(341) +— +— +Excess tax benefits from stock-based compensation awards +— +611 +— +Cash used in financing activities +(7,881) +(21,916) +(29,401) +Effect of exchange rates on cash +494 +(399) +(186) +Net (decrease) increase in cash and cash equivalents: +(13,750) +23,349 +665 +Cash and cash equivalents, beginning of period +36,955 +13,606 +12,941 +Cash and cash equivalents, end of period +$ +23,205 +$ +36,955 +$ +13,606 +Supplemental disclosures of cash flow information +Cash paid (refunded) during the period for: +Interest +$ +18,466 +$ +15,071 +$ +11,986 +Income taxes +$ +30 +$ +(468) +$ +10,136 +See accompanying notes to consolidated financial statements +F-6 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated) +1. Business +CPI Card Group Inc., formerly known as CPI Holdings I, Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards which the Company defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express, Discover and Interac (in Canada)) in the United States and Canada. The Company also is engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards (primarily in Europe and Canada). +As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be certified by one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers. +The Company’s business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and U.K. Limited. +· +U.S. Debit and Credit Segment. The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands, Private Label Credit Cards, defined as credit cards that an individual merchant issues for exclusive use in its own stores, and that are not issued on the networks of the Payment Cards Brands, and instant issuance systems. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands, and where required by the Company’s customers, certified to be in compliance with the standards of the PCI Security Standards Council. +· +U.S. Prepaid Debit Segment. The U.S. Prepaid Debit segment primarily provides integrated card services to prepaid debit card issuers in the United States. Services provided include tamper-evident security packaging and card personalization and fulfillment and CPI on Demand services, where the Company is able to produce all images, personalized payment cards and related collateral on a one-by-one, on demand, basis for its customers, enabling individualized offerings and reducing waste. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages mentioned above. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. +· +U.K. Limited Segment. The U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment services. Neither of the Company’s operations in this segment is certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. +The Company also has an operation in Ontario, Canada that provides EMV and Prepaid Debit Cards and card services, which is reflected in “Other” . See Note 16 “Segment Reporting”. +The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) under an asset purchase agreement for $5,000 in cash. The Nevada operation primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, the Company’s Consolidated Balance Sheet as of December 31, 2015, and Statements of Operations and Comprehensive Income for the year ended December 31, 2015 +F-7 +Table of Contents +has been reclassified to present the Nevada operation as a discontinued operation. See Note 3 “Discontinued Operation and Disposition”. +In August 2015, the Company completed the shut-down and closure of its operation in Petersfield, United Kingdom. Petersfield primarily produced retail gift cards that are not issued on networks of the Payment Card Brands. In connection with the shut-down and closure of the Petersfield, United Kingdom operation, the Company accrued facility contract termination costs of $681 during the year ended December 31, 2015. +On August 17, 2015, the Company entered into a first lien credit agreement ("First Lien Credit Facility") with a syndicate of lenders providing for a $435,000 first lien term loan facility ("First Lien Term Loan") and a $40,000 revolving credit facility ("Revolving Credit Facility"). The Company used proceeds from the First Lien Credit Facility to pay off the outstanding balance on our previous credit facility of $158,420, and to redeem 62,140 shares of Series A Preferred Stock for an aggregate price of $276,688. See Note 8 “Long-Term Debt and Credit Facility” and Note 10 “Series A Preferred Stock”. +On October 15, 2015, the Company completed its initial public offering (“IPO”) issuing 3,000,000 shares of common stock at a price of $50.00 per share (as adjusted for the one-for-five reverse stock split of our common stock discussed in “Basis of Presentation” below) . The net proceeds from the IPO, after issuance costs, were utilized to (i) redeem all of our remaining Series A Preferred Stock for a total redemption price of $11,877, (ii) repay $112,500 of the amount outstanding under the First Lien Term Loan (as defined herein), and (iii) terminate and settle all outstanding obligations due under the Phantom Stock Plan (as defined herein) of $13, 268 . The proceeds of the IPO were net of deferred offering expenses of $7,196 and are reflected in “Capital deficiency” in the Company’s Consolidated Balance Sheet and Consolidated Statement of Stockholders’ Deficit. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +On December 18, 2017, the Company filed a Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a one-for-five reverse stock split of the Company’s common stock. The reverse stock split became effective on December 20, 2017, at which time each lot of five shares of common stock issued and outstanding automatically and without any further action on the part of our stockholders, converted into and became one share of common stock. In lieu of issuing any fractional shares, any stockholder entitled to receive less than one share of common stock received cash for such stockholder’s fractional share. Share and per share amounts reflect the one-for-five reverse stock split for all periods presented throughout the accompanying consolidated financial statements and notes thereto. +Revenue Recognition +Generally, the Company recognizes revenue related to sales of its products upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectability is reasonably assured. +In certain cases, at the customer’s request, the Company enters into bill-and-hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. The Company recognizes revenue associated with bill-and-hold arrangements when the product is complete and ready to ship, hold criteria have been met, the amount due from the customer is fixed and collectability of the related receivable is reasonably assured. +The company includes gross shipping and handling revenue and costs in net sales and cost of sales respectively. +Multiple-Element Arrangements +The Company enters into warehouse, fulfillment and distribution service agreements where customers engage the Company to store and handle completed cards and packages on their behalf. For the sales arrangements that contain +F-8 +Table of Contents +multiple deliverables, the arrangement is split into separate units of accounting, and individually delivered elements have value to the customer on a standalone basis. When separate units of accounting exist, revenue is allocated to each element based on the Company’s best estimate of competitive market prices. At the point in which completed cards and packages are shipped to the Company’s warehouses or secure vaults, the product is billed and the revenue is recognized in accordance with the Company’s revenue recognition policy. Warehousing services revenue is recognized monthly based on volume and handling requirements; fulfillment services revenue is recognized when the product is handled in the manner specified by the customer for a unit or handling fee. +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it becomes probable collection will not occur. The allowance for bad debt and credit activity for the years ended December 31, 2017 and 2016 is summarized as follows: +Balance as of December 31, 2015 +$ +212 +Bad debt expense +12 +Write-off of uncollectible accounts +(90) +Currency translation adjustments +(8) +Balance as of December 31, 2016 +$ +126 +Bad debt expense +(51) +Write-off of uncollectible accounts +(26) +Currency translation adjustments +4 +Balance as of December 31, 2017 +$ +53 +For the year ended December 31, 2017 one customer represented 12.4% of the Company’s consolidated net sales. For the years ended December 31, 2016 and 2015, the Company did not have sales to a single customer that exceeded 10% of consolidated net sales. +Inventories +Inventories consist of raw materials, work-in-process and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out, specific identification or weighted-average method basis) in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2015-11, Inventory — Simplifying the Measurement of Inventory, which the Company adopted on January 1, 2017. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this standard did not impact the Company’s financial position, results of operations or cash flows. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. +Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such +F-9 +Table of Contents +reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required. +Goodwill and Intangible Assets +Goodwill is not amortized, but instead is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For impairment evaluations, the Company first makes a qualitative assessment with respect to both goodwill and other indefinite-lived intangibles. During 2017, the Company early adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with its annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; discrete and long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +The Company recorded goodwill impairment charges of $19,074 during the year ended December 31, 2017. Refer to Note 6 “Goodwill and Other Intangible Assets” for information. +Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made. +The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Stock-Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the +F-10 +Table of Contents +requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 15 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans. +As a result of the Company’s adoption of ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) as of January 1, 2017, the Company accounts for forfeitures when they occur. The cumulative-effect adjustment to “Accumulated earnings” and “Capital deficiency” in the Company’s Consolidated Balance Sheet was immaterial. In addition, excess tax benefits and deficiencies in connection with the Company’s stock-based compensation plans are recorded in “Income tax benefit” in the Consolidated Statement of Operations and Comprehensive (Loss) Income. The Company elected to present excess tax benefits as an operating activity prospectively in the Consolidated Statement of Cash Flows for the year ended December 31, 2017. As required by ASU 2016-09, the Company classifies payments to tax authorities for shares withheld to satisfy employer income tax obligations in relation to the vesting of stock-based compensation awards as a financing activity in the Consolidated Statement of Cash Flows. +Advertising Costs +Advertising costs are expensed as incurred. Advertising costs during the years ended December 31, 2017, 2016 and 2015 were $783, $ 801, and $764, respectively. +Use of Estimates +Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, valuation allowances for inventories and deferred taxes, debt, uncertain tax positions and stock-based compensation expense. Actual results could differ from those estimates. +Foreign Currency Translation +Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted-average exchange rate for each reporting period for revenue, expenses, gains and losses. Translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss in the accompanying consolidated financial statements. +Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in “Foreign currency gain (loss)” in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income. For the years ended December 31, 2017, 2016 and 2015 there were $560, $(417), and $59 of such foreign currency gains (losses), respectively. +Recently Issued Accounting Pronouncements +The FASB issued ASU 2014-09, Revenue from Contracts with Customers , in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09, as amended, as of January 1, 2018 using the modified retrospective transition method, with the cumulative effect of initial adoption recognized at the date of initial application. +The Company is finalizing the analysis of the effects of ASU 2014-09 on the consolidated financial statements, and subject to completion of this analysis, the Company expects to record a cumulative effective of adoption adjustment as of January 1, 2018 to increase accumulated earnings by a range of $3,000 to $4,000, reflecting the earnings the Company would have recognized under ASU 2014-09 if applied as of December 31, 2017. The Company does not +F-11 +Table of Contents +expect the application of ASU 2014-09 will have a material effect on the Consolidated Statement of Operations. Under the new guidance, the Company expects to recognize certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use, and the Company has the right to payment for work completed on such items. This will accelerate the timing of revenue recognition for these arrangements, as revenue will be recognized as goods are produced rather than upon shipment or delivery of goods. In addition to accelerating the timing of recording revenue, the Company expects corresponding decreases in deferred revenue, work in process and finished goods inventories, and an increase to accounts receivable. The Company is in the process of implementing and refining the required changes to its business and accounting processes, and internal controls to support recognition and disclosures under the new standard. +In February 2016, the FASB issued ASU 2016-02, Leases , which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements. +3. Discontinued Operation and Disposition +On January 12, 2015, the Company sold its Nevada non-secure operation under an asset purchase agreement for $5,000 in cash. The Nevada operation was primarily engaged in the design, production, data personalization, packaging and daily fulfillment of retail gift and loyalty cards for customers in the United States and was not certified by any of the Payment Card Brands. At the date of sale, the net carrying values of the assets classified as a discontinued operation included inventory and plant, equipment and leasehold improvements of $3,129 and $2,910, respectively. For the year ended December 31, 2015, the Company recognized a gain on the sale of the discontinued operation of $208, which is included in “Gain on sale of a discontinued operation”, net of an income tax benefit of $1,247, in the Company’s Consolidated Statement of Operations and Comprehensive (Loss) Income. +During the year ended December 31, 2015, the Nevada operation recognized a loss of $606 as included in “Loss from a discontinued operation, net of taxes” in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. This amount is net of an income tax benefit of $404 for the year ended December 31, 2015. There was no financial impact related to Nevada for the years ended December 31, 2017 and 2016. +After the Nevada Sale, CPI retained no continuing involvement in the Nevada operations other than a 180 day transition of services agreement, which expired on July 11, 2015. As a result of the Nevada Sale, the Company made a tax deduction of $32,128 related to the tax deductible goodwill and intangible assets of the Nevada operations, of which $4,190 of the tax deductible goodwill resulted in the recognition of an income tax benefit of $1,510 during the year ended December 31, 2015. +4. Inventories +Inventories are summarized below: +December 31, +2017 +2016 +Raw materials +$ +6,498 +$ +8,206 +Work-in-process +6,557 +6,340 +Finished goods +3,182 +4,823 +$ +16,237 +$ +19,369 +F-12 +Table of Contents +5. Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements consist of the following: +December 31, +2017 +2016 +Buildings +$ +2,318 +$ +2,077 +Machinery and equipment +62,318 +59,464 +Furniture, fixtures and computer equipment +7,585 +6,634 +Leasehold improvements +19,754 +18,655 +Construction in progress +1,980 +1,136 +93,955 +87,966 +Less accumulated depreciation and amortization +(44,655) +(34,547) +$ +49,300 +$ +53,419 +Amounts recorded for the depreciation of plant, equipment and leasehold improvements were $13,112, $12,295, and $11,389 for the years ended December 31, 2017, 2016 and 2015, respectively. +There were no impairments of the Company’s plant, equipment, and leasehold improvement assets for the years ended December 31, 2017, 2016, and 2015. +6. Goodwill and Other Intangible Assets +The Company’s goodwill by reportable segment at December 31, 2017 and 2016 is as follows: +December 31, +2017 +2016 +U.S. Debit and Credit +$ +47,150 +$ +64,330 +U.K. Limited +6,461 +5,908 +Other +— +1,758 +$ +53,611 +$ +71,996 +Goodwill activity is summarized as follows: +Balance as of January 1, 2016 +$ +73,123 +Currency translation +(1,127) +Balance as of December 31, 2016 +$ +71,996 +Currency translation +689 +Impairments +(19,074) +Balance as of December 31, 2017 +$ +53,611 +The Company completed its goodwill impairment testing as of October 1, 2017, and recorded impairment charges of $19,074, of which $17,181 related to U.S. Debit and Credit resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1,893 relates to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. The Company determined the fair value of the reporting units primarily based on an income approach, using the present value of future discounted cash flows of the reporting unit. This approach includes significant estimates of the reporting unit’s weighted average cost of capital, financial forecasts developed by management, and long-term rate of growth and profitability. The market approach was also considered, with fair value determined by applying pricing multiplies derived from publicly-traded companies that are comparable to the reporting unit. There were no goodwill impairments recognized during the years ended December 31, 2016 and 2015. +During the year ended December 31, 2016, the Company recognized an intangible asset impairment charge of $2,700 related to a trademark acquired in the EFT Source acquisition. The impairment was a result of the Company’s plans to discontinue its use of the trademark in its sales, marketing and other business practices. Accordingly, the trademark was written down to its fair value of zero. Refer to Note 7 “Fair Value of Financial Instruments” for further definition of valuation inputs. The impaired asset is included in the U.S. Debit and Credit reportable segment. +F-13 +Table of Contents +Subsequent to this impairment, the Company evaluated the future utilization of its trademarks and updated its estimate to amortize these assets over lives ranging from 7.5 to 10 years. As a result, the Company has no remaining indefinite lived intangible assets as of December 31, 2017. There was no impairment of indefinite-lived intangible assets for the year ended December 31, 2015. +CPI’s amortizable intangible assets consist of customer relationships, technology and software, trademarks and non-compete agreements. Total intangible assets are being amortized over a weighted-average useful life of 15.6 years. Intangible amortization expense totaled $4,902, $4,632, and $4,577, for the years ended December 31, 2017, 2016 and 2015, respectively. During the years ended December 31, 2017, 2016 and 2015, there were no material impairments of the Company’s amortizable intangible assets. +Intangible assets consist of the following: +December 31, 2017 +December 31, 2016 +Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +12 to 20 +$ +58,895 +(24,373) +34,522 +$ +58,994 +$ +(20,972) +$ +38,022 +Technology and software +7 to 10 +7,101 +(3,095) +4,006 +7,101 +(2,167) +4,934 +Trademarks +7.5 to 10 +3,330 +(487) +2,843 +3,330 +(98) +3,232 +Noncompete agreements +5 to 8 +491 +(390) +101 +491 +(331) +160 +Intangible assets subject to amortization +$ +69,817 +$ +(28,345) +$ +41,472 +$ +69,916 +$ +(23,568) +$ +46,348 +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2017 is as follows: +2018 +$ +4,880 +2019 +4,860 +2020 +4,820 +2021 +4,577 +2022 +4,091 +Thereafter +18,244 +$ +41,472 +7. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +· +Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +· +Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +· +Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +F-14 +Table of Contents +The Company’s financial assets and liabilities that are not required to be remeasured at fair value in the Consolidated Balance Sheets are as follows: +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2017 +December 31, +December 31, +(Using Fair Value Hierarchy) +2017 +2017 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +228,125 +$ +— +$ +228,125 +$ +— +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2016 +December 31, +December 31, +(Using Fair Value Hierarchy) +2016 +2016 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +290,625 +$ +— +$ +290,625 +$ +— +The aggregate fair value of the Company’s First Lien Term Loan, as defined in Note 8, “Long-Term Debt and Credit Facility,” was based on bank quotes. +The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities. +Nonrecurring fair value measurements include the Company’s goodwill and intangible asset impairments recognized during the year ended December 31, 2017 and the trademark intangible asset impairment recognized during the year ended December 31, 2016 as determined based on unobservable Level 3 inputs. Refer to Note 6, “Goodwill and Other Intangible Assets.” +8. Long-Term Debt and Credit Facility +Long-term debt consists of the following: +Interest +December 31, +December 31, +Rate +2017 +2016 +First Lien Term Loan (a) +5.96% +$ +312,500 +$ +312,500 +Unamortized discount +(3,122) +(3,795) +Unamortized deferred financing costs +(5,509) +(6,783) +Total long-term debt +303,869 +301,922 +Less current maturities +- +- +Long-term debt, net of current maturities +$ +303,869 +$ +301,922 +(a) +Interest rate on December 31, 2017 +First Lien Credit Facility +On August 17, 2015, the Company entered into the First Lien Credit Facility with a syndicate of lenders providing for the $435,000 First Lien Term Loan and the $40,000 Revolving Credit Facility. The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively. +The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company's assets constituting equipment, inventory, receivables, cash and other tangible and intangible property. +Interest rates under the First Lien Credit Facility are based, at the Company's election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50% or a base rate plus a margin of 3.50%. +The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company's assets and affiliate transactions. The First Lien Credit Facility also contains a requirement that, as of the last +F-15 +Table of Contents +day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage not in excess of 7.0 times Adjusted EBITDA, as defined in the agreement. As of December 31, 2017, the Company was in compliance with all covenants under the First Lien Credit Facility. +The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. The Company does not have a required excess cash flow payment related to 2017 . +In accordance with the terms of the First Lien Credit Facility, the Company repaid $112,500 of the First Lien Term Loan on October 15, 2015 in conjunction with the completion of its initial public offering, and an additional $10,000 during the fourth quarter of 2015. See Note 1 “Business”. The Company recognized additional interest expense of $4,687 during the year ended December 31, 2015 related to accelerated amortization of deferred financing costs and discount in connection with these repayments. +As of December 31, 2017, the Company did not have any outstanding amounts under the Revolving Credit Facility, and has $19,950 available for borrowing. Additional amounts may be available for borrowing under the term of the Revolving Credit Facility, up to the full $40,000, to the extent the Company’s net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The Company has one outstanding letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the applicable margin, which was 4.5% as of December 31, 2017 and December 31, 2016, in addition to a fronting fee of 0.125% per annum. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines. The Company has accrued interest of $4,296 and $3,858, recorded within “Accrued expenses” on the Consolidated Balance Sheets as of December 31, 2017, and 2016, respectively. +Sellers Note +The Company entered into a subordinated, unsecured promissory note for $9,000 with certain sellers of EFT Source as part of the EFT Source acquisition, which was fully repaid on September 2, 2016. Interest on the Sellers Note accrued at 5.0% per annum and was paid quarterly. +Deferred Financing Costs +Certain costs incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. +F-16 +Table of Contents +9. Income Taxes +Income tax (benefit) expense from continuing operations and effective income tax rates consist of the following: +December 31, +2017 +2016 +2015 +Current taxes: +Domestic +$ +(7,376) +$ +4,944 +$ +16,036 +Foreign +99 +27 +254 +(7,277) +4,971 +16,290 +Deferred taxes: +Domestic +(9,161) +(1,830) +1,656 +Foreign +66 +1 +(100) +(9,095) +(1,829) +1,556 +Income tax (benefit) expense +$ +(16,372) +$ +3,142 +$ +17,846 +(Loss) income before income taxes +Domestic +$ +(36,646) +$ +7,437 +$ +50,692 +Foreign +(1,736) +1,104 +(1,585) +Total +$ +(38,382) +$ +8,541 +$ +49,107 +Effective income tax rate +42.7 +% +36.8 +% +36.3 +% +The effective income tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2017 +2016 +2015 +Tax at federal statutory rate +35.0 +% +35.0 +% +35.0 +% +State income taxes +0.5 +6.3 +2.0 +Foreign taxes +0.3 +(1.9) +0.3 +Deferred tax impact of enacted tax rate and law changes +18.4 +— +— +Goodwill impairments +(17.4) +— +— +Tax credits +10.8 +— +— +Unrecognized tax benefits +(3.2) +— +— +Other +(1.7) +(2.6) +(1.0) +Effective income tax rate +42.7 +% +36.8 +% +36.3 +% +F-17 +Table of Contents +The components of the deferred tax assets and liabilities are as follows: +December 31, +2017 +2016 +Deferred tax assets: +Accrued expense +$ +744 +$ +1,089 +Unrealized foreign exchange loss +647 +1,426 +Net operating loss carryforward +2,227 +3,066 +Deferred financing costs +707 +1,355 +Stock compensation +679 +1,166 +Tax credit carryforward +420 +— +Other +868 +555 +Total gross deferred tax assets +6,292 +8,657 +Valuation allowance +(4,688) +(4,930) +Net deferred tax assets +1,604 +3,727 +Deferred tax liabilities: +Plant, equipment and leasehold improvements +(2,819) +(6,393) +Intangible assets +(10,144) +(17,159) +Prepaid expenses +(927) +(1,436) +Total gross deferred tax liabilities +(13,890) +(24,988) +Net deferred tax liabilities +$ +(12,286) +$ +(21,261) +The net deferred tax liabilities are reflected in the consolidated balance sheets as follows: +December 31, +2017 +2016 +Long-term deferred tax liabilities +$ +(12,286) +$ +(21,261) +The net change in the valuation allowance during the year ended December 31, 2017 was a decrease of $242 and related to foreign currency exchange rate fluctuations, changes in net operating losses of foreign locations and state research and development credits carried forward. +The Company has potential tax benefits associated with $8,089 of gross foreign operating loss carryforwards, which expire at various dates from 2024 through 2032. Due to the uncertainty of being able to recognize these loss carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit. +The Company has potential tax benefits associated with state research and development tax credit carryforwards as of December 31, 2017 of $584, which will expire at various dates between 2029 and 2032. Due to the uncertainty of being able to recognize these credit carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit. +At December 31, 2017, no provision has been made for U.S. federal and state taxes on cumulative foreign earnings from CPI Card Group-Europe Limited operations of approximately $4,800, which are expected to be indefinitely reinvested outside of the U.S. The U.S. deferred tax liability associated with indefinitely reinvested earnings and profits is not material. +F-18 +Table of Contents +2017 Tax Reform +On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation that includes significant changes to taxation of business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) elimination of deduction for income attributable to domestic production activities and (iv) a partial shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with a transitional rule that taxes certain historic foreign accumulated earnings and certain rules that aim to prevent erosion of U.S. income tax base). In conjunction with the Tax Act’s reduction of the U.S. federal tax rate from 35.0% to 21.0%, the Company accrued a $7,057 tax benefit during the year ended December 31, 2017 related to the net change in deferred tax liabilities. +Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118, requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Accordingly, the Company is currently estimating a zero tax liability on foreign unremitted earnings due to a net earnings and profits (“E&P”) deficit on accumulated post-1986 deferred foreign income. Therefore, the Company has not accrued any amount of tax expense for the Tax Act’s one-time transition tax on the foreign subsidiaries’ accumulated, unremitted earnings going back to 1986 for the year ended December 31, 2017. The Company will continue to analyze historical E&P on accumulated post-1986 deferred foreign income and will record any resulting tax adjustment during 2018. All other accounting as required by the Tax Act as of December 31, 2017 is complete. +Unrecognized Tax Benefits +Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Income taxes receivable” and “Deferred income taxes” in the Company’s consolidated balance sheets. The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination. +Balance as of December 31, 2016 +$ +— +Increase related to current year tax position +154 +Increase related to prior year tax position +1,058 +Decrease related to settlements with tax authorities +— +Lapse of statute of limitations +— +Balance as of December 31, 2017 +$ +1,212 +As of December 31, 2017, the total amount of tax contingency reserves was $1,212, that if recognized, would impact the Company’s effective tax rate, prior to the impact of any related valuation allowance. The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits as of and for the year ended December 31, 2017 was not material. The Company had no uncertain tax positions as of December 31, 2016 and 2015. Amounts recorded for unrecognized tax benefits represent management estimates, and actual results could differ which would impact the Company’s effective tax rate. +It is reasonably possible that $723 of the Company’s unrecognized tax benefits and associated interest and penalties, related to state income tax matters, will be paid or favorably settled in the next twelve months. +The Company is generally subject to potential federal and state examinations for the tax years after December 31, 2013 for federal purposes and December 31, 2012 for state purposes. The Company’s locations in the United Kingdom and Canada are subject to examinations for tax years after December 31, 2014 and December 31, 2012, respectively. +F-19 +Table of Contents +10. Series A Preferred Stock +There were no outstanding shares of Series A Preferred Stock as of December 31, 2017 and 2016. +During the year ended December 31, 2015, the Company redeemed a total of 64,809 shares of Series A Preferred Stock at prices ranging between $3,950.33 and $4,610.68 per share, including the redemption of 62,140 shares of the Series A Preferred Stock for $276,688, or $4,446.70 per share, on August 17, 2015 with proceeds from the Company’s First Lien Credit Facility (see Note 8 “Long-Term Debt and Credit Facility”), and the redemption of 2,576 shares of the Series A Preferred Stock for $11,877, or $4,610.68 per share, using proceeds from the Company’s IPO (see Note 1 “Business”). Of the $288,565 redemption amount during the year ended December 31, 2015, $58,250 was treated as a return of capital and $230,315 was treated as a dividend. +11. Stockholders’ Equity +Common Stock +Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. +On December 20, 2017, the Company effected a one-for-five reverse stock split of its common stock, whereby each lot of five shares of common stock issued and outstanding immediately prior to the reverse stock split was converted into and became one share of common stock. In lieu of issuing any fractional shares, any stockholder entitled to receive less than one share of common stock received cash for such stockholder’s fractional share. Share and per share amounts reflect the one-for-five reverse stock split for all periods presented in this Annual Report on Form 10-K, including the accompanying Consolidated Financial Statements and these notes . +On September 3, 2015, the Company approved a 22-for-1 stock split of its common stock and increased the number of authorized shares of common stock to 100,000,000. Upon the effective date of the stock split, each outstanding share of common stock and restricted common stock was divided into 22 shares of common stock or restricted common stock, as applicable. Shares of common stock available for issuance under the Option Plan (as hereinafter defined) were increased accordingly. +During the year ended December 31, 2017, the Company paid dividends of $7,540, representing $0.675 per share. During August 2017, the Company discontinued its quarterly dividend of $0.225 per share. During the year ended December 31, 2016, the Company paid dividends of $7,519, representing $0.675 per share. Additionally, on November 9, 2016, the Board of Directors approved a dividend of $0.225 per share, payable on January 12, 2017 to stockholders of record as of the close of business on December 16, 2016. The accrued dividend of $2,491 is reflected in “Accrued expenses” in the Consolidated Balance Sheet as of December 31, 2016. For the year ended December 31, 2016, the Company declared aggregate dividends of $0.90 per share. +On May 11, 2016, the Board of Directors approved a stock repurchase program that authorized repurchases of the Company’s common stock up to $20,000. The stock repurchase program expired by its terms during May 2017. During the year ended December 31, 2017, there were no common shares repurchased. During the year ended December 31, 2016, there were 287,883 common shares repurchased for $6,008, at an average cost of $20.85 per share. The repurchases have been accounted for as a share retirement. +12. (Loss) Earnings per Share +Basic or diluted (loss) earnings per share is computed by dividing net earnings or loss by the weighted-average number of ordinary shares outstanding during the period. +F-20 +Table of Contents +The following table sets forth the computation of basic and diluted (loss) earnings per share, giving retroactive effect for the one-for-five reverse stock split effective December 20, 2017, attributable to continuing and discontinued operations: +December 31, +2017 +2016 +2015 +Numerator: +Net (loss) income from continuing operations +$ +(22,010) +$ +5,399 +$ +31,261 +Preferred stock dividends +— +— +(32,548) +(Loss) income from continuing operations attributable to common stockholders +(22,010) +5,399 +(1,287) +Loss from a discontinued operation, net of taxes +— +— +(398) +Net (loss) income attributable to common stockholders +$ +(22,010) +$ +5,399 +$ +(1,685) +Denominator: +Basic EPS—weighted average common shares outstanding +11,117,454 +11,165,445 +8,963,223 +Diluted EPS—weighted average common shares outstanding +11,117,454 +11,240,720 +8,963,223 +Basic and Diluted EPS: +(Loss) earnings per share from continuing operations +$ +(1.98) +$ +0.48 +$ +(0.15) +Loss from a discontinued operation, net of taxes +— +— +(0.04) +(Loss) earnings per share +$ +(1.98) +$ +0.48 +$ +(0.19) +The potentially dilutive effect of 993,587, 265,563, and 251,490, stock options and restricted stock units as of December 31, 2017, 2016, and 2015, respectively, has been excluded from the computation of diluted earnings per share as their inclusion would be anti-dilutive. The cumulative dividends in arrears related to Series A Preferred Stock were paid in conjunction with the Company’s IPO. See Note 10, “Series A Preferred Stock.” +13. Commitments and Contingencies +Commitments +The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2018 and 2024 and contain various provisions for rental adjustments and renewals. All of these leases require the Company to pay property taxes, insurance and normal maintenance costs. +During the normal course of business, the Company also enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The 2019 purchase obligation in the table below relates to a single contract for the purchase of materials. +Future cash payments with respect to operating leases and purchase obligations as of December 31, 2017 are as follows: +Operating +Purchase +Leases +Obligations +2018 +$ +3,613 +4,793 +2019 +2,823 +9,720 +2020 +2,568 +2021 +2,291 +2022 +1,008 +Thereafter +1,059 +Total +$ +13,362 +$ +14,513 +The Company incurred rent expense under non-cancellable operating leases during the years ended December 31, 2017, 2016 and 2015, totaling $3,803, 3,467, and $3,518, respectively. +Asset retirement obligations relate to legal obligations associated with the removal of all leasehold improvements at the end of the lease term. The Company records all asset retirement obligations, which primarily relate to “make-good” clauses in operating leases, for its leased property containing leasehold improvements. The liability is accreted through charges to operating expenses. If the asset retirement obligation is settled for an amount other than the +F-21 +Table of Contents +carrying amount of the liability, the Company recognizes a gain or loss on settlement. The Company’s accretion expense incurred during the years ended December 31, 2017, 2016 and 2015 was immaterial. As of December 31, 2017 and 2016, the Company’s asset retirement obligations included in “Other long-term liabilities” in the Consolidated Balance Sheets were $620 and $602, respectively. +Contingencies +In Re CPI Card Group Inc. Securities Litigation , Case No. 1:16-CV-04531 (S.D.N.Y.) +On June 15, 2016, two purported CPI stockholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc.,in the United States District Court for the Southern District of New York against CPI, certain of its former officers and current and former directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 initial public offering (“IPO”). The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”) and seek, among other things, damages and costs. In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ended December 31, 2015. The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. +On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (the “PSLRA”). On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in the EMV market. +On November 16, 2016, the Company filed a motion to dismiss the amended complaint, which was denied by the court on October 30, 2017. +The Company believes these claims are without merit and intends to defend the actions vigorously. Given the current stage of these matters, the range of any potential loss is not probable or estimable and no accrual has been recognized as of December 31, 2017. +Heckermann v. Montross, et al. , Case No. 1:17-CV-01673 (D. Del.) +On November 20, 2017, a purported CPI stockholder filed a shareholder derivative complaint in the United States District Court for the District of Delaware against certain of CPI’s former officers and current and former directors, along with the sponsors of CPI’s October 2015 IPO (with CPI named as the nominal defendant). The derivative complaint is based principally on the same set of factual allegations underlying In Re CPI Card Group Inc. Securities Litigation , and asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, and for, inter alia , purported breaches of fiduciary duties, unjust enrichment and waste of corporate assets. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements and seeks, among other things, injunctive relief, damages and costs. +The Company believes these claims are without merit and intends to defend the action vigorously. Given the current stage of this matter, the range of any potential loss is not probable or estimable and no accrual has been recognized as of December 31, 2017. +Gemalto S.A. v. CPI Card Group Inc. (2 cases) +First case. This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The complaint alleged that the Company infringed a +F-22 +Table of Contents +now-expired Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. The Company successfully moved to transfer the lawsuit to the District of Colorado, answered the complaint, and filed counterclaims that the asserted patent was invalid and unenforceable, and that Gemalto’s lawsuit was a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims in February 2016. In March 2016, Gemalto provided specific infringement contentions, which named CPI products that incorporate microchips supplied by two specific vendors. +On May 31, 2016, the Company filed an Inter Partes Review ("IPR") petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. On July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The petition was granted as to all of the independent claims of Gemalto’s patent on November 9, 2016. The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The PTAB heard oral argument on the IPR on August 4, 2017. +Second case. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleged that the Company infringed a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. Gemalto provided initial infringement contentions to the Company in July 2016, and amended its contentions in October 2016. During May 2017, the Company filed an IPR petition with the PTAB, seeking re-examination of Gemalto’s asserted patent. +On September 28, 2017, the Company reached a settlement with Gemalto to resolve both lawsuits. Under the terms of the settlement, the Company made a one-time payment of $750 in the fourth quarter of 2017, which is recorded in “Selling, General and Administrative” expenses in the Consolidated Statement of Operations during the during year ended December 31, 2017. The settlement resulted in the dismissal of both lawsuits with prejudice, and also includes a mutual covenant not to sue for a period of 18 months. +In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of such matters will not have a material adverse effect on our business, financial condition or results of operations. +14. Employee Benefit Plan +The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment accounts. The Company matches 100% of the participant’s first 3% of deferrals and 50% matching on each of the 4 th and 5 th percent contributed by the participant. The Company’s portion is 100% vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $1,236, $1,382, and $1,049, for the years ended December 31, 2017, 2016 and 2015, respectively. +15. Stock Based Compensation +CPI Card Group Inc. Omnibus Incentive Plan +On December 20, 2017, the Company effected a one-for-five reverse stock split of its common stock, whereby each lot of five shares of common stock issued and outstanding immediately prior to the reverse stock split was converted into and became one share of common stock. Share and per share amounts below reflect the one-for-five reverse stock split for all periods presented. +During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company had reserved 800,000 shares of common stock for issuance under the Omnibus Plan. Effective September 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 400,000. The increase was made effective in the fourth quarter of +F-23 +Table of Contents +2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000 shares of common stock for issuance. As of December 31, 2017, there were 175,134 shares available for grant under the Omnibus Plan. +During the year ended December 31, 2017, the Company granted awards of non-qualified stock options for 713,075 shares of common stock. During the third quarter of 2017, the Company granted stock option awards in lieu of the regular cycle of Omnibus Plan awards that the Company would have otherwise made in the first quarter of 2018, and also in conjunction with the appointment of the Company’s President and Chief Executive Officer. All stock option grants have a 10-year term, and will generally vest ratably over a three-year period beginning on the first anniversary of the grant date. +The following is a summary of the activity in outstanding stock options under the Omnibus Plan: +Weighted- +Weighted- +Average +Average +Remaining +Exercise +Contractual Term +Options +Price +(in Years) +Outstanding as of December 31, 2016 +287,500 +$ +42.86 +Granted +713,075 +8.85 +Forfeited +(63,265) +40.96 +Outstanding as of December 31, 2017 +937,310 +$ +17.11 +9.20 +Options vested and exercisable as of December 31, 2017 +60,407 +47.91 +7.89 +Options vested and expected to vest as of December 31, 2017 +937,310 +17.11 +9.20 +The following is a summary of the activity in non-vested stock options under the Omnibus Plan: +Weighted- +Average +Grant Date +Number +Fair Value +Non-vested as of December 31, 2016 +287,500 +$ +11.77 +Granted +713,075 +2.43 +Forfeited +(63,265) +11.55 +Vested +(60,407) +13.35 +Non-vested as of December 31, 2017 +876,903 +$ +4.08 +Unvested options as of December 31, 2017 vest as follows: +2018 +313,818 +2019 +307,637 +2020 +253,022 +2021 +2,426 +Total unvested options as of December 31, 2017 +876,903 +F-24 +Table of Contents +Stock options were granted under the Omnibus Plan at various times during the years ended December 31, 2017, 2016, and 2015. The fair value of stock option awards was determined at the date of grant using either a Black-Scholes option-pricing model, or a Monte Carlo simulation, with the following weighted-average assumptions: +Year ended December 31, +2017 +2016 +2015 +Expected term in years +6.0 +6.3 +6.5 +Volatility +31.9 +% +35.4 +% +36.7 +% +Risk-free interest rate +2.0 +% +1.5 +% +1.8 +% +Dividend yield (1) +0.9 +% +3.3 +% +1.3 +% +(1) +Represents the weighted-average dividend yield for grants made during the year ended December 31, 2017. The Company discontinued its quarterly dividend program during August 2017. +Expected term –For option grants valued using a Black-Scholes option-pricing model, the Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. Certain stock option awards granted in 2016 with an exercise price of $50 per share were valued using a Monte Carlo simulation. The Monte Carlo model simulates many future stock price paths, and assumes the exercise of vested options will occur uniformly once the options are projected to be in-the money. +Volatility – The expected volatility percentage was based on a peer group average historical volatility over the expected option term. The peer group was based on financial technology companies that completed an initial public offering of common stock within the last 10 years. +Risk-free interest rate – The risk-free interest rate was determined by using the United States Treasury rate for the period that coincided with the expected option term. +Dividend yield – The estimated dividend yield is based on the Company’s recent historical dividend practice and the market value of its common stock. +The weighted average grant date fair value of options granted is as follows: +Year Ended December 31, +2017 +2016 +2015 +Weighted Average Grant Date Fair Value of Options Granted +$ +2.43 +$ +7.12 +$ +17.03 +The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2017 under the Omnibus Plan: +Weighted- +Average +Grant Date +Shares +Fair Value +Outstanding as of December 31, 2016 +54,075 +$ +35.67 +Granted +47,870 +15.55 +Vested +(50,604) +36.21 +Forfeited +(1,664) +21.75 +Outstanding as of December 31, 2017 +49,677 +$ +16.20 +During the year ended December 31, 2017, the Company granted awards of restricted stock units for 47,870 shares of common stock. During the year ended December 31, 2016, the Company granted awards of restricted stock +F-25 +Table of Contents +units for 61,046 shares of common stock at a weighted-average grant-date fair value of $36.10. There were no awards of restricted stock units granted in 2015. The restricted stock unit awards contain conditions associated with continued employment or service, and generally vest one year from the date of grant. On the vesting dates, shares of common stock will be issued to the award recipients. +The following table summarizes the changes in the number of outstanding cash performance units for the year ended December 31, 2017: +Weighted- +Average +Grant Date +Shares +Fair Value +Outstanding as of December 31, 2016 +— +$ +— +Granted +932,837 +0.71 +Vested +— +Forfeited +(109,922) +0.71 +Outstanding as of December 31, 2017 +822,915 +$ +0.71 +During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units with a grant date fair value of $663. These awards will settle in cash in three annual payments on the first, second and third anniversaries of the date of grant. The cash performance units are based on the performance of the Company’s stock, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant. The cash performance units were valued using a Monte Carlo simulation. The Monte Carlo model used the following valuation assumptions based on the 3-year term of the awards: leverage adjusted peer volatility of 48%, risk free rate of 1.5%, and a dividend yield of 4.0%, which was based on the Company’s dividend practice in March 2017 when the awards were granted. The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and remeasured to fair value at the end of each reporting period. As of December 31, 2017, the Company recognized a liability of $106 in “Accrued expenses” and $89 in “Other long-term liabilities” in the Consolidated Balance Sheet for unsettled cash performance units. +Compensation expense for the Omnibus Plan for the years ended December 31, 2017, 2016, and 2015 was $2,360, $2,770, and $239, respectively. As of December 31, 2017, the total unrecognized compensation expense related to unvested options, restricted stock units, and cash performance unit awards under the Omnibus Plan was $2,211, which the Company expects to recognize over an estimated weighted average period of 1.7 years. +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan +In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted. +As a result of the Company’s adoption of its Omnibus Plan, as further described above, no further awards will be made under the Option Plan. The outstanding stock options under the Option Plan are non-qualified, have a 10-year life and are fully vested as of December 31, 2017. +F-26 +Table of Contents +The following table summarizes the changes in the number of outstanding stock options under the Option Plan for the year ended December 31, 2017: +Weighted- +Average +Remaining +Weighted- Average +Contractual Term +Options +Exercise Price +(in Years) +Outstanding and Exercisable as of December 31, 2016 +43,266 +$ +0.002 +Granted +— +— +Exercised +(36,666) +0.002 +Forfeited +— +— +Outstanding and Exercisable as of December 31, 2017 +6,600 +$ +0.002 +5.49 +Compensation expense and unrecorded compensation expense related to options previously granted under the Option Plan, for the years ended December 31, 2017, 2016 and 2015, were de minimis. +Other Stock-Based Compensation Awards +During June 2015, the Company issued 38,332 restricted shares of common stock to certain executives of the Company at a weighted-average grant-date fair value of $47.40. There are no outstanding unvested restricted shares of common stock as of December 31, 2017. The terms of the unvested restricted shares of common stock provide voting and regular dividend rights to the holders of the restricted shares of common stock, and accordingly are included in weighted-average shares outstanding in the Company’s basic earnings per share calculation. See Note 12 “Earnings per Share”. +During the year ended December 31, 2017, of the remaining 18,972 of unvested restricted stock awards that were outstanding, 9,486 shares vested, and the remaining 9,486 shares were forfeited. The executive who held the remaining 18,972 unvested restricted shares changed employment status to a consultant during the first quarter of 2017, and accordingly, the Company remeasured the awards on the date of the change in employment status and reduced stock-based compensation expense by $143. Compensation expense related to these awards for the years ended December 31, 2017, 2016, and 2015, was $(371), $809, and $646, respectively. +16. Segment Reporting +The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, EBITDA (as defined below), or total assets or subsidiaries which the Company believes information about the segment would be useful to the readers of the financial statements from a qualitative perspective. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures such as revenue and EBITDA. +EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments. +As of December 31, 2017, the Company’s reportable segments are as follows: +· +U.S. Debit and Credit +F-27 +Table of Contents +· +U.S. Prepaid Debit +· +U.K. Limited +The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands, instant issuance systems, and private label credit cards that are not issued on the networks of the Payment Cards Brands (including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards). This segment also provides a variety of integrated card services, including card personalization and fulfillment and instant issuance. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands and, where required by the Company’s customers, certified to be in compliance with the standards of the PCI Security Standards Council. These operating segments have been aggregated into a single reportable segment due to similarities in the nature of the products and services sold by these subsidiaries, a common customer base, the substantial degree of integration and redundancy across the segments, and utilization of centrally shared sales, marketing, quality and planning departments. Separate information about these segments would not be useful to the readers of the financial statements. +The U.S. Prepaid Debit segment primarily provides integrated card services to prepaid debit card issuers in the United States. Services provided include tamper-evident security packaging, card personalization and fulfillment and CPI on Demand services, where the Company is able to produce all images, personalized payment cards and related collateral on a one-by-one, on demand, basis for its customers, enabling individualized offerings and reducing waste. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages mentioned above. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. +The U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment services. The U.K. Limited segment operations are not certified by the Payment Card Brands, nor are they PCI certified, but are certified to be in compliance with ISO 27001 standards. +The “Other” category includes the Company’s corporate activities and less significant operating segments that derive their revenue from the production of Financial Payment Cards and retail gift cards in Canada (CPI—Canada) and, through 2015, the U.K. (CPI—Petersfield). For additional information regarding the Company’s decision to shut-down the CPI—Petersfield facility during the third quarter of 2015, see Note 1 “Business.” +Performance Measures of Reportable Segments +Revenue and EBITDA from continuing operations of the Company’s reportable segments for the years ended December 31, 2017, 2016 and 2015 were as follows: +Revenue +EBITDA +December 31, +December 31, +2017 +2016 +2015 +2017 +2016 +2015 +U.S. Debit and Credit +$ +158,899 +$ +208,795 +$ +263,668 +$ +11,469 +$ +52,090 +$ +78,981 +U.S. Prepaid Debit +61,132 +60,065 +65,878 +19,244 +18,646 +22,993 +U.K Limited +31,119 +29,689 +34,361 +2,305 +2,839 +3,572 +Other +11,049 +13,110 +17,420 +(32,538) +(28,063) +(22,145) +Intersegment eliminations (a) +(7,337) +(2,959) +(7,217) +— +— +— +Total: +$ +254,862 +$ +308,700 +$ +374,110 +$ +480 +$ +45,512 +$ +83,401 +(a) +Amounts include the revenue from sales between segments and are eliminated upon consolidation. +F-28 +Table of Contents +The following table provides a reconciliation of total segment EBITDA from continuing operations to “Net (loss) income from continuing operations” for the years ended December 31, 2017, 2016 and 2015: +December 31, +2017 +2016 +2015 +Total segment EBITDA from continuing operations +$ +480 +$ +45,512 +$ +83,401 +Interest, net +(20,848) +(20,044) +(18,328) +Income tax benefit (expense) +16,372 +(3,142) +(17,846) +Depreciation and amortization +(18,014) +(16,927) +(15,966) +Net (loss) income from continuing operations +$ +(22,010) +$ +5,399 +$ +31,261 +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2017 and 2016 were as follows: +December 31, +2017 +2016 +U.S. Debit and Credit +$ +164,397 +$ +205,417 +U.S. Prepaid Debit +33,130 +23,509 +U.K. Limited +22,640 +26,060 +Other +13,838 +9,434 +Total assets: +$ +234,005 +$ +264,420 +Plant, Equipment and Leasehold Improvement Additions of Geographic Locations +Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the years ended December 31, 2017, 2016 and 2015 were as follows: +December 31, +2017 +2016 +2015 +U.S. +$ +7,164 +$ +13,169 +$ +19,129 +Canada +172 +263 +275 +Total North America +7,336 +13,432 +19,404 +U.K. +1,540 +1,447 +659 +Total plant, equipment and leasehold improvement additions +$ +8,876 +$ +14,879 +$ +15,568 +Net Sales of Geographic Locations +Net sales of the Company’s geographic locations for the years ended December 31, 2017, 2016 and 2015 were as follows: +December 31, +2017 +2016 +2015 +U.S. +$ +214,136 +$ +262,544 +$ +316,111 +Canada +9,535 +11,998 +12,541 +Total North America +223,671 +274,542 +328,652 +U.K. +25,638 +25,705 +36,954 +Other (a) +5,553 +8,453 +8,504 +Total net sales +$ +254,862 +$ +308,700 +$ +374,110 +(a) +Amounts in other include sales to various countries that individually are not material. +F-29 +Table of Contents +Long-Lived Assets of Geographic Segments +Long-lived assets of the Company’s geographic segments as of December 31, 2017 and 2016 were as follows: +December 31, +2017 +2016 +U.S. +$ +130,767 +$ +157,773 +Canada +911 +2,899 +Total North America: +131,678 +160,672 +U.K. +12,705 +11,091 +Total long-lived assets +$ +144,383 +$ +171,763 +Net Sales by Product and Services +Net sales from products and services sold by the Company for the years ended December 31, 2017, 2016 and 2015 were as follows: +December 31, +2017 +2016 +2015 +Product net sales (a) +$ +125,306 +$ +168,510 +$ +241,609 +Services net sales (b) +129,556 +140,190 +132,501 +Total net sales: +$ +254,862 +$ +308,700 +$ +374,110 +(a) +Product net sales include the design and production of Financial Payment Cards, in contact EMV, dual-interface EMV, contactless and magnetic stripe formats. The Company also generates product revenue from the sale of Card@Once ® instant issuance systems, Private Label Credit Cards, and retail gift cards. It is impracticable to split the products described into dollar amounts in the table above. +(b) +Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper-evident security packaging, providing fulfillment services to Prepaid Debit Card program managers, CPI on Demand and software as a service personalization of instant issuance debit cards. The Company also generates services revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom). It is impracticable to split the services described into dollar amounts in the table above. +17. Quarterly Financial Information (Unaudited) +Summarized quarterly results for the years ended December 31, 2017 and 2016 were as follows: +Year Ended +December 31, +2017 by Quarter: +Q1 +Q2 +Q3 +Q4 +2017 +Net sales +$ +56,008 +65,846 +68,044 +$ +64,964 +$ +254,862 +Gross profit +16,095 +19,286 +20,976 +18,634 +74,991 +Net loss +(4,506) +(2,161) +(735) +(14,608) +(22,010) +Basic and diluted loss per share +$ +(0.40) +$ +(0.20) +$ +(0.05) +$ +(1.31) +$ +(1.98) +Year Ended +December 31, +2016 by Quarter: +Q1 +Q2 +Q3 +Q4 +2016 +Net sales +$ +86,393 +$ +73,725 +$ +81,202 +$ +67,380 +$ +308,700 +Gross profit +29,692 +22,707 +29,063 +20,436 +101,898 +Net income (loss) +5,714 +(328) +4,026 +(4,014) +5,399 +Basic and diluted earnings (loss) per share +$ +0.50 +$ +(0.05) +$ +0.35 +$ +(0.36) +$ +0.48 +F-30 +Table of Contents +18. Subsequent Events +During February 2018 the Company made the decision to consolidate three personalization operations in the United States into two facilities to better enable the Company to optimize operations and achieve market-leading quality and service with a cost-competitive business model. The Company plans to be substantially complete with the transition in the third quarter of 2018. +F-31 +Table of Contents +(This page has been left blank intentionally.) +F-32 +Table of Contents +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2017, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +61 +Table of Contents +Changes in Internal Control Over Financial Reporting +There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Informatio n +None. +PART II I +Item 10. Directors, Executiv e Officers and Corporate Governance +The information required by this Item will be included in our definitive Proxy Statement for the 2018 Annual Meeting of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended December 31, 2017 and is incorporated herein by reference. +Item 11. Executive Compensatio n +Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy Statement. +Item 12. Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement. +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. +Item 14. Principal Accountant Fees and Service s +Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement. +62 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Income (Loss) +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +Exhibit No. +Exhibit Description +2.1 +Purchase and Sale Agreement, dated as of August 22, 2014, by and among William S. Dinker, Katherine S. Nevill, Bobby Smith and Tom Hedrich, William S. Dinker 2012 Trust for Edward McCullough Dinker, William S. Dinker 2012 Trust for John Walsh Dinker and William S. Dinker 2012 Trust for William S. Dinker III, EFT Source, Inc., CPI Acquisition, Inc. and William S. Dinker, as Sellers' Representative (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +3.1 +Third Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +3.2 +Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed December 22, 2017). +3.3 +Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.1** +Employment and Non-Competition Agreement, dated April 22, 2009, between CPI Acquisition, Inc. and Steven Montross (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.2** +First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017, between CPI Acquisition, Inc. and Steven Montross (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2017). +10.3** +Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.4** +Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +63 +Table of Contents +10.5** +Employment and Non-Competition Agreement, dated October 1, 2008, between Metaca Corporation and Anna Rossetti (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6** +Employment and Non-Competition Agreement, effective as of January 1, 2017, between CPI Card Group, Inc. and Lillian Etzkorn (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 13, 2017). +10.7** +CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective September 25, 2017 (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.8** +Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc.Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017). +10.9** +Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017). +10.10** +Form of Nonqualified Stock Option Agreement for United Kingdom Participants under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017). +10.11** +Form of Stock Option Agreement for Canadian Eligible Participants under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017). +10.12** +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.13** +CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017). +10.14 +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.15 +First Lien Credit Agreement, dated as of August 17, 2015, by and among CPI Card Group Inc., CPI Acquisition Inc., the lenders from time to time party thereto and the Bank of Nova Scotia, as Administrative Agent and Collateral Agent (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +64 +Table of Contents +10.16 +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.17 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +24.1* +Power of Attorney (included on the signature pages hereto). +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* Filed herewith. +** Management contract or compensatory plan or arrangement. +65 +Table of Contents +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ Lillian Etzkorn +Lillian Etzkorn +Chief Financial Officer +March 13, 2018 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint Scott Scheirman and Lillian Etzkorn and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the 1934 Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Scott Scheirman +President, Chief Executive +March 13, 2018 +Scott Scheirman +Officer and Director +(Principal Executive Officer) +/s/ Lillian Etzkorn +Chief Financial Officer +March 13, 2018 +Lillian Etzkorn +(Principal Financial Officer) +/s/ Chris Bakke +Chief Accounting Officer +March 13, 2018 +Chris Bakke +(Principal Accounting Officer) +/s/ Bradley Seaman +Chairman of the Board +March 13, 2018 +Bradley Seaman +/s/ Diane Fulton +Director +March 13, 2018 +Diane Fulton +/s/ Douglas Pearce +Director +March 13, 2018 +Douglas Pearce +/s/ Nicholas Peters +Director +March 13, 2018 +Nicholas Peters +/s/ Robert Pearce +Director +March 13, 2018 +66 +Table of Contents +Robert Pearce +/s/ David Rowntree +Director +March 13, 2018 +David Rowntree +/s/ Silvio Tavares +Director +March 13, 2018 +Silvio Tavares +67 \ No newline at end of file diff --git a/raw/filings/0001641614/2017/0001558370-18-001943/filing_metadata.csv b/raw/filings/0001641614/2017/0001558370-18-001943/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..9d273ad224932b6886f51ab230713ed13310ad73 --- /dev/null +++ b/raw/filings/0001641614/2017/0001558370-18-001943/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001641614,PMTS,CPI Card Group Inc.,10-K,2018-03-13,2017-12-31,2018-03-13T01:11:40.000Z,0001558370-18-001943,pmts-20171231x10k.htm,10-K,13521296,1,0,https://www.sec.gov/Archives/edgar/data/1641614/000155837018001943/pmts-20171231x10k.htm,https://www.sec.gov/Archives/edgar/data/1641614/000155837018001943/,2017,2017,1 diff --git a/raw/filings/0001641614/2017/0001558370-18-001943/item1.txt b/raw/filings/0001641614/2017/0001558370-18-001943/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..ea425c125cffb63f8ada92275f8bf4a64bb798c1 --- /dev/null +++ b/raw/filings/0001641614/2017/0001558370-18-001943/item1.txt @@ -0,0 +1,112 @@ +Item 1. Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express and Discover) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this attractive subsector of the financial technology market. Our customers include leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process) and card processors. We serve a diverse set of over 4,000 direct and indirect customers, including some of the largest issuers of debit and credit cards in the United States and Canada, and the largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of production and card services facilities, including high-security facilities in the United States and Canada, each of which is certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”). We have a leading network of high-security production facilities in the United States and Canada, allowing us to optimize our solutions offerings to serve the needs of our diverse customer base. +We believe we have: +· +a leading position in the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +· +a leading position in the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions, driven by our strong relationships, capabilities and technologies; and +· +a solid position in the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +In addition to our high-security facilities in the United States and Canada, we have facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, as well as provide personalization, packaging and fulfillment services. Retail cards produced at our facilities in the United Kingdom are not issued on the networks of the Payment Card Brands. +In 2017, we generated: +· +net sales of $254.9 million, which represented a decrease of 17.4% compared to the prior year; +· +net losses of $22.0 million, compared to net income of $5.4 million in the prior year; and +· +cash provided by operating activities of $2.4 million, compared to cash flow provided by operating activities of $60.0 million during 2016. +Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States; U.S. Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card issuers in the United States; and U.K. +3 +Table of Contents +Limited, which primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe, and which are not certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. Businesses not considered part of these segments are categorized as "Other" and include our operations in Ontario, Canada and, through 2015, Petersfield, United Kingdom . +During February 2018, we made the decision to consolidate our three personalization operations in the United States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a cost-competitive business model. We plan to be substantially complete with the transition in the third quarter of 2018. In August 2015, we completed the shut-down and closure of our operations at our Petersfield, United Kingdom facility. The Petersfield, United Kingdom facility was not material to our business. Also included in “Other” are corporate activities. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 16 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Strong Market Position with Long-Term Customer Relationships. We are focused on becoming the partner of choice for our customers by providing market-leading quality products and customer service with a cost-competitive business model. We have long-standing trust-based relationships with customers, many of whom we have served for decades. Our customer relationships, particularly with those who utilize our card services and instant issuance systems and services, often involve process and technology integration. As a result, our customers are selective about working with partners they can trust to deliver the highest quality products and customer service. We strive to put our customers at the center of everything we do. We also maintain important relationships with the Payment Card Brands to ensure our facilities and processes consistently meet their standards. +· +Well Positioned to Capitalize on Expected Growth in Financial Payment Card Market and Remaining EMV ® Conversion in the United States. Europay, Mastercard and Visa (“EMV”) is a global, technical standard, maintained by EMVCo for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic stripes. EMV cards can be contact cards that must be physically inserted into a reader, contactless cards that can be read over a short distance using radio-frequency identification (“RFID”) technology, or cards with both contact and contactless functionality (“dual-interface EMV cards”). With the past investments made to our physical infrastructure and equipment platform in preparation for the EMV conversion, we believe that we continue to be well-positioned to meet future demand in the Financial Payment Card market, the remaining small to mid-sized issuer U.S. market conversion to EMV cards, and the longer-term U.S. market conversion to dual-interface EMV cards. In addition, we have made investments in premium product capabilities, such as our metal card offering, CPI Metals TM , in response to market demand for premium card products. +· +Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small to mid-sized issuer customers is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. Similarly, our installed base of instant issuance systems at bank and credit union branches across the United States require comparable levels of customer integration, as our Card@Once ® instant issuance system utilizes only our secure technology to instantly personalize cards. Certain customers have also integrated our proprietary software into their customer-facing websites to offer card +4 +Table of Contents +design and customization to their cardholders. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +· +Certified Network of High-Security Facilities. Our high-security facilities are each certified by one or more of the Payment Card Brands and Interac (in Canada), forming a leading network of certified production facilities in in the United States and Canada. The Payment Card Brand certifications allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. Additionally, many of our facilities are also certified to be in compliance with the standards of the PCI Security Standards Council. These certification processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain this designation, which are regularly verified by both the Payment Card Brands and our customers. +· +Industry Experience and Proprietary and Patented Solutions. We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage. We have developed and acquired intellectual property over our operating history and hold 20 U.S. patents, including five patents related to our CPI Metals TM card solution, 10 foreign patents, as well as 27 pending U.S. and foreign patent applications, on our Financial Payment Card solutions. We also have patents on our instant issuance offering and on our tamper-evident security packaging used by customers with Prepaid Debit Card offerings, and we hold exclusive production rights to certain products the Company has developed. +· +Experienced Management Team. We have built an experienced management team, and have strengthened the team with the addition of key executives during 2017, including our Chief Executive Officer, Chief Financial Officer and our Chief Legal and Compliance Officer. The leadership, depth of experience and relevant market knowledge our entire management team brings will be invaluable as we execute on our plans moving forward. +Our Strategy +We are a payment technologies company providing end-to-end debit, credit, and prepaid payment solutions delivered physically, digitally, and on-demand. Our strategy is to be the partner of choice by providing market-leading quality products and service, with a cost-competitive business model. Our client is at the center of all that we do. While consumers have a rational and emotional need for the payment transactions that power their lives, our clients are working to be the choice to facilitate those transactions. Our goal is to help our clients foster compelling connections and build their brands with their customers via traditional and next generation solutions that enhance people’s everyday lives. +Our focus is to have platforms and exceptional service that make working with us easy and help redefine experiences that may have traditionally seemed rigid and complex. Providing flexibility in timing, design, product options, and overall utility creates efficiencies, choice and control for our clients. We aim to inspire and delight our clients with market-leading quality and service. By cultivating an environment with dedicated and passionate employees, we deliver superior quality products through collaboration, a laser-focus on service and accountability. +We are determined to build a strong foundation for growth, invest in innovation and quality, and are improving cost efficiencies to achieve profitability through supply chain improvements, an optimized footprint, automation, process enhancements, and inventive ways to cost-effectively produce and deliver high quality premium products. We believe we are well-positioned in the market given our diversified business model, and have scaled a full and expanding suite of catalytic and competitively differentiated products and services. +5 +Table of Contents +Our Products and Services +EMV Financial Payment Cards (Contact and Dual-Interface) +We produce both plastic and metal contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce dual-interface EMV cards, which feature both the contact EMV technology and an RFID antenna that utilizes near field communications (“NFC”) technology to allow transactions to also be processed on a contactless basis when the card is brought within the requisite proximity to a NFC-enabled payment terminal. +Non-EMV Financial Payment Cards and Retail Gift Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology and cards that include both magnetic stripes and NFC technology. In addition, we produce retail gift cards (which are not issued on the network of the Payment Card Brands) primarily in the U.K. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact EMV, dual-interface EMV and non-EMV card formats. Our personalization services are technology-driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. +Tamper-Evident Security Packaging Solutions +We offer specialized and innovative tamper-evident security packaging products and services to customers with a Prepaid Debit Card offering that reduce fraud for Prepaid Debit Cards sold through the retail channel. The majority of the tamper-evident security packaging we produce is protected by our patents. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once ® , our proprietary and patented instant card issuance system and services, which provides our card issuing bank customers the ability to issue a completely personalized permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, an EMV card, or a dual-interface EMV card, and personalizes the card on a desktop output terminal in a process which is certified by Mastercard ® and Visa. Our instant issuance system generates both system sales and recurring revenue from software as a service, card personalization and sales of cards and consumables. In addition, we provide instant issuance of debit cards to large financial institutions whereby we provide fully-personalized temporary debit cards which are issued to card holders upon opening a new account, and we manage the fulfillment and replenishment of these fully personalized cards directly to thousands of individual bank branches. +CPI on Demand TM Solutions +Through our CPI on Demand TM services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on demand basis for our customers, enabling individualized offerings and reducing waste. While not significant to our 2017 financial results, w e believe the CPI on Demand TM solution will further differentiate us with our financial institution customers, and we believe it will enable us to further penetrate new, business-to-business and business-to-consumer verticals of the prepaid market such as healthcare, transit, payroll, corporate incentives, benefits and insurance. +6 +Table of Contents +Digital Services +While not currently significant to our financial results, we are focusing on enabling payments for the emerging digital payment marketplace, including self-service card customization, on demand fulfillment, order lifecycle management, customer inventory management, EMV key management, and other innovative solutions, such as digitizing and securely delivering payment credentials as a virtual payment method. +Suppliers +One of the most important components of our products is the EMV microchip. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in South Korea, France, the United States and Singapore, primarily on a purchase order basis. Our main suppliers of EMV microchips are four leading international manufacturers, including one supplier that is also owned by a competitor. Approximately 90% of our purchased EMV microchips for the year ended December 31, 2017 came from these four main suppliers. The other key components for our products are substrates (such as PVC), antennas and inlays which we also source from multiple suppliers. We continuously monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers, prepaid debit issuers, program managers, Group Service Providers and card processors. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest U.S. Prepaid Debit Card program managers. Our top customer represented 12.4% of our net sales for the year ended December 31, 2017. Our top five customers represented approximately 28.5% of our net sales for the year ended December 31, 2017, and we have been serving these customers for an average of greater than 10 years. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into purchase order or other short-term arrangements that define the prices and the quantities of products to be delivered and services rendered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +Our production and services strategy has several key facets. We have a large network of integrated high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high-volume production runs that allow us to meet the competitive price points of large orders; +· +execute lower-volume, highly customized runs that allow us to meet the high-service and quick-turn needs of smaller orders, as well as on demand solutions; and +· +meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this retail prepaid market. +We operate approximately 500,000 square feet of facilities in the United States, Canada and the United Kingdom, where we focus on Financial Payment Card production and personalization services. See Part I, Item 2, “Properties” of this Annual Report on Form 10-K for information on the operations of each facility. +7 +Table of Contents +We rely on secure ground and secure air freight to deliver products to our banking customers. Due to the high-security nature of the products we provide to our banking customers, product must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we utilize the U.S., Canadian and U.K. postal services to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality and meaningful, innovative products at competitive prices. We work to strategize and collaborate with our customers to bring them valuable and innovative solutions. We have approximately 30 field-based sales representatives that give us a wide geographic reach across the United States, the United Kingdom and Canada. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer groups, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements and educational webinars to introduce our existing customers and new customers to innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings and competitive pricing. Competitive factors for our business include product quality, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features and price. +Our products and services compete with other card manufacturers and card solutions providers. We believe our primary competitors are IDEMIA (formerly known as Oberthur Technologies S.A.), Giesecke & Devrient GmbH, Valid S.A., Gemalto NV, CompoSecure L.L.C., and Multi Packaging Solutions, Inc. Certain existing and potential customers also have the ability to personalize Financial Payment Cards in-house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own and control various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are also a party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31, 2017, we had 35 U.S. and foreign trademark registrations and applications, 20 existing U.S. patents, 10 foreign patents, as well as 27 pending U.S. and foreign patent applications. Our patents have an average remaining maturity of 12 years, and our trademarks will be due for renewal for additional ten or fifteen-year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +8 +Table of Contents +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, addresses, card account numbers and expiration dates. In some cases, we receive a cardholder’s PIN number. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, the privacy provisions of the Gramm‑Leach‑Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with various other federal and state privacy statutes and regulations, and the PCI Security Standards Council’s Data Security Standards, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of numerous countries and jurisdictions, including the General Data Protection Regulation (the “GDPR”) in the European Union. The interpretation and application of these privacy and data protection laws in the United States, Europe and elsewhere are often uncertain and in a state of flux. +In order to comply with our obligations under the GLBA, applicable state laws and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. As part of their compliance with these requirements, each of our U.S. customers is expected to have a program in place for protecting personally identifiable information and responding to unauthorized access to, or use of, personally identifiable information that could result in substantial harm or inconvenience to consumers, as required by law. A majority of U.S. states have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, which could result in significant costs to us and significant damage to our reputation. +In May 2016, the European Union adopted the GDPR, which is a comprehensive general data privacy regulation that will replace the current EU Data Protection Directive and related country-specific legislation. The GDPR will become fully effective in May 2018 . The regulation will impose more stringent operational requirements for processors and controllers of personal data of residents of the European Union, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, mandatory data breach notification requirements and higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. The regulation will also include significant penalties for non-compliance. +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve certification that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining these certifications, and have invested significant capital to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly certification process serves as a significant barrier to new entrants to our market. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations +9 +Table of Contents +require our financial institution clients to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our clients’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations including those relating to the movement of money. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with licensing and reporting requirements, to implement operating policies and procedures to comply with anti-money laundering laws, to protect the privacy and security of our clients’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs and, in some cases, limited revenue sources for us and our clients. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, to CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments and/or limit our fees or other revenue sources. We do not currently anticipate a materially adverse impact on our business, results of operations or financial condition due to these regulations, but it is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential clients. +Employees and Labor +As of December 31, 2017, our businesses employed approximately 1,200 employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10026 W. San Juan Way – Suite 200, Littleton, CO 80127 , telephone (303) 973-9311. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. \ No newline at end of file diff --git a/raw/filings/0001641614/2017/0001558370-18-001943/item13.txt b/raw/filings/0001641614/2017/0001558370-18-001943/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c23eaf069f58452092de9649aa5850bcb0478b34 --- /dev/null +++ b/raw/filings/0001641614/2017/0001558370-18-001943/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001641614/2017/0001558370-18-001943/item9a.txt b/raw/filings/0001641614/2017/0001558370-18-001943/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..d9bbf55fb633f826bc21385656dca20cb0150112 --- /dev/null +++ b/raw/filings/0001641614/2017/0001558370-18-001943/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2017, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +61 +Table of Contents +Changes in Internal Control Over Financial Reporting +There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001641614/2017/0001558370-18-001943/rp_note.txt b/raw/filings/0001641614/2017/0001558370-18-001943/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001641614/2017/0001558370-18-001943/rpt_disclosure.txt b/raw/filings/0001641614/2017/0001558370-18-001943/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..3fce8be2df91c3287a73203a52dfa8a75e3cb9c0 --- /dev/null +++ b/raw/filings/0001641614/2017/0001558370-18-001943/rpt_disclosure.txt @@ -0,0 +1,13 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2018 to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them had or will have a direct or indirect material interest. +Registration Rights Agreement +In connection with our initial public offering, we entered into a registration rights agreement with the Tricor Funds (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Tricor Funds are entitled to request that we register shares of our common stock on a long-form or short-form registration statement on one or more occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. The Tricor Funds also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay the Tricor Funds’ expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our common stock held by the Tricor Funds as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the common stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization, or certain other corporate transactions, and (iii) any of our common stock owned or acquired following the closing of our initial public offering by the Tricor Funds (“Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. +Director Nomination Agreement +In connection with our initial public offering, we entered into a Director Nomination Agreement with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our Board of Directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our Board of Directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds shall be entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. In addition, for so long as the Tricor Funds collectively beneficially own 10% or more of the total number of shares of our common stock then outstanding, the Tricor Funds shall also have the right to have their designees participate on committees of our Board of Directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding common stock. Nicolas Peters and Bradley Seaman have been designated by the Tricor Funds as nominees to be included in the Company’s proxy statement commencing in 2016. +Policies and Procedures for Related Party Transactions +Our board of directors has adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving us in which the aggregate amount involved exceeds or may be expected to exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which a related person has or will have a direct or indirect material interest. For purposes of this policy, a related person is defined as a director, executive officer, nominee for director, or a greater than 5% beneficial owner of our common stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and +-29- +Table of Contents +approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider the material facts of the transaction, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction. +-30- +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2018/0001558370-19-001550/filing.txt b/raw/filings/0001641614/2018/0001558370-19-001550/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..45fd44ea62efe428c2d8eec4d09c8d5b6fdc9b00 --- /dev/null +++ b/raw/filings/0001641614/2018/0001558370-19-001550/filing.txt @@ -0,0 +1,3181 @@ +10-K +1 +pmts-20181231x10k.htm +10-K +pmts_Current_Folio_10K +Table of Contents +UNITED STATES SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☑ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31, 2018 +Or +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10026 West San Juan Way +Littleton, CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code (303) 973-9311 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, $0.001 par value +NASDAQ Capital Market +Securities registered pursuant to section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ☐   No ☑ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +Yes ☐   No ☑ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑   No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑   No ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ◻ +Accelerated filer ◻ +Non-accelerated filer ☑ +Smaller reporting company ☑ +Emerging growth company ☑ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☑ +The aggregate market value of the Registrant’s common stock held by non-affiliates was $8.1 million on June 30, 2018 computed based on the closing sale price of the Registrant’s common stock of $2.00 on NASDAQ on that date. +As of February 22, 2019, the number of shares outstanding of the Registrant’s common stock was 11,160,537. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K . +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +3 +Item 1A +Risk Factors +10 +Item 1B +Unresolved Staff Comments +22 +Item 2 +Properties +23 +Item 3 +Legal Proceedings +23 +Item 4 +Mine Safety Disclosures +24 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +24 +Item 6 +Selected Financial Data +25 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +25 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +40 +Item 8 +Financial Statements and Supplementary Data +F-1 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +42 +Item 9A +Controls and Procedures +42 +Item 9B +Other Information +43 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +43 +Item 11 +Executive Compensation +43 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +43 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +43 +Item 14 +Principal Accountant Fees and Services +43 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +44 +Index To Exhibits +44 +Signatures +47 +1 +Table of Contents +Cautionary Statement Regarding Forward-Looking Information +Certain statements and information in this Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us, and other information currently available. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated. +These risks and uncertainties include, but are not limited to: our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our limited ability to raise capital in the future; system security risks, data protection breaches and cyber-attacks and possible exposure to litigation and/or regulatory penalties under applicable data privacy and other laws for failure to prevent such incidents; interruptions in our operations, including our IT systems, or in the operations of the third parties that operate the data centers or computing infrastructure on which we rely; our failure to maintain our listing on the NASDAQ Capital Market; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation or infringement, claims that our technology is infringing on the intellectual property of others, and risks related to open source software; defects in our software; problems in production quality and process; our failure to retain our existing customers or identify and attract new customers; a loss of market share or a decline in profitability resulting from competition; our inability to recruit, retain and develop qualified personnel, including key personnel; our inability to sell, exit, reconfigure or consolidate businesses or facilities that no longer meet with our strategy; our inability to develop, introduce and commercialize new products; the effect of legal and regulatory proceedings; developing technologies that make our existing technology solutions and products less relevant or a failure to introduce new products and services in a timely manner; quarterly variation in our operating results; infringement of our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; our inability to realize the full value of our long-lived assets; our failure to operate our business in accordance with the PCI Security Standards Council (“PCI”) security standards or other industry standards such as Payment Card Brand certification standards; costs relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state retailers; disruption or delays in our manufacturing operations or supply chain; a decline in U.S. and global market and economic conditions and resulting decreases in consumer and business spending; costs relating to product defects and any related product liability and/or warranty claims; maintenance and further imposition of tariffs and/or trade restrictions on goods imported into the United States; our dependence on licensing arrangements; risks associated with international operations; non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we operate and sell our products; risks associated with the controlling stockholders’ ownership of our stock; and other risks that are described in Part I, Item 1A – Risk Factors and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +EMV® is a registered trademark or trademark of EMVCo LLC in the United States and other countries. +2 +Table of Contents +CPI Card Group Inc. qualifies as a Smaller Reporting Company in accordance with Rule 12b-2 of the Exchange Act, and has elected to follow certain of the scaled back disclosure accommodations within this Form 10-K. +PART I +Item 1. Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express and Discover) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience. Our customers include leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors. We serve a diverse set of over 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States and Canada, and the largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of production and card services facilities, including high-security facilities in the United States which are certified by one or more of the Payment Card Brands and, where required by our customers, certified to be in compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”). This leading network of high-security production facilities allows us to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +· +the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +· +the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; and +· +the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +On August 3, 2018, we completed the sale of the U.K. Limited segment. The historical financial position, results of operations, and cash flows for the U.K. segment have been restated for all periods to conform with discontinued operations presentation. Unless otherwise indicated, financial information within this document relates to continuing operations. +Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States, and U.S. Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card program managers in the United States. Business not considered part of these segments are considered “Other” and include our operations in Canada and corporate expenses. +In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include customers for which we only manufacture and personalize Financial Payment Cards. The transaction is expected to close in the first half of 2019. The agreement to sell our Canadian subsidiary does not meet the criteria to be reported as a discontinued operation. The Financial Payment Card business customers of our Canada operations will either migrate to our +3 +Table of Contents +operations in the U.S. or migrate to other service providers before the transaction closes. The divestiture allows us to further optimize our footprint and is consistent with our previously announced plan to better position ourselves to serve customers by focusing on our core businesses. +During February 2018, we made the decision to consolidate our three personalization operations in the United States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a market-competitive business model. This consolidation was completed in 2018. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 16 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Strong Market Position with Long-Term Customer Relationships. We are focused on becoming the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We have long-standing trust-based relationships with customers, many of whom we have served for decades. Our customer relationships, particularly with those who utilize our card services and instant issuance systems and services, may involve process and technology integration. As a result, our customers are selective about working with partners they can trust to deliver the highest quality products and customer service. We strive to put our customers at the center of everything we do, and to provide responsive and high quality customer care. We also maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the U.S. prepaid debit market, built on high quality services and reliable delivery to our customers. Our installed base of instant issuance systems at bank and credit union branches across the United States may include customer integration, and our Card@Once ® instant issuance system utilizes our secure technology to instantly personalize cards. Certain customers have integrated our proprietary software into their systems to improve the quality of the overall process and to offer card design and customization to their cardholders. +· +Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small to mid-sized issuer customers is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +· +Certified Network of High-Security Facilities. Our high-security facilities are each certified by one or more of the Payment Card Brands and Interac (in Canada), forming a leading network of certified production facilities in the United States. The Payment Card Brand certifications allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. Additionally, many of our facilities are certified to be in compliance with the standards of the PCI Security Standards Council. These certification processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. +· +Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV”) is a global, technical standard, maintained by EMVCo for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV® cards are smart cards (also called chip cards) which +4 +Table of Contents +store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic stripes. We also produce dual-interface EMV cards that have both contact and contactless functionality. We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. We have invested in CPI Metals TM, a premium product capability, in response to the market. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage. We have developed and acquired intellectual property over our operating history and hold 25 U.S. patents, including five patents related to our CPI Metals TM card solution, 18 foreign patents, as well as 21 pending U.S. and foreign patent applications. +· +Experienced Management Team. We have built an experienced management team, and strengthened the team with additions of certain key executives during 2018. The leadership team has energized the organization to focus on customers, accountability, and delivering results. +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our goal is to be our customers’ partner of choice by providing market-leading quality products and customer service with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our customers elevate the customer experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. +A Customer-Centric Culture +We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex, and offering market-leading quality and service. Based on our core values of customer first, accountability, teamwork, excellence, integrity and results, our strong team of dedicated, passionate employees has helped build CPI into a leading provider of high quality products with a laser-focus on service. With our full and expanding suite of catalytic and competitively differentiated products and services, we offer our customers choice, convenience and control by providing flexibility in timing, design, product options, and overall utility. +Innovation and Growth +We strategically invest in innovation and quality to create a strong foundation for growth. We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. +Our Products and Services +EMV ® Financial Payment Cards (Contact, Contactless, and Dual-Interface) +We produce both plastic and metal contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards, and dual-interface EMV cards, which feature an RFID antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. The dual-interface EMV cards additionally include the contact EMV technology. +Non-EMV Financial Payment Cards and Retail Gift Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, as well as retail gift cards (which are not issued on the network of the Payment Card Brands). +5 +Table of Contents +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact EMV, dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with visibility to manage card stock inventory and fulfillment materials. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. +Tamper-Evident Security Packaging Solutions +We offer specialized and innovative tamper-evident security packaging products and services to customers with a Prepaid Debit Card offering that reduce fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once ®, our proprietary and patented instant card issuance system and services, which provides our card issuing bank customers the ability to issue a completely personalized permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, an EMV card, or a dual-interface EMV card, and personalizes the card on a desktop output terminal in a process which is certified by Mastercard ® and Visa. Our instant issuance system generates both system sales and recurring revenue from software as a service, card personalization and sales of cards and consumables. +CPI On-Demand TM Solutions +Through our CPI On-Demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on demand basis for our customers, enabling individualized offerings and reducing waste and inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. While not significant to our 2018 financial results, we believe the CPI On-Demand solution will further differentiate us with our financial institution customers, and we believe it will enable us to further penetrate new, business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, benefits and insurance. +Digital Services +While not currently significant to our financial results, we are focusing on enabling digital services and payments, including self-service card customization, on demand fulfillment, order lifecycle management, customer inventory management, EMV® key management, and other innovative solutions, such as digitizing and securely delivering payment credentials as a virtual payment method. +Suppliers +One of the most important components of our products is the EMV microchip. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in South Korea, France, Germany, and Singapore, primarily on a purchase order basis. Our main suppliers of EMV microchips are four leading international manufacturers. Approximately 88% of our purchased EMV microchips for the year ended December 31, 2018 came from these four main suppliers. The other key components for our products are substrates (such as PVC), antennas and inlays which we also source from multiple suppliers. We continuously monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. +6 +Table of Contents +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers, prepaid debit issuers, program managers, Group Service Providers, and card processors. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest U.S. Prepaid Debit Card program managers. Our top customer represented approximately 19% of our net sales for the year ended December 31, 2018. Our top five customers represented approximately 39% of our net sales for the year ended December 31, 2018, and we have been serving these customers for an average of greater than 10 years. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangements that define the quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +Our production and services strategy has several key facets. We have a large network of integrated high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high-volume production runs that allow us to meet the competitive price points of large orders; +· +execute lower-volume, highly customized runs that allow us to meet the high-service and quick-turn needs of smaller orders, as well as on-demand solutions; and +· +meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this retail prepaid market. +As of December 31, 2018, we operate approximately 446,000 square feet of facilities in the United States and Canada where we focus on Financial Payment Card production and personalization services. See Part I, Item 2, “Properties” of this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our banking customers. Due to the high-security nature of the Financial Payment Card products we provide to our banking customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we utilize the U.S. and Canadian postal services to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality and meaningful, innovative products at competitive prices. We work to strategize and collaborate with our customers to bring them valuable and innovative solutions. We have approximately 30 sales representatives that give us a wide geographic reach across the United States and Canada. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to +7 +Table of Contents +innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings and competitive pricing. Competitive factors for our business include product quality, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card manufacturers and card solutions providers. We believe we are in competition with IDEMIA (formerly known as Oberthur Technologies S.A.), Giesecke & Devrient GmbH, Valid S.A., Gemalto NV, CompoSecure L.L.C., Multi Packaging Solutions, Inc., and Arroweye. Certain existing and potential customers also have the ability to personalize Financial Payment Cards in-house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own and control various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We have been party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31, 2018, we had 35 U.S. and foreign trademark registrations and applications, 25 existing U.S. patents, 18 foreign patents, as well as 21 pending U.S. and foreign patent applications. Our patents have an average remaining maturity of 12 years, and our trademarks will be due for renewal for additional ten or fifteen-year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, the privacy provisions of the Gramm-Leach-Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with various other federal and state privacy statutes and regulations, and the PCI Security Standards Council’s Data Security Standards, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of numerous countries and jurisdictions. The interpretation and application of these privacy and data protection laws are often uncertain and in a state of flux. +In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. As part of their compliance with these requirements, each of our U.S. customers is expected to have a program in place for protecting personally identifiable information and responding to unauthorized access to, or use of, personally identifiable information that could result in substantial harm or inconvenience to consumers, as required by law. A majority of U.S. states have enacted security breach legislation, +8 +Table of Contents +requiring varying levels of consumer notification in the event of a security breach, which could result in significant costs to us and significant damage to our reputation. +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve certification that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining these certifications, and have invested significant capital to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly certification process may serve as a significant barrier to new entrants to our market. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts, and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution clients to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations including those relating to the movement of money. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with licensing and reporting requirements, to implement operating policies and procedures to comply with anti-money laundering laws, to protect the privacy and security of our clients’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, to CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential clients. +Employees and Labor +As of December 31, 2018, our businesses employed approximately 1,100 employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +9 +Table of Contents +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10026 W. San Juan Way – Suite 200, Littleton, CO 80127 , telephone (303) 973-9311. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. +Item 1A. Risk Factors +Our outstanding indebtedness may impact our business and our results of operations and may restrict our ability to grow; the covenants and restrictions of our credit facility and other loans could make it difficult or impossible to timely make our debt service payments or refinance our debt when it comes due. +We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our business. Our substantial indebtedness and interest expense could have important consequences to us, including: +· +limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, expanding our infrastructure, capital expenditures and other general business activities and investment opportunities in our company, because we must dedicate a substantial portion of these funds to pay interest and/or service our debt; +· +impacting our cash flows, results of operations and financial condition as interest rates rise, as our First Lien Credit Facility is entirely floating rate debt; +· +requiring us to seek to incur further indebtedness in order to make the capital expenditures and other expenses or investments necessary to operate the business to the extent our future cash flows are insufficient; +· +limiting our ability to retain existing customers and/or attract new customers due to the significant amount of debt and the related implications of such debt; +· +limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; +· +limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +· +limiting our ability to satisfy our obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +· +increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; +· +placing us at a competitive disadvantage as compared to our competitors that are less leveraged; +· +limiting our ability to timely make our debt service payments; +· +limiting our ability, or increasing the costs, to refinance indebtedness, when our Revolving Credit Facility matures on August 17, 2020 and our First Lien Term Loan matures on August 17, 2022; +· +limiting access to supply chain and vendor terms, and +· +increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally. +In addition, the terms of our First Lien Credit Facility restrict, and covenants contained in agreements governing indebtedness in the future may restrict, our ability to operate our business and to pursue our business strategies. Among other things, our First Lien Credit Facility restricts our ability to: +· +incur additional debt or contingent liabilities; +· +declare or pay dividends, redeem stock, or make other distributions to stockholders; +· +make loans, advances, guarantees or other investments; +· +create liens or use assets as security in other transactions; +· +merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; +10 +Table of Contents +· +enter into transactions with affiliates; and +· +enter into certain asset sale transactions or other dispositions of assets. +Our failure to comply with any of these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the First Lien Credit Facility. Moreover, these restrictions, as well as the limitations described above, could have a material adverse effect on our business, financial condition, results of operations and prospects. If we are unable to satisfy our obligations under our indebtedness as they become due, or if we are unable to pay our interest obligations we would be rendered insolvent. +Our ability to raise capital in the future may be limited. +Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. As a result of our financial condition, additional financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. Any failure to achieve adequate funding will delay our product and services innovation and development and could lead to abandonment of one or more of our strategic initiatives. Any of these events could materially harm our business, financial condition and prospects. +System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, disrupt our internal operations, harm perception of our products, and expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and our reputation. +In operating a Financial Payment Card business, we manage large amounts of personally identifiable information of cardholders, including cardholder names, account numbers and similar information. The reliability and security of our information technology (“IT”) infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. Our handling of such information makes us a potential target of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, phishing attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from unauthorized use of or access to computer systems (including from internal and external sources). A breach of our security defenses could result in a loss of our intellectual property, the release of sensitive cardholder information, customer or employee personal data, or the loss of production capabilities at one or more of our production facilities. These types of incidents have become more prevalent and pervasive across industries, including in our industry. +In addition, our encryption systems are at risk of being breached or decoded. Smart cards are equipped with keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, whether caused by cyber-attacks, security breaches or otherwise, which could ultimately have a material adverse effect on our business, financial condition and results of operations. +The protective measures we have implemented to protect against data and security breaches and cyber-attacks may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. We regularly evaluate, assess and test our systems and the controls, processes and practices to protect those systems. The evaluations, assessments and testing identify areas of weakness in, and suggested improvements to, the maturity of our systems, processes, and risk management framework as well as vulnerabilities in those areas that could be attacked and exploited to access and acquire proprietary and confidential information. Although cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access are a high priority for us, our activities and investment may not be deployed quickly enough or successfully protect our system or network against disruptions and may be insufficient to prevent or limit the damage from any future security breaches. In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +11 +Table of Contents +In addition, we are subject to significant security and privacy regulations. Some state and federal laws impose, or in the future may impose, privacy and security requirements on us. For example, California recently enacted the California Consumer Privacy Act (“CCPA”), which will, among other things, require covered companies to provide certain disclosures to California consumers and allow such consumers to opt-out of certain sharing of personal information, when it goes into effect on January 1, 2020. The CCPA has already been amended and it remains unclear whether it will be further amended or how it will be interpreted. The prospect of new data privacy laws and ambiguity regarding the interpretation of existing laws has resulted in significant uncertainty and compliance costs. Congressional committees have recently held preliminary hearings about the advisability of a federal data privacy law, but it is uncertain whether the U.S. government would adopt such a law and whether it would preempt state data privacy laws. Although we monitor regulatory developments in this area, any actual or perceived failure by us to comply with these requirements could subject us to significant penalties and negative publicity and require changes to our business practices. Making these changes is, and will likely continue to be, difficult and expensive. Investigations by the regulators of data security laws could also result in the payment of fines and harm our reputation. Private actions by affected individuals or our customers could also result in significant monetary or reputational damage. +Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business and reputation. +Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, including the operation of complex IT systems. In addition, a significant portion of the communication between our employees, customers, and suppliers depends on our IT systems. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. +We depend on data centers and computing infrastructure operated by third parties to serve customers and operate certain aspects of our services. While we control and have access to applications and data that are hosted in these external locations, we do not control the operation of these facilities or in some cases the hardware and infrastructure within them. Any disruption of, interference at, or inability to keep up with our needs for capacity by our third-party data center or hosted infrastructure partners could interrupt our business operations. In addition, any problems faced by our third-party data center operations or hosted infrastructure partners, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Any interruption in our business applications, systems or networks, including, but not limited to, new system implementations, server downtime, facility issues or energy blackouts, could have a material adverse impact on our operations, sales and operating results. +Not only could we suffer damage to our brand and reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements with financial institutions require the payment of penalties if our systems do not meet certain operating standards, and failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of the certification of our facilities, any of which could have a material adverse effect on our business. In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. We have established certain protective measures in an effort to ensure the continuation of core business operations in the event that normal operations could not be performed due to a catastrophic event. However, these measures may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results of operations. +Disruptions in production at one or more of our facilities may have a material adverse impact on our business, results of operations and/or financial condition. +Any serious disruption at any of our facilities could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. Our other facilities may not have sufficient capacity, may not have the specialized equipment necessary, may have higher production costs, may take significant time to increase production or may fail to meet our customers’ requirements, any of which could negatively impact our business, results of operations and/or financial condition. Long‑term production disruptions may cause our customers to seek alternative supply which could further adversely affect our profitability. +12 +Table of Contents +Additionally, a significant amount of certain specialized manufacturing capacity is concentrated in single-site location. Due to the specialized nature of the assets, in the event such a location experiences disruption, it may not be possible to find replacement capacity quickly or substitute production from our other facilities. Accordingly, disruption at a single-site manufacturing operation could significantly impact our ability to supply our customers and could produce severe impact on us. +If we fail to meet the continued listing standards of NASDAQ, our common stock may be delisted, which may adversely affect the market price and liquidity of our common stock. +Our common stock is currently traded on the NASDAQ Capital Market (“NASDAQ”). As a condition of the continued listing of our common stock, NASDAQ generally requires that, among other requirements, (i) we maintain at least $2.5 million in stockholders equity, or $35.0 million in market capitalization, or $0.5 million in net income from continuing operations, in either the last fiscal year, or two out of the last three fiscal years, and (ii) we maintain a minimum bid price of $1.00 per share. As of December 31, 2018, we had $149.6 million in stockholders’ deficit. Our net loss from continuing operations was $14.8 million and $23.1 million for the years ended December 31, 2018, and 2017, respectively. As of March 4, 2019, our market capitalization was approximately $40.2 million. There can be no assurance that we will be able to maintain compliance with the requirements for continued listing of our common stock on NASDAQ. If our common stock is delisted and we are unable to list our common stock on another U.S. national securities exchange, we expect our securities would be quoted on an over-the-counter market. We believe our stock would likely remain listed on the Toronto Stock Exchange (TSX). Any delisting from NASDAQ could result in significant material adverse consequences for our stockholders, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Furthermore, if our common stock were delisted it could adversely affect our ability to obtain financing for the continuation of our operations and/or result in the loss of confidence by investors, customers, suppliers and employees. +We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or infringement, which may have a material adverse effect on our business. +Our ability to protect our intellectual property is important to our business. We depend on patents and other intellectual property rights to protect our products, proprietary designs, and technological processes against misappropriation by others. There is no assurance that our existing or future patents will not be challenged, invalidated or circumvented. Furthermore, we may have difficulty obtaining additional patents and other intellectual property protections in the future. The patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Moreover, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which we provide services. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. We actively seek to protect our proprietary rights and trade secrets by engaging in litigation and by entering into confidentiality agreements with our employees, consultants and strategic partners and controlling access to and distribution of our technologies, documentation and other proprietary information. Nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary and may use such information to interfere with our customers. Enforcing our intellectual property rights may also cause us to incur significant costs. These costs and other consequences from the unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. +Irrespective of our intellectual property rights, we may be required to defend against alleged infringement of the intellectual property rights of others. Our products may contain technology provided to us by other parties such as suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. +Companies in our industry aggressively protect their intellectual property rights. From time to time, we receive notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights or that challenge the validity of our patents. In addition to the costs and distraction that result from intellectual property litigation, an adverse determination in these types of disputes could prevent us from offering some of our products and services or from enforcing our intellectual property rights. Settlements can involve royalty or other payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our +13 +Table of Contents +suppliers, customers and licensors may not be required to fully indemnify us for the costs of defending against infringement claims. In addition, we may be required to indemnify some customers and strategic partners related to allegations, regardless of merit, that our products infringe on the intellectual property rights of others. +We also face risks related to open source software. Our software may be derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. Usage of open source software can lead to greater risks than the use of third‑party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software, or remedies against the licensors. Many of the risks associated with open source software cannot be eliminated and could have a material adverse effect on our business, financial condition and results of operations. +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +Our services are based on sophisticated software and computing systems, and the software underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our clients. Defects in our software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of clients, negative publicity or exposure to liability claims. Although we attempt to limit our potential liability through disclaimers and limitation of liability provisions in our license and client agreements, we cannot be certain that these measures will successfully limit our liability. +Our business could suffer from problems in production quality and process. +We produce our products using processes that are highly complex, require advanced and costly equipment and must continually be modified to improve yields and performance. Difficulties in the production process can reduce product yields, reduce product quality or interrupt production altogether. As a result of such problems, we may not be able to deliver products, or may be able to deliver products, but in a less timely or cost‑effective manner or at a lower than expected quality level, or we may be required to rework or replace products. As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our production processes at the market rate, we may experience a lower production quality than the market standard. We may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures, or as a result of external factors beyond our control, such as delay of, or quality issues with, materials provided by suppliers, interruption of our electrical service or a natural disaster. Any such event could have a material adverse effect on our business, financial condition and results of operations. +Failure to retain our existing customers or identify and attract new customers could have a material adverse effect on our business. +A substantial portion of our net sales is derived from several large customers. Our top five customers accounted for approximately 39% of our net sales for the year ended December 31, 2018. Our ability to provide products and services to these customers and our other customers and meet very high quality standards in a timely manner is critical to our business success. For example, one of the key services that we offer our customers is the prompt and timely production and delivery of replacement debit or credit cards. Orders for replacement debit or credit cards often are placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a timely manner, our relationships with our customers may be adversely affected and we may lose contracts. +14 +Table of Contents +In addition, our continued business relationship with our customers may be impacted by several factors beyond our control, including more attractive product offerings from our competitors, pricing pressures or the financial health of these customers, many of whom operate in competitive businesses and depend on favorable macroeconomic conditions. Because our contractual arrangements include neither exclusivity clauses nor commitments to order specified quantities of products on a medium or long-term basis, there is no guarantee that we will be able to renew or win contracts or purchase orders in a given year. +If we experience difficulty attracting and retaining customers, our business, financial condition and results of operations may be materially and adversely affected. +We face competition that may result in a loss of our market share and/or a decline in our profitability. +Our marketplace is highly competitive, relatively saturated, and increasingly consolidated. We expect these market dynamics to continue as new product markets develop, companies develop lower-cost production processes, our competitors consolidate, and other competitors attempt to enter the markets in which we operate. +Some of our competitors have larger global customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other capabilities than we do. These competitors may be able to adapt more quickly to new technological requirements and changes in customer and/or regulatory requirements and to leverage their scale to lower production costs and prices. We also face competition from newly established competitors, suppliers of products and customers who choose to develop their own products and services. +Existing or new competitors may develop products, technologies or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. As the technological sophistication of our competitors and the size of the market increases, competing low‑cost producers could emerge and grow stronger. These dynamics could result in declining average selling prices and reduced gross margins in our businesses. If we cannot sufficiently reduce our production costs or develop new products, technologies or services, we may not be able to compete successfully and we may lose market share, which could have a material adverse effect on our business, financial condition and results of operations. +The ability to recruit, retain and develop qualified personnel is critical to our success and ability to grow. +Our business functions are complex and require wide‑ranging expertise and intellectual capital. For us to successfully compete and grow, we must retain, recruit and develop personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. In addition, we must develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is highly competitive, particularly in the states in which our operations are concentrated. This may result in market increases in compensation. Our efforts to retain and develop personnel may also result in significant additional expenses, which could have a material adverse effect on our profitability. Even then, we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. In addition, our key personnel may not continue to be employed or we may be unable to attract and retain qualified personnel in the future. Any failure to retain or attract employees or key personnel could have a material adverse effect on our business, financial condition and results of operations. +We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer meet with our strategy or that should be consolidated. +In executing our strategy, we have experienced consolidation of certain of our facilities and/or the divestiture of certain of our businesses. We will continue to evaluate such opportunities. Any such consolidation or divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position. +We cannot provide any assurance that we will be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of operations or closure, may not be available to us or may be more costly than anticipated. +15 +Table of Contents +Our future success depends upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process. We may be unable to commercialize new or improved products we may develop on a timely basis, or at all. +The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological, market and industry trends, as well as precise technical execution. The successful development of new products may require us to undertake time-consuming and costly development activities, and we may experience difficulties or challenging market conditions that could delay or prevent the successful development, commercialization and marketing of these new products, including, for example, limited market acceptance of dual-interface EMV technology in the United States. Before we can commercialize any new products, we may need to expend significant funds in order to conduct substantial research and development. If we have difficulty producing innovative products, there could be a material adverse effect on our revenue, results of operations, reputation and business. +As we develop products, we may need to make significant investments in product development, as well as sales and marketing resources. Furthermore, if we are unable to develop and introduce new and innovative products in a cost‑effective and timely manner, our product and service offerings could be rendered obsolete. In addition, competitors may develop and commercialize competing products faster than we are able to do so. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. +Our business and financial results may be materially adversely affected by various legal and regulatory proceedings. +We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our business, operating results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any liability that may be imposed on us. See Part I, Item 3, “Legal Proceedings” of this Annual Report on Form 10-K for information on our currently pending legal proceedings. +New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected. +The markets for our products and services are subject to technological changes, frequent introductions of new products and services and evolving industry standards. In particular, the rise in the adoption in wireless payment systems or mobile payments may make physical cards less attractive as a method of payment. Although to date we have not seen a meaningful reduction in card‑based payments in the U.S. resulting from the emergence of mobile payment applications, mobile payments offer consumers an alternative method to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services, or our new services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. We continually engage in efforts to innovate and upgrade our products and services. If we do not complete or gain market acceptance of new products, services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or attract new ones. For example, one of our growth opportunities is the potential adoption of dual-interface EMV cards by U.S. card issuing banks. Banks may be delayed in transitioning to the issuance of dual‑interface EMV cards due to increased costs and other factors. If these entities do not deploy dual‑interface EMV technology or do so less quickly and/or completely than we expect, our ability to grow could be significantly affected which could have a material adverse effect on our business, financial condition and results of operations. +16 +Table of Contents +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +· +effectively identify and capitalize upon opportunities in new and emerging product markets; +· +invest resources in innovation and research and development; +· +complete and introduce new products and integrated services solutions in a timely manner; +· +license any required third‑party technology or intellectual property rights; +· +qualify for and obtain required industry certification for our products; +· +comply with applicable data protection regulations; and +· +retain and hire talent experienced in developing new products and services +Additionally, opportunities to combine or package products and service offerings and the ability to cross‑sell products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross‑sell our products and services, this may have a material adverse effect on our business, financial condition and results of operations. +Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue and profitability or lead to significant variability in our operating results. These factors include, among others, the cyclicality of the financial card and electronic payment industries, capital requirements, inventory management, the availability of funding, competition, new product developments, technological changes, production problems and other factors. +Furthermore, in periods of industry overcapacity or when our customers encounter difficulties in their end‑markets, orders are more exposed to cancellations, reductions, price renegotiations or postponements, which in turn reduce our management’s ability to forecast the next quarter or full‑year production levels, net sales, profits and cash flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations as visibility is reduced. This may have a material adverse effect on our business, financial condition and results of operations. +Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value. +Our long-lived assets recorded as of December 31, 2018 were $121.7 million, representing 59% of our total assets, of which we have recorded plant, equipment and leasehold improvements of $39.1 million, as our operations require significant investments in machinery and equipment. +We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we were to conclude that an additional future write‑down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write‑down of our long-lived assets may result from, among other things, deterioration in our performance and a decline in expected future cash flows and could have a material adverse effect on our business, financial condition and results of operations. +During the second quarter of 2018, we recorded an impairment charge of $7.6 million on the long lived assets in our U.K. Limited segment. During the fourth quarter of 2018, based on the goodwill impairment test performed annually as of October 1, there were no other impairment charges necessary. See Part II, Item 8, Financial Statements and Supplementary Data , Note 7 “Goodwill and Other Intangible Assets,” and Note 4 “Discontinued Operations and Dispositions” in this Annual Report on Form 10-K for more information. +17 +Table of Contents +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brand certification standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and manufacturers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated if we fail to comply with these standards and criteria. +We make significant investments to our network of high‑security facilities in order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have constituted in the past an important part of our revenue and profitability. For the year ended December 31, 2018, the vast majority of the products we produced and services we provided were subject to certification with one or more of the Payment Card Brands. If we were to lose our certification from one or more of the Payment Card Brands, Interac (in Canada), or PCI certification for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the networks of the Payment Card Brands. If we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations. +A disruption in our operations or supply chain could adversely affect our business and financial results. +As a company engaged in manufacturing and distribution, we are subject to the risks inherent in such activities, including disruptions or delays in supply chain or information technology, product quality control, as well other external factors over which we have no control. One of the most important components of our products is the EMV microchip. We obtain our components from multiple suppliers located in South Korea, France, the United States and Singapore, primarily on a purchase order basis. Key components for our products include EMV microchips, substrates (such as PVC), modules, antennas, and inlays, which we source from a few key suppliers. Changes in the financial or business condition of our suppliers could subject us to losses or adversely affect our ability to bring products to market. Further, the failure of our suppliers to deliver goods and services in sufficient quantities, in compliance with applicable standards, and in a timely manner could adversely affect our customer service levels and overall business. For example, we have in the past experienced delays in our supply chain, which made it difficult to produce our products in a timely manner. In addition, any increases in the costs of goods and services for our business may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in our operations. +Risks associated with reduced levels of consumer and business spending could adversely affect our business, financial condition and results of operations. +Our business depends heavily on the overall level of consumer and business spending. Our revenue is exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. A sustained deterioration in general economic condition, particularly in the United States, or increases in interest rates may adversely affect our financial performance by reducing the demand for our Financial Payment Card solutions or reduce the purchase of our higher margin products. If a downturn occurs, credit card issuers may reduce credit limits, close accounts, and become more selective with respect to whom they issue credit cards. These and other changes in economic conditions could also adversely impact our future revenues and profits and cause a materially adverse effect on our business, financial condition and results of operations. +Costs relating to product defects, and any related product liability and warranty claims may materially adversely affect our business +We offer highly complex services and products and, accordingly, from time to time defects have occurred. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory, the loss of potential sales and claims by third parties. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused +18 +Table of Contents +by such defects. If we sell defective products into the market, our reputation could suffer and we may lose sales opportunities and incur liability for damages, including damage claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations. +If the U.S. government puts significant tariffs or other restrictions on goods imported into the United States, our revenue and results of operations may be materially harmed. +Most of our chips, as well as certain other raw materials, are imported from companies located outside of the United States. The U.S. government has already imposed tariffs on imports from certain countries and may impose further tariffs and/or trade restrictions. The current U.S. administration has also expressed antipathy towards certain existing international trade agreements. Any of these factors could depress economic activity, restrict our access to suppliers and have a material adverse effect on our business, financial condition and results of operations. +These tariffs are subject to a number of uncertainties as they are implemented, including future adjustments and changes to the products covered by additional tariffs and to the countries included or excluded from such tariffs. The ultimate reaction of other countries, and the impact of these tariffs or other actions on the United States and our business, financial condition and results of operations, cannot be predicted at this time, nor can we predict the impact of any other developments with respect to global trade. +We may become subject to additional sales tax collection obligations and claims for uncollected amounts. +In recent years, a number of states have adopted or considered adopting legislation requiring out-of-state sellers to collect and remit sales tax on sales transactions into those states where they have no physical presence. The United States Supreme Court’s June 2018 decision in South Dakota v. Wayfair, Inc. significantly increased the ability of states to impose sales tax collection responsibilities on out-of-state sellers. The ruling is widely expected to result in an increased number of states seeking to expand the applicability of their own laws regarding sales tax “nexus.” If this occurs, we could become subject to additional costs and administrative requirements to collect and remit sales tax in additional jurisdictions. Further, we may be subject to the retroactive assessment of state or local sales taxes in certain jurisdictions. Such assessments may adversely affect our future cash flow and financial results. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. +Many of our products integrate third‑party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with, among other benefits, access to technology owned by third parties. For example, we license Java card technology from Oracle and Multos card technology from Multos International, a subsidiary of a competitor, for use in certain of our products, including in EMV cards. This Java and Multos card technology provides a secure environment for applications on smart cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements with Oracle and Multos International for the continued use of these platforms. Oracle and Multos International may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross‑licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios. If we are unable to continue to successfully renew these agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products, which could have a material adverse effect on our operations. +We are required to comply with complex laws and regulations in the United States and other countries and are exposed to business risks associated with our international operations. +We are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and +19 +Table of Contents +permit requirements, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. There are a number of risks associated with international business operations, including political instability (e.g., the threat of war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect our employees, reputation, business or financial results as well as our ability to meet our objectives. +We may not be in full compliance at all times with the laws and regulations to which we are subject and we may not have obtained the permits, authorizations, or licenses that we need. Any failure to comply with applicable laws or regulations could result in fines or sanctions. In such a case, or if any of these international business risks were to materialize, there could be a material adverse effect on our business, financial condition and results of operations. +Environmental, health and safety laws and regulations expose us to liability and any such liability may have a material adverse effect on our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, our products and the raw materials we use in our production processes are subject to numerous environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We may not be able to be at all times, in full compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or operate real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liability on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +The scientific examination of, political attention to, and rules and regulations on issues surrounding the existence and extent of climate change may result in an increase in our cost of production due to increases in the price of energy and/or the introduction of energy or carbon taxes. A variety of regulatory developments have been introduced that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gasses. Companies such as ours may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. These developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in environmental regulations could increase our production costs, which could have a material adverse effect on our business, financial condition and results of operations. +Our majority stockholders have the ability to control significant corporate activities +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital), own approximately 37% and 22% of our common stock, respectively, as of December 31, 2018. As a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to control decision‑making with respect to our business direction and policies. Matters over which the Tricor Funds, directly or indirectly, exercise control include: +· +election of directors; +· +mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; +· +other acquisitions or dispositions of businesses or assets; +· +incurrence of indebtedness and the issuance of equity securities; +20 +Table of Contents +· +repurchases of stock and payment of dividends; and +· +the issuance of shares to management under our incentive plans. +Tricor Funds may divest all or some of their ownership of our common stock at any time, either through sale on the open market or through a distribution to the participants in the funds. If Tricor Funds or the participants in the funds cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. +Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial portion of our board of directors. +Messrs. Bradley Seaman and Nicholas Peters, who are officers or affiliates of Parallel49 Equity (and its predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49 Equity, on the one hand, and of other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors. +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +· +the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +· +following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors +· +advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings +· +allowing only our board of directors to fill vacancies on our board of directors; and +· +following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, super‑majority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation +21 +Table of Contents +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate when the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law (the “DGCL”), an anti‑takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti‑takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, the potential issuance of preferred stock may delay or prevent a change in control of us or discourage bids for our common stock at a premium over the market price. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +Any issuance of preferred stock could adversely affect holders of our common stock, which could depress the price of our common stock. +Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance or issuance of preferred stock may adversely affect the market price and the voting and other rights of the holders of our common stock. +Item 1B. Unresolved Staff Comment s +None. +22 +Table of Contents +Item 2. Propertie s +Information regarding each of our facilities is set forth below. +Location +Operations +Square +Footage +Owned/ +Leased +Littleton, Colorado +(Corporate) +Corporate headquarters facility +12,000 +Leased +Littleton, Colorado +(Centennial) +Financial Payment Card production +65,000 +Leased +Roseville, Minnesota +Financial Payment Card production, card personalization, card packaging services, secure fulfillment +200,000 +Leased +Fort Wayne, Indiana +Financial Payment Card production +36,000 +Leased +Nashville, Tennessee +Financial Payment Card personalization services and fulfillment +66,000 +Leased +Toronto, Ontario +Financial Payment Card and retail gift card production and card personalization services and fulfillment +67,000 +Leased +Item 3. Legal Proceeding s +In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.) (the “Class Action”) +On June 15, 2016, two purported CPI stockholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc. in the United States District Court for the Southern District of New York (the “Court”) against CPI, certain of its former officers and current and former directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 initial public offering (“IPO”). The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, asserted claims under §§11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”) and sought, among other things, damages and costs. In particular, the complaints alleged that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard and VISA chip cards (collectively, “EMV® cards”) during the first half of fiscal year 2015 and resulting EMV® card inventory levels; and (ii) capacity to purchase additional EMV® cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ended December 31, 2015. The complaints alleged that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. +On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act. On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint was based principally on the same theories as the original complaints, but added allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV® technology and (ii) increased pricing pressure and competition CPI faced in the EMV® market. +On September 21, 2018, the parties executed a stipulation and agreement of settlement (“Stipulation”) to resolve the claims asserted in the amended complaint. On October 22, 2018, the Court granted lead plaintiff’s motion for authorization to notify the settlement class of the proposed settlement. After distribution of the notice to the class and a final settlement hearing on February 5, 2019, the Court entered orders on February 6, 2019: (i) approving the proposed settlement; and (ii) granting in part lead plaintiff’s motion for attorneys’ fees and expenses. On February 25, 2019, the Court entered an order and final judgment dismissing the case, in its entirety, with prejudice. +Heckermann v. Montross et al. , Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”) +On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and former directors, along with the sponsors of the IPO. CPI is also named as a nominal defendant. The derivative complaint asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions +23 +Table of Contents +in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets. +On March 28, 2018, the Court entered the parties’ stipulated order staying the Derivative Suit pending final determination of the Class Action. Under its terms, the stay of the Derivative Suit will be lifted 30 days after the entry of final judgment in the Class Action which was entered on February 25, 2019. +The Company believes these claims are without merit and is defending the Derivative Suit vigorously. +CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. (2 cases) +First case. On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado. The complaint asserts that MPS ultra secure gift card packages sold to at least one customer infringe a Company patent on ultrasecure gift card packages. MPS has answered the complaint and counterclaimed for invalidity and noninfringement. The Company’s preliminary injunction request was denied without prejudice after MPS represented that it had voluntarily ceased using the accused technology and will notify CPI before it re-starts. Discovery is underway. MPS’s early motion for summary judgment was denied in August 2017 and its motion to dismiss on jurisdictional grounds was denied in July 2018. The Company’s subsidiary CPI Card Group-Minnesota, Inc., has been added to the case as plaintiff. The Company’s patent will expire in 2028. +In June 2017, MPS filed an Inter Partes Review (“IPR”) petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”) to review the patent at issue in the patent infringement suit. The PTAB instituted the IPR on January 9, 2018. The PTAB entered its final written decision on January 4, 2019, determining that all of the claims in the patent are unpatentable. The Company filed an appeal of this decision to the federal circuit court on March 1, 2019. The patent infringement suit is administratively dismissed pending the final determination of the patent validity. +The Company intends to vigorously assert its intellectual property rights in connection with this litigation and the IPR. +Second case. During the summer of 2017, the Company commenced a lawsuit in the District of Minnesota against a former employee, MPS, and two MPS employees (collectively, the Defendants). The former employee was a sales executive who left the Company in 2017 to join MPS. In the lawsuit, the Company alleges that the Defendants misappropriated the Company's trade secrets and confidential information, that the former employee violated his employment agreements with the Company, and that Defendants committed various related business torts. After some early discovery, the Company moved for a preliminary injunction, which the Court granted in December, 2017. The company received a second preliminary injunction in August 2018. The litigation is ongoing. +In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. +Item 4. Mine Safety Disclosure s +Not applicable. +PART I I +Item 5. Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market Information for Common Stock +Our common stock is listed on the NASDAQ and the Toronto Stock Exchange (“TSX”) under the symbol “PMTS” and “PMTS.TO”, respectively. +24 +Table of Contents +On December 20, 2017, we effected a one-for-five reverse stock split of our common stock, whereby each lot of five shares of common stock issued and outstanding immediately prior to the reverse stock split was converted into and became one share of common stock. In lieu of issuing any fractional shares, any stockholder entitled to receive less than one share of common stock received cash for such stockholder’s fractional share. Share and per share amounts reflect the one-for-five reverse stock split for all periods presented throughout this Annual Report on Form 10-K and the accompanying consolidated financial statements. +The following table sets forth for the indicated periods dividends declared and the high and low prices of our common stock as reported on the NASDAQ and TSX, as adjusted for the reverse stock split discussed above. +Cash Dividends +NASDAQ ($) +Toronto Stock Exchange (CAD$) +2018 +Declared +High +Low +High +Low +First Quarter +$ +— +$ +4.13 +$ +2.52 +$ +5.20 +$ +3.20 +Second Quarter +$ +— +$ +2.98 +$ +2.00 +$ +3.95 +$ +2.66 +Third Quarter +$ +— +$ +3.95 +$ +1.96 +$ +5.22 +$ +2.53 +Fourth Quarter +$ +— +$ +3.15 +$ +1.98 +$ +4.03 +$ +2.73 +2017 +First Quarter +$ +0.225 +$ +24.51 +$ +20.36 +$ +33.50 +$ +27.90 +Second Quarter +$ +0.225 +$ +20.61 +$ +9.32 +$ +28.10 +$ +11.80 +Third Quarter +$ +— +$ +15.75 +$ +4.53 +$ +21.95 +$ +5.50 +Fourth Quarter +$ +— +$ +7.25 +$ +3.44 +$ +9.60 +$ +4.90 +Holders +There were eight stockholders of record as of February 22, 2019. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. +Dividend +During the year ended December 31, 2017, the Company declared quarterly cash dividends of $0.225 per share payable on April 7 and July 7, respectively. The Company discontinued its quarterly dividend during August 2017. +Issuer Purchases of Equity Securities +There were no shares repurchased under the Company’s stock repurchase plan during the years ended December 31, 2018 and 2017, and the stock repurchase plan expired by its terms during May 2017. +Item 6. Selected Financial Dat a +Not required due to small reporting company status +Item 7. Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control. See "Risk Factors" and “Forward-Looking Statements.” +Company Overview +We are engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which we define as credit cards, debit cards and prepaid cards issued on the networks of Payment Card Brands (Visa, MasterCard, American express and Discover) in the United States of America. We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on +25 +Table of Contents +this attractive subsector of the financial technology market. Our customers include leading national and regional banks, independent community banks, credit unions, Prepaid Debit Card program managers, Group Service Providers (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) card transaction processors. We serve a diverse set of over 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States of America the largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card transaction processors. +We serve our customers through a network of production and card services facilities, including high-security facilities in the United States and Canada that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. We have a leading network of high-security production facilities in the United States and Canada, allowing us to optimize our solutions offerings to serve the needs of our diverse customer base. +In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include customers for which we only manufacture and personalize Financial Payment Cards. The transaction is expected to close in the first half of 2019. The Financial Payment Card business customers of our Canada operations will migrate to our operations in the U.S. or migrate to other service providers before the transaction closes. The divestiture allows us to further optimize our footprint and is consistent with our previously announced plan to better position ourselves to serve customers by focusing on our core businesses. Our Canadian subsidiary is part of the Other reportable segment. +On August 3, 2018, we completed the sale of our three facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provide personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The transaction was structured as a sale of all of the outstanding shares of CPI Card Group – UK Limited, for total consideration of approximately $4.5 million. During the third quarter 2018, the Company received net cash proceeds of $0.3 million after the repayment of liabilities associated with the United Kingdom facilities, excluding tax benefits related to the structure of the sale. The historical financial position, results of operations and cash flows for the U.K. segment have been restated for all periods presented to conform with discontinued operations presentation. Unless otherwise indicated, information in Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to continuing operations. T he operations and cash flows were removed from the Company’s consolidated operating results. In connection with the substantial liquidation of the Company’s U.K Limited segment in the third quarter of 2018, we released the related foreign currency cumulative translation adjustment of $4.0 million from accumulated other comprehensive loss into loss from discontinued operations. U.K. Limited incurred a pre-tax loss from operations of $15.4 million for the year ended December 31, 2018, due to the softness in our U.K. Limited retail sector and a decline in sales relating to certain customers. Additionally, we recorded the following charges during the year ended December 31, 2018: impairment charges of $7.6 million associated with goodwill and customer relationship intangible assets, and a $7.2 million loss on the sale. The major line items constituting the (loss) income of the discontinued operation were as follows: +For the year ended +December 31, +2018 +2017 +Total net sales +$ +10,741 +$ +31,119 +Total cost of sales +10,222 +24,331 +Selling, general and administrative +4,336 +5,591 +Impairments +7,615 +— +Other expense (income), net +4,006 +(43) +Pretax (loss) income from discontinued operation +(15,438) +1,240 +Pretax loss on sale of discontinued operation +(7,248) +— +Total pretax (loss) income on discontinued operation +(22,686) +1,240 +Income tax benefit (expense) +23 +(165) +Net income (loss) from discontinued operation +$ +(22,663) +$ +1,075 +26 +Table of Contents +During February 2018, we made the decision to consolidate our three personalization operations in the United States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a cost-competitive business model. +2018 Summary of Financial Performance +Information below is described on a continuing operations basis. During the year ended December 31, 2018, net sales increased 14.3% from 2017, to $255.8 million, and we recorded income from operations of $4.6 million compared to $19.3 million loss from operations during 2017. The operating income margin for the year ended December 31, 2018 was 2%, an increase from operating loss margin of 9% in 2017. For the year ended December 31, 2018, we recorded net loss from continuing operations of $14.8 million, compared to net loss of $23.1 million in 2017. +Included in loss from operations and net loss from continuing operations during the prior year ended December 31, 2017, were goodwill impairment charges of $19.1 million. This impairment charge was comprised of $17.2 million related to the U.S. Debit and Credit segment resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1.9 million related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. See Note 7 “Goodwill and Other Intangible Assets” in Part II, Item 8, “Financial Statements and Supplementary Data” and “Critical Accounting Policies and Estimates” in this Annual Report on Form 10-K for additional information. +Cash provided by operating activities from continuing operations for the year ended December 31, 2018 was $7.1 million, representing an increase of $3.6 million compared to $3.5 million during the prior year period. +Segment Overview +During the first quarter of 2018, we reorganized our United States business operations and realigned our United States reporting segments to correspond with the manner with which our chief operating decision maker evaluates operating performance and makes decisions as to the allocation of resources. As a result of this realignment, the CPI On-Demand business operations have been moved from the U.S. Prepaid Debit segment into the U.S. Debit and Credit reporting segment, consistent with the other related personalization operations. Segment information for previous periods has been restated to conform with this realignment and current year presentation. The restatement of the prior year segment information was not material. +Our reportable segments were as follows: +· +U.S. Debit and Credit, +· +U.S. Prepaid Debit, and +· +Other. +U.S. Debit and Credit Segment +Our U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact, contactless, and dual interface cards, and CPI Metals TM , a premium product capability. We also sell instant card issuance systems, and Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands (including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards). We provide CPI On-Demand services, where we produce images, personalized payment cards, and related collateral on a one-by-one, on demand basis for our customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. +27 +Table of Contents +U.S. Prepaid Debit Segment +Our U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. +Other +Our Other segment includes our corporate headquarter costs and a less significant operations that generate revenue from the production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment services in Canada. +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive loss. All line items below are described on a continuing operations basis. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of EMV and non-EMV Financial Payment Cards, including contact, contactless, and dual interface cards, and CPI Metals TM . We also generate product revenue from the sale of our Card@Once ® instant issuance equipment and supplies, Private Label Credit Cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, including CPI On-Demand services, tamper-evident security packaging, fulfillment services and software as a service personalization of instant issuance Financial Payment cards. We also generate services revenue from personalizing retail gift cards primarily in Canada. +As of January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers , (“ASC 606”), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In accordance with this new standard, certain of our performance obligations are required to be recognized over time as the goods are produced rather than upon shipment, as required under applicable accounting guidance prior to ASC 606, as those products provide value only to a specified customer, have no alternative use, and we have the right to payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements, as revenue will be recognized as goods are produced rather than upon shipment or delivery of goods. See Note 2, “Summary of Significant Accounting Policies” in Part II, Item 8, “ Financial Statements and Supplementary Data ” and “Critical Accounting Policies and Estimates—Revenue Recognition.” in this Annual Report on Form 10-K for additional information. +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including microchips in the case of EMV cards and, additionally, RFID assemblies in the case of contactless and dual-interface EMV cards, labor costs, material costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Product costs also include desktop card personalization terminals in the case of Card@Once ® instant issuance system sales. Services costs include the cost of labor and the potential rising costs associated with labor, raw materials in the case of tamper-evident security packaging, and equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, promotional activity and employee relations. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. We include gross shipping and handling revenue and cost in net sales and cost of sales respectively +28 +Table of Contents +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service, human resources, research and development, and administrative personnel, including payroll, benefits and stock-based compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and software related fees. Operating expense also includes depreciation and amortization expense, and may include impairment charges on tangible and intangible assets, when necessary. +Income (Loss) from Operations and Operating Margin +Income (loss) from operations consists of our gross profit less our operating expenses and impairments, if applicable. Operating margin is income (loss) from operations as a percentage of net sales. +Other Expense, net +Other expense, net consists primarily of interest expense and foreign currency gains and losses. +Net Loss from Continuing Operations +Net loss from continuing operations consists of our income (loss) from operations, less other expense, net, and income tax benefit. +Results of Operations +Year Ended December 31, 2018 Compared With Year Ended December 31, 2017 +The table below presents our results of operations, on a continuing operations basis, for the years ended December 31, 2018 and 2017: +Year Ended December 31, +2018 +2017 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +125,069 +$ +104,459 +$ +20,610 +19.7 +% +Services +130,745 +119,285 +11,460 +9.6 +% +Total net sales +255,814 +223,744 +32,070 +14.3 +% +Cost of sales +177,224 +155,539 +21,685 +13.9 +% +Gross profit +78,590 +68,205 +10,385 +15.2 +% +Operating expenses (exclusive of impairments shown below) +74,002 +68,431 +5,571 +8.1 +% +Impairments +— +19,074 +(19,074) +* +Income (loss) from operations +4,588 +(19,300) +23,888 +* +% +Other expense, net: +Interest, net +(23,431) +(20,850) +(2,581) +12.4 +% +Foreign exchange (loss) gain +(311) +517 +(828) +* +Other income +16 +12 +4 +33.3 +% +Loss before income taxes +(19,138) +(39,621) +20,483 +51.7 +% +Income tax benefit +4,339 +16,536 +(12,197) +* +Net loss from continuing operations +$ +(14,799) +$ +(23,085) +$ +8,286 +35.9 +% +* Not meaningful +29 +Table of Contents +Net Sales +Year Ended December 31, +2018 +2017 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +U.S. Debit and Credit +$ +178,597 +$ +162,216 +$ +16,381 +10.1 +% +U.S. Prepaid Debit +69,199 +57,005 +12,194 +21.4 +Other +9,891 +11,049 +(1,158) +(10.5) +% +Eliminations +(1,873) +(6,526) +4,653 +* +Total +$ +255,814 +$ +223,744 +$ +32,070 +14.3 +% +* Not meaningful +Net sales for the year ended December 31, 2018 increased $32.1 million, or 14.3%, to $ 255.8 million compared to $223.7 million for the year ended December 31, 2017. The increase in net sales during 2018 was due to a 10.1% increase in U.S. Debit and Credit and a 21.4% increase in U.S. Prepaid Debit, partially offset by a 10.5% decrease in Other. +U.S. Debit and Credit +Net sales for U.S. Debit and Credit for the year ended December 31, 2018 increased $16.4 million, or 10.1%, to $178.6 million compared to $162.2 million for the year ended December 31, 2017. The increase was primarily due to higher net sales from our emerging products and solutions, including metal cards, dual interface EMV® cards, and Card@Once®. Metal cards are a premium product, and dual interface EMV cards include additional technology to process contactless transactions and generally have a higher selling price than other contact-only EMV cards. Partially offsetting these increases was a decline in EMV ® card net sales, excluding metal and dual interface, and non-EMV card net sales. Volumes of EMV card net sales, excluding metal and dual interface, increased 5% during the year ended December 31, 2018 compared to the prior year, while average selling prices declined on a year over year basis . +U.S. Prepaid Debit +Net sales for U.S. Prepaid Debit for the year ended December 31, 2018 increased $12.2 million, or 21.4%, to $69.2 million compared to $57.0 million for the year ended December 31, 2017. The increase was the result of additional sales volumes from new portfolio wins with existing customers and overall higher volumes from our existing customer base. +Other +Net sales in Other decreased $1.2 million, or 10.5%, from the year ended December 31, 2018, compared to the year ended December 31, 2017, as a result of lower volumes with certain customers. +Eliminations +Amounts include the sales between segments and are eliminated upon consolidation. The decrease in eliminations for the year ended December 31, 2018 compared to the year ended December 31, 2017 is due to less sales between segments. +30 +Table of Contents +Gross Profit and Gross Margin +Year Ended December 31, +% of +% of +2018 +net sales +2017 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +U.S. Debit and Credit +$ +50,036 +28.0 +% +$ +45,179 +27.9 +% +$ +4,857 +10.8 +% +U.S. Prepaid Debit +26,422 +38.2 +% +20,358 +35.7 +% +6,064 +29.8 +% +Other +2,132 +19.3 +% +2,668 +24.1 +% +(536) +(20.1) +% +Total +$ +78,590 +30.7 +% +$ +68,205 +30.5 +% +$ +10,385 +15.2 +% +Gross profit for the year ended December 31, 2018 increased $10.4 million, or 15.2%, to $78.6 million compared to $68.2 million for the year ended December 31, 2017. +U.S. Debit and Credit +Gross profit for U.S. Debit and Credit for the year ended December 31, 2018 increased $4.9 million, or 10.8%, to $50.1 million compared to $45.2 million for the year ended December 31, 2017. The increase in gross profit for U.S. Debit and Credit was driven by more profitable sales mix as noted in the net sales discussion above, partially offset by the acceleration of depreciation expense and restructuring charges relating to the consolidation of our personalization operations. +U.S. Prepaid Debit +Gross profit for U.S. Prepaid Debit for the year ended December 31, 2018 increased $6.1 million, or 29.8%, to $26.4 million compared to $20.4 million for the year ended December 31, 2017. The increase in gross profit and margin was attributed primarily to higher sales volumes, favorable overhead cost absorption, and cost efficiencies. +Other +Gross profit in Other decreased 20.1% in 2018 to $2.1 million from $2.7 million in 2017. The decrease is a result of lower sales volumes with certain customers and unfavorable overhead cost absorption. +Operating Expenses +Year Ended December 31, +2018 +2017 +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +U.S. Debit and Credit +$ +27,622 +$ +43,053 +$ +(15,431) +(35.8) +% +U.S. Prepaid Debit +4,494 +3,678 +816 +22.2 +% +Other +41,886 +40,774 +1,112 +2.7 +% +Total +$ +74,002 +$ +87,505 +$ +(13,503) +(15.4) +% +31 +Table of Contents +Goodwill Impairments +We perform goodwill impairment testing on an annual basis as of October 1 of each year or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For the year ended December 31, 2018, there was no goodwill impairment necessary for the continuing operations. Based on the goodwill impairment test performed in the prior year, as of October 1, 2017, we recorded an impairment charge of $19.1 million. This impairment charge included $17.2 million related to the U.S. Debit and Credit segment resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1.9 million related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. +U.S. Debit and Credit +The decrease in operating expenses is primarily attributed to the goodwill impairment charge of $17.2 million during the year ended December 31, 2017. Partially offsetting this impairment charge were higher costs associated with the consolidation of our personalization operations and increased employee performance incentive compensation. +U.S. Prepaid Debit +U.S. Prepaid Debit increased $0.8 million, primarily due to increased employee performance incentive compensation, and administrative costs. +Other +Other operating expenses increased $1.1 million due to increased employee performance incentive compensation of $3.4 million and consulting and other administrative costs of $1.6 million. Partially offsetting these costs were decreased legal costs of $2.2 million. Additionally, we recorded a $1.9 million goodwill impairment charge during the year ended December 31, 2017, relating to the Canada business within the Other segment. +Income (Loss) from Operations and Operating Margin +Year Ended December 31, +% of +% of +2018 +net sales +2017 +net sales +$ Change +% Change +(dollars in thousands) +Income (loss) from operations by segment: +U.S. Debit and Credit +$ +22,414 +12.6 +% +$ +2,121 +1.3 +% +$ +20,293 +956.8 +% +U.S. Prepaid Debit +21,928 +31.7 +% +16,679 +29.3 +% +5,249 +31.5 +% +Other +(39,754) +* +% +(38,100) +* +% +(1,654) +4.3 +% +Total +$ +4,588 +1.8 +% +$ +(19,300) +(8.6) +% +$ +23,888 +123.8 +% +* Not meaningful +During the year ended December 31, 2018 we had income from operations of $4.6 million compared to loss of $19.3 million for the year ended December 31, 2017. Included in the loss from operations during the year ended December 31, 2017 were the goodwill impairment charges discussed above, totaling $19.1 million. Operating margins for the year ended December 31, 2018 increased to 1.8% compared to (8.6)% for the year ended December 31, 2017. +U.S. Debit and Credit +Income from operations for U.S. Debit and Credit for the year ended December 31, 2018 increased $20.3 million to $22.4 million compared to $2.1 million for the year ended December 31, 2017. Operating margins for the year ended December 31, 2018 increased to 12.6% compared to 1.3% for the year ended December 31, 2017, primarily due to higher sales volume and more profitable sales mix, partially offset by charges relating to the consolidation of our personalization operations. Included in income from operations during the year ended December 31, 2017 were the goodwill impairment charges discussed above, totaling $17.2 million related to the U.S. Debit and Credit segment. +32 +Table of Contents +U.S. Prepaid Debit +Income from operations for U.S. Prepaid Debit for the year ended December 31, 2018 increased $5.2 million, or 31.5%, to $21.9 million compared to $16.7 million for the year ended December 31, 2017, primarily due to increased sales volumes and higher overhead cost absorption, partially offset by increased employee performance compensation . U.S. Prepaid Debit operating income margin for the year ended December 31, 2018 increased to 31.7% from 29.3% for the same period in 2017. +Other +Loss from operations in Other of $39.8 million represented an increased loss of $1.7 million for the year ended December 31, 2018 compared to the year ended December 31, 2017. The larger operating loss was mainly attributable to higher operating expenses, and lower profit in the Canadian business from reduced sales volumes. +Interest, net +Interest expense for the year ended December 31, 2018 increased $2.6 million, or 12.4%, to $23.4 million compared to $20.9 million for the year ended December 31, 2017. The additional interest expense resulted from a higher average interest rate on the First Lien Term Loan during the year ended December 31, 2018 compared to the same period ended 2017. +Income tax benefit +During the year ended December 31, 2018 there was an income tax benefit of $4.3 million compared with an income tax benefit of $16.5 million for the year ended December 31, 2017. In December 2017, the U.S. government enacted comprehensive tax reform legislation, and the U.S. federal tax rate reduced from 35.0% in 2017 to 21.0% in 2018. The effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of a tax benefit recorded during the year ended December 31, 2018 in connection with the U.K. Limited sale, and to a lesser extent, due to state income taxes and federal tax credits. Partially offsetting the increased tax benefit was the establishment of a partial valuation allowance on certain U.S. deferred tax assets and an uncertain tax position reserve. +Net loss from continuing operations +Net loss from continuing operations for the year ended December 31, 2018 was $14.8 million, compared to net loss of $23.1 million for the year ended December 31, 2017. The change was primarily due to more profitable sales mix, higher sales volumes resulting improved gross margin, offset by lower other EMV ® card pricing, and higher operating expenses and interest expense as described above. Contributing to the change was the impairment charge recorded during the year ended December 31, 2017. +Fourth Quarter +Our net sales increased 19.2% in the fourth quarter of 2018 compared to the fourth quarter of 2017. Net sales for U.S. Debit and Credit increased 23.9% in the fourth quarter of 2018 compared to fourth quarter of 2017. The increase in net sales was primarily due to higher net sales from our emerging products and solutions, including metal cards, dual interface EMV cards, and Card@Once® instant issuance systems. Volumes of EMV card sales, excluding metal and dual interface, increased 17% during the quarter ended December 31, 2018 compared to the prior year, while average selling prices declined on a year over year basis . +Net sales for our U.S. Prepaid Debit segment increased $1.0 million, or 6.0%, to $17.1 million in the fourth quarter of 2018 compared to $16.1 million in the fourth quarter of 2017. The increase was the result of additional sales volumes from our existing customer base. +Selling, general and administrative (exclusive of depreciation and amortization) expenses increased $1.5 million to $19.9 million in the fourth quarter of 2018 compared to $18.4 million in the fourth quarter 2017. This increase was included employee termination charges of $1.0 million, in our Other segment, related to the sale of our Canadian operations which is expected to close in the first half of 2019. +33 +Table of Contents +During the fourth quarter of 2018 there was a loss from operations of $0.4 million compared to a loss from operations of $21.5 million in the fourth quarter of 2017. The decrease in loss from operation was primarily due to the goodwill impairment charges of $19.1 million relating to reporting units within U.S. Debit and Credit and Other, during the three months ended December 31, 2017, as further described above. +Liquidity and Capital Resources +As of December 31, 2018, we had $20.3 million of cash and cash equivalents. Of this amount, $1.4 million was held in accounts outside of the United States. +Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs. +At December 31, 2018, there was $312.5 million outstanding under the First Lien Term Loan. We have a $40.0 million Revolving Credit Facility, of which $20.0 million was available for borrowing as of December 31, 2018. Additional amounts may be available for borrowing during the term of the Revolving Credit Facility, up to the full $40.0 million, to the extent our net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The First Lien Term Loan and Revolving Credit Facility (collectively, “First Lien Credit Facility”) mature on August 17, 2022 and August 17, 2020, respectively. As of December 31, 2018, our net leverage ratio was 10.9 times Adjusted EBITDA. +Interest rates under the First Lien Term Loan, at the Company’s election, are based on either a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%. As of December 31, 2018, the interest rate on our First Lien Term Loan was 7.02% and increased to 7.35% for the first six months of 2019, as the interest rate was reset on the First Lien Term Loan during January 2019. Total cash interest paid during 2018 was $20.7 million, an increase of $2.2 million compared to the prior year 2017. +The First Lien Credit Facility contains customary covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our assets, and affiliate transactions. We may also be required to make repayments on the First Lien Term Loan in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. We do not have a required excess cash flow payment related to 2018, and we were in compliance with all covenants under the First Lien Credit Facility as of December 31, 2018. +During August 2017, we discontinued our quarterly dividend of $0.225 per share. The dividend discontinuation was part of our plan to utilize a greater portion of available cash to reinvest back into the business and fund growth initiatives and to service our debt. +Operating Activities +Cash provided by operating activities from continuing operations for the year ended December 31, 2018 was $7.1 million compared to cash provided by operating activities of $3.5 million during the year ended December 31, 2017. The year over year increase was due to net working capital fluctuations, including accruals in 2018 for employee performance incentive compensation, and income taxes. Certain working capital fluctuations were partially offsetting the benefit, including an accounts receivable increase from the prior year. Additionally, during the year ended December 31, 2018, we recorded a lower net loss from continuing operations than compared to the prior year period. Included in the net loss from continuing operations during the year ended December 31, 2017, were non-cash impairment charges of $19.2 million, which did not impact cash flows from operating activities. Cash outflows from operating activities relating to our discontinued operation in the U.K., were a result of the decline in sales and operating losses incurred during 2018, and direct costs relating to the sale. +34 +Table of Contents +Investing Activities +Cash used in investing activities from continuing operations for the year ended December 31, 2018 was $5.6 million relating to capital expenditures. In 2018, we financed $1.8 million of machinery and equipment under capital leases. In addition to investments in machinery for our Financial Payment Card production and personalization operations, our capital expenditures in 2018 included investments in information technology. During the year ended December 31, 2017, capital expenditures from continuing operations were $7.3 million. +Financing Activities +Cash used in financing activities for the year ended December 31, 2018 was $0.5 million related to principal payments on capital leases. Cash used in financing activities for the year ended December 31, 2017, primarily related to dividend payments of $7.5 million. +Working Capital +Our working capital relating to continuing operations as of December 31, 2018 was $43.2 million, compared to $52.1 million as of December 31, 2017. During the year ended December 31, 2018, our cash balance decreased by $2.9 million, and our inventory balance decreased $4.0 million. Additionally, we had a net decrease in working capital compared to the prior year due to higher accrued expenses of $11.1 million. The increase to accrued expenses was primarily due to employee incentive compensation accruals. Partially offsetting these impacts was an increase in accounts receivable of $11.3 million. Refer to Note 2 in Item 8, Financial Statements, for further discussion of the impacts on the consolidated balance sheet of new accounting guidance for revenue recognition, implemented January 1, 2018. +Contractual Obligations +Not required due to smaller reporting company status. +Cyclical and Seasonal Nature of Business +Financial Payment Cards and Private Label Credit Cards are generally influenced by broader cyclical changes in the economy, with economic downturns resulting in decreases in the demand for our products and services. In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. Net sales are also influenced by Financial Payment Card renewal cycles. Additionally, we generally generate higher net sales in the third quarter of the year, as our sales of Prepaid Debit Card solutions are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season in the United States. +Off-Balance Sheet Arrangements +We had no off-balance sheet arrangements at December 31, 2018 and 2017. +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported net sales, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty, and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +35 +Table of Contents +Impairment Assessments of Goodwill and Long-Lived Assets +We account for business combinations using the acquisition method and allocate the acquisition price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The difference between the acquisition price and the fair value of the net assets acquired is recorded as goodwill. +In determining the fair values in impairment tests, we use one or more of the following recognized valuation methods: +· +the income approach (including discounted cash flows); +· +the market approach; or +· +the cost approach. +We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in those fair value measurements include identifying business factors such as size, growth, profitability, risk and return on investment and assessing comparable net sales and earnings multiples. Further, when measuring fair value based on discounted cash flows, we make assumptions about future price levels, rates of increase in net sales, cost of sales and operating expenses, weighted average cost of capital, rates of long term growth and income tax rates. We also consider our market capitalization, adjusted for unallocated monetary assets such as cash, debt, a control premium and other factors determined by management. Valuations are performed by management or third party valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values used in impairment tests are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates. Changes to or a failure to achieve our projected business assumptions, including growth and profitability, could result in a valuation that would trigger an impairment of goodwill. +Goodwill and other indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For impairment evaluations, we first make a qualitative assessment with respect to both goodwill and other indefinite-lived intangibles. In 2017, we adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with our annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. We completed our annual goodwill impairment testing as of October 1, 2018, which resulted in no such impairment charge. +On August 3, 2018, we completed the sale of our United Kingdom facilities that comprised the U.K. Limited reporting segment. We did not retain significant continuing involvement with the discontinued operation subsequent to the disposal. In connection with the sale, we performed a goodwill impairment test and recorded a charge of $6.4 million in the second quarter of 2018. The impairment was a result of continued market softness in the U.K. Limited segment, resulting in lower sales and margins and an expected sales price below the carrying value of the segment. We recorded an impairment charge of $1.2 million to customer relationship intangible assets related to the U.K. Limited segment in the second quarter of 2018, which is reported in discontinued operations. +For the year ended December 31, 2017, we recorded impairment charges of $19.1 million, of which $17.2 million related to U.S. Debit and Credit resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1.9 million related to the Other segment which resulted from declines in net sales and operating losses incurred in our Canadian business. +Goodwill is allocated to our reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to a reporting unit, it no longer retains its identification with a particular acquisition and becomes identified with that reporting unit. Accordingly, the fair value of the reporting unit as a whole is available to support the +36 +Table of Contents +recoverability of its goodwill. As of December 31, 2018, all of our goodwill is included within reporting units in our U.S. Debit and Credit segment. +Refer to Note 7, “Goodwill and Other Intangible Assets” and Note 8 “Fair Value of Financial Instruments” in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for certain additional information on goodwill and intangible asset impairments and for further definition of valuation inputs. +Long-lived assets, such as plant, equipment and software, and amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Plant, equipment, and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for equipment, furniture, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. If circumstances require that a long-lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. There were no material long-lived asset impairments recorded for the years ended December 31, 2018 and 2017, relating to the continuing operations of the Company. +Future changes in our assumptions or the interrelationship of those assumptions may negatively impact future valuations. In future measurements of fair value, adverse changes in assumptions could result in an impairment of goodwill or long-lived assets that would require a non-cash charge to the consolidated statements of operations and may have a material effect on our financial condition and operating results. +Revenue Recognition +For periods after January 1, 2018, we account for our net sales as follows: +Products Net Sales: “Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and billed, we estimate net sales by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are manufactured Financial Payment Cards, including in contact-EMV®, Dual-Interface EMV®, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once® printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. +Services Net Sales: Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. For work performed but not completed and billed, we estimate revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts: The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASU 2014-09 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +Inventory Valuation +Raw materials, and finished goods inventories are valued at the lower of cost or net realizable value, with cost determined using a first-in, first-out, specific identification or weighted-average method. Cost is calculated based upon the price paid for an item at the time it is received by us. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company monitors inventory for events or circumstances that may indicate the net realizable value is less than the carrying value of inventory, such as negative margins, expiration of material usage, and other forms of obsolescence. We record +37 +Table of Contents +adjustments to the valuation of inventory, as necessary. For manufacturing work performed but not completed and billed, inventory costs are recognized through cost of sales as the work is completed, consistent with the recognition of revenue. +Stock-Based Compensation +During October 2015, we adopted the CPI Card Group Inc. Omnibus Incentive Plan (“Omnibus Plan”). During the years ended December 31, 2018 and 2017, we granted stock options to certain employees. We estimate the fair value of option awards using a Black-Scholes option pricing model or other option pricing models, as we deem appropriate. Option-pricing models require us to estimate a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. The most subjective estimate is the expected volatility of the underlying stock when determining the fair market value of an option granted. Based on the limited amount of trading history of our common stock, we have partially utilized a peer group to estimate the volatility assumption when calculating the fair value of stock options granted during 2018 and 2017. As we obtain more trading history on our own common stock, our specific trading history and associated volatility has been gradually included to replace the peer group volatility assumption. As such, once our own common stock is fully utilized for the volatility assumption within the Black-Scholes option pricing model, our volatility assumption in the future could be significantly different going forward than what we have estimated for our 2018 and 2017 grants. This change could impact our stock-based compensation expense in future periods. +A 10% change in our stock-based compensation expense for the year ended December 31, 2018, would have affected pre-tax income by approximately $0.1 million. We include stock-based compensation expense in selling, general and administrative expenses in our consolidated statement of operations and comprehensive (loss) income. +Income Taxes +We record income tax expense using the liability method for taxes and are subject to income tax in many jurisdictions, including the United States, various states and localities, the United Kingdom, and Canada. A current tax asset or liability is recognized for the estimated taxes refundable or payable on the tax returns for the current year and a deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. In evaluating our ability to realize our deferred tax asset, we considered the following sources of future taxable income: +· +future reversals of existing taxable temporary differences; +· +future taxable income, exclusive of reversing temporary differences and carryforwards; +· +taxable income in prior carryback years; and +· +tax-planning strategies. +Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. Our forecast of future profitability represents our best estimate of these future events. After conducting this assessment, the valuation allowance recorded, net of federal benefit, against our deferred tax assets was $6.8 and $4.6 million as of December 31, 2018 and December 31, 2017, respectively. If actual results differ from estimated results, or if we adjust these assumptions in the future, we may need to adjust our deferred tax assets or liabilities, which could impact our effective tax rate. +The amount of income taxes we pay could be subject to possible audits in the taxing jurisdictions in which we operate. In the event of these possible audits, the taxing authorities might challenge items on our tax returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. We recognize tax benefits for uncertain positions only to the extent that we believe it is more likely than not that the tax +38 +Table of Contents +position will be sustained. Our future results may include favorable or unfavorable adjustments to our unrecognized tax benefits due to closure of income tax audits, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis. +Recent Accounting Pronouncements +Recently Adopted Accounting Pronouncements +As of January 1, 2018, we adopted ASC 606, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires an entity to disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted ASC 606 using the modified retrospective method and recognized the cumulative effect of adoption as an adjustment to the opening balance of “Accumulated loss” on the Consolidated Balance Sheet. Under the new guidance, we recognizes certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use, and we have the right to payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements, as revenue is recognized as goods are produced rather than upon shipment or delivery of goods. In addition, as a result of adopting the new guidance, we have recorded decreases to deferred revenue, and work in process, and an increase to accounts receivable. +Recently Issued Accounting Pronouncements +In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new guidance requires the recognition and measurement of leases at the beginning of the earliest comparative period presented in the financial statements. The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. In July 2018, t he FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. +The Company will adopt the new guidance on the effective date of January 1, 2019 and use the adoption date as the date of initial application as allowed under ASC 842. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. +The new standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight transition practical expedient. +The Company’s adoption process of ASC 842 is ongoing, including evaluating and quantifying the impact on the financial statements, identifying the population of leases and collecting and validating lease data. While the Company continues to assess all of the effects of adoption, the Company currently believes the most significant effects relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for real estate operating leases, and providing significant new disclosures about the Company’s leasing activities. +The new standard also provides practical expedients for the Company’s ongoing accounting. The Company expects to elect the short-term lease recognition exemption for all leases that qualify, meaning the Company will not recognize right-of-use assets or lease liabilities for existing and new lease agreements that qualify. The Company also expects to elect the practical expedient to not separate lease and non-lease components for all of its leases. +39 +Table of Contents +Item 7A. Quantitative and Qualitative Disclosures about Market Ris k +Not required due to smaller reporting company status +40 +Table of Contents +Item 8. Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 2018 and 2017 and for the years ended December 31, 2018 and 2017 +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations and Comprehensive Loss +F-4 +Consolidated Statements of Stockholders’ Deficit +F-5 +Consolidated Statements of Cash Flows +F-6 +Notes to Consolidated Financial Statements +F-7 +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the two‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. +Change in Accounting Principle +As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue in the year ended December 31, 2018 due to the adoption of ASC Topic 606, Revenue from Contracts with Customers . +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/KPMG LLP +We have served as the Company’s auditor since 2014. +Denver, Colorado +March 5, 2019 +F-2 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(Dollars in Thousands, Except Shares and Per Share Amounts) +December 31, +2018 +2017 +Assets +Current assets: +Cash and cash equivalents +$ +20,291 +$ +23,205 +Accounts receivable, net of allowances of $211 and $48, respectively +43,794 +32,531 +Inventories +9,827 +13,799 +Prepaid expenses and other current assets +4,997 +3,681 +Income taxes receivable +5,564 +8,208 +Assets of discontinued operation +— +20,651 +Total current assets +84,473 +102,075 +Plant, equipment and leasehold improvements, net +39,110 +44,436 +Intangible assets, net +35,437 +40,093 +Goodwill +47,150 +47,150 +Other assets +1,034 +251 +Total assets +$ +207,204 +$ +234,005 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +16,511 +$ +13,239 +Accrued expenses +23,853 +12,789 +Deferred revenue and customer deposits +912 +3,342 +Liabilities of discontinued operation +— +5,669 +Total current liabilities +41,276 +35,039 +Long-term debt +305,818 +303,869 +Deferred income taxes +5,749 +12,168 +Other long-term liabilities +3,937 +2,503 +Total liabilities +356,780 +353,579 +Commitments and contingencies (Note 13) +Stockholders’ deficit: +Common Stock; $0.001 par value—100,000,000 shares authorized; 11,160,377 shares issued and outstanding and 11,134,714 shares issued and outstanding at December 31, 2018 and 2017, respectively +11 +11 +Capital deficiency +(112,223) +(113,081) +Accumulated loss +(36,004) +(1,366) +Accumulated other comprehensive loss +(1,360) +(5,138) +Total stockholders’ deficit +(149,576) +(119,574) +Total liabilities and stockholders’ deficit +$ +207,204 +$ +234,005 +See accompanying notes to consolidated financial statements +F-3 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive Loss +(Dollars in Thousands, Except Share and Per Share Amounts) +Year Ended December 31, +2018 +2017 +Net sales: +Products +$ +125,069 +$ +104,459 +Services +130,745 +119,285 +Total net sales +255,814 +223,744 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +82,110 +70,527 +Services (exclusive of depreciation and amortization shown below) +82,697 +74,315 +Depreciation and amortization +12,417 +10,697 +Total cost of sales +177,224 +155,539 +Gross profit +78,590 +68,205 +Operating expenses: +Selling, general and administrative (exclusive of depreciation and amortization shown below) +68,014 +62,206 +Impairments +— +19,074 +Depreciation and amortization +5,988 +6,225 +Total operating expenses +74,002 +87,505 +Income (loss) from operations +4,588 +(19,300) +Other expense, net: +Interest, net +(23,431) +(20,850) +Foreign currency (loss) gain +(311) +517 +Other income, net +16 +12 +Total other expense, net +(23,726) +(20,321) +Loss before income taxes +(19,138) +(39,621) +Income tax benefit +4,339 +16,536 +Net loss from continuing operations +(14,799) +(23,085) +Net (loss) income from discontinued operation, net of taxes +(22,663) +1,075 +Net loss +$ +(37,462) +$ +(22,010) +Basic and diluted (loss) earnings per share: +Continuing operations +$ +(1.33) +$ +(2.08) +Discontinued operation +(2.03) +0.10 +$ +(3.36) +$ +(1.98) +Basic and dilutive weighted-average shares outstanding +11,149,554 +11,117,454 +Dividends declared per common share +$ +— +$ +0.45 +Comprehensive loss +Net loss +(37,462) +(22,010) +Reclassification adjustment from discontinued operations +3,983 +— +Currency translation adjustment +(205) +1,277 +Total comprehensive loss +$ +(33,684) +$ +(20,733) +See accompanying notes to consolidated financial statements +F-4 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Stockholders’ Deficit +(Dollars in Thousands, Except Share Amounts) +Accumulated +other +Common Shares +Capital +Accumulated +comprehensive +Shares (1) +Amount (1) +deficiency +earnings (loss) +loss +Total +December 31, 2016 +11,071,813 +$ +11 +$ +(114,837) +$ +25,968 +$ +(6,415) +$ +(95,273) +Adoption of ASU 2016-09 +— +— +(38) +38 +— +— +Common stock dividends +— +— +— +(5,021) +— +(5,021) +Shares issued under stock-based compensation plans +62,901 +— +— +(341) +— +(341) +Stock-based compensation +— +— +1,794 +— +— +1,794 +Components of comprehensive (loss) income: +Net loss +— +— +— +(22,010) +— +(22,010) +Currency translation adjustment +— +— +— +— +1,277 +1,277 +December 31, 2017 +11,134,714 +$ +11 +$ +(113,081) +$ +(1,366) +$ +(5,138) +$ +(119,574) +Adoption of ASU 2014-09 +— +— +— +2,824 +— +2,824 +Shares issued under stock-based compensation plans +25,663 +— +— +— +— +— +Stock-based compensation +— +— +858 +— +— +858 +Components of comprehensive (loss) income: +Net loss +— +— +— +(37,462) +— +(37,462) +Other comprehensive loss from discontinued operations +— +— +— +— +3,983 +3,983 +Currency translation adjustment +— +— +— +— +(205) +(205) +December 31, 2018 +11,160,377 +$ +11 +$ +(112,223) +$ +(36,004) +$ +(1,360) +$ +(149,576) +(1) Common share and par value amounts have been adjusted to give retroactive effect to the 1-for-5 reverse stock split effected on December 20, 2017. +See accompanying notes to consolidated financial statements +F-5 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(Dollars in Thousands) +Year Ended December 31, +2018 +2017 +Operating activities +Net loss +$ +(37,462) +$ +(22,010) +Adjustments to reconcile net loss to net cash provided by operating activities: +Loss (income) from discontinued operations +22,663 +(1,075) +Impairments +— +19,074 +Depreciation and amortization expense +18,405 +16,922 +Stock-based compensation expense +961 +1,989 +Amortization of debt issuance costs and debt discount +1,949 +1,947 +Deferred income tax +(6,897) +(9,167) +Other, net +302 +(165) +Changes in operating assets and liabilities: +Accounts receivable +(5,523) +(6,396) +Inventories +(1,998) +2,826 +Prepaid expenses and other assets +(2,108) +619 +Income taxes +2,644 +(8,581) +Accounts payable +2,411 +5,655 +Accrued expenses +10,436 +(456) +Deferred revenue and customer deposits +632 +599 +Other liabilities +655 +1,671 +Cash provided by operating activities - continuing operations +7,070 +3,452 +Cash used in operating activities -discontinued operations +(3,550) +(1,025) +Investing activities +Acquisitions of plant, equipment and leasehold improvements +(5,634) +(7,263) +Cash used in investing activities - continuing operations +(5,634) +(7,263) +Cash used in investing activities - discontinued operations +(220) +(1,527) +Financing activities +Dividends paid on common stock +— +(7,540) +Payments on capital leases +(519) +— +Taxes withheld and paid on stock-based compensation awards +— +(341) +Cash used in financing activities +(519) +(7,881) +Effect of exchange rates on cash +(61) +494 +Net decrease in cash and cash equivalents: +(2,914) +(13,750) +Cash and cash equivalents, beginning of period +23,205 +36,955 +Cash and cash equivalents, end of period +$ +20,291 +$ +23,205 +Supplemental disclosures of cash flow information +Cash paid (refunded) during the period for: +Interest +$ +20,703 +$ +18,466 +Income tax (refunds) payments, net +$ +(657) +$ +30 +Capital lease obligations incurred for certain machinery and equipment +$ +1,812 +$ +— +Accounts payable for acquisition of plant, equipment and leasehold improvements +$ +1,339 +$ +400 +See accompanying notes to consolidated financial statements +F-6 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated) +1. Business +CPI Card Group Inc., (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express, Discover and Interac (in Canada)) in the United States and Canada. The Company also offers an instant card issuance system and services, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. +As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be certified by one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers. +In 2018, the Company consolidated three personalization operations in the United States into two facilities to better enable the Company to optimize operations and achieve market-leading quality and service with a market-competitive business model. In conjunction with this decision, the Company accelerated the depreciation of certain related assets, which totaled $2,398 for the year ended December 31, 2018. The Company recorded severance charges of $552, and recorded lease termination charges of $476 during the year ended December 31, 2018. The charges were recorded in the U.S. Debit and Credit segment and were included in “Cost of sales” and “Selling, general and administrative” expenses on the Consolidated Statement of Operations. +On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provide personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The transaction was structured as a sale of all of the outstanding shares of CPI Card Group – UK Limited, for total consideration of approximately $4,500. During the third quarter 2018, the Company received net cash proceeds of $315 after the repayment of liabilities associated with the United Kingdom facilities, excluding tax benefits related to the structure of the sale. +During the first quarter of 2018, the Company reorganized its United States business operations and realigned its United States reporting segments to correspond with the manner with which the Company’s chief operating decision maker evaluates operating performance and makes decisions as to the allocation of resources. As a result of this realignment, the Company’s CPI on Demand business operations moved from the U.S. Prepaid Debit segment into the U.S. Debit and Credit reporting segment, consistent with the other related personalization operations. Segment information for previous periods has been restated to conform with this realignment and the current period presentation. The restatement of the segment information was not material. +The Company’s business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and Other. +U.S. Debit and Credit Segment +The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and Prepaid Debit Cards issued on the networks of the Payment Card Brands, and Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands (including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards). The Company’s sales of instant card issuance systems are recorded in this segment. CPI On-Demand services, where the Company is able to produce all images, personalized payment cards and related collateral on a one-by-one, on demand basis for its +F-7 +Table of Contents +customers, enabling individualized offerings and reducing waste. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. +U.S. Prepaid Debit Segment +The U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging and fulfillment. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. +Other +The Other category includes corporate headquarters and a less significant operating segment that derives revenue from the production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment services in Canada. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. +December 31, 2018 +December 31, 2017 +Trade accounts receivable +$ +36,428 +$ +32,579 +Unbilled accounts receivable +7,577 +— +44,005 +32,579 +Less allowance for doubtful accounts +(211) +(48) +$ +43,794 +$ +32,531 +The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it is +F-8 +Table of Contents +determined collection will not occur. The allowance for bad debt and credit activity for the years ended December 31, 2018 and 2017 is summarized as follows: +Balance as of December 31, 2016 +$ +124 +Bad debt expense +4 +Write-off of uncollectible accounts +(82) +Currency translation adjustments +2 +Balance as of December 31, 2017 +$ +48 +Bad debt expense +169 +Write-off of uncollectible accounts +(6) +Balance as of December 31, 2018 +$ +211 +For the year ended December 31, 2018 one customer represented 19% of the Company’s consolidated net sales. For the year ended December 31, 2017 one customer represented 15% of the Company’s consolidated net sales. +Inventories +Inventories consist of raw materials, and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out, specific identification or weighted-average method basis). Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. +Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required. +Goodwill and Intangible Assets +Goodwill is not amortized, but instead is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For impairment evaluations, the Company first makes a qualitative assessment with respect to both goodwill and other indefinite-lived intangibles. During 2017, the Company early adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with its annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; discrete and long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +F-9 +Table of Contents +Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made. +The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Stock-Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 15 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans. +Accrued Expenses +Accrued liabilities include accrued payroll expense of $2,371, and $2,526, as of December 31, 2018, and 2017, respectively. Accrued liabilities as of December 31, 2018, also includes accrued employee performance bonus of $7,137. +Use of Estimates +The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require management to make assumptions and estimates relating to the reporting of assets and liabilities in its preparation of the Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, valuation allowances for inventories and deferred taxes, debt, uncertain tax positions and stock-based compensation expense. Actual results could differ from those estimates. +Foreign Currency Translation +Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted-average exchange rate for each reporting period for net sales, expenses, gains and losses. Translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss in the accompanying consolidated financial statements. +F-10 +Table of Contents +Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in “Foreign currency gain (loss)” in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income. For the years ended December 31, 2018 and 2017 there were $(311) and $517 of such foreign currency (losses) gains, respectively. +Recently Accounting Pronouncements +Recently Adopted Accounting Pronouncements +As of January 1, 2018, the Company adopted Accounting Standards Codification ASC 606, Revenue from Contracts with Customers , (“ASC 606”), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires an entity to disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASC 606 of January 1, 2018 to all its contracts using the modified retrospective method and recognized the cumulative effect of adoption as an adjustment to the opening balance of “Accumulated loss” on the Consolidated Balance Sheet. Under the new guidance, the Company recognizes certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use and the Company has the right to payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements, as revenue is recognized as goods are produced rather than upon shipment or delivery of goods. In addition, as a result of adopting the new guidance, the Company has recorded decreases to deferred revenue, and work in process and finished goods inventories, and an increase to accounts receivable. These changes are reflected in the adoption adjustments table below. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. +See Note 3 “Net sales” for revenue recognition timing and methodology under ASC 606. +The cumulative effects of the adjustments made to the Company’s January 1, 2018 Consolidated Balance Sheet upon adoption of ASC 606 were as follows: +December 31, +Adoption +January 1, +2017 +Adjustments +2018 +Assets: +Accounts receivable, net +$ +32,531 +$ +5,991 +$ +38,522 +Inventories +13,799 +(5,929) +7,870 +Assets of discontinued operation +20,651 +(357) +20,294 +Liabilities: +Deferred revenue and customer deposits +3,342 +(3,063) +279 +Liabilities of discontinued operation +5,669 +(535) +5,134 +Deferred income taxes +12,168 +479 +12,647 +Stockholders' deficit: +Accumulated (loss) earnings +(1,366) +2,824 +1,458 +F-11 +Table of Contents +In accordance with ASC 606, the impact on the Company’s Consolidated Balance Sheet and Statement of Operations and Comprehensive Loss was as follows: +Balances +As Reported +Without +December 31, +Adoption of +Balance Sheet +2018 +Adjustments +ASC 606 +Assets: +Accounts receivable, net +$ +43,794 +$ +(7,508) +$ +36,286 +Inventories +9,827 +7,350 +17,177 +Liabilities: +Deferred revenue and customer deposits +912 +1,893 +2,805 +Deferred income taxes +5,749 +(567) +5,182 +Stockholders' deficit: +Accumulated loss +(36,004) +(1,484) +(37,488) +Year ended December 31, 2018 +Balances +As Reported +Without +Statement of Operations and +December 31, +Adoption of +Comprehensive Loss +2018 +Adjustments +ASC 606 +Net sales: +Products +$ +125,069 +$ +(1,803) +$ +123,266 +Services +130,745 +387 +131,132 +Cost of sales: +Products (exclusive of depreciation and amortization) +82,110 +(1,738) +80,372 +Services (exclusive of depreciation and amortization) +82,697 +510 +83,207 +Gross profit +78,590 +(188) +78,402 +Income tax benefit (expense) +4,339 +39 +4,378 +Net loss from continuing operations +(14,799) +(149) +(14,948) +Net loss from discontinued operation, net of tax +(22,663) +157 +(22,506) +During 2017, the Company early adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with its annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +Recently Issued Accounting Pronouncements +In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new guidance requires the recognition and measurement of leases at the beginning of the earliest comparative period presented in the financial statements. The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. In July 2018, t he FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. +F-12 +Table of Contents +The Company will adopt the new guidance on the effective date of January 1, 2019 and use the adoption date as the date of initial application as allowed under ASC 842. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. +The new standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight transition practical expedient. +The Company’s adoption process of ASC 842 is ongoing, including evaluating and quantifying the impact on the financial statements, identifying the population of leases, calculating its incremental borrowing rate and collecting and validating lease data. While the Company continues to assess all of the effects of adoption, the Company currently believes the most significant effects relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for real estate operating leases, and providing significant new disclosures about the Company’s leasing activities. +The new standard also provides practical expedients for the Company’s ongoing accounting. The Company expects to elect the short-term lease recognition exemption for all leases that qualify, meaning the Company will not recognize right-of-use assets or lease liabilities for existing and new lease agreements that qualify. The Company also expects to elect the practical expedient to not separate lease and non-lease components for all of its leases. +3. Net Sales +The Company disaggregates its net sales by major source as follows: +For the year ended December 31, 2018 +Products +Services +Total +U.S. Debit and Credit +$ +122,119 +$ +56,478 +$ +178,597 +U.S. Prepaid Debit +— +69,199 +69,199 +Other +4,398 +5,493 +9,891 +Intersegment eliminations +(1,448) +(425) +(1,873) +Total +$ +125,069 +$ +130,745 +$ +255,814 +For periods after January 1, 2018, the Company accounts for its net sales as follows: +Products Net Sales +“ Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” revenue are manufactured Financial Payment Cards, including in contact-EMV, Dual-Interface EMV®, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once® printers and consumables are also included in “Products” revenue, and their associated revenues are recognized at the time of shipping. +The Company includes gross shipping and handling revenue and cost in net sales and cost of sales respectively. +Services Net Sales +Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant +F-13 +Table of Contents +issuance debit cards. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts +The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +4. Discontinued Operation +On August 3, 2018, the Company completed the sale of its United Kingdom facilities that comprised the U.K. Limited reporting segment. The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal. In connection with the sale, the Company performed a goodwill impairment test and recorded a charge of $6,366 in the second quarter of 2018. The impairment was a result of continued market softness in the U.K. Limited segment, resulting in lower sales and margins and an expected sales price below the carrying value of the segment. The Company also recorded an impairment charge of $1,249 to customer relationship intangible assets related to the U.K. Limited segment in the second quarter of 2018. +The Company recorded a $7,248 loss on sale of U.K Limited for the year ended December 31, 2018. In connection with the substantial liquidation of the foreign entity, the Company released the related cumulative translation adjustment from accumulated other comprehensive loss into loss from discontinued operations. This adjustment was $3,983 and is included in other expense (income), net in the schedule below. +As of December 31, 2017, the carrying amounts of the major classes of assets and liabilities of the discontinued operation were as follows: +December 31, 2017 +Assets: +Accounts receivable +$ +5,006 +Inventories +2,438 +Other assets +506 +Plant, equipment and leasehold improvements +4,864 +Intangible assets +1,379 +Goodwill +6,458 +Total assets of discontinued operation +20,651 +Liabilities: +Accounts payable +3,307 +Other current liabilities +1,866 +Other long-term liabilities +496 +Total liabilities of discontinued operation +$ +5,669 +F-14 +Table of Contents +The major line items constituting the (loss) income of the discontinued operation for the year ended December 31, 2018 and 2017 were as follows: +For the year ended +December 31, +2018 +2017 +Total net sales +$ +10,741 +$ +31,119 +Total cost of sales +10,222 +24,331 +Selling, general and administrative +4,336 +5,591 +Impairments +7,615 +— +Other expense (income), net +4,006 +(43) +Pretax (loss) income from discontinued operation +(15,438) +1,240 +Pretax loss on sale of discontinued operation +(7,248) +— +Total pretax (loss) income on discontinued operation +(22,686) +1,240 +Income tax benefit (expense) +23 +(165) +Net income (loss) from discontinued operation +$ +(22,663) +$ +1,075 +5. Inventories +Inventories are summarized below: +December 31, +2018 +2017 +Raw materials +$ +8,235 +$ +7,411 +Work-in-process +— +5,107 +Finished goods +2,991 +2,974 +Inventory reserve +(1,399) +(1,693) +$ +9,827 +$ +13,799 +6. Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements consist of the following: +December 31, +2018 +2017 +Machinery and equipment +$ +62,067 +$ +58,595 +Machinery and equipment under capital leases +1,812 +— +Furniture, fixtures and computer equipment +7,730 +6,288 +Leasehold improvements +19,651 +19,601 +Construction in progress +1,596 +1,512 +92,856 +85,996 +Less accumulated depreciation and amortization +(53,746) +(41,560) +$ +39,110 +$ +44,436 +Amounts recorded for the depreciation of plant, equipment and leasehold improvements were $13,749 and $12,235 for the years ended December 31, 2018 and 2017, respectively. +There were no impairments of the Company’s plant, equipment, and leasehold improvement assets for the continuing operations of the Company for the years ended December 31, 2018 and 2017. +F-15 +Table of Contents +7. Goodwill and Other Intangible Assets +The Company’s goodwill by reportable segment at December 31, 2018 and 2017 is as follows: +December 31, +2018 +2017 +U.S. Debit and Credit +$ +47,150 +$ +47,150 +Goodwill activity is summarized as follows: +Balance as of December 31, 2016 +$ +66,088 +Currency translation +136 +Impairments +(19,074) +Balance as of December 31, 2017 +$ +47,150 +Currency translation +— +Impairments +— +Balance as of December 31, 2018 +$ +47,150 +In connection with the sale of the Company’s U.K. Limited segment, the Company performed a goodwill impairment test and recorded a charge of $6,366 in discontinued operations during the year ended December 31, 2018. The impairment was a result of continued market softness in the U.K. operations, resulting in lower sales and margins and an expected sale price below the carrying value of the segment. +The Company completed its goodwill impairment testing as of October 1, 2018, and no other impairments were recognized as a result of this analysis. +The Company completed its goodwill impairment testing as of October 1, 2017, and recorded impairment charges of $19,074, of which $17,181 related to U.S. Debit and Credit resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1,893 related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. The Company determined the fair value of the reporting units primarily based on an income approach, using the present value of future discounted cash flows of the reporting unit. This approach includes significant estimates of the reporting unit’s weighted average cost of capital, financial forecasts developed by management, and long-term rate of growth and profitability. The market approach was also considered, with fair value determined by applying pricing multiplies derived from publicly-traded companies that are comparable to the reporting unit. +CPI’s amortizable intangible assets consist of customer relationships, technology and software, trademarks and non-compete agreements. Total intangible assets are being amortized over a weighted-average useful life of 15.7 years. Intangible amortization expense totaled $4,656 and $4,687 for the years ended December 31, 2018 and 2017, respectively. During the years ended December 31, 2018 and 2017, there were no material impairments of the Company’s amortizable intangible assets from continuing operations. The Company recorded an impairment charge of $1,249 to customer relationship intangible assets related to the U.K. Limited segment in the second quarter of 2018, which is reported in discontinued operations. +Intangible assets consist of the following: +December 31, 2018 +December 31, 2017 +Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +12 to 20 +$ +55,454 +(25,587) +$ +29,867 +$ +55,454 +$ +(22,311) +$ +33,143 +Technology and software +7 to 10 +7,101 +(4,024) +3,077 +7,101 +(3,095) +4,006 +Trademarks +7.5 to 10 +3,330 +(877) +2,453 +3,330 +(487) +2,843 +Noncompete agreements +5 to 8 +491 +(451) +40 +491 +(390) +101 +Intangible assets subject to amortization +$ +66,376 +$ +(30,939) +$ +35,437 +$ +66,376 +$ +(26,283) +$ +40,093 +F-16 +Table of Contents +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2018 is as follows: +2019 +$ +4,635 +2020 +4,595 +2021 +4,352 +2022 +3,867 +2023 +3,867 +Thereafter +14,121 +$ +35,437 +8. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +· +Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +· +Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +· +Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +The Company’s financial assets and liabilities that are not required to be remeasured at fair value in the Consolidated Balance Sheets are as follows: +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2018 +December 31, +December 31, +(Using Fair Value Hierarchy) +2018 +2018 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +203,125 +$ +— +$ +203,125 +$ +— +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2017 +December 31, +December 31, +(Using Fair Value Hierarchy) +2017 +2017 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +228,125 +$ +— +$ +228,125 +$ +— +The aggregate fair value of the Company’s First Lien Term Loan, as defined in Note 9, “Long-Term Debt and Credit Facility,” was based on bank quotes. +The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities. +Nonrecurring fair value measurements include the Company’s goodwill and intangible asset impairments recognized during the year ended December 31, 2018 and 2017, as determined based on unobservable Level 3 inputs. Refer to Note 7, “Goodwill and Other Intangible Assets”, and Note 4, “Discontinued Operations”. +F-17 +Table of Contents +9. Long-Term Debt and Credit Facility +Long-term debt consists of the following: +Interest +December 31, +December 31, +Rate +2018 +2017 +First Lien Term Loan (a) +7.02% +$ +312,500 +$ +312,500 +Unamortized discount +(2,448) +(3,122) +Unamortized deferred financing costs +(4,234) +(5,509) +Total long-term debt +305,818 +303,869 +Less current maturities +- +- +Long-term debt, net of current maturities +$ +305,818 +$ +303,869 +(a) +Interest rate on December 31, 2018 +First Lien Credit Facility +On August 17, 2015, the Company entered into the First Lien Credit Facility with a syndicate of lenders providing for the $435,000 First Lien Term Loan and the $40,000 Revolving Credit Facility. The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively. +The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company's assets constituting equipment, inventory, receivables, cash and other tangible and intangible property. +Interest rates under the First Lien Credit Facility are based, at the Company's election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50% or a base rate plus a margin of 3.50%. +The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company's assets and affiliate transactions. The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage not in excess of 7.0 times Adjusted EBITDA, as defined in the agreement. As of December 31, 2018, the Company was in compliance with all covenants under the First Lien Credit Facility. +The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. The Company does not have a required excess cash flow payment related to 2018 . +In accordance with the terms of the First Lien Credit Facility, the Company repaid $112,500 of the First Lien Term Loan on October 15, 2015 in conjunction with the completion of its initial public offering, and an additional $10,000 during the fourth quarter of 2015. +As of December 31, 2018, the Company did not have any outstanding amounts under the Revolving Credit Facility, and has $19,950 available for borrowing. Additional amounts may be available for borrowing under the term of the Revolving Credit Facility, up to the full $40,000, to the extent the Company’s net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The Company has one outstanding letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the applicable margin, which was 4.5% as of December 31, 2018, in addition to a fronting fee of 0.125% per annum. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines. The Company has accrued interest of $5,058 and $4,296 recorded within “Accrued expenses” on the Consolidated Balance Sheets as of December 31, 2018, and 2017, respectively. +F-18 +Table of Contents +Deferred Financing Costs +Certain costs incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. +10. Income Taxes +Income tax benefit from continuing operations and effective income tax rates consist of the following: +December 31, +2018 +2017 +Current taxes: +Domestic +$ +2,558 +$ +(7,369) +Foreign +— +— +2,558 +(7,369) +Deferred taxes: +Domestic +(6,897) +(9,167) +Foreign +— +— +(6,897) +(9,167) +Income tax benefit +$ +(4,339) +$ +(16,536) +Loss before income taxes +Domestic +$ +(18,383) +$ +(36,985) +Foreign +(755) +(2,636) +Total +$ +(19,138) +$ +(39,621) +Effective income tax rate +22.7 +% +41.7 +% +The effective income tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2018 +2017 +Tax at federal statutory rate +21.0 +% +35.0 +% +State income taxes +4.0 +0.5 +Foreign taxes +(0.1) +(0.1) +Tax benefit for U.K. sale +17.5 +— +Valuation allowance +(13.5) +(1.5) +Unrecognized tax benefits +(4.8) +(3.2) +Tax credits +2.5 +10.8 +Deferred tax impact of enacted tax rate and law changes +(0.7) +18.4 +Goodwill impairments +— +(17.4) +Other +(3.2) +(0.8) +Effective income tax rate +22.7 +% +41.7 +% +F-19 +Table of Contents +The components of the deferred tax assets and liabilities are as follows: +December 31, +2018 +2017 +Deferred tax assets: +Accrued expense +$ +2,553 +$ +744 +Unrealized foreign exchange loss +— +647 +Net operating loss carryforward +5,589 +2,156 +Deferred financing costs +553 +707 +Stock compensation +861 +679 +Tax credit carryforward +1,118 +420 +Interest limitation +4,412 +— +Other +927 +753 +Total gross deferred tax assets +16,013 +6,106 +Valuation allowance +(6,823) +(4,617) +Net deferred tax assets +9,190 +1,489 +Deferred tax liabilities: +Plant, equipment and leasehold improvements +(3,851) +(2,819) +Intangible assets +(9,311) +(9,912) +Prepaid expenses and other +(1,777) +(926) +Total gross deferred tax liabilities +(14,939) +(13,657) +Net deferred tax liabilities +$ +(5,749) +$ +(12,168) +The net change in the valuation allowance during the year ended December 31, 2018 was an increase of $2,206 and related to the limitation on the deductibility of interest expense, changes in net operating losses of foreign locations, the interest limitation related to section 163(j) of tax reform legislation that is not expected to be realized, and state research and development credits carried forward. +The Company has potential tax benefits associated with $10,791 of gross foreign operating loss carryforwards, which expire at various dates from 2024 through 2038. Due to the uncertainty of being able to recognize these loss carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit. Additionally, the Company has potential tax benefits associated with $9,156 of gross domestic operating loss carryforwards, which do not expire. The Company also has various state and local operating loss carryforwards which will expire at various dates from 2033 to 2038. The Company does expect to be able to utilize these losses prior to expiration. +The Company has potential tax benefits associated with state research and development tax credit carryforwards as of December 31, 2018 of $ 778 , which will expire at various dates between 2029 and 2033. Due to the uncertainty of being able to recognize these credit carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit. Additionally, the Company has potential tax benefits associated with federal research and development tax credit carryforwards as of December 31, 2018 of $3 40 , which will expire in 2038. Due to the uncertainty of the research and development credit the Company has provided a 100% valuation allowance. +At December 31, 2018, no provision has been made for U.S. federal and state taxes on cumulative foreign earnings as there are no current or cumulative earnings of foreign operations. The Company recorded a current tax benefit in 2018 related to the sale of the U.K. Limited segment of $3,332. +2017 Tax Reform +On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation that includes significant changes to taxation of business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) elimination of deduction for income attributable to domestic production activities and (iv) a partial shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with a transitional rule that taxes certain historic foreign accumulated earnings and certain rules that aim to prevent erosion of U.S. income tax base). In conjunction with tax reform and the reduction of the U.S. federal tax rate from 35.0% to 21.0%, the Company accrued a $7,057 tax benefit during the year ended December 31, 2017 related to the net change in deferred tax liabilities. +F-20 +Table of Contents +Unrecognized Tax Benefits +Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Other long term liabilities” and “Deferred income taxes” in the Company’s consolidated balance sheets. The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination. +Balance as of December 31, 2017 +$ +1,212 +Increase related to current year tax position +506 +Increase related to prior year tax position +871 +Decrease related to settlements with tax authorities, net of federal benefit +(545) +Lapse of statute of limitations +— +Balance as of December 31, 2018 +$ +2,044 +The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits as of and for the year ended December 31, 2018 was $221 and not material for the year ended December 31, 2017. +The Company is generally subject to potential federal and state examinations for the tax years on and after December 31, 2015 for federal purposes and December 31, 2013 for state purposes. The Company’s locations in the United Kingdom and Canada are subject to examinations for tax years on and after December 31, 2018 and December 31, 2014, respectively. The Company’s U.K. Limited segment which was sold on August 3, 2018, is subject to examinations for tax years on and after December 31, 2017. +11. Stockholders’ Equity +Common Stock +Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. +During the year ended December 31, 2017, the Company paid dividends of $7,540, representing $0.675 per share. During August 2017, the Company discontinued its quarterly dividend of $0.225 per share. +12. (Loss) Earnings per Share +Basic or diluted (loss) earnings per share is computed by dividing net earnings or loss by the weighted-average number of ordinary shares outstanding during the period. +F-21 +Table of Contents +The following table sets forth the computation of basic and diluted (loss) earnings per share, giving retroactive effect for the one-for-five reverse stock split effective December 20, 2017, attributable to continuing and discontinued operations: +December 31, +2018 +2017 +Numerator: +Net loss from continuing operations +$ +(14,799) +$ +(23,085) +Net (loss) income from a discontinued operation, net of taxes +(22,663) +1,075 +Net loss +$ +(37,462) +$ +(22,010) +Denominator: +Basic and dilutive EPS—weighted average common shares outstanding +11,149,554 +11,117,454 +Basic and Diluted EPS: +(Loss) per share from continuing operations +$ +(1.33) +$ +(2.08) +(Loss) income per share from discontinued operations, net of taxes +(2.03) +0.10 +(Loss) per share +$ +(3.36) +$ +(1.98) +The potentially dilutive effect of 985,876 and 993,587, stock options and restricted stock units as of December 31, 2018 and 2017, respectively, has been excluded from the computation of diluted earnings per share as their inclusion would be anti-dilutive. +13. Commitments and Contingencies +Commitments +The Company leased certain machinery and equipment under capital lease obligations, which consisted of the following at December 31, 2018: +December 31, +2018 +Machinery and equipment +$ +1,565 +Less current portion of capital lease obligations +(521) +Total long-term capital lease obligations +$ +1,044 +The Company has recorded the current portion of capital lease obligations in “Accrued expenses” and the long-term capital lease obligations in “Other long-term liabilities”, within the consolidated balance sheet as of December 31, 2018. +The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2019 and 2024 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs. +During the normal course of business, the Company also enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The 2019 purchase obligations in the table below relates primarily to purchases of capital expenditures. +F-22 +Table of Contents +Future cash payments with respect to leases and purchase obligations as of December 31, 2018 are as follows: +Operating +Capital +Purchase +Leases +Leases +Obligations +2019 +$ +2,927 +$ +521 +$ +3,848 +2020 +2,771 +474 +— +2021 +2,512 +243 +— +2022 +1,243 +256 +— +2023 +971 +71 +— +Thereafter +652 +— +— +Total +$ +11,076 +$ +1,565 +$ +3,848 +The Company incurred rent expense under non-cancellable operating leases during the years ended December 31, 2018 and 2017, totaling $3,767 and $3,528, respectively. +Contingencies +In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount of litigation-related expense. The Company expenses professional fees associated with litigation claims and assessments as incurred. +In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.) (the “Class Action”) +On June 15, 2016, two purported CPI stockholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc. in the United States District Court for the Southern District of New York (the “Court”) against CPI, certain of its former officers and current and former directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 initial public offering (“IPO”). The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, asserted claims under §§11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”) and sought, among other things, damages and costs. In particular, the complaints alleged that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard and VISA chip cards (collectively, “EMV® cards”) during the first half of fiscal year 2015 and resulting EMV® card inventory levels; and (ii) capacity to purchase additional EMV® cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ended December 31, 2015. The complaints alleged that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. +On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act. On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint was based principally on the same theories as the original complaints, but added allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV® technology and (ii) increased pricing pressure and competition CPI faced in the EMV® market. +On September 21, 2018, the parties executed a stipulation and agreement of settlement (“Stipulation”) to resolve the claims asserted in the amended complaint. On October 22, 2018, the Court granted lead plaintiff’s motion for authorization to notify the settlement class of the proposed settlement. After distribution of the notice to the class and a final settlement hearing on February 5, 2019, the Court entered orders on February 6, 2019: (i) approving the proposed settlement; and (ii) granting in part lead plaintiff’s motion for attorneys’ fees and expenses. On February 25, 2019, the Court entered an order and final judgment dismissing the case, in its entirety, with prejudice. +F-23 +Table of Contents +The Company paid an insignificant amount during the fourth quarter of 2018 in relation to an allocation of the total agreed settlement amount. As of December 31, 2018, the Company did not have any liability recorded for an estimate of additional probable loss relating to this matter. There was no liability recorded as of December 31, 2017. +Heckermann v. Montross et al. , Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”) +On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and former directors, along with the sponsors of the IPO. CPI is also named as a nominal defendant. The derivative complaint asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets. +On March 28, 2018, the Court entered the parties’ stipulated order staying the Derivative Suit pending final determination of the Class Action. Under its terms, the stay of the Derivative Suit will be lifted 30 days after the entry of final judgment in the Class Action which was entered on February 25, 2019. +The Company believes these claims are without merit and is defending the Derivative Suit vigorously. Given the current stage of these matters, the range of any potential loss is not probable or estimable and no liability has been recorded as of December 31, 2018 and 2017. +In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on its business, financial condition or results of operations. +14. Employee Benefit Plan +The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment options. The Company matches 100% of the participant’s first 3% of deferrals and 50% matching on each of the 4 th and 5 th percent contributed by the participant. As the Company operates the plan as a safe harbor 401(k) plan, the Company’s match is 100% vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $1,235 and $1,236 for the years ended December 31, 2018 and 2017, respectively. +15. Stock Based Compensation +CPI Card Group Inc. Omnibus Incentive Plan +During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company had reserved 800,000 shares of common stock for issuance under the Omnibus Plan. Effective September 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 400,000. The increase was made effective in the fourth quarter of 2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000 shares of common stock for issuance. As of December 31, 2018, there were 156,917 shares available for grant under the Omnibus Plan. +During the year ended December 31, 2018, the Company granted awards of non-qualified stock options for 159,755 shares of common stock. During the year ended December 31, 2017, the Company granted awards of non-qualified stock options for 713,075 shares of common stock. During the third quarter of 2017, the Company granted stock option awards in lieu of the regular cycle of Omnibus Plan awards that the Company would have otherwise made +F-24 +Table of Contents +in the first quarter of 2018, and also in conjunction with the appointment of the Company’s President and Chief Executive Officer. All stock option grants have a 10-year term, and will generally vest ratably over a three-year period beginning on the first anniversary of the grant date. +The following is a summary of the activity in outstanding stock options under the Omnibus Plan: +Weighted- +Weighted- +Average +Average +Remaining +Exercise +Contractual Term +Options +Price +(in Years) +Outstanding as of December 31, 2017 +937,310 +$ +17.11 +Granted +159,755 +2.74 +Forfeited +(186,438) +15.17 +Outstanding as of December 31, 2018 +910,627 +$ +14.99 +8.38 +Options vested and exercisable as of December 31, 2018 +305,275 +23.04 +7.93 +Options vested and expected to vest as of December 31, 2018 +910,627 +14.99 +8.38 +The following is a summary of the activity in non-vested stock options under the Omnibus Plan: +Weighted- +Average +Grant-Date +Number +Fair Value +Non-vested as of December 31, 2017 +876,903 +$ +4.08 +Granted +159,755 +1.21 +Forfeited +(152,242) +3.45 +Vested +(279,064) +4.81 +Non-vested as of December 31, 2018 +605,352 +$ +3.14 +Unvested options as of December 31, 2018 vest as follows: +2019 +301,267 +2020 +250,228 +2021 +53,857 +2022 +- +Total unvested options as of December 31, 2018 +605,352 +Stock options were granted under the Omnibus Plan at various times during the years ended December 31, 2018 and 2017. The fair value of stock option awards was determined at the date of grant using either a Black-Scholes option-pricing model, or a Monte Carlo simulation, with the following weighted-average assumptions: +Year ended December 31, +2018 +2017 +Expected term in years +6.0 +6.0 +Volatility +48.0 +% +31.9 +% +Risk-free interest rate +2.7 +% +2.0 +% +Dividend yield (1) +- +% +0.9 +% +(1) +Represents the weighted-average dividend yield for grants made during the year ended December 31, 2017. The Company discontinued its quarterly dividend program during August 2017. +Expected term –For option grants valued using a Black-Scholes option-pricing model, the Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock +F-25 +Table of Contents +option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. Certain stock option awards granted in 2016 with an exercise price of $50 per share were valued using a Monte Carlo simulation. The Monte Carlo model simulates many future stock price paths, and assumes the exercise of vested options will occur uniformly once the options are projected to be in-the money. +Volatility – The Company considered the volatility of its own common stock in determining the fair value of stock option awards, in addition to a peer group average historical volatility over the expected option term. This is due to the limited amount of trading history of the Company’s common stock. The peer group was based on financial technology companies that completed an initial public offering of common stock within the last 10 years. +Risk-free interest rate – The risk-free interest rate was determined by using the United States Treasury rate for the period that coincided with the expected option term. +Dividend yield – The estimated dividend yield is based on the Company’s recent historical dividend practice and the market value of its common stock. +The weighted average grant-date fair value of options granted is as follows: +Year Ended December 31, +2018 +2017 +Weighted Average Grant-Date Fair Value of Options Granted +$ +1.21 +$ +2.43 +The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2018 under the Omnibus Plan: +Weighted- +Average +Grant-Date +Shares +Fair Value +Outstanding as of December 31, 2017 +49,677 +$ +16.20 +Granted +75,188 +2.66 +Vested +(25,928) +10.63 +Forfeited +(30,288) +9.91 +Outstanding as of December 31, 2018 +68,649 +$ +6.25 +During the year ended December 31, 2018, the Company granted awards of restricted stock units for 75,188 shares of common stock. During the year ended December 31, 2017, the Company granted awards of restricted stock units for 47,870 shares of common stock. The restricted stock unit awards contain conditions associated with continued employment or service, and generally vest one year from the date of grant. On the vesting dates, shares of common stock will be issued to the award recipients. +Unvested restricted stock units as of December 31, 2018 will vest as follows: +2019 +57,563 +2020 +10,843 +2021 +243 +Total unvested restricted stock units as December 31, 2018 +68,649 +F-26 +Table of Contents +The following table summarizes the changes in the number of outstanding cash performance awards for the year ended December 31, 2018: +Shares +Outstanding as of December 31, 2017 +822,915 +Granted +— +Vested +(274,854) +Forfeited +(123,049) +Outstanding as of December 31, 2018 +425,012 +During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units with a grant-date fair value of $663. These awards will settle in cash in three annual payments on the first, second and third anniversaries of the date of grant. The cash performance units are based on the performance of the Company’s stock, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant. The cash performance units were valued using a Monte Carlo simulation. The Monte Carlo model used the following valuation assumptions based on the 3-year term of the awards: leverage adjusted peer volatility of 48%, risk free rate of 1.5%, and a dividend yield of 4.0%, which was based on the Company’s dividend practice in March 2017 when the awards were granted. The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and remeasured to fair value at the end of each reporting period. As of December 31, 2018, the Company recognized a liability of $96 in “Accrued expenses” and $64 in “Other long-term liabilities” in the Consolidated Balance Sheet for unsettled cash performance units. +Compensation expense for the Omnibus Plan for the years ended December 31, 2018 and 2017 was $961 and $2,360, respectively. As of December 31, 2018, the total unrecognized compensation expense related to unvested options, restricted stock units, and cash performance unit awards under the Omnibus Plan was $840, which the Company expects to recognize over an estimated weighted average period of 1.2 years. +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan +In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted. +As a result of the Company’s adoption of its Omnibus Plan, as further described above, no further awards will be made under the Option Plan. The outstanding stock options under the Option Plan are non-qualified, have a 10-year life and are fully vested as of December 31, 2018. +During the year ended December 31, 2018, there was no activity under the Option Plan. As such, total shares outstanding and exercisable were 6,600 shares with a weighted-average exercise price of $0.002 per share and a weighted-average remaining contract term of 4.4 years at December 31, 2018. +Compensation expense and unrecorded compensation expense related to options previously granted under the Option Plan, for years ended December 31, 2018 and 2017 were de minimis. +Other Stock-Based Compensation Awards +During the year ended December 31, 2017, of the remaining 18,972 of unvested restricted stock awards that were outstanding, 9,486 shares vested, and the remaining 9,486 shares were forfeited. The executive who held the remaining 18,972 unvested restricted shares changed employment status to a consultant during the first quarter of 2017, and accordingly, the Company remeasured the awards on the date of the change in employment status and reduced +F-27 +Table of Contents +stock-based compensation expense by $143. Compensation expense related to these awards for the year ended December 31, 2017, was $(371). +16. Segment Reporting +The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its net sales, EBITDA (as defined below) or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures, such as net sales and EBITDA. +EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments. +On August 3, 2018, the Company completed the sale of the U.K. Limited segment. See Note 4 “Discontinued Operation” for further information. The Company has restated all historical periods presented within these financial statements and has not included U.K. Limited as a reportable segment. +During the first quarter of 2018, the Company reorganized its United States business operations and realigned its United States reporting segments to correspond with the manner with which the Company’s chief operating decision maker evaluates operating performance and makes decisions as to the allocation of resources. As a result of this realignment, the Company’s CPI on Demand business operations have been moved from the U.S. Prepaid Debit segment into the U.S. Debit and Credit reporting segment, consistent with the other related personalization operations. Segment information for previous periods has been restated to conform with this realignment and current period presentation. The restatement of the segment information for the year ended December 31, 2017 was not material. +As of December 31, 2018, the Company’s reportable segments were as follows: +· +U.S. Debit and Credit, +· +U.S. Prepaid Debit, and +· +Other. +The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact, contactless, and dual interface cards, and CPI Metals TM , a premium product capability. This segment also sells instant card issuance systems, and Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands (including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards). The Company provides CPI On-Demand services, where we produce images, personalized payment cards, and related collateral on a one-by-one, on demand basis for our customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands and, where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council. +The U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The U.S. +F-28 +Table of Contents +Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. +The Other category includes the Company’s corporate headquarters and a less significant operating segment that derives its net sales from the production of Financial Payment Cards and retail gift cards in Canada. +Performance Measures of Reportable Segments +Net sales and EBITDA from continuing operations of the Company’s reportable segments for the years ended December 31, 2018 and 2017 were as follows: +Net Sales +EBITDA +December 31, +December 31, +2018 +2017 +2018 +2017 +U.S. Debit and Credit +$ +178,597 +$ +162,216 +$ +34,213 +$ +11,618 +U.S. Prepaid Debit +69,199 +57,005 +23,782 +18,847 +Other +9,891 +11,049 +(35,297) +(32,314) +Intersegment eliminations (a) +(1,873) +(6,526) +— +— +Total: +$ +255,814 +$ +223,744 +$ +22,698 +$ +(1,849) +(a) +Amounts include the elimination of sales between segments for consolidation. +The following table provides a reconciliation of total segment EBITDA from continuing operations to “Net (loss) income from continuing operations” for the years ended December 31, 2018 and 2017: +December 31, +2018 +2017 +Total segment EBITDA from continuing operations +$ +22,698 +$ +(1,849) +Interest, net +(23,431) +(20,850) +Income tax benefit +4,339 +16,536 +Depreciation and amortization +(18,405) +(16,922) +Net loss from continuing operations +$ +(14,799) +$ +(23,085) +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2018 and 2017 were as follows: +December 31, +2018 +2017 +U.S. Debit and Credit +$ +169,567 +$ +174,717 +U.S. Prepaid Debit +25,117 +22,810 +Other +12,520 +15,827 +Total assets - reportable segments +$ +207,204 +$ +213,354 +Assets of discontinued operation +— +20,651 +Total assets: +$ +207,204 +$ +234,005 +Net Sales to Geographic Location, Property, Equipment and Leasehold Improvements and Long-Lived assets by Geographic Segments +Subsequent to the sale of the Company’s U.K. Limited segment and reclassification to discontinued operations, the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of the United States is insignificant. +F-29 +Table of Contents +Net Sales by Product and Services +Net sales from products and services sold by the Company for the years ended December 31, 2018 and 2017 were as follows: +December 31, +2018 +2017 +Product net sales (a) +$ +125,069 +$ +104,459 +Services net sales (b) +130,745 +119,285 +Total net sales: +$ +255,814 +$ +223,744 +(a) +Product net sales include the design and production of Financial Payment Cards, in contact EMV, dual-interface EMV, contactless and magnetic stripe formats. The Company also generates product revenue from the sale of Card@Once ® instant issuance systems, Private Label Credit Cards, and retail gift cards. It is impracticable to split the products described into dollar amounts in the table above. +(b) +Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper-evident security packaging, providing fulfillment services to Prepaid Debit Card program managers, CPI on Demand and software as a service personalization of instant issuance debit cards. The Company also generates services revenue from personalizing retail gift cards (primarily in Canada). It is impracticable to split the services described into dollar amounts in the table above. +17. Quarterly Financial Information (Unaudited) +Summarized quarterly results for the years ended December 31, 2018 and 2017 on a continuing operations basis, were as follows: +Year Ended +December 31, +2018 by Quarter: +Q1 +Q2 +Q3 +Q4 +2018 +Net sales +$ +54,857 +61,454 +70,987 +68,516 +255,814 +Gross profit +14,428 +19,875 +23,308 +20,979 +78,590 +Net loss from continuing operations +(5,677) +(802) +(1,085) +(7,235) +(14,799) +Basic and diluted loss per share from continuing operations +$ +(0.51) +(0.07) +(0.10) +(0.65) +(1.33) +Year Ended +December 31, +2017 by Quarter: +Q1 +Q2 +Q3 +Q4 +2017 +Net sales +$ +50,422 +54,836 +60,997 +$ +57,489 +$ +223,744 +Gross profit +14,648 +16,666 +19,444 +17,447 +68,205 +Net loss from continuing operations +(4,598) +(3,273) +(798) +(14,416) +(23,085) +Basic and diluted loss per share from continuing operations +$ +(0.42) +$ +(0.30) +$ +(0.07) +$ +(1.29) +$ +(2.08) +F-30 +Table of Contents +(This page has been left blank intentionally.) +41 +Table of Contents +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2018, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2018, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +42 +Table of Contents +Changes in Internal Control Over Financial Reporting +There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Informatio n +None. +PART II I +Item 10. Directors, Executiv e Officers and Corporate Governance +The information required by this Item will be included in our definitive Proxy Statement for the 2019 Annual Meeting of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended December 31, 2018 and is incorporated herein by reference. +Item 11. Executive Compensatio n +Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy Statement. +Item 12. Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement. +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. +Item 14. Principal Accountant Fees and Service s +Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement. +43 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Loss +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +Exhibit No. +Exhibit Description +2.1 +Purchase and Sale Agreement, dated as of August 22, 2014, by and among William S. Dinker, Katherine S. Nevill, Bobby Smith and Tom Hedrich, William S. Dinker 2012 Trust for Edward McCullough Dinker, William S. Dinker 2012 Trust for John Walsh Dinker and William S. Dinker 2012 Trust for William S. Dinker III, EFT Source, Inc., CPI Acquisition, Inc. and William S. Dinker, as Sellers' Representative (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +2.2 +Share Purchase Agreement, dated August 1, 2018, by and between CPI Card Group-Europe Limited, SEAFOX BIDCO Limited and CPI Acquisition, Inc. (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 9, 2018). +3.1 +Third Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +3.2 +Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed December 22, 2017). +3.3 +Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.1** +Employment and Non-Competition Agreement, dated April 22, 2009, between CPI Acquisition, Inc. and Steven Montross (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.2** +First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017, between CPI Acquisition, Inc. and Steven Montross (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2017). +44 +Table of Contents +10.3** +Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.4** +Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.5** +Employment and Non-Competition Agreement, dated October 1, 2008, between Metaca Corporation and Anna Rossetti (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6** +Employment and Non-Competition Agreement, effective as of January 1, 2017, between CPI Card Group, Inc. and Lillian Etzkorn (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 13, 2017). +10.7** +CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective September 25, 2017 (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.8** +Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc.Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017). +10.9** +Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017). +10.10** +Form of Nonqualified Stock Option Agreement for United Kingdom Participants under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017). +10.11** +Form of Stock Option Agreement for Canadian Eligible Participants under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017). +10.12** +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.13** +CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017). +10.14 +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.15 +First Lien Credit Agreement, dated as of August 17, 2015, by and among CPI Card Group Inc., CPI Acquisition Inc., the lenders from time to time party thereto and the Bank of Nova Scotia, as Administrative Agent and Collateral Agent (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.16 +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.17 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.18 +First Amendment to Credit Agreement dated December 31, 2016, between CPI Card Group Inc. and the Bank of Nova Scotia (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 7, 2018). +45 +Table of Contents +10.19* ** +2019 Executive Retention Agreement dated November 7, 2018 between CPI Card Group Inc. and Scott Scheirman. +10.20* ** +Form of 2019 Executive Retention Agreement for certain Executive Officers. +10.21* ** +2019 Executive Incentive Plan dated February 27, 2019 . +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +24.1* +Power of Attorney (included on the signature pages hereto). +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* Filed herewith. +** Management contract or compensatory plan or arrangement. +46 +Table of Contents +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ John Lowe +John Lowe +Chief Financial Officer +March 6, 2019 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint Scott Scheirman and John Lowe and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the 1934 Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Scott Scheirman +President, Chief Executive +March 6, 2019 +Scott Scheirman +Officer and Director +(Principal Executive Officer) +/s/ John Lowe +Chief Financial Officer +March 6, 2019 +John Lowe +(Principal Financial Officer) +/s/ Kevin O’Brien +Chief Accounting Officer +March 6, 2019 +Kevin O’Brien +(Principal Accounting Officer) +/s/ Bradley Seaman +Chairman of the Board +March 6, 2019 +Bradley Seaman +/s/ Douglas Pearce +Director +March 6, 2019 +Douglas Pearce +/s/ Robert Pearce +Director +March 6, 2019 +Robert Pearce +/s/ Nicholas Peters +Director +March 6, 2019 +Nicholas Peters +/s/ Valerie Soranno Keating +Director +March 6, 2019 +Valerie Soranno Keating +47 \ No newline at end of file diff --git a/raw/filings/0001641614/2018/0001558370-19-001550/filing_metadata.csv b/raw/filings/0001641614/2018/0001558370-19-001550/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..e8e55c43d1747f20430ccb21b6fd00f6498f2a38 --- /dev/null +++ b/raw/filings/0001641614/2018/0001558370-19-001550/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001641614,PMTS,CPI Card Group Inc.,10-K,2019-03-06,2018-12-31,2019-03-06T14:31:32.000Z,0001558370-19-001550,pmts-20181231x10k.htm,10-K,12804252,1,0,https://www.sec.gov/Archives/edgar/data/1641614/000155837019001550/pmts-20181231x10k.htm,https://www.sec.gov/Archives/edgar/data/1641614/000155837019001550/,2018,2018,1 diff --git a/raw/filings/0001641614/2018/0001558370-19-001550/item1.txt b/raw/filings/0001641614/2018/0001558370-19-001550/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..01859c60665c903254f5c523b1b77bd9fb062485 --- /dev/null +++ b/raw/filings/0001641614/2018/0001558370-19-001550/item1.txt @@ -0,0 +1,106 @@ +Item 1. Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express and Discover) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience. Our customers include leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors. We serve a diverse set of over 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States and Canada, and the largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of production and card services facilities, including high-security facilities in the United States which are certified by one or more of the Payment Card Brands and, where required by our customers, certified to be in compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”). This leading network of high-security production facilities allows us to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +· +the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +· +the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; and +· +the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +On August 3, 2018, we completed the sale of the U.K. Limited segment. The historical financial position, results of operations, and cash flows for the U.K. segment have been restated for all periods to conform with discontinued operations presentation. Unless otherwise indicated, financial information within this document relates to continuing operations. +Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States, and U.S. Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card program managers in the United States. Business not considered part of these segments are considered “Other” and include our operations in Canada and corporate expenses. +In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include customers for which we only manufacture and personalize Financial Payment Cards. The transaction is expected to close in the first half of 2019. The agreement to sell our Canadian subsidiary does not meet the criteria to be reported as a discontinued operation. The Financial Payment Card business customers of our Canada operations will either migrate to our +3 +Table of Contents +operations in the U.S. or migrate to other service providers before the transaction closes. The divestiture allows us to further optimize our footprint and is consistent with our previously announced plan to better position ourselves to serve customers by focusing on our core businesses. +During February 2018, we made the decision to consolidate our three personalization operations in the United States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a market-competitive business model. This consolidation was completed in 2018. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 16 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Strong Market Position with Long-Term Customer Relationships. We are focused on becoming the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We have long-standing trust-based relationships with customers, many of whom we have served for decades. Our customer relationships, particularly with those who utilize our card services and instant issuance systems and services, may involve process and technology integration. As a result, our customers are selective about working with partners they can trust to deliver the highest quality products and customer service. We strive to put our customers at the center of everything we do, and to provide responsive and high quality customer care. We also maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the U.S. prepaid debit market, built on high quality services and reliable delivery to our customers. Our installed base of instant issuance systems at bank and credit union branches across the United States may include customer integration, and our Card@Once ® instant issuance system utilizes our secure technology to instantly personalize cards. Certain customers have integrated our proprietary software into their systems to improve the quality of the overall process and to offer card design and customization to their cardholders. +· +Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small to mid-sized issuer customers is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +· +Certified Network of High-Security Facilities. Our high-security facilities are each certified by one or more of the Payment Card Brands and Interac (in Canada), forming a leading network of certified production facilities in the United States. The Payment Card Brand certifications allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. Additionally, many of our facilities are certified to be in compliance with the standards of the PCI Security Standards Council. These certification processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. +· +Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV”) is a global, technical standard, maintained by EMVCo for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV® cards are smart cards (also called chip cards) which +4 +Table of Contents +store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic stripes. We also produce dual-interface EMV cards that have both contact and contactless functionality. We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. We have invested in CPI Metals TM, a premium product capability, in response to the market. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage. We have developed and acquired intellectual property over our operating history and hold 25 U.S. patents, including five patents related to our CPI Metals TM card solution, 18 foreign patents, as well as 21 pending U.S. and foreign patent applications. +· +Experienced Management Team. We have built an experienced management team, and strengthened the team with additions of certain key executives during 2018. The leadership team has energized the organization to focus on customers, accountability, and delivering results. +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our goal is to be our customers’ partner of choice by providing market-leading quality products and customer service with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our customers elevate the customer experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. +A Customer-Centric Culture +We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex, and offering market-leading quality and service. Based on our core values of customer first, accountability, teamwork, excellence, integrity and results, our strong team of dedicated, passionate employees has helped build CPI into a leading provider of high quality products with a laser-focus on service. With our full and expanding suite of catalytic and competitively differentiated products and services, we offer our customers choice, convenience and control by providing flexibility in timing, design, product options, and overall utility. +Innovation and Growth +We strategically invest in innovation and quality to create a strong foundation for growth. We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. +Our Products and Services +EMV ® Financial Payment Cards (Contact, Contactless, and Dual-Interface) +We produce both plastic and metal contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards, and dual-interface EMV cards, which feature an RFID antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. The dual-interface EMV cards additionally include the contact EMV technology. +Non-EMV Financial Payment Cards and Retail Gift Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, as well as retail gift cards (which are not issued on the network of the Payment Card Brands). +5 +Table of Contents +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact EMV, dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with visibility to manage card stock inventory and fulfillment materials. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. +Tamper-Evident Security Packaging Solutions +We offer specialized and innovative tamper-evident security packaging products and services to customers with a Prepaid Debit Card offering that reduce fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once ®, our proprietary and patented instant card issuance system and services, which provides our card issuing bank customers the ability to issue a completely personalized permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, an EMV card, or a dual-interface EMV card, and personalizes the card on a desktop output terminal in a process which is certified by Mastercard ® and Visa. Our instant issuance system generates both system sales and recurring revenue from software as a service, card personalization and sales of cards and consumables. +CPI On-Demand TM Solutions +Through our CPI On-Demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on demand basis for our customers, enabling individualized offerings and reducing waste and inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. While not significant to our 2018 financial results, we believe the CPI On-Demand solution will further differentiate us with our financial institution customers, and we believe it will enable us to further penetrate new, business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, benefits and insurance. +Digital Services +While not currently significant to our financial results, we are focusing on enabling digital services and payments, including self-service card customization, on demand fulfillment, order lifecycle management, customer inventory management, EMV® key management, and other innovative solutions, such as digitizing and securely delivering payment credentials as a virtual payment method. +Suppliers +One of the most important components of our products is the EMV microchip. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in South Korea, France, Germany, and Singapore, primarily on a purchase order basis. Our main suppliers of EMV microchips are four leading international manufacturers. Approximately 88% of our purchased EMV microchips for the year ended December 31, 2018 came from these four main suppliers. The other key components for our products are substrates (such as PVC), antennas and inlays which we also source from multiple suppliers. We continuously monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. +6 +Table of Contents +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers, prepaid debit issuers, program managers, Group Service Providers, and card processors. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest U.S. Prepaid Debit Card program managers. Our top customer represented approximately 19% of our net sales for the year ended December 31, 2018. Our top five customers represented approximately 39% of our net sales for the year ended December 31, 2018, and we have been serving these customers for an average of greater than 10 years. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangements that define the quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +Our production and services strategy has several key facets. We have a large network of integrated high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high-volume production runs that allow us to meet the competitive price points of large orders; +· +execute lower-volume, highly customized runs that allow us to meet the high-service and quick-turn needs of smaller orders, as well as on-demand solutions; and +· +meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this retail prepaid market. +As of December 31, 2018, we operate approximately 446,000 square feet of facilities in the United States and Canada where we focus on Financial Payment Card production and personalization services. See Part I, Item 2, “Properties” of this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our banking customers. Due to the high-security nature of the Financial Payment Card products we provide to our banking customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we utilize the U.S. and Canadian postal services to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality and meaningful, innovative products at competitive prices. We work to strategize and collaborate with our customers to bring them valuable and innovative solutions. We have approximately 30 sales representatives that give us a wide geographic reach across the United States and Canada. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to +7 +Table of Contents +innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings and competitive pricing. Competitive factors for our business include product quality, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card manufacturers and card solutions providers. We believe we are in competition with IDEMIA (formerly known as Oberthur Technologies S.A.), Giesecke & Devrient GmbH, Valid S.A., Gemalto NV, CompoSecure L.L.C., Multi Packaging Solutions, Inc., and Arroweye. Certain existing and potential customers also have the ability to personalize Financial Payment Cards in-house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own and control various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We have been party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31, 2018, we had 35 U.S. and foreign trademark registrations and applications, 25 existing U.S. patents, 18 foreign patents, as well as 21 pending U.S. and foreign patent applications. Our patents have an average remaining maturity of 12 years, and our trademarks will be due for renewal for additional ten or fifteen-year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, the privacy provisions of the Gramm-Leach-Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with various other federal and state privacy statutes and regulations, and the PCI Security Standards Council’s Data Security Standards, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of numerous countries and jurisdictions. The interpretation and application of these privacy and data protection laws are often uncertain and in a state of flux. +In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. As part of their compliance with these requirements, each of our U.S. customers is expected to have a program in place for protecting personally identifiable information and responding to unauthorized access to, or use of, personally identifiable information that could result in substantial harm or inconvenience to consumers, as required by law. A majority of U.S. states have enacted security breach legislation, +8 +Table of Contents +requiring varying levels of consumer notification in the event of a security breach, which could result in significant costs to us and significant damage to our reputation. +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve certification that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining these certifications, and have invested significant capital to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly certification process may serve as a significant barrier to new entrants to our market. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts, and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution clients to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations including those relating to the movement of money. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with licensing and reporting requirements, to implement operating policies and procedures to comply with anti-money laundering laws, to protect the privacy and security of our clients’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, to CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential clients. +Employees and Labor +As of December 31, 2018, our businesses employed approximately 1,100 employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +9 +Table of Contents +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10026 W. San Juan Way – Suite 200, Littleton, CO 80127 , telephone (303) 973-9311. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. \ No newline at end of file diff --git a/raw/filings/0001641614/2018/0001558370-19-001550/item13.txt b/raw/filings/0001641614/2018/0001558370-19-001550/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c23eaf069f58452092de9649aa5850bcb0478b34 --- /dev/null +++ b/raw/filings/0001641614/2018/0001558370-19-001550/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001641614/2018/0001558370-19-001550/item9a.txt b/raw/filings/0001641614/2018/0001558370-19-001550/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..79494f98a5b083b08ba661e399ec3e8be690bb7e --- /dev/null +++ b/raw/filings/0001641614/2018/0001558370-19-001550/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2018, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2018, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +42 +Table of Contents +Changes in Internal Control Over Financial Reporting +There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001641614/2018/0001558370-19-001550/rp_note.txt b/raw/filings/0001641614/2018/0001558370-19-001550/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001641614/2018/0001558370-19-001550/rpt_disclosure.txt b/raw/filings/0001641614/2018/0001558370-19-001550/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..3fce8be2df91c3287a73203a52dfa8a75e3cb9c0 --- /dev/null +++ b/raw/filings/0001641614/2018/0001558370-19-001550/rpt_disclosure.txt @@ -0,0 +1,13 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2018 to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them had or will have a direct or indirect material interest. +Registration Rights Agreement +In connection with our initial public offering, we entered into a registration rights agreement with the Tricor Funds (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Tricor Funds are entitled to request that we register shares of our common stock on a long-form or short-form registration statement on one or more occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. The Tricor Funds also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay the Tricor Funds’ expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our common stock held by the Tricor Funds as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the common stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization, or certain other corporate transactions, and (iii) any of our common stock owned or acquired following the closing of our initial public offering by the Tricor Funds (“Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. +Director Nomination Agreement +In connection with our initial public offering, we entered into a Director Nomination Agreement with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our Board of Directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our Board of Directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds shall be entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. In addition, for so long as the Tricor Funds collectively beneficially own 10% or more of the total number of shares of our common stock then outstanding, the Tricor Funds shall also have the right to have their designees participate on committees of our Board of Directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding common stock. Nicolas Peters and Bradley Seaman have been designated by the Tricor Funds as nominees to be included in the Company’s proxy statement commencing in 2016. +Policies and Procedures for Related Party Transactions +Our board of directors has adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving us in which the aggregate amount involved exceeds or may be expected to exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which a related person has or will have a direct or indirect material interest. For purposes of this policy, a related person is defined as a director, executive officer, nominee for director, or a greater than 5% beneficial owner of our common stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and +-29- +Table of Contents +approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider the material facts of the transaction, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction. +-30- +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2020/0001558370-21-001721/filing.txt b/raw/filings/0001641614/2020/0001558370-21-001721/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..ca1dc5403c193daf3fb2b98019eabb3785f97097 --- /dev/null +++ b/raw/filings/0001641614/2020/0001558370-21-001721/filing.txt @@ -0,0 +1,2931 @@ +10-K +1 +pmts-20201231x10k.htm +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31, 2020 +Or +◻ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10368 W. Centennial Road +Littleton, CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code (720) 681-6304 +Securities registered pursuant to Section 12(b) of the Act: None +Securities registered pursuant to section 12(g) of the Act: Common stock $0.001 par value +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ◻    No þ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +Yes ◻    No þ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No ◻ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ    No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ◻ +Accelerated filer ◻ +Non-accelerated filer þ +Smaller reporting company þ +Emerging growth company ◻ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ◻   No þ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻    No þ +The aggregate market value of the registrant’s common stock held by non-affiliates was $13.1 million on June 30, 2020 computed based on the last quoted sales price of the registrant’s common stock of $2.90 on OTC Markets Group Inc. on that date. +As of February 15, 2021, the number of shares outstanding of the registrant’s common stock was 11,230,482. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K . +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +4 +Item 1A +Risk Factors +13 +Item 1B +Unresolved Staff Comments +32 +Item 2 +Properties +32 +Item 3 +Legal Proceedings +32 +Item 4 +Mine Safety Disclosures +32 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +32 +Item 6 +Selected Financial Data +33 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +33 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +44 +Item 8 +Financial Statements and Supplementary Data +45 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +74 +Item 9A +Controls and Procedures +74 +Item 9B +Other Information +75 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +75 +Item 11 +Executive Compensation +75 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +75 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +75 +Item 14 +Principal Accountant Fees and Services +75 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +76 +Signatures +80 +1 +Table of Contents +Cautionary Statement Regarding Forward-Looking Information +Certain statements and information in this Annual Report on Form 10-K (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “guides,” “provides guidance,” “provides outlook” or other similar expressions are intended to identify forward-looking statements, which are not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us and other information currently available. Such forward-looking statements, because they relate to future events, are by their very nature subject to many important risks and uncertainties that could cause actual results or other events to differ materially from those contemplated. +These risks and uncertainties include, but are not limited to: the potential effects of COVID-19 on our business, including our supply-chain, customer demand, workforce, operations and ability to comply with certain covenants in our credit facilities; our lack of eligibility to participate in government relief programs related to COVID-19 or inability to realize material benefits from such programs; our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our credit facilities and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our limited ability to raise capital in the future; a disruption or other failure in our supply chain; the effects of current or additional U.S. government tariffs as well as economic downturns or disruptions, including delays or interruptions in our ability to source raw materials and components used in our products from foreign countries; system security risks, data protection breaches and cyber-attacks; interruptions in our operations, including our information technology (“IT”) systems, or in the operations of the third parties that operate the data centers or computing infrastructure on which we rely; failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security; disruptions in production at one or more of our facilities; our failure to retain our existing customers or identify and attract new customers; our inability to recruit, retain and develop qualified personnel, including key personnel; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation or infringement claims and risks related to open source software; defects in our software; problems in production quality, materials and process; a loss of market share or a decline in profitability resulting from competition; our inability to develop, introduce and commercialize new products; new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services in a timely manner; costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state businesses, as well as new U.S. tax legislation increasing the corporate income tax rate and challenges to our income tax positions; failure to meet the continued listing standards of the Toronto Stock Exchange or the rules of the OTCQX® Best Market; a continued decrease in the value of our common stock combined with our common stock no longer being traded on a United States national securities exchange, which may prevent investors or potential investors from investing or achieving a meaningful degree of liquidity; quarterly variation in our operating results; our inability to realize the full value of our long-lived assets; our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards; a decline in U.S. and global market and economic conditions and resulting decreases in consumer and business spending; costs relating to product defects and any related product liability and/or warranty claims; our dependence on licensing arrangements; risks associated with international operations; non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we operate and sell our products and services; the effect of legal and regulatory proceedings; our ability to comply with a wide variety of environmental, health and safety laws and regulations and the exposure to liability for any failure to comply; risks associated with the majority stockholders’ ownership of our stock; the influence of securities analysts over the trading market for and price of our common stock; our inability to sell, exit, reconfigure or consolidate businesses or facilities that no longer meet with our strategy; potential conflicts of interest that may arise due to our board of directors being comprised in part of directors who are principals of our majority stockholders; certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors; and other risks that are described in Part I, Item 1A – Risk Factors in this Annual Report on Form 10-K and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +2 +Table of Contents +We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +3 +Table of Contents +PART I +Item 1. +Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States and Interac, in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Solutions market through more than 20 years of experience. We serve a diverse set of approximately 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States, and the largest Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our leading network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; and +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +Our business consists of the following reportable segments: Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States, and Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. Our “Other” segment includes corporate expenses. +On August 3, 2018, we completed the sale of the U.K. Limited segment and, on April 1, 2019, we completed the sale of our Canada subsidiary. The divestitures of the U.K. and Canada businesses allowed us to better position ourselves to serve customers by focusing on our core businesses. +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 18 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +4 +Table of Contents +COVID-19 Update +The ongoing adverse effects of the COVID-19 pandemic have continued to impact the locations where we, our customers and our suppliers conduct business. Overall, we believe that COVID-19 had a net negative impact relative to our full year expectations for 2020. The broader and long-term implications of COVID-19 on our results of operations and overall financial performance remain uncertain. The health and safety of our employees remain paramount, and we continue to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines.  All of CPI’s operations have remained open and continue to provide direct and essential support to the financial services industry. CPI’s net sales in 2020 increased over the prior year; however, in certain areas of the business we experienced lower customer demand than expected which we believe is primarily attributable to the COVID-19 pandemic. We may experience constrained supply, curtailed customer demand, impacts on our workforce and other effects that could materially adversely impact our business, results of operations and overall financial condition in future periods. CPI’s strategies may not be successful in effectively managing our resources and mitigating the negative impact of the COVID-19 pandemic on our business, operating results and financial condition. See Item 1A, Risk Factors , in this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business. +On March 27, 2020, the Coronavirus Aid Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 12 “Income Taxes” for a discussion of the CARES Act income tax impacts on the Company. In addition, we have deferred employer social security payments starting with the second quarter of 2020 in accordance with the CARES Act. While we are participating in certain programs under the CARES Act, the Act and its guidance are subject to change. +Our Competitive Strengths +● Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We believe these efforts have resulted in CPI gaining overall market share each year from 2018 to 2020. We have long-standing, trust-based relationships with customers, many of whom we have served for decades. We have collaborated with our top 10 customers for more than ten years, on average. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. Our Card@Once® instant issuance solution provides the necessary on-site equipment and supplies, customer support and secure data exchange to provide personalized cards on-site and on-demand at bank and credit union branches across the United States. Data is exchanged through either a secure web interface or through integrations of our proprietary software with our customers’ card issuance systems. Integrations provide a more seamless experience for our customers and we believe they foster longer lasting and closer customer relationships. +● Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small- to mid-sized issuer customers is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solutions allow our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing +5 +Table of Contents +multiple suppliers across a complex value chain. Approximately 2/3rds of our annual net sales in our Debit and Credit segment is from small- to mid-sized issuers. +● Compliant Network of High-Security Facilities. Our high-security facilities are each audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands, forming a leading network of approved production facilities in the United States. The Payment Card Brand attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long and complex and our facilities must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +● Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV”) is a global technical standard, maintained by EMVCo LLC (“EMVCo”) for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV ® cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We also produce dual-interface EMV cards that have both contact and contactless functionality. +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. CPI’s Second Wave ® payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”), and Earthwise TM “high content” plastic cards address customer demands for more sustainable card options. We also sell CPI Metals ® , a premium encased metal card. Our offerings also include Card@Once, our proprietary and patented instant card issuance system and software-as-a-service. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Solutions market, gives us a competitive advantage. +● Experienced Leadership Team. We have built an experienced leadership team that has energized the organization to focus on customers, accountability, innovation, and delivering results. +EMV ® is a registered trademark or tradename of EMVCo LLC in the United States and other countries. +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality products, customer service and continuous innovation with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our clients elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality products and customer service, continuous innovation, and market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +6 +Table of Contents +Market-Leading Quality Products and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading solutions provider. With a focus on market-leading quality products and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their businesses. We listen to the voices of our customers and focus on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our shareholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. Continuous innovation is aimed at winning new business and helping our customers differentiate themselves with distinctive products and solutions, build their brands, and achieve top-of-wallet status. +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We aim to streamline our operations, which enables us to allocate resources focused on providing our customers with unmatched solutions, innovation and exceptional service. We have also developed standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We have invested in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance, profitability, and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact and Contactless Dual-Interface) +We produce both plastic and encased metal contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards, including plastic and encased metal dual-interface EMV cards, which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology. +Second Wave Cards Featuring a Core made with Recovered Ocean-Bound Plastic +Our Second Wave cards feature a core made with ROBP. Aimed at reducing first-use plastic and diverting plastic waste from entering the ocean, Second Wave cards are available in all forms of EMV Financial Payment Cards (contact and contactless dual-interface) and cards for access applications such as travel, ticketing, lodging, and entertainment. Our Second Wave cards have been approved by two of the major Payment Card Brands. Second Wave offers a seamless cardholder experience that aligns with broader consumer values and helps support our customers’ environmental, social and governance (“ESG”) goals by providing companies across multiple segments of the card industry with a simple, effective, and more environmentally-friendly solution. CPI’s eco-focused solutions also include Earthwise “High Content” cards, which were launched in 2020. This is the first contactless dual-interface card product to incorporate up to 98% upcycled plastic content, dependent on design. As the leading eco-focused card provider in the U.S., we estimate that CPI produced more than 80% of all U.S. eco-focused cards in 2020, shipping over 25 million eco-focused contactless payment cards in the past 18 months. +7 +Table of Contents +Non-EMV Financial Payment Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands including for the purpose of government disbursement, as well as retail gift cards (which are not issued on the networks of the Payment Card Brands). +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact, contactless, and dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven with full color printing and edge-to-edge coverage, and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with visibility to manage card stock inventory and fulfillment materials. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We also provide consultation and card design services to further assist customers in card customization. +CPI On-Demand ® Solutions +Through our CPI On-Demand ® services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing waste and inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. We believe the CPI On-Demand solution further differentiates us with our financial institution and program manager customers and enables us to access new, business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, government disbursement, benefits and insurance. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once, our proprietary and patented instant card issuance system and software-as-a-service, which provides our card issuing bank customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, a contact EMV card, or a contactless dual-interface EMV card, and personalizes the card on a desktop printer solution provided by CPI. These processes are audited for PCI Data Security Standard compliance annually. Our instant issuance system generates both initial sales revenue for the printer solution and recurring revenue from card personalization and sales of cards and consumables. +Adaptives TM +While not currently significant to our financial results, we offer Adaptives TM , an EMVCo certified chip and antenna personalization technology. This technology is one of the smallest and most flexible available, allowing for versatility and use across a wide variety of form factors. Adaptives’ embedded contactless technology can be integrated into portable, wearable or non-wearable devices, or other objects. +8 +Table of Contents +Digital Services +While not currently significant to our financial results, we are investing in digital services and issuance technologies, including self-service card customization, online card ordering, on demand fulfillment, order lifecycle management, customer inventory management, EMV key management, and other innovative solutions. We also offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to order customized cards on the internet and customize cards with individualized digital images. +Suppliers +While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the EMV/ dual-interface microchips and antennas. Our main suppliers of EMV/ dual-interface microchips and antennas include four leading international manufacturers with locations in Germany, Thailand, Netherlands, South Korea, and Singapore. Approximately 95% of our purchased microchips and antennas for the year ended December 31, 2020 came from these four main suppliers, primarily on a purchase order basis. The other key components for our products are substrates and inlays, which include PVC and ROBP. We monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. We generally purchase inventory sufficient to fulfill customer purchase orders and to maintain certain levels of inventory in anticipation of future customer demand and potential supply chain constraints. +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers including financial technology companies, prepaid debit issuers, program managers, Group Service Providers, and card processors. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest Prepaid Debit Card program managers. The Company had two customers that each accounted for 10% or more of its net sales in 2020. Net sales from these customers were approximately 15% and 14% of total net sales for a combined total of approximately 29% of our net sales for the year ended December 31, 2020. We have been serving these customers for greater than 10 years on-average. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangements that define the quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a network of high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +● execute high-volume production runs that allow us to offer cost-effective price points on large orders; +● execute lower-volume, highly customized runs that allow us to meet the high-service and quick-turn needs of smaller orders, as well as on-demand solutions; and +● meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this prepaid retail market. +9 +Table of Contents +As of December 31, 2020, we operate facilities comprising approximately 381,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card packaging and fulfillment services. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources, and create innovative and responsible products. Our key areas of focus include: incorporating environmental sustainability practices as and where feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility, and meaningful, innovative products at competitive prices. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives and partners that give us a wide geographic reach across the United States. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customer’s individual needs. We use an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. We believe these efforts drive customer retention and satisfaction, and attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation, and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card manufacturers and solutions providers. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. We believe we are in competition with Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA (formerly known as Oberthur Technologies S.A.), Perfect Plastic, Thales (formerly known as Gemalto NV), Valid S.A., Travel Tags and WestRock (Multi Packaging Solutions), among others. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +10 +Table of Contents +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2020, we had 57 U.S. and foreign trademark registrations and applications, 32 existing U.S. patents, 20 existing foreign patents, as well as 40 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 13 years, and our trademarks will be due for renewal for additional ten year periods on an ongoing basis. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy statutes and regulations, and certain of the PCI Security Standards Council’s requirements, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining compliance with the requirements from the Payment Card Brands, and have invested significant capital to obtain and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply +11 +Table of Contents +with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, as well as CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Human Capital +Our leadership team has significant experience in the payments industry, and many of our employees possess career-long expertise and knowledge that is unique to the Financial Payment Card industry. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee pulse surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of the Company’s core values. Throughout the COVID-19 pandemic, the health and safety of our employees has remained paramount. We continue to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local orders and guidelines.  Our office-based employees moved to a primarily remote work environment beginning in March 2020. +We are committed to a diverse and inclusive workplace, in which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior and employees are required to follow these standards and participate in related training. We have an open door policy and encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. +As of December 31, 2020, CPI employed approximately 1,000 full-time employees, of which approximately 700 are production and service facility staff and approximately 300 are office staff. We also use the services of temporary workers in our facilities to provide flexibility for our business needs. None of our employees are represented by labor unions. We believe that our relations with our employees are positive. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127 , telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that +12 +Table of Contents +site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC by the Company . +CPI Card Group Inc. qualifies as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and has elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. +Item 1A. Risk Factors +There are many factors that affect our business, financial condition, results of operations and cash flows, some of which are beyond our control. The following is a description of some important factors that may cause our business, financial condition, results of operations and cash flows in future periods to differ materially from those currently expected or desired. Factors not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations and cash flows. You should carefully consider all of these risks described below, together with the other information included in this Annual Report on Form 10-K, before investing in our securities. As a result of any of these risks, known or unknown, you may lose all or part of your investment in our securities. +Risk Factors Summary +Risks Relating to COVID-19 +● The effects of the COVID-19 pandemic and responsive government measures as well as related economic disruptions adversely affecting our supply chain, workforce, overall operations and financial condition, ability to access capital markets and refinance indebtedness, and ability to market and sell our products, as well as our inability to participate in or realize benefit from government relief programs. +Risks Relating to our Business +● Our substantial indebtedness and the covenants and restrictions in the agreements governing our indebtedness limiting our ability to use our cash flow in certain areas of our business, capitalize on certain business opportunities and pursue our business strategies, all of which could increase if we incur additional debt. +● The effects of the terms of our outstanding indebtedness and our financial condition on our ability to meet debt service obligations or obtain additional financing. +● Disruptions or delays in our supply chain, including with respect to single-source suppliers, or the failure or inability of our suppliers to comply with our codes of conduct or contractual requirements. +● A cyber-attack or breach of our information technology systems resulting in losses of our intellectual property and/or sensitive cardholder data, harm to our competitive position and a loss of customer trust and confidence, and, as threats evolve, the necessity to invest in significant additional resources to enhance our information security and controls. +● Any interruption of our information technology systems, including disruptions or failures of our third-party data centers, inhibiting our ability to service our customers. +● A disruption at any of our production facilities and our inability to recover quickly or otherwise provide continuity of production in order to meet customer requirements. +● Failure to retain existing key customers and attract new customers due to competitive products, pricing pressures, financial health of our customers and macroeconomic conditions affecting our industry or our customers. +● Our inability to recruit, retain, develop and adequately compensate the personnel needed to successfully operate and grow our business. +● Our inability to protect our trade secrets, intellectual property and proprietary software, to obtain additional intellectual property rights in the future, and to ensure our products are not infringing the intellectual property rights of others. +● Defects in our software and computing systems, resulting in errors or delays in the processing of transactions and other interruptions in our business operations. +● Problems in our production processes, including as a result of mechanical or technological failures, which could lead to reduced production capacity and quality. +● Our inability to undertake time-consuming and costly research and development activities in order to develop new or enhanced products. +13 +Table of Contents +● An increased number of states seeking to apply sales tax “nexus” laws or future increases in U.S. federal or state income taxes, resulting in additional tax expenses in the event we are unable to pass such expenses along to our customers. +● Our inability to divest or consolidate certain non-strategic businesses at all or on terms that are acceptable to us. +● A write-down of our long-lived assets, which represent a significant portion of our total assets. +● Defects in our products that may give rise to products recalls, product liability and warranty claims as well as damage to our reputation. +● Our inability to renew licenses with key technology licensors, resulting in our loss of access to certain technologies upon which we rely to develop certain of our products. +Risks Relating to our Industry +● The effects of current or additional U.S. government tariffs as well as economic downturns or disruptions, including delays or interruptions in our ability to source raw materials and components used in our products from foreign countries and increased prices of our products. +● Existing or future data privacy and security laws, regulations and requirements may cause us to incur significant compliance costs or result in fines, sanctions, penalties and lawsuits if we fail to comply. +● The highly competitive, saturated and consolidated nature of our marketplace. +● The widespread adoption of technological changes, new products or industry standards, such as digital payment systems or mobile payments, which may render our products obsolete or irrelevant, and our failure to develop and introduce innovative products to address the evolving needs of our customers. +● The unpredictability of our operating results due to the varying cyclicality of the financial card and electronic payment industries, capital requirements, inventory management, the availability of funding, competition, new product developments, technological changes, production problems, supplier management and other factors. +● Our failure to comply with the standards of the PCI Security Standards Council, including due to an inability to continue to make investments in our facilities necessary to maintain compliance with such standards. +● A deterioration in general economic conditions, resulting in reduced consumer confidence and consumer and business spending. +● Our failure to comply with environmental, health and safety laws and regulations that apply to our products and the raw materials we use in our production processes. +Risks Relating to Ownership of our Common Stock +● Our failure to maintain our listing on the Toronto Stock Exchange (“TSX”) due to failure to comply with TSX listing standards and/or our failure to continue trading on the OTCQX® Best Market (“OTCQX”) due to failure to comply with OTCQX rules and standards. +● A reduction in the share price of our common stock and an inability of investors to trade our common stock due to a limited market for our shares as a result of no longer being listed on a United States national securities exchange. +● Our majority stockholders’ continued concentrated ownership of our shares and ability to control decisions regarding our business direction and policies as well as the potential conflicts of interest that may arise between our majority stockholders and our other stockholders. +● The influence of securities analysts over the trading market for and price of our common stock, particularly due to the lack of substantial research coverage of our common stock following our delisting from the Nasdaq Capital Market (“Nasdaq”) . +● Certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors. +General Risk Factors +● Our inability to comply with numerous evolving and complex laws and regulations relating to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, labor and health and safety. +● Legal costs, insurance expenses, settlement costs and the risk of an adverse decision related to legal or regulatory proceedings or litigation. +14 +Table of Contents +Risks Relating to COVID-19 +The ongoing COVID-19 pandemic and responses thereto may, or may continue to, adversely affect our supply chain, workforce, overall operations and financial condition, and our ability to access capital markets and refinance indebtedness, each of which may have a material adverse effect on our business. +The COVID-19 pandemic and efforts by federal, state and local governments to attempt to control its spread, including “stay-at-home” orders, quarantine requirements, mandating closures of certain businesses not deemed “essential” and executive and other governmental orders, restrictions and recommendations for residents and businesses (some of which are still in place) have caused significant economic disruption and adversely impacted the global economy. Even though some measures may currently be relaxed, they may be put back into place or increased if the spread of the pandemic continues or increases in the future. Any such new orders, restrictions or recommendations could mandate or encourage the suspension of some or all of our operations or otherwise negatively impact our ability to operate our business at full capacity. Additionally, the reinstating of orders, restrictions and recommendations previously in effect and/or the adoption of new orders, restrictions and recommendations may again result in widespread closures of businesses, work stoppages, social distancing practices, slowdowns and delays, work-from-home policies, travel restrictions and cancellations of events, as well as adverse impacts on the national and global economies. Disruptions to our activities and operations resulting from such governmental orders, restrictions and recommendations would negatively impact our business, operating results and financial condition. If the recent surge in COVID-19 cases coupled with the slow rollout of vaccinations continues or worsens, or if vaccinations prove to be ineffectual or mutated virus strains that are resistant to vaccinations emerge, then the ongoing spread of COVID-19 may have a devastating long-term negative impact on the national and world economies, in which case the risks to our sales, operating results and financial condition described herein would be elevated significantly. +The longer term impact of COVID-19 on our business may be difficult to assess or predict. The pandemic may result in significant and extended disruption of global financial markets, which may reduce or eliminate our ability to access capital markets and/or to refinance our existing indebtedness, which would negatively affect our liquidity and prospects. Further, the actual and potential governmental orders, restrictions and recommendations described above (which include travel restrictions and the potential for import restrictions) in response to COVID-19 have resulted in delays in certain of our suppliers’ deliveries to us and could continue to disrupt or cause greater disruption to our supply chain and thus our ability to obtain materials needed to manufacture our products and provide our services. Any import or other cargo restrictions related to our products or the materials used to manufacture our products would restrict our ability to manufacture products and thereby harm our business, financial condition and results of operations. Also, such orders, restrictions and recommendations have resulted and may continue to result in increased transportation costs for materials from our suppliers (for which we are responsible), which may negatively impact our cash flows, as well as increased transportation costs for our products that we ship to our customers (for which our customers are responsible in some cases), which may adversely affect customer demand. Additionally, if we are required to disrupt operations at or close any of our facilities, or if we elect to do so to protect our employees from an actual or potential outbreak of COVID-19 at any facility, such disruption or closure could impair our ability to fulfill customer orders and may have a material adverse impact on our revenues and increase our costs and expenses. In the event of such a disruption or closure at one of our facilities, our other facilities may not be able to effectively assume the production activities of such impacted facility due to insufficient capacity, lack of necessary specialized equipment, higher production costs and/or significant time needed to increase production, any of which may result in failure to meet our customers’ requirements, resulting in negative impact to our business, results of operations and/or financial condition. Moreover, our key personnel and other employees could be affected by COVID-19, potentially reducing their availability and disrupting our operations. We have and may continue to incur additional cost associated with our response to COVID-19 and delay or reduce certain capital spending and the completion of related projects until the impacts of COVID-19 begin to abate. +The global outbreak of COVID-19 continues to evolve. The ultimate impact of the COVID-19 outbreak remains uncertain and subject to change, and we cannot predict its future impacts on our business or the economy as a whole. However, these effects may harm our business, financial condition and results of operations in the near term and could have a continuing material impact on our operations, sales, liquidity and ability to continue as a going concern in the longer term. As a result of all of the foregoing, we may, in the future, take actions including reductions to salary and work hours, furloughs, restructuring or layoffs, which may negatively impact our workforce and our business. +15 +Table of Contents +Customer demand for and our ability to sell and market our products and services may be adversely affected by the COVID-19 pandemic and responses thereto. +As discussed above, state and local governments have imposed orders, restrictions and recommendations resulting in closures of businesses, work stoppages, social distancing practices, slowdowns and delays, work-from-home policies, travel restrictions and cancellations of events, some of which are still in place. The reinstating of those orders, restrictions and recommendations that are currently no longer in effect and/or the issuance of additional orders, restrictions and recommendations, combined with fears of the spreading of COVID-19, may (i) cause certain of our customers to delay, cancel or reduce orders of our products and services, and (ii) result in temporary or permanent closures or reduced hours of operation of certain of our customers’ branches and/or increased consumer utilization of digital banking services, which could adversely impact our product or service sales and cash flows. A sustained deterioration in general economic conditions may adversely affect our profits, revenue and financial performance if credit card issuers reduce credit limits, close accounts, and become more selective in determining to whom they issue credit cards as a result thereof. We are unable to accurately predict how these factors will reduce our sales going forward and when orders, restrictions and recommendations that are in place or may be put in place will be relaxed or lifted. A prolonged economic contraction or recession may also result in our customers seeking to reduce their costs and expenditures, which could result in lower demand for our products or a shift to demand for lower margin products. If our sales decline, or if such lost sales are not recoverable in the future, our business and results of operations will be significantly adversely affected. Additionally, our sales and customer relationship personnel have been and may continue to be unable to engage in-person meetings and interaction with our customers. COVID-19 related restrictions have thus harmed our sales and marketing efforts, and continued restrictions could have a negative impact on our sales and results of operations. +We may not be eligible to participate in the relief programs provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and even if we are eligible we may not realize any material benefits from participating in such programs. +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We are continuing to evaluate the potential impacts of, and apply, certain provisions of the CARES Act that provide benefit to the Company. While we are participating in certain programs under the CARES Act, the CARES Act and its guidance are subject to change, and there is no guarantee that any government relief programs will provide meaningful benefit to our business or that we will meet eligibility requirements of any additional requirements of any additional relief programs for which we may determine to apply. +Risks Relating to our Business +The covenants and restrictions contained in agreements governing our indebtedness may adversely affect our business and results of operations, may restrict our ability to grow and could make it difficult or impossible to timely make our debt service payments or refinance our debt when it comes due. +We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our business. Our credit facilities do not fully prohibit us or our subsidiaries from incurring additional indebtedness in the future, and to the extent that we incur additional indebtedness, the risks associated with our substantial indebtedness described below, including our possible inability to service our debt, may increase. Our substantial indebtedness and interest expense could have important consequences to us, including: +● limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, research and development, expanding our infrastructure, capital expenditures and other general business activities and investment opportunities in our company, because we must dedicate a substantial portion of these funds to pay interest and/or service our debt; +● impacting our cash flows, results of operations and financial condition when interest rates rise, because the interest rates on our credit facilities are floating rates that vary depending on market interest rates from time to time; +16 +Table of Contents +● limiting our ability to retain or attract customers and our ability to attract or retain qualified employees due to our significant amount of debt and the related implications of such debt for the Company’s long-term financial condition; +● limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; +● limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +● limiting our ability to timely make our debt service payments or to satisfy our other obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +● increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; +● placing us at a competitive disadvantage as compared to our competitors that are less leveraged; and +● limiting our ability, or increasing the costs, to refinance indebtedness, when our First Lien Term Loan (as defined below) matures on August 17, 2022 and our Senior Credit Facility (as defined below) matures on May 17, 2022. +The terms of our Senior Credit Facility and First Lien Term Loan restrict, and any additional indebtedness we may incur in the future could similarly restrict, our ability to operate our business and to pursue our business strategies. Among other things, our Senior Credit Facility and First Lien Term Loan restrict our ability to: +● incur additional indebtedness or contingent liabilities +● declare or pay dividends, repurchase stock, or make other distributions to stockholders; +● make investments in any business that is not a wholly-owned subsidiary; +● create liens or use assets as security in other transactions; +● merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; +● enter into transactions with affiliates; and +● enter into certain asset sale transactions or other dispositions of assets. +In addition, our Senior Credit Facility contains a covenant requiring us to achieve at least $25 million of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the previous four consecutive fiscal quarters in total for each quarterly period ending on or after March 31, 2020. The adjusted EBITDA computation is defined in the Senior Credit Facility. Our failure to comply with any of these covenants could result in an event of default, which could result in the acceleration of all of our indebtedness under the Senior Credit Facility and First Lien Term Loan. Moreover, these restrictions, as well as the limitations described above, could have a material adverse effect on our business, financial condition, results of operations and prospects. If we are unable to satisfy our obligations under our indebtedness as they become due or if we are unable to pay our interest obligations, we would be rendered insolvent. +Our ability to raise capital in the future may be limited, which could lead to delays in innovation and abandonment of our strategic initiatives. +In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. The terms of our outstanding indebtedness and our financial condition may adversely affect our ability to obtain additional financing and any such financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. Any failure to achieve adequate funding will delay our products and services innovation and development and could lead to abandonment of one or more of our strategic initiatives and impair our ability to continue as a going concern. Any of these events could materially harm our business, financial condition and prospects. +A disruption or other failure in our supply chain could adversely affect our business and financial results. +As a company engaged in manufacturing and distribution, we are subject to the risks inherent in such activities, including disruptions or delays in supply chain, product quality control, as well other external factors over which we have no control. Key components for our products include EMV microchips, substrates (such as PVC), resin, modules, antennas and inlays, which we source from multiple suppliers located in Germany, Thailand, the Netherlands, South +17 +Table of Contents +Korea, the United States and Singapore, primarily on a purchase order basis. Additionally, our Second Wave cards, featuring a core made with “recovered ocean bound plastic” rely on a largely international supply chain to source and provide such “recovered ocean bound plastic” in accordance with our defined parameters. It is difficult and costly to monitor suppliers of key components and their compliance with our parameters, our codes of conduct, and applicable laws. Any failure by our suppliers to so comply could adversely affect our ability to produce Second Wave payment cards or cards with EMV microchips at all or in a manner consistent with standards agreed upon with our customers, which could adversely affect our business, reputation and customer relationships. Moreover, in certain cases, such as with ROBP, microchip and resin suppliers, we may rely on suppliers for which there are not adequate and immediate or any replacements, which may result in our inability to continue to produce or a reduction in production of products that use components from these suppliers in the event the suppliers terminate their relationships with us, fail to deliver products or materials in required volumes or in required timeframes, or otherwise fail to meet their obligations to us. We generally do not maintain large volumes of inventory, which makes us even more susceptible to harm if a single-source supplier fails to deliver products or materials as required. Also, changes in the financial or business condition of our suppliers, political instability, social unrest or adverse market conditions in a supplier’s country (including relating to any continued outbreak of COVID-19), demand from other customers of such suppliers or failure to comply with our codes of conduct or other contractual requirements could render our suppliers unable to provide us with, or render us unable or unwilling to accept, the components we need to produce our products and thus subject us to losses or adversely affect our ability to bring products to market. Further, the failure of our suppliers to deliver goods and services in sufficient quantities, in compliance with applicable standards, contract requirements, or laws and regulations, and in a timely manner could adversely affect our customer service levels, our reputation and our overall business. For example, we have in the past experienced delays in our supply chain, which made it difficult to produce our products in a timely manner. In addition, any increases in the costs of goods and services for our business may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in our operations. If a company in our supply chain engages in illegal, unethical or other questionable conduct, we may not have visibility to these practices and we, and our customers, may face reputational harm in addition to interruptions to our supply chain. +System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, impair customer and vendor relationships, disrupt our internal operations, harm perception of our products, and expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and our reputation. +The reliability and security of our IT infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. We may be a target of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, phishing attacks, ransomware attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from unauthorized use of or access to computer systems (including from internal and external sources). A breach of our security defenses could result in a loss of our intellectual property, the release of sensitive cardholder information and customer, consumer or employee personal data, or the loss of production capabilities at one or more of our production facilities. In recent years these types of incidents have become more prevalent and pervasive across industries, including in our industry. +In addition, our encryption systems are at risk of being breached or decoded. We use encryption technology to protect sensitive data while in transit and at rest. Also, smart cards are equipped with keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, whether caused by cyber-attacks, security breaches or otherwise, which could ultimately have a material adverse effect on our business, financial condition and results of operations. +The protective measures we have implemented to protect against data and security breaches and cyber-attacks may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. Our activities and investment in protective measures may not be deployed sufficiently quickly or successfully in order to protect our system or network against disruptions and may not prevent or limit the damage from any future security breaches. In addition, as these threats continue to evolve, we may be required to invest significant +18 +Table of Contents +additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business and reputation. +Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, including the operation of complex IT systems. In addition, a significant portion of the communication between our employees, customers, and suppliers depends on our IT systems. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. +In order to serve our customers and operate certain aspects of our business, we depend on data centers and computing infrastructure that is both our own as well as provided by third party vendors. To the extent applications and data used in our business are hosted by third party vendors at their facilities, we do not control the operation of such facilities or in some cases the hardware and infrastructure within them. Any disruption of, interference at, or inability to keep up with our needs for capacity by our third-party data centers or hosted infrastructure partners could interrupt our business operations. In addition, any problems faced by our third-party data center operations or hosted infrastructure partners with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our ability to service our customers also largely depends on the efficient and uninterrupted operation of our own computer information systems residing at our leased facilities. The proper functioning of such systems can be adversely affected by the increasing age and usage of such systems, among other things. Any interruption in our business applications, systems or networks, including, but not limited to, new system implementations, server downtime, facility issues, natural disasters or energy blackouts, could have a material adverse impact on our operations, sales and operating results. Additionally, we have a limited number of employees with the expertise required to operate such internal applications, systems and networks as well as remediate them in the event of a failure, and thus the attrition of such employees could result in our inability to quickly and effectively resolve future IT issues that may arise. +Not only could we suffer damage to our brand and reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements require the payment of penalties if our systems do not meet certain operating standards, and failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of compliance of our facilities, any of which could have a material adverse effect on our business. In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Protective measures we have established for continuation of core business operations in the event of a catastrophic event may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results of operations. +Disruptions in production at one or more of our facilities may have a material adverse impact on our business, results of operations and/or financial condition. +Any serious disruption at any of our facilities, including as a result of the COVID-19 pandemic, severe weather conditions, natural disasters, hostilities, political instability, social unrest, network outages, climate change or terrorist activities, could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. In the event of a disruption in production at one of our facilities, our other facilities may not have sufficient capacity, may not have the specialized equipment necessary, may have higher production costs, may take significant time to increase production or may fail to meet our customers’ requirements, any of which could negatively impact our business, results of operations and financial condition. Long-term production disruptions may cause our customers to seek alternative supply, which could further adversely affect our profitability. +A significant amount of certain specialized manufacturing capacity is also concentrated in single-site locations. Due to the specialized nature of the assets used in the manufacturing process at each location, in the event a particular facility experiences disruption, it may not be possible to find replacement capacity quickly or substitute production from our other facilities. Accordingly, disruption at a single-site manufacturing operation could significantly impact our ability to supply our customers and could have a severe impact on us. +19 +Table of Contents +Additionally, all of our manufacturing facilities are currently leased, and we are subject to risks associated with our current and future real estate leases for such facilities. As each lease expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, we may be unable to find replacement locations with adequate capacity for our unique equipment and operational needs, and we may experience disruption or significant cost in relocating, any of which could have an adverse effect on our operations, customer relationships and financial performance. +Failure to retain our existing customers or identify and attract new customers could have a material adverse effect on our business. +A substantial portion of our net sales is derived from several large customers. The Company had two customers that accounted for 10% or more of its net sales in 2020. Net sales from these customers were approximately 15% and 14% of total net sales for a combined total of approximately 29% of our net sales for the year ended December 31, 2020. If one or more of these key customer relationships ends, it could have a material adverse effect on our business and financial results. Our ability to provide products and services to these customers and our other customers and meet very high quality standards in a timely manner is critical to our business success. For example, one of the key services that we offer our customers is the prompt and timely production and delivery of replacement debit or credit cards. Orders for replacement debit or credit cards often are placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a high quality and timely manner, our relationships with our customers may be adversely affected and customers may terminate our contracts with them. +In addition, our continued business relationship with our customers may be impacted by several factors beyond our control, including more attractive product offerings from our competitors, pricing pressures, the financial health of our customers and macroeconomic conditions affecting the Financial Payment Card industry or our financial institution and other customers. Because our contractual arrangements with customers generally do not include exclusivity clauses or commitments to order specified quantities of products on a medium or long-term basis, there is no guarantee that we will receive orders on a consistent basis or on favorable terms, or be able to renew contracts or purchase orders in a given year on favorable terms or at all. +If we experience difficulty attracting and retaining customers, our business, financial condition and results of operations may be materially and adversely affected. +The failure to effectively recruit, retain and develop qualified personnel and implement effective succession processes could adversely affect our success and ability to grow and could have a material adverse effect on our profitability. +Our business functions are complex and require wide-ranging expertise and intellectual capital. If we fail to recruit, retain and develop personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs, then the ability of our business to successfully compete and grow may be adversely affected. In addition, the loss of key personnel without adequate succession plans in place may cause a failure to maintain continuity in key business functions. The market for qualified personnel is highly competitive, particularly in the states in which our operations are concentrated. This may result in market increases in compensation and difficulty attracting top level talent in the event we are unable to offer market compensation to prospective employees. Additionally, equity-based incentive awards have been, and may in the future be, an important element to attract, retain and motivate certain of our employees and executive officers. We may not be able to make these awards in the future without amending our Omnibus Incentive Plan to (i) add additional shares eligible for issuance (which would require stockholder approval) and (ii) increase the number of shares permitted to be awarded to our directors and officers (which, under TSX rules, would require approval of our disinterested stockholders voting at a duly called meeting). If we are unable to effectuate one or both of these amendments because we do not have the requisite stockholder approval, we will be unable to offer equity-based incentives as part of our compensation for certain employees and our executive officers going forward, which may hinder our ability to retain such personnel and to recruit other talented personnel. Our efforts to retain and develop personnel may also result in significant additional expenses, which could have a material adverse effect on our profitability. Even then, we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. In addition, our key personnel may not continue to be employed or we may be unable to attract and retain qualified personnel in the future. Any failure to retain or attract qualified employees or key personnel could have a material adverse effect on our business, financial condition and results of operations. +20 +Table of Contents +We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or infringement, which may have a material adverse effect on our business. +Our ability to protect our intellectual property is important to our business. We depend on patents and other intellectual property rights to protect our products, proprietary designs and technological processes against misappropriation by others. Our existing or future patents may be challenged, invalidated or circumvented. Our patents have been and may in the future be challenged as invalid. Furthermore, we may have difficulty obtaining additional patents and other intellectual property protections in the future. The patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Moreover, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which we provide services or sell or license products. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. We actively seek to protect our proprietary rights and trade secrets by engaging in litigation and by entering into confidentiality agreements with our employees, consultants, and strategic partners and controlling access to and distribution of our technologies, documentation and other proprietary information. Nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary and may use such information to interfere with our business. Enforcing our intellectual property rights has in the past, and may in the future, cause us to incur significant costs. These costs and other consequences from the unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. +We may be required to defend against alleged infringement by us of the intellectual property rights of others. Our products often contain technology provided to us by other parties such as suppliers or customers, and we compete in an industry that is highly active in generating intellectual property. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. +Companies in our industry aggressively protect their intellectual property rights. From time to time, we receive notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights or that challenge the validity of our patents. In addition to the costs and distraction that result from intellectual property litigation, an adverse determination in these types of disputes could prevent us from offering some of our products and services or from enforcing our intellectual property rights. Settlements can involve royalty or other payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our suppliers, customers and licensors may not be required to fully indemnify us for the costs of defending against infringement claims. In addition, we may be required to indemnify some customers and strategic partners related to allegations, regardless of merit, that our products infringe on the intellectual property rights of others. +We also face risks related to open source software. Certain of our software is derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. Usage of open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software, or remedies against the licensors. Many of the risks associated with open source software cannot be eliminated and could have a material adverse effect on our business, financial condition and results of operations. +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +Our services are based on sophisticated software and computing systems, and the software underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our customers. Defects in +21 +Table of Contents +our software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of customers, negative publicity or exposure to liability claims. +Our business could suffer from problems in production quality, materials and process, which could reduce, delay or interrupt production of our products, resulting in adverse impacts to our business and financial results. +We produce our products using processes that are highly complex, require advanced and costly equipment and must continually be modified to improve yields and performance. Difficulties in the production process can reduce product yields, reduce product quality or interrupt production altogether. We may not have adequate replacements for failing or malfunctioning machinery available in a timely fashion. Additionally, we have experienced malfunctions and errors, including human error, relating to the operation of certain machinery and systems used in our production process that, in some instances, have resulted in the delivery to our customers of products that did not meet their standards or specifications or whose functionality in the marketplace was adversely impacted. Such problems may result in our inability to properly fulfill customer orders and/or our obligation or election to replace products at our cost and expense, provide credit to or reimburse customers for related damages. We may also be subject to claims relating to such issues. The occurrence of any of these risks could damage our reputation and result in the loss of business from affected customers, which could have an adverse impact on our business, financial condition and results of operations. +As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our production processes at the market rate, we may experience a lower production quality than the market standard. We may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures, human or other errors, or as a result of external factors beyond our control, such as delay of, or quality issues with, materials provided by suppliers, interruption of our electrical service or a natural disaster. We may also risk non-compliance with certain industry standards if we experience failure of certain required operations or processes, such as those related to facility security, which may impede our ability to deliver products to our customers. Any such event could have a material adverse effect on our business, financial condition and results of operations. +Our future success depends upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process. We may be unable to commercialize new or improved products we may develop on a timely basis, or at all. +The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological, market and industry trends, as well as precise technical execution, all of which could adversely affect our ability to meet customer demand for new or enhanced products. The successful development of new products may require us to undertake time-consuming and costly research and development activities, and we may experience difficulties or challenging market conditions that could delay or prevent the successful development, commercialization and marketing of these new products, including, for example, limited or delayed market acceptance of dual-interface EMV technology in the United States. Before we can commercialize any new products, we may need to expend significant funds in order to conduct substantial research and development. Additionally, we have limited research and development resources as compared to many of our competitors, which may result in an immature product development process and lengthy product roll-outs. If we have difficulty producing innovative products, there could be a material adverse effect on our revenue, results of operations, reputation and business. New or enhanced product offerings may also expose us to additional risks, such as new sources of supplies, increased regulation or reputational harm. +As we develop products, we may need to make significant investments in product development, as well as sales and marketing resources. Furthermore, if we are unable to develop and introduce new and innovative products in a cost-effective and timely manner, our product and service offerings could be rendered obsolete. In addition, competitors may be able to develop and commercialize competing products more quickly and efficiently. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. +We may become subject to additional sales tax collection obligations and claims for uncollected amounts, new U.S. tax legislation could expose us to additional tax liabilities and our income tax positions may be challenged by relevant tax authorities, all of which could adversely affect our cash flows and financial results. +22 +Table of Contents +In recent years, a number of states have adopted or considered adopting legislation requiring out-of-state sellers to collect and remit sales tax on sales transactions into those states where they have no physical presence. The United States Supreme Court’s June 2018 decision in South Dakota v. Wayfair, Inc. significantly increased the ability of states to impose sales tax collection responsibilities on out-of-state sellers. In 2020, we determined that sales tax was not properly collected from certain customers and remitted to the appropriate state tax authorities, and we recorded an associated sales tax expense (see Part II Item 8, Financial Statements and Supplementary Data, Note 15 “Commitments and Contingencies” in this Annual Report on Form 10-K regarding the sales tax expense and liability recorded). An increased number of states seeking to expand applicability of sales tax “nexus” laws could result in additional tax expenses in the event we are unable to pass these expenses along to our customers and additional administrative burden to collect and remit sales tax in such jurisdictions. These laws could also subject us to retroactive assessment of state or local sales taxes in such jurisdictions, which could adversely affect our future cash flows and financial results. In addition, we are subject to U.S. federal and state income taxes. Our tax receivables may not be realized, and o ur tax expense and the tax positions included in our financial statements, which are subject to estimates, could be impacted by changes in rules or interpretations of existing tax laws and changes in U.S. federal and state tax legislation and tax rates. Our tax positions may be challenged by relevant tax authorities and we may not be successful in defending against any such challenge, which may adversely affect our future cash flows and financial results. +Various levels of government are increasingly focused on tax reform and other legislative actions to increase tax revenue, and President Biden’s campaign proposals included increasing the U.S. corporate income tax rate and imposing a new alternative minimum tax on book income. If these proposals are ultimately enacted into legislation, they could materially impact our tax provision, cash tax liability and effective tax rate. +Additionally, o ur tax positions may be challenged by relevant tax authorities and we may not be successful in defending against any such challenge, which may adversely affect our future cash flows and financial results. +We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer meet with our strategy or that should be consolidated. +In executing our strategy, we have consolidated certain of our facilities and divested certain of our businesses. We will continue to evaluate such opportunities. Any such consolidation or divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position. +We may not be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of operations or closure, may not be available to us or may be more costly than anticipated. +Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value. +Our long-lived assets recorded as of December 31, 2020 were $113.6 million, representing 43% of our total assets, of which we have recorded plant, equipment, leasehold improvements and operating lease right-of-use assets of $39.4 million, which includes significant investments in machinery and equipment as used in our operations. +We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we were to conclude that a future write-down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write-down of our long-lived assets may result from, among other things, deterioration in our performance and a decline in expected future cash flows and could have a material adverse effect on our business, financial condition and results of operations. +Costs relating to product defects, and any related product liability and warranty claims may materially adversely affect our business. +We offer highly complex services and products and, accordingly, from time to time, defects have occurred. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing +23 +Table of Contents +defective items, writing down defective inventory, the loss of potential sales and claims by third parties. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we sell defective products into the market, our reputation could suffer and we may lose sales opportunities and incur liability for damages, including damage claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. +Many of our products integrate third-party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with, among other benefits, access to technology owned by third parties. For example, we license Java card technology from Oracle and Multos card technology from Multos International, a subsidiary of a competitor, for use in certain of our products, including in EMV cards. This Java and Multos card technology provides a secure environment for applications on smart cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements with Oracle and Multos International for the continued use of these platforms. Oracle and Multos International may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross-licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios. If we are unable to continue to successfully renew these agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products, which could have a material adverse effect on our business. +Risks Relating to our Industry +If the U.S. government puts significant tariffs or other restrictions on goods imported into the United States, our business, financial condition and results of operations may be materially harmed. +Most of our chips, as well as certain other raw materials used in our products, are imported from companies located outside of the United States. The U.S. government has imposed tariffs on imports from certain countries, including countries in which are suppliers are located, and may impose further tariffs and/or trade restrictions, including in response to any continued outbreak of COVID-19 in foreign countries. There may also be other slow-downs or interruptions in our ability to obtain materials imported into the United States due to global economic downturns and trade disruptions, including related to the COVID-19 pandemic. The future status of certain existing international trade agreements to which the United States is party is also uncertain, and such trade agreements could be terminated or replaced. Any of these factors could depress economic activity, restrict our access to suppliers and have a material adverse effect on our business, financial condition and results of operations. +Existing tariffs are also subject to a number of uncertainties as they are implemented, including future adjustments and changes to the products covered by additional tariffs and to the countries included or excluded from such tariffs. Changes in U.S. trade policy have resulted in one or more foreign governments, including China, adopting responsive trade policies that make it more difficult or costly for us to import our products, or to purchase products which include components, from those countries. Additional trade restrictions may lead to increased prices to our customers, which may reduce demand, or, if we are unable to achieve increased prices, result in lowering our margin on products sold. +We cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions on the import or export of goods in the future, nor can we predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. +24 +Table of Contents +economy, which in turn could have a material adverse effect on our business, financial condition and results of operations. +Current and prospective regulations, changes in our product offerings and customer contractual requirements addressing consumer privacy and data use and security could increase our costs of operations, which could adversely affect our operations, results of operations and financial condition. +In operating a Financial Payment Card business, we manage large amounts of personally identifiable information of cardholders, including cardholder names, account numbers and similar information and are thus subject to laws and requirements relating to data privacy and security, which continue to evolve and may become increasingly difficult to comply with. For example, the California Consumer Privacy Act (“CCPA”) generally requires companies like CPI, who process consumer personal information on behalf of their customers, to use, retain or disclose consumer personal information solely for certain limited purposes, including to provide services to our customers according to the terms of our customer contracts. The CCPA has already been amended, and it remains unclear whether it will be further amended. Furthermore, to the extent these laws apply to our customers, our customers have imposed, and may continue to impose additional, privacy related contractual obligations on us, adherence to which may require additional investment in resources and internal processes. Additionally, as we continue to innovate our products and services offerings and expand into new lines of business and as the number of jurisdictions enacting privacy and related laws increases and the scope of these laws and enforcement efforts expand, we may become subject to additional data privacy and security legal requirements and regulations. New products and services we develop may also require that we obtain and retain more personally identifiable information for a longer period of time than we have done historically. We have incurred significant expenses to meet the obligations of current privacy-related laws and requirements, and we expect to continue to incur these as well as additional expenses if we become subject to additional privacy-related laws and regulations, which will continue to necessitate us making changes to our internal processes, procedures and systems. Failure to comply with existing or future data privacy and security laws, regulations and requirements to which we are or become subject could result in fines, sanctions, penalties, civil lawsuits or other adverse consequences as well as loss of customer and consumer confidence, which could materially adversely affect our results of operations, overall business and reputation. The legal, political and business environments in these areas are rapidly changing, and subsequent legislation, regulation, litigation, court rulings or other events could expose the Company to increased program costs, liability and reputational damage. +We face competition that may result in a loss of our market share and/or a decline in our profitability. +Our marketplace is highly competitive, relatively saturated and increasingly consolidated. We expect these market dynamics to continue as new product markets develop, competitors develop lower-cost production processes, competitors consolidate and other competitors attempt to enter the markets in which we operate. +Some of our competitors have larger global customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other capabilities than we do. These competitors may be able to adapt more quickly to new technological requirements and changes in customer and/or regulatory requirements and to leverage their scale to lower production costs and prices. We also face competition from newly established competitors, suppliers of products and customers who choose to develop their own products and services. +Existing or new competitors may develop products, technologies or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. As the technological sophistication of our competitors and the size of the market increases, competing low-cost producers could emerge and grow stronger. These dynamics could result in declining average selling prices and reduced gross margins in our businesses. If we cannot sufficiently reduce our production costs or develop new products, technologies or services, we may not be able to compete successfully, and we may lose market share, which could have a material adverse effect on our business, financial condition and results of operations. +New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected. +The markets for our products and services are subject to technological changes, frequent introductions of new products and services, evolving industry standards and changing customer preferences and demands. In particular, the rise in the adoption in digital payment systems or mobile payments may make physical cards less attractive as a method +25 +Table of Contents +of payment. Mobile payments offer consumers an alternative method to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services, or our new services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. If we do not complete or gain market acceptance of new products, services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or attract new ones. For example, one of our growth opportunities is the continued transition to dual-interface EMV cards by U.S. card issuing banks. Banks may be delayed in transitioning to the issuance of dual-interface EMV cards due to increased costs and other factors. If these entities do not deploy dual-interface EMV technology or do so less quickly and/or completely than we expect, our ability to grow could be significantly affected which could have a material adverse effect on our business, financial condition and results of operations. +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +● effectively identify and capitalize upon opportunities in new and emerging product markets; +● invest resources in innovation and research and development; +● complete and introduce new products and integrated services solutions in a timely manner; +● license any required third-party technology or intellectual property rights +● qualify for and obtain required industry compliance for our products; +● effectively manage the supply chain and related risks; +● comply with applicable data protection regulations; and +● retain and hire personnel experienced in developing new products and services. +Additionally, opportunities to combine or package products and service offerings and the ability to cross-sell products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross-sell our products and services, this may have a material adverse effect on our business, financial condition and results of operations. +Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue and profitability or lead to significant variability in our operating results. These factors include, among others, the varying cyclicality of the financial card and electronic payment industries, capital requirements, inventory management, the availability of funding, competition, new product developments, technological changes, production problems, supplier management and other factors. +Furthermore, in periods of industry overcapacity or when our customers encounter difficulties in their end-markets, orders are more exposed to cancellations, reductions, price renegotiations or postponements, which in turn reduce our management’s ability to forecast the next quarter or full-year production levels, net sales, profits and cash flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations as visibility is reduced. This may have a material adverse effect on our business, financial condition and results of operations. +26 +Table of Contents +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brand compliance standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and manufacturers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated, or customers may cease doing business with us, if we fail to comply with these standards and criteria. +We make significant investments in our network of high-security facilities in order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have constituted in the past an important part of our revenue and profitability. For the year ended December 31, 2020, the vast majority of the products we produced and services we provided were subject to compliance with the standards of one or more of the Payment Card Brands. If we were to lose compliance with one or more of the standards of the Payment Card Brands or of the PCI Security Standards Council for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the networks of the Payment Card Brands. Additionally, certain of our facilities operate under variances of certain of these standards. If such variances are not granted in the future or if we are required to move a facility in order to maintain compliance, we may incur significant costs and delays, or may lose our ability to offer services in that facility which would be disruptive to our business and have an adverse effect on our customer relationships and financial results. If, as a result of noncompliance with standards of the PCI Security Standards Council or other standards of the Payment Card Brands, we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations. +Risks associated with reduced levels of consumer and business spending as well as the effects of an economic downturn on retailers could adversely affect our business, financial condition and results of operations. +Our business depends heavily on the overall level of consumer and business spending. Our revenue is exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. A sustained deterioration in general economic conditions, particularly in the United States, or increases in interest rates may adversely affect our financial performance by reducing the demand for our Financial Payment Card solutions or reducing the purchase of our higher margin products. If an economic downturn occurs, credit card issuers may reduce credit limits, close accounts and become more selective with respect to whom they issue credit cards. Additionally, an economic downturn or the continued outbreak of the COVID-19 pandemic could result in extended voluntary or mandated closure of retail locations that sell certain of our products to consumers, including our Prepaid Debit Cards. These and other changes in economic conditions could therefore adversely impact our future revenues and profits and cause a materially adverse effect on our business, financial condition and results of operations. +Environmental, health and safety laws and regulations expose us to liability and any such liability may have a material adverse effect on our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, the handling of certain materials and equipment we use in our production processes is subject to health and safety and environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or lease real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liabilities on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to +27 +Table of Contents +natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +The scientific examination of, political attention to, and rules and regulations on issues surrounding the existence and extent of climate change may result in an increase in our cost of production due to increases in the price of energy and/or the introduction of energy or carbon taxes. A variety of regulatory developments have been introduced that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gasses. As a result, we may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. These developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in health and safety or environmental regulations could increase our production costs, which could have a material adverse effect on our business, financial condition and results of operations. +Risks Relating to Ownership of our Common Stock +If we fail to meet the continued listing standards of the Toronto Stock Exchange or the rules of the OTCQX® Best Market, our common stock may no longer be permitted to trade on these platforms, which may adversely affect the market price and liquidity of our common stock. +Our common stock is currently traded on the TSX and quoted on the OTCQX. In order to maintain our listing on the TSX, we must maintain certain financial and share distribution targets, including maintaining a minimum number of public stockholders, a minimum amount of free trading public shares, a minimum amount of market capitalization and a minimum amount of value held by public stockholders. In addition to objective standards, the TSX may delist the securities of any issuer if, in the TSX’s opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; if it appears that the extent of the public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the TSX inadvisable; if the issuer sells or disposes of principal operating assets or ceases to be an operating company; if the issuer fails to comply with the listing requirements of the TSX; or if any other event occurs or any condition exists which makes continued listing on the TSX, in the opinion of the TSX, inadvisable. In order to continue quotations on the OTCQX, we must maintain a minimum per share bid price, a minimum amount of market capitalization, minimum net tangible assets, a minimum amount of net sales, and a minimum public float, in addition to continuing to comply with the United States securities laws and SEC reporting rules. +If we are unable to maintain the continued listing requirements of the TSX or comply with the OTCQX rules, this could result in an inability of our stock to trade on such platforms, resulting in adverse consequences for our stockholders, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Other consequences could include a loss of confidence by investors, customers, suppliers, and employees, and an adverse effect on our ability to obtain financing to continue operations. +Our common stock is not currently traded on a United States national securities exchange, which may continue to decrease the value of our common stock and prevent investors from investing or achieving a meaningful degree of liquidity. +In January 2020, our common stock was suspended from Nasdaq and began being quoted on the OTCQX. While our stock is still currently listed on the TSX, a Canadian stock exchange, we cannot assure investors that our common stock will be listed on a United States national exchange such as Nasdaq or any securities exchange in the future. +Based upon the fact that our common stock is no longer traded on a United States national exchange and that the value of our issued and outstanding common stock has decreased in value in recent years, certain stockholders may no longer be able to invest in our common stock. Bid quotations on the OTCQX can be sporadic and may not provide meaningful liquidity to investors. An investor may find it difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. As a result of these limitations, our common stock may have fewer market makers, lower trading volumes and larger spreads between bid and asked prices than securities listed on a national stock exchange or automated quotation system would typically have. +28 +Table of Contents +Because there may be a limited market and generally low volume of trading in our common stock, the share price of our common stock may be more significantly affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the market’s perception of our business and announcements made by us, our competitors or parties with whom we have business relationships. There may also be fewer institutional investors willing to hold or acquire our common stock. The lack of liquidity in our common stock may make it difficult for us to issue additional securities for financing or other purposes or to otherwise arrange for financing that we may need in the future, which could harm our business. +Furthermore, our common stock may not continue to be quoted on the OTCQX in the future, broker-dealers may cease to provide public quotes of our common stock on this market or the trading volume of our common stock may be insufficient to provide for an efficient trading market. Any such developments could impair the value of your investment. We expect that the price of our common stock could fluctuate substantially. +Because we are not listed on a United States national exchange, we are not subject to certain standards, such as certain corporate governance requirements. Without required compliance with such standards, our investors do not have the same protections afforded to investors in companies that are subject to such standards, and interest in our common stock may decrease. +Our majority stockholders have the ability to control significant corporate activities, which may result in the Company taking actions that other stockholders did not approve, and their ownership of a significant percentage of our outstanding common stock may impact your liquidity, reduce the trading price of our stock or trigger a change in control under our Senior Credit Facility. +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital), own approximately 37% and 22% of our common stock, respectively, as of December 31, 2020. Continuation of this concentrated ownership could result in a limited amount of shares being available to be traded in the market, resulting in reduced liquidity. +Also, as a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of all stockholders and, through our board of directors, the ability to control decision-making with respect to our business direction and policies. Matters over which the Tricor Funds, directly or indirectly, exercise control include: +● election of directors; +● mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; +● other acquisitions or dispositions of businesses or assets; +● incurrence of indebtedness and the issuance of equity securities; +● repurchases of stock and payment of dividends; and +● the issuance of shares to management under our incentive plans and other executive compensation matters. +The shares held by the Tricor Funds are restricted securities within the meaning of Rule 144 under the Securities Act and are eligible for resale in the public market without registration subject to volume, manner of sale and holding period limitations under Rule 144 under the Securities Act. Further, pursuant to the Registration Rights Agreement, dated as of October 15, 2015, among the Tricor Funds and the Company, all of the shares of our common stock owned by the Tricor Funds are now eligible to be registered under the Securities Act, subject to certain limitations set forth in the Registration Rights Agreement, and may be offered and sold to the public now or in the future. If and when some or all of these shares are sold by the Tricor Funds or the participants in their funds, either through sale on the open market or through a distribution to the participants in their funds, or if it is perceived that they will be sold, the market price of our common stock could decline. +In addition, if Tricor Funds were to sell or otherwise dispose of more than 25% of our outstanding common stock, or otherwise cease to own at least 30% of our outstanding common stock, other than by means of distributing our common stock to the participants in Tricor Funds, a “change of control” event of default would occur under the terms of our Senior Credit Facility. +29 +Table of Contents +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +The trading market for our common stock could be influenced to some extent by the research and reports that industry or financial analysts publish about the Company and our business. We do not control these analysts. Since the decline in the price of our common stock that preceded our delisting from Nasdaq and the subsequent listing of our common stock on the OTCQX, we have not attracted substantial research coverage, and the analysts who publish information about our common stock may have relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain additional securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial portion of our board of directors. +Messrs. Bradley Seaman and Nicholas Peters, who are officers or affiliates of Parallel49 Equity (and its predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49 Equity, on the one hand, and of our other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors. +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +● the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +● following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors; +● advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings; +● allowing only our board of directors to fill vacancies on our board of directors; and +30 +Table of Contents +● following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, super-majority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation. +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate when the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti-takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of the Company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, the potential issuance of preferred stock may delay or prevent a change in control of us or discourage bids for our common stock at a premium over the market price. It may also adversely affect the market price and the voting and other rights of the holders of our common stock as it could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +General Risk Factors +We are required to comply with complex laws and regulations in the United States and other countries and are exposed to business risks associated with our international business. +We are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. Though we currently have limited international operations, the expansion thereof in the future may increasingly expose us to risks associated with international business operations, including political instability (e.g., the threat of war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect our employees, reputation, business or financial results as well as our ability to meet our objectives. +We may not be in full compliance at all times with the laws and regulations to which we are subject and we may not have obtained the permits, authorizations or licenses that we need. Any failure to comply with applicable laws +31 +Table of Contents +or regulations could result in fines or sanctions. In such a case, or if any of these international business risks were to materialize, there could be a material adverse effect on our business, financial condition and results of operations. +Our business and financial results may be materially adversely affected by various legal and regulatory proceedings. +We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our business, operating results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any liability that may be imposed on us. +Item 1B. +Unresolved Staff Comment s +None. +Item 2. +Propertie s +Information regarding each of our facilities, which may include multiple leases at each location, is set forth below. +Square +Owned/ +Location +Operations +Footage +Leased +Littleton, Colorado +Financial Payment Card production, corporate facility +65,000 +Leased +Roseville, Minnesota +Financial Payment Card production, card personalization services, card packaging services, fulfillment +200,000 +Leased +Fort Wayne, Indiana +Financial Payment Card production +45,000 +Leased +Nashville, Tennessee +Financial Payment Card personalization services, instant issuance, fulfillment +71,000 +Leased +Item 3. Legal Proceeding s +The Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on our business, financial condition or results of operations. +Item 4. +Mine Safety Disclosure s +Not applicable. +PART I I +Item 5. +Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market Information for Common Stock +Our common stock is currently quoted on OTCQX Best Market and traded on the TSX under the symbol “PMTS”. In January 2020, our common stock was suspended from listing on Nasdaq and began being quoted on the OTCQX. Any over-the-counter market quotations reflect inter-dealer prices, without mark-up, mark-down or commission and may not necessarily represent actual transactions. We are evaluating our ability to return to listing on +32 +Table of Contents +Nasdaq and intend to apply for listing on The Nasdaq Global Market as we are able and eligible to do so. However, there can be no assurance that, if we seek to return to listing on Nasdaq, we will be successful in doing so. +Holders +There were thirty-two stockholders of record as of February 15, 2021. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. +Issuer Purchases of Equity Securities +There were no shares repurchased during the years ended December 31, 2020, and 2019. +Item 6. +Selected Financial Dat a +Not required due to smaller reporting company status. +Item 7. +Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, some of which are not within our control. See "Risk Factors" and “Cautionary Statement Regarding Forward-Looking Statements.” +Company Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard, American Express and Discover in the United States and Interac in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card market through more than 20 years of experience. We serve a diverse set of approximately 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States, and the largest Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our leading network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; and +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +33 +Table of Contents +2020 Summary of Financial Performance +During the year ended December 31, 2020, net sales increased 12.3% from the prior year, to $312.2 million, and we recorded income from operations of $38.4 million, compared to net sales of $278.1 million and income from operations of $24.7 million during 2019. Our operating income margin for the year ended December 31, 2020 increased to 12.3% compared to 8.9% in the prior year. During the year ended December 31, 2019, we received $6.0 million cash related to a litigation settlement, which was recorded as a reduction to net operating expenses in the Other segment. For the year ended December 31, 2020, we recorded net income from continuing operations of $16.2 million, compared to net loss from continuing operations of $5.0 million in 2019, an improvement of $21.2 million. +Cash provided by operating activities from continuing operations for the year ended December 31, 2020 was $22.1 million, representing an increase of $19.1 million compared to $3.0 million in the prior year. +Segment Overview +Our business consists of the following reportable segments: +● Debit and Credit, +● Prepaid Debit, and +● Other. +Debit and Credit Segment +Our Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless dual-interface cards and plastic and encased metal cards, and Second Wave payment cards featuring a core made with ROBP. We also sell Card@Once, our proprietary and patented instant card issuance system and software-as-a-service, and other private label credit cards that are not issued on the networks of the Payment Cards Brands. We provide CPI On-Demand services, where we produce images, personalized payment cards, and related collateral on a one-by-one, on demand basis for our customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services. The Debit and Credit segment operations are each audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +Prepaid Debit Segment +Our Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid Debit segment operation is audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +Other +Our Other segment includes corporate general and administrative expenses and a less significant operation that generated sales from the production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment services in Canada, prior to its sale. In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to our operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and we received cash proceeds of $1.5 million. After the payment of liabilities and transaction costs, including employee termination costs, the majority of which were expensed in 2018, the sale did not have a significant impact on cash, and there was no significant loss on sale. +On August 3, 2018, we completed the sale of the U.K. Limited segment. +34 +Table of Contents +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive income. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of Financial Payment Cards, including contact and contactless dual-interface cards, and Second Wave ROBP cards. D ual-interface EMV cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV cards. We do not anticipate the conversion from contact EMV cards to dual interface EMV cards to have a negative impact to our gross profit and gross margin, as this conversion occurs over time. We also generate product revenue from the sale of our Card@Once instant issuance system and consumables, private label credit cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, including CPI On-Demand services, tamper-evident security packaging, fulfillment services and software as a service personalization of instant issuance Financial Payment cards. See Part II, Item 8, Financial Statements and Supplementary Data, Note 2 “Summary of Significant Accounting Policies” and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates—Revenue Recognition” in this Annual Report on Form 10-K for further information and timing of revenue recognition for net sales. We include gross shipping and handling revenue in net sales. +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including the EMV/ dual-interface microchips and antennas, labor costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Product costs also include Card@Once instant issuance printer costs. Services costs include the cost of labor, raw materials in the case of tamper-evident security packaging, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, promotional activity and employee relations. We include the costs of shipping and handling in cost of sales. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service, human resources, research and development, and administrative personnel, including payroll, benefits and stock-based compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and software related fees. Operating expense also includes depreciation and amortization expense and may include impairment charges on tangible and intangible assets or cash from litigation settlements, when necessary. +Income from Operations and Operating Margin +Income from operations consists of our gross profit less our net operating expenses. Operating margin is income from operations as a percentage of net sales. +Other Expense, net +Other expense, net consists primarily of interest expense and foreign currency gains or losses. +35 +Table of Contents +Income tax benefit (expense) +Income tax benefit (expense) consists of our U.S. federal and state income taxes at statutory rates, including the impact of other items such as valuation allowances, tax credits, permanent items, and foreign taxes. +Net Income (Loss) from Continuing Operations +Net income (loss) from continuing operations consists of our income from operations, less other expense, net, and income taxes. +Results of Operations +Year Ended December 31, 2020 Compared With Year Ended December 31, 2019 +The table below presents our results of operations, on a continuing operations basis, for the years ended December 31, 2020 and 2019: +Year Ended December 31, +2020 +2019 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +171,968 +$ +143,941 +$ +28,027 +19.5 +% +Services +140,221 +134,132 +6,089 +4.5 +% +Total net sales +312,189 +278,073 +34,116 +12.3 +% +Cost of sales +201,881 +187,003 +14,878 +8.0 +% +Gross profit +110,308 +91,070 +19,238 +21.1 +% +Selling, general and administrative (including depreciation and amortization) +71,917 +72,359 +(442) +(0.6) +% +Litigation settlement gain +(6,000) +6,000 +* +Income from operations +38,391 +24,711 +13,680 +55.4 +% +Other expense, net: +Interest, net +(25,397) +(24,891) +(506) +2.0 +% +Foreign exchange loss +(7) +(1,335) +1,328 +* +Other income (loss) +(102) +(4) +(98) +* +% +Income (loss) before income taxes +12,885 +(1,519) +14,404 +* +% +Income tax benefit (expense) +3,305 +(3,474) +6,779 +* +Net income (loss) from continuing operations +$ +16,190 +$ +(4,993) +$ +21,183 +424.3 +% +* Not meaningful +Net Sales +Year Ended December 31, +2020 +2019 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +Debit and Credit +$ +250,427 +$ +213,141 +$ +37,286 +17.5 +% +Prepaid Debit +63,596 +64,330 +(734) +(1.1) +% +Other +— +1,679 +(1,679) +* +% +Eliminations +(1,834) +(1,077) +(757) +* +Total +$ +312,189 +$ +278,073 +$ +34,116 +12.3 +% +* Not meaningful +Net sales for the year ended December 31, 2020, increased $34.1 million, or 12.3%, to $312.2 million compared to $278.1 million for the year ended December 31, 2019. +36 +Table of Contents +Debit and Credit: +Net sales for Debit and Credit for the year ended December 31, 2020, increased $37.3 million, or 17.5%, to $250.4 million compared to $213.1 million for the year ended December 31, 2019. The net sales increase was primarily due to higher volumes of contactless dual-interface EMV cards, including our Second Wave cards f eaturing a core made with recovered ocean bound plastics. In addition, net sales increased from CPI On-Demand card personalization due to higher volumes from our existing customers, new customers in the current year, and COVID-19 related government disbursement work. D ual-interface EMV cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV cards, which benefitted the current year sales increases compared to the prior year. Partially offsetting these increases were reductions in volumes of Card@Once instant issuance product sales and card personalization sales in 2020. The decline in volumes was primarily as a result of ongoing impacts from COVID-19 including reduced hours of operation and lack of access or closure of certain bank branches, and fewer new accounts and requests for replacement cards. +Prepaid Debit: +Net sales for Prepaid Debit for the year ended December 31, 2020, decreased $0.7 million, or 1.1%, to $63.6 million, compared to $64.3 million for the year ended December 31, 2019. The decrease was the result of lower sales volumes primarily associated with COVID-19 impacts, including lower retail store traffic. +Other: +There were no Other net sales for the year ended December 31, 2020, compared to $1.7 million for the year ended December 31, 2019. In April 2019, we sold our Canadian subsidiary, which was the only operation contributing to Other segment net sales. +Eliminations: +This includes the elimination of intercompany sales between segments in the consolidation of our financial statements. The increase in eliminations for the year ended December 31, 2020 compared to the year ended December 31, 2019, is due to higher sales between segments. +Gross Profit and Gross Margin +Year Ended December 31, +% of +% of +2020 +net sales +2019 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +Debit and Credit +$ +85,833 +34.3 +% +$ +66,353 +31.1 +% +$ +19,480 +29.4 +% +Prepaid Debit +24,475 +38.5 +% +24,814 +38.6 +% +(339) +(1.4) +% +Other +— +* +% +(97) +* +% +97 +* +% +Total +$ +110,308 +35.3 +% +$ +91,070 +32.8 +% +$ +19,238 +21.1 +% +* Not meaningful +Gross profit for the year ended December 31, 2020 increased $19.2 million, or 21.1%, to $110.3 million compared to $91.1 million for the year ended December 31, 2019. +Debit and Credit +Gross profit for Debit and Credit for the year ended December 31, 2020 increased $19.5 million, or 29.4%, to $85.8 million compared to $66.4 million for the year ended December 31, 2019. The increase in gross profit was driven primarily by higher sales volumes and pricing of contactless dual-interface EMV cards, including Second Wave cards. In addition, higher sales from CPI On-Demand card personalization and COVID-19 related government disbursement work contributed to an improvement in gross profit compared to the prior year. Gross profit margin increased to 34.3% during the year ended December 31, 2020, compared to 31.1% in the prior year, due primarily to operating leverage from higher contactless dual-interface card sales including Second Wave cards and CPI On-Demand net sales. +37 +Table of Contents +Prepaid Debit +Gross profit for Prepaid Debit during the year ended December 31, 2020 decreased 1.4% to $24.5 million compared to $24.8 million for the year ended December 31, 2019. Gross profit margin for Prepaid Debit for the year ended December 31, 2020 decreased to 38.5% compared to 38.6% for the prior year. The decrease in gross profit and margin was attributed to lower sales primarily from COVID-19 impacts which resulted in unfavorable cost absorption. +Other +There was no gross profit for the year ended December 31, 2020 compared to gross loss of $0.1 million for the year ended December 31, 2019. In April 2019, we sold our Canadian subsidiary, which was the only operation contributing to Other segment gross profit. +Operating Expenses, net +Year Ended December 31, +2020 +% of net sales +2019 +% of net sales +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +Debit and Credit +$ +30,985 +12.4 +% +$ +31,204 +14.6 +% +$ +(219) +(0.7) +% +Prepaid Debit +4,533 +7.1 +% +4,431 +6.9 +% +102 +2.3 +% +Other +36,399 +* +% +36,724 +* +% +(325) +(0.9) +% +Other-litigation settlement +— +* +% +(6,000) +* +% +6,000 +* +% +Total +$ +71,917 +23.0 +% +$ +66,359 +23.9 +% +$ +5,558 +8.4 +% +* Not meaningful +Operating expenses, net, for the year ended December 31, 2020 increased $5.6 million, or 8.4%, to $71.9 million compared to $66.4 million for the year ended December 31, 2019. The increase was primarily due to the cash litigation settlement gain of $6.0 million recorded in the second quarter of 2019, which was a reduction to net operating expenses. +Debit and Credit +Debit and Credit operating expenses decreased $0.2 million to $31.0 million for the year ended December 31, 2020 compared to $31.2 million for the year ended December 31, 2019, primarily due to cost reductions. +Prepaid Debit +Prepaid Debit operating expenses were $4.5 million for the year ended December 31, 2020, an increase of 2.3% compared to the year ended December 31, 2019. +Other +Other operating expenses were down $0.3 million for the year ended December 31, 2020 when compared to the year ended December 31, 2019. The reduction in operating expenses was primarily due to certain cost reductions and expense savings from the sale of our Canadian subsidiary . During the second quarter of 2019, we received $6.0 million cash, which was recorded as a reduction to net operating expenses, related to a litigation settlement. +38 +Table of Contents +Income from Operations and Operating Margin +Year Ended December 31, +% of +% of +2020 +net sales +2019 +net sales +$ Change +% Change +(dollars in thousands) +Income (loss) from operations by segment: +Debit and Credit +$ +54,848 +21.9 +% +$ +35,149 +16.5 +% +$ +19,699 +56.0 +% +Prepaid Debit +19,942 +31.4 +% +20,383 +31.7 +% +(441) +(2.2) +% +Other +(36,399) +* +% +(30,821) +* +% +(5,578) +(18.1) +% +Total +$ +38,391 +12.3 +% +$ +24,711 +8.9 +% +$ +13,680 +55.4 +% +* Not meaningful +During the year ended December 31, 2020 we had income from operations of $38.4 million compared to income from operations of $24.7 million for the year ended December 31, 2019. Our operating profit margin for the year ended December 31, 2020, increased to 12.3% compared to 8.9% for the year ended December 31, 2019. I n the prior year, we reached a litigation settlement and received $6.0 million cash which was recorded through income from operations within the Other segment. +Debit and Credit +Income from operations for Debit and Credit for the year ended December 31, 2020 increased $19.7 million to $54.8 million compared to $35.1 million for the year ended December 31, 2019. The increase in income from operations was driven primarily by higher sales volumes and pricing of contactless dual-interface EMV cards including Second Wave cards, and CPI On-Demand card personalization and COVID-19 related government disbursement work . Operating margins for the year ended December 31, 2020 increased to 21.9% compared to 16.5% for the prior year. +Prepaid Debit +Income from operations for Prepaid Debit for the year ended December 31, 2020 decreased $0.4 million, or 2.2%, to $19.9 million compared to $20.4 million for the year ended December 31, 2019. The decrease in income from operations was due to reduced sales volumes primarily due to COVID-19 impacts from lower retail store traffic. Operating income margin for the year ended December 31, 2020 decreased to 31.4% from 31.7% in 2019, primarily as a result of unfavorable cost absorption from lower sales, which impacted gross profit . +Other +The loss from operations in Other was $36.4 million for the year ended December 31, 2020, compared to a loss from operations of $30.8 million for 2019. The 2019 loss benefited from the $6.0 million cash litigation settlement gain, and was partially offset by lower net current year operating expenses. +Interest, net +Interest expense for the year ended December 31, 2020, increased $0.5 million to $25.4 million compared to $24.9 million for the year ended December 31, 2019. Interest expense was higher in 2020 primarily as a result of interest incurred on the Senior Credit Facility entered into on March 6, 2020. This additional expense was partially offset by a decline in the interest incurred on our First Lien Term Loan due to lower average interest rates for the year ended December 31, 2020 compared to 2019. +Income tax expense/ benefit +During the year ended December 31, 2020, we recorded an income tax benefit of $3.3 million on pre-tax income of $12.9 million, representing an effective income tax rate of (25.6)%. The effective tax rate differs from the federal U.S. statutory rate in 2020 primarily due to the impact of the CARES Act which was signed into law in March 2020. The CARES Act allows companies with net operating losses (“NOLs”) originating in 2018, 2019, or 2020 to carry back those losses for five years and temporarily eliminates the tax law provision that limits the use of NOLs to 80% of +39 +Table of Contents +taxable income. The CARES Act increases the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allows for the acceleration of refunds of alternative minimum tax credits. For the year ended December 31, 2020, the Company recorded a tax benefit for certain provisions in the CARES Act including the carryback of losses and the increase to the interest deduction limitation, resulting in a tax rate benefit of 20.9% . In addition, we applied the 2018 proposed regulations relating to the Section 163(j) interest deduction limitation which contributed to a valuation allowance change and tax rate benefit of 41.1%. Other items impacting the effective tax rate in 2020 include unrecognized tax benefits, permanent non-deductible items and tax credits. During the year ended December 31, 2019, we recorded an income tax expense of $3.5 million on pre-tax loss of $1.5 million, representing an effective tax rate of (228.7)%. Given the amount of pre-tax loss and the partial valuation allowance on certain U.S. deferred tax assets, the effective tax rate can be subject to significant variance from the federal U.S. statutory rate of 21%. For 2019, the effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of tax expense recorded related to a partial valuation allowance on certain U.S. deferred tax assets at an effective income tax rate impact of (213.8)%. The partial valuation allowance was due to the limitation on the deductibility of interest expense. +Net income/ loss from continuing operations +Net income from continuing operations for the year ended December 31, 2020 was $16.2 million, compared to net loss of $5.0 million for the year ended December 31, 2019. The change was primarily due to higher net sales and gross profit, and the income tax benefit recorded in 2020, partially offset by the cash litigation settlement gain recorded in the prior year. +Fourth Quarter +Our net sales increased 15.9% in the fourth quarter of 2020 to $84.1 million, compared to $72.6 million in the fourth quarter of 2019. Net sales for Debit and Credit increased by $7.9 million to $69.6 million, or 12.9% in the fourth quarter of 2020 compared to the fourth quarter of 2019. The increase in net sales was primarily due to higher net sales volumes from contactless dual-interface EMV cards, including Second Wave cards, and CPI On-Demand card personalization. +Net sales for our Prepaid Debit segment increased $3.7 million, or 33.6%, to $14.9 million in the fourth quarter of 2020 compared to $11.2 million in the fourth quarter of 2019. This increase in sales is related to higher demand of customer orders in the fourth quarter of 2020 as compared to the prior year. +Selling, general and administrative (exclusive of depreciation and amortization) expenses increased $0.1 million to $16.9 million in the fourth quarter of 2020 compared to $16.8 million in the fourth quarter 2019. The increase was due to an additional estimated sales tax expense, partially offset by certain corporate cost reductions, and restructuring severance charges incurred in the prior year. +During the fourth quarter of 2020 we earned income from operations of $12.4 million compared to $3.7 million in the fourth quarter of 2019. The increase in income from operations was primarily due to higher net sales volumes and gross profit. +Liquidity and Capital Resources +As of December 31, 2020, we had $57.6 million of cash and cash equivalents. Of this amount, $0.5 million was held in accounts outside of the United States. +Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs. +The Company is party to a First Lien Credit Facility, dated as of August 17, 2015, that includes a $312.5 million First Lien Term Loan that matures on August 17, 2022. On March 6, 2020, the Company entered into a new $30 million Senior Credit Facility which matures on May 17, 2022. The Senior Credit Facility ranks senior in priority to the +40 +Table of Contents +Company’s First Lien Term Loan, which had $312.5 million outstanding as of December 31, 2020. The Company’s Revolving Credit Facility was terminated concurrently with the entry into the new Senior Credit Facility on March 6, 2020. The Revolving Credit Facility had no borrowings outstanding as of the termination date. +The Senior Credit Facility and the First Lien Term Loan contain customary representations, covenants and events of default, including certain covenants that limit or restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational documents, among other restrictions and subject to certain exceptions. In accordance with the terms of the Senior Credit Facility, the Company is also required to have adjusted EBITDA, as defined in the agreement, of $25 million for the previous four consecutive fiscal quarters in total at the end of each quarterly period ending on or after March 31, 2020. +The Senior Credit Facility and the First Lien Term Loan also require prepayment or offers to prepay certain amounts, in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the respective agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. As of December 31, 2020, we have classified $8.0 million of debt principal as a current liability as a result of an excess free cash flow calculation for 2020, pursuant to the terms of the debt agreements, which amount the Company will offer to prepay pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, as applicable. The Company was not required to make any prepayments of the First Lien Term Loan in 2020, with respect to our 2019 annual financial statements. +Interest rates under the Senior Credit Facility are based, at the Company's election, on a Eurodollar rate subject to an interest rate floor of 1.0%, plus a margin of 8.5% or a base rate plus a margin of 7.5%. As of December 31, 2020, the interest rate on our Senior Credit Facility was 9.5%. Interest rates under the First Lien Term Loan, at the Company’s election, are based on either a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%. As of December 31, 2020, the interest rate on our First Lien Term Loan was 5.5%. +Operating Activities – Continuing Operations +Cash provided by operating activities – continuing operations for the year ended December 31, 2020, was $22.1 million compared to $3.0 million for the year ended December 31, 2019. The year over year increase was primarily due to net income of $16.1 million for the year ended December 31, 2020, compared to a net loss of $5.1 million for 2019. In addition, during 2020 we had working capital cash benefits, including in accrued expenses as we deferred approximately $2.6 million of 2020 employer social security payments in accordance with CARES Act provisions. Comparatively in 2019, we had a cash usage in accrued expenses related primarily to employee performance incentive compensation earned in 2018 and paid in the first quarter of 2019. We had a cash usage of $6.1 million and $10.4 million in 2020 and 2019, respectively, related to our investment in additional inventory to support the growth of our business. Partially offsetting the increases in cash provided by operating activities during 2020 compared to the prior year, was an increase in accounts receivable of $11.7 million, primarily relating to unbilled accounts receivable for work performed but not completed. In addition, we received $6.0 million cash from a litigation settlement during the second quarter of 2019. For the year ended December 31, 2020, cash interest paid was $22.8 million, compared to $23.0 million in the prior year, as lower interest rates on our First Lien Term Loan in 2020 were partially offset by additional cash interest due on the new Senior Credit Facility. +Investing Activities +Cash used in investing activities for the year ended December 31, 2020 was $7.1 million, compared to a usage of $2.6 million during the year ended December 31, 2019. Cash used in investing activities was related primarily to capital expenditures, including investments to support the growth of the business, such as machinery and equipment, and information technology equipment, and was $7.1 million and $4.2 million for the years ended December 31, 2020 and 2019, respectively. Partially offsetting the capital expenditure outflows, we received cash of $1.5 million for the sale of our Canadian subsidiary in the second quarter of 2019. As presented in our supplemental disclosures of non-cash information on the statement of cash flows, finance leases were executed for the acquisition of right-of-use machinery and equipment assets totaling $1.7 million and $6.4 million during the years ended December 31, 2020, and 2019, respectively. +41 +Table of Contents +Financing Activities – Continuing Operations +During the year ended December 31, 2020, cash provided by financing activities was $24.0 million compared to cash used in financing activities of $1.9 million. The Senior Credit Facility provided $29.1 million of cash, net of discount, partially offset by $2.5 million of associated debt issuance costs during the year ended December 31 , 2020. The Company paid $2.6 million and $1.9 million of principal on finance leases during the years ended December 31 , 2020 and 2019, respectively. For working capital purposes, we borrowed and repaid $11.5 million on the Revolving Credit Facility for the year ended December 31, 2019, all occurring within the first and second quarter of 2019. The Revolving Credit Facility was terminated concurrently with the new Senior Credit Facility on March 6, 2020. +Working Capital +Our working capital as of December 31, 2020 was $95.6 million, compared to $50.5 million as of December 31, 2019. During the year ended December 31, 2020, our cash balance increased by $38.9 million, accounts receivable increased by $11.8 million, and our inventory balance increased $4.6 million to support the growth of the business. Partially offsetting these increases to working capital was the reclassification of $8.0 million of long term debt principal to a current liability as a result of the excess cash flow calculation, pursuant to the terms of the debt agreements which amount we will offer to prepay pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, as applicable. +Cyclical and Seasonal Nature of Business +Financial Payment Cards are generally influenced by broader cyclical changes in the economy, with economic downturns resulting in decreases in the demand for our products and services, while economic upturns may increase demand. In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. Our net sales are also influenced by Financial Payment Card renewal cycles and demand for new products, such as contactless dual-interface cards. Additionally, we historically have generated higher net sales in the third quarter of the year, as our sales of Prepaid Debit Card solutions are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season in the United States. +Off-Balance Sheet Arrangements +We had no off-balance sheet arrangements at December 31, 2020, and 2019. +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported net sales, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty, and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +Revenue Recognition +Products Net Sales: “ Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, we estimate net sales by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are manufactured Financial Payment Cards, including +42 +Table of Contents +contact-EMV, Dual-Interface EMV, Second Wave, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. +Services Net Sales: Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and software-as-a-service personalization of instant issuance debit and credit cards. For work performed but not completed and billed, we estimate revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts: The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. Usually our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. The contract term as defined by ASC 606, Revenue from Contracts with Customers , is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +Income Taxes +We are subject to income taxes in the United States and certain foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies. Changes in the relevant facts can significantly impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. +During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the current provision for income taxes. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Sales Tax +We are in the process of evaluating a state sales tax liability analysis for states in which we have economic nexus, and collecting exemption documentation from our customers. It is probable that we will be subject to sales tax liabilities plus interest and penalties relating to historical activity in certain states. We have estimated a contingent liability for sales tax which is recorded in a ccrued expenses in the consolidated balance sheet. The liability includes significant judgments and estimates that may change in the future, and the liability may exceed our current estimate. W e may be subject to examination by the relevant state tax authorities and we can provide no assurances that outcomes from these examinations will not have a significant effect on our operating results, financial condition, and cash flows. +43 +Table of Contents +Recent Accounting Pronouncements +Recently Adopted Accounting Pronouncements +In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The guidance required companies to recognize the assets and liabilities for the rights and obligations created by leased assets. The Company adopted the guidance on January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. Right-of-use (“ROU”) represents the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. We recorded lease liabilities and right-to-use assets as the present value of future minimum lease payments using a discount rate that is either implicit in the lease or our incremental borrowing rate. If not implicit in the lease, we estimate our incremental borrowing rate by using market data from companies similar to us, having publicly traded debt instruments and similar credit ratings. Our estimated incremental borrowing rate utilizes judgements, including selection of comparable companies, our credit risk, sensitivity analysis and certain other valuation estimates. We also use judgement in determining whether a contract contains a lease. +Recently Issued Accounting Standards +In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The effective date of ASU 2016-13 was amended by ASU 2019-10, Credit Losses Effective Dates. Since CPI is a smaller reporting company, adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods therein, with early adoption permitted. The Company has elected not to early adopt this accounting standard in 2020. The Company is evaluating the impact of adoption of this standard, and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s consolidated financial position and results of operations. +Item 7A. Quantitative and Qualitative Disclosures about Market Ris k +Not required due to smaller reporting company status. +44 +Table of Contents +Item 8. +Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 2020 and 2019 and for the years ended December 31, 2020 and 2019 +Report of Independent Registered Public Accounting Firm +46 +Consolidated Balance Sheets +48 +Consolidated Statements of Operations and Comprehensive Income (Loss ) +49 +Consolidated Statements of Stockholders’ Deficit +50 +Consolidated Statements of Cash Flows +51 +Notes to Consolidated Financial Statements +52 +45 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in +conformity with U.S. generally accepted accounting principles . +Change in Accounting Principle +As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Realizability of the Deferred Tax Asset related to the Interest Deduction Limitation +As discussed in Note 12 to the consolidated financial statements, the Company has a gross deferred tax asset related to Section 163(j) interest deduction limitation of $1.4 million as of December 31, 2020. Prior to 2020, +46 +Table of Contents +the Company had a valuation allowance related to this deferred tax asset, as it was not expected to be fully realized. In 2020, the Company has elected to apply the 2018 Proposed Regulations, which allow previously disallowed business interest expense carryforward to be added back in the computation of its adjusted taxable income. In order for the Company to apply the 2018 Proposed Regulations, “related parties” to the Company as defined by Internal Revenue Code Section 267(b) and 707(b)(1) must also consistently apply the 2018 Proposed Regulations to those same tax years. The 2018 Proposed Regulations may only be adopted by the Company through tax year December 31, 2020. Under the 2018 Proposed Regulations, the Company is able to deduct additional business interest expense, and as a result, they have reversed the valuation allowance as the deferred tax asset is now expected to be fully realized. +We identified management’s evaluation of the realizability of the deferred tax asset related to the interest deduction limitation as a critical audit matter. Subjective auditor judgment was required in evaluating the application of the 2018 Proposed Regulations, which included the determination of related parties in the Company’s ownership structure, and validation, as needed, of consistent application of the 2018 Proposed Regulations among the applicable related parties. In addition, the evaluation required the involvement of tax professionals with specialized skills and knowledge. +The following are the primary procedures we performed to address this critical audit matter. We obtained the ownership structure of the Company to identify the related parties required to consistently apply the 2018 Proposed Regulations. We involved tax professionals with specialized skills and knowledge who assisted in: +‒ evaluating the Company’s application of the 2018 Proposed Regulations +‒ evaluating the Company’s determination of related parties required to consistently apply the 2018 Proposed Regulations. +/s/ KPMG LLP +We have served as the Company’s auditor since 2014. +Denver, Colorado +February 25, 2021 +47 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(Dollars in Thousands, Except Shares and Per Share Amounts) +December 31, +2020 +2019 +Assets +Current assets: +Cash and cash equivalents +$ +57,603 +$ +18,682 +Accounts receivable, net of allowances of $289 and $395, respectively +54,592 +42,832 +Inventories +24,796 +20,192 +Prepaid expenses and other current assets +5,032 +6,345 +Income taxes receivable +10,511 +4,164 +Total current assets +152,534 +92,215 +Plant, equipment, leasehold improvements and operating lease right-of-use assets, net +39,403 +41,612 +Intangible assets, net +26,207 +30,802 +Goodwill +47,150 +47,150 +Other assets +857 +1,232 +Total assets +$ +266,151 +$ +213,011 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +18,883 +$ +16,482 +Accrued expenses +28,149 +24,735 +Current portion of Long-term debt +8,027 +— +Deferred revenue and customer deposits +1,868 +468 +Total current liabilities +56,927 +41,685 +Long-term debt +328,681 +307,778 +Deferred income taxes +7,409 +6,366 +Other long-term liabilities +11,171 +11,478 +Total liabilities +404,188 +367,307 +Commitments and contingencies (Note 15) +Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at December 31, 2020 and 2019 +— +— +Stockholders’ deficit: +Common Stock; $0.001 par value—100,000,000 shares authorized; 11,230,482 and 11,224,191 shares issued and outstanding at December 31, 2020 and 2019, respectively +11 +11 +Capital deficiency +(111,858) +(111,988) +Accumulated loss +(26,190) +(42,319) +Total stockholders’ deficit +(138,037) +(154,296) +Total liabilities and stockholders' deficit +$ +266,151 +$ +213,011 +See accompanying notes to consolidated financial statements +48 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive Income (Loss ) +(Dollars in Thousands, Except Share and Per Share Amounts) +Year Ended December 31, +2020 +2019 +Net sales: +Products +$ +171,968 +$ +143,941 +Services +140,221 +134,132 +Total net sales +312,189 +278,073 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +107,642 +94,889 +Services (exclusive of depreciation and amortization shown below) +83,538 +80,894 +Depreciation and amortization +10,701 +11,220 +Total cost of sales +201,881 +187,003 +Gross profit +110,308 +91,070 +Operating expenses: +Selling, general and administrative (exclusive of depreciation and amortization shown below) +65,791 +66,328 +Depreciation and amortization +6,126 +6,031 +Litigation settlement gain +— +(6,000) +Total operating expenses, net +71,917 +66,359 +Income from operations +38,391 +24,711 +Other expense, net: +Interest, net +(25,397) +(24,891) +Foreign currency loss +(7) +(1,335) +Other expense, net +(102) +(4) +Total other expense, net +(25,506) +(26,230) +Income (loss) before income taxes +12,885 +(1,519) +Income tax benefit (expense) +3,305 +(3,474) +Net income (loss) from continuing operations +16,190 +(4,993) +Net loss from discontinued operation, net of tax (Note 4) +(61) +(124) +Net income (loss) +$ +16,129 +$ +(5,117) +Basic and Diluted net income (loss) per share from continuing operations: +$ +1.44 +$ +(0.45) +Basic and Diluted net income (loss) per share: +$ +1.44 +$ +(0.46) +Basic weighted-average shares outstanding: +11,228,707 +11,196,710 +Diluted weighted-average shares outstanding: +11,232,004 +11,196,710 +Comprehensive income (loss) +Net income (loss) +16,129 +(5,117) +Reclassification adjustment to foreign currency loss +— +1,329 +Currency translation adjustment +— +31 +Total comprehensive income (loss) +$ +16,129 +$ +(3,757) +See accompanying notes to consolidated financial statements +49 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Stockholders’ Deficit +(Dollars in Thousands, Except Share Amounts) +Accumulated +other +Common Stock +Capital +Accumulated +comprehensive +Stockholders +Shares +Amount +deficiency +loss +loss +Deficit +December 31, 2018 +11,160,377 +$ +11 +$ +(112,223) +$ +(37,202) +$ +(1,360) +$ +(150,774) +Shares issued under stock-based compensation plans +63,814 +— +— +— +— +— +Stock-based compensation +— +— +235 +— +— +235 +Components of comprehensive (loss) income: +Net loss +— +— +— +(5,117) +— +(5,117) +Reclassification adjustment to foreign currency loss +— +— +— +— +1,329 +1,329 +Currency translation adjustment +— +— +— +— +31 +31 +December 31, 2019 +11,224,191 +$ +11 +$ +(111,988) +$ +(42,319) +$ +— +$ +(154,296) +Shares issued under stock-based compensation plans +6,291 +— +— +— +— +— +Stock-based compensation +— +— +130 +— +— +130 +Components of comprehensive (loss) income: +Net income +— +— +— +16,129 +— +16,129 +December 31, 2020 +11,230,482 +$ +11 +$ +(111,858) +$ +(26,190) +$ +— +$ +(138,037) +See accompanying notes to consolidated financial statements +50 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(Dollars in Thousands) +Year Ended December 31, +2020 +2019 +Operating activities +Net income (loss) +$ +16,129 +$ +(5,117) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Loss from discontinued operations +61 +124 +Depreciation and amortization expense +16,827 +17,251 +Stock-based compensation expense +136 +250 +Amortization of debt issuance costs and debt discount +3,453 +1,960 +Deferred income tax +1,043 +969 +Reclassification adjustment to foreign currency loss +— +1,329 +Other, net +1,834 +153 +Changes in operating assets and liabilities: +Accounts receivable +(11,662) +(688) +Inventories +(6,105) +(10,410) +Prepaid expenses and other assets +494 +(1,328) +Income taxes +(6,346) +1,369 +Accounts payable +1,657 +1,127 +Accrued expenses +2,958 +(3,810) +Deferred revenue and customer deposits +1,404 +(446) +Other liabilities +192 +232 +Cash provided by operating activities - continuing operations +22,075 +2,965 +Cash used in operating activities -discontinued operations +(61) +(124) +Investing activities +Capital expenditures for plant, equipment and leasehold improvements +(7,093) +(4,175) +Cash received from sale of Canadian subsidiary +— +1,451 +Other +— +150 +Cash used in investing activities +(7,093) +(2,574) +Financing activities +Proceeds from Senior Credit Facility, net of discount +29,100 +— +Debt issuance costs +(2,507) +— +Proceeds from revolving credit facility +— +11,500 +Principal payment on revolving credit facility +— +(11,500) +Payments on financing leases +(2,616) +(1,926) +Cash provided by (used in) financing activities +23,977 +(1,926) +Effect of exchange rates on cash +23 +50 +Net increase (decrease) in cash and cash equivalents +38,921 +(1,609) +Cash and cash equivalents, beginning of period +18,682 +20,291 +Cash and cash equivalents, end of period +$ +57,603 +$ +18,682 +Supplemental disclosures of cash flow information +Cash paid during the period for: +Interest +$ +22,750 +$ +23,036 +Income tax payments, net +$ +1,043 +$ +780 +Right-of-use assets obtained in exchange for lease obligations: +Operating leases +$ +3,260 +$ +8,533 +Financing leases +$ +1,718 +$ +6,438 +Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements +$ +1,052 +$ +308 +See accompanying notes to consolidated financial statements +51 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated) +1. Business +CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. CPI is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit, debit and Prepaid Debit Cards issued on the networks of the Payment Card Brands (Visa, Mastercard, American Express and Discover in the United States and Interac, in Canada). CPI also offers an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. +CPI serves its customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands. CPI’s leading network of high-security production facilities allows the Company to optimize its solutions offerings and to serve its customers. +The Company’s business consists of the following reportable segments: Debit and Credit, Prepaid Debit and Other. The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States. The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. The Company’s “Other” segment includes corporate expenses. +In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Canadian subsidiary. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to the Company’s operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and the Company received cash proceeds of $1,451. After the payment of liabilities and transaction costs, including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on sale. In connection with the disposition of the foreign entity, the Company released the related cumulative translation adjustment from “Accumulated Other Comprehensive Loss” on the Balance Sheet into income from continuing operations during the year ended December 31, 2019. This adjustment was $1,329 and is included in “Foreign Currency Loss” on the Statement of Operations. The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment. +COVID-19 Update +The ongoing adverse effects of the COVID-19 pandemic have continued to impact the locations where CPI, its customers and its suppliers conduct business. Overall, CPI believes that COVID-19 had a net negative impact relative to its full year expectations for 2020. The broader and long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain. The health and safety of CPI employees remain paramount, and the Company continues to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines.  All of CPI’s operations have remained open and continue to provide direct and essential support to the financial services industry. CPI’s net sales in 2020 increased over the prior year; however, in certain areas of the business, the Company experienced lower customer demand than expected which it believes is primarily attributable to the COVID-19 pandemic. CPI may experience constrained supply, curtailed customer demand, impacts on its workforce and other effects that could materially adversely impact the Company’s business, results of operations and overall financial condition in future periods. CPI’s strategies may not be successful in effectively managing its resources and mitigating the negative impact of the COVID-19 pandemic on its business, operating results and financial condition. See Item 1A, Risk Factors , in this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on the Company. +52 +Table of Contents +On March 27, 2020, the Coronavirus Aid Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Note 12 “Income Taxes” for a discussion of the CARES Act income tax impacts on the Company. In addition, CPI has deferred employer social security payments starting with the second quarter of 2020 in accordance with the CARES Act. While the Company is participating in certain programs under the CARES Act, the Act and its guidance are subject to change. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. +December 31, 2020 +December 31, 2019 +Trade accounts receivable +$ +44,305 +$ +39,004 +Unbilled accounts receivable +10,576 +4,223 +54,881 +43,227 +Less allowance for doubtful accounts +(289) +(395) +$ +54,592 +$ +42,832 +The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it is determined collection will not occur. The allowance for bad debt activity for the years ended December 31, 2020 and 2019 is summarized as follows: +Balance as of December 31, 2018 +$ +211 +Bad debt expense +228 +Write-off of uncollectible accounts +(37) +Currency translation adjustments +(7) +Balance as of December 31, 2019 +$ +395 +Bad debt expense (benefit) +(89) +Write-off of uncollectible accounts +(2) +Currency translation adjustments +(15) +Balance as of December 31, 2020 +$ +289 +During 2020, the Company recorded a bad debt benefit due to the reduction of allowances for potentially uncollectible accounts receivable from the prior year. The increase in bad debt expense during 2019 primarily relates to reserves established for outstanding receivables from the Company’s Canadian operations that were disposed on April 1, 2019. +For the year ended December 31, 2020 the Company had two customers that represented more than 10% of the Company’s consolidated net sales. Net sales for these customers were approximately 15% and 14% of the Company’s +53 +Table of Contents +consolidated net sales. For the year ended December 31, 2019 one customer represented 18% of the Company’s consolidated net sales. +Inventories +Inventories consist of raw materials, and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out, specific identification or weighted-average method basis). Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Finished goods inventory represents primarily stock cards and Card@Once printers. The stock cards are not manufactured for a specific customer, but are ready to be personalized and sold as customer orders are received. The Company monitors inventory for events or circumstances that may indicate the net realizable value is less than the carrying value of inventory, such as negative margins, expiration of material usage, and other forms of obsolescence, and records adjustments to the valuation of inventory, as necessary. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. +Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required. +Goodwill and Intangible Assets +Goodwill is not amortized, but instead is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For impairment evaluations, the Company may first make a qualitative assessment with respect to goodwill, if appropriate. In accordance with accounting standards, the Company performs its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognizes an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +All of the Company’s goodwill is included in the Debit and Credit segment. The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; discrete and long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required. +54 +Table of Contents +Sales Tax +The Company records sales tax collected from its customers on a net basis, and therefore excludes it from net sales as defined in ASC 606, Revenue from Contracts with Customers . Cash collected from customers is recorded in accrued expenses on the Company’s consolidated Balance Sheet and then remitted to the proper taxing authority. In addition, refer to Note 15 “Commitments and Contingencies” for discussion regarding an estimated sales tax liability the Company recorded in relation to historical activity in certain states. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made. +The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when the Company believes that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. The Company adjusts uncertain tax position in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Stock-Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period. The Company accounts for forfeitures as they occur and reverses previously recognized expense for the unvested portion of the forfeited shares. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 17 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans. +Net Sales +Products Net Sales +“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers, have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are the design and production of Financial Payment Cards, including contact-EMV, Dual-Interface EMV, Second Wave, metal, contactless and magnetic stripe cards, and private label credit cards and retail gift cards. Card@Once ® printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales. +Services Net Sales +Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and +55 +Table of Contents +fulfillment services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance debit cards. The Company also generates “Service” revenue usage-fees from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. “Services” revenue was also generated from personalizing retail gift cards historically in Canada prior to disposition. As applicable, for work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts +The Company often enters into MSAs with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally considered short term in nature. +Use of Estimates +The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require management to make assumptions and estimates relating to the reporting of assets and liabilities in its preparation of the consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, liability for sales tax, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed, and uncertain tax positions. Actual results could differ from those estimates. +Foreign Currency Translation +Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted-average exchange rate for each reporting period for net sales, expenses, gains and losses. Translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss in the accompanying consolidated financial statements. Subsequent to the sale of the Company’s UK Limited and Canada subsidiary, the Company has no significant foreign subsidiaries. +Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in “Foreign currency loss” in the accompanying Consolidated Statements of Operations and Comprehensive Loss. For the years ended December 31, 2020 and 2019 there were ($7) and ($1,335) of such foreign currency losses, respectively. The foreign currency loss for the year ended December 31, 2019, includes the release of the cumulative translation adjustment of $1,329 from “Accumulated Other Comprehensive Loss” on the Balance Sheet in connection with the sale of the Company’s Canada subsidiary. +Recent Accounting Pronouncements +Recently Adopted Accounting Pronouncements +In February 2016, the FASB issued ASC 842, Leases , which provides guidance for accounting for leases. The guidance required companies to recognize the assets and liabilities for the rights and obligations created by leased assets. The Company adopted the guidance on January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. ROU represents the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The lease term includes options to extend the lease when it is reasonably certain that the Company will exercise that option. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the +56 +Table of Contents +right to direct the use of such assets. Lease expense for operating leases recorded in the balance sheet is included in operating costs and expenses and is based on the future minimum lease payments recognized on a straight-line basis over the term of the lease plus any variable lease costs. The Company recorded lease liabilities and right-to-use assets as the present value of future minimum lease payments using a discount rate that is either implicit in the lease or our incremental borrowing rate. If not implicit in the lease, the Company estimates the incremental borrowing rate by using market data from similar companies, having publicly traded debt instruments and similar credit ratings. The estimated incremental borrowing rate utilizes judgements, including selection of comparable companies, credit risk, sensitivity analysis and certain other valuation estimates. The Company also uses judgement in determining whether a contract contains a lease. +Recently Issued Accounting Pronouncements +In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments . This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The effective date of ASU 2016-13 was amended by ASU 2019-10, Credit Losses Effective Dates. Since CPI is a smaller reporting company, adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods therein, with early adoption permitted. The Company has elected not to early adopt this accounting standard in 2020. The Company is evaluating the impact of adoption of this standard, and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s consolidated financial position and results of operations. +Adjustment of Prior Period Financial Statements for Immaterial Items +In accordance with Securities and Exchange Commission Staff Accounting Bulletin 99, Materiality, codified in ASC 250, Presentation of Financial Statements , the Company corrected two immaterial items relating to estimated sales tax expense and depreciation expense for all prior periods presented by revising the consolidated financial statements and other financial information included herein. The total impact on prior years for estimated sales tax expense was $1,907 and depreciation expense was $476. These adjustments represent the expenses pertaining to the period of 2017 to 2019, including an increase to estimated sales tax expense recorded in “Selling, General and Administrative expenses” (“SG&A”) of $584, and depreciation expense in “Cost of sales” of $249, for the year ended December 31, 2019. For the year ended December 31, 2020, the Company recorded estimated sales tax expense in SG&A of $926. Refer to Note 15, “Commitments and Contingencies” for additional discussion of the estimated sales tax liability recorded in “Accrued expenses” on the consolidated balance sheet. +3. Net Sales +The Company disaggregates its net sales by major source as follows: +For the year ended December 31, 2020 +Products +Services +Total +Debit and Credit +$ +173,765 +$ +76,662 +$ +250,427 +Prepaid Debit +— +63,596 +63,596 +Intersegment eliminations +(1,797) +(37) +(1,834) +Total +$ +171,968 +$ +140,221 +$ +312,189 +For the year ended December 31, 2019 +Products +Services +Total +Debit and Credit +$ +144,541 +$ +68,600 +$ +213,141 +Prepaid Debit +— +64,330 +64,330 +Other +396 +1,283 +1,679 +Intersegment eliminations +(996) +(81) +(1,077) +Total +$ +143,941 +$ +134,132 +$ +278,073 +57 +Table of Contents +4. Discontinued Operation +On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produced retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provided personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The Company reported the U.K. Limited reporting segment as discontinued operations in conformity with GAAP. Unless otherwise indicated, information in these notes to the consolidated financial statements relate to continuing operations. The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal. The impact of the discontinued operations was insignificant to the Company’s consolidated statement of operations for the years ended December 31, 2020 and 2019. +5. Inventories +Inventories are summarized below: +December 31, +2020 +2019 +Raw materials +$ +23,009 +$ +16,492 +Finished goods +4,635 +5,047 +Inventory reserve +(2,848) +(1,347) +$ +24,796 +$ +20,192 +6. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-use Assets +Plant, equipment, leasehold improvements and operating lease right-of-use assets consist of the following: +December 31, +2020 +2019 +Machinery and equipment +$ +55,459 +$ +52,212 +Machinery and equipment under financing leases +9,974 +8,256 +Furniture, fixtures and computer equipment +4,410 +4,749 +Leasehold improvements +15,083 +14,905 +Construction in progress +2,386 +455 +87,312 +80,577 +Less accumulated depreciation and amortization +(55,092) +(45,277) +Operating lease right-of-use assets, net of accumulated amortization +7,183 +6,312 +$ +39,403 +$ +41,612 +Amounts recorded for the depreciation of plant, equipment and leasehold improvements were $12,232 and $12,616 for the years ended December 31, 2020 and 2019, respectively. +There were no impairments of the Company’s plant, equipment, and leasehold improvement assets for the years ended December 31, 2020 and 2019. +7. Goodwill and Other Intangible Assets +All of the Company’s $47,150 of goodwill is included in the Debit and Credit segment at December 31, 2020 and 2019. The Company completed its goodwill impairment testing as of October 1, 2020 and the Company determined it is not more likely than not that the fair value of each reporting unit is less than its carrying amount. +CPI’s amortizable intangible assets consist of customer relationships, technology and software, and trademarks. Total intangible assets are being amortized over a weighted-average useful life of 15.7 years. Intangible amortization expense totaled $4,595 and $4,635 for the years ended December 31, 2020 and 2019, respectively. During the years ended December 31, 2020 and 2019, there were no impairments of the Company’s amortizable intangible assets. +58 +Table of Contents +Intangible assets consist of the following: +December 31, 2020 +December 31, 2019 +Weighted Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +17.2 +$ +55,454 +(32,141) +$ +23,313 +$ +55,454 +$ +(28,865) +$ +26,589 +Technology and software +8 +7,101 +(5,881) +1,220 +7,101 +(4,952) +2,149 +Trademarks +8.7 +3,330 +(1,656) +1,674 +3,330 +(1,266) +2,064 +Intangible assets subject to amortization +$ +65,885 +$ +(39,678) +$ +26,207 +$ +65,885 +$ +(35,083) +$ +30,802 +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2020 is as follows: +2021 +$ +4,352 +2022 +3,867 +2023 +3,867 +2024 +3,630 +2025 +3,440 +Thereafter +7,051 +$ +26,207 +8. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +● Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +● Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +● Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +The Company’s financial assets and liabilities that are not required to be remeasured at fair value in the Consolidated Balance Sheets are as follows: +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2020 +December 31, +December 31, +(Using Fair Value Hierarchy) +2020 +2020 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +287,500 +$ +— +$ +287,500 +$ +— +Senior Credit Facility +$ +30,000 +$ +30,000 +$ +— +$ +— +$ +30,000 +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2019 +December 31, +December 31, +(Using Fair Value Hierarchy) +2019 +2019 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +234,375 +$ +— +$ +234,375 +$ +— +59 +Table of Contents +The aggregate fair value of the Company’s First Lien Term Loan (as defined in Note 11 “Long-Term Debt”) was based on bank quotes. The fair value measurement associated with the Senior Credit Facility (as defined in Note 11 “Long-Term Debt”) is based on significant unobservable Level 3 inputs, which require management judgment and estimation. The Senior Credit Facility ranks senior in priority to the Company’s First Lien Term Loan, and was valued using market data from companies with similar credit ratings. +The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature. +9. Accrued Liabilities +Accrued liabilities consisted of the following: +December 31, 2020 +December 31, 2019 +Accrued payroll and related employee expenses +$ +4,938 +$ +3,954 +Accrued employee performance bonus +4,873 +3,920 +Employer payroll tax, including social security deferral +3,034 +368 +Accrued rebates +1,178 +1,573 +Sales tax liability +1,696 +1,907 +Accrued Interest +4,145 +4,951 +Operating and financing lease liability (current portion) +4,407 +4,494 +Other +3,878 +3,568 +Total accrued expenses +$ +28,149 +$ +24,735 +The estimated sales tax liability is further described in Note 15, Commitments and Contingencies and Note 2, Summary of Significant Accounting Policies. Other accrued liabilities include miscellaneous accruals for invoices not yet received and other items such as self- insurance liability accruals and the current portion of uncertain tax position reserves. +10. Financing and Operating Leases +CPI adopted ASC 842 effective January 1, 2019. As a result of the adoption of ASC 842, the Company recorded $8,025 of operating ROU assets, and corresponding operating lease liabilities of $8,813 on January 1, 2019, relating to existing real estate operating leases. +The components of operating and finance lease costs were as follows: +Year Ended +Year Ended +December 31, 2020 +December 31, 2019 +Operating lease costs +$ +2,649 +2,625 +Variable lease costs +667 +719 +Short-term operating lease costs +75 +- +Total expense from operating leases +$ +3,391 +3,344 +Finance lease cost: +Right-of-use amortization expense +$ +1,342 +886 +Interest on lease liabilities +540 +290 +Total financing lease costs +$ +1,882 +1,176 +60 +Table of Contents +The following table reflects balances for operating and financing leases: +December 31, 2020 +December 31, 2019 +Operating leases +Operating lease right-of-use assets, net of amortization +$ +7,183 +$ +6,312 +Operating lease liability (current) +$ +2,267 +$ +2,283 +Long-term operating liability +5,491 +5,067 +Total operating lease liabilities +$ +7,758 +$ +7,350 +Financing leases +Property, equipment and leasehold improvements +$ +9,974 +$ +8,256 +Accumulated depreciation +(2,422) +(1,094) +Total financing leases in property, equipment and leasehold improvements, net +$ +7,552 +$ +7,162 +Financing lease liability (current) +$ +2,140 +$ +2,211 +Long-term financing liability +3,052 +3,886 +Total financing lease liabilities +$ +5,192 +$ +6,097 +Finance and operating lease ROU assets are recorded in “Plant, equipment, leasehold improvements, and +operating lease right-of-use assets, net”. Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term liabilities.” +Components of lease expense were as follows: +December 31, 2020 +Weighted Average Remaining Lease Term +Operating Leases +4.93 +Financing Leases +2.52 +Weighted Average Discount Rate +Operating Leases +9.29% +Financing Leases +8.71% +Future cash payment with respect to lease obligations as of December 31, 2020 were as follows: +Operating +Financing +Lease +Leases +Year Ending +2021 +$ +2,894 +$ +2,494 +2022 +1,782 +2,007 +2023 +1,467 +1,069 +2024 +1,250 +261 +2025 +670 +2 +2026 +1,792 +— +Total lease payments +9,855 +5,833 +Less imputed interest +(2,097) +(641) +Total +$ +7,758 +$ +5,192 +Cash paid on operating lease liabilities was $2,347 and $1,973 during the years ended December 31, 2020 and December 31, 2019, respectively. +61 +Table of Contents +11. Long-Term Debt +Long-term debt consists of the following: +Interest +December 31, +December 31, +Rate (1) +2020 +2019 +First Lien Term Loan +5.50 +% +312,500 +312,500 +Senior Credit Facility +9.50 +% +30,000 +— +Unamortized discount +(1,988) +(1,770) +Unamortized deferred financing costs +(3,804) +(2,952) +Total long-term debt +336,708 +307,778 +Less current maturities +(8,027) +— +Long-term debt, net of current maturities +328,681 +307,778 +(1) The interest rate on the First Lien Term Loan was 5.5%, and 6.71% as of December 31, 2020, and December 31, 2019, respectively. The interest rate on the Senior Credit Facility, which was entered into on March 6, 2020, was 9.5% as of December 31, 2020. +On August 17, 2015, the Company entered into a first lien credit facility (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan matures on August 17, 2022 and the Revolving Credit Facility was terminated concurrently with the Company entering into a new senior credit facility on March 6, 2020. +On March 6, 2020, the Company and its wholly owned subsidiary, CPI Acquisition, Inc. (now known as CPI CG Inc.) (the “Borrower”), entered into a super senior credit agreement with Guggenheim Credit Services, LLC (“Guggenheim”), Vector Capital Credit Opportunity Master Fund, L.P., Guggenheim, as administrative agent and collateral agent, and certain other lenders from time to time party thereto (the “Senior Credit Agreement” and together with all ancillary documents thereto, the “Senior Credit Facility”). The Senior Credit Facility matures on May 17, 2022, and provides for the extension of credit to the Borrower in the form of super senior term loans in an aggregate principal amount of $30,000, and ranks senior in priority to the Company’s First Lien Term Loan. +The Senior Credit Facility and the First Lien Term Loan are secured by substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property. +The Senior Credit Facility and the First Lien Term Loan contain customary representations, covenants and events of default, including certain covenants that limit or restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational documents, among other restrictions and subject to certain exceptions. In accordance with the terms of the Senior Credit Facility, the Company is also required to have adjusted EBITDA, as defined in the agreement, of $25,000 for the previous four consecutive fiscal quarters in total, at the end of each quarterly period ending on or after March 31, 2020. +The Senior Credit Facility and the First Lien Term Loan also require prepayment or offers to prepay certain amounts, in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the respective agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. As of December 31, 2020, $8,027 of debt principal was classified as a current liability as a result of an excess free cash flow calculation for 2020 pursuant to the terms of the debt agreements, which amount the Company will offer to prepay pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, as applicable. The Company was not required to make any prepayments of the First Lien Term Loan with respect to the excess free cash flow calculation relating to the 2019 annual financial statements. +Interest rates under the Senior Credit Facility are based, at the Company's election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 8.5% or a base rate plus a margin of 7.5%. Certain prepayments made prior to February 15, 2022 are subject to a make-whole premium. Interest rates under the First Lien Term Loan are based, at the Company’s election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%. +62 +Table of Contents +The term loans made under the Senior Credit Facility would be accelerated and become immediately due and payable if an event of default (as defined in the Senior Credit Agreement) were to occur. Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), own approximately 37% and 22% of the Company’s common stock, respectively, as of December 31, 2020. If the Tricor Funds were to sell or otherwise dispose of more than 25% of CPI’s outstanding common stock, or otherwise cease to own at least 30% of CPI’s outstanding common stock, other than by means of distributing CPI common stock to the participants in Tricor Funds, a “change of control” event of default would occur. Additionally, certain proposed changes to the Senior Credit Facility require the consent of lenders representing more than 50% of the outstanding term loans, and if a lender does not consent to such proposed changes, then, among other options, CPI may be required to pre-pay the non-consenting lender’s portion of the loan, including accrued interest, fees and other amounts payable, as well as a make-whole premium. +The Company is authorized to use the proceeds from the Senior Credit Facility to provide for the working capital and general corporate requirements of the Company and its subsidiaries, including to pay any fees and expenses in connection with the Senior Credit Facility and other related loan documents. +Deferred Financing Costs and Discount +Certain costs and discounts incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. The discount on the Senior Credit Facility was $1,400, and financing costs were $3,215, and both were recorded as a reduction to the long-term debt balance in the quarter ended March 31, 2020. The net discount and debt issuance costs on the Senior Credit Facility is included within financing activities on the consolidated statement of cash flows and relates to cash flows during the year ended December 31, 2020. +12. Income Taxes +Income tax (benefit) expense from continuing operations and effective income tax rates consist of the following: +December 31, +2020 +2019 +Current taxes: +Domestic +$ +(4,364) +$ +2,490 +Foreign +16 +15 +(4,348) +2,505 +Deferred taxes: +Domestic +1,043 +969 +Foreign +— +— +1,043 +969 +Income tax (benefit) expense +$ +(3,305) +$ +3,474 +Income (loss) before income taxes +Domestic income (loss) +$ +12,790 +$ +(40) +Foreign income (loss) +95 +(1,479) +Total +$ +12,885 +$ +(1,519) +Effective income tax rate +(25.6) +% +(228.7) +% +63 +Table of Contents +The effective income tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2020 +2019 +Tax at federal statutory rate +21.0 +% +21.0 +% +State income taxes +5.3 +(50.3) +Foreign taxes +— +(23.3) +Tax benefit for U.K. sale +— +154.8 +Valuation allowance +(41.1) +(213.8) +Unrecognized tax benefits +5.6 +(15.5) +Tax credits +(1.2) +(48.6) +Permanent items +4.0 +(54.1) +Tax benefit CARES Act +(20.9) +— +Other +1.7 +1.1 +Effective income tax rate +(25.6) +% +(228.7) +% +The components of the deferred tax assets and liabilities are as follows: +December 31, +2020 +2019 +Deferred tax assets: +Accrued expense +$ +2,519 +$ +2,854 +Net operating loss carryforward +524 +1,216 +Deferred financing costs +260 +400 +Stock compensation +935 +892 +Tax credit carryforward +645 +17 +Interest limitation +1,418 +8,773 +Lease liability +1,899 +1,728 +Capital loss carryover +2,030 +— +Other +2,598 +669 +Total gross deferred tax assets +12,828 +16,549 +Valuation allowance +(2,615) +(5,659) +Net deferred tax assets +10,213 +10,890 +Deferred tax liabilities: +Plant, equipment and leasehold improvements +(4,939) +(5,382) +Intangible assets +(8,689) +(8,877) +Right-of-use assets +(1,758) +(1,486) +Prepaid expenses and other +(2,236) +(1,511) +Total gross deferred tax liabilities +(17,622) +(17,256) +Net deferred tax liabilities +$ +(7,409) +$ +(6,366) +The net change in the valuation allowance during the year ended December 31, 2020 was a decrease of $3,044. The change was comprised primarily of a decrease due to Company’s election to apply the 2018 proposed regulations relating to the interest deduction limitation in section 163(j) of the Internal Revenue Code. This was partially offset by an increase related to the sale of certain foreign subsidiaries. The valuation allowance as of December 31, 2020, is relating to a capital loss realized on the sale of a foreign subsidiary whereby the Company does not anticipate a capital gain in the foreseeable future that would allow for the recognition of the capital loss carryover. In addition, the Company has a full valuation allowance related to a state net operating loss and a partial valuation allowance on a state interest limitation, both of which the Company estimates may not be fully utilized. +In March 2020, the CARES Act was signed into law. The CARES Act allows companies with net operating losses (“NOLs”) originating in 2018, 2019, or 2020 to carry back those losses for five years and temporarily eliminates the tax law provision that limits the use of NOLs to 80% of taxable income. The CARES Act increases the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allows for the acceleration of refunds of alternative minimum tax credits. For the year ended December 31, 2020, the Company recorded a tax benefit for certain provisions in the CARES Act resulting in a tax rate benefit of 20.9%. In addition, the Company reduced the partial valuation allowance due to the limitation on the deductibility of interest expense, and recorded an income tax rate benefit +64 +Table of Contents +during for the year ended December 31, 2020 of 41.1%. Other items impacting the effective tax rate in 2020 include unrecognized tax benefits, permanent non-deductible items and tax credits. +The Company no longer has any substantial potential tax benefits associated with gross foreign operating loss carryforwards due to the sale of its foreign subsidiaries. The Company has various state and local operating loss carryforwards which will expire at various dates from 2033 to 2038. The Company does expect to be able to utilize a portion of these losses prior to expiration. The Company’s income tax receivable on the consolidated balance sheet as of December 31, 2020, is primarily comprised of U.S. federal income tax refund claims attributable to the CARES Act provisions, including alternative minimum tax credits and allowance of NOL carrybacks. +The Company has potential tax benefits associated with federal research and development tax credit carryforwards as of December 31, 2020 of $645, which will expire in 2036. The Company expects to be able to recognize these credit carryforwards, and accordingly has not provided a valuation allowance for the tax benefit. Additionally, the Company does not have any potential tax benefits associated with state research and development tax credit carryforwards as of December 31, 2020. +At December 31, 2020, no provision has been made for U.S. federal and state taxes on cumulative foreign earnings as there are no current or cumulative earnings of foreign operations. The Company recorded no net current tax benefit in 2019 related to the sale of the Canadian operations. +Unrecognized Tax Benefits +Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Accrued expenses”, “Other long term liabilities” and “Deferred income taxes” in the Company’s consolidated balance sheets. The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination. +Balance as of December 31, 2019 +$ +2,172 +Increase related to current year tax position +72 +Increase related to prior year tax position +1,068 +Balance as of December 31, 2020 +$ +3,312 +The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits for the year ended December 31, 2020 was $255, and was $238 for the year ended December 31, 2019. +The Company believes that it is reasonably possible that approximately $852 of its unrecognized tax benefits may be recognized by the end of 2021 as a result of settlement with the taxing authorities. As such, this balance is reflected in “Accrued expenses” in the Company’s consolidated balance sheet as of December 31, 2020. The Company is generally subject to potential federal and state examinations for the tax years on and after December 31, 2013 for federal purposes and December 31, 2016 for state purposes. The Company is subject to examinations for its U.K. subsidiaries for tax years ended on and after December 31, 2018. The Company's Canadian subsidiary which was sold April 1, 2019, is subject to examination for tax years ended on and after December 31, 2016. +13. Stockholders’ Deficit +Common Stock +Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, +65 +Table of Contents +any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. +14. Income (Loss) per Share +Basic and diluted income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. The following table sets forth the computation of basic and diluted income (loss) per share: +Year Ended +December 31, +2020 +2019 +Numerator: +Net income (loss) from continuing operations +$ +16,190 +$ +(4,993) +Net loss from discontinued operation +(61) +(124) +Net income (loss) +$ +16,129 +$ +(5,117) +Denominator: +Basic weighted-average common shares outstanding +11,228,707 +11,196,710 +Dilutive shares +3,297 +— +Diluted weighted-average common shares outstanding +11,232,004 +11,196,710 +Net income (loss) per share from continuing operations - Basic: +$ +1.44 +$ +(0.45) +Net income (loss) per share from discontinued operations - Basic: +0.00 +(0.01) +Net income (loss) per share - Basic: +$ +1.44 +$ +(0.46) +Net income (loss) per share from continuing operations - Diluted: +$ +1.44 +$ +(0.45) +Net income (loss) per share from discontinued operations - Diluted: +0.00 +(0.01) +Net income (loss) per share - Diluted: +$ +1.44 +$ +(0.46) +The Company reported a net loss for the year ended December 31, 2019. Accordingly, the potentially dilutive effect of 793,084 stock options and 7,347 restricted stock units were excluded from the computation of diluted earnings per share as of December 31, 2019, as their inclusion would be anti-dilutive. +15. Commitments and Contingencies; Litigation Settlement +Commitments +Refer to Note 10 “Financing and Operating Leases” for details on the Company’s future cash payments with respect to financing and operating leases. During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2021 and 2028 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs. +Contingencies +In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount of expense. The Company expenses professional fees associated with litigation claims and assessments as incurred. +66 +Table of Contents +Heckermann v. Montross et al. , Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”) +On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and former directors, along with the sponsors of CPI’s October 2015 initial public offering (“IPO”). CPI is also named as a nominal defendant. The derivative complaint asserts claims under §§10(b) and 20(a) of the Exchange Act and Securities and Exchange Commission Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets. +On December 18, 2019, the parties filed a Stipulation and Agreement of Settlement to resolve and dismiss the Derivative Suit, and on April 1, 2020, the Court granted final approval of the settlement set forth therein and dismissed with prejudice all claims (the “Settlement”). Under the Settlement, (i) all claims that were or could have been asserted in the Derivative Suit were resolved and discharged, (ii) the Company agreed to implement certain corporate governance reforms, and (iii) the Company’s insurer agreed to pay fees and expenses awarded to the plaintiff’s counsel in the amount of $343 and a service award to the plaintiff of a nominal amount. No liability was recorded for the Settlement as of December 31, 2020 or December 31, 2019. +In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations. +Estimated Sales Tax Liability +The Company is evaluating a state sales tax liability analysis for states in which it has economic nexus, and collecting exemption documentation from its customers. It is probable that the Company will be subject to sales tax liabilities plus interest and penalties relating to historical activity in certain states. The estimated liability for sales tax as of December 31, 2020 is $1,696, and is recorded in a ccrued expenses in the consolidated balance sheets. The liability changed from the original estimate recorded in prior periods primarily due to the Company remitting cash to the proper state tax authorities for historical sales tax and interest, partially offset by an increase of $633 in the contingency estimate during the fourth quarter of 2020. Due to the estimates involved in the analysis, the Company expects that the estimated liability will change in the future, and may exceed the current estimate. The Company also may be subject to examination by the relevant state tax authorities. Sales tax recovered from customers reduces the estimated expense when it is probable of collection, and the Company recorded $596 of probable customer collections during the second half of 2020. Future changes to the liability estimate that impact the consolidated statements of operations will be recorded within selling, general, and administrative expenses. +Litigation Settlement +CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. Second Case +During the summer of 2017, the Company and its subsidiary, CPI Card Group – Minnesota, Inc. (together, the “Company Plaintiffs”), commenced a lawsuit in the United States District Court for the District of Minnesota against a former employee, Multi Packaging Solutions, Inc. (“MPS”), and two MPS employees as individuals (collectively, the “Defendants”). On June 12, 2019, the Company Plaintiffs and the Defendants reached a settlement pursuant to which the case was resolved and dismissed by mutual agreement on terms that provided for, among other things, a cash payment to the Company. The Company received a $6,000 cash settlement payment during the second quarter of 2019, and recorded the gain within income from operations, in the Other segment. The case was dismissed in its entirety, with prejudice, by court order on July 12, 2019. +16. Employee Benefit Plan +The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment options. The Company matches 100% of the participant’s first 3% of deferrals +67 +Table of Contents +and 50% matching on each of the 4 th and 5 th percent contributed by the participant. As the Company operates the plan as a safe harbor 401(k) plan, the Company’s match is 100% vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $1,473 and $1,359 for the years ended December 31, 2020 and 2019, respectively. +17. Stock Based Compensation +CPI Card Group Inc. Omnibus Incentive Plan +During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company had reserved 1,200,000 shares of common stock for issuance under the Omnibus Plan. As of December 31, 2020, there were 185,113 shares available for grant under the Omnibus Plan. +The Company did not grant any awards of non-qualified stock options for the years ended December 31, 2020 and December 31, 2019. All stock option grants have a 10-year term, and will generally vest ratably over a three-year period beginning on the first anniversary of the grant date. The following is a summary of the activity in outstanding stock options under the Omnibus Plan: +Weighted- +Weighted- +Average +Average +Remaining +Exercise +Contractual Term +Options +Price +(in Years) +Outstanding as of December 31, 2019 +793,084 +$ +14.91 +Forfeited +(86,712) +12.61 +Outstanding as of December 31, 2020 +706,372 +$ +15.20 +6.44 +Options vested and exercisable as of December 31, 2020 +661,053 +16.08 +6.37 +Options vested and expected to vest as of December 31, 2020 +706,372 +15.20 +6.44 +The following is a summary of the activity in unvested stock options under the Omnibus Plan: +Weighted- +Average +Grant-Date +Number +Fair Value +Unvested as of December 31, 2019 +250,571 +$ +1.90 +Forfeited +(16,028) +2.33 +Vested +(189,224) +2.05 +Unvested as of December 31, 2020 +45,319 +$ +1.10 +68 +Table of Contents +Unvested stock options as of December 31, 2020 of 45,319, will entirely vest in 2021. +The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2020 under the Omnibus Plan: +Weighted- +Average +Grant-Date +Shares +Fair Value +Outstanding as of December 31, 2019 +7,347 +$ +22.49 +Granted +180,001 +2.12 +Vested +(7,144) +22.51 +Forfeited +(203) +21.75 +Outstanding as of December 31, 2020 +180,001 +$ +2.12 +The Company granted 180,001 awards of restricted stock units for the year ended December 31, 2020. The restricted stock unit awards contain conditions associated with continued employment or service, and vest two years from the date of grant. On the vesting dates, shares of common stock are issued to the award recipients. Unvested restricted stock units of 180,001 as of December 31, 2020 will vest entirely in 2022. +During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units with a grant-date fair value of $663. These awards settled in cash in three annual payments on the first, second and third anniversaries of the date of grant. The cash performance units were based on the performance of the Company’s stock, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant. The Company recognized compensation expense on a straight-line basis for each annual performance period. The cash performance units were accounted for as a liability and remeasured to fair value at the end of each reporting period. During the twelve months ended December 31, 2020, the third tranche of the cash performance units vested and the Company made a cash payment of $68 to the award recipients. There are no outstanding cash performance units as of December 31, 2020. +Compensation expense for the Omnibus Plan for the years ended December 31, 2020 and 2019 was $136 and $250, respectively. As of December 31, 2020, the total unrecognized compensation expense related to unvested options and restricted stock units, was $340, which the Company expects to recognize over an estimated weighted average period of 1.7 years. +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan +In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted. +As a result of the Company’s adoption of its Omnibus Plan, as further described above, no further awards will be made under the Option Plan. During the year ended December 31, 2019, the remaining 6,600 outstanding shares in the Option Plan were exercised. As such, there were no outstanding shares remaining as of December 31, 2020. There was no compensation expense related to options previously granted under the Option Plan, for years ended December 31, 2020 and 2019. +18. Segment Reporting +The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its net sales, EBITDA (as defined below) or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures, such as net sales and EBITDA. +69 +Table of Contents +EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is useful as a supplement to GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and to identify strategies to improve the allocation of resources amongst segments. +As of December 31, 2020, the Company’s reportable segments were as follows: +● Debit and Credit, +● Prepaid Debit, and +● Other. +Debit and Credit Segment +The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless dual-interface cards, and plastic and encased metal cards, and Second Wave payment cards featuring a core made with ROBP. The Company also sells Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the Payment Cards Brands. The Company provides CPI On-Demand services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on demand basis for customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The Debit and Credit segment operations are each audited for compliance by multiple Payment Card Brands. Many of the Company’s customers require CPI to comply with the standards of the PCI Security Standards Council. +Prepaid Debit Segment +The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid Debit segment operation is audited for compliance by multiple Payment Card Brands. Many of the Company’s customers require CPI to comply with the standards of the PCI Security Standards Council. +Other +The Other segment includes corporate expenses and a less significant operation that generated sales from the production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment services in Canada, prior to its sale. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as those business customers of the Canadian subsidiary migrated to the Company’s operations in the U.S. or to other service providers in 2019. +70 +Table of Contents +Performance Measures of Reportable Segments +Net sales and EBITDA from continuing operations of the Company’s reportable segments for the years ended December 31, 2020 and 2019 were as follows: +Net Sales +EBITDA +December 31, +December 31, +2020 +2019 +2020 +2019 +Debit and Credit +$ +250,427 +$ +213,141 +$ +64,522 +$ +45,635 +Prepaid Debit +63,596 +64,330 +22,156 +22,456 +Other +— +1,679 +(31,569) +(27,468) +Intersegment eliminations (a) +(1,834) +(1,077) +— +— +Total: +$ +312,189 +$ +278,073 +$ +55,109 +$ +40,623 +(a) Amounts include the elimination of sales between segments for consolidation. +The following table provides a reconciliation of total segment EBITDA from continuing operations to “Net loss from continuing operations” for the years ended December 31, 2020 and 2019: +December 31, +2020 +2019 +Total segment EBITDA from continuing operations +$ +55,109 +$ +40,623 +Interest, net +(25,397) +(24,891) +Income tax benefit (expense) +3,305 +(3,474) +Depreciation and amortization +(16,827) +(17,251) +Net Income (loss) from continuing operations +$ +16,190 +$ +(4,993) +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2020 and 2019 were as follows: +December 31, +2020 +2019 +Debit and Credit +$ +215,846 +$ +176,020 +Prepaid Debit +34,734 +25,259 +Other +15,571 +11,732 +Total assets +$ +266,151 +$ +213,011 +Net Sales to Geographic Location; Property, Equipment and Leasehold Improvements and Long-Lived assets by Geographic Segments +Subsequent to the sale of the Company’s Canada operations on April 1, 2019, the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of the United States is insignificant. +Net Sales to Major Customers +For the year ended December 31, 2020 the Company had two customers that represented more than 10% of the Company’s consolidated net sales. Net sales for these customers were approximately 15% and 14% of the Company’s consolidated net sales. For the year ended December 31, 2019 one customer represented 18% of the Company’s consolidated net sales. +71 +Table of Contents +Net Sales by Product and Services +Net sales from products and services sold by the Company for the years ended December 31, 2020 and 2019 were as follows: +December 31, +2020 +2019 +Product net sales (a) +$ +171,968 +$ +143,941 +Services net sales (b) +140,221 +134,132 +Total net sales: +$ +312,189 +$ +278,073 +(a) “Products” net sales include the design and production of Financial Payment Cards in contact-EMV, contactless dual-interface EMV, metal, contactless and magnetic stripe card formats. The Company also generates “Products” revenue from the sale of Card@Once printers and consumables, private label credit cards and retail gift cards. +(b) “Services” net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance cards. +19. Quarterly Financial Information (Unaudited) +Summarized quarterly results for the years ended December 31, 2020 and 2019 on a continuing operations basis, were as follows: +Year Ended +December 31, +2020 by Quarter: +Q1 +Q2 +Q3 +Q4 +2020 +Net sales +$ +73,969 +$ +71,378 +$ +82,702 +$ +84,140 +$ +312,189 +Gross profit +$ +25,648 +$ +23,090 +$ +30,607 +$ +30,963 +$ +110,308 +Net income from continuing operations +$ +1,782 +$ +1,283 +$ +5,809 +$ +7,316 +$ +16,190 +Basic and diluted earnings per share from continuing operations +$ +0.16 +$ +0.11 +$ +0.52 +$ +0.65 +$ +1.44 +Year Ended +December 31, +2019 by Quarter: +Q1 +Q2 +Q3 +Q4 +2019 +Net sales +$ +66,866 +$ +66,901 +$ +71,681 +$ +72,625 +$ +278,073 +Gross profit +$ +21,459 +$ +22,318 +$ +25,357 +$ +21,936 +$ +91,070 +Net income (loss) from continuing operations +$ +(3,262) +$ +1,185 +$ +(629) +$ +(2,287) +$ +(4,993) +Basic and diluted earnings (loss) per share from continuing operations +$ +(0.29) +$ +0.11 +$ +(0.06) +$ +(0.20) +$ +(0.45) +72 +Table of Contents +(This page has been left blank intentionally.) +73 +Table of Contents +Item 9. +Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +None. +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2020, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm as it is not required. +74 +Table of Contents +Changes in Internal Control Over Financial Reporting +Except as noted in the following sentence, there have not been any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. During the fourth quarter of 2020, the Company continued to enhance internal controls to appropriately determine compliance with, and accounting for, certain state and local sales tax regulations. +Item 9B. +Other Informatio n +None. +PART II I +Item 10. +Directors, Executiv e Officers and Corporate Governance +The information required by this Item will be included in our definitive Proxy Statement for the 2021 Annual Meeting of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended December 31, 2020 and is incorporated herein by reference. +Item 11. +Executive Compensatio n +Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy Statement. +Item 12. +Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement. +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. +Item 14. +Principal Accountant Fees and Service s +Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement. +75 +Table of Contents +PART IV +Item 15. +Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Loss +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +Exhibit Description +2.1 +Purchase and Sale Agreement, dated as of August 22, 2014, by and among William S. Dinker, Katherine S. Nevill, Bobby Smith and Tom Hedrich, William S. Dinker 2012 Trust for Edward McCullough Dinker, William S. Dinker 2012 Trust for John Walsh Dinker and William S. Dinker 2012 Trust for William S. Dinker III, EFT Source, Inc., CPI Acquisition, Inc. and William S. Dinker, as Sellers' Representative (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +2.2 +Share Purchase Agreement, dated August 1, 2018, by and between CPI Card Group-Europe Limited, SEAFOX BIDCO Limited and CPI Acquisition, Inc. (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 9, 2018). +3.1 +Third Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +3.2 +Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed December 22, 2017). +3.3 +Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +4.2* +Description of Registrant’s Securities. +10.1** +Employment and Non-Competition Agreement, dated April 22, 2009, between CPI Acquisition, Inc. and Steven Montross (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.2** +First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017, between CPI Acquisition, Inc. and Steven Montross (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2017). +76 +Table of Contents +10.3** +Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.4** +Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.5** +Employment and Non-Competition Agreement, dated October 1, 2008, between Metaca Corporation and Anna Rossetti (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6** +CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective September 25, 2017 (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.7** +Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017). +10.8** +Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017) +10.9** +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.10** +CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017). +10.11** +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.12 +First Lien Credit Agreement, dated as of August 17, 2015, by and among CPI Card Group Inc., CPI Acquisition Inc., the lenders from time to time party thereto and the Bank of Nova Scotia, as Administrative Agent and Collateral Agent (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.13** +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.14 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.15 +First Amendment to Credit Agreement dated December 31, 2016, between CPI Card Group Inc. and the Bank of Nova Scotia (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 7, 2018). +10.16** +2019 Executive Retention Agreement dated November 7, 2018 between CPI Card Group Inc. and Scott Scheirman Officers (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 6, 2019). +10.17** +Form of 2019 Executive Retention Agreement for certain Executive Officers (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 6, 2019). +10.18** +2019 Executive Incentive Plan dated February 27, 2019 (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 6, 2019). +77 +Table of Contents +10.19** +2020 Executive Retention Agreement, dated September 11, 2019 between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.20** +Form of 2020 Executive Retention Agreement, dated September 11, 2019 for certain Executive Officers (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.21** +Form of 2020 Executive Short-Term Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.22 +First Lien Amending Agreement, dated March 6, 2020 between CPI Card Group Inc. and Guggenheim Credit Services, LLC (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 6, 2020). +10.23 +Intercreditor Agreement, dated March 6, 2020 between CPI Card Group Inc. and Guggenheim Credit Services, LLC (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 6, 2020). +10.24 +Super Senior Credit Agreement, dated March 6, 2020 between CPI Card Group Inc. and Guggenheim Credit Services, LLC (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 6, 2020). +10.25 +Amendment to Credit Agreement, dated July 10, 2020, by and among CPI CG INC., CPI Card Group Inc., the other Loan Parties (as defined therein), the Lenders party thereto, GLAS USA LLC and GLAS Americas LLC, as collateral agent for the lenders (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 5, 2020). +10.26** +Form of Executive Retention Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.27** +2021 Executive Retention Agreement, dated October 2, 2020, between CPI Card Group. Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.28** +Form of Executive Restricted Stock Unit Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.29** +Restricted Stock Unit Agreement, dated October 2, 2020, between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +78 +Table of Contents +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* +Filed or furnished herewith. +** Management contract or compensatory plan or arrangement. +79 +Table of Contents +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ John Lowe +John Lowe +Chief Financial Officer +February 25, 2021 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint Scott Scheirman and John Lowe and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Scott Scheirman +President, Chief Executive +February 25, 2021 +Scott Scheirman +Officer and Director +(Principal Executive Officer) +/s/ John Lowe +Chief Financial Officer +February 25, 2021 +John Lowe +(Principal Financial Officer) +/s/ Kevin O’Brien +Chief Accounting Officer +February 25, 2021 +Kevin O’Brien +(Principal Accounting Officer) +/s/ Bradley Seaman +Chairman of the Board +February 25, 2021 +Bradley Seaman +/s/ Robert Pearce +Director +February 25, 2021 +Robert Pearce +/s/ Nicholas Peters +Director +February 25, 2021 +Nicholas Peters +/s/ Marc Sheinbaum +Director +February 25, 2021 +Marc Sheinbaum +/s/ Valerie Soranno Keating +Director +February 25, 2021 +Valerie Soranno Keating +80 \ No newline at end of file diff --git a/raw/filings/0001641614/2020/0001558370-21-001721/filing_metadata.csv b/raw/filings/0001641614/2020/0001558370-21-001721/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..669ad499720d14d4c9671dad7b7235ceb74a6c61 --- /dev/null +++ b/raw/filings/0001641614/2020/0001558370-21-001721/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001641614,PMTS,CPI Card Group Inc.,10-K,2021-02-25,2020-12-31,2021-02-25T12:39:16.000Z,0001558370-21-001721,pmts-20201231x10k.htm,10-K,10234069,1,0,https://www.sec.gov/Archives/edgar/data/1641614/000155837021001721/pmts-20201231x10k.htm,https://www.sec.gov/Archives/edgar/data/1641614/000155837021001721/,2020,2020,1 diff --git a/raw/filings/0001641614/2020/0001558370-21-001721/item1.txt b/raw/filings/0001641614/2020/0001558370-21-001721/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..d76090ed000c9dfeb2d2f81dd44aea57752146ce --- /dev/null +++ b/raw/filings/0001641614/2020/0001558370-21-001721/item1.txt @@ -0,0 +1,114 @@ +Item 1. +Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States and Interac, in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Solutions market through more than 20 years of experience. We serve a diverse set of approximately 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States, and the largest Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our leading network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; and +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +Our business consists of the following reportable segments: Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States, and Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. Our “Other” segment includes corporate expenses. +On August 3, 2018, we completed the sale of the U.K. Limited segment and, on April 1, 2019, we completed the sale of our Canada subsidiary. The divestitures of the U.K. and Canada businesses allowed us to better position ourselves to serve customers by focusing on our core businesses. +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 18 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +4 +Table of Contents +COVID-19 Update +The ongoing adverse effects of the COVID-19 pandemic have continued to impact the locations where we, our customers and our suppliers conduct business. Overall, we believe that COVID-19 had a net negative impact relative to our full year expectations for 2020. The broader and long-term implications of COVID-19 on our results of operations and overall financial performance remain uncertain. The health and safety of our employees remain paramount, and we continue to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines.  All of CPI’s operations have remained open and continue to provide direct and essential support to the financial services industry. CPI’s net sales in 2020 increased over the prior year; however, in certain areas of the business we experienced lower customer demand than expected which we believe is primarily attributable to the COVID-19 pandemic. We may experience constrained supply, curtailed customer demand, impacts on our workforce and other effects that could materially adversely impact our business, results of operations and overall financial condition in future periods. CPI’s strategies may not be successful in effectively managing our resources and mitigating the negative impact of the COVID-19 pandemic on our business, operating results and financial condition. See Item 1A, Risk Factors , in this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business. +On March 27, 2020, the Coronavirus Aid Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 12 “Income Taxes” for a discussion of the CARES Act income tax impacts on the Company. In addition, we have deferred employer social security payments starting with the second quarter of 2020 in accordance with the CARES Act. While we are participating in certain programs under the CARES Act, the Act and its guidance are subject to change. +Our Competitive Strengths +● Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We believe these efforts have resulted in CPI gaining overall market share each year from 2018 to 2020. We have long-standing, trust-based relationships with customers, many of whom we have served for decades. We have collaborated with our top 10 customers for more than ten years, on average. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. Our Card@Once® instant issuance solution provides the necessary on-site equipment and supplies, customer support and secure data exchange to provide personalized cards on-site and on-demand at bank and credit union branches across the United States. Data is exchanged through either a secure web interface or through integrations of our proprietary software with our customers’ card issuance systems. Integrations provide a more seamless experience for our customers and we believe they foster longer lasting and closer customer relationships. +● Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small- to mid-sized issuer customers is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solutions allow our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing +5 +Table of Contents +multiple suppliers across a complex value chain. Approximately 2/3rds of our annual net sales in our Debit and Credit segment is from small- to mid-sized issuers. +● Compliant Network of High-Security Facilities. Our high-security facilities are each audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands, forming a leading network of approved production facilities in the United States. The Payment Card Brand attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long and complex and our facilities must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +● Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV”) is a global technical standard, maintained by EMVCo LLC (“EMVCo”) for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV ® cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We also produce dual-interface EMV cards that have both contact and contactless functionality. +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. CPI’s Second Wave ® payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”), and Earthwise TM “high content” plastic cards address customer demands for more sustainable card options. We also sell CPI Metals ® , a premium encased metal card. Our offerings also include Card@Once, our proprietary and patented instant card issuance system and software-as-a-service. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Solutions market, gives us a competitive advantage. +● Experienced Leadership Team. We have built an experienced leadership team that has energized the organization to focus on customers, accountability, innovation, and delivering results. +EMV ® is a registered trademark or tradename of EMVCo LLC in the United States and other countries. +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality products, customer service and continuous innovation with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our clients elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality products and customer service, continuous innovation, and market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +6 +Table of Contents +Market-Leading Quality Products and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading solutions provider. With a focus on market-leading quality products and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their businesses. We listen to the voices of our customers and focus on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our shareholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. Continuous innovation is aimed at winning new business and helping our customers differentiate themselves with distinctive products and solutions, build their brands, and achieve top-of-wallet status. +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We aim to streamline our operations, which enables us to allocate resources focused on providing our customers with unmatched solutions, innovation and exceptional service. We have also developed standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We have invested in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance, profitability, and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact and Contactless Dual-Interface) +We produce both plastic and encased metal contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards, including plastic and encased metal dual-interface EMV cards, which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology. +Second Wave Cards Featuring a Core made with Recovered Ocean-Bound Plastic +Our Second Wave cards feature a core made with ROBP. Aimed at reducing first-use plastic and diverting plastic waste from entering the ocean, Second Wave cards are available in all forms of EMV Financial Payment Cards (contact and contactless dual-interface) and cards for access applications such as travel, ticketing, lodging, and entertainment. Our Second Wave cards have been approved by two of the major Payment Card Brands. Second Wave offers a seamless cardholder experience that aligns with broader consumer values and helps support our customers’ environmental, social and governance (“ESG”) goals by providing companies across multiple segments of the card industry with a simple, effective, and more environmentally-friendly solution. CPI’s eco-focused solutions also include Earthwise “High Content” cards, which were launched in 2020. This is the first contactless dual-interface card product to incorporate up to 98% upcycled plastic content, dependent on design. As the leading eco-focused card provider in the U.S., we estimate that CPI produced more than 80% of all U.S. eco-focused cards in 2020, shipping over 25 million eco-focused contactless payment cards in the past 18 months. +7 +Table of Contents +Non-EMV Financial Payment Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands including for the purpose of government disbursement, as well as retail gift cards (which are not issued on the networks of the Payment Card Brands). +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact, contactless, and dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven with full color printing and edge-to-edge coverage, and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with visibility to manage card stock inventory and fulfillment materials. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We also provide consultation and card design services to further assist customers in card customization. +CPI On-Demand ® Solutions +Through our CPI On-Demand ® services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing waste and inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. We believe the CPI On-Demand solution further differentiates us with our financial institution and program manager customers and enables us to access new, business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, government disbursement, benefits and insurance. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once, our proprietary and patented instant card issuance system and software-as-a-service, which provides our card issuing bank customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, a contact EMV card, or a contactless dual-interface EMV card, and personalizes the card on a desktop printer solution provided by CPI. These processes are audited for PCI Data Security Standard compliance annually. Our instant issuance system generates both initial sales revenue for the printer solution and recurring revenue from card personalization and sales of cards and consumables. +Adaptives TM +While not currently significant to our financial results, we offer Adaptives TM , an EMVCo certified chip and antenna personalization technology. This technology is one of the smallest and most flexible available, allowing for versatility and use across a wide variety of form factors. Adaptives’ embedded contactless technology can be integrated into portable, wearable or non-wearable devices, or other objects. +8 +Table of Contents +Digital Services +While not currently significant to our financial results, we are investing in digital services and issuance technologies, including self-service card customization, online card ordering, on demand fulfillment, order lifecycle management, customer inventory management, EMV key management, and other innovative solutions. We also offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to order customized cards on the internet and customize cards with individualized digital images. +Suppliers +While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the EMV/ dual-interface microchips and antennas. Our main suppliers of EMV/ dual-interface microchips and antennas include four leading international manufacturers with locations in Germany, Thailand, Netherlands, South Korea, and Singapore. Approximately 95% of our purchased microchips and antennas for the year ended December 31, 2020 came from these four main suppliers, primarily on a purchase order basis. The other key components for our products are substrates and inlays, which include PVC and ROBP. We monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. We generally purchase inventory sufficient to fulfill customer purchase orders and to maintain certain levels of inventory in anticipation of future customer demand and potential supply chain constraints. +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers including financial technology companies, prepaid debit issuers, program managers, Group Service Providers, and card processors. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest Prepaid Debit Card program managers. The Company had two customers that each accounted for 10% or more of its net sales in 2020. Net sales from these customers were approximately 15% and 14% of total net sales for a combined total of approximately 29% of our net sales for the year ended December 31, 2020. We have been serving these customers for greater than 10 years on-average. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangements that define the quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a network of high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +● execute high-volume production runs that allow us to offer cost-effective price points on large orders; +● execute lower-volume, highly customized runs that allow us to meet the high-service and quick-turn needs of smaller orders, as well as on-demand solutions; and +● meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this prepaid retail market. +9 +Table of Contents +As of December 31, 2020, we operate facilities comprising approximately 381,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card packaging and fulfillment services. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources, and create innovative and responsible products. Our key areas of focus include: incorporating environmental sustainability practices as and where feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility, and meaningful, innovative products at competitive prices. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives and partners that give us a wide geographic reach across the United States. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customer’s individual needs. We use an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. We believe these efforts drive customer retention and satisfaction, and attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation, and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card manufacturers and solutions providers. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. We believe we are in competition with Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA (formerly known as Oberthur Technologies S.A.), Perfect Plastic, Thales (formerly known as Gemalto NV), Valid S.A., Travel Tags and WestRock (Multi Packaging Solutions), among others. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +10 +Table of Contents +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2020, we had 57 U.S. and foreign trademark registrations and applications, 32 existing U.S. patents, 20 existing foreign patents, as well as 40 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 13 years, and our trademarks will be due for renewal for additional ten year periods on an ongoing basis. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy statutes and regulations, and certain of the PCI Security Standards Council’s requirements, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining compliance with the requirements from the Payment Card Brands, and have invested significant capital to obtain and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply +11 +Table of Contents +with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, as well as CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Human Capital +Our leadership team has significant experience in the payments industry, and many of our employees possess career-long expertise and knowledge that is unique to the Financial Payment Card industry. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee pulse surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of the Company’s core values. Throughout the COVID-19 pandemic, the health and safety of our employees has remained paramount. We continue to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local orders and guidelines.  Our office-based employees moved to a primarily remote work environment beginning in March 2020. +We are committed to a diverse and inclusive workplace, in which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior and employees are required to follow these standards and participate in related training. We have an open door policy and encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. +As of December 31, 2020, CPI employed approximately 1,000 full-time employees, of which approximately 700 are production and service facility staff and approximately 300 are office staff. We also use the services of temporary workers in our facilities to provide flexibility for our business needs. None of our employees are represented by labor unions. We believe that our relations with our employees are positive. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127 , telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that +12 +Table of Contents +site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC by the Company . +CPI Card Group Inc. qualifies as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and has elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. \ No newline at end of file diff --git a/raw/filings/0001641614/2020/0001558370-21-001721/item13.txt b/raw/filings/0001641614/2020/0001558370-21-001721/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..60bc230d5aa0d5195d0fdb4eb55264a25997fb56 --- /dev/null +++ b/raw/filings/0001641614/2020/0001558370-21-001721/item13.txt @@ -0,0 +1,3 @@ +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001641614/2020/0001558370-21-001721/item9a.txt b/raw/filings/0001641614/2020/0001558370-21-001721/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..7226d3959f31672a492aa5b5b5d041a700833a1d --- /dev/null +++ b/raw/filings/0001641614/2020/0001558370-21-001721/item9a.txt @@ -0,0 +1,15 @@ +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2020, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm as it is not required. +74 +Table of Contents +Changes in Internal Control Over Financial Reporting +Except as noted in the following sentence, there have not been any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. During the fourth quarter of 2020, the Company continued to enhance internal controls to appropriately determine compliance with, and accounting for, certain state and local sales tax regulations. \ No newline at end of file diff --git a/raw/filings/0001641614/2020/0001558370-21-001721/rp_note.txt b/raw/filings/0001641614/2020/0001558370-21-001721/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001641614/2020/0001558370-21-001721/rpt_disclosure.txt b/raw/filings/0001641614/2020/0001558370-21-001721/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..1697086250a633fda981a6d357f1fd74fd888a71 --- /dev/null +++ b/raw/filings/0001641614/2020/0001558370-21-001721/rpt_disclosure.txt @@ -0,0 +1,10 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2020 to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them had or will have a direct or indirect material interest. +Registration Rights Agreement +In connection with our initial public offering, we entered into a registration rights agreement with the Tricor Funds (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Tricor Funds are entitled to request that we register shares of our Common Stock on a long-form or short-form registration statement on one or more occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. The Tricor Funds also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay the Tricor Funds’ expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our Common Stock held by the Tricor Funds as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the Common Stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization or certain other corporate transactions, and (iii) any shares of our Common Stock owned or acquired following the closing of our initial public offering by the Tricor Funds (collectively, “Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. In September 2021, we filed a registration statement on Form S-3 with respect to the shares of Common Stock held by the Tricor Funds in compliance with our obligations under the Registration Rights Agreement. +Director Nomination Agreement +In connection with our initial public offering, we entered into a Director Nomination Agreement with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our Board for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our Common Stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our Board as the number of shares of Common Stock beneficially owned by the Tricor Funds bears to the total number of shares of Common Stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds shall be entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. In addition, for so long as the Tricor Funds collectively beneficially own 10% or more of the total number of shares of our Common Stock then outstanding, the Tricor Funds shall also have the right to have their designees participate on committees of our Board, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding Common Stock. Nicholas Peters and Bradley Seaman have been designated by the Tricor Funds as nominees to be included in the Company’s proxy statement commencing in 2016. +Policies and Procedures for Related Party Transactions +Our Board has adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving us in which the aggregate amount involved in any calendar year will or may be expected to exceed $100,000 and in which a related person has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). For purposes of this policy, a related person is defined as an executive officer, director, nominee for director, or a greater than 5% beneficial owner of our Common Stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider, among other factors, the related party’s relationship to the Company and interest in the transaction, the material facts of the transaction, the benefits to the Company of the transaction, the availability of other sources of comparable products or services (if applicable), whether the transaction is on terms that are comparable to the terms generally available to an unrelated third party, whether the transaction has the potential to impair director independence and whether the transaction constitutes a conflict of interest. +31 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2021/0001558370-22-003016/filing.txt b/raw/filings/0001641614/2021/0001558370-22-003016/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..070955bd6370b903f7591ff0c6bb22e623d63853 --- /dev/null +++ b/raw/filings/0001641614/2021/0001558370-22-003016/filing.txt @@ -0,0 +1,2929 @@ +0 0001641614 FY false http://www.cpicardgroup.com/20211231#PropertyPlantAndEquipmentOperatingLeaseRightOfUseAsset http://www.cpicardgroup.com/20211231#PropertyPlantAndEquipmentOperatingLeaseRightOfUseAsset http://fasb.org/us-gaap/2021-01-31#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2021-01-31#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2021-01-31#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2021-01-31#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2021-01-31#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2021-01-31#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2021-01-31#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2021-01-31#OtherLiabilitiesNoncurrent 11255466 0 0 11230482 2021 P7Y P10Y 0001641614 2022-02-23 2022-02-23 0001641614 us-gaap:CommonStockMember 2021-01-01 2021-12-31 0001641614 us-gaap:CommonStockMember 2020-01-01 2020-12-31 0001641614 us-gaap:RetainedEarningsMember 2021-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001641614 us-gaap:RetainedEarningsMember 2020-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001641614 us-gaap:RetainedEarningsMember 2019-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember pmts:ShareBasedCompensationAwardTrancheFiveMember 2021-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2020-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-05-27 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-05-27 2021-05-27 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2020-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember pmts:ShareBasedCompensationAwardTrancheFiveMember 2021-01-01 2021-12-31 0001641614 us-gaap:PendingLitigationMember 2021-12-31 0001641614 us-gaap:PendingLitigationMember 2020-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USPrepaidDebitMember 2021-01-01 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USDebitAndCreditMember 2021-01-01 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ProductsMember pmts:USDebitAndCreditMember 2021-01-01 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2021-01-01 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2021-01-01 2021-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ServicesMember 2021-01-01 2021-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ProductsMember 2021-01-01 2021-12-31 0001641614 us-gaap:IntersegmentEliminationMember 2021-01-01 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USPrepaidDebitMember 2020-01-01 2020-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USDebitAndCreditMember 2020-01-01 2020-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ProductsMember pmts:USDebitAndCreditMember 2020-01-01 2020-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2020-01-01 2020-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2020-01-01 2020-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ServicesMember 2020-01-01 2020-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ProductsMember 2020-01-01 2020-12-31 0001641614 us-gaap:IntersegmentEliminationMember 2020-01-01 2020-12-31 0001641614 srt:MinimumMember 2021-01-01 2021-12-31 0001641614 srt:MaximumMember 2021-01-01 2021-12-31 0001641614 us-gaap:MachineryAndEquipmentMember 2021-12-31 0001641614 us-gaap:LeaseholdImprovementsMember 2021-12-31 0001641614 us-gaap:FurnitureAndFixturesMember 2021-12-31 0001641614 us-gaap:ConstructionInProgressMember 2021-12-31 0001641614 pmts:MachineryAndEquipmentUnderFinancialLeasesMember 2021-12-31 0001641614 us-gaap:MachineryAndEquipmentMember 2020-12-31 0001641614 us-gaap:LeaseholdImprovementsMember 2020-12-31 0001641614 us-gaap:FurnitureAndFixturesMember 2020-12-31 0001641614 us-gaap:ConstructionInProgressMember 2020-12-31 0001641614 pmts:MachineryAndEquipmentUnderFinancialLeasesMember 2020-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember 2021-03-15 2021-03-15 0001641614 us-gaap:RetainedEarningsMember 2021-01-01 2021-12-31 0001641614 us-gaap:RetainedEarningsMember 2020-01-01 2020-12-31 0001641614 pmts:SmartPackagingSolutionsSVCpiCardGroupIncMember us-gaap:PendingLitigationMember 2021-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember 2022-03-03 0001641614 us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember 2022-03-02 0001641614 us-gaap:RevolvingCreditFacilityMember 2021-03-15 0001641614 pmts:SeniorRevolvingCreditFacilityMember 2021-12-31 0001641614 pmts:FirstLienCreditFacilityMember 2021-12-31 0001641614 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember 2021-01-01 2021-12-31 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember 2021-01-01 2021-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember 2021-06-30 0001641614 pmts:SeniorRevolvingCreditFacilityMember 2021-03-15 0001641614 pmts:FirstLienCreditFacilityMember 2021-03-15 0001641614 srt:MaximumMember 2021-12-31 0001641614 us-gaap:TrademarksMember 2021-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2021-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2021-12-31 0001641614 us-gaap:TrademarksMember 2020-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2020-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2020-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember 2021-04-01 2021-06-30 0001641614 pmts:FirstLienCreditFacilityMember us-gaap:SecuredDebtMember 2021-01-01 2021-12-31 0001641614 pmts:SeniorRevolvingCreditFacilityMember 2021-01-01 2021-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2021-01-01 2021-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2021-12-31 0001641614 pmts:DefinedContributionPlanEmployerMatchOfIncrementalEmployeeDeferral2Member 2021-01-01 2021-12-31 0001641614 pmts:DefinedContributionPlanEmployerMatchOfIncrementalEmployeeDeferral1Member 2021-01-01 2021-12-31 0001641614 us-gaap:StateAndLocalJurisdictionMember 2021-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember 2021-12-31 0001641614 us-gaap:SeniorNotesMember 2021-01-01 2021-12-31 0001641614 us-gaap:SeniorNotesMember us-gaap:SubsequentEventMember 2022-02-28 2022-02-28 0001641614 us-gaap:FairValueInputsLevel2Member us-gaap:SeniorNotesMember 2021-12-31 0001641614 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SeniorNotesMember 2021-12-31 0001641614 pmts:SeniorRevolvingCreditFacilityMember us-gaap:FairValueInputsLevel3Member us-gaap:SecuredDebtMember 2020-12-31 0001641614 pmts:SeniorRevolvingCreditFacilityMember us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SecuredDebtMember 2020-12-31 0001641614 pmts:FirstLienCreditFacilityMember us-gaap:FairValueInputsLevel2Member us-gaap:SecuredDebtMember 2020-12-31 0001641614 pmts:FirstLienCreditFacilityMember us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SecuredDebtMember 2020-12-31 0001641614 us-gaap:SeniorNotesMember 2021-12-31 0001641614 us-gaap:SeniorNotesMember 2021-12-31 0001641614 us-gaap:SeniorNotesMember 2021-03-15 0001641614 pmts:SeniorRevolvingCreditFacilityMember us-gaap:SecuredDebtMember 2020-12-31 0001641614 pmts:FirstLienCreditFacilityMember us-gaap:SecuredDebtMember 2020-12-31 0001641614 pmts:SeniorRevolvingCreditFacilityMember 2020-12-31 0001641614 pmts:FirstLienCreditFacilityMember 2020-12-31 0001641614 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember us-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember 2022-03-03 2022-03-03 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember us-gaap:SubsequentEventMember us-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember 2022-03-03 2022-03-03 0001641614 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember 2021-01-01 2021-12-31 0001641614 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember us-gaap:BaseRateMember 2021-01-01 2021-12-31 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember 2021-01-01 2021-12-31 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember us-gaap:BaseRateMember 2021-01-01 2021-12-31 0001641614 pmts:RevolvingCreditFacilityBaseRateMember us-gaap:LondonInterbankOfferedRateLIBORMember 2021-01-01 2021-12-31 0001641614 pmts:RevolvingCreditFacilityBaseRateMember pmts:FederalFundsRateMember 2021-01-01 2021-12-31 0001641614 srt:RevisionOfPriorPeriodErrorCorrectionAdjustmentMember pmts:RevisionOf2017Through2020ImmaterialErrorsMember 2020-01-01 2020-12-31 0001641614 pmts:ServicesMember 2021-01-01 2021-12-31 0001641614 pmts:ProductsMember 2021-01-01 2021-12-31 0001641614 pmts:ServicesMember 2020-01-01 2020-12-31 0001641614 pmts:ProductsMember 2020-01-01 2020-12-31 0001641614 pmts:MajorCustomerNumberOneMember us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001641614 pmts:MajorCustomerNumberTwoMember us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2020-01-01 2020-12-31 0001641614 pmts:MajorCustomerNumberOneMember us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2020-01-01 2020-12-31 0001641614 us-gaap:CommonStockMember 2020-12-31 0001641614 us-gaap:CommonStockMember 2019-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2020-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2020-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2020-12-31 0001641614 us-gaap:OperatingSegmentsMember 2020-12-31 0001641614 2019-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-01-01 2021-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2020-01-01 2020-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-12-31 0001641614 us-gaap:TrademarksMember 2021-01-01 2021-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2021-01-01 2021-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2021-01-01 2021-12-31 0001641614 pmts:FinanceLeasedAssetsMember 2021-12-31 0001641614 pmts:FinanceLeasedAssetsMember 2020-12-31 0001641614 pmts:AccruedLiabilitiesCurrentMember 2021-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-01-01 2021-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-12-31 0001641614 srt:RevisionOfPriorPeriodErrorCorrectionAdjustmentMember 2020-01-01 2020-12-31 0001641614 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember pmts:UnitedKingdomLimitedSegmentMember 2018-08-03 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2020-01-01 2020-12-31 0001641614 pmts:SmartPackagingSolutionsSVCpiCardGroupIncMember us-gaap:PendingLitigationMember 2021-04-20 0001641614 us-gaap:AllOtherSegmentsMember 2021-01-01 2021-12-31 0001641614 pmts:USPrepaidDebitMember 2021-01-01 2021-12-31 0001641614 pmts:USDebitAndCreditMember 2021-01-01 2021-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2020-01-01 2020-12-31 0001641614 pmts:USPrepaidDebitMember 2020-01-01 2020-12-31 0001641614 pmts:USDebitAndCreditMember 2020-01-01 2020-12-31 0001641614 us-gaap:PendingLitigationMember 2021-01-01 2021-12-31 0001641614 us-gaap:CommonStockMember 2021-12-31 0001641614 pmts:SeniorRevolvingCreditFacilityMember 2021-03-15 2021-03-15 0001641614 pmts:FirstLienCreditFacilityMember 2021-03-04 2021-03-04 0001641614 us-gaap:SeniorNotesMember us-gaap:SubsequentEventMember 2022-02-28 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:OneSupplierMember 2021-01-01 2021-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:FourSuppliersMember 2021-01-01 2021-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:OneSupplierMember 2020-01-01 2020-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:FourSuppliersMember 2020-01-01 2020-12-31 0001641614 us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001641614 us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2020-01-01 2020-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2021-12-31 0001641614 pmts:USPrepaidDebitMember 2021-12-31 0001641614 pmts:USDebitAndCreditMember 2021-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2020-12-31 0001641614 pmts:USPrepaidDebitMember 2020-12-31 0001641614 pmts:USDebitAndCreditMember 2020-12-31 0001641614 2020-01-01 2020-12-31 0001641614 2021-12-31 0001641614 2020-12-31 0001641614 2021-06-30 0001641614 2022-02-22 0001641614 2021-01-01 2021-12-31 xbrli:shares iso4217:USD xbrli:pure pmts:customer pmts:item pmts:Vote xbrli:shares iso4217:USD xbrli:shares +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☑ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31 , 2021 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10368 W. Centennial Road +Littleton , CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code ( 720 ) 681-6304 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value +PMTS +Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ☐     No ☑ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +Yes ☐     No ☑ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑    No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑    No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☑ +Non-accelerated filer ☐ +Smaller reporting company ☑ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑   +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☑ +The aggregate market value of the registrant’s common stock held by non-affiliates was $ 86.8 million on June 30, 2021 computed based on the closing price of the registrant’s common stock of $19.24 as reported on the Nasdaq Global Market on that date. +As of February 22, 2022, the number of shares outstanding of the registrant’s common stock was 11,255,466 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2022 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K . +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +4 +Item 1A +Risk Factors +13 +Item 1B +Unresolved Staff Comments +33 +Item 2 +Properties +34 +Item 3 +Legal Proceedings +34 +Item 4 +Mine Safety Disclosures +34 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +34 +Item 6 +[Reserved] +35 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +35 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +47 +Item 8 +Financial Statements and Supplementary Data +47 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +77 +Item 9A +Controls and Procedures +77 +Item 9B +Other Information +78 +Item 9C +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +79 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +79 +Item 11 +Executive Compensation +79 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +79 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +79 +Item 14 +Principal Accountant Fees and Services +79 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +80 +Item 16 +Form 10-K Summary +83 +Signatures +84 +1 +Table of Contents +Cautionary Statement Regarding Forward-Looking Information +Certain statements and information in this Annual Report on Form 10-K (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “attempt,” “target,” “guides,” “seek,” “focus,” “provides guidance,” “provides outlook” or other similar expressions are intended to identify forward-looking statements, which are not historical in nature. These forward-looking statements, including statements about our strategic initiatives and market opportunities, are based on our current expectations and beliefs concerning future developments and their potential effect on us and other information currently available. Such forward-looking statements, because they relate to future events, are by their very nature subject to many important risks and uncertainties that could cause actual results or other events to differ materially from those contemplated. +These risks and uncertainties include, but are not limited to: the potential effects of COVID-19 and responses thereto on our business, including our supply chain, customer demand, workforce, operations and ability to comply with certain covenants related to our indebtedness; our transition to being an accelerated filer and complying with Section 404 of the Sarbanes-Oxley Act of 2002 and the costs associated with such compliance and implementation of procedures thereunder; our failure to maintain effective internal control over financial reporting or remediate material weaknesses; our inability to recruit, retain and develop qualified personnel, including key personnel; a disruption or other failure in our supply chain or labor pool resulting in increased costs and inability to pass those costs on to our customers and extended production lead times and difficulty meeting customers’ delivery expectations; our failure to retain our existing customers or identify and attract new customers; system security risks, data protection breaches and cyber-attacks; our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our indebtedness and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; interruptions in our operations, including our information technology (“IT”) systems, or in the operations of the third parties that operate the data centers or computing infrastructure on which we rely; disruptions in production at one or more of our facilities; environmental, social and governance preferences and demands of various stakeholders and our ability to conform to such preferences and demands and to comply with any related regulatory requirements; the effects of climate change, negative perceptions of our products due to the impact of plastic on the environment, social unrest, and other ESG-related risks; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation, infringement claims brought against us and risks related to open source software; defects in our software; our limited ability to raise capital in the future; problems in production quality, materials and process; our inability to develop, introduce and commercialize new products; costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state businesses, as well as potential new U.S. tax legislation increasing the corporate income tax rate and challenges to our income tax positions; our inability to successfully execute on our divestitures or acquisitions; our inability to realize the full value of our long-lived assets; costs relating to product defects and any related product liability and/or warranty claims; our inability to renew licenses with key technology licensors; the highly competitive, saturated and consolidated nature of our marketplace; the effects of delays or interruptions in our ability to source raw materials and components used in our products from foreign countries; failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security; new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services in a timely manner; quarterly variation in our operating results; our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards; a decline in U.S. and global market and economic conditions and resulting decreases in consumer and business spending and ongoing inflation; our failure to comply with environmental, health and safety laws and regulations, including climate change regulations that apply to our products and the raw materials we use in our production processes; risks associated with the majority stockholders’ ownership of our stock; potential conflicts of interest that may arise due to our board of directors being comprised in part of directors who are principals of our majority stockholders; the influence of securities analysts over the trading market for and price of our common stock; failure to meet the continued listing standards of the Nasdaq Global Market; certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors; our ability to comply with a wide variety of complex laws and regulations and +2 +Table of Contents +the exposure to liability for any failure to comply; the effect of legal and regulatory proceedings; and other risks that are described in Part I, Item 1A, Risk Factors in this Annual Report on Form 10-K and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +3 +Table of Contents +PART I +Item 1. +Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States and Interac, in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience. +We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“FinTechs”), as well as independent community banks, credit unions and Group Service Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our leading network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, serving many of the top U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and +● the U.S. FinTech market, where we produce and personalize Financial Payment Cards for financial technology companies. +Our business consists of the following reportable segments: +● Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States; +● Prepaid Debit, which primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States; and +● “Other,” which includes corporate expenses. +4 +Table of Contents +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 18 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +COVID-19 Update +The COVID-19 pandemic has impacted, and continues to impact, the global economy and the locations where we, our customers and our suppliers conduct business. The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain. The health and safety of CPI employees remains paramount, and the Company continues to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines.  All of CPI’s operations have remained open during the pandemic and provide direct and essential support to the financial services industry. +The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain, including increased lead times for, and higher costs of, certain raw materials and components, such as microchips, which are expected to continue in the future. CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to help mitigate supply chain constraints. The current environment has also affected the available labor pool in the areas in which the Company operates, which has resulted in increased labor cost and turnover in our facilities, challenges hiring production employees and shipping delays. On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) issued an Emergency Temporary Standard (“ETS”) mandating certain employers to require either full vaccination against COVID-19 or weekly testing of employees. The United States Supreme Court upheld a stay on enforcement of the ETS mandate, and on January 25, 2022, OSHA announced that it would withdraw the ETS to focus on finalizing a permanent COVID-19 Healthcare Standard. At this time, it is not possible to predict the impact a permanent COVID-19 Healthcare Standard, or any corresponding mandates from federal, state or local governmental entities would have on us or on our workforce. Federal, state or local mandates could result in increased costs as well as labor disruptions, employee attrition and/or difficulty recruiting new employees which could compound the labor shortage already impacting the Company. +The Company believes the labor and supply chain challenges described above, and the associated costs, may continue to increase throughout 2022 and possibly beyond. The Company may not be able to pass all of these costs through to its customers. The Company also believes the increased production lead times described above are likely to continue throughout 2022 and possibly beyond, depending on the duration of the labor and supply chain challenges and the level of demand from its customers. The Company will continue to monitor and respond as the situation evolves, including mitigation efforts such as purchasing additional inventory and attempting to hire additional production employees. See Part I, Item 1A, Risk Factors in this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on the Company. +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, included provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. We deferred employer social security payments in 2020 in accordance with the CARES Act, and the first installment repayment was made in the fourth quarter of 2021. The second installment payment is permitted to be paid no later than the fourth quarter of 2022. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 12 “Income Taxes” for a discussion of the historical CARES Act income tax impacts on the Company. +Our Competitive Strengths +● Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We believe these efforts have resulted in CPI gaining estimated overall market share each year from 2018 to 2021. We have long-standing, trust-based relationships with customers, many of whom we have served for decades. We have collaborated with our top 10 customers for more than ten years, on average. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology +5 +Table of Contents +integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. Our Card@Once ® instant issuance solution provides the necessary on-site equipment and supplies, proprietary software-as-a service (Saas) capability, customer support and secure data exchange to provide personalized cards on-site and on-demand at bank and credit union branches across the United States. Data is exchanged through either a secure web interface or through integrations of our proprietary software with our customers’ card issuance systems. Integrations provide a more seamless experience for our customers and we believe they foster longer lasting and closer customer relationships. +● Comprehensive End-to-End Card Solutions. The foundation of our strong market position with our small- to mid-sized issuer customers and FinTechs is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card design and production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solutions allow our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +● Network of High-Security Facilities. Our high-security facilities are each audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands, forming a leading network of compliant production facilities in the United States. The Payment Card Brand attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long and complex, and our facilities must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +● Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV”) is a global technical standard, maintained by EMVCo LLC (“EMVCo”) for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV ® cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We also produce dual-interface EMV cards that have both contact and contactless functionality. +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. CPI’s Second Wave ® payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”), and Earthwise TM cards made with upcycled plastic address customer demands for more eco-focused card options. We also sell CPI Metals ® , a premium encased metal card. Our offerings also include Card@Once, our proprietary and patented instant card issuance system and software-as-a-service solution. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Solutions market, gives us a competitive advantage. +● Experienced Leadership Team. We have an experienced leadership team that has energized the organization to focus on customers, accountability, innovation and delivering results. +6 +Table of Contents +EMV ® is a registered trademark or tradename of EMVCo LLC in the United States and other countries. +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality products, customer service and continuous innovation with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our customers elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality products and customer service, continuous innovation, and market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +Market-Leading Quality Products and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading solutions provider. With a focus on market-leading quality products and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their businesses. We listen to the voices of our customers and focus on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our stockholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. Continuous innovation aims to win new business and help our customers differentiate themselves with distinctive products and solutions, build their brands, and achieve top-of-wallet status. +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We aim to streamline our operations, which enables us to allocate resources focused on providing our customers with unmatched solutions, innovation and exceptional service. We have also developed standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We invest in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance, profitability, and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact and Contactless Dual-Interface) +We produce plastic EMV cards, including our eco-focused solutions that we describe further below, and encased metal contact EMV cards. These EMV cards feature an integrated circuit that interfaces with an EMV payment +7 +Table of Contents +terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology, and we generally refer to all cards we produce with an RFID antenna as ‘contactless’ cards. +Earth Elements TM Eco-Focused Cards +We believe we are a leading provider of eco-focused card solutions in the U.S., having sold nearly 50 million eco-focused contactless payment cards since launch in 2019. Our Earth Elements portfolio offers eco-focused solutions, including our Second Wave cards that feature a core made with ROBP and our Earthwise cards made with upcycled plastic. Dependent upon design and card construction, Earth Elements cards incorporate varying types and amounts of upcycled plastic content, including ROBP, recycled PVC and recycled PET-G. We offer an Earthwise card that incorporates up to 98% upcycled plastic content, dependent on design. Cards in the Earth Elements portfolio are available in all forms of EMV Financial Payment Cards (contact and contactless dual-interface), and have been approved by two of the major Payment Card Brands. These solutions aim to satisfy increasing consumer demand for more eco-focused products and help support our and our customers’ environmental, social and governance (“ESG”) objectives. +Non-EMV Financial Payment Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards that utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, including prepaid debit cards. In 2021 and 2020 we produced non-EMV cards for the purpose of government disbursement in the U.S., and have produced non-EMV transit cards. We also produce retail gift cards that are not issued on the networks of the Payment Card Brands. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact, contactless, and dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven with full color printing and edge-to-edge coverage, and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss or print with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with an inventory of their card stock and fulfillment materials. In addition, we provide EMV data preparation services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We also provide consultation and card design services to further assist customers in card customization. +CPI On-Demand ® Solutions +Through our CPI On-Demand ® services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. We believe the CPI On-Demand solution further differentiates us with our financial institution and prepaid debit card program manager customers and enables us to access new, business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, government disbursement, benefits and insurance. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +8 +Table of Contents +Instant Card Issuance Systems and Services +We offer Card@Once, our proprietary and patented instant card issuance system and software-as-a-service, which provides our card issuing-bank customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, a contact EMV card or a contactless dual-interface EMV card, and personalizes the card on a desktop printer solution provided by CPI. These processes are audited for PCI data security standards compliance annually. Our instant issuance system generates both initial sales revenue for the printer solution and recurring revenue from card personalization and sales of cards and consumables. We offer multiple Card@Once solutions, including our latest innovation, which is our premium Spectrum solution that enables issuers to produce a higher resolution payment card with over-the-edge printing capability. +Digital Services +While not currently significant to our financial results, we provide digital services and issuance technologies, including online card ordering, order lifecycle management, customer inventory management, self-service card customization, and other innovative solutions. +Suppliers +While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the EMV/ contactless microchips and antennas. Our main suppliers of EMV/ contactless microchips and antennas include four leading international manufacturers with locations in Germany, Thailand, Netherlands, South Korea, and Singapore. For the year ended December 31, 2021 approximately 92% of our purchased microchips and antennas came from these four main suppliers, and approximately 64% came from one supplier, primarily on a purchase order basis. The other key components for our products are substrates and inlays. Additionally, o ur Second Wave ® payment cards feature a core made with ROBP, which we currently source from one supplier in Haiti. +We monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation, resiliency and price. Surges in demand for certain raw materials and components, as well as other factors such as staffing challenges, have continued to strain the global supply chain network, which has resulted in increased costs of such raw materials and components, increased shipping costs, freight and logistics delays, longer lead times and unpredictability. Although we strive to place orders for materials and components sufficiently in advance to compile buffer stock to mitigate the impacts of freight and logistics delays and to bolster our access to raw materials and components, it is difficult to predict the ability of our suppliers to continue to fulfill such orders, and it is possible that such delays as well as costs to obtain such raw materials and components will increase in 2022. If suppliers cannot fulfill our microchip orders this can constrain our ability to support customer demand and negatively impact net sales in 2022. We significantly increased inventory levels in 2021 to mitigate the supply chain constraints discussed above. +Customers +We categorize our customers as follows: large issuers, small to mid-sized issuers, FinTechs, prepaid debit issuers and program managers and Group Service Providers. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest Prepaid Debit Card program managers. The Company had one customer that accounted for 10% or more of its net sales in 2021. Net sales from this customer was approximately 18% of total net sales for the year ended December 31, 2021. We have been serving this customer for greater than 10 years. In addition, nearly two-thirds of our net sales for the year ended December 31, 2021 were from our top ten direct customers, which includes certain Group Service Providers. We have been serving these top ten direct customers for an average of greater than 10 years. In addition, through our direct and indirect customer relationships, approximately two-thirds of our annual net sales in our Debit and Credit segment are derived from small- to mid-sized issuers and FinTechs. Individually, many of these customers represent minor amounts of our annual net sales as these +9 +Table of Contents +small- to mid-sized issuers, including independent community banks and credit unions, do not require a significant amount of annual replenishment of Financial Payment Cards or ongoing card data personalization. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangements that define the quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a network of high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers and provide consistent supply. We have designed our facilities and operating processes to target providing exceptional service to all customers, with capabilities to: +● execute high-volume production runs that allow us to offer cost-effective price points on large orders; +● execute lower-volume production runs of smaller orders, as well as on-demand solutions; and +● meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this prepaid retail market. +As of December 31, 2021, we operate facilities comprising approximately 386,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card printer provisioning and fulfillment, card packaging and fulfillment services. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we seek to embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources and create innovative and responsible products. Our key areas of focus in this area include: incorporating environmental sustainability practices as and where feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility and meaningful, innovative products at value-driven pricing. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives, customer relationships and partners that provide a wide geographic reach across the United States to sell and market our solutions. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customer’s individual needs. We use an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the +10 +Table of Contents +payments market. We also strive to meet customer demand for new or enhanced products by innovating through research and development activities. We believe these efforts drive customer retention and satisfaction, and attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation, and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card solutions providers. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. We believe we are in competition with Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA (formerly known as Oberthur Technologies S.A.), Perfect Plastic, Thales (formerly known as Gemalto NV), Travel Tags, Valid S.A., and WestRock (Multi Packaging Solutions), among others. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2021, we had 56 U.S. and foreign trademark registrations and applications, 37 existing U.S. patents, 33 existing foreign patents, as well as 28 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 13 years, and our trademarks will be due for renewal for additional ten year periods on an ongoing basis. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy statutes and regulations, and certain of the PCI Security Standards Council’s requirements, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws, and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council’s requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in achieving and maintaining compliance with the requirements from the Payment Card Brands, and have invested significant capital to achieve and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We +11 +Table of Contents +believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers like us as well as CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +12 +Table of Contents +Human Capital +Our leadership team has significant experience in the payments industry, and many of our employees possess career-long expertise and knowledge that is unique to the Financial Payment Card industry. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of the Company’s core values. Throughout the COVID-19 pandemic, the health and safety of our employees has remained paramount. We continue to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local orders and guidelines.  Our office-based employees moved to a primarily remote work environment beginning in March 2020. +We are committed to a diverse and inclusive workplace, in which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior, and employees are required to follow these standards and participate in related training. We encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. We also focus on a variety of community initiatives to enhance the lives of people in the communities where we operate through volunteerism, charitable giving and economic support. +As of December 31, 2021, CPI employed approximately 1,150 full-time employees, roughly 57% male and 43% female. Approximately 52% of the employee base identifies as being within a minority category. Approximately 72% of our full-time employees are production and service facility staff. Additionally, we use the services of temporary workers to provide flexibility for our business needs. None of our employees are represented by labor unions. We believe that our relations with our employees are positive . +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127, telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of the Company's website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC by the Company. +CPI Card Group Inc. qualifies as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and has elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. As of June 30, 2021, the market value of outstanding shares of our common stock owned by non-affiliates exceeded $75 million, which triggered the Company being classified as an accelerated filer with respect to SEC regulations and filing requirements effective December 31, 2021. +Item 1A. Risk Factors +There are many factors that affect our business, financial condition, results of operations and cash flows, some of which are beyond our control. The following is a description of some important factors that may cause our business, financial condition, results of operations and cash flows in future periods to differ materially from those currently expected or desired. Factors not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations and cash flows. You should carefully consider all of these risks described below, together with the other information included in this Annual Report on Form 10-K, before investing in our securities. As a result of any of these risks, known or unknown, you may lose all or part of your investment in our securities. +13 +Table of Contents +Risk Factors Summary +Risks Relating to COVID-19 +● The effects of the COVID-19 pandemic and responsive government measures as well as related economic disruptions adversely affecting our supply chain, workforce, overall operations and financial condition and ability to market and sell our products. +Risks Relating to our Business +● Costs associated with our recent transition to being an accelerated filer and compliance with Section 404 of the Sarbanes-Oxley Act of 2002 as well as our inability to remediate material weaknesses in internal control over financial reporting and as a result of such material weaknesses, our inability to detect errors on a timely basis and the loss of investor confidence in our financial reporting. +● Failure to recruit, retain and develop qualified new and replacement personnel amidst labor shortages and in competitive labor markets. +● Disruptions, delays and increasing costs and inflationary pressures in our supply chain, including with respect to single-source suppliers, or the failure or inability of our suppliers to comply with our codes of conduct or contractual requirements. +● Failure to retain existing key customers and attract new customers due to competitive products, pricing pressures, extended production lead times, financial health of our customers and macroeconomic conditions affecting our industry or our customers. +● A cyber-attack or breach of our information technology systems resulting in losses of our intellectual property and/or sensitive cardholder data, harm to our competitive position and a loss of customer trust and confidence, and, as threats evolve, the necessity to invest in significant additional resources to enhance our information security and controls. +● Our substantial indebtedness and the covenants and restrictions in the agreements governing our indebtedness limiting our ability to use our cash flow in certain areas of our business, capitalize on certain business opportunities and pursue our business strategies, all of which could increase if we incur additional debt. +● Any interruption of our information technology systems, including disruptions or failures of our third-party data centers, inhibiting our ability to service our customers. +● A disruption at any of our production facilities and our inability to recover quickly or otherwise provide continuity of production in order to meet customer requirements. +● The impact of the increasing focus on environmental, social and governance (“ESG”) factors on our ability to access capital, manufacture our products in conformity with stakeholder preferences, and comply with stakeholder demands as well as comply with any new ESG related regulatory requirements. +● The effects of climate change on our business. +● Our inability to protect our trade secrets, intellectual property and proprietary software, to obtain additional intellectual property rights in the future, and to ensure our products are not infringing the intellectual property rights of others. +● Defects in our software and computing systems, resulting in errors or delays in the processing of transactions and other interruptions in our business operations. +● The effects of the low trading volume and fluctuating trading price of our common stock as well as terms of our outstanding indebtedness and market conditions on our ability to access capital markets. +● Problems in our production processes, including as a result of mechanical or technological failures, which could lead to reduced production capacity and quality. +● Our inability to undertake time-consuming and costly research and development activities in order to develop new or enhanced products. +● An increased number of states seeking to apply sales tax “nexus” laws or future increases in U.S. federal or state income taxes, resulting in additional tax expenses in the event we are unable to pass such expenses along to our customers. +● Our inability to divest or consolidate certain non-strategic businesses, and our inability to execute successfully on an acquisition strategy. +● A write-down of our long-lived assets, which represent a significant portion of our total assets. +● Defects in our products that may give rise to products recalls, product liability and warranty claims as well as damage to our reputation. +● Our inability to renew licenses with key technology licensors, resulting in our loss of access to certain technologies upon which we rely to develop certain of our products. +14 +Table of Contents +Risks Relating to our Industry +● The highly competitive, saturated and consolidated nature of our marketplace. +● The effects of delays or interruptions in our ability to source raw materials and components used in our products from foreign countries due to economic downturns or disruptions, including as a result of responses to continued outbreaks of COVID-19 and tariffs and trade restrictions. +● Challenges, costs and potential liabilities associated with compliance or failure to comply with existing or future data privacy and security laws, regulations and requirements. +● The widespread adoption of technological changes, new products or industry standards, such as digital payment systems or mobile payments, which may render our products obsolete or irrelevant, and our failure to develop and introduce innovative products to address the evolving needs of our customers. +● The unpredictability of our operating results due to the varying cyclicality of the financial card and electronic payment industries, capital requirements, competition, new product developments, technological changes and other factors. +● Our failure to comply with the standards of the PCI Security Standards Council, including due to an inability to continue to make investments in our facilities necessary to maintain compliance with such standards. +● A deterioration in general economic conditions, including rising inflation, resulting in reduced consumer confidence and consumer and business spending. +● Our failure to comply with environmental, health and safety laws and regulations, including climate change regulations, that apply to our products and the raw materials we use in our production processes. +Risks Relating to Ownership of our Common Stock +● Our majority stockholders’ continued concentrated ownership of our shares and ability to control decisions regarding our business direction and policies as well as the potential conflicts of interest that may arise between our majority stockholders and our other stockholders. +● The influence of securities analysts over the trading market for and price of our common stock, particularly due to the lack of substantial research coverage of our common stock. +● Our failure to maintain our listing on the Nasdaq Global Market (“Nasdaq”) due to failure to comply with Nasdaq listing standards . +● Certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors. +General Risk Factors +● Our inability to comply with numerous evolving and complex laws and regulations relating to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, labor and health and safety. +● Legal costs, insurance expenses, settlement costs and the risk of an adverse decision related to legal or regulatory proceedings or litigation. +Risks Relating to COVID-19 +The ongoing COVID-19 pandemic and responses thereto may, or may continue to, adversely affect our supply chain, workforce, overall operations and financial condition, each of which may have a material adverse effect on our business. +The COVID-19 pandemic has caused significant economic disruption and adversely impacted the global economy. Since the beginning of the COVID-19 pandemic in early 2020, we have experienced, and expect to continue to experience, delays in the supply of, and increased costs of, materials necessary to operate our business, and challenges hiring and retaining workers as well as increased labor costs. Federal, state and local government measures in response to the COVID-19 pandemic, including the institution of orders, restrictions and guidelines relating to the operation of our facilities, travel bans and restrictions, quarantines and shutdowns, have impacted and may continue to impact our workforce, sales and marketing efforts, and our operations and have caused and may continue to cause us to incur significant costs and have a negative impact on our sales and results of operations. For example, our sales and customer relationship personnel have been and may in the future be unable to engage in in-person meetings and interaction with our customers. Although certain restrictions related to the COVID-19 pandemic have eased, uncertainty continues to exist regarding the duration of such measures and potential future measures. Current material and component shortages, +15 +Table of Contents +logistics constraints and labor inefficiencies have led to and may continue to lead to increased costs and challenges meeting customer demand, which could have a material adverse effect on our business, results of operations and/or financial condition. +The COVID-19 pandemic has also significantly increased economic and customer demand uncertainty and has caused inflationary pressure in the U.S. and elsewhere as well as supply chain disruptions. Economic uncertainties could continue to adversely affect the financial condition and credit risk of our customers as well as customer demand for the Company’s products and services, particularly if credit card issuers reduce credit limits, close accounts and become more selective in determining to whom they issue credit cards as a result thereof. A prolonged economic contraction or recession may also result in our customers seeking to reduce their costs and expenditures, which could result in lower demand for our products or a shift to demand for lower margin products. If our sales decline, or if such lost sales are not recoverable in the future, our business and results of operations will be significantly adversely affected. +Continued uncertainties related to the magnitude, duration and persistent effects of the COVID-19 pandemic may adversely affect our business. These uncertainties include, among other things: the duration and impact of the resurgence in COVID-19 cases in any country, state, or region; the emergence, contagiousness, and threat of new and different strains of the virus; the availability, acceptance, and effectiveness of vaccines; prolonged reduction or closure of the Company’s operations; disruptions in the global supply chain; increased labor cost and turnover in our facilities as well as challenges hiring production employees; the impact of the pandemic on the Company’s customers and suppliers; the impact of disruptions in the global capital markets and/or declines in our financial performance, which could impact the Company’s ability to obtain financing in the future; and the impact of the pandemic on customer demand for our products and services as discussed above. All of these factors could materially and adversely affect our business, results of operations and/or financial condition. +The global outbreak of COVID-19 continues to evolve. The ultimate impact of the COVID-19 outbreak remains uncertain and subject to change, and we cannot predict its future impacts on our business or the economy as a whole. However, these effects may harm our business, financial condition and results of operations in the near term and could have a continuing material impact on our operations, sales, and liquidity. +16 +Table of Contents +Risks Relating to our Business +Our transition to being an accelerated filer and compliance with Section 404 of the Sarbanes-Oxley Act of 2002 has been and will continue to be time consuming and costly, and because we have identified material weaknesses in our internal control over financial reporting, our inability to maintain effective internal controls could result in investors losing confidence in the accuracy and completeness of our financial reports or our inability to accurately or timely produce our financial reports, any of which could negatively affect the market price of our common stock, perhaps significantly. +As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Because we became an accelerated filer effective for the year ended December 31, 2021, Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires our independent registered public accounting firm to attest to the effectiveness of our internal control over financial reporting. Our transition to becoming subject to additional requirements of Section 404 of the Sarbanes-Oxley Act has been and will continue to be time-consuming. Further, the costs associated with compliance with and implementation of procedures under these and future laws and related rules could have a material impact on our results of operations. +Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that assessment, we identified several material weaknesses in internal control over financial reporting, as described in Part II, Item 9A, Controls and Procedures in this Annual Report on Form 10-K. +We are in the process of enhancing our internal controls to remediate the material weaknesses. However, we can give no assurance that these measures will be sufficient to remediate the material weaknesses, that additional material weaknesses or significant deficiencies in our internal controls will not be identified in the future or that we will otherwise be able to establish and maintain an effective system of internal controls. As a result of the material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis, our financial statements may be materially misstated, investors may lose confidence in the accuracy and completeness of our financial reports and we may be unable to timely produce our financial reports. Any of the foregoing could negatively affect the market price of our common stock, perhaps significantly. In addition, we could become subject to investigations by any stock exchange on which our securities are listed, the SEC or other regulatory authorities, or litigation or disputes with stockholders, which could require additional financial and management resources and result in more costly directors’ and officers’ insurance, which could have an adverse impact on our business. +The failure to effectively recruit, retain and develop qualified personnel and implement effective succession processes could adversely affect our success and could have a material adverse effect on our business, financial condition and results of operations. +Our business functions are complex and require wide-ranging expertise and intellectual capital. If we fail to recruit, retain and develop personnel who can provide the needed expertise across the entire spectrum of our expertise and intellectual capital needs, then the ability of our business to successfully compete and grow may be adversely affected. The market for qualified personnel is highly competitive and we have experienced labor availability issues in several of our facilities. This shortage of labor has resulted, and may continue to result, in increased compensation and recruiting expenses, which could have a material adverse effect on our profitability, particularly if we are unable to pass all of such expenses on to our customers. In addition, the loss of key personnel without adequate succession plans in place may cause a failure to maintain continuity in key business functions. We may not succeed in recruiting sufficient personnel to support our production needs or may fail to effectively replace current personnel who depart with qualified or effective successors. Personnel shortages have resulted, and may continue to result, in extended production lead times and difficulty in meeting customers’ delivery expectations, which could result in the loss of customers and damage to our reputation and have a material adverse effect on our business, financial condition and results of operations. +A disruption or other failure in our supply chain could adversely affect our business and financial results. +As a company engaged in manufacturing and distribution, we are subject to the risks inherent in such activities, including product quality control issues, disruptions or delays in our supply chain as well other external factors over which we have no control. Raw materials used in our products may be sourced from a few, or single, key suppliers. +17 +Table of Contents +Specifically, certain key components for our Financial Payment Card products include EMV microchips, substrates (such as PVC), resin, modules, antennas and inlays, which we source from multiple suppliers located in Germany, Thailand, the Netherlands, South Korea, the United States, Haiti and Singapore, primarily on a purchase order basis. Though we obtain the microchips used in our Financial Payment Card products from multiple suppliers, we source the substantial majority of such microchips from one supplier. For the year ended December 31, 2021 approximately 92% of our purchased microchips and antennas came from four main suppliers, and approximately 64% came from one supplier. If such supplier is unable to fulfill our orders for microchips or is delayed in shipping microchips to us, we could fail to timely fulfill customer orders, which could damage our reputation and result in a loss of customers and customer opportunities and material harm to our financial results. +Additionally, our Second Wave® cards, featuring a core made with “recovered ocean bound plastic” rely on a largely international supply chain to source and provide such “recovered ocean bound plastic” in accordance with our defined parameters. It is difficult and costly to monitor suppliers of key components and their compliance with our parameters, our codes of conduct, and applicable laws. Any failure by our suppliers to so comply could adversely affect our ability to produce Second Wave payment cards or cards with EMV microchips at all or in a manner consistent with standards agreed upon with our customers, which could adversely affect our business, reputation and customer relationships. Moreover, in certain cases, such as with ROBP, microchip and resin suppliers, we may rely on suppliers for which there are not adequate and immediate or any replacements, which may result in our inability to continue to produce or a reduction in production of products that use components from these suppliers in the event the suppliers terminate their relationships with us, fail to deliver products or materials in required volumes or in required timeframes, or otherwise fail to meet their obligations to us. We generally do not maintain large volumes of inventory, which makes us even more susceptible to harm if a single-source supplier fails to deliver products or materials as required. +Also, changes in the financial or business condition of our suppliers, political instability, social or civil unrest, war or adverse market conditions in a supplier’s country (including relating to any continued outbreak of COVID-19), demand from other customers of such suppliers or failure to comply with our codes of conduct or other contractual requirements could render our suppliers unable to provide us with, or render us unable or unwilling to accept, the components we need to produce our products and thus subject us to losses or adversely affect our ability to bring products to market. Further, the failure of our suppliers to deliver goods and services in sufficient quantities, in compliance with applicable standards, contract requirements, or laws and regulations, and in a timely manner could adversely affect our customer service levels, our reputation and our overall business. For example, we have in the past experienced delays in our supply chain, which made it difficult to produce our products in a timely manner. In addition, any increases in the costs of goods and services for our business, including as a result of inflationary pressures, may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in our operations. If a company in our supply chain engages in illegal, unethical or other questionable conduct, we may not have visibility to these practices and we, and our customers, may face reputational harm in addition to interruptions to our supply chain. +Failure to retain our existing customers or identify and attract new customers would have a material adverse effect on our business. +A substantial portion of our net sales is derived from several large customers. The Company had one customer that accounted for 10% or more of its net sales in 2021. Net sales from this customer was approximately 18% of total net sales for the year ended December 31, 2021. We have been serving this customer for greater than 10 years. In addition, nearly two-thirds of our net sales for the year ended December 31, 2021 were from our top ten direct customers, which includes certain Group Service Providers. We have been serving these top ten direct customers for an average of greater than 10 years. If one or more of our key customer relationships ends, it could have a material adverse effect on our business and financial results. Our ability to provide products and services to these customers and our other customers and meet very high quality standards in a timely manner is critical to our business success. For example, one of the key services that we offer our customers is the prompt and timely production and delivery of replacement debit or credit cards. Orders for replacement debit or credit cards often are placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a high quality and timely manner, our relationships with our customers may be adversely affected and customers may terminate their contracts with us. +In addition, our continued business relationship with our customers may be impacted by several factors beyond our control, including more attractive product offerings from our competitors, pricing and inflationary pressures, the financial health of our customers and macroeconomic conditions affecting the Financial Payment Card industry or our +18 +Table of Contents +financial institution and other customers. Because our contractual arrangements with customers generally do not include exclusivity clauses or commitments to order specified quantities of products on a medium or long-term basis, there is no guarantee that we will receive orders on a consistent basis or on favorable terms, or be able to renew contracts or purchase orders in a given year on favorable terms or at all. Additionally, as a result of labor shortages and supply chain constraints, the Company has experienced extended production lead times in some areas of the business and difficulty meeting some customers’ delivery expectations. While we continue to proactively monitor, assess and take steps to minimize disruptions and delays in production, these disruptions and delays have caused, and may continue to cause, the Company to lose or delay customer opportunities. +If we experience difficulty attracting and retaining customers, our business, financial condition and results of operations would be materially and adversely affected. +System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, impair customer and vendor relationships, disrupt our internal operations, harm perception of our products and expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and our reputation. +The reliability and security of our IT infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. We have been and may continue to be a target of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, phishing attacks, ransomware attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from unauthorized use of or access to computer systems (including from internal and external sources). A breach of our security defenses could result in a loss of our intellectual property, the release of sensitive cardholder information and customer, consumer or employee personal data, or the loss of production capabilities at one or more of our production facilities. In recent years these types of incidents have become more prevalent and pervasive across industries, including in our industry. +In addition, our encryption systems are at risk of being breached or decoded. We use encryption technology to protect sensitive data while in transit and at rest. Also, smart cards are equipped with keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, whether caused by cyber-attacks, security breaches, internal control failures, or otherwise, which could ultimately have a material adverse effect on our business, financial condition and results of operations. +The protective measures we have implemented to protect against data and security breaches and cyber-attacks may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. Our activities and investment in protective measures may not be deployed sufficiently quickly or successfully in order to protect our system or network against disruptions and may not prevent or limit the damage from any future security breaches. In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +The covenants and restrictions contained in agreements governing our indebtedness may adversely affect our business and results of operations, may restrict our ability to grow and could make it difficult or impossible to timely make our debt service payments or refinance our debt when it comes due. +We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our business. The agreements governing our indebtedness do not fully prohibit us or our subsidiaries from incurring additional indebtedness in the future, and to the extent that we incur additional indebtedness, the risks associated with our substantial indebtedness described below, including our possible inability to service our debt, may increase. Our substantial indebtedness and interest expense could have important consequences to us, including: +19 +Table of Contents +● limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, research and development, expanding our infrastructure, capital expenditures and other general business activities and investment opportunities in our company, because we must dedicate a substantial portion of these funds to pay interest, make principal payments and/or otherwise service our debt; +● impacting our cash flows, results of operations and financial condition when interest rates rise, because the interest rate on our revolving credit facility is a floating rate that varies depending on market interest rates from time to time; +● limiting our ability to retain or attract customers and our ability to attract or retain qualified employees due to our significant amount of debt and the related implications of such debt for the Company’s long-term financial condition; +● limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; +● limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +● limiting our ability to timely make our debt service payments or to satisfy our other obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +● increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; and +● placing us at a competitive disadvantage as compared to our competitors that are less leveraged. +Additionally, the terms of the agreements governing our indebtedness restrict, and any additional indebtedness we may incur in the future could similarly restrict, our ability to operate our business and to pursue our business strategies. Among other things, these agreements restrict our ability to: +● incur additional indebtedness; +● create liens or use assets as security in other transactions; +● enter into certain asset sale transactions or other dispositions of assets; +● declare or pay dividends, repurchase or redeem stock, or make other distributions to stockholders; +● make investments in other businesses or joint ventures; +● merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; and +● enter into transactions with affiliates. +Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business and reputation. +Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, including the operation of complex IT systems. In addition, a significant portion of the communication between our employees, customers, and suppliers depends on our IT systems. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. +In order to serve our customers and operate certain aspects of our business, we depend on data centers and computing infrastructure that is both our own as well as provided by third party vendors. To the extent applications and data used in our business are hosted by third party vendors at their facilities, we do not control the operation of such facilities or in some cases the hardware and infrastructure within them. Any disruption of, interference at, or inability to keep up with our needs for capacity by our third-party data centers or hosted infrastructure partners could interrupt our business operations. In addition, any problems faced by our third-party data center operations or hosted infrastructure partners with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our ability to service our customers also largely depends on the efficient and uninterrupted operation of our own computer information systems residing at our leased facilities. The proper functioning of such systems can be adversely affected by the increasing age and usage of such systems, among other things. Any interruption in our business applications, systems or networks, including, but not limited to, new system implementations, server +20 +Table of Contents +downtime, facility issues, natural disasters or energy blackouts, could have a material adverse impact on our operations, sales and operating results. Additionally, we have a limited number of employees with the expertise required to operate such internal applications, systems and networks as well as remediate them in the event of a failure, and thus the attrition of such employees could result in our inability to quickly and effectively resolve future IT issues that may arise. +Not only could we suffer damage to our brand and reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements require the payment of penalties if our systems do not meet certain operating standards, and failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of compliance of our facilities, any of which could have a material adverse effect on our business. +In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Protective measures we have established for continuation of core business operations in the event of a catastrophic event may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results of operations. +Disruptions in production at one or more of our facilities may have a material adverse impact on our business, results of operations and/or financial condition. +Any serious disruption at any of our facilities, including as a result of the COVID-19 pandemic, severe weather conditions, climate change, natural disasters, hostilities, political instability, social unrest, network outages or terrorist activities, could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. In the event of a disruption in production at one of our facilities, our other facilities may not have sufficient capacity, may not have the specialized equipment necessary, may have higher production costs, may take significant time to increase production or may fail to meet our customers’ requirements, any of which could negatively impact our business, results of operations and financial condition. Production disruptions may cause our customers to seek alternative supply, which could further adversely affect our profitability. +A significant amount of certain specialized manufacturing capacity is also concentrated in single-site locations. Due to the specialized nature of the assets used in the manufacturing process at each location, in the event a particular facility experiences disruption, it may not be possible to find replacement capacity quickly or substitute production from our other facilities. Accordingly, disruption at a single-site manufacturing operation could significantly impact our ability to supply our customers and could have a severe impact on us. +Additionally, all of our manufacturing facilities are currently leased, and we are subject to risks associated with our current and future real estate leases for such facilities. As each lease expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, we may be unable to find replacement locations with adequate capacity for our unique equipment and operational needs, and we may experience disruption or significant cost in relocating, any of which could have an adverse effect on our operations, customer relationships and financial performance. +Expectations of stakeholders relating to environmental, social and governance matters may impose additional costs and expose us to new risks as well as have an adverse effect on our business, financial condition, results of operations, and cash flows. +There is an increasing focus from certain investors, regulators, customers and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance (“ESG”) matters. Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in the Company if they believe our practices relating to ESG are inadequate, which may hinder the Company’s access to capital. In addition, investment in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures to their investment decisions. In addition to the topics typically considered in such assessments, for businesses in the card manufacturing industry, issues of emissions and plastic waste are of particular importance. For example, increased attention to conservation measures and negative consumer attitudes about plastic products or other components in our products could have an adverse impact on demand for our products, which could adversely impact our business and results of operations. +21 +Table of Contents +There have also been changing consumer concerns and perceptions (whether accurate or inaccurate) regarding the potentially adverse environmental effects of substances present in certain consumer products, including substances and components the Company uses in its products, including PVC plastic. Potential consumer concerns may also extend to the sourcing of certain materials and labor and other conditions in those locations. We may be unable to manufacture or procure our products in conformity with these preferences and concerns, or doing so may require significant research and development costs as well as increased costs associated with procuring alternative raw materials and components. We also may need to make changes to our operations that could require additional capital expenditures. This would adversely affect our financial condition, results of operations and cash flows. +Furthermore, customer, investor and consumer expectations in ESG areas have been varied, rapidly evolving and increasing. Specifically, certain customers are beginning to request that the Company provide information on its plans relating to certain environmental related matters such as greenhouse gas emissions, waste sent to landfills and energy usage. The enhanced stakeholder focus on ESG issues requires the continuous monitoring of various and evolving standards, which is time consuming and costly. In addition, in the event that we communicate certain initiatives or goals regarding ESG matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. A failure to adequately meet these various stakeholder expectations and standards may result in reputational damage, the loss of business, diluted market valuation, an inability to attract customers or an inability to attract and retain top talent. +Additionally, the potential for future ESG and climate risk reporting requirements may result in additional costs to monitor, track and report sustainability measures. We have implemented or are considering implementing ESG strategies, including efforts to offer more eco-focused solutions to our customers. Our customers may request that changes be made to our products or operations, as well as other aspects of our production processes. These strategies and customer requests could increase our operating costs and may require the investment of capital. The failure to implement ESG strategies, meet our ESG goals or evolving stakeholder expectations or standards or comply with any new ESG related regulations could adversely affect our reputation and our relationships with customers, which in turn could adversely affect our business, financial condition, results of operations and cash flows. +Climate change may adversely affect our operations and financial performance. +There is continuing concern from members of the scientific community and the general public that emissions of greenhouse gases (“GHG”) and other human activities have caused or will cause significant changes in weather patterns and increase the frequency and severity of extreme weather events, including, without limitation, droughts, wildfires, hurricanes and flooding. Extreme weather events have and may continue to adversely affect us because of their impact on the availability and cost of raw materials and components we need to manufacture our products and that we source from locations in the United States and internationally that have experienced and may continue to experience such events. In addition, extreme weather events could have an adverse impact on, among other things, our customers’ demand for our products and services due to impacts of such events on them as well as decreased consumer demand and spending power as a result of such events, and also on our insurance premiums, operating costs and ability to timely fulfill customer orders in the event of damage or disruption to one of our facilities resulting from such an event. +We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or infringement, which may have a material adverse effect on our business. +Our ability to protect our intellectual property is important to our business. We depend on patents and other intellectual property rights to protect our products, proprietary designs and technological processes against misappropriation by others. Our existing or future patents may be challenged, invalidated or circumvented. Our patents have been and may in the future be challenged as invalid. Furthermore, we may have difficulty obtaining additional patents and other intellectual property protections in the future. The patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Moreover, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which we provide services or sell or license products. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. We actively seek to protect our proprietary rights and trade secrets by engaging in litigation and by entering into confidentiality agreements with our employees, consultants, and strategic partners and controlling access to and distribution of our technologies, documentation and other proprietary +22 +Table of Contents +information. Nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary and may use such information to interfere with our business. Enforcing our intellectual property rights has in the past, and may in the future, cause us to incur significant costs. These costs and other consequences from the unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. +Companies in our industry aggressively protect their intellectual property rights. Our products often contain technology provided to us by other parties such as suppliers or customers, and we compete in an industry that is highly active in generating intellectual property. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. From time to time, we receive notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights or that challenge the validity of our patents. In addition to the costs and distraction that result from intellectual property litigation and infringement claims, an adverse outcome in these types of disputes could prevent us from offering some of our products and services or from enforcing our intellectual property rights. Settlements can involve royalty or other payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our suppliers, customers and licensors may not be required to fully indemnify us for the costs of defending against infringement claims. In addition, we may be required to indemnify some customers and strategic partners related to allegations, regardless of merit, that our products infringe on the intellectual property rights of others. +We also face risks related to open source software. Certain of our software is derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. Usage of open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software or remedies against the licensors. Many of the risks associated with open source software cannot be eliminated and could have a material adverse effect on our business, financial condition and results of operations. +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +Our services are based on sophisticated software and computing systems, and the software underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our customers. Defects in our software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of customers, negative publicity or exposure to liability claims. +Our ability to raise capital in the future may be limited, which could lead to delays in innovation and abandonment of our strategic initiatives. +In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. The terms of our outstanding indebtedness, low trading volume and the fluctuating trading price of our common stock may adversely affect our ability to access capital markets and any such financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. We may be unable to access capital due to unfavorable market conditions or other market factors outside of our control, and there can be no assurance that we will be able to raise additional capital when needed. Any failure to achieve adequate funding will delay our products and services innovation and development and could lead to abandonment of one or more of our strategic initiatives. Any of these events could materially harm our business, financial condition and prospects. +23 +Table of Contents +Our business could suffer from problems in production quality, materials and process, which could reduce, delay or interrupt production of our products, resulting in adverse impacts to our business and financial results. +We produce our products using processes that are highly complex, require complex and costly equipment and must continually be modified to improve yields and performance. Difficulties in the production process can reduce product yields, reduce product quality or interrupt production altogether. We may not have adequate replacements for failing or malfunctioning machinery available in a timely fashion. Additionally, we have experienced malfunctions and errors, including human error, relating to the operation of certain machinery and systems used in our production process that, in some instances, have resulted in the delivery to our customers of products that did not meet their standards or specifications or whose functionality in the marketplace was adversely impacted. Such problems may result in our inability to properly fulfill customer orders and/or our obligation or election to replace products at our cost and expense, provide credit to or reimburse customers for related damages. We may also be subject to claims relating to such issues. The occurrence of any of these risks could damage our reputation and result in the loss of business, which could have an adverse impact on our business, financial condition and results of operations. +As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our production processes at the market rate, we may experience a lower production quality than the market standard. We may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures, human or other errors, or as a result of external factors beyond our control, such as delay of, or quality issues with, materials provided by suppliers, interruption of our electrical service or a natural disaster. We may also risk non-compliance with certain industry standards if we experience failure of certain required operations or processes, such as those related to facility security, which may impede our ability to deliver products to our customers. Any such event could have a material adverse effect on our business, financial condition and results of operations. +Our future success depends upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process. We may be unable to commercialize new or improved products we may develop on a timely basis or at all. +The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological, market and industry trends, as well as precise technical execution, all of which could adversely affect our ability to meet customer demand for new or enhanced products. The successful development of new products may require us to undertake time-consuming and costly research and development activities, and we may experience difficulties or challenging market conditions that could delay or prevent the successful development, commercialization and marketing of these new products, including, for example, limited or delayed market acceptance of dual-interface EMV technology or eco-focused card solutions in the United States. Before we can commercialize any new products, we may need to expend significant funds in order to conduct substantial research and development. Additionally, we have limited research and development resources as compared to many of our competitors, which may result in an immature product development process and lengthy product roll-outs. If we have difficulty producing innovative products, there could be a material adverse effect on our revenue, results of operations, reputation and business. New or enhanced product offerings may also expose us to additional risks, such as new sources of supplies, increased regulation or reputational harm. +As we develop products, we may need to make significant investments in product development and new technology, as well as sales and marketing resources. Furthermore, if we are unable to develop and introduce new and innovative products in a cost-effective and timely manner, our product and service offerings could be rendered obsolete. In addition, competitors may be able to develop and commercialize competing products more quickly and efficiently. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. +We may become subject to additional sales tax collection obligations and claims for uncollected amounts, new U.S. tax legislation could expose us to additional tax liabilities and our income tax positions may be challenged by relevant tax authorities, all of which could adversely affect our cash flows and financial results. +Several states have adopted legislation requiring out-of-state sellers to collect and remit sales tax on sales transactions into those states where they have no physical presence. States seeking to expand applicability of sales tax “nexus” laws could result in additional tax expenses in the event we are unable to pass these expenses along to our +24 +Table of Contents +customers and additional administrative burden to collect and remit sales tax in such jurisdictions. In 2020, we determined that sales tax was not properly collected from certain customers and remitted to the appropriate state tax authorities, and we recorded an associated sales tax expense (see Part II Item 8, Financial Statements and Supplementary Data, Note 15 “Commitments and Contingencies” in this Annual Report on Form 10-K regarding the sales tax expense and liability recorded). Our sales tax positions may be challenged by relevant tax authorities and we may not be successful in defending against any such challenge, which may subject us to retroactive assessment of state or local sales taxes in such jurisdictions and adversely affect our future cash flows and financial results. +In addition, we are subject to U.S. federal and state income taxes. Our tax receivables may not be realized, and o ur tax expense and the tax positions included in our financial statements, which are subject to estimates, could be impacted by changes in rules or interpretations of existing tax laws and changes in U.S. federal and state tax legislation and tax rates. New legislation may be enacted which could increase income tax rates in jurisdictions where we operate or have nexus and materially impact our tax provision, cash tax liability and effective tax rate. Additionally, o ur income tax positions may be challenged by relevant tax authorities and we may not be successful in defending against any such challenge, which may adversely affect our future cash flows and financial results. +We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer meet with our strategy or that should be consolidated, and we may not be able to execute on an acquisition strategy or integrate acquisitions successfully. +In executing our strategy, we have consolidated certain of our facilities and divested certain of our businesses. We will continue to evaluate such opportunities. Any such consolidation or divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position. +We may not be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of operations or closure, may not be available to us or may be more costly than anticipated. +We intend to continue to seek additional acquisition opportunities to potentially expand into new markets and to enhance our position in existing markets. We cannot assure we will be able to successfully identify suitable acquisition opportunities, prevail against competing potential acquirers, negotiate appropriate acquisition terms, obtain financing that may be needed to consummate such acquisitions, complete proposed acquisitions, successfully integrate acquired businesses into our existing operations or expand into new markets. In addition, any acquisition, once successfully integrated, may not perform as planned, be accretive to earnings, or prove to be beneficial to our operations and cash flow. +Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value. +Our long-lived assets recorded as of December 31, 2021 include $47.3 million of plant, equipment, leasehold improvements and operating lease right-of-use assets, $21.9 million of net intangible assets, and $47.2 million of goodwill. +We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we were to conclude that a future write-down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write-down of our long-lived assets may result from, among other things, deterioration in our performance and a decline in expected future cash flows and could have a material adverse effect on our business, financial condition and results of operations. +Costs relating to product defects, and any related product liability and warranty claims may materially adversely affect our business. +We offer highly complex services and products and, accordingly, from time to time, defects have occurred. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing +25 +Table of Contents +defective items, writing down defective inventory, the loss of potential sales and claims by third parties. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we sell defective products into the market, our reputation could suffer, and we may lose sales opportunities and incur liability for damages, including damages claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. +Many of our products integrate third-party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with, among other benefits, access to technology owned by third parties. For example, we license card technology for use in certain of our products, including in EMV cards. This card technology provides a secure environment for applications on smart cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements with the licensors of such technology for the continued use of these platforms. These licensors may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross- licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios. We also may seek to enter into additional cross-licensing arrangements with certain competitors as we pursue additional growth initiatives. If we are unable to enter into new cross-licensing agreements or continue to successfully renew existing cross-licensing agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products and or be forced to cease or delay certain growth initiatives, which could have a material adverse effect on our business. +Risks Relating to our Industry +We face competition that may result in a loss of our market share and/or a decline in our profitability. +Our marketplace is highly competitive, relatively saturated and increasingly consolidated. We expect these market dynamics to continue for new product innovations, and as competitors develop lower-cost production processes, competitors consolidate and other competitors attempt to enter the markets in which we operate. +Some of our competitors have larger global customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other capabilities than we do. These competitors may be able to adapt more quickly to new technological requirements and changes in customer and/or regulatory requirements to leverage their scale to lower production costs and prices, and utilize their global footprint to win certain customers with card needs in multiple markets. We also face competition from newly established competitors, suppliers of products and customers who choose to develop their own products and services. +Existing or new competitors may develop products, technologies or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. As the technological sophistication of our competitors and the size of the market increases, competing low-cost producers could emerge and grow stronger. These dynamics could result in declining average selling prices and reduced gross margins in our businesses. If we cannot sufficiently reduce our production costs or develop new products, technologies or services, we may not be able to compete successfully, and we may lose market share, which could have a material adverse effect on our business, financial condition and results of operations. +26 +Table of Contents +Delays or interruptions in our ability to source raw materials and components used in our products from foreign countries, as well as trade restrictions on goods imported into the United States, could materially harm our business, financial condition and results of operations. +Most of our microchips, as well as certain other raw materials used in our products, are imported from suppliers located outside of the United States. We have experienced and may continue to experience delays and interruptions in our ability to obtain materials imported into the United States due to global economic downturns and trade disruptions, including related to the COVID-19 pandemic. We may also experience such delays and interruptions in our supply chain due to political instability, civil unrest or war in countries from which we directly or indirectly source raw materials and components used in our products. Additionally, the U.S. government has imposed tariffs on imports from certain countries, including countries in which our suppliers are located, and may impose further tariffs and/or trade restrictions. The future status of certain existing international trade agreements to which the United States is party is also uncertain, and such trade agreements could be terminated or replaced. Any of these factors could depress economic activity, restrict our access to suppliers and have a material adverse effect on our business, financial condition and results of operations. +Existing tariffs are also subject to a number of uncertainties as they are implemented, including future adjustments and changes to the products covered by additional tariffs and to the countries included or excluded from such tariffs. Changes in U.S. trade policy have resulted in one or more foreign governments, including China, adopting responsive trade policies that make it more difficult or costly for us to import our products, or to purchase products which include components, from those countries. Additional trade restrictions may lead to increased prices to our customers, which may reduce demand, or, if we are unable to achieve increased prices, result in lowering our margin on products sold and adversely affecting on our business, financial condition and results of operations. +We cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions on the import or export of goods in the future, nor can we predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could have a material adverse effect on our business, financial condition and results of operations. +Current and prospective regulations, changes in our product offerings and customer contractual requirements addressing consumer privacy and data use and security could increase our costs of operations, which could adversely affect our operations, results of operations and financial condition. +In operating a Financial Payment Card business, we manage large amounts of personally identifiable information of cardholders, including cardholder names, account numbers and similar information and are thus subject to laws and requirements relating to data privacy and security, which continue to evolve and may become increasingly difficult to comply with. For example, the California Consumer Privacy Act and the California Privacy Rights Act generally require companies like CPI, who process consumer personal information on behalf of their customers, to use, retain or disclose consumer personal information solely for certain limited purposes, including to provide services to our customers according to the terms of our customer contracts. Other states have enacted similar data privacy laws and regulations and/or amended their existing data privacy laws and regulations. Furthermore, to the extent these laws apply to our customers, our customers have imposed, and may continue to impose additional, privacy related contractual obligations on us, adherence to which may require additional investment in resources and internal processes. Additionally, as we continue to innovate our products and services offerings and expand into new lines of business and as the number of jurisdictions enacting privacy and related laws increases and the scope of these laws and enforcement efforts expand, we may become subject to additional data privacy and security legal requirements and regulations. New products and services we develop may also require that we obtain and retain more personally identifiable information for a longer period of time than we have done historically. We have incurred significant expenses to meet the obligations of current privacy-related laws and requirements, and we expect to continue to incur these as well as additional expenses if we become subject to additional privacy-related laws and regulations, which will continue to necessitate us making changes to our internal processes, procedures and systems. Failure to comply with existing or future data privacy and security laws, regulations and requirements to which we are or become subject could result in fines, sanctions, penalties, civil lawsuits or other adverse consequences as well as loss of customer and consumer confidence, which could materially adversely affect our results of operations, overall business and reputation. The legal, political and business environments in these areas are +27 +Table of Contents +rapidly changing, and subsequent legislation, regulation, litigation, court rulings or other events could expose the Company to increased program costs, liability and reputational damage. +New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected. +The markets for our products and services are subject to technological changes, frequent introductions of new products and services, evolving industry standards and changing customer preferences and demands. In particular, the rise in the adoption in digital payment systems or mobile payments may make physical cards less attractive as a method of payment. Mobile payments offer consumers an alternative method to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services, or our new services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. If we do not complete or gain market acceptance of new products, services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or attract new ones. For example, one of our growth opportunities is the continued transition to dual-interface EMV cards by U.S. card issuing banks. Banks may be delayed in transitioning to the issuance of dual-interface EMV cards due to increased costs and other factors. If these entities do not deploy dual-interface EMV technology or do so less quickly and/or completely than we expect, our ability to grow could be significantly affected which could have a material adverse effect on our business, financial condition and results of operations. +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +● effectively identify and capitalize upon opportunities in new and emerging product markets; +● invest resources in innovation and research and development; +● complete and introduce new products and integrated services solutions in a timely manner; +● license any required third-party technology or intellectual property rights; +● qualify for and obtain required industry compliance for our products; +● effectively manage the supply chain and related risks; +● comply with applicable data protection regulations; and +● retain and hire personnel experienced in developing new products and services. +Additionally, opportunities to combine or package products and service offerings and the ability to cross-sell products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross-sell our products and services, this may have a material adverse effect on our business, financial condition and results of operations. +Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue and profitability or lead to significant variability in our operating results. These factors include, among others, the varying cyclicality of the financial card and electronic payment industries, labor and supply challenges, capital requirements, Payment Card Brands standards and requirements, competition, new product developments, technological changes and other factors. +28 +Table of Contents +Furthermore, in periods of industry overcapacity or when our customers encounter difficulties in their end-markets, orders are more exposed to cancellations, reductions, price renegotiations or postponements, which in turn reduce our management’s ability to forecast the next quarter or full-year production levels, net sales, profits and cash flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations as visibility is reduced. This may have a material adverse effect on our business, financial condition and results of operations. +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brand compliance standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and manufacturers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated, or customers may cease doing business with us, if we fail to comply with these standards and criteria. +We make significant investments in our network of high-security facilities in order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have constituted in the past an important part of our revenue and profitability. For the year ended December 31, 2021, the vast majority of the products we produced and services we provided were subject to compliance with the standards of one or more of the Payment Card Brands. If we were to lose compliance with one or more of the standards of the Payment Card Brands or of the PCI Security Standards Council for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the networks of the Payment Card Brands. Additionally, certain of our facilities operate under variances of certain of these standards. If such variances are not granted in the future or if we are required to move a facility in order to maintain compliance, we may incur significant costs and delays, or may lose our ability to offer services in that facility, which would be disruptive to our business and have an adverse effect on our customer relationships and financial results. If, as a result of noncompliance with standards of the PCI Security Standards Council or other standards of the Payment Card Brands, we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations. +Risks associated with reduced levels of consumer and business spending, ongoing inflation and the effects of an economic downturn on retailers could adversely affect our business, financial condition and results of operations. +Our business depends heavily on the overall level of consumer and business spending. Our revenue is exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. A sustained deterioration in general economic conditions, particularly in the United States, or increases in interest rates may adversely affect our financial performance by reducing the demand for our Financial Payment Card solutions or reducing the purchase of our higher margin products. If an economic downturn occurs, credit card issuers may reduce credit limits, close accounts and become more selective with respect to whom they issue credit cards. Additionally, an economic downturn or the continued outbreak of the COVID-19 pandemic could result in extended voluntary or mandated closure of retail locations that sell certain of our products to consumers, including our Prepaid Debit Cards. These and other changes in economic conditions could therefore adversely impact our future revenues and profits and cause a materially adverse effect on our business, financial condition and results of operations. +Inflation, which increased significantly during 2021, has adversely affected us by increasing the costs of materials and labor needed to operate our business and could continue to adversely affect us in future periods. In the event inflation continues to increase, we may seek to increase the sales prices of our products and services in order to maintain satisfactory margins. However, such increases may result in customer pushback or attrition and be difficult or impossible in future periods, all of which may have an adverse effect on our financial condition and results of operations. Additionally, actions by the government to stimulate the economy may increase the risk of significant inflation, which may also have an adverse impact on our business or financial results. +29 +Table of Contents +Environmental, health and safety laws and regulations, including climate change regulations, expose us to liability and any such liability may have a material adverse effect on our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, the handling of certain materials and equipment we use in our production processes is subject to health and safety and environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or lease real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liabilities on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +The increasing concern over climate change has resulted in a broad range of proposed and promulgated federal, state and local regulations aimed at mitigating the effects of climate change, including regulating emission of carbon dioxide, methane and other GHG emissions, mandating recycling of plastic materials, imposing energy or carbon or other waste taxes and effectuating other governmental charges and mandates. Because we use materials in many of our products and engage in manufacturing processes that may be the subject of certain of these regulations, if enacted, such regulations could result in additional costs and adverse effects on our business in the form of (i) additional taxes, (ii) potential fines for noncompliance, (iii) restrictions on output, (iv) additional expenditures to either purchase new, or modify existing, equipment or processes, (v) required acquisition or trading of emission allowances and/or (v) increased costs in the price of energy and/or in procuring alternative or additional raw materials from our suppliers. +Climate change regulation continues to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such regulation could have a material adverse effect on our business, results of operations, financial position, capital expenditures and reputation. +These developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in health and safety or environmental regulations could increase our production costs, which could have a material adverse effect on our business, financial condition and results of operations. +Risks Relating to Ownership of our Common Stock +Our majority stockholders have the ability to control significant corporate activities, which may result in the Company taking actions that other stockholders did not approve, and their ownership of a significant percentage of our outstanding common stock may adversely impact the liquidity and trading price of our stock. +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital), own approximately 58% of our common stock, in the aggregate, as of December 31, 2021. Continuation of this concentrated ownership could result in a limited amount of shares being available to be traded in the market, resulting in reduced liquidity. Additionally, the price of our common stock has experienced volatility due to the limited number of shares available to trade on the open market. +Also, as a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of all stockholders and, +30 +Table of Contents +through our board of directors, the ability to control decision-making with respect to our business direction and policies. Matters over which the Tricor Funds, directly or indirectly, exercise control include: +● election of directors; +● mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; +● other acquisitions or dispositions of businesses or assets; +● incurrence of indebtedness and the issuance of equity securities; +● repurchases of stock and payment of dividends; and +● the issuance of shares to management under our incentive plans and other executive compensation matters. +The shares of our common stock held by the Tricor Funds are registered for resale, which means that they may be offered and sold to the public now or in the future without regard to the volume limitations under Rule 144 of the Securities Act. If and when some or all of these shares are sold by the Tricor Funds or the participants in their funds, either through sale on the open market, through privately negotiated transactions or through a distribution to the participants in their funds, or if it is perceived that they will be sold, the market price of our common stock could decline. +Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial portion of our board of directors. +Messrs. Bradley Seaman and Nicholas Peters, who are officers or affiliates of Parallel49 Equity (and its predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49 Equity, on the one hand, and of our other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors. +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +The trading market for our common stock could be influenced to some extent by the research and reports that industry or financial analysts publish about the Company and our business. We do not control these analysts. Historically, we have not attracted substantial research coverage, and the analysts who publish information about our common stock may have relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain additional securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +31 +Table of Contents +If we fail to meet the continued listing standards of the Nasdaq Global Market, our common stock may be delisted, which may adversely affect the market price and liquidity of our common stock. +Our common stock is currently traded on the Nasdaq Global Market. In order to maintain our listing on Nasdaq, we must maintain certain financial and share distribution targets, including maintaining a minimum number of public stockholders, a minimum number of publicly held shares, a minimum market value of publicly held shares and a minimum bid price, in addition to meeting certain corporate governance requirements. There can be no assurance that we will be able to maintain compliance with the requirements for continued listing of our common stock on Nasdaq. If our common stock is delisted and we are unable to list our common stock on another U.S. national securities exchange, we expect our securities would be quoted on an over-the-counter market. Any delisting from Nasdaq could result in significant material adverse consequences for our stockholders, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Other consequences could include a loss of confidence by investors, customers, suppliers and employees, and an adverse effect on our ability to obtain financing to continue operations. +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +● the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +● following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors; +● advance notice procedures and information and disclosure requirements for nominating candidates to our board of directors or presenting matters at stockholder meetings; and +● allowing only our board of directors to fill vacancies on our board of directors. +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate when the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti-takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the +32 +Table of Contents +forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of the Company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, the potential issuance of preferred stock may delay or prevent a change in control of us or discourage bids for our common stock at a premium over the market price. It may also adversely affect the market price and the voting and other rights of the holders of our common stock as it could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +General Risk Factors +We are required to comply with complex laws and regulations in the United States and other countries and are exposed to business risks associated with our international business. +We are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. Though we currently have limited international operations, the expansion thereof in the future may increasingly expose us to risks associated with international business operations, including political instability (e.g., the threat of or actual war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect our employees, reputation, business or financial results as well as our ability to meet our objectives. +We may not be in full compliance at all times with the laws and regulations to which we are subject and we may not have obtained the permits, authorizations or licenses that we need. Any failure to comply with applicable laws or regulations could result in fines or sanctions. In such a case, or if any of these international business risks were to materialize, there could be a material adverse effect on our business, financial condition and results of operations. +Our business and financial results may be materially adversely affected by various legal and regulatory proceedings. +We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our business, operating results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any liability that may be imposed on us. +Item 1B. +Unresolved Staff Comment s +None. +33 +Table of Contents +Item 2. +Propertie s +Information regarding each of our facilities, which may include multiple leases at each location, is set forth below. +Square +Owned/ +Location +Operations +Footage +Leased +Littleton, Colorado +Financial Payment Card production, corporate facility +65,000 +Leased +Roseville, Minnesota +Financial Payment Card production, card personalization services, card packaging services, fulfillment +205,000 +Leased +Fort Wayne, Indiana +Financial Payment Card production +45,000 +Leased +Nashville, Tennessee +Financial Payment Card personalization services, instant issuance, fulfillment +71,000 +Leased +Item 3. Legal Proceeding s +Smart Packaging Solutions SA v. CPI Card Group Inc. +On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief. In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta. The patents all relate to antenna technology. SPS alleges that the Company incorporates the patented technology into its products that use contactless communication. The Company does not manufacture antennas; it purchases certain antenna-related components from SPS and a number of other suppliers. The Company was served with the complaint and is in the process of preparing an answer. The Company intends to investigate and pursue its rights relating to the claims and to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. +In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on our business, financial condition or results of operations. +Item 4. +Mine Safety Disclosure s +Not applicable. +PART I I +Item 5. +Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market +In August 2021 our common stock returned to listing and is currently traded on the Nasdaq Global Market under the symbol “PMTS”. +Holders +There were twenty-seven stockholders of record as of February 22, 2022. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. +34 +Table of Contents +Dividends +We do not currently expect that any cash or other dividends will be paid to holders of our common stock in the near future. Any future cash dividend or other dividend declarations are subject to the determination of the Company’s board of directors. +Repurchases +There were no shares repurchased during the years ended December 31, 2021, and 2020. +Item 6. +[Reserved] +Item 7. +Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, some of which are not within our control. See "Risk Factors" and “Cautionary Statement Regarding Forward-Looking Statements.” +Company Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States and Interac, in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience. +We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“FinTechs”), as well as independent community banks, credit unions and Group Services Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our leading network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, serving many of the top U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; +35 +Table of Contents +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and +● the U.S. FinTech market, where we produce and personalize Financial Payment Cards for financial technology companies. +Trends and Key Factors Affecting our Financial Performance +We believe the following key factors may have a meaningful impact on our business performance and may negatively influence our financial and operating results: +● We have experienced, and expect to continue to experience, labor availability issues, particularly in the Company’s production facilities. In the year ended December 31, 2021, the Company incurred increased employee compensation and recruiting expenses in Cost of Sales and Operating Expenses, which we expect to continue to increase throughout 2022 and possibly beyond as the Company continues to actively recruit additional employees. Also as a result of labor shortages and supply chain constraints, as described below, the Company has experienced extended production lead times in some areas of the business and difficulty meeting some customers’ delivery expectations. We continue to proactively monitor, assess and take steps to minimize disruptions and delays in production; however, these disruptions and delays have caused the Company to lose or delay customer opportunities, and are likely to continue throughout 2022 and possibly beyond. +● Surges in demand for certain raw materials and components, as well as other factors such as staffing challenges, have continued to strain the global supply chain network, which has resulted in increased costs of certain raw materials and components, increased shipping costs, freight and logistics delays, longer lead times and unpredictability. In particular, shortages of raw materials and components that we use in many of our products is expected to continue for the foreseeable future and may adversely affect our ability to meet customer demand for our products. Although we strive to place orders for materials and components sufficiently in advance, to compile buffer stock to mitigate the impacts of freight and logistics delays and to bolster our access to raw materials and components, it is difficult to predict the ability of our suppliers to continue to fulfill such orders or to do so in a timely manner, and it is likely that such delays as well as costs to obtain such raw materials and components will increase in 2022 and possibly beyond. Additionally, certain microchip manufacturers recently indicated they plan to limit the types of microchips that they manufacture, which will affect our ability to continue to provide lower-cost contact microchips for certain of our customers. This could cause us and affected customers to migrate programs to more expensive microchip options or to contactless cards at a faster pace than expected, which may be costly and disruptive for the Company and affected customers. While we may be able to pass on some of our increased labor and material costs to our customers, we expect these factors will impact profitability in 2022 and possibly beyond. In addition, given that raw materials inventory is recognized on a first-in, first-out basis, we expect the impact of increasing raw materials costs to be realized into our statement of operations in 2022 and possibly beyond. +● Our Second Wave® payment cards feature a core made with recovered ocean-bound plastic (“ROBP”), which we source from Haiti and process using single source suppliers. Due to political instability and other factors in Haiti as well as the supply chain constraints described above, there is an increased likelihood that we may face challenges in obtaining an adequate supply of ROBP, which is necessary to meet customer demand for our Second Wave cards. The Company actively monitors and manages its supply chain, including compiling buffer stock of materials and seeking alternative suppliers and sources for ROBP, but it is uncertain how the current political climate in Haiti and other factors in the ROBP supply chain will affect our ability to continue obtaining sufficient ROBP. Additionally, to the extent we are able to secure one or more alternative suppliers of ROBP, we may be subject to increased shipping and materials costs, which we may not be able to pass through to our customers. +● As of June 30, 2021, the market value of outstanding shares of our common stock owned by non-affiliates exceeded $75 million, which triggered the Company being classified as an accelerated filer with respect to SEC regulations and filing requirements effective with the year ended December 31, 2021. As a result, our +36 +Table of Contents +annual assessment of the effectiveness of our internal control over financial reporting must be audited by our external audit firm in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002. Preparations to comply and continued compliance with this new requirement has significantly increased our compensation expense, professional fees and other administrative costs during the year ended December 31, 2021. We expect these increased costs to continue in 2022 and possibly beyond. In connection with our evaluation and testing during 2021, management identified deficiencies that they determined resulted in material weaknesses in internal controls. For additional information, see Part II, Item 9A, Controls and Procedures in this Annual Report on Form 10-K. +2021 Summary of Financial Performance +During the year ended December 31, 2021, net sales increased 20.2% from the prior year, to $375.1 million, and we recorded income from operations of $59.5 million, compared to net sales of $312.2 million and income from operations of $38.4 million during 2020. Our operating margin for the year ended December 31, 2021 increased to 15.9% compared to 12.3% in the prior year. For the year ended December 31, 2021, we recorded net income of $15.9 million, compared to $16.1 million in 2020, a decrease of $0.2 million. +Cash provided by operating activities for the year ended December 31, 2021 was $20.2 million, representing a decrease of $1.9 million compared to $22.1 million in the prior year. +Segment Overview +Our business consists of the following reportable segments: +● Debit and Credit; +● Prepaid Debit; and +● Other. +Debit and Credit Segment +Our Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless (dual-interface) cards and plastic and encased metal cards, and Second Wave payment cards featuring a core made with ROBP. We also sell Card@Once, our proprietary and patented instant card issuance system and software-as-a-service, and other private label credit cards that are not issued on the networks of the Payment Cards Brands. We provide CPI On-Demand services, where we produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services. The Debit and Credit segment operations are each audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +Prepaid Debit Segment +Our Prepaid Debit segment primarily provides integrated prepaid card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid Debit segment operation is audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +Other +Our Other segment includes corporate general and administrative expenses. +37 +Table of Contents +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive income. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of Financial Payment Cards, including contact and contactless cards, and Second Wave® ROBP cards. Contactless EMV cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV cards. We also generate product revenue from the sale of our Card@Once instant issuance system and consumables, private label credit cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, including CPI On-Demand services, tamper-evident security packaging, fulfillment services and software as a service personalization of instant issuance Financial Payment cards. See Part II, Item 8, Financial Statements and Supplementary Data , Note 2 “Summary of Significant Accounting Policies” and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates—Revenue Recognition” in this Annual Report on Form 10-K for further information and timing of revenue recognition for net sales. We include gross shipping and handling revenue in net sales. +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including microchips and antennas for contactless EMV cards, labor costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Product costs also include Card@Once instant issuance printer costs. Services costs include the cost of labor, raw materials in the case of tamper-evident security packaging, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, promotional activity, and employee relations. We include the costs of shipping and handling in cost of sales. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service, human resources, research and development and administrative personnel, including payroll, benefits and stock-based compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and software related fees. Operating expense also includes depreciation and amortization expense and may include impairment charges on tangible and intangible assets, when necessary. +Income from Operations and Operating Margin +Income from operations consists of our gross profit less our net operating expenses. Operating margin is income from operations as a percentage of net sales. +Other Expense, net +Other expense, net consists primarily of interest expense. +38 +Table of Contents +Income tax (expense) benefit +Income tax (expense) benefit consists of our U.S. federal and state income taxes at statutory rates, including the impact of other items such as valuation allowances, tax credits, permanent items, and foreign taxes. +Net Income +Net income consists of our income from operations, less other expense, net, and income taxes. +Results of Operations +Year Ended December 31, 2021 Compared With Year Ended December 31, 2020 +The table below presents our results of operations for the years ended December 31, 2021 and 2020: +Year Ended December 31, +2021 +2020 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +199,586 +$ +171,968 +$ +27,618 +16.1 +% +Services +175,533 +140,221 +35,312 +25.2 +% +Total net sales +375,119 +312,189 +62,930 +20.2 +% +Cost of sales +233,693 +201,881 +31,812 +15.8 +% +Gross profit +141,426 +110,308 +31,118 +28.2 +% +Operating expenses +81,962 +71,917 +10,045 +14.0 +% +Income from operations +59,464 +38,391 +21,073 +54.9 +% +Other income (expense), net: +Interest, net +(30,608) +(25,397) +(5,211) +20.5 +% +Loss on debt extinguishment +(5,048) +(92) +(4,956) +* +Other income (expense) +14 +(17) +31 +* +Income before income taxes +23,822 +12,885 +10,937 +* +Income tax (expense) benefit +(7,881) +3,305 +(11,186) +* +Net income from continuing operations +$ +15,941 +$ +16,190 +$ +(249) +(1.5) +% +Net loss from discontinued operations +— +(61) +61 +* +Net income +$ +15,941 +$ +16,129 +$ +(188) +(1.2) +% +* Not meaningful +Net Sales +Year Ended December 31, +2021 +2020 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +Debit and Credit +$ +296,204 +$ +250,427 +$ +45,777 +18.3 +% +Prepaid Debit +79,213 +63,596 +15,617 +24.6 +% +Eliminations +(298) +(1,834) +1,536 +* +Total +$ +375,119 +$ +312,189 +$ +62,930 +20.2 +% +* Not meaningful +Debit and Credit: +Net sales for Debit and Credit increased $45.8 million, or 18.3%, due primarily to the ongoing transition to contactless cards and new customer growth. Product net sales increased due to higher volumes of contactless cards and higher Card@Once instant issuance sales. Additionally, net sales from card personalization services increased due to higher volumes of contactless cards and higher CPI On-Demand sales. The increases in product and services net sales benefited from significant new customer onboarding volumes in the first half of the year. Contactless EMV cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only +39 +Table of Contents +EMV cards, which contributed more to the current year sales increases compared to the prior year. Debit and Credit net sales in the prior year were impacted by lower customer demand than expected, which we believe was primarily attributable to the COVID-19 pandemic. +Prepaid Debit: +Net sales for Prepaid Debit increased $15.6 million, or 24.6%, due primarily to higher volumes from existing customers which included the acquisition of new customer portfolios and the replenishment of inventory by our customers which had been maintained at lower levels in the prior year due to COVID-19 uncertainties. +Eliminations: +This includes the elimination of intercompany sales between segments in the consolidation of our financial statements. The decrease in eliminations for the year ended December 31, 2021 compared to the year ended December 31, 2020 is due to lower sales between segments. +Gross Profit and Gross Margin +Year Ended December 31, +% of +% of +2021 +net sales +2020 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +Debit and Credit +$ +110,006 +37.1 +% +$ +85,833 +34.3 +% +$ +24,173 +28.2 +% +Prepaid Debit +31,420 +39.7 +% +24,475 +38.5 +% +6,945 +28.4 +% +Total +$ +141,426 +37.7 +% +$ +110,308 +35.3 +% +$ +31,118 +28.2 +% +Debit and Credit +Gross profit for Debit and Credit increased $24.2 million, or 28.2%, driven primarily by the net sales increase described above. The increase in net sales was partially offset by higher labor costs in the current year. Gross profit margin increased to 37.1% during the year ended December 31, 2021, compared to 34.3% in the prior year, due primarily to operating leverage from higher net sales, partially offset by labor cost increases. +Prepaid Debit +Gross profit for Prepaid Debit increased $6.9 million, or 28.4%, compared to the prior year. Gross profit margin for the year ended December 31, 2021 increased to 39.7% compared to 38.5% for the prior year. Gross profit and gross profit margin were driven primarily by the net sales increase described above and operating leverage, partially offset by increased labor costs. +Operating Expenses, net +Year Ended December 31, +2021 +% of net sales +2020 +% of net sales +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +Debit and Credit +$ +30,537 +10.3 +% +$ +30,985 +12.4 +% +$ +(448) +(1.4) +% +Prepaid Debit +4,510 +5.7 +% +4,533 +7.1 +% +(23) +(0.5) +% +Other +46,915 +* +36,399 +* +10,516 +28.9 +% +Total +$ +81,962 +21.8 +% +$ +71,917 +23.0 +% +$ +10,045 +14.0 +% +* Not meaningful +40 +Table of Contents +Debit and Credit +Debit and Credit operating expenses decreased $0.4 million, or 1.4%, compared to the prior year, due primarily to a benefit recorded in 2021 relating to estimated sales taxes, which is further described in Part II, Item 8, Financial Statements and Supplementary Data , Note 15, “Commitments and Contingencies” of this Annual Report on Form 10-K, partially offset by increased compensation expense. +Prepaid Debit +Prepaid Debit operating expenses were essentially flat and decreased less than $0.1 million, or 0.5%, compared to the prior year. +Other +Other operating expenses increased $10.5 million, or 28.9%, due primarily to $7.4 million of compensation expenses including $3.3 million of salaries, payroll taxes, and other compensation related expenses, $1.6 million of healthcare expenses, $1.4 million of employee performance incentive compensation due to strong business performance, and $1.1 million of stock-based compensation expense, in addition to $2.7 million of increased professional fees and other compliance costs. +Income from Operations and Operating Margin +Year Ended December 31, +% of +% of +2021 +net sales +2020 +net sales +$ Change +% Change +(dollars in thousands) +Income (loss) from operations by segment: +Debit and Credit +$ +79,469 +26.8 +% +$ +54,848 +21.9 +% +$ +24,621 +44.9 +% +Prepaid Debit +26,910 +34.0 +% +19,942 +31.4 +% +6,968 +34.9 +% +Other +(46,915) +* +(36,399) +* +(10,516) +(28.9) +% +Total +$ +59,464 +15.9 +% +$ +38,391 +12.3 +% +$ +21,073 +54.9 +% +* Not meaningful +Debit and Credit +Income from operations for Debit and Credit increased $24.6 million, or 44.9%, due primarily to higher net sales and related gross profit as described above. Operating margins for the year ended December 31, 2021 increased to 26.8% compared to 21.9% for the prior year, due to primarily higher net sales and operating leverage, partially offset by increased labor costs. +Prepaid Debit +Income from operations for Prepaid Debit increased $7.0 million, or 34.9%, due primarily to higher net sales and gross margin as described above. Operating margin for the year ended December 31, 2021 increased to 34.0% from 31.4% in 2020, due primarily to higher net sales and favorable operating leverage, partially offset by increased labor costs. +Other +The loss from operations in Other increased $10.5 million, or 28.9%, due to the increases in operating expenses discussed above. +41 +Table of Contents +Interest, net +Interest expense for the year ended December 31, 2021, increased $5.2 million to $30.6 million compared to $25.4 million for the year ended December 31, 2020. Interest expense was higher in 2021 primarily due to higher interest rates on the Senior Notes (as defined below) issued in 2021, compared to the interest rates on our previous credit facilities in the prior year, and the “make-whole” interest premium of $2.6 million paid in connection with the termination of the Senior Credit Facility (as defined below). This increase was partially offset by lower debt principal outstanding in the current year compared to the prior year, and from interest income received of approximately $0.4 million in 2021 related to income tax refunds. +Income tax expense +For the year ended December 31, 2021, we recorded income tax expense of $7.9 million on pre-tax income of $23.8 million, representing an effective income tax rate of 33.1%. The effective tax rate differs from the federal U.S. statutory rate in 2021 primarily due to state income taxes, which had a tax rate impact of 7.4%. Other items impacting the effective tax rate in 2021 include permanent items and unrecognized tax benefits. During the year ended December 31, 2020, we recorded an income tax benefit of $3.3 million on pre-tax income of $12.9 million, representing an effective tax rate of (25.6)%. The CARES Act allowed net operating losses (“NOLs”) generated in 2018, 2019, or 2020 to be carried back for five years and temporarily eliminated the tax law provision that limits the use of NOLs to 80% of taxable income. The CARES Act increased the Internal Revenue Code Section 163(j) interest deduction limit for 2020 and 2019, and allowed for the acceleration of refunds of alternative minimum tax credits. For the year ended December 31, 2020, the Company recorded a tax benefit for certain provisions in the CARES Act including the carryback of losses and the increase to the interest deduction limitation, resulting in a tax rate benefit of 20.9%. In addition, we applied the 2018 proposed regulations relating to the Section 163(j) interest deduction limitation which contributed to a valuation allowance change and tax rate benefit of 41.1%. +Net income +Net income for the year ended December 31, 2021 was $15.9 million, compared to net income of $16.2 million for the year ended December 31, 2020. The decrease was primarily due to increases in income tax expense, operating expenses, interest and the loss on debt extinguishment, partially offset by higher net sales and gross profit. +Fourth Quarter +Our net sales increased 10.8% in the fourth quarter of 2021 to $93.2 million, compared to $84.1 million in the fourth quarter of 2020. Net sales for Debit and Credit increased by $7.8 million to $77.4 million, or 11.3%, in the fourth quarter of 2021 compared to the fourth quarter of 2020. The increase in net sales was primarily due to higher net sales volumes from contactless EMV cards, including Second Wave cards. +Net sales for our Prepaid Debit segment increased $1.0 million, or 6.4%, to $15.9 million in the fourth quarter of 2021 compared to $14.9 million in the fourth quarter of 2020. This increase in sales is primarily due to higher volumes from existing customers, including the acquisition of new portfolios, as compared to the prior year fourth quarter period. +Gross profit decreased slightly to $30.9 million in the fourth quarter of 2021, compared to $31.0 million in the fourth quarter of 2020. Gross profit margin decreased to 33.2% during the fourth quarter of 2021, compared to 36.8% in the prior year period, due primarily to increased labor costs, partially offset by increased operating leverage from higher net sales. +Selling, general and administrative (exclusive of depreciation and amortization) expenses increased $3.4 million to $20.3 million in the fourth quarter of 2021 compared to $16.9 million in the fourth quarter 2020. The increase was due primarily to increased compensation expenses, including increased stock compensation and healthcare expenses, and professional fees and compliance costs. +42 +Table of Contents +During the fourth quarter of 2021 we earned income from operations of $9.2 million compared to $12.4 million in the fourth quarter of 2020. The decrease in income from operations was due to increased operating expenses described above. +Liquidity and Capital Resources +As of December 31, 2021, we had $20.7 million of cash and cash equivalents. +Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs. +On March 15, 2021, we completed a private offering of $310 million aggregate principal amount of 8.625% senior secured notes due 2026 (the “Senior Notes”) and related guarantees at an issue price of 100%. In addition, we entered into a credit agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an ABL revolver of up to $50 million (the “ABL Revolver”), subject to a borrowing base. +The Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year, beginning on September 15, 2021. The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes. Borrowings under the ABL Revolver bear interest at a rate per annum that ranges from the LIBOR Rate plus 1.25% to the LIBOR Rate plus 1.75%, or the Base Rate plus 0.25% to the Base Rate plus 0.75%, based on the average daily borrowing capacity under the ABL Revolver over the most recently completed month. The Base Rate as defined in the ABL Revolver is the greater of the Federal Funds Rate plus 0.5%, the LIBOR Rate for a one month interest period plus 1.0%, or the Wells Fargo Bank, National Association “prime rate”. We may elect to apply either the LIBOR Rate or Base Rate interest to borrowings at our discretion. The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the ABL Revolver over the immediately preceding month. +While not impacting the year ended December 31, 2021, the ABL Revolver includes limitations on our ability to borrow in certain situations, including during periods in which the amount available to borrow under the ABL Revolver is less than $5 million. Commencing with the month immediately following a date on which borrowing availability is below $5 million until such time that borrowing availability equals or exceeds $5 million for 30 consecutive days, in order to borrow under the ABL Revolver, we must maintain a fixed charge coverage ratio (as defined in the credit agreement for the ABL Revolver) of at least 1.00 to 1.00, calculated for the trailing 12 months, tested monthly during such period. Borrowings under the ABL Revolver are also subject to limitations based on the borrowing base. +The Senior Notes and the ABL Revolver also contain covenants limiting the ability of the Company, the borrower and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional indebtedness or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications, as set forth in the respective agreements. +Prior to March 15, 2023, the Company may redeem some or all of the Senior Notes at a “make-whole” redemption price, and on or after March 15, 2023, the Company may redeem some or all of the Senior Notes at a redemption price initially set at 104.313% of the principal amount of the notes to be redeemed, and reducing over time to 100%, in each case plus accrued and unpaid interest. Additionally, prior to March 15, 2023, the Company may redeem, on one or more occasions, up to 40% of the aggregate principal amount of the Senior Notes with the proceeds of certain equity offerings, at a redemption price equal to 108.625% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Furthermore, prior to March 15, 2023, but not more than once during each consecutive twelve-month, the Company may also redeem up to 10% of the aggregate principal amount of the Senior Notes at a redemption price equal to 103% of the principal amount of the notes being redeemed, plus accrued and unpaid interest. +43 +Table of Contents +The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of the related indenture, with any required payments to be made after the issuance of the Company’s annual financial statements. No such payment is required based on the Company’s 2021 operating results. +In connection with the issuance of the Senior Notes and entry into the ABL Revolver, we terminated our previous credit facilities, consisting of a $30 million senior credit agreement (the “Senior Credit Facility”), and a $435 million first lien term loan (the “First Lien Term Loan”). Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $15 million under the ABL Revolver, were used to pay in full and terminate the Senior Credit Facility and First Lien Term Loan on March 15, 2021, and to pay related fees and expenses. During the three months ended March 31, 2021, prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the debt agreements. As of December 31, 2021, the Company had $310 million aggregate principal amount outstanding on the Senior Notes, plus accrued and unpaid interest. As of December 31, 2021, the Company had no borrowings outstanding and $50 million available for borrowing under the ABL Revolver. +Operating Activities +Cash provided by operating activities for the year ended December 31, 2021 was $20.2 million compared to $22.1 million for the year ended December 31, 2020. Cash generated by earnings was offset by a cash usage of $33.4 million and $6.1 million in 2021 and 2020, respectively, related to our investment in additional inventory to mitigate potential supply chain constraints and in anticipation of future demand. Additionally, the company had cash inflows related to income taxes of $10.0 million in 2021 compared to a cash usage from income taxes of $6.3 million in 2020, primarily due to federal tax refunds received in 2021. We had working capital cash benefits related to accounts payable and accrued expenses of $6.6 million and $10.4 million, respectively, in 2021, compared to $1.7 million and $3.0 million, respectively, in 2020. +Investing Activities +Cash used in investing activities for the year ended December 31, 2021 was $9.9 million, compared to a usage of $7.1 million during the year ended December 31, 2020. Cash used in investing activities was related primarily to capital expenditures of $10.1 million and $7.1 million for the years ended December 31, 2021 and 2020, respectively, which included investments to support the business, such as machinery and equipment, including information technology equipment. As presented in our supplemental disclosures of non-cash information on the statement of cash flows, finance leases were executed for the acquisition of right-of-use machinery and equipment assets totaling $1.9 million and $1.7 million during the years ended December 31, 2021, and 2020, respectively. We anticipate capital expenditures to be higher in 2022 as compared to 2021 in order to increase production capacity, gain efficiencies, and expand capabilities to meet the emerging needs of our customers. +Financing Activities +During the year ended December 31, 2021, cash used in financing activities was $47.2 million compared to a cash inflow of $24.0 million during the year ended December 31, 2020. Proceeds from the new Senior Notes and ABL Revolver, net of discount, were $310 million and $14.8 million, respectively. We used proceeds from the Senior Notes and ABL Revolver, plus cash on hand from our balance sheet, to pay in full and terminate the Senior Credit Facility balance of $30 million and the First Lien Term Loan balance of $304.7 million on March 15, 2021. During the year ended December 31, 2021, we paid $9.5 million of debt issuance costs and $2.7 million of debt extinguishment costs, which included an early termination “make-whole” interest premium of $2.6 million on the Senior Credit Facility. During the year ended December 31, 2021, prior to the termination of the First Lien Term Loan, we made an excess free cash flow payment of $7.8 million pursuant to the terms of the debt agreement. +During the second quarter of 2021 we used $15 million of cash on hand to pay down the ABL Revolver to zero and had no borrowings thereunder as of December 31, 2021. +During the year ended December 31, 2020, we entered into the Senior Credit Facility which provided $29.1 million of cash, net of discount, partially offset by $2.5 million of associated debt issuance costs. We also paid $2.2 +44 +Table of Contents +million and $2.6 million of principal on finance leases during the years ended December 31, 2021 and 2020, respectively. +Working Capital +Our working capital as of December 31, 2021 was $80.9 million, compared to $95.6 million as of December 31, 2020. During the year ended December 31, 2021, accounts receivable increased by $6.4 million, our inventory balance increased $33.2 million to support the business, and the current portion of long-term debt decreased by $8.0 million as this balance was paid entirely in the first quarter of 2021. Partially offsetting these increases to working capital was a decrease in our cash balance of $36.9 million and increases in accounts payable of $7.6 million and accrued expenses of $9.0 million. +Material Cash Requirements +Our material cash requirements include interest payments on our long-term debt, operating and finance lease payments, and purchase obligations to support our operations. +Debt Service Requirements +As of December 31, 2021, the total projected principal and interest payments on our borrowings were $431.4 million, primarily related to the Senior Notes, of which $27.0 million of interest is expected to be paid in the next 12 months. The remaining interest payments are expected to be paid over the remaining term of the Senior Notes which mature in 2026, and the principal is due upon maturity. We have estimated our future interest payments assuming no borrowings under the ABL Revolver, no early redemptions of principal, and no debt issuances or renewals upon the maturity dates of our notes. However, we may borrow under the ABL Revolver, redeem principal on the Senior Notes early or refinance all or a portion of our borrowings in future periods. +Leases +We lease real property for production and services, in addition to equipment. Refer to Part II, Item 8, Financial Statements and Supplemental Data, Note 10, “Financing and Operating Leases” for details on our leasing arrangements, including future maturities of our operating lease liabilities. +Purchase Obligations +A purchase obligation is an agreement to purchase goods or services that is enforceable, legally binding, and specifies all significant terms. As of December 31, 2021, we had approximately $33.7 million of outstanding purchase obligations, of which approximately $33.4 million is expected to be paid in the next 12 months. +Cyclical and Seasonal Nature of Business +Financial Payment Cards are generally influenced by broader cyclical changes in the economy, with economic downturns potentially resulting in decreases in the demand for our products and services and economic upturns potentially resulting in increases in demand. In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. Our net sales are also influenced by Financial Payment Card renewal cycles and demand for new products, such as contactless cards. Additionally, we historically have generated higher net sales in the third quarter of the year, as our sales of Prepaid Debit Card solutions are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season in the United States. +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported net sales, results of operations and net income, as well as on the value +45 +Table of Contents +of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +Revenue Recognition +Products Net Sales: “ Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, we estimate net sales by taking actual costs incurred and applying historical margins for similar types of contracts. Margins across each business with similar contracts have been relatively consistent and we have not made changes to our methods and assumptions during 2021. Items included in “Products” net sales are manufactured Financial Payment Cards, including contact-EMV, Contactless EMV, Second Wave, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. +Services Net Sales: Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and software-as-a-service personalization of instant issuance debit and credit cards. For work performed but not completed and billed, we estimate revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Margins across each business with similar contracts have been relatively consistent and we have not made changes to our methods and assumptions during 2021. +Customer Contracts: The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. Usually our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. The contract term as defined by ASC 606, Revenue from Contracts with Customers , is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally considered short term in nature. +Income Taxes +We are subject to income taxes in the United States and certain foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies. Changes in the relevant facts can significantly impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. +During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are +46 +Table of Contents +likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the current provision for income taxes. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. +The Company’s valuation allowance recorded as of December 31, 2021 relates primarily to a capital loss realized on the sale of a foreign subsidiary whereby the Company does not anticipate a capital gain in the foreseeable future that would allow for the recognition of the capital loss carryover. In addition, the Company has a partial valuation allowance on certain state interest deduction limitations, which the Company estimates may not be fully utilized. As of December 31, 2021 the Company does not have a valuation allowance recorded on federal interest deduction limitations. However, the deductibility of interest expense becomes more limited beginning in 2022 as a result of Internal Revenue Code Section 163(j) provisions, which may require a partial valuation allowance to be recorded by the Company in future years. Additionally, other changes to the federal and state tax regulations can lead to variability in allowable deductions, which can impact the valuation allowance. +Recent Accounting Pronouncements +Refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 2, “Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements. +Item 7A. Quantitative and Qualitative Disclosures about Market Ris k +Not required due to smaller reporting company status. +Item 8. +Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 2021 and 2020 and for the years ended December 31, 2021 and 2020 +Reports of Independent Registered Public Accounting Firm (KPMG LLP, Denver, CO, Auditor Firm ID: 185 ): +Opinion on the Consolidated Financial Statements +48 +Opinion on Internal Control Over Financial Reporting +50 +Consolidated Balance Sheets +52 +C onsolidated Statements of Operations and Comprehensive Income +53 +Consolidated Statements of Stockholders’ Deficit +54 +Consolidated Statements of Cash Flows +55 +Notes to Consolidated Financial Statements +56 +47 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for the years then ended and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 8, 2022 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +1 Non-deductible excess compensation under IRC Section 162(m) +As discussed in Note 12 to the consolidated financial statements, the Company has recorded compensation for certain covered employees in excess of $1.0 million per year. Under Internal Revenue Code (IRC) Section 162(m), the Company is prohibited from deducting for tax purposes compensation in excess of $1.0 million per year for each of these employees. The covered employees are defined as the Chief Executive Officer (CEO), Chief Financial +48 +Table of Contents +Officer (CFO), and the three next-highest-compensated officers of the Company. The Company considers the impact of the estimated IRC Section 162(m) limitations on the future deductibility of existing temporary differences. +We identified the evaluation of the Company’s assessment of non-deductible excess compensation under IRC Section 162(m) as a critical audit matter. Specifically, the evaluation of the estimated future compensation for each covered employee used to determine the amount of permanently disallowed compensation under IRC Section 162(m) involved subjective auditor judgment. In addition, the evaluation required the involvement of tax professionals with specialized skills and knowledge. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s income tax process, including a control related to estimating future compensation for each covered employee. We evaluated the reasonableness of estimated future compensation included in the Company’s assessment by considering historical compensation figures for each covered employee and the potential impact to the Section 162(m) limitation if compensation increased or decreased in future years. We involved tax professionals with specialized skills and knowledge who assisted in evaluating the Company’s application of IRC Section 162(m) to determine the amount of permanently disallowed compensation under IRC Section 162(m) for United States tax purposes. +/s/ KPMG LLP +We have served as the Company’s auditor since 2014. +Denver, Colorado +March 8, 2022 +49 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited CPI Card Group Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements), and our report dated March 8, 2022 expressed an unqualified opinion on those consolidated financial statements. +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses have been identified related to risk assessment primarily due to an inadequate complement of personnel with requisite experience in the design and implementation of controls. This resulted in ineffective general information technology controls over user access administration within the revenue system at certain locations, and change management related to the development of customized reports. Due to the general information technology control deficiencies, certain process-level automated controls and manual controls that are dependent on the completeness and accuracy of information derived from the affected information technology systems were also ineffective because they could have been adversely impacted. The deficiencies in risk assessment also resulted in ineffective (i) journal entry controls due to inadequate review for segregation of duties on journal entries processed in batches, and (ii) controls over the accuracy of the sales price for sales in certain locations. A material weakness was also identified related to ineffective controls over review and authorization of certain transactions in the purchasing process due to inadequate communication and monitoring activities. The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report on those consolidated financial statements . +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +50 +Table of Contents +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Denver, Colorado +March 8, 2022 +51 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(Dollars in Thousands, Except Shares and Per Share Amounts) +December 31, +2021 +2020 +Assets +Current assets: +Cash and cash equivalents +$ +20,683 +$ +57,603 +Accounts receivable, net of allowances of $ 86 and $ 289 , respectively +60,953 +54,592 +Inventories +58,009 +24,796 +Prepaid expenses and other current assets +5,522 +5,032 +Income taxes receivable +534 +10,511 +Total current assets +145,701 +152,534 +Plant, equipment, leasehold improvements and operating leases right-of-use assets, net +47,251 +39,403 +Intangible assets, net +21,854 +26,207 +Goodwill +47,150 +47,150 +Other assets +6,184 +857 +Total assets +$ +268,140 +$ +266,151 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +26,443 +$ +18,883 +Accrued expenses +37,150 +28,149 +Current portion of Long-term debt +— +8,027 +Deferred revenue and customer deposits +1,182 +1,868 +Total current liabilities +64,775 +56,927 +Long-term debt +303,626 +328,681 +Deferred income taxes +5,253 +7,409 +Other long-term liabilities +15,506 +11,171 +Total liabilities +389,160 +404,188 +Commitments and contingencies (Note 15) +Series A Preferred Stock; $ 0.001 par value— 100,000 shares authorized; 0 shares issued and outstanding at December 31, 2021 and 2020 +— +— +Stockholders’ deficit: +Common Stock; $ 0.001 par value— 100,000,000 shares authorized; 11,255,466 and 11,230,482 shares issued and outstanding at December 31, 2021 and 2020, respectively +11 +11 +Capital deficiency +( 110,782 ) +( 111,858 ) +Accumulated loss +( 10,249 ) +( 26,190 ) +Total stockholders’ deficit +( 121,020 ) +( 138,037 ) +Total liabilities and stockholders' deficit +$ +268,140 +$ +266,151 +See accompanying notes to consolidated financial statements +52 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive Income +(Dollars in Thousands, Except Share and Per Share Amounts) +Year Ended December 31, +2021 +2020 +Net sales: +Products +$ +199,586 +$ +171,968 +Services +175,533 +140,221 +Total net sales +375,119 +312,189 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +121,601 +107,642 +Services (exclusive of depreciation and amortization shown below) +103,255 +83,538 +Depreciation and amortization +8,837 +10,701 +Total cost of sales +233,693 +201,881 +Gross profit +141,426 +110,308 +Operating expenses: +Selling, general and administrative (exclusive of depreciation and amortization shown below) +75,701 +65,791 +Depreciation and amortization +6,261 +6,126 +Total operating expenses, net +81,962 +71,917 +Income from operations +59,464 +38,391 +Other (expense) income, net: +Interest, net +( 30,608 ) +( 25,397 ) +Loss on debt extinguishment +( 5,048 ) +( 92 ) +Other income (expense) +14 +( 17 ) +Total other expense, net +( 35,642 ) +( 25,506 ) +Income before income taxes +23,822 +12,885 +Income tax (expense) benefit +( 7,881 ) +3,305 +Net income from continuing operations +15,941 +16,190 +Net loss from discontinued operation, net of tax (Note 4) +— +( 61 ) +Net income +$ +15,941 +$ +16,129 +Basic and diluted earnings per share: +Basic earnings per share from continuing operations: +$ +1.42 +$ +1.44 +Diluted earnings per share from continuing operations: +$ +1.36 +$ +1.44 +Basic earnings per share: +$ +1.42 +$ +1.44 +Diluted earnings per share: +$ +1.36 +$ +1.44 +Basic weighted-average shares outstanding: +11,239,049 +11,228,707 +Diluted weighted-average shares outstanding: +11,763,963 +11,232,004 +Comprehensive income +Net income +15,941 +16,129 +Total comprehensive income +$ +15,941 +$ +16,129 +See accompanying notes to consolidated financial statements +53 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Stockholders’ Deficit +(Dollars in Thousands, Except Share Amounts) +Accumulated +other +Common Stock +Capital +Accumulated +comprehensive +Stockholders +Shares +Amount +deficiency +loss +loss +Deficit +December 31, 2019 +11,224,191 +$ +11 +$ +( 111,988 ) +$ +( 42,319 ) +$ +— +$ +( 154,296 ) +Shares issued under stock-based compensation plans +6,291 +— +— +— +— +— +Stock-based compensation +— +— +130 +— +— +130 +Components of comprehensive income: +Net income +— +— +— +16,129 +— +16,129 +December 31, 2020 +11,230,482 +$ +11 +$ +( 111,858 ) +$ +( 26,190 ) +$ +— +$ +( 138,037 ) +Shares issued under stock-based compensation plans +24,984 +— +( 174 ) +— +— +( 174 ) +Stock-based compensation +— +— +1,250 +— +— +1,250 +Components of comprehensive income: +Net income +— +— +— +15,941 +— +15,941 +December 31, 2021 +11,255,466 +$ +11 +$ +( 110,782 ) +$ +( 10,249 ) +$ +— +$ +( 121,020 ) +See accompanying notes to consolidated financial statements +54 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(Dollars in Thousands) +Year Ended December 31, +2021 +2020 +Operating activities +Net income +$ +15,941 +$ +16,129 +Adjustments to reconcile net income to net cash provided by operating activities: +Loss from discontinued operations +— +61 +Depreciation and amortization expense +15,098 +16,827 +Stock-based compensation expense +1,250 +136 +Amortization of debt issuance costs and debt discount +2,367 +3,453 +Deferred income tax +( 2,156 ) +1,043 +Loss on debt extinguishment +5,048 +92 +Other, net +213 +1,742 +Changes in operating assets and liabilities: +Accounts receivable +( 6,361 ) +( 11,662 ) +Inventories +( 33,388 ) +( 6,105 ) +Prepaid expenses and other assets +( 4,062 ) +494 +Income taxes +9,977 +( 6,346 ) +Accounts payable +6,582 +1,657 +Accrued expenses +10,365 +2,958 +Deferred revenue and customer deposits +( 690 ) +1,404 +Other liabilities +45 +192 +Cash provided by operating activities - continuing operations +20,229 +22,075 +Cash used in operating activities -discontinued operations +— +( 61 ) +Investing activities +Capital expenditures for plant, equipment and leasehold improvements +( 10,074 ) +( 7,093 ) +Other +156 +— +Cash used in investing activities +( 9,918 ) +( 7,093 ) +Financing activities +Principal payments on First Lien Term Loan +( 312,500 ) +— +Principal payments on Senior Credit Facility +( 30,000 ) +— +Principal payments on ABL Revolver +( 15,000 ) +— +Proceeds from Senior Notes +310,000 +— +Proceeds from ABL Revolver, net of discount +14,750 +— +Proceeds from Senior Credit Facility, net of discount +— +29,100 +Debt issuance costs +( 9,452 ) +( 2,507 ) +Payments on finance lease obligations +( 2,171 ) +( 2,616 ) +Payments on debt extinguishment and other +( 2,859 ) +— +Cash (used in) provided by financing activities +( 47,232 ) +23,977 +Effect of exchange rates on cash +1 +23 +Net (decrease) increase in cash and cash equivalents +( 36,920 ) +38,921 +Cash and cash equivalents, beginning of period +57,603 +18,682 +Cash and cash equivalents, end of period +$ +20,683 +$ +57,603 +Supplemental disclosures of cash flow information +Cash paid (refunded) during the period for: +Interest +$ +22,268 +$ +22,750 +Income taxes paid +$ +9,792 +1,302 +Income taxes (refunded) +$ +( 9,846 ) +$ +( 259 ) +Right-of-use assets obtained in exchange for lease obligations: +Operating leases +$ +6,932 +$ +3,260 +Financing leases +$ +1,897 +$ +1,718 +Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements +$ +2,972 +$ +1,052 +See accompanying notes to consolidated financial statements +55 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated) +1. Business +CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. CPI is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit, debit and Prepaid Debit Cards issued on the networks of the Payment Card Brands (Visa, Mastercard, American Express and Discover in the United States and Interac, in Canada). CPI also offers an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. +CPI serves its customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands. CPI’s leading network of high-security production facilities allows the Company to optimize its solutions offerings and to serve its customers. +The Company’s business consists of the following reportable segments: Debit and Credit, Prepaid Debit and Other. The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States. The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. The Company’s “Other” segment includes corporate expenses. +COVID-19 Update +The COVID-19 pandemic has impacted economies and societies globally. The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain. The health and safety of CPI employees remain paramount, and the Company continues to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines.  All of CPI’s operations have remained open and continue to provide direct and essential support to the financial services industry. +The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain, including increased lead times for, and higher costs of, certain raw materials and components, such as microprocessing chips, which are expected to continue in the future. CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to help mitigate supply chain constraints. The current environment has also affected the available labor pool in the areas in which the Company operates, which has resulted in increased labor cost and turnover in our facilities, challenges hiring production employees and shipping delays. On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) issued an Emergency Temporary Standard (“ETS”) mandating certain employers to require either full vaccination against COVID-19 or weekly testing of employees. The United States Supreme Court upheld a stay on enforcement of the ETS mandate, and on January 25, 2022, OSHA announced that it would withdraw the ETS to focus on finalizing a permanent COVID-19 Healthcare Standard. At this time, it is not possible to predict the impact a permanent COVID-19 Healthcare Standard, or any corresponding mandates from federal, state or local governmental entities, would have on us or on our workforce. Federal, state or local mandates could result in increased costs as well as labor disruptions, employee attrition and/or difficulty recruiting new employees which could compound the labor shortage already impacting the Company. +The Company believes the labor and supply chain challenges described above, and the associated costs, may continue to increase throughout 2022 and possibly beyond. The Company may not be able to pass all of these costs through to its customers. The Company is experiencing increased production lead times, which it believes is likely to continue throughout 2022 and possibly beyond, depending on the duration of the staffing and supply chain challenges and the level of demand from its customers. The Company will continue to monitor and respond as the situation evolves. +56 +Table of Contents +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, included provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Note 12, “Income Taxes” for a discussion of the CARES Act income tax impacts on the Company. In addition, we deferred employer social security payments in 2020 in accordance with the CARES Act, and the first installment repayment was made in the fourth quarter of 2021. The second installment payment is permitted to be paid no later than the fourth quarter of 2022. Refer to Note 9 “Accrued Liabilities” for additional discussion. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. +December 31, 2021 +December 31, 2020 +Trade accounts receivable +$ +50,042 +$ +44,305 +Unbilled accounts receivable +10,997 +10,576 +61,039 +54,881 +Less allowance for doubtful accounts +( 86 ) +( 289 ) +$ +60,953 +$ +54,592 +The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it is determined collection will not occur. The allowance for bad debt activity for the years ended December 31, 2021 and 2020 is summarized as follows: +Balance as of December 31, 2019 +$ +395 +Bad debt expense +( 89 ) +Write-off of uncollectible accounts +( 2 ) +Currency translation adjustments +( 15 ) +Balance as of December 31, 2020 +$ +289 +Write-off of uncollectible accounts +( 203 ) +Balance as of December 31, 2021 +$ +86 +During 2021, the Company wrote-off uncollectible accounts primarily relating to reserves previously established for outstanding receivables from the Company’s Canadian operations that were disposed in 2019. +For the year ended December 31, 2021 one customer represented 18 % of the Company’s consolidated net sales. +57 +Table of Contents +For the year ended December 31, 2020 the Company had two customers that represented more than 10% of the Company’s consolidated net sales. Net sales for these customers were approximately 15 % and 14 % of the Company’s consolidated net sales. +Inventories +Inventories consist of raw materials, and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out, specific identification or weighted-average method basis). Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Finished goods inventory represents primarily stock cards and Card@Once printers. The stock cards are not manufactured for a specific customer, but are ready to be personalized and sold as customer orders are received. The Company monitors inventory for events or circumstances that may indicate the net realizable value is less than the carrying value of inventory, such as negative margins, expiration of material usage, and other forms of obsolescence, and records adjustments to the valuation of inventory, as necessary. +For the year ended December 31, 2021 approximately 92 % of our purchased microchips and antennas came from four main suppliers, and approximately 64 % came from one supplier. Approximately 95 % of our purchased microchips and antennas for the year ended December 31, 2020 came from four main suppliers, and approximately 53 % came from one supplier. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. +Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required. +Goodwill and Intangible Assets +Goodwill is not amortized, but instead is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For impairment evaluations, the Company may first make a qualitative assessment with respect to goodwill, if appropriate. In accordance with accounting standards, the Company performs its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognizes an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +All of the Company’s goodwill is included in the Debit and Credit segment. The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; discrete and long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be +58 +Table of Contents +recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required. +Sales Tax +The Company records sales tax collected from its customers on a net basis, and therefore excludes it from net sales as defined in ASC 606, Revenue from Contracts with Customers . Cash collected from customers is recorded in accrued expenses on the Company’s consolidated Balance Sheet and then remitted to the proper taxing authority. In addition, refer to Note 15 “Commitments and Contingencies” for discussion regarding an estimated sales tax liability the Company recorded in relation to historical activity in certain states. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made. +The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when the Company believes that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. The Company adjusts uncertain tax positions in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Stock-Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period. The Company accounts for forfeitures as they occur and reverses previously recognized expense for the unvested portion of the forfeited shares. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 17 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans. +Net Sales +Products Net Sales +“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers, have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are the design and production of Financial Payment Cards, including contact-EMV, contactless EMV, Earth Elements TM Eco-Focused Cards, metal, magnetic stripe cards, and private label credit cards and retail gift cards. Card@Once® printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales. +59 +Table of Contents +Services Net Sales +Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance debit cards. As applicable, for work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts +The Company often enters into MSAs with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally considered short term in nature. +Use of Estimates +The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require management to make assumptions and estimates relating to the reporting of assets and liabilities in its preparation of the consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, liability for sales tax, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed, and uncertain tax positions. Actual results could differ from those estimates. +Recent Accounting Pronouncements +Recently Issued Accounting Pronouncements +In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments . This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The effective date of ASU 2016-13 was amended by ASU 2019-10, Credit Losses Effective Dates. Since CPI is a smaller reporting company, adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods therein, with early adoption permitted. The Company has elected not to early adopt this accounting standard in 2021. The Company is evaluating the impact of adoption of this standard, and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s consolidated financial position and results of operations. +Adjustment of Prior Period Financial Statements for Immaterial Items +In accordance with Securities and Exchange Commission Staff Accounting Bulletin 99, Materiality, codified in Accounting Standards Codification (“ASC”) 250, Presentation of Financial Statements, during the year ended December 31, 2020, the Company corrected two immaterial items relating to estimated sales tax expense and depreciation expense that related to prior periods. The consolidated financial statements for the year ended December 31, 2020 reflect the corrected balances which included sales tax expense in Selling, General and Administrative expenses (“SG&A”) of $ 293 and depreciation expense of $ 124 for the year ended December 31, 2020. Refer to Note 15 “Commitments and Contingencies” for additional discussion of the estimated sales tax liability recorded in “Accrued expenses” on the consolidated balance sheet. +60 +Table of Contents +3. Net Sales +The Company disaggregates its net sales by major source as follows: +For the year ended December 31, 2021 +Products +Services +Total +Debit and Credit +$ +199,825 +$ +96,379 +$ +296,204 +Prepaid Debit +— +79,213 +79,213 +Intersegment eliminations +( 239 ) +( 59 ) +( 298 ) +Total +$ +199,586 +$ +175,533 +$ +375,119 +For the year ended December 31, 2020 +Products +Services +Total +Debit and Credit +$ +173,765 +$ +76,662 +$ +250,427 +Prepaid Debit +— +63,596 +63,596 +Intersegment eliminations +( 1,797 ) +( 37 ) +( 1,834 ) +Total +$ +171,968 +$ +140,221 +$ +312,189 +4. Discontinued Operation +On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produced retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provided personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The Company reported the U.K. Limited reporting segment as discontinued operations in conformity with GAAP. Unless otherwise indicated, information in these notes to the consolidated financial statements relate to continuing operations. The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal. The impact of the discontinued operations was insignificant to the Company’s consolidated statement of operations for the years ended December 31, 2021 and 2020. +5. Inventories +Inventories are summarized below: +December 31, +2021 +2020 +Raw materials +$ +54,254 +$ +23,009 +Finished goods +6,778 +4,635 +Inventory reserve +( 3,023 ) +( 2,848 ) +$ +58,009 +$ +24,796 +6. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-use Assets +Plant, equipment, leasehold improvements and operating lease right-of-use assets consist of the following: +December 31, +2021 +2020 +Machinery and equipment +$ +64,051 +$ +55,459 +Machinery and equipment under financing leases +9,088 +9,974 +Furniture, fixtures and computer equipment +4,570 +4,410 +Leasehold improvements +14,142 +15,083 +Construction in progress +5,268 +2,386 +97,119 +87,312 +Less accumulated depreciation and amortization +( 61,937 ) +( 55,092 ) +Operating lease right-of-use assets, net of accumulated amortization +12,069 +7,183 +$ +47,251 +$ +39,403 +61 +Table of Contents +Amounts recorded for the depreciation of plant, equipment and leasehold improvements were $ 10,745 and $ 12,232 for the years ended December 31, 2021 and 2020, respectively. +There were no impairments of the Company’s plant, equipment, and leasehold improvement assets for the years ended December 31, 2021 and 2020. +7. Goodwill and Other Intangible Assets +All of the Company’s $ 47,150 of goodwill is included in the Debit and Credit segment at December 31, 2021 and 2020. The Company completed its goodwill impairment testing as of October 1, 2021 and the Company determined it is not more likely than not that the fair value of each reporting unit is less than its carrying amount. +CPI’s amortizable intangible assets consist of customer relationships, technology and software, and trademarks. Total intangible assets are being amortized over a weighted-average useful life of 15.7 years. Intangible amortization expense totaled $ 4,353 and $ 4,595 for the years ended December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020, there were no impairments of the Company’s amortizable intangible assets. +Intangible assets consist of the following: +December 31, 2021 +December 31, 2020 +Weighted Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +17.2 +$ +55,454 +( 35,419 ) +$ +20,035 +$ +55,454 +$ +( 32,141 ) +$ +23,313 +Technology and software +8 +7,101 +( 6,567 ) +534 +7,101 +( 5,881 ) +1,220 +Trademarks +8.7 +3,330 +( 2,045 ) +1,285 +3,330 +( 1,656 ) +1,674 +Intangible assets subject to amortization +$ +65,885 +$ +( 44,031 ) +$ +21,854 +$ +65,885 +$ +( 39,678 ) +$ +26,207 +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2021 is as follows: +2022 +$ +3,866 +2023 +3,867 +2024 +3,630 +2025 +3,440 +2026 +2,471 +Thereafter +4,580 +$ +21,854 +8. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +● Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +● Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +● Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +62 +Table of Contents +The Company’s financial assets and liabilities that are not required to be remeasured at fair value in the Consolidated Balance Sheets are as follows: +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2021 +December 31, +December 31, +(Using Fair Value Hierarchy) +2021 +2021 +Level 1 +Level 2 +Level 3 +Liabilities: +Senior Notes +$ +310,000 +$ +327,050 +$ +— +$ +327,050 +$ +— +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2020 +December 31, +December 31, +(Using Fair Value Hierarchy) +2020 +2020 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +287,500 +$ +— +$ +287,500 +$ +— +Senior Credit Facility +$ +30,000 +30,000 +$ +— +$ +— +$ +30,000 +The aggregate fair value of the Company’s Senior Notes (as defined in Note 11 “Long-Term Debt”) was based on bank quotes. +The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature. +9. Accrued Liabilities +Accrued liabilities consisted of the following: +December 31, 2021 +December 31, 2020 +Accrued payroll and related employee expenses +$ +7,558 +$ +4,938 +Accrued employee performance bonus +6,900 +4,873 +Employer payroll tax, including social security deferral +1,910 +3,034 +Accrued rebates +1,423 +1,178 +Estimated sales tax liability +1,019 +1,696 +Accrued Interest +7,955 +4,145 +Operating and financing lease liability (current portion) +4,114 +4,407 +Other +6,271 +3,878 +Total accrued expenses +$ +37,150 +$ +28,149 +The estimated sales tax liability is further described in Note 15 “Commitments and Contingencies” and Note 2 “Summary of Significant Accounting Policies”. Other accrued liabilities include miscellaneous accruals for invoices not yet received and other items such as self- insurance liability accruals and the current portion of uncertain tax position reserves. +10. Financing and Operating Leases +Right-of-use (“ROU”) represents the right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. Certain leases contain escalation provisions and/or renewal options, giving the Company +63 +Table of Contents +the right to extend the leases by up to 10 years . However, these options are generally not reflected in the calculation of the ROU assets and lease liabilities due to uncertainty surrounding the likelihood of renewal. +The components of operating and finance lease costs were as follows: +Year Ended +Year Ended +December 31, 2021 +December 31, 2020 +Operating lease costs +$ +2,258 +2,649 +Variable lease costs +676 +667 +Short-term operating lease costs +416 +75 +Total expense from operating leases +$ +3,350 +3,391 +Finance lease cost: +Right-of-use amortization expense +$ +1,009 +1,342 +Interest on lease liabilities +380 +540 +Total financing lease costs +$ +1,389 +1,882 +The following table reflects balances for operating and financing leases: +December 31, 2021 +December 31, 2020 +Operating leases +Operating lease right-of-use assets, net of amortization +$ +12,069 +$ +7,183 +Operating lease liability (current) +$ +1,857 +$ +2,267 +Long-term operating liability +10,703 +5,491 +Total operating lease liabilities +$ +12,560 +$ +7,758 +Financing leases +Property, equipment and leasehold improvements +$ +9,088 +$ +9,974 +Accumulated depreciation +( 2,451 ) +( 2,422 ) +Total financing leases in property, equipment and leasehold improvements, net +$ +6,637 +$ +7,552 +Financing lease liability (current) +$ +2,257 +$ +2,140 +Long-term finance +ng liability +2,668 +3,052 +Total financing lease liabilities +$ +4,925 +$ +5,192 +Finance and operating lease ROU assets are recorded in “Plant, equipment, leasehold improvements, and +operating lease right-of-use assets, net”. Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term liabilities.” +Components of lease expense were as follows: +December 31, 2021 +December 31, 2020 +Weighted Average Remaining Lease Term +Operating Leases +6.05 +4.93 +Financing Leases +2.73 +2.52 +Weighted Average Discount Rate +Operating Leases +8.04 % +9.29 % +Financing Leases +8.01 % +8.71 % +64 +Table of Contents +Future cash payment with respect to lease obligations as of December 31, 2021 were as follows: +Operating +Financing +Lease +Leases +Year Ending +2022 +$ +2,801 +$ +2,489 +2023 +2,828 +1,541 +2024 +2,644 +743 +2025 +2,090 +485 +2026 +1,958 +52 +Thereafter +3,654 +— +Total lease payments +15,975 +5,310 +Less imputed interest +( 3,415 ) +( 385 ) +Total +$ +12,560 +$ +4,925 +Cash paid on operating lease liabilities was $ 2,007 and $ 2,347 during the years ended December 31, 2021 and December 31, 2020, respectively. +11. Long-Term Debt +Long-term debt consists of the following: +Interest +December 31, +December 31, +Rate (1) +2021 +2020 +Senior Notes +8.625 +% +310,000 +— +ABL Revolver +— +% +— +— +First Lien Term Loan +5.500 +% +— +312,500 +Senior Credit Facility +9.500 +% +— +30,000 +Unamortized deferred financing costs +( 6,374 ) +( 3,804 ) +Unamortized discount +— +( 1,988 ) +Total long-term debt +303,626 +336,708 +Less current maturities +— +( 8,027 ) +Long-term debt, net of current maturities +303,626 +328,681 +(1) The Senior Notes bear interest at a fixed rate. The variable interest rate on the First Lien Term Loan and Senior Credit Facility was 5.5 % and 9.5 % , respectively, as of December 31, 2020. +On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc. (the “Issuer”), of $ 310,000 aggregate principal amount of 8.625 % senior secured notes due 2026 (the “Senior Notes”) and related guarantees. The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S. persons in compliance with Regulation S under the Securities Act. In addition, the Company and CPI CG Inc. as borrower entered into a credit agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility of up to $ 50,000 (the “ABL Revolver”). +The Senior Notes bear interest at a rate of 8.625 % per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year. The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes. Borrowings under the ABL Revolver bear interest at a rate per annum that ranges from the LIBOR Rate plus 1.25 % to the LIBOR Rate plus 1.75 % , or the Base Rate plus 0.25 % to the Base Rate plus 0.75 % , based on the average daily borrowing capacity under the ABL Revolver over the most recently completed month. The Base Rate as defined in the ABL Revolver is the greater of the Federal Funds Rate plus 0.5 % , the LIBOR Rate for a one month interest period plus 1.0 % , or the Wells Fargo Bank, National Association “prime rate”. The Company may elect to apply either the LIBOR Rate or Base Rate interest to borrowings at its discretion. The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375 % to 0.50 % per annum, based on the average daily borrowing capacity under the ABL Revolver over the immediately preceding month. +65 +Table of Contents +The Senior Notes are guaranteed by the Company and certain of its current and future wholly-owned domestic subsidiaries (other than the Issuer) that guarantee the ABL Revolver, and are secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. The ABL Revolver is guaranteed by the Company and its subsidiaries (other than the Issuer and excluded subsidiaries), and is secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. +The Senior Notes and the ABL Revolver contain covenants limiting the ability of the Company, the Issuer and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Issuer and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements. +The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among Issuer, the Company, the subsidiary guarantors and U.S. Bank National Association, as trustee, with any required prepayments to be made after the issuance of the Company’s annual financial statements. No such payment is required based on the Company’s 2021 operating results. +Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $ 15,000 under the ABL Revolver, were used to pay in full and terminate the Senior Credit Facility and First Lien Term Loan on March 15, 2021, and to pay related fees and expenses. As of March 15, 2021, the Company had outstanding borrowings of $ 30,000 , plus accrued and unpaid interest, under the Senior Credit Facility, and $ 304,746 , plus accrued and unpaid interest, under the First Lien Term Loan. In addition, early termination of the Senior Credit Facility required payment of a “make-whole” premium of $ 2,635 as an early termination penalty, which was paid on March 15, 2021, and recorded as interest expense on the condensed consolidated statement of comprehensive income for the year ended December 31, 2021. +During the second quarter of 2021, the Company used $ 15,000 of cash on hand to pay down the ABL Revolver to zero and had no borrowings outstanding thereunder as of December 31, 2021. +As of December 31, 2020, $ 8,027 of debt principal was classified as a current liability as a result of an excess free cash flow calculation for 2020 pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan. The Company offered to prepay the balance, pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, which resulted in a required principal prepayment of $ 7,754 to the First Lien Term Loan lenders on March 4, 2021, plus accrued interest thereon. +In connection with the issuance of the Senior Notes and entry into the ABL Revolver, the Company terminated its previous credit facilities consisting of a $ 30,000 senior credit agreement, dated as of March 6, 2020, among the Company, CPI CG Inc., as borrower, the lenders party thereto and Guggenheim Credit Services, LLC as administrative agent and collateral agent (the “Senior Credit Facility”), and a $ 435,000 first lien term loan, dated as of August 17, 2015 as amended, among the Company, the borrower, the lenders party thereto, GLAS USA LLC, as administrative agent and GLAS Americas LLC, as collateral agent (the “First Lien Term Loan”) . +Deferred Financing Costs and Discount +Certain costs and discounts incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. The debt issuance costs recorded upon issuance of the Senior Notes were $ 7,558 and the remaining unamortized balance is reported as a reduction to the long-term debt balance as of December 31, 2021. The net discount and debt issuance costs on the ABL Revolver were $ 2,144 and are recorded as other assets (current and long term) on the condensed consolidated balance sheet as of December 31, 2021. +66 +Table of Contents +During the year ended December 31, 2021, the Company recorded a $ 5,048 loss on debt extinguishment relating to the unamortized deferred financing costs and debt discount in connection with the termination of the Senior Credit Facility and First Lien Term Loan. +12. Income Taxes +Income tax expense (benefit) and effective income tax rates consist of the following: +December 31, +2021 +2020 +Current taxes: +Domestic +$ +10,038 +$ +( 4,364 ) +Foreign +( 1 ) +16 +10,037 +( 4,348 ) +Deferred taxes: +Domestic +( 2,154 ) +1,043 +Foreign +( 2 ) +— +( 2,156 ) +1,043 +Income tax expense (benefit) +$ +7,881 +$ +( 3,305 ) +Income before income taxes +Domestic income +$ +23,761 +$ +12,790 +Foreign income +61 +95 +Total +$ +23,822 +$ +12,885 +Effective income tax rate +33.1 +% +( 25.6 ) +% +The effective income tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2021 +2020 +Tax at federal statutory rate +21.0 +% +21.0 +% +State taxes, net +7.4 +5.3 +Valuation allowance +— +( 41.1 ) +Unrecognized tax benefits +1.4 +5.6 +Tax credits +( 0.2 ) +( 1.2 ) +Permanent items +2.4 +4.0 +Tax benefit CARES Act +— +( 20.9 ) +Other +1.1 +1.7 +Effective income tax rate +33.1 +% +( 25.6 ) +% +67 +Table of Contents +The components of the deferred tax assets and liabilities are as follows: +December 31, +2021 +2020 +Deferred tax assets: +Accrued expense +$ +3,664 +$ +2,519 +Net operating loss carryforward +305 +524 +Stock compensation +894 +935 +Tax credit carryforward +— +645 +Interest limitation +3,693 +1,418 +Lease liability +3,222 +1,899 +Capital loss carryover +2,076 +2,030 +Other +2,867 +2,858 +Total gross deferred tax assets +16,721 +12,828 +Valuation allowance +( 2,832 ) +( 2,615 ) +Net deferred tax assets +13,889 +10,213 +Deferred tax liabilities: +Plant, equipment and leasehold improvements +( 5,773 ) +( 4,939 ) +Intangible assets +( 8,284 ) +( 8,689 ) +Right-of-use assets +( 3,098 ) +( 1,758 ) +Other +( 1,987 ) +( 2,236 ) +Total gross deferred tax liabilities +( 19,142 ) +( 17,622 ) +Net deferred tax liabilities +$ +( 5,253 ) +$ +( 7,409 ) +The net change in the valuation allowance during the year ended December 31, 2021 was an increase of $ 217 . The change was comprised primarily of an increase due to the interest deduction limitation in Section 163(j) of the Internal Revenue Code pertaining to certain states. The valuation allowance as of December 31, 2021, is primarily relating to a capital loss realized on the sale of a foreign subsidiary whereby the Company does not anticipate a capital gain in the foreseeable future that would allow for the recognition of the capital loss carryover. In addition, the Company has a partial valuation allowance on certain state interest deduction limitations, which the Company estimates may not be fully utilized. +For the year ended December 31, 2021 the effective tax rate differs from the federal U.S. statutory rate primarily due to state income taxes, which had a tax rate impact of 7.4 % . Other items impacting the effective tax rate in 2021 include permanent items and unrecognized tax benefits. In March 2020, the CARES Act was signed into law. The CARES Act allows net operating losses (“NOLs”) generated in 2018, 2019, or 2020 to be carried back up to five years and temporarily eliminates the tax law provision that limits the use of NOLs to 80% of taxable income. The CARES Act increased the Internal Revenue Code Section 163(j) interest deduction limit for 2020 and 2019, and allowed for the acceleration of refunds of alternative minimum tax credits. For the year ended December 31, 2020, the Company recorded a tax benefit for certain provisions in the CARES Act resulting in a tax rate benefit of 20.9 % . In addition, the Company reduced the partial valuation allowance associated with the limitation on the deductibility of interest expense, and recorded an income tax rate benefit for the year ended December 31, 2020 of 41.1 % . +The Company no longer has any substantial potential tax benefits associated with gross foreign operating loss carryforwards due to the sale of its foreign subsidiaries. The Company has various state and local operating loss carryforwards which will expire at various dates from 2037 to 2039. The Company does expect to be able to utilize these losses prior to expiration. The Company received income tax refunds in 2021 of $ 9,846 , which were primarily comprised of U.S. federal income tax refund claims attributable to the CARES Act provisions, including alternative minimum tax credits and NOL carrybacks. +The Company does no t have any potential tax benefits associated with state research and development tax credit carryforwards as of December 31, 2021. +The Company has recorded compensation for certain covered employees in excess of $1,000 per year. Under Internal Revenue Code Section 162(m), the Company is prohibited from deducting the amount of tax compensation that exceeds $1,000 per year for these employees. The covered employees are defined as the Chief Executive Officer, Chief +68 +Table of Contents +Financial Officer, and the three next-highest-compensated officers of the Company. The Company considers the impact of the estimated IRC Section 162(m) limitations on the future deductibility of existing temporary differences. +At December 31, 2021, no provision has been made for U.S. federal and state taxes on cumulative foreign earnings as there are no material current or cumulative earnings of foreign operations. +Unrecognized Tax Benefits +Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Accrued expenses”, “Other long term liabilities” and “Deferred income taxes” in the Company’s consolidated balance sheets. The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination. +Balance as of December 31, 2020 +$ +3,312 +Other +( 201 ) +Increase related to current year tax position +64 +Decrease related to prior year tax position +( 37 ) +Decrease related to settlements with tax authorities, net of federal benefit +( 788 ) +Balance as of December 31, 2021 +$ +2,350 +The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits for the year ended December 31, 2021 is $ 289 , and was $ 255 for the year ended December 31, 2020. +The Company believes that it is reasonably possible that approximately $ 301 of its unrecognized tax benefits may be recognized by the end of 2022 as a result of settlement with the taxing authorities. The Company also believes that it is reasonably possible that a decrease of up to $ 1,009 of its unrecognized tax benefits related to an asset basis tax position and research and development tax credits may be recognized by the end of 2022 as a result of a lapse of the statute of limitations. The total $ 1,310 is reflected in “Accrued expenses” in the Company’s consolidated balance sheet as of December 31, 2021. +13. Stockholders’ Deficit +Common Stock +Common Stock has a par value of $ 0.001 per share. Holders of Common Stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. +14. Earnings per Share +Basic and diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested. For the years +69 +Table of Contents +ended December 31, 2021 and 2020, 121,993 and 137,787 potentially dilutive securities, respectively, are excluded from the calculation of diluted earnings per share because their inclusion would be anti-dilutive. +The following table sets forth the computation of basic and diluted income earnings per share: +Year Ended +December 31, +2021 +2020 +Numerator: +Net income from continuing operations +$ +15,941 +$ +16,190 +Net loss from discontinued operation +— +( 61 ) +Net income +$ +15,941 +$ +16,129 +Denominator: +Basic weighted-average common shares outstanding +11,239,049 +11,228,707 +Dilutive shares +524,914 +3,297 +Diluted weighted-average common shares outstanding +11,763,963 +11,232,004 +Net income per share from continuing operations - Basic: +$ +1.42 +$ +1.44 +Net income per share from discontinued operations - Basic: +- +( 0.00 ) +Net income per share - Basic: +$ +1.42 +$ +1.44 +Net income per share from continuing operations - Diluted: +$ +1.36 +$ +1.44 +Net income per share from discontinued operations - Diluted: +— +( 0.00 ) +Net income per share - Diluted: +$ +1.36 +$ +1.44 +15. Commitments and Contingencies +Commitments +Refer to Note 10 “Financing and Operating Leases” for details on the Company’s future cash payments with respect to financing and operating leases. During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2023 and 2029 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs. The Company’s financing leases expire at various dates between 2022 and 2026 and contain purchase options which the Company may exercise to keep the machinery in use. +Contingencies +In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount of expense. The Company expenses professional fees associated with litigation claims and assessments as incurred. +Smart Packaging Solutions SA v. CPI Card Group Inc. +On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief. In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed +70 +Table of Contents +from Feinics AmaTech Teoranta. The patents all relate to antenna technology. SPS alleges that the Company incorporates the patented technology into its products that use contactless communication. The Company does not manufacture antennas; it purchases certain antenna-related components from SPS and a number of other suppliers. The Company was served with the complaint and is in the process of preparing an answer. The Company intends to investigate and pursue its rights relating to the claims and to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. Due to the stage of this matter, the Company is unable to predict the outcome or the possible loss or range of loss, if any, associated with this matter, and no liability has been recorded as of December 31, 2021. +In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations. +Estimated Sales Tax Liability +The Company is evaluating a state sales tax liability analysis for state and local jurisdictions in which it has economic nexus. It is probable that the Company will be subject to sales tax liabilities plus interest and penalties relating to historical activity in certain states. The estimated liability for sales tax as of December 31, 2021 and 2020 was $ 1,019 and $ 1,696 , respectively, and is recorded in accrued expenses in the consolidated balance sheets. The liability changed from the original estimate recorded in prior periods primarily due to the Company remitting cash to the proper state tax authorities for historical sales tax and interest. The Company may be subject to examination by the relevant state and local tax authorities. Due to the estimates involved in the analysis, the liability may change in the future. The Company is unable to predict a range of additional loss that is reasonably possible. Sales tax recovered from customers reduces the estimated expense when it is received or probable of collection. Future changes to the liability estimate that impact the consolidated statements of operations will be recorded within SG&A. During the year ended December 31, 2021 the Company recorded a sales tax benefit of $ 614 within SG&A for current activity relating to sales tax recovered from customers and net changes to the estimated liability . +16. Employee Benefit Plan +The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment options. The Company matches 100 % of the participant’s first 3% of deferrals and 50 % matching on each of the 4 th and 5 th percent contributed by the participant. As the Company operates the plan as a safe harbor 401(k) plan, the Company’s match is 100 % vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $ 1,604 and $ 1,473 for the years ended December 31, 2021 and 2020, respectively. +17. Stock Based Compensation +CPI Card Group Inc. Omnibus Incentive Plan +In October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity-based incentives may be granted to participating employees, advisors and directors. On May 27, 2021, the Company’s stockholders approved an amendment and restatement of the Omnibus Plan to, among other things, increase the total number of shares of the Company’s Common Stock reserved and available for issuance thereunder by 1,000,000 shares resulting in a total of 2,200,000 shares of Common Stock issuable under the Omnibus Plan. As of December 31, 2021, there were 951,109 shares of Common Stock available for grant under the Omnibus Plan. +For the year ended December 31, 2021, the Company granted 128,063 awards of non-qualified stock options, and during the fiscal year ended December 31, 2020, the Company did not grant any awards of no n-qualified stock options. The following is a summary of the activity in outstanding stock options under the Omnibus Plan: +71 +Table of Contents +Weighted- +Weighted- +Average +Average +Remaining +Exercise +Contractual Term +Options +Price +(in Years) +Outstanding as of December 31, 2020 +706,372 +$ +15.20 +6.44 +Granted +128,063 +29.61 +6.69 +Exercised +( 35,513 ) +3.04 +- +Forfeited +( 20,087 ) +23.33 +- +Outstanding as of December 31, 2021 +778,835 +$ +18.02 +5.59 +Options vested and exercisable as of December 31, 2021 +651,478 +$ +15.76 +5.37 +Options vested and expected to vest as of December 31, 2021 +778,835 +$ +18.02 +5.59 +The following is a summary of the activity in unvested stock options under the Omnibus Plan: +Weighted- +Average +Grant-Date +Number +Fair Value +Unvested as of December 31, 2020 +45,319 +$ +1.10 +Granted +128,063 +17.42 +Vested +( 45,319 ) +1.10 +Forfeited +( 706 ) +17.42 +Unvested as of December 31, 2021 +127,357 +$ +17.42 +Unvested stock options as of December 31, 2021 of 127,357 have a seven year term and are expected to vest ratably over a two-year period on each anniversary of the grant date. +The fair value of the stock option awards granted for the year ended December 31, 2021, was +determined using a Black-Scholes option-pricing model with the following weighted-average assumptions: +December 31, 2021 +Expected term in years (1) +4.25 +Volatility (2) +78.6 +% +Risk-free interest rate (3) +0.71 +% +Dividend yield (4) +— +% +(1) The Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. +(2) Volatility was based on a weighting of the Company’s historical volatility and its peer group, which is comprised of companies with similar industry, size, and financial leverage. +(3) The risk-free interest rate was determined by using the United States Treasury rate for the period consistent with the expected option term described above. +(4) The Company’s expected annual dividend yield was zero based on current practice. +72 +Table of Contents +The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2021 under the Omnibus Plan: +Weighted- +Average +Grant-Date +Shares +Fair Value +Outstanding as of December 31, 2020 +180,001 +$ +2.12 +Granted +105,941 +29.61 +Forfeited +( 23,960 ) +2.60 +Outstanding as of December 31, 2021 +261,982 +$ +13.19 +The restricted stock unit awards contain conditions associated with continued employment or service. The restricted stock units granted in 2021 are expected to either vest ratably over a two-year period on each anniversary of the grant date or vest entirely on the year-and-a-half anniversary of the grant date. The Company granted 180,001 restricted stock units in 2020 and they are expected to vest on the two-year anniversary of the date of grant. On the vesting date, shares of Common Stock will be issued to the award recipients. +Compensation expense for the Omnibus Plan for the years ended December 31, 2021 and 2020 was $ 1,250 and $ 136 , respectively. As of December 31, 2021, the total unrecognized compensation expense related to unvested options and restricted stock units was $ 4,384 , which the Company expects to recognize over an estimated weighted average period of 1.61 years. +18. Segment Reporting +The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its net sales, EBITDA (as defined below) or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures, such as net sales and EBITDA. +EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is useful as a supplement to GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and to identify strategies to improve the allocation of resources amongst segments. +As of December 31, 2021, the Company’s reportable segments were as follows: +● Debit and Credit, +● Prepaid Debit, and +● Other. +Debit and Credit Segment +The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless cards, and Earth Elements Eco-Focused Cards . The Company also sells Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the Payment Cards Brands. The Company provides CPI On-Demand services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on demand basis for customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and +73 +Table of Contents +instant issuance services. The Debit and Credit segment operations are each audited for compliance by multiple Payment Card Brands. Many of the Company’s customers require CPI to comply with the standards of the PCI Security Standards Council. +Prepaid Debit Segment +The Prepaid Debit segment primarily provides integrated prepaid card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid Debit segment operation is audited for compliance by multiple Payment Card Brands. Many of the Company’s customers require CPI to comply with the standards of the PCI Security Standards Council. +Other +The Other segment includes corporate expenses. +Performance Measures of Reportable Segments +Net sales and EBITDA of the Company’s reportable segments for the years ended December 31, 2021 and 2020 were as follows: +Net Sales +EBITDA +December 31, +December 31, +2021 +2020 +2021 +2020 +Debit and Credit +$ +296,204 +$ +250,427 +$ +87,499 +$ +64,522 +Prepaid Debit +79,213 +63,596 +29,156 +22,156 +Other +— +— +( 47,127 ) +( 31,569 ) +Intersegment eliminations (a) +( 298 ) +( 1,834 ) +— +— +Total: +$ +375,119 +$ +312,189 +$ +69,528 +$ +55,109 +(a) Amounts include the elimination of sales between segments for consolidation. +The following table provides a reconciliation of total segment EBITDA to Net Income for the years ended December 31, 2021 and 2020: +December 31, +2021 +2020 +Total segment EBITDA +$ +69,528 +$ +55,109 +Interest, net +( 30,608 ) +( 25,397 ) +Income tax (expense) benefit +( 7,881 ) +3,305 +Depreciation and amortization +( 15,098 ) +( 16,827 ) +Net loss from discontinued operations +— +( 61 ) +Net Income +$ +15,941 +$ +16,129 +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2021 and 2020 were as follows: +December 31, +2021 +2020 +Debit and Credit +$ +210,492 +$ +215,846 +Prepaid Debit +31,480 +34,734 +Other +26,168 +15,571 +Total assets +$ +268,140 +$ +266,151 +74 +Table of Contents +Capital Expenditures of Reportable Segments +Total capital expenditures of the Company’s reportable segments as of December 31, 2021 and 2020 were as follows: +December 31, +2021 +2020 +Debit and Credit +$ +6,826 +$ +5,179 +Prepaid Debit +2,774 +1,548 +Other +474 +366 +Total company capital expenditures +$ +10,074 +$ +7,093 +Net Sales to Geographic Location; Property, Equipment and Leasehold Improvements and Long-Lived assets by Geographic Segments +Each of the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of the United States is insignificant. +Net Sales by Product and Services +Net sales from products and services sold by the Company for the years ended December 31, 2021 and 2020 were as follows: +December 31, +2021 +2020 +Product net sales (a) +$ +199,586 +$ +171,968 +Services net sales (b) +175,533 +140,221 +Total net sales: +$ +375,119 +$ +312,189 +(a) “Products” net sales include the design and production of Financial Payment Cards in contact-EMV, contactless EMV, metal, contactless and magnetic stripe card formats. The Company also generates “Products” revenue from the sale of Card@Once printers and consumables, private label credit cards and retail gift cards. +(b) “Services” net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance cards. +19. Subsequent Events +On February 28, 2022, CPI CG Inc., a wholly-owned subsidiary of the Company, provided notice of its intention to redeem $ 20,000 aggregate principal amount of its 8.625 % Senior Secured Notes at a redemption price equal to 103 % of the principal amount thereof plus accrued and unpaid interest thereon to the redemption date. The Company plans to use the available borrowing capacity under the ABL Revolver to fund this redemption, which is expected to be completed in the first quarter of 2022. The notice of redemption was sent by the trustee to the registered holders of the notes in accordance with the requirements of the indenture, and this report does not constitute a notice of redemption. +Additionally, on March 3, 2022, the Company and CPI CG Inc. as borrower, entered into an amendment to the ABL Revolver to, among other things, increase the available borrowing capacity to $ 75,000 , from $ 50,000 . In connection with this amendment, the Company incurred certain customary costs. Borrowings under the amended ABL Revolver will bear interest at a rate per annum that ranges from the SOFR Rate plus 1.25 % to 1.75 %, based on the average daily borrowing capacity under the ABL Revolver over the most recently completed quarter. +75 +Table of Contents +(This page has been left blank intentionally.) +76 +Table of Contents +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2021. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting as described below in Management’s Report on Internal Control Over Financial Reporting. As previously disclosed in the September 30, 2021 Form 10-Q , our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective based on their evaluation as of September 30, 2021, and, based on a re-evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2020, March 31, 2021 and June 30, 2021. +Management’s Report on Internal Control Over Financial Reporting +Management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements would not be prevented or detected on a timely basis. +Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that assessment, we identified a material weakness in our risk assessment primarily due to an inadequate complement of personnel with requisite experience in the design and implementation of controls. This resulted in ineffective general information technology controls over user access administration within the revenue system at certain locations, and change management related to the development of customized reports. Due to the general information technology control deficiencies, certain process-level automated controls and manual controls that are dependent on the completeness and accuracy of information derived from the affected information technology systems were also ineffective because they could have been adversely impacted. The deficiencies in risk assessment also resulted in ineffective (i) journal entry controls due to inadequate review for segregation of duties on journal entries processed in batches, and (ii) controls over the accuracy of the sales price for sales in certain locations. We also identified ineffective controls over review and authorization of certain transactions in the purchasing process due to inadequate communication and monitoring activities. +The material weaknesses did not result in any identified material misstatements to the financial statements and there were no changes to previously reported financial results. Based on these material weaknesses, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2021. +77 +Table of Contents +Our independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this Annual Report on Form 10-K, issued an adverse opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. KPMG LLP's report appears on pages 50-51 of this Annual Report on Form 10-K. +Remediation of Material Weaknesses +We are in the process of enhancing our internal controls in the aforementioned areas to remediate the material weaknesses. We intend to implement training programs and hire additional resources with the appropriate skills and knowledge to address these internal control deficiencies. In addition, management is continuing to develop the design and implementation of internal controls to require appropriate reviews as well as retain documentation of those reviews with regards to our purchasing and revenue processes. We are also implementing new systems and automating certain processes to enhance our internal controls and to address these material weaknesses. We are assessing and revising the controls over user access administration and implementing monitoring activities over batch processing to ensure appropriate segregation of duties on journal entries processed in batches. We are also enhancing change controls relating to custom reports in certain information technology systems and performing additional analysis of source documentation to appropriately support information used primarily in the purchasing and revenue processes. +We continuously evaluate the effectiveness of our internal control over financial reporting and may implement additional changes or remediation efforts as we implement the above actions. The deficiencies will be determined to be remediated when revised controls have been operating for a reasonable period of time and have been tested to determine they are operating effectively. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2021 we remediated certain user access deficiencies regarding certain systems that were noted in our evaluation of controls and procedures previously reported as of September 30, 2021. We have hired additional resources in information technology, initiated trainings and begun implementing changes to improve controls in our purchasing and revenue processes. Except with respect to changes in connection with the initiatives to remediate the material weaknesses noted above, there were no other changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. +Other Informatio n +On March 3, 2022, the Company and CPI CG Inc., as borrower (the “Borrower”), entered into Amendment No. 1 to Credit Agreement (the “Amendment”), which amends that certain Credit Agreement, dated as of March 15, 2021 (the “ABL Revolver”), by and among the Company, the Borrower, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. +The Amendment, among other things, increases the available borrowing capacity under the ABL Revolver to $75 million from $50 million, increases the uncommitted accordion feature to $25 million from $15 million, and revises the LIBOR rate provisions to provide for a successor benchmark using SOFR. Borrowings under the amended ABL Revolver will bear interest at a rate per annum that ranges from the SOFR Rate plus 1.25% to 1.75%, based on the average daily borrowing capacity under the ABL Revolver over the most recently completed quarter. +The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Amendment and the amended and restated ABL Revolver attached thereto, which is included as Exhibit 10.30 to this report and is incorporated herein by reference. +Some of the lenders and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with the Company or its affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions. +78 +Table of Contents +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +PART II I +Item 10. +Directors, Executiv e Officers and Corporate Governance +The information required by this Item will be included in our definitive Proxy Statement for the 2022 Annual Meeting of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended December 31, 2021 and is incorporated herein by reference. +Item 11. +Executive Compensatio n +Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy Statement. +Item 12. +Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement. +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. +Item 14. +Principal Accountant Fees and Service s +Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement. +79 +Table of Contents +PART IV +Item 15. +Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Loss +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +Exhibit Description +2.1 +Purchase and Sale Agreement, dated as of August 22, 2014, by and among William S. Dinker, Katherine S. Nevill, Bobby Smith and Tom Hedrich, William S. Dinker 2012 Trust for Edward McCullough Dinker, William S. Dinker 2012 Trust for John Walsh Dinker and William S. Dinker 2012 Trust for William S. Dinker III, EFT Source, Inc., CPI Acquisition, Inc. and William S. Dinker, as Sellers' Representative (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +2.2 +Share Purchase Agreement, dated August 1, 2018, by and between CPI Card Group-Europe Limited, SEAFOX BIDCO Limited and CPI Acquisition, Inc. (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 9, 2018). +3.1* +Fourth Amended and Restated Certificate of Incorporation of CPI Card Group Inc. +3.2* +Third Amended and Restated Bylaws of CPI Card Group Inc. +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +4.2* +Description of Registrant’s Securities. +4.3 +Indenture, dated as of March 15, 2021, by and among CPI CG Inc., as issuer, CPI Card Group Inc., as a guarantor, the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee and notes collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed March 16, 2021) . +4.4 +Form of 8.625% Senior Secured Notes due 2026 (included as Exhibit A to the Indenture included herewith as Exhibit 4.3) . +10.1** +Employment and Non-Competition Agreement, dated April 22, 2009, between CPI Acquisition, Inc. and Steven Montross (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +80 +Table of Contents +10.2** +First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017, between CPI Acquisition, Inc. and Steven Montross (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2017). +10.3** +Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.4** +Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.5** +Employment and Non-Competition Agreement, dated October 1, 2008, between Metaca Corporation and Anna Rossetti (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6** +CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective May 27, 2021 (incorporated by reference to the Company’s Current Report on Form 8-K filed May 28, 2021) . +10.7** +Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017). +10.8** +Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017) +10.9** +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.10** +CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017). +10.11** +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.12** +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.13 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.14** +2019 Executive Retention Agreement dated November 7, 2018 between CPI Card Group Inc. and Scott Scheirman Officers (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 6, 2019). +10.15** +Form of 2019 Executive Retention Agreement for certain Executive Officers (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 6, 2019). +10.16** +2019 Executive Incentive Plan dated February 27, 2019 (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 6, 2019). +10.17** +2020 Executive Retention Agreement, dated September 11, 2019 between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.18** +Form of 2020 Executive Retention Agreement, dated September 11, 2019 for certain Executive Officers (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +81 +Table of Contents +10.19** +Form of 2020 Executive Short-Term Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.20** +Form of Executive Retention Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.21** +2021 Executive Retention Agreement, dated October 2, 2020, between CPI Card Group. Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.22** +Form of Executive Restricted Stock Unit Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.23** +Restricted Stock Unit Agreement, dated October 2, 2020, between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.24** +Form of Executive Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.25** +Form of Executive Restricted Stock Unit Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.26** +Form of Director Restricted Stock Unit Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.27** +Offer Letter, dated October 1, 2021 by and between CPI Card Group Inc. and Amintore Schenkel (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.28** +Offer Letter, dated October 1, 2021 by and between CPI Card Group Inc. and John Lowe (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.29* +Amendment No. 1 to ABL Credit Agreement, among CPI Card Group Inc., CPI CG Inc., the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and collateral agent. +10.30 +Guaranty and Security Agreement, dated as of March 15, 2021, among CPI Card Group Inc. and certain of its subsidiaries from time to time party thereto and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed March 16, 2021) . +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH* +Inline XBRL Taxonomy Extension Schema Document. +82 +Table of Contents +101.CAL* +Inline XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +Inline XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +Inline XBRL Taxonomy Extension Presentation Linkbase Document. +104* +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). +* +Filed or furnished herewith. +** Management contract or compensatory plan or arrangement. +Item 16. Form 10-K Summary +None. +83 +Table of Contents +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ Amintore Schenkel +Amintore Schenkel +Chief Financial Officer +March 8, 2022 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint Scott Scheirman and Amintore Schenkel and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Scott Scheirman +President, Chief Executive +March 8, 2022 +Scott Scheirman +Officer and Director +(Principal Executive Officer) +/s/ Amintore Schenkel +Chief Financial Officer +March 8, 2022 +Amintore Schenkel +(Principal Financial Officer) +/s/ Kevin O’Brien +Chief Accounting Officer +March 8, 2022 +Kevin O’Brien +(Principal Accounting Officer) +/s/ Bradley Seaman +Chairman of the Board +March 8, 2022 +Bradley Seaman +/s/ Thomas Furey +Director +March 8, 2022 +Thomas Furey +/s/ Robert Pearce +Director +March 8, 2022 +Robert Pearce +/s/ Nicholas Peters +Director +March 8, 2022 +Nicholas Peters +/s/ Marc Sheinbaum +Director +March 8, 2022 +Marc Sheinbaum +/s/ Valerie Soranno Keating +Director +March 8, 2022 +Valerie Soranno Keating +84 \ No newline at end of file diff --git a/raw/filings/0001641614/2021/0001558370-22-003016/filing_metadata.csv b/raw/filings/0001641614/2021/0001558370-22-003016/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..123e33ae6ed0dd15e91de16e982bf8e5626bae2e --- /dev/null +++ b/raw/filings/0001641614/2021/0001558370-22-003016/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001641614,PMTS,CPI Card Group Inc.,10-K,2022-03-08,2021-12-31,2022-03-08T12:15:59.000Z,0001558370-22-003016,pmts-20211231x10k.htm,10-K,12844101,1,1,https://www.sec.gov/Archives/edgar/data/1641614/000155837022003016/pmts-20211231x10k.htm,https://www.sec.gov/Archives/edgar/data/1641614/000155837022003016/,2021,2021,1 diff --git a/raw/filings/0001641614/2021/0001558370-22-003016/item1.txt b/raw/filings/0001641614/2021/0001558370-22-003016/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..dcb2d54a886d3edcdf1d10155567bc2997404127 --- /dev/null +++ b/raw/filings/0001641614/2021/0001558370-22-003016/item1.txt @@ -0,0 +1,121 @@ +Item 1. +Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States and Interac, in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience. +We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“FinTechs”), as well as independent community banks, credit unions and Group Service Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our leading network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, serving many of the top U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and +● the U.S. FinTech market, where we produce and personalize Financial Payment Cards for financial technology companies. +Our business consists of the following reportable segments: +● Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States; +● Prepaid Debit, which primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States; and +● “Other,” which includes corporate expenses. +4 +Table of Contents +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 18 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +COVID-19 Update +The COVID-19 pandemic has impacted, and continues to impact, the global economy and the locations where we, our customers and our suppliers conduct business. The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain. The health and safety of CPI employees remains paramount, and the Company continues to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines.  All of CPI’s operations have remained open during the pandemic and provide direct and essential support to the financial services industry. +The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain, including increased lead times for, and higher costs of, certain raw materials and components, such as microchips, which are expected to continue in the future. CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to help mitigate supply chain constraints. The current environment has also affected the available labor pool in the areas in which the Company operates, which has resulted in increased labor cost and turnover in our facilities, challenges hiring production employees and shipping delays. On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) issued an Emergency Temporary Standard (“ETS”) mandating certain employers to require either full vaccination against COVID-19 or weekly testing of employees. The United States Supreme Court upheld a stay on enforcement of the ETS mandate, and on January 25, 2022, OSHA announced that it would withdraw the ETS to focus on finalizing a permanent COVID-19 Healthcare Standard. At this time, it is not possible to predict the impact a permanent COVID-19 Healthcare Standard, or any corresponding mandates from federal, state or local governmental entities would have on us or on our workforce. Federal, state or local mandates could result in increased costs as well as labor disruptions, employee attrition and/or difficulty recruiting new employees which could compound the labor shortage already impacting the Company. +The Company believes the labor and supply chain challenges described above, and the associated costs, may continue to increase throughout 2022 and possibly beyond. The Company may not be able to pass all of these costs through to its customers. The Company also believes the increased production lead times described above are likely to continue throughout 2022 and possibly beyond, depending on the duration of the labor and supply chain challenges and the level of demand from its customers. The Company will continue to monitor and respond as the situation evolves, including mitigation efforts such as purchasing additional inventory and attempting to hire additional production employees. See Part I, Item 1A, Risk Factors in this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on the Company. +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, included provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. We deferred employer social security payments in 2020 in accordance with the CARES Act, and the first installment repayment was made in the fourth quarter of 2021. The second installment payment is permitted to be paid no later than the fourth quarter of 2022. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 12 “Income Taxes” for a discussion of the historical CARES Act income tax impacts on the Company. +Our Competitive Strengths +● Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We believe these efforts have resulted in CPI gaining estimated overall market share each year from 2018 to 2021. We have long-standing, trust-based relationships with customers, many of whom we have served for decades. We have collaborated with our top 10 customers for more than ten years, on average. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology +5 +Table of Contents +integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. Our Card@Once ® instant issuance solution provides the necessary on-site equipment and supplies, proprietary software-as-a service (Saas) capability, customer support and secure data exchange to provide personalized cards on-site and on-demand at bank and credit union branches across the United States. Data is exchanged through either a secure web interface or through integrations of our proprietary software with our customers’ card issuance systems. Integrations provide a more seamless experience for our customers and we believe they foster longer lasting and closer customer relationships. +● Comprehensive End-to-End Card Solutions. The foundation of our strong market position with our small- to mid-sized issuer customers and FinTechs is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card design and production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solutions allow our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +● Network of High-Security Facilities. Our high-security facilities are each audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands, forming a leading network of compliant production facilities in the United States. The Payment Card Brand attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long and complex, and our facilities must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +● Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV”) is a global technical standard, maintained by EMVCo LLC (“EMVCo”) for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV ® cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We also produce dual-interface EMV cards that have both contact and contactless functionality. +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. CPI’s Second Wave ® payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”), and Earthwise TM cards made with upcycled plastic address customer demands for more eco-focused card options. We also sell CPI Metals ® , a premium encased metal card. Our offerings also include Card@Once, our proprietary and patented instant card issuance system and software-as-a-service solution. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Solutions market, gives us a competitive advantage. +● Experienced Leadership Team. We have an experienced leadership team that has energized the organization to focus on customers, accountability, innovation and delivering results. +6 +Table of Contents +EMV ® is a registered trademark or tradename of EMVCo LLC in the United States and other countries. +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality products, customer service and continuous innovation with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our customers elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality products and customer service, continuous innovation, and market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +Market-Leading Quality Products and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading solutions provider. With a focus on market-leading quality products and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their businesses. We listen to the voices of our customers and focus on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our stockholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. Continuous innovation aims to win new business and help our customers differentiate themselves with distinctive products and solutions, build their brands, and achieve top-of-wallet status. +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We aim to streamline our operations, which enables us to allocate resources focused on providing our customers with unmatched solutions, innovation and exceptional service. We have also developed standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We invest in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance, profitability, and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact and Contactless Dual-Interface) +We produce plastic EMV cards, including our eco-focused solutions that we describe further below, and encased metal contact EMV cards. These EMV cards feature an integrated circuit that interfaces with an EMV payment +7 +Table of Contents +terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology, and we generally refer to all cards we produce with an RFID antenna as ‘contactless’ cards. +Earth Elements TM Eco-Focused Cards +We believe we are a leading provider of eco-focused card solutions in the U.S., having sold nearly 50 million eco-focused contactless payment cards since launch in 2019. Our Earth Elements portfolio offers eco-focused solutions, including our Second Wave cards that feature a core made with ROBP and our Earthwise cards made with upcycled plastic. Dependent upon design and card construction, Earth Elements cards incorporate varying types and amounts of upcycled plastic content, including ROBP, recycled PVC and recycled PET-G. We offer an Earthwise card that incorporates up to 98% upcycled plastic content, dependent on design. Cards in the Earth Elements portfolio are available in all forms of EMV Financial Payment Cards (contact and contactless dual-interface), and have been approved by two of the major Payment Card Brands. These solutions aim to satisfy increasing consumer demand for more eco-focused products and help support our and our customers’ environmental, social and governance (“ESG”) objectives. +Non-EMV Financial Payment Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards that utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, including prepaid debit cards. In 2021 and 2020 we produced non-EMV cards for the purpose of government disbursement in the U.S., and have produced non-EMV transit cards. We also produce retail gift cards that are not issued on the networks of the Payment Card Brands. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact, contactless, and dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven with full color printing and edge-to-edge coverage, and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss or print with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with an inventory of their card stock and fulfillment materials. In addition, we provide EMV data preparation services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We also provide consultation and card design services to further assist customers in card customization. +CPI On-Demand ® Solutions +Through our CPI On-Demand ® services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. We believe the CPI On-Demand solution further differentiates us with our financial institution and prepaid debit card program manager customers and enables us to access new, business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, government disbursement, benefits and insurance. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +8 +Table of Contents +Instant Card Issuance Systems and Services +We offer Card@Once, our proprietary and patented instant card issuance system and software-as-a-service, which provides our card issuing-bank customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, a contact EMV card or a contactless dual-interface EMV card, and personalizes the card on a desktop printer solution provided by CPI. These processes are audited for PCI data security standards compliance annually. Our instant issuance system generates both initial sales revenue for the printer solution and recurring revenue from card personalization and sales of cards and consumables. We offer multiple Card@Once solutions, including our latest innovation, which is our premium Spectrum solution that enables issuers to produce a higher resolution payment card with over-the-edge printing capability. +Digital Services +While not currently significant to our financial results, we provide digital services and issuance technologies, including online card ordering, order lifecycle management, customer inventory management, self-service card customization, and other innovative solutions. +Suppliers +While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the EMV/ contactless microchips and antennas. Our main suppliers of EMV/ contactless microchips and antennas include four leading international manufacturers with locations in Germany, Thailand, Netherlands, South Korea, and Singapore. For the year ended December 31, 2021 approximately 92% of our purchased microchips and antennas came from these four main suppliers, and approximately 64% came from one supplier, primarily on a purchase order basis. The other key components for our products are substrates and inlays. Additionally, o ur Second Wave ® payment cards feature a core made with ROBP, which we currently source from one supplier in Haiti. +We monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation, resiliency and price. Surges in demand for certain raw materials and components, as well as other factors such as staffing challenges, have continued to strain the global supply chain network, which has resulted in increased costs of such raw materials and components, increased shipping costs, freight and logistics delays, longer lead times and unpredictability. Although we strive to place orders for materials and components sufficiently in advance to compile buffer stock to mitigate the impacts of freight and logistics delays and to bolster our access to raw materials and components, it is difficult to predict the ability of our suppliers to continue to fulfill such orders, and it is possible that such delays as well as costs to obtain such raw materials and components will increase in 2022. If suppliers cannot fulfill our microchip orders this can constrain our ability to support customer demand and negatively impact net sales in 2022. We significantly increased inventory levels in 2021 to mitigate the supply chain constraints discussed above. +Customers +We categorize our customers as follows: large issuers, small to mid-sized issuers, FinTechs, prepaid debit issuers and program managers and Group Service Providers. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest Prepaid Debit Card program managers. The Company had one customer that accounted for 10% or more of its net sales in 2021. Net sales from this customer was approximately 18% of total net sales for the year ended December 31, 2021. We have been serving this customer for greater than 10 years. In addition, nearly two-thirds of our net sales for the year ended December 31, 2021 were from our top ten direct customers, which includes certain Group Service Providers. We have been serving these top ten direct customers for an average of greater than 10 years. In addition, through our direct and indirect customer relationships, approximately two-thirds of our annual net sales in our Debit and Credit segment are derived from small- to mid-sized issuers and FinTechs. Individually, many of these customers represent minor amounts of our annual net sales as these +9 +Table of Contents +small- to mid-sized issuers, including independent community banks and credit unions, do not require a significant amount of annual replenishment of Financial Payment Cards or ongoing card data personalization. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangements that define the quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a network of high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers and provide consistent supply. We have designed our facilities and operating processes to target providing exceptional service to all customers, with capabilities to: +● execute high-volume production runs that allow us to offer cost-effective price points on large orders; +● execute lower-volume production runs of smaller orders, as well as on-demand solutions; and +● meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this prepaid retail market. +As of December 31, 2021, we operate facilities comprising approximately 386,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card printer provisioning and fulfillment, card packaging and fulfillment services. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we seek to embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources and create innovative and responsible products. Our key areas of focus in this area include: incorporating environmental sustainability practices as and where feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility and meaningful, innovative products at value-driven pricing. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives, customer relationships and partners that provide a wide geographic reach across the United States to sell and market our solutions. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customer’s individual needs. We use an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the +10 +Table of Contents +payments market. We also strive to meet customer demand for new or enhanced products by innovating through research and development activities. We believe these efforts drive customer retention and satisfaction, and attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation, and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card solutions providers. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. We believe we are in competition with Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA (formerly known as Oberthur Technologies S.A.), Perfect Plastic, Thales (formerly known as Gemalto NV), Travel Tags, Valid S.A., and WestRock (Multi Packaging Solutions), among others. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2021, we had 56 U.S. and foreign trademark registrations and applications, 37 existing U.S. patents, 33 existing foreign patents, as well as 28 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 13 years, and our trademarks will be due for renewal for additional ten year periods on an ongoing basis. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy statutes and regulations, and certain of the PCI Security Standards Council’s requirements, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws, and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council’s requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in achieving and maintaining compliance with the requirements from the Payment Card Brands, and have invested significant capital to achieve and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We +11 +Table of Contents +believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers like us as well as CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +12 +Table of Contents +Human Capital +Our leadership team has significant experience in the payments industry, and many of our employees possess career-long expertise and knowledge that is unique to the Financial Payment Card industry. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of the Company’s core values. Throughout the COVID-19 pandemic, the health and safety of our employees has remained paramount. We continue to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local orders and guidelines.  Our office-based employees moved to a primarily remote work environment beginning in March 2020. +We are committed to a diverse and inclusive workplace, in which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior, and employees are required to follow these standards and participate in related training. We encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. We also focus on a variety of community initiatives to enhance the lives of people in the communities where we operate through volunteerism, charitable giving and economic support. +As of December 31, 2021, CPI employed approximately 1,150 full-time employees, roughly 57% male and 43% female. Approximately 52% of the employee base identifies as being within a minority category. Approximately 72% of our full-time employees are production and service facility staff. Additionally, we use the services of temporary workers to provide flexibility for our business needs. None of our employees are represented by labor unions. We believe that our relations with our employees are positive . +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127, telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of the Company's website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC by the Company. +CPI Card Group Inc. qualifies as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and has elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. As of June 30, 2021, the market value of outstanding shares of our common stock owned by non-affiliates exceeded $75 million, which triggered the Company being classified as an accelerated filer with respect to SEC regulations and filing requirements effective December 31, 2021. \ No newline at end of file diff --git a/raw/filings/0001641614/2021/0001558370-22-003016/item13.txt b/raw/filings/0001641614/2021/0001558370-22-003016/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..60bc230d5aa0d5195d0fdb4eb55264a25997fb56 --- /dev/null +++ b/raw/filings/0001641614/2021/0001558370-22-003016/item13.txt @@ -0,0 +1,3 @@ +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001641614/2021/0001558370-22-003016/item9a.txt b/raw/filings/0001641614/2021/0001558370-22-003016/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..852eba6b7c8d07db187470e9fb41449244ca95af --- /dev/null +++ b/raw/filings/0001641614/2021/0001558370-22-003016/item9a.txt @@ -0,0 +1,17 @@ +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2021. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting as described below in Management’s Report on Internal Control Over Financial Reporting. As previously disclosed in the September 30, 2021 Form 10-Q , our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective based on their evaluation as of September 30, 2021, and, based on a re-evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2020, March 31, 2021 and June 30, 2021. +Management’s Report on Internal Control Over Financial Reporting +Management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. +A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements would not be prevented or detected on a timely basis. +Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that assessment, we identified a material weakness in our risk assessment primarily due to an inadequate complement of personnel with requisite experience in the design and implementation of controls. This resulted in ineffective general information technology controls over user access administration within the revenue system at certain locations, and change management related to the development of customized reports. Due to the general information technology control deficiencies, certain process-level automated controls and manual controls that are dependent on the completeness and accuracy of information derived from the affected information technology systems were also ineffective because they could have been adversely impacted. The deficiencies in risk assessment also resulted in ineffective (i) journal entry controls due to inadequate review for segregation of duties on journal entries processed in batches, and (ii) controls over the accuracy of the sales price for sales in certain locations. We also identified ineffective controls over review and authorization of certain transactions in the purchasing process due to inadequate communication and monitoring activities. +The material weaknesses did not result in any identified material misstatements to the financial statements and there were no changes to previously reported financial results. Based on these material weaknesses, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2021. +77 +Table of Contents +Our independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this Annual Report on Form 10-K, issued an adverse opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. KPMG LLP's report appears on pages 50-51 of this Annual Report on Form 10-K. +Remediation of Material Weaknesses +We are in the process of enhancing our internal controls in the aforementioned areas to remediate the material weaknesses. We intend to implement training programs and hire additional resources with the appropriate skills and knowledge to address these internal control deficiencies. In addition, management is continuing to develop the design and implementation of internal controls to require appropriate reviews as well as retain documentation of those reviews with regards to our purchasing and revenue processes. We are also implementing new systems and automating certain processes to enhance our internal controls and to address these material weaknesses. We are assessing and revising the controls over user access administration and implementing monitoring activities over batch processing to ensure appropriate segregation of duties on journal entries processed in batches. We are also enhancing change controls relating to custom reports in certain information technology systems and performing additional analysis of source documentation to appropriately support information used primarily in the purchasing and revenue processes. +We continuously evaluate the effectiveness of our internal control over financial reporting and may implement additional changes or remediation efforts as we implement the above actions. The deficiencies will be determined to be remediated when revised controls have been operating for a reasonable period of time and have been tested to determine they are operating effectively. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2021 we remediated certain user access deficiencies regarding certain systems that were noted in our evaluation of controls and procedures previously reported as of September 30, 2021. We have hired additional resources in information technology, initiated trainings and begun implementing changes to improve controls in our purchasing and revenue processes. Except with respect to changes in connection with the initiatives to remediate the material weaknesses noted above, there were no other changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001641614/2021/0001558370-22-003016/rp_note.txt b/raw/filings/0001641614/2021/0001558370-22-003016/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001641614/2021/0001558370-22-003016/rpt_disclosure.txt b/raw/filings/0001641614/2021/0001558370-22-003016/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8312f64bf1506ab957e4de4a74b8980b8a5927b1 --- /dev/null +++ b/raw/filings/0001641614/2021/0001558370-22-003016/rpt_disclosure.txt @@ -0,0 +1,10 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2021 to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them had or will have a direct or indirect material interest. +Registration Rights Agreement +In connection with our initial public offering, we entered into a registration rights agreement with the Tricor Funds (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Tricor Funds are entitled to request that we register shares of our Common Stock on a long-form or short-form registration statement on one or more occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. The Tricor Funds also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay the Tricor Funds’ expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our Common Stock held by the Tricor Funds as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the Common Stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization or certain other corporate transactions, and (iii) any shares of our Common Stock owned or acquired following the closing of our initial public offering by the Tricor Funds (collectively, “Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. In September 2021, we filed a registration statement on Form S-3 with respect to the shares of Common Stock held by the Tricor Funds in compliance with our obligations under the Registration Rights Agreement. +Director Nomination Agreement +In connection with our initial public offering, we entered into a Director Nomination Agreement with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our Board for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our Common Stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our Board as the number of shares of Common Stock beneficially owned by the Tricor Funds bears to the total number of shares of Common Stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds shall be entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. In addition, for so long as the Tricor Funds collectively beneficially own 10% or more of the total number of shares of our Common Stock then outstanding, the Tricor Funds shall also have the right to have their designees participate on committees of our Board, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding Common Stock. Nicholas Peters and Bradley Seaman have been designated by the Tricor Funds as nominees for election of directors to our Board commencing in 2016. H. Sanford Riley has been designated by the Tricor Funds to stand as a nominee for the first time at the Annual Meeting. +Policies and Procedures for Related Party Transactions +Our Board has adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving us in which the aggregate amount involved in any calendar year will or may be expected to exceed $100,000 and in which a related person has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). For purposes of this policy, a related person is defined as an executive officer, director, nominee for director, or a greater than 5% beneficial owner of our Common Stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider, among other factors, the related party’s relationship to the Company and interest in the transaction, the material facts of the transaction, the benefits to the Company of the transaction, the availability of other sources of comparable products or services (if applicable), whether the transaction is on terms that are comparable to the terms generally available to an unrelated third party, whether the transaction has the potential to impair director independence and whether the transaction constitutes a conflict of interest. +33 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2022/0001558370-23-003082/filing.txt b/raw/filings/0001641614/2022/0001558370-23-003082/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..2d33aa7624852550a51491756b9d8f694b07a149 --- /dev/null +++ b/raw/filings/0001641614/2022/0001558370-23-003082/filing.txt @@ -0,0 +1,2846 @@ +http://www.cpicardgroup.com/20221231#PropertyPlantAndEquipmentOperatingLeaseRightOfUseAsset http://www.cpicardgroup.com/20221231#PropertyPlantAndEquipmentOperatingLeaseRightOfUseAsset http://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrent 0001641614 FY false 11390355 0 0 11255466 2022 P7Y P10Y P10Y P7Y 0001641614 2022-02-23 2022-02-23 0001641614 us-gaap:CommonStockMember 2022-01-01 2022-12-31 0001641614 us-gaap:CommonStockMember 2021-01-01 2021-12-31 0001641614 us-gaap:RetainedEarningsMember 2022-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2022-12-31 0001641614 us-gaap:RetainedEarningsMember 2021-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001641614 us-gaap:RetainedEarningsMember 2020-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember pmts:ShareBasedCompensationAwardTrancheFiveMember 2022-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-05-27 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-05-27 2021-05-27 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-01-01 2021-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2022-01-01 2022-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2022-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember pmts:ShareBasedCompensationAwardTrancheFiveMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USPrepaidDebitMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USDebitAndCreditMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ProductsMember pmts:USDebitAndCreditMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2022-01-01 2022-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ServicesMember 2022-01-01 2022-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ProductsMember 2022-01-01 2022-12-31 0001641614 us-gaap:IntersegmentEliminationMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USPrepaidDebitMember 2021-01-01 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USDebitAndCreditMember 2021-01-01 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ProductsMember pmts:USDebitAndCreditMember 2021-01-01 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2021-01-01 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2021-01-01 2021-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ServicesMember 2021-01-01 2021-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ProductsMember 2021-01-01 2021-12-31 0001641614 us-gaap:IntersegmentEliminationMember 2021-01-01 2021-12-31 0001641614 srt:MinimumMember 2022-01-01 2022-12-31 0001641614 srt:MaximumMember 2022-01-01 2022-12-31 0001641614 us-gaap:MachineryAndEquipmentMember 2022-12-31 0001641614 us-gaap:LeaseholdImprovementsMember 2022-12-31 0001641614 us-gaap:FurnitureAndFixturesMember 2022-12-31 0001641614 us-gaap:ConstructionInProgressMember 2022-12-31 0001641614 pmts:MachineryAndEquipmentUnderFinancialLeasesMember 2022-12-31 0001641614 us-gaap:MachineryAndEquipmentMember 2021-12-31 0001641614 us-gaap:LeaseholdImprovementsMember 2021-12-31 0001641614 us-gaap:FurnitureAndFixturesMember 2021-12-31 0001641614 us-gaap:ConstructionInProgressMember 2021-12-31 0001641614 pmts:MachineryAndEquipmentUnderFinancialLeasesMember 2021-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember 2021-03-15 2021-03-15 0001641614 us-gaap:RetainedEarningsMember 2022-01-01 2022-12-31 0001641614 us-gaap:RetainedEarningsMember 2021-01-01 2021-12-31 0001641614 pmts:SmartPackagingSolutionsSVCpiCardGroupIncMember us-gaap:PendingLitigationMember 2022-12-31 0001641614 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember 2023-04-01 2023-04-01 0001641614 srt:MinimumMember pmts:SeniorRevolvingCreditFacilityMember 2023-04-01 2023-04-01 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember 2023-04-01 2023-04-01 0001641614 srt:MaximumMember pmts:SeniorRevolvingCreditFacilityMember 2023-04-01 2023-04-01 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember 2022-03-03 2022-03-03 0001641614 us-gaap:RevolvingCreditFacilityMember 2021-03-15 0001641614 us-gaap:RevolvingCreditFacilityMember 2021-01-01 2021-12-31 0001641614 srt:MaximumMember 2022-12-31 0001641614 us-gaap:TrademarksMember 2022-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2022-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2022-12-31 0001641614 us-gaap:TrademarksMember 2021-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2021-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2021-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2022-12-31 0001641614 us-gaap:SeniorNotesMember 2022-01-01 2022-12-31 0001641614 pmts:DefinedContributionPlanEmployerMatchOfIncrementalEmployeeDeferral2Member 2022-01-01 2022-12-31 0001641614 pmts:DefinedContributionPlanEmployerMatchOfIncrementalEmployeeDeferral1Member 2022-01-01 2022-12-31 0001641614 us-gaap:SeniorNotesMember 2022-12-28 2022-12-28 0001641614 us-gaap:SeniorNotesMember 2021-03-11 2021-03-11 0001641614 us-gaap:FairValueInputsLevel2Member us-gaap:SeniorNotesMember 2022-12-31 0001641614 us-gaap:FairValueInputsLevel2Member pmts:AblCreditFacilityMember 2022-12-31 0001641614 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SeniorNotesMember 2022-12-31 0001641614 us-gaap:EstimateOfFairValueFairValueDisclosureMember pmts:AblCreditFacilityMember 2022-12-31 0001641614 us-gaap:FairValueInputsLevel2Member us-gaap:SeniorNotesMember 2021-12-31 0001641614 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SeniorNotesMember 2021-12-31 0001641614 us-gaap:SeniorNotesMember 2022-12-31 0001641614 us-gaap:SeniorNotesMember 2022-12-31 0001641614 pmts:AblCreditFacilityMember 2022-12-31 0001641614 pmts:AblCreditFacilityMember 2022-12-31 0001641614 us-gaap:SeniorNotesMember 2021-12-31 0001641614 us-gaap:SeniorNotesMember 2021-12-31 0001641614 us-gaap:SeniorNotesMember 2021-03-15 0001641614 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember pmts:SecuredOvernightFinancingRateMember 2023-04-01 2023-04-01 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember pmts:SecuredOvernightFinancingRateMember 2023-04-01 2023-04-01 0001641614 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember pmts:SecuredOvernightFinancingRateMember 2022-03-03 2022-03-03 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember pmts:SecuredOvernightFinancingRateMember 2022-03-03 2022-03-03 0001641614 pmts:ServicesMember 2022-01-01 2022-12-31 0001641614 pmts:ProductsMember 2022-01-01 2022-12-31 0001641614 pmts:ServicesMember 2021-01-01 2021-12-31 0001641614 pmts:ProductsMember 2021-01-01 2021-12-31 0001641614 us-gaap:CommonStockMember 2021-12-31 0001641614 us-gaap:CommonStockMember 2020-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember 2021-12-31 0001641614 2020-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2022-01-01 2022-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2021-01-01 2021-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-12-31 0001641614 us-gaap:TrademarksMember 2022-01-01 2022-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2022-01-01 2022-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2022-01-01 2022-12-31 0001641614 pmts:FinanceLeasedAssetsMember 2022-12-31 0001641614 pmts:FinanceLeasedAssetsMember 2021-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2022-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember 2022-03-15 0001641614 us-gaap:RevolvingCreditFacilityMember 2022-03-03 0001641614 pmts:SmartPackagingSolutionsSVCpiCardGroupIncMember us-gaap:PendingLitigationMember 2021-04-20 0001641614 us-gaap:RevolvingCreditFacilityMember 2022-01-01 2022-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2022-01-01 2022-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2021-01-01 2021-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2022-01-01 2022-12-31 0001641614 pmts:USPrepaidDebitMember 2022-01-01 2022-12-31 0001641614 pmts:USDebitAndCreditMember 2022-01-01 2022-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2021-01-01 2021-12-31 0001641614 pmts:USPrepaidDebitMember 2021-01-01 2021-12-31 0001641614 pmts:USDebitAndCreditMember 2021-01-01 2021-12-31 0001641614 us-gaap:CommonStockMember 2022-12-31 0001641614 2021-01-01 2021-12-31 0001641614 pmts:SeniorRevolvingCreditFacilityMember 2021-03-15 2021-03-15 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:OneSupplierMember 2022-01-01 2022-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:FourSuppliersMember 2022-01-01 2022-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:OneSupplierMember 2021-01-01 2021-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:FourSuppliersMember 2021-01-01 2021-12-31 0001641614 pmts:MajorCustomerNumberOneMember us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2022-01-01 2022-12-31 0001641614 pmts:MajorCustomerNumberOneMember us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2022-12-31 0001641614 pmts:USPrepaidDebitMember 2022-12-31 0001641614 pmts:USDebitAndCreditMember 2022-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2021-12-31 0001641614 pmts:USPrepaidDebitMember 2021-12-31 0001641614 pmts:USDebitAndCreditMember 2021-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember 2022-12-31 0001641614 2022-12-31 0001641614 2021-12-31 0001641614 2022-06-30 0001641614 2023-03-01 0001641614 2022-01-01 2022-12-31 xbrli:shares iso4217:USD pmts:customer pmts:item xbrli:pure pmts:Vote xbrli:shares iso4217:USD xbrli:shares +Table of Contents +Print- +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☑ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31 , 2022 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10368 W. Centennial Road +Littleton , CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code ( 720 ) 681-6304 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value +PMTS +Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐     No ☑ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐     No ☑ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑    No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑    No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☑ +Non-accelerated filer ☐ +Smaller reporting company ☑ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑   +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☑ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive o ffi cers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +The aggregate market value of the registrant’s common stock held by non-affiliates was $ 76.2 million on June 30, 2022 computed based on the closing price of the registrant’s common stock of $16.80 as reported on the Nasdaq Global Market on that date. +As of March 1, 2023, the number of shares outstanding of the registrant’s common stock was 11,391,580 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2023 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +4 +Item 1A +Risk Factors +13 +Item 1B +Unresolved Staff Comments +34 +Item 2 +Properties +34 +Item 3 +Legal Proceedings +34 +Item 4 +Mine Safety Disclosures +35 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +35 +Item 6 +[Reserved] +35 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +35 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +47 +Item 8 +Financial Statements and Supplementary Data +48 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +76 +Item 9A +Controls and Procedures +76 +Item 9B +Other Information +77 +Item 9C +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +77 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +77 +Item 11 +Executive Compensation +77 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +78 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +78 +Item 14 +Principal Accountant Fees and Services +78 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +79 +Item 16 +Form 10-K Summary +81 +Signatures +82 +1 +Table of Contents +Cautionary Statement Regarding Forward-Looking Information +Certain statements and information in this Annual Report on Form 10-K (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “attempt,” “target,” “objective,” “guides,” “seek,” “focus,” “provides guidance,” “provides outlook” or other similar expressions are intended to identify forward-looking statements, which are not historical in nature. These forward-looking statements, including statements about our strategic initiatives and market opportunities, are based on our current expectations and beliefs concerning future developments and their potential effect on us and other information currently available. Such forward-looking statements, because they relate to future events, are by their very nature subject to many important risks and uncertainties that could cause actual results or other events to differ materially from those contemplated. +These risks and uncertainties include, but are not limited to: a deterioration in general economic conditions, including rising inflation and resulting in reduced consumer confidence and business spending, and a decline in consumer credit worthiness impacting demand for our products; a disruption or other failure in our supply chain, including as a result of the Russia-Ukraine conflict and with respect to single source suppliers, or the failure or inability of suppliers to comply with our code of conduct or contractual requirements, or political unrest in countries in which our suppliers operate, resulting in increased costs and inability to pass those costs on to our customers and extended production lead times and difficulty meeting customers’ delivery expectations; our failure to retain our existing customers or identify and attract new customers; the unpredictability of our operating results, including an inability to anticipate changes in customer inventory management practices and its impact on our business; our status as an accelerated filer and complying with Section 404 of the Sarbanes-Oxley Act of 2002 and the costs associated with such compliance and implementation of procedures thereunder; our failure to maintain effective internal control over financial reporting; our inability to recruit, retain and develop qualified personnel, including key personnel; the potential effects of COVID-19 and responses thereto on our business, including our supply chain, customer demand, workforce, operations; system security risks, data protection breaches and cyber-attacks; interruptions in our operations, including our information technology (“IT”) systems, or in the operations of the third parties that operate computing infrastructure on which we rely; our inability to develop, introduce and commercialize new products; our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our indebtedness and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; disruptions in production at one or more of our facilities; defects in our software; environmental, social and governance preferences and demands of various stakeholders and our ability to conform to such preferences and demands and to comply with any related regulatory requirements; the effects of climate change, negative perceptions of our products due to the impact of our products and production processes on the environment and other ESG-related risks; disruptions in production due to weather conditions, climate change, political instability or social unrest; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation, infringement claims brought against us and risks related to open source software; our limited ability to raise capital; problems in production quality, materials and process; costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state businesses or unclaimed property, as well as potential new U.S. tax legislation increasing the corporate income tax rate and challenges to our income tax positions; our inability to successfully execute on our divestitures or acquisitions; our inability to realize the full value of our long-lived assets; costs relating to product defects and any related product liability and/or warranty claims; our inability to renew licenses with key technology licensors; the highly competitive, saturated and consolidated nature of our marketplace; the effects of restrictions, delays or interruptions in our ability to source raw materials and components used in our products from foreign countries; the effects on the global economy of the ongoing military action by Russia in Ukraine; costs and potential liabilities associated with compliance or failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security; new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services in a timely manner; quarterly variation in our operating results; our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards; our failure to comply with environmental, health and safety laws and regulations that apply to our products and the raw materials we use in our production processes; risks associated with the majority stockholders’ ownership of our stock ; potential conflicts of interest that may arise due to our board of directors being comprised in part of directors who are principals of our majority stockholders; the influence of securities analysts over the trading market for and price of our common stock; failure to meet the continued listing standards of the Nasdaq Global Market; the impact of stockholder activism or securities litigation, on the trading price and volatility of our common stock; certain provisions of our organizational documents and other contractual provisions +2 +Table of Contents +that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors; our ability to comply with a wide variety of complex laws and regulations and the exposure to liability for any failure to comply; the effect of legal and regulatory proceedings; and other risks that are described in Part I, Item 1A, Risk Factors in this Annual Report on Form 10-K and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +3 +Table of Contents +PART I +Item 1. +Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards (as defined below) issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience. +We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships, whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“fintechs”), as well as independent community banks, credit unions and Group Service Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, innovation, and supply-chain management, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, including the largest U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized financial institutions market, which includes independent community banks and credit unions; +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and +● the U.S. fintech market, where we produce and personalize Financial Payment Cards for financial technology companies. +Our business consists of the following reportable segments: +● Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing financial institutions primarily in the United States; +● Prepaid Debit, which primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States; and +● “Other,” which includes corporate expenses. +4 +Table of Contents +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 17 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +● Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We believe these efforts have resulted in CPI gaining estimated overall market share each year from 2018 to 2022. We have long-standing, trust-based relationships with customers and have collaborated with our top 10 customers for more than ten years, on average. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. Our Card@Once ® instant issuance solution provides the necessary on-site equipment and supplies, proprietary software-as-a service (SaaS) capability, customer support and secure data exchange to provide personalized cards on-site and on-demand at bank and credit union branches across the United States. Data is exchanged through either a secure web interface or through integrations of our proprietary software with our customers’ card issuance systems. Integrations provide a more seamless experience for our customers and we believe they foster longer lasting and closer customer relationships. +● Comprehensive End-to-End Card Solutions. The foundation of our strong market position with our small- to mid-sized issuer customers and fintechs is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card design and production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solutions allow our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +● Network of High-Security Facilities. Our high-security facilities are each audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands, forming a network of compliant production facilities in the United States. The Payment Card Brand attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long and complex, and our facilities and systems must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +● Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV ® ”) is a global technical standard, maintained by EMVCo LLC for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We also produce dual-interface EMV cards that have both contact and contactless functionality. +5 +Table of Contents +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. CPI’s Second Wave ® payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”), and Earthwise ® cards made with upcycled plastic address customer demands for more eco-focused card options. We also sell CPI Metals ® , a premium encased metal card. Our offerings also include Card@Once, our proprietary and patented instant card issuance system and SaaS solution. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Solutions market, gives us a competitive advantage. +● Experienced Leadership Team. We have an experienced leadership team that has energized the organization to focus on customers, accountability, innovation and delivering results. +EMV ® is a registered trademark or tradename of EMVCo LLC in the United States and other countries. +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality products, customer service and continuous innovation with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our customers elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality products and customer service, continuous innovation, and market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +Market-Leading Quality Products and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading solutions provider. With a focus on market-leading quality products and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their businesses. We listen to the voices of our customers and focus on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our stockholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. Continuous innovation aims to win new business and help our customers differentiate themselves with distinctive products and solutions, build their brands, and achieve top-of-wallet status. +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We aim to streamline our operations, which enables us to allocate resources focused on providing our +6 +Table of Contents +customers with unmatched solutions, innovation and exceptional service. We have also developed standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We invest in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance, profitability, and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact and Contactless Dual-Interface) +We produce plastic EMV cards, including our eco-focused solutions that we describe further below, and encased metal contact EMV cards. These EMV cards feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology, and we generally refer to all cards we produce with an RFID antenna as ‘contactless’ cards. +Earth Elements TM Eco-Focused Cards +We believe we are a leading provider of eco-focused card solutions in the U.S., having sold more than 90 million eco-focused contactless payment cards since launch in 2019. Our Earth Elements portfolio offers eco-focused solutions, including our Second Wave cards that feature a core made with ROBP and our Earthwise cards made with upcycled plastic. Dependent upon design and card construction, Earth Elements cards incorporate varying types and amounts of upcycled plastic content, including ROBP, recycled PVC and recycled PET-G. Cards in the Earth Elements portfolio are available in all forms of EMV Financial Payment Cards (contact and contactless dual-interface), and have been approved by two of the major Payment Card Brands. These solutions aim to satisfy increasing consumer demand for more eco-focused products and help support our and our customers’ environmental, social and governance (“ESG”) objectives. +Non-EMV Financial Payment Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards that utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, including prepaid debit cards. In 2020 we began producing non-EMV cards for the purpose of government disbursement in the U.S., and have produced non-EMV transit cards and health savings account cards. We also produce retail gift cards that are not issued on the networks of the Payment Card Brands. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact, contactless, and dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven with full color printing and edge-to-edge coverage, and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss or print with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with an inventory of their card stock and fulfillment materials. In addition, we provide EMV data preparation services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We also provide consultation and card design services to further assist customers in card customization. +Print-On-Demand Solution +Through our print-on-demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. We believe our print-on-demand solution further differentiates us with our financial institution and prepaid debit card program manager customers and enables us to access business-to-business and +7 +Table of Contents +business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, government disbursement, benefits and insurance. +Instant Card Issuance Systems and Services +In addition to centralized personalization services performed at our facilities, our customers may also utilize personalization services through Card@Once, our proprietary and patented instant card issuance system and SaaS solution, which provides our customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to encode a magnetic stripe card, a contact EMV card or a contactless dual-interface EMV card, and personalize the card on a desktop printer solution provided by CPI. These processes are audited for PCI data security standards compliance annually. Our instant issuance system generates both initial sales revenue for the printer solution and recurring revenue from card personalization and sales of cards and consumables. We offer multiple Card@Once solutions including our premium Spectrum solution that enables issuers to produce a high resolution payment card with over-the-edge printing capability. +Digital Services +While not currently significant to our financial results, we provide digital services and issuance technologies, including online card ordering, order lifecycle management, customer inventory management, self-service card customization, push provisioning, and other innovative solutions. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Suppliers +While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, one objective of our procurement strategy is not to depend on any single supplier. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the EMV/ contactless microchips and antennas. Our main suppliers of EMV/ contactless microchips and antennas include four leading international producers with locations in Germany, Thailand, South Korea and Singapore, some of which source materials from Taiwan. For the year ended December 31, 2022 approximately 97% of our purchased microchips and antennas came from these four main suppliers, and approximately 68% came from one supplier, with most of our contactless chips being provided from that same supplier. The other key components for our products are substrates and inlays. Additionally, o ur Second Wave payment cards feature a core made with ROBP, which we either have sourced or currently source from suppliers in Haiti and Thailand. +We monitor supply-chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation, resiliency and price. Surges in demand for certain raw materials and components, as well as other factors such as staffing challenges, have continued to strain the global supply-chain network, which has resulted in increased costs of such raw materials and components, increased shipping costs, freight and logistics delays, longer lead times and unpredictability. Although we strive to place orders for materials and components sufficiently in advance to compile buffer stock to mitigate the impacts of freight and logistics delays and to bolster our access to raw materials and components, it is difficult to predict the ability of our suppliers to continue to fulfill such orders, and it is possible that such delays as well as costs to obtain such raw materials and components will continue. If suppliers cannot fulfill our orders this can constrain our ability to support customer demand and negatively impact net sales. To mitigate the supply-chain constraints discussed above, we increased inventory levels in 2022 and entered into a capacity reservation agreement with one of our chip suppliers to reserve production supply capacity. Under the agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve +8 +Table of Contents +capacity to produce a set quantity of chips from 2023 through 2025, subject to certain conditions, and the Company has committed to purchase those chips. The total value of our commitment is $194.9 million over the term of the agreement. +Customers +We categorize our customers as follows: large issuers, small to mid-sized issuers, fintechs, prepaid debit issuers and program managers and Group Service Providers. We consider large issuers to be the top 10 card issuers in the United States based on an average of cards issued during the past three years. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest Prepaid Debit Card program managers in the United States. +The Company had one customer that accounted for 10% or more of its net sales in 2022. Net sales from this customer was approximately 16% of total net sales for the year ended December 31, 2022. We have been serving this customer for more than 10 years. Nearly two-thirds of our net sales for the year ended December 31, 2022 were from our top ten direct customers, which include certain Group Service Providers and we have been serving these top ten direct customers for an average of more than 10 years. In addition, through our direct and indirect customer relationships, a majority of our annual net sales in our Debit and Credit segment are derived from small- to mid-sized issuers and fintechs. Individually, many of these customers, including independent community banks and credit unions, represent minor amounts of our annual net sales. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangement that defines the quantities of products to be delivered or services rendered and other terms specific to the order as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a network of high-security facilities that we leverage to fulfill customer orders, with an array of products and services available to our customers. We have designed our facilities and operating processes to target providing exceptional service to all customers, with capabilities to: +● execute high-volume production runs; +● execute lower-volume production runs of smaller orders, as well as on-demand solutions; and +● meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, through our expertise and capabilities specifically designed for this prepaid retail market. +As of December 31, 2022, we operated facilities comprising approximately 386,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card printer provisioning and fulfillment, card packaging and fulfillment services. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we seek to embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources and create innovative and responsible products. Our key areas of focus in this area include: incorporating environmental sustainability practices as and where feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +9 +Table of Contents +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility and meaningful, innovative products at value-driven pricing. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives, customer relationships and partners that provide a wide geographic reach across the United States to sell and market our solutions. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customers’ individual needs. We use an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. We also strive to meet customer demand for new or enhanced products by innovating through research and development activities. We believe these efforts drive customer retention and satisfaction, and attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation, and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card solutions providers. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. We believe we are in competition with ABCorp, Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA (formerly known as Oberthur Technologies S.A.), Perfect Plastic, Thales (formerly known as Gemalto NV), Travel Tags, and WestRock (Multi Packaging Solutions), among others. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2022, we had 48 U.S. and foreign trademark registrations and applications, 39 existing U.S. patents, 42 existing foreign patents, as well as 45 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 13 years, and our trademarks will be due for renewal for additional ten year periods on an ongoing basis. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information can include names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state +10 +Table of Contents +privacy statutes and regulations, certain of the PCI Security Standards Council’s requirements, and the Health Insurance Portability and Accountability Act (“HIPAA”), each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws, and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council’s requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in achieving and maintaining compliance with the requirements from the Payment Card Brands, and have invested, and will continue to invest, significant capital to achieve and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers like us as well as CFPB supervised banks and nonbanks. The CFPB has in the past +11 +Table of Contents +and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Human Capital +Our leadership team has significant experience in the payments industry, and many of our employees possess career-long expertise and knowledge that is unique to the Financial Payment Card industry. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of the Company’s core values. Health and safety of our employees has remained paramount and the Company has adapted its health and safety procedures and protocols as necessary to foster a safe working environment. Our office-based employees moved to a primarily remote work environment beginning in March 2020. +We are committed to a diverse and inclusive workplace, in which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior, and employees are required to follow these standards and participate in related training. We encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. We also focus on a variety of community initiatives to enhance the lives of people in the communities where we operate through volunteerism, charitable giving and economic support. +As of December 31, 2022, CPI employed approximately 1,375 full-time employees, approximately 55% male and 45% female. Approximately 59% of the employee base identifies as being within a minority category. Approximately 74% of our full-time employees are production and service facility staff. Additionally, we use the services of temporary workers to provide flexibility for our business needs, particularly in our Prepaid Debit Card locations where historically we experienced more seasonality, although this is becoming a less meaningful portion of our workforce. In 2022, we began transitioning positions that were staffed with temporary workers to permanent employee positions, in order to better manage our workforce and operations. None of our employees are represented by labor unions. We believe that our relations with our employees are positive. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127, telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of the Company's website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC by the Company. +CPI Card Group Inc. qualifies as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and has elected to follow certain of the scaled back disclosure accommodations within this Annual +12 +Table of Contents +Report on Form 10-K. Beginning with the year ended December 31, 2021, the Company is classified as an accelerated filer with respect to SEC regulations and filing requirements. +Item 1A. Risk Factors +There are many factors that affect our business, financial condition, results of operations and cash flows, some of which are beyond our control. The following is a description of some important factors that may cause our business, financial condition, results of operations and cash flows in future periods to differ materially from those currently expected or desired. Factors not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations and cash flows. You should carefully consider all of these risks described below, together with the other information included in this Annual Report on Form 10-K, before investing in our securities. As a result of any of these risks, known or unknown, you may lose all or part of your investment in our securities. +Risk Factors Summary +Risks Relating to our Business +● A deterioration in general economic conditions, including rising inflation, resulting in reduced consumer confidence and consumer and business spending and decreased demand for our products. +● Disruptions, delays and increasing costs and inflationary pressures in our supply chain, including with respect to single-source suppliers, or the failure or inability of our suppliers to comply with our codes of conduct or contractual requirements. +● Failure to retain existing key customers and attract new customers due to competitive products, pricing pressures, extended production lead times, financial health of our customers and macroeconomic conditions affecting our industry or our customers. +● The unpredictability of our operating results due to the varying cyclicality of the financial card and electronic payment industries, changes in customer inventory management practices, capital requirements, competition, new product developments, technological changes and other factors. +● Costs associated with being an accelerated filer and compliance with Section 404 of the Sarbanes-Oxley Act of 2002. +● Failure to recruit, retain and develop qualified new and replacement personnel amidst labor shortages and in competitive labor markets. +● The effects of the COVID-19 pandemic including restrictions imposed by federal, state and local governments as well as related economic disruptions adversely affecting our supply chain, workforce, overall operations and financial condition. +● A cyber-attack or breach of our information technology systems resulting in losses of our intellectual property and/or sensitive cardholder data, harm to our competitive position and a loss of customer trust and confidence, and, as threats evolve, the necessity to invest in significant additional resources to enhance our information security and controls. +● Any interruption of our information technology systems, including disruptions or failures of our third-party data centers, inhibiting our ability to service our customers. +● Our inability to undertake time-consuming and costly research and development activities in order to develop new or enhanced products. +● Our substantial indebtedness and the covenants and restrictions in the agreements governing our indebtedness limiting our ability to use our cash flow in certain areas of our business, capitalize on certain business opportunities and pursue our business strategies, all of which could increase if we incur additional debt. +● A disruption at any of our production facilities and our inability to recover quickly or otherwise provide continuity of production in order to meet customer requirements. +● Problems in our production processes, including as a result of mechanical or technological failures, which could lead to reduced production capacity and quality. +● The impact of the increasing focus on environmental, social and governance (“ESG”) factors on our ability to access capital, produce our products in conformity with stakeholder preferences, and comply with stakeholder demands as well as comply with any new ESG related regulatory requirements. +● The effects of climate change on our business. +13 +Table of Contents +● Our inability to protect our trade secrets, intellectual property and proprietary software, to obtain additional intellectual property rights in the future, and to ensure our products are not infringing the intellectual property rights of others. +● Defects in our software and computing systems, resulting in errors or delays in the processing of transactions and other interruptions in our business operations. +● The effects of the low trading volume and fluctuating trading price of our common stock as well as terms of our outstanding indebtedness and market conditions on our ability to access capital markets. +● Our exposure to additional tax collection efforts by states, unclaimed property laws, or future increases in U.S. federal or state income taxes, resulting in additional expenses which we may be unable to pass along to our customers. +● Our inability to divest or consolidate certain non-strategic businesses, and our inability to execute successfully on an acquisition strategy. +● A write-down of our long-lived assets, which represent a significant portion of our total assets. +● Defects in our products that may give rise to products recalls, product liability and warranty claims as well as damage to our reputation. +● Our inability to renew licenses with key technology licensors, resulting in our loss of access to certain technologies upon which we rely to develop certain of our products. +Risks Relating to our Industry +● The highly competitive, saturated and consolidated nature of our marketplace. +● The effects of delays or interruptions in our ability to source raw materials and components used in our products from foreign countries due to economic downturns or disruptions, including as a result of responses to continued outbreaks of COVID-19 and tariffs and trade restrictions. +● The effects of the ongoing military action by Russia in Ukraine on the global economy. +● Challenges, costs and potential liabilities associated with compliance or failure to comply with existing or future data privacy and security laws, regulations and requirements. +● The widespread adoption of technological changes, new products or industry standards, such as digital payment systems or mobile payments, which may render our products obsolete or irrelevant, and our failure to develop and introduce innovative products to address the evolving needs of our customers. +● Our failure to comply with the standards of the PCI Security Standards Council, including due to an inability to continue to make investments in our facilities necessary to maintain compliance with such standards. +● Our failure to comply with environmental, health and safety laws and regulations, including climate change regulations, that apply to our products and the raw materials we use in our production processes. +Risks Relating to Ownership of our Common Stock +● Our majority stockholders’ continued concentrated ownership of our shares and ability to control decisions regarding our business direction and policies as well as the potential conflicts of interest that may arise between our majority stockholders and our other stockholders. +● The influence of securities analysts over the trading market for and price of our common stock, particularly due to the lack of substantial research coverage of our common stock. +● Our failure to maintain our listing on the Nasdaq Global Market (“Nasdaq”) due to failure to comply with Nasdaq listing standards . +● The impact of stockholder activism or securities litigation on the trading price and volatility of our common stock. +● Certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors. +General Risk Factors +● Our inability to comply with numerous evolving and complex laws and regulations relating to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, labor and health and safety. +● Legal costs, insurance expenses, settlement costs and the risk of an adverse decision related to legal or regulatory proceedings or litigation. +14 +Table of Contents +Risks Relating to our Business +Risks associated with reduced levels of consumer and business spending, ongoing inflation and the effects of an economic downturn could adversely affect our business, financial condition and results of operations. +Our business depends heavily on the overall level of consumer and business spending. Our revenue is exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. A sustained deterioration in general economic conditions, particularly in the United States, or increases in interest rates may adversely affect our financial performance by reducing the demand for our Financial Payment Card solutions or reducing the purchase of our higher margin products. If an economic downturn occurs, credit card issuers may reduce credit limits, close accounts and become more selective with respect to whom they issue credit cards. Certain of our customers, especially in the fintech space, could be severely impacted by a downturn in economic conditions limiting their spending on cards, or cease to exist altogether. Additionally, an economic downturn or prolonged outbreak of the COVID-19 pandemic could result in extended voluntary or mandated closure of retail locations that sell certain of our products to consumers, including our Prepaid Debit Cards. These and other changes in economic conditions could therefore adversely impact our future revenues and profits and cause a materially adverse effect on our business, financial condition and results of operations. +Inflation, which increased significantly during 2022, has adversely affected us by increasing the costs of materials and labor needed to operate our business and could continue to adversely affect us in future periods. In the event inflation continues to increase, we may seek to increase the sales prices of our products and services in order to maintain satisfactory margins. However, such increases may result in customer pushback or attrition and be difficult or impossible in future periods, all of which may have an adverse effect on our financial condition and results of operations. Additionally, actions by the government to stimulate the economy may increase the risk of significant inflation, which may also have an adverse impact on our business or financial results. +A disruption or other failure in our supply chain could adversely affect our business and financial results. +As a company engaged in production and distribution, we are subject to the risks inherent in such activities, including product quality control issues, disruptions or delays in our supply chain as well other external factors over which we have no control. Raw materials used in our products may be sourced from a few, or single, key suppliers. Specifically, certain key components for our Financial Payment Card products include EMV microchips, substrates (such as PVC), resin, modules, antennas and inlays, which we source from multiple suppliers located in Germany, Thailand, South Korea, the United States, Haiti and Singapore, some of which source materials from Taiwan, primarily on a purchase order basis. Though we obtain the microchips used in our Financial Payment Card products from multiple suppliers, we source the substantial majority of such microchips from one supplier. For the year ended December 31, 2022 approximately 97% of our purchased microchips and antennas came from four main suppliers, and approximately 68% came from one supplier, with most of our contactless chips being provided from that same supplier. We may enter into agreements with suppliers from time to time which commit us to purchase products at prices less favorable than those available in the market at the time of the order, or in quantities greater than our future needs. If such supplier is unable to fulfill our orders for microchips or is delayed in shipping microchips to us, we could fail to timely fulfill customer orders, which could damage our reputation and result in a loss of customers and customer opportunities and material harm to our financial results. +Additionally, our Second Wave cards, featuring a core made with recovered ocean-bound plastic (“ROBP”) rely on a largely international supply chain to source and provide such plastic in accordance with our defined parameters. It is difficult and costly to monitor suppliers of key components and their compliance with our parameters, our codes of conduct, and applicable laws. Any failure by our suppliers to so comply could adversely affect our ability to produce Financial Payment Cards at all or in a manner consistent with standards agreed upon with our customers, which could adversely affect our business, reputation and customer relationships. Moreover, in certain cases, such as with ROBP, microchip and resin suppliers, we may rely on suppliers for which there are not adequate and immediate replacements, which may result in our inability to continue to produce or a reduction in production of products that use components from these suppliers in the event the suppliers terminate their relationships with us, fail to deliver products or materials in required volumes or in required timeframes, or otherwise fail to meet their obligations to us. We generally do not +15 +Table of Contents +maintain large volumes of inventory, which makes us even more susceptible to harm if a supplier fails to deliver products or materials as required. +Changes in the financial or business condition of our suppliers, political instability, social or civil unrest, war or adverse market conditions in a supplier’s country (including relating to any continued outbreak of COVID-19), demand from other customers of such suppliers or failure to comply with our codes of conduct or other contractual requirements could render our suppliers unable to provide us with, or render us unable or unwilling to accept, the components we need to produce our products and thus subject us to losses or adversely affect our ability to bring products to market. Further, the failure of our suppliers to deliver goods and services in sufficient quantities, in compliance with applicable standards, contract requirements, or laws and regulations, and in a timely manner could adversely affect our customer service levels, our reputation and our overall business. For example, we have in the past experienced delays in our supply chain, which made it difficult to produce our products in a timely manner. In addition, any increases in the costs of goods and services for our business, including as a result of inflationary pressures, may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in our operations. If a company in our supply chain engages in illegal, unethical or other questionable conduct, we may not have visibility to these practices, we may in certain circumstances be deemed to have concurrent responsibility with our supplier for such conduct, and we, and our customers, may face legal or reputational harm in addition to interruptions to our supply chain. +Failure to retain our existing customers or identify and attract new customers would have a material adverse effect on our business. +A substantial portion of our net sales is derived from several large customers. The Company had one customer that accounted for 10% or more of its net sales in 2022. Net sales from this customer was approximately 16% of total net sales for the year ended December 31, 2022. We have been serving this customer for more than 10 years. In addition, nearly two-thirds of our net sales for the year ended December 31, 2022 were from our top ten direct customers, which include certain Group Service Providers. We have been serving these top ten direct customers for an average of more than 10 years. If one or more of our key customer relationships ends, it could have a material adverse effect on our business and financial results. Our ability to provide products and services to these customers and our other customers and meet very high quality standards in a timely manner is critical to our business success. For example, one of the key services that we offer our customers is the prompt and timely production and delivery of replacement debit or credit cards. Orders for replacement debit or credit cards often are placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a high quality and timely manner, our relationships with our customers may be adversely affected and customers may terminate their contracts with us. +In addition, our continued business relationship with our customers may be impacted by several factors beyond our control, including changes of inventory management practices by our customers, more attractive product offerings from our competitors, pricing and inflationary pressures, Group Service Providers’ and program managers’ ability to retain existing or gain new customers, the financial health of our customers and macroeconomic conditions affecting the Financial Payment Card industry or our financial institution and other customers. Our business practices may also be subject to periodic audits by customers as part of that customer’s third-party risk management programs, the outcome of which may result in the loss of that customer or may cause us to incur significant costs in order to satisfy the customer’s requirements. Because our contractual arrangements with customers generally do not include exclusivity clauses or commitments to order specified quantities of products on a medium or long-term basis, there is no guarantee that we will receive orders on a consistent basis or on favorable terms, or be able to renew contracts or purchase orders in a given year on favorable terms or at all. Additionally, as a result of labor shortages and supply-chain constraints, the Company has experienced extended production lead times in some areas of the business and difficulty meeting some customers’ delivery expectations. While we continue to proactively monitor, assess and take steps to minimize disruptions and delays in production, these disruptions and delays have caused, and may continue to cause, the Company to lose or delay customer opportunities. +If we experience difficulty attracting and retaining customers, our business, financial condition and results of operations would be materially and adversely affected. +16 +Table of Contents +Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue and profitability or lead to significant variability in our operating results. These factors include, among others, the varying cyclicality of the financial card and electronic payment industries, labor and supply challenges, capital requirements, Payment Card Brands standards and requirements, competition, new product developments, technological changes and other factors. +Furthermore, in periods of industry overcapacity or when our customers encounter difficulties in their end-markets, orders are more exposed to cancellations, reductions, price renegotiations or postponements, or changes in customer inventory management practices which in turn reduce our management’s ability to forecast the next quarter or full-year production levels, net sales, profits and cash flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations as visibility is reduced. This may have a material adverse effect on our business, financial condition and results of operations. +We are considered an accelerated filer and are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and our inability to maintain effective internal control over financial reporting in the future could result in investors losing confidence in the accuracy and completeness of our financial reports and negatively affect the market price of our common stock. +As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Because we became and continue to be an accelerated filer since the year ended December 31, 2021, Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires our independent registered public accounting firm to attest to the effectiveness of our internal control over financial reporting. Our transition to becoming subject to additional requirements of Section 404 of the Sarbanes-Oxley Act has been and will continue to be time-consuming. Further, the costs associated with compliance with and implementation of procedures under these and future laws and related rules could have a material impact on our results of operations. +Management has assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that assessment, we identified several material weaknesses in internal control over financial reporting during 2021 and have concluded those material weaknesses to be remediated as of December 31, 2022, as described in Part II, Item 9A, Controls and Procedures in this Annual Report on Form 10-K. However, we can give no assurance that additional material weaknesses or significant deficiencies in our internal controls will not be identified in the future. If any such control deficiencies occur in the future, we may not detect errors on a timely basis, our financial statements may be materially misstated, investors may lose confidence in the accuracy and completeness of our financial reports and we may be unable to timely produce our financial reports. Any of the foregoing could negatively affect the market price of our common stock, perhaps significantly. In addition, we could become subject to investigations by any stock exchange on which our securities are listed, the SEC or other regulatory authorities, or litigation or disputes with stockholders, which could require additional financial and management resources and result in more costly directors’ and officers’ insurance, which could have an adverse impact on our business. +The failure to effectively recruit, retain and develop qualified personnel and implement effective succession processes could adversely affect our success and could have a material adverse effect on our business, financial condition and results of operations. +Our business functions are complex and require wide-ranging expertise and intellectual capital. If we fail to recruit, retain and develop personnel who can provide the needed expertise across the entire spectrum of our expertise and intellectual capital needs, then the ability of our business to successfully compete and grow may be adversely affected. The market for qualified personnel is highly competitive and we have experienced labor availability issues in several of our facilities. This shortage of labor has resulted, and may continue to result, in increased compensation and recruiting expenses which could have a material adverse effect on our profitability, particularly if we are unable to pass all of such expenses on to our customers or are limited in our ability to find suitable workers. In addition, the loss of key personnel without adequate succession plans in place may cause a failure to maintain continuity in key business functions. We may not succeed in recruiting sufficient personnel to support our production needs, may fail to effectively replace current personnel who depart with qualified or effective successors, or may not succeed in transitioning from +17 +Table of Contents +temporary to permanent labor at certain facilities. Personnel shortages have resulted, and may continue to result, in extended production lead times and difficulty in meeting customers’ delivery expectations, which could result in the loss of customers and damage to our reputation and have a material adverse effect on our business, financial condition and results of operations. +The ongoing COVID-19 pandemic and responses thereto may, or may continue to, adversely affect our supply chain, workforce, overall operations and financial condition, each of which may have a material adverse effect on our business. +The COVID-19 pandemic has caused significant economic disruption and adversely impacted the global economy. Since the beginning of the COVID-19 pandemic in early 2020, we have experienced, and expect to continue to experience, delays in the supply of, and increased costs of, materials necessary to operate our business, and challenges hiring and retaining workers as well as increased labor costs. Federal, state and local government measures in response to the COVID-19 pandemic, including the institution of orders, restrictions and guidelines relating to the operation of our facilities, travel bans and restrictions, quarantines and shutdowns, have impacted and may continue to impact our workforce, sales and marketing efforts, and our operations and have caused and may continue to cause us to incur significant costs and have a negative impact on our sales and results of operations. For example, our sales and customer relationship personnel have been and may in the future be unable to engage in in-person meetings and interaction with our customers. Although certain restrictions related to the COVID-19 pandemic have eased, uncertainty continues to exist regarding the duration of such measures and potential future measures. Current material and component shortages, logistics constraints and labor inefficiencies have led to and may continue to lead to increased costs and challenges meeting customer demand, which could have a material adverse effect on our business, results of operations and/or financial condition. +The COVID-19 pandemic has also significantly increased economic and customer demand uncertainty and has caused inflationary pressure in the U.S. and elsewhere as well as supply-chain disruptions. Economic uncertainties could continue to adversely affect the financial condition and credit risk of our customers as well as customer demand for the Company’s products and services, particularly if credit card issuers reduce credit limits, close accounts and become more selective in determining to whom they issue credit cards as a result thereof. A prolonged economic contraction or recession may also result in our customers seeking to reduce their costs and expenditures, which could result in lower demand for our products or a shift to demand for lower margin products. If our sales decline, or if such lost sales are not recoverable in the future, our business and results of operations will be significantly adversely affected. +Continued uncertainties related to the magnitude, duration and persistent effects of the COVID-19 pandemic may adversely affect our business. These uncertainties include, among other things: the duration and impact of the resurgence in COVID-19 cases in any country, state, or region; the emergence, contagiousness, and threat of new and different strains of the virus; the availability, acceptance, and effectiveness of vaccines; prolonged reduction or closure of the Company’s operations; disruptions in the global supply chain; increased labor cost and turnover in our facilities as well as challenges hiring production employees; the impact of the pandemic on the Company’s customers and suppliers; the impact of disruptions in the global capital markets and/or declines in our financial performance, which could impact the Company’s ability to obtain financing in the future; and the impact of the pandemic on customer demand for our products and services as discussed above. All of these factors could materially and adversely affect our business, results of operations and/or financial condition. +The global outbreak of COVID-19 continues to evolve. The ultimate impact of the COVID-19 outbreak remains uncertain and subject to change, and we cannot predict its future impacts on our business or the economy as a whole. However, these effects may harm our business, financial condition and results of operations in the near term and could have a continuing material impact on our operations, sales, and liquidity. +System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, impair customer and vendor relationships, disrupt our internal operations, harm perception of our products and expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and our reputation. +The reliability and security of our IT infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. We have been and may continue to be a target of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, +18 +Table of Contents +phishing attacks, ransomware attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from unauthorized use of or access to computer systems (including from internal and external sources). A breach of our security defenses could result in a loss of our intellectual property, the release of sensitive cardholder information and customer, consumer or employee personal data, or the loss of production capabilities at one or more of our production facilities. In recent years these types of incidents have become more prevalent and pervasive across industries, including in our industry. +In addition, our encryption systems are at risk of being breached or decoded. We use encryption technology to protect sensitive data while in transit and at rest. Also, smart cards are equipped with keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, whether caused by cyber-attacks, security breaches, internal control failures, or otherwise, which could ultimately have a material adverse effect on our business, financial condition and results of operations. +The protective measures we have implemented to protect against data and security breaches and cyber-attacks may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. Our activities and investment in protective measures may not be deployed sufficiently quickly or successfully in order to protect our system or network against disruptions and may not prevent or limit the damage from any future security breaches. In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business and reputation. +Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, including the operation of complex IT systems and production equipment. In addition, a significant portion of the communication between our employees, customers, and suppliers depends on our IT systems. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. +In order to serve our customers and operate certain aspects of our business, we depend on data centers and computing infrastructure that is both our own as well as provided by third party vendors. To the extent applications and data used in our business are hosted by third party vendors at their facilities, we do not control the operation of such facilities or in some cases the hardware and infrastructure within them. Any disruption of, interference at, or inability to keep up with our needs for capacity by our third-party data centers or hosted infrastructure partners could interrupt our business operations. In addition, any problems faced by our third-party data center operations or hosted infrastructure partners with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our ability to service our customers also largely depends on the efficient and uninterrupted operation of our own computer information systems and complex production equipment, much of which relies on computer operating systems, residing at our leased facilities. The proper functioning of such systems can be adversely affected by the increasing age and usage of such systems, among other things. Any interruption in our business applications, systems or networks, including, but not limited to, new system implementations, server downtime, failure to upgrade or patch software, facility issues, natural disasters or energy blackouts, could have a material adverse impact on our operations, sales and operating results. Additionally, we have a limited number of employees with the expertise required to operate such internal applications, systems and networks as well as remediate them in the event of a failure, and thus the attrition of such employees could result in our inability to quickly and effectively resolve future IT issues that may arise. +Not only could we suffer damage to our brand and reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements +19 +Table of Contents +require the payment of penalties if our systems do not meet certain operating standards, and failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of compliance of our facilities, any of which could have a material adverse effect on our business. +In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Protective measures we have established for continuation of core business operations in the event of a catastrophic event may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results of operations. +Our future success depends upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process. We may be unable to commercialize new or improved products we may develop on a timely basis or at all. +The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological, market and industry trends, as well as precise technical execution, all of which could adversely affect our ability to meet customer demand for new or enhanced products. The successful development of new products may require us to undertake time-consuming and costly research and development activities, and we may experience difficulties or challenging market conditions that could delay or prevent the successful development, commercialization and marketing of these new products, including, for example, limited or delayed market acceptance of dual-interface EMV technology or eco-focused card solutions in the United States. Before we can commercialize any new products, we may need to expend significant funds in order to conduct substantial research and development. Additionally, we have limited research and development resources as compared to many of our competitors, which may result in an immature product development process and lengthy product roll-outs. If we have difficulty producing innovative products, there could be a material adverse effect on our revenue, results of operations, reputation and business. New or enhanced product offerings may also expose us to additional risks, such as new sources of supplies, increased regulation or reputational harm. +As we develop products, we may need to make significant investments in product development and new technology, as well as sales and marketing resources. Furthermore, if we are unable to develop and introduce new and innovative products in a cost-effective and timely manner, our product and service offerings could be rendered obsolete. In addition, competitors may be able to develop and commercialize competing products more quickly and efficiently. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. +The covenants and restrictions contained in agreements governing our indebtedness may adversely affect our business and results of operations, may restrict our ability to grow and could make it difficult or impossible to timely make our debt service payments or refinance our debt when it comes due. +We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our business. The agreements governing our indebtedness do not fully prohibit us or our subsidiaries from incurring additional indebtedness in the future, and to the extent that we incur additional indebtedness, the risks associated with our substantial indebtedness described below, including our possible inability to service our debt, may increase. Our substantial indebtedness and interest expense could have important consequences to us, including: +● limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, research and development, expanding our infrastructure, capital expenditures and other general business activities and investment opportunities in our company, because we must dedicate a substantial portion of these funds to pay interest, make principal payments and/or otherwise service our debt; +● impacting our cash flows, results of operations and financial condition when interest rates rise, because the interest rate on our revolving credit facility is a floating rate that varies depending on market interest rates from time to time; +20 +Table of Contents +● limiting our ability to retain or attract customers and our ability to attract or retain qualified employees due to our significant amount of debt and the related implications of such debt for the Company’s long-term financial condition; +● limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; +● limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +● limiting our ability to timely make our debt service payments or to satisfy our other obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +● increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; and +● placing us at a competitive disadvantage as compared to our competitors that are less leveraged. +Additionally, the terms of the agreements governing our indebtedness restrict, and any additional indebtedness we may incur in the future could similarly restrict, our ability to operate our business and to pursue our business strategies. Among other things, these agreements restrict our ability to: +● incur additional indebtedness; +● create liens or use assets as security in other transactions; +● enter into certain asset sale transactions or other dispositions of assets; +● declare or pay dividends, repurchase or redeem stock, or make other distributions to stockholders; +● make investments in other businesses or joint ventures; +● merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; and +● enter into transactions with affiliates. +Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business and reputation. +Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, including the operation of complex IT systems and production equipment. In addition, a significant portion of the communication between our employees, customers, and suppliers depends on our IT systems. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. +In order to serve our customers and operate certain aspects of our business, we depend on data centers and computing infrastructure that is both our own as well as provided by third party vendors. To the extent applications and data used in our business are hosted by third party vendors at their facilities, we do not control the operation of such facilities or in some cases the hardware and infrastructure within them. Any disruption of, interference at, or inability to keep up with our needs for capacity by our third-party data centers or hosted infrastructure partners could interrupt our business operations. In addition, any problems faced by our third-party data center operations or hosted infrastructure partners with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our ability to service our customers also largely depends on the efficient and uninterrupted operation of our own computer information systems and complex production equipment, much of which relies on computer operating systems, residing at our leased facilities. The proper functioning of such systems can be adversely affected by the increasing age and usage of such systems, among other things. Any interruption in our business applications, systems or networks, including, but not limited to, new system implementations, server downtime, failure to upgrade or patch software, facility issues, natural disasters or energy blackouts, could have a material adverse impact on our operations, sales and operating results. Additionally, we have a limited number of employees with the expertise required to operate such internal applications, systems and networks as well as remediate them in the event of a failure, and thus the attrition of such employees could result in our inability to quickly and effectively resolve future IT issues that may arise. +21 +Table of Contents +Not only could we suffer damage to our brand and reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements require the payment of penalties if our systems do not meet certain operating standards, and failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of compliance of our facilities, any of which could have a material adverse effect on our business. +In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Protective measures we have established for continuation of core business operations in the event of a catastrophic event may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results of operations. +Disruptions in production at one or more of our facilities may have a material adverse impact on our business, results of operations and/or financial condition. +Any serious disruption at any of our facilities, including as a result of the COVID-19 pandemic, severe weather conditions, climate change, natural disasters, hostilities, political instability, social unrest, network outages or terrorist activities, could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. In the event of a disruption in production at one of our facilities, our other facilities may not have sufficient capacity, may not have the specialized equipment necessary, may have higher production costs, may take significant time to increase production or may fail to meet our customers’ requirements, any of which could negatively impact our business, results of operations and financial condition. Production disruptions may cause our customers to seek alternative supply, which could further adversely affect our profitability. +A significant amount of certain specialized production capacity is also concentrated in single-site locations. Due to the specialized nature of the assets used in the production process at each location, in the event a particular facility experiences disruption, it may not be possible to find replacement capacity quickly or substitute production from our other facilities. Accordingly, disruption at a single-site production operation could significantly impact our ability to supply our customers and could have a severe impact on us. +Additionally, all of our production facilities are currently leased, and we are subject to risks associated with our current and future real estate leases for such facilities. As each lease expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, we may be unable to find replacement locations with adequate capacity for our unique equipment and both current and future operational needs, and we may experience disruption or significant cost in relocating, any of which could have an adverse effect on our operations, customer relationships and financial performance. +Our business could suffer from problems in production quality, materials and process, which could reduce, delay or interrupt production of our products, resulting in adverse impacts to our business and financial results. +We produce our products using processes that are highly complex, require complex and costly equipment and must continually be modified to improve yields and performance. Difficulties in the production process can reduce product yields, reduce product quality or interrupt production altogether. We may not have adequate replacements for failing or malfunctioning machinery available in a timely fashion. Additionally, we have experienced malfunctions and errors, including human error, relating to the operation of certain machinery and systems used in our production process that, in some instances, have resulted in the delivery to our customers of products that did not meet their standards or specifications or whose functionality in the marketplace was adversely impacted. Such problems may result in our inability to properly fulfill customer orders and/or our obligation or election to replace products at our cost and expense, provide credit to or reimburse customers for related damages. We may also be subject to claims relating to such issues. The occurrence of any of these risks could damage our reputation and result in the loss of business, which could have an adverse impact on our business, financial condition and results of operations. +As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our production processes at the market rate, we may experience a lower production quality than the market standard. We may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures, human or other errors, or as a result of external factors beyond our control, such as delay of, or quality issues with, +22 +Table of Contents +materials provided by suppliers, interruption of our electrical service or a natural disaster. We may also risk non-compliance with certain industry standards if we experience failure of certain required operations or processes, such as those related to facility security, which may impede our ability to deliver products to our customers. Any such event could have a material adverse effect on our business, financial condition and results of operations. +Expectations of stakeholders relating to environmental, social and governance matters may impose additional costs and expose us to new risks as well as have an adverse effect on our business, financial condition, results of operations, and cash flows. +There is an increasing focus from certain investors, regulators, customers and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance (“ESG”) matters. Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in the Company if they believe our practices relating to ESG are inadequate, which may hinder the Company’s access to capital. In addition, investment in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures to their investment decisions. In addition to the topics typically considered in such assessments, for businesses in the card production industry, issues of emissions and plastic waste are of particular importance. For example, increased attention to conservation measures and negative consumer attitudes about plastic products or other components in our products could have an adverse impact on demand for our products, which could adversely impact our business and results of operations. +There have also been changing consumer concerns and perceptions (whether accurate or inaccurate) regarding the potentially adverse environmental effects of substances present in certain consumer products, including substances and components the Company uses in its products, including PVC plastic. Potential consumer concerns may also extend to the sourcing of certain materials and labor and other conditions in those locations. We may be unable to produce or procure our products in conformity with these preferences and concerns, or doing so may require significant research and development costs as well as increased costs associated with procuring alternative raw materials and components. We also may need to make changes to our operations that could require additional capital expenditures. This would adversely affect our financial condition, results of operations and cash flows. +Furthermore, customer, investor and consumer expectations in ESG areas have been varied, rapidly evolving and increasing. Specifically, certain customers are beginning to request that the Company provide information on its plans relating to certain environmental related matters such as greenhouse gas emissions, waste sent to landfills and energy usage. The enhanced stakeholder focus on ESG issues requires the continuous monitoring of various and evolving standards, which is time consuming and costly. In addition, in the event that we communicate certain initiatives or goals regarding ESG matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. A failure to adequately meet these various stakeholder expectations and standards may result in reputational damage, the loss of business, diluted market valuation, an inability to attract customers or an inability to attract and retain top talent. +Additionally, the potential for future ESG and climate risk reporting requirements may result in additional costs to monitor, track and report sustainability measures. We have implemented or are considering implementing ESG strategies, including efforts to offer more eco-focused solutions to our customers. Our customers may request that changes be made to our products or operations, as well as other aspects of our production processes. These strategies and customer requests could increase our operating costs and may require the investment of capital. The failure to implement ESG strategies, meet our ESG goals or evolving stakeholder expectations or standards or comply with any new ESG related regulations could adversely affect our reputation and our relationships with customers, which in turn could adversely affect our business, financial condition, results of operations and cash flows. +Climate change may adversely affect our operations and financial performance. +There is continuing concern from members of the scientific community and the general public that emissions of greenhouse gases (“GHG”) and other human activities have caused or will cause significant changes in weather patterns and increase the frequency and severity of extreme weather events, including, without limitation, droughts, wildfires, hurricanes and flooding. Extreme weather events have and may continue to adversely affect us because of their impact on the availability and cost of raw materials and components we need to produce our products and that we source from locations in the United States and internationally that have experienced and may continue to experience such events. In +23 +Table of Contents +addition, extreme weather events could have an adverse impact on, among other things, our customers’ demand for our products and services due to impacts of such events on them as well as decreased consumer demand and spending power as a result of such events, and also on our insurance premiums, operating costs and ability to timely fulfill customer orders in the event of damage or disruption to one of our facilities resulting from such an event. +We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or infringement, which may have a material adverse effect on our business. +Our ability to protect our intellectual property is important to our business. We depend on patents and other intellectual property rights to protect our products, proprietary designs and technological processes against misappropriation by others. Our existing or future patents may be challenged, invalidated or circumvented. Our patents have been and may in the future be challenged as invalid. Furthermore, we may have difficulty obtaining additional patents and other intellectual property protections in the future. The patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Moreover, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which we provide services or sell or license products. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. We actively seek to protect our proprietary rights and trade secrets by engaging in litigation and by entering into confidentiality agreements with our employees, consultants, and strategic partners and controlling access to and distribution of our technologies, documentation and other proprietary information. Nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary and may use such information to interfere with our business. Enforcing our intellectual property rights has in the past, and may in the future, cause us to incur significant costs. These costs and other consequences from the unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. +Companies in our industry aggressively protect their intellectual property rights. Our products often contain technology provided to us by other parties such as suppliers or customers, and we compete in an industry that is highly active in generating intellectual property. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. From time to time, we receive notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights or that challenge the validity of our patents. In addition to the costs and distraction that result from intellectual property litigation and infringement claims, an adverse outcome in these types of disputes could prevent us from offering some of our products and services or from enforcing our intellectual property rights. Settlements can involve royalty or other payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our suppliers, customers and licensors may not be required to fully indemnify us for the costs of defending against infringement claims. In addition, we may be required to indemnify some customers and strategic partners related to allegations, regardless of merit, that our products infringe on the intellectual property rights of others. +We also face risks related to open source software. Certain of our software is derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property and we may incur additional costs to the extent we use open source software that is subject to licensing. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. Usage of open source software can lead to greater risks than the use of third party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software or remedies against the licensors. Many of the risks associated with open source software cannot be eliminated and could have a material adverse effect on our business, financial condition and results of operations. +24 +Table of Contents +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +Our services are based on sophisticated software and computing systems, and the software underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our customers. Defects in our software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of customers, negative publicity or exposure to liability claims. +Our ability to raise capital in the future may be limited, which could lead to delays in innovation and abandonment of our strategic initiatives. +In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. The terms of our outstanding indebtedness, low trading volume and the fluctuating trading price of our common stock may adversely affect our ability to access capital markets and any such financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. We may be unable to access capital due to unfavorable market conditions or other market factors outside of our control, and there can be no assurance that we will be able to raise additional capital when needed. Any failure to achieve adequate funding will delay our products and services innovation and development and could lead to abandonment of one or more of our strategic initiatives. Any of these events could materially harm our business, financial condition and prospects. +We may become subject to additional tax collection obligations, claims for uncollected amounts, and assessments from unclaimed property audits, new U.S. tax legislation could expose us to additional liabilities and our income tax positions or unclaimed property practices may be challenged by relevant authorities, all of which could adversely affect our cash flows and financial results. +Several states have adopted legislation requiring out-of-state sellers to collect and remit sales tax on sales transactions into those states where they have no physical presence. States seeking to expand applicability of sales tax “nexus” laws could result in additional tax expenses in the event we are unable to pass these expenses along to our customers and additional administrative burden to collect and remit sales tax in such jurisdictions. +In addition, we are subject to U.S. federal and state income taxes. Our tax receivables may not be realized, and o ur tax expense and the tax positions included in our financial statements, which are subject to estimates, could be impacted by changes in rules or interpretations of existing tax laws and changes in U.S. federal and state tax legislation and tax rates. New legislation may be enacted which could increase income tax rates in jurisdictions where we operate or have nexus and materially impact our tax provision, cash tax liability and effective tax rate. Additionally, o ur income tax positions may be challenged by relevant tax authorities and we may not be successful in defending against any such challenge, which may adversely affect our future cash flows and financial results. +We are also subject to unclaimed property (escheat) laws in various states which require us to turn over to certain government authorities the property of others held by us that has been unclaimed for a specified period of time. We are subject to audit by individual U.S. states with regard to our escheatment practices. Such audits may cause us to incur significant costs related to outside professional fees and divert management’s time away from business operations. Additionally, we may be subject to assessments, penalties or fines that could adversely affect our financial results. The legislation and regulations related to tax and unclaimed property matters tend to be complex and subject to varying interpretations by both government authorities and taxpayers. +We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer meet with our strategy or that should be consolidated, and we may not be able to execute on an acquisition strategy or integrate acquisitions successfully. +In executing our strategy, we have consolidated certain of our facilities and divested certain of our businesses. We will continue to evaluate such opportunities. Any such consolidation or divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position. +25 +Table of Contents +We may not be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of operations or closure, may not be available to us or may be more costly than anticipated. +We intend to continue to seek additional acquisition opportunities to potentially expand into new markets and to enhance our position in existing markets. We cannot assure we will be able to successfully identify suitable acquisition opportunities, prevail against competing potential acquirers, negotiate appropriate acquisition terms, obtain financing that may be needed to consummate such acquisitions, complete proposed acquisitions, successfully integrate acquired businesses into our existing operations or expand into new markets. In addition, any acquisition, once successfully integrated, may not perform as planned, be accretive to earnings, or prove to be beneficial to our operations and cash flow. +Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value. +Our long-lived assets recorded as of December 31, 2022 include $57.2 million of plant, equipment, leasehold improvements and operating lease right-of-use assets, $18.0 million of net intangible assets, and $47.2 million of goodwill. +We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we were to conclude that a future write-down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write-down of our long-lived assets may result from, among other things, deterioration in our performance and a decline in expected future cash flows and could have a material adverse effect on our business, financial condition and results of operations. +Costs relating to product defects, and any related product liability and warranty claims may materially adversely affect our business. +We offer highly complex services and products and, accordingly, from time to time, defects have occurred. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory, the loss of potential sales and claims by third parties. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we sell defective products into the market, our reputation could suffer, and we may lose sales opportunities and incur liability for damages, including damages claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. +Many of our products integrate third-party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with, among other benefits, access to technology owned by third parties. For example, we license card technology for use in certain of our products, including in EMV cards. This card technology provides a secure environment for applications on smart cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements with the licensors of such technology for the continued use of these platforms. These licensors may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross-licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios. We also may seek to enter into additional cross-licensing arrangements with certain competitors as we pursue additional growth initiatives. If we are unable to enter into +26 +Table of Contents +new cross-licensing agreements or continue to successfully renew existing cross-licensing agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products and or be forced to cease or delay certain growth initiatives, which could have a material adverse effect on our business. +Risks Relating to our Industry +We face competition that may result in a loss of our market share and/or a decline in our profitability. +Our marketplace is highly competitive, relatively saturated and increasingly consolidated. We expect these market dynamics to continue for new product innovations, and as competitors develop lower-cost production processes, competitors consolidate and other competitors attempt to enter the markets in which we operate. +Some of our competitors have larger global customer bases and significantly greater financial, sales and marketing, production, distribution, technical and other capabilities than we do. These competitors may be able to adapt more quickly to new technological requirements and changes in customer and/or regulatory requirements to leverage their scale to lower production costs and prices, and utilize their global footprint to win certain customers with card needs in multiple markets and by producing cards in lower cost geographies. In addition, some competitors are non-public companies, and are therefore not subject to the public company requirements and related expenses that we are. We also face competition from newly established competitors, suppliers of products and customers who choose to develop their own products and services. +Existing or new competitors may develop products, technologies or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. As the technological sophistication of our competitors and the size of the market increases, competing low-cost producers could emerge and grow stronger. These dynamics could result in declining average selling prices and reduced gross margins in our businesses. If we cannot sufficiently reduce our production costs or develop new products, technologies or services, we may not be able to compete successfully, and we may lose market share, which could have a material adverse effect on our business, financial condition and results of operations. +Delays or interruptions in our ability to source raw materials and components used in our products from foreign countries, as well as trade restrictions on goods imported into the United States, could materially harm our business, financial condition and results of operations. +Most of our microchips, as well as certain other raw materials used in our products, are imported from suppliers located outside of the United States, including some with operations in China, Taiwan, Thailand or Haiti. We have experienced and may continue to experience delays and interruptions in our ability to obtain materials imported into the United States due to global economic downturns and trade disruptions, including related to the COVID-19 pandemic. We may also experience such delays and interruptions in our supply chain due to political instability, civil unrest or war in countries from which we directly or indirectly source raw materials and components used in our products. Additionally, the U.S. government has imposed tariffs on imports from certain countries, including countries in which our suppliers are located, and may impose further tariffs and/or trade restrictions. The future status of certain existing international trade agreements to which the United States is party is also uncertain, and such trade agreements could be terminated or replaced. Any of these factors could depress economic activity, restrict our access to suppliers and have a material adverse effect on our business, financial condition and results of operations. +Existing tariffs are also subject to a number of uncertainties as they are implemented, including future adjustments and changes to the products covered by additional tariffs and to the countries included or excluded from such tariffs. Changes in U.S. trade policy have resulted in one or more foreign governments, including China, adopting responsive trade policies that make it more difficult or costly for us to import our products, or to purchase products which include components, from those countries. Additional trade restrictions may lead to increased prices to our customers, which may reduce demand, or, if we are unable to achieve increased prices, result in lowering our margin on products sold and adversely affecting on our business, financial condition and results of operations. +We cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions on the import or export of goods in the future, nor can we predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies +27 +Table of Contents +has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could have a material adverse effect on our business, financial condition and results of operations. +The ongoing military action by Russia in Ukraine has impacted and may continue to have adverse effects on the global economy, and such effects could materially adversely affect our business, operations, operating results and financial condition. +In early 2022, Russian forces launched significant military action against Ukraine, and the region has since experienced sustained conflict and disruption, which may continue in 2023 and beyond. Governments in the United States, United Kingdom and European Union have each imposed export controls on certain products and financial and economic sanctions on certain industry sectors and parties in Russia. These actions and the broader Russia-Ukraine conflict have not had a material impact on the Company's financial condition or results of operations; however, the continuation or escalation of geopolitical tensions or military action related to the conflict and the imposition of additional economic sanctions could continue to adversely affect the global economy and financial markets, disrupt trade and accelerate inflationary pressures, among other things, which could negatively affect the demand for our products and further intensify problems in the global supply chain. Although we have no operations in Russia or Ukraine, we believe we have experienced shortages in raw materials and increased costs for transportation and energy due in part to the negative impact of the Russia-Ukraine conflict on the global economy, which impacts may persist or worsen as the conflict continues or escalates. The conflict also increases the risk of retaliatory acts from Russia impacting U.S. companies, which may include disruptions to our or our customers’ or suppliers’ technology infrastructure, including through cyberattack, ransom attack or cyber-intrusion. The extent and duration of the military action, sanctions and resulting market and economic disruptions are impossible to predict but could be substantial. +Current and prospective regulations, changes in our product offerings and customer contractual requirements addressing consumer privacy and data use and security could increase our costs of operations, which could adversely affect our operations, results of operations and financial condition. +In operating a Financial Payment Card business, we manage large amounts of personally identifiable information of cardholders, including cardholder names, account numbers, healthcare provider names and health savings account numbers, and similar information and are thus subject to laws and requirements relating to data privacy and security, which continue to evolve and may become increasingly difficult to comply with. For example, the California Consumer Privacy Act and the California Privacy Rights Act generally require companies like ours, which process consumer personal information on behalf of their customers, to use, retain or disclose consumer personal information solely for certain limited purposes, including to provide services to our customers according to the terms of our customer contracts. Other states have enacted similar data privacy laws and regulations and/or amended their existing data privacy laws and regulations. Furthermore, to the extent these laws apply to our customers, our customers have imposed, and may continue to impose additional, privacy related contractual obligations on us, adherence to which may require additional investment in resources and internal processes. Additionally, as we continue to innovate our products and services offerings and expand into new lines of business and as the number of jurisdictions enacting privacy and related laws increases and the scope of these laws and enforcement efforts expand, we have and may continue to become subject to additional data privacy and security legal requirements and regulations such as HIPAA. New products and services we develop may also require that we obtain and retain more personally identifiable information for a longer period of time than we have done historically. We have incurred significant expenses to meet the obligations of current privacy-related laws and requirements, and we expect to continue to incur these as well as additional expenses if we become subject to additional privacy-related laws and regulations, which will continue to necessitate us making changes to our internal processes, procedures and systems. Failure to comply with existing or future data privacy and security laws, regulations and requirements to which we are or become subject could result in fines, sanctions, penalties, civil lawsuits or other adverse consequences as well as loss of customer and consumer confidence, which could materially adversely affect our results of operations, overall business and reputation. The legal, political and business environments in these areas are rapidly changing, and subsequent legislation, regulation, litigation, court rulings or other events could expose the Company to increased program costs, liability and reputational damage. +28 +Table of Contents +New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected. +The markets for our products and services are subject to technological changes, frequent introductions of new products and services, evolving industry standards and changing customer preferences and demands. In particular, the rise in the adoption in digital payment systems or mobile payments may make physical cards less attractive as a method of payment. Mobile payments offer consumers an alternative method to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services, or our new services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. If we do not complete or gain market acceptance of new products, services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or attract new ones. For example, one of our growth opportunities is the continued transition to dual-interface EMV cards by U.S. card issuing banks. Banks may be delayed in transitioning to the issuance of dual-interface EMV cards due to increased costs and other factors. If these entities do not deploy dual-interface EMV technology or do so less quickly and/or completely than we expect, our ability to grow could be significantly affected which could have a material adverse effect on our business, financial condition and results of operations. +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +● effectively identify and capitalize upon opportunities in new and emerging product markets; +● invest resources in innovation and research and development; +● complete and introduce new products and integrated services solutions in a timely manner; +● license any required third-party technology or intellectual property rights; +● qualify for and obtain required industry compliance for our products; +● effectively manage the supply chain and related risks; +● comply with applicable data protection regulations; and +● retain and hire personnel experienced in developing new products and services. +Additionally, opportunities to combine or package products and service offerings and the ability to cross-sell products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross-sell our products and services, this may have a material adverse effect on our business, financial condition and results of operations. +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brand compliance standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and producers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated, or customers may cease doing business with us, if we fail to comply with these standards and criteria. +We make significant investments in our network of high-security facilities in order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may +29 +Table of Contents +become ineligible to provide products and services that have constituted in the past an important part of our revenue and profitability. For the year ended December 31, 2022, the vast majority of the products we produced and services we provided were subject to compliance with the standards of one or more of the Payment Card Brands. If we were to lose compliance with one or more of the standards of the Payment Card Brands or of the PCI Security Standards Council for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the networks of the Payment Card Brands. Additionally, certain of our facilities operate under variances of certain of these standards. If such variances are not granted in the future or if we are required to move or alter a facility in order to maintain compliance, we may incur significant costs and delays, or may lose our ability to offer services in that facility, which would be disruptive to our business and have an adverse effect on our customer relationships and financial results. If, as a result of noncompliance with standards of the PCI Security Standards Council or other standards of the Payment Card Brands, we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations. +Environmental, health and safety laws and regulations, including climate change regulations, expose us to liability and any such liability may have a material adverse effect on our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, the handling of certain materials and equipment we use in our production processes is subject to health and safety and environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or lease real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liabilities on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +The increasing concern over climate change has resulted in a broad range of proposed and promulgated federal, state and local regulations aimed at mitigating the effects of climate change, including regulating emission of carbon dioxide, methane and other GHG emissions, mandating recycling of plastic materials, imposing energy or carbon or other waste taxes and effectuating other governmental charges and mandates. Because we use materials in many of our products and engage in production processes that may be the subject of certain of these regulations, if enacted, such regulations could result in additional costs and adverse effects on our business in the form of (i) additional taxes, (ii) potential fines for noncompliance, (iii) restrictions on output, (iv) additional expenditures to either purchase new, or modify existing, equipment or processes, (v) required acquisition or trading of emission allowances and/or (vi) increased costs in the price of energy and/or in procuring alternative or additional raw materials from our suppliers. +Climate change regulation continues to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such regulation could have a material adverse effect on our business, results of operations, financial position, capital expenditures and reputation. +These developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in health and safety or environmental regulations could increase our production costs, which could have a material adverse effect on our business, financial condition and results of operations. +30 +Table of Contents +Risks Relating to Ownership of our Common Stock +Our majority stockholders have the ability to control significant corporate activities, which may result in the Company taking actions that other stockholders did not approve, and their ownership of a significant percentage of our outstanding common stock may adversely impact the liquidity and trading price of our stock. +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital), own approximately 58% of our common stock, in the aggregate, as of December 31, 2022. Continuation of this concentrated ownership could result in a limited amount of shares being available to be traded in the market, resulting in reduced liquidity. Additionally, the price of our common stock has experienced volatility due to the limited number of shares available to trade on the open market. +Also, as a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of all stockholders and, through our board of directors, the ability to control decision-making with respect to our business direction and policies. Matters over which the Tricor Funds, directly or indirectly, exercise control include: +● election of directors; +● mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; +● other acquisitions or dispositions of businesses or assets; +● incurrence of indebtedness and the issuance of equity securities; +● repurchases of stock and payment of dividends; and +● the issuance of shares to management under our incentive plans and other executive compensation matters. +The shares of our common stock held by the Tricor Funds are registered for resale, which means that they may be offered and sold to the public now or in the future without regard to the volume limitations under Rule 144 of the Securities Act. If and when some or all of these shares are sold by the Tricor Funds or the participants in their funds, either through sale on the open market, through privately negotiated transactions or through a distribution to the participants in their funds, or if it is perceived that they will be sold, the market price of our common stock could decline. +Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial portion of our board of directors. +Messrs. Bradley Seaman and Nicholas Peters, who are officers or affiliates of Parallel49 Equity (and its predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49 Equity, on the one hand, and of our other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors. +31 +Table of Contents +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +The trading market for our common stock could be influenced to some extent by the research and reports that industry or financial analysts publish about the Company and our business. We do not control these analysts. Historically, we have not attracted substantial research coverage, and the analysts who publish information about our common stock may have relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain additional securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +If we fail to meet the continued listing standards of the Nasdaq Global Market, our common stock may be delisted, which may adversely affect the market price and liquidity of our common stock. +Our common stock is currently traded on the Nasdaq Global Market. In order to maintain our listing on Nasdaq, we must maintain certain financial and share distribution targets, including maintaining a minimum number of public stockholders, a minimum number of publicly held shares, a minimum market value of publicly held shares and a minimum bid price, in addition to meeting certain corporate governance requirements. There can be no assurance that we will be able to maintain compliance with the requirements for continued listing of our common stock on Nasdaq. If our common stock is delisted and we are unable to list our common stock on another U.S. national securities exchange, we expect our securities would be quoted on an over-the-counter market. Any delisting from Nasdaq could result in significant material adverse consequences for our stockholders, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Other consequences could include a loss of confidence by investors, customers, suppliers and employees, and an adverse effect on our ability to obtain financing to continue operations. +Our business and operations could be negatively affected by stockholder activism and securities litigation. +Stockholder activism, which could take many forms or arise in a variety of situations, has become increasingly prevalent in recent years. On February 24, 2023, Steamboat Capital Partners Master Fund, LP (“Steamboat”) delivered a notice to us indicating its intent to nominate its managing member as a director candidate to stand for election as a director at our 2023 annual meeting of stockholders, which was preceded by criticisms publicly expressed by an affiliate Steamboat regarding the Company’s strategic direction, capital allocation priorities and corporate governance. The Company is evaluating this purported nomination. An affiliate of Steamboat has criticized us, and we could face criticism from others, for risks associated with Parallel49 Equity’s controlling ownership interest in the Company. We could become more prone to stockholder activist demands in the event Parallel49 Equity reduces its ownership in the Company. Additionally, we have in the past been subject to securities litigation following volatility in the price of our common stock, and may again be subject to securities litigation, including as a result of the volatility in the price of our common stock, related to stockholder activism, or otherwise. +Stockholder activism, including potential proxy contests and advance stockholder proposals, and securities litigation could result in substantial costs and divert management’s and our Board of Directors’ attention and resources from our business. Additionally, stockholder activism or securities litigation could give rise to perceived uncertainties as to our future, adversely affect our relationships with customers and make it more difficult to attract and retain qualified personnel. These matters could also hinder the execution of our business and growth strategies or constrain our capital deployment opportunities. Further, the price of our common stock could be subject to significant fluctuation or otherwise be adversely affected. Any adverse determination in litigation could also subject us to significant liabilities. +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the +32 +Table of Contents +best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +● the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +● following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors; +● advance notice procedures and information and disclosure requirements for nominating candidates to our board of directors or presenting matters at stockholder meetings; and +● allowing only our board of directors to fill vacancies on our board of directors. +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate when the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti-takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of the Company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, the potential issuance of preferred stock may delay or prevent a change in control of us or discourage bids for our common stock at a premium over the market price. It may also adversely affect the market price and the voting and other rights of the holders of our common stock as it could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +33 +Table of Contents +General Risk Factors +We are required to comply with complex laws and regulations in the United States and other countries and are exposed to business risks associated with our international business. +We are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. Though we currently have limited international operations, the expansion thereof in the future may increasingly expose us to risks associated with international business operations, including political instability (e.g., the threat of or actual war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect our employees, reputation, business or financial results as well as our ability to meet our objectives. +We may not be in full compliance at all times with the laws and regulations to which we are subject and we may not have obtained the permits, authorizations or licenses that we need. Any failure to comply with applicable laws or regulations could result in fines or sanctions. In such a case, or if any of these international business risks were to materialize, there could be a material adverse effect on our business, financial condition and results of operations. +Our business and financial results may be materially adversely affected by various legal and regulatory proceedings. +We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our business, operating results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any liability that may be imposed on us. +Item 1B. +Unresolved Staff Comment s +None. +Item 2. +Propertie s +Information regarding each of our facilities, which may include multiple leases at each location, is set forth below. +Square +Owned/ +Location +Operations +Footage +Leased +Littleton, Colorado +Financial Payment Card production, corporate facility +65,000 +Leased +Roseville, Minnesota +Financial Payment Card production, card personalization services, card packaging services, fulfillment +205,000 +Leased +Fort Wayne, Indiana +Financial Payment Card production +45,000 +Leased +Nashville, Tennessee +Financial Payment Card personalization services, instant issuance, fulfillment +71,000 +Leased +Item 3. Legal Proceeding s +Smart Packaging Solutions SA v. CPI Card Group Inc. +On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief. In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta. The patents all relate to antenna technology. SPS alleges that the Company incorporates the patented technology into its products that use contactless communication. The Company does not produce antennas; it purchases certain antenna-related components from SPS and a number of other suppliers. The Company’s motion to dismiss the complaint is currently pending. Additionally, a third party, Infineon, has filed requests +34 +Table of Contents +for Inter Parties Review (“IPR”) proceedings concerning each of the four patents. As a result, the Delaware District Court stayed the case pending resolution of the requests for review. The United States Patent Office has instituted proceedings with respect to all of the IPR requests. The current proceedings in the patent office are scheduled to run through September 2023. Should the patents survive review by the United States Patent Office, the Company intends to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. +In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations. +Item 4. +Mine Safety Disclosure s +Not applicable. +PART I I +Item 5. +Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market +Our common stock trades on the Nasdaq Global Market under the symbol “PMTS”. +Holders +There were twenty-five stockholders of record as of March 1, 2023. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. +Dividends +We do not currently expect that any cash or other dividends will be paid to holders of our common stock in the near future. Any future cash dividend or other dividend declarations are subject to the determination of the Company’s board of directors. +Repurchases +There were no shares repurchased during the years ended December 31, 2022, and 2021. +Item 6. +[Reserved] +Item 7. +Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, some of which are not within our control. See "Risk Factors" and “Cautionary Statement Regarding Forward-Looking Statements.” +Company Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards (as defined below) issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ). +35 +Table of Contents +We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience. +We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“fintechs”), as well as independent community banks, credit unions and Group Service Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, including the largest U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized financial institutions market, which includes independent community banks and credit unions; +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and +● the U.S. fintech market, where we produce and personalize Financial Payment Cards for financial technology companies. +Trends and Key Factors Affecting our Financial Performance +We believe the following key factors may have a meaningful impact on our business performance and may negatively influence our financial and operating results: +● We have experienced, and expect to continue to experience, labor availability issues, particularly in the Company’s production facilities. In the year ended December 31, 2022, the Company incurred increased employee compensation and recruiting expenses in Cost of Sales and Operating Expenses, which we expect to continue throughout 2023 and beyond as the Company continues to actively recruit additional employees and is affected by inflationary pressure. Also as a result of labor shortages and supply-chain constraints, as described below, the Company has experienced extended production lead times in some areas of the business and difficulty meeting some customers’ delivery expectations. We continue to proactively monitor, assess and take steps to minimize disruptions and delays in production and are seeing improvements; however, disruptions and delays that have previously caused the Company to lose or delay customer opportunities could reoccur again or worsen in 2023 and beyond. +● We have experienced, and continue to experience, inflationary pressure in our supply chain, as well as delays and difficulties in sourcing key materials and components needed for our products. Although we are seeing improvements in certain areas, such issues as well as other factors such as staffing challenges, have continued to strain the global supply chain network, which has resulted in increased costs of certain raw materials and components, increased shipping costs, freight and logistics delays, longer lead times, shortages of raw materials we use in our products, such as the on-going global microchip shortage, and +36 +Table of Contents +unpredictability. Certain of our suppliers have also required us to place orders that commit us to purchase goods a year or more in advance of our anticipated production need, which is a significant change from the historical practice of placing purchase orders for delivery within weeks of the anticipated production need. While we are taking actions to limit the impact of the dynamics described above, including compiling buffer stock, we expect to experience supply-chain impacts on our business which may impact our ability to meet customer demand in future periods. We also believe some of our customers may have anticipated, or may anticipate in the future, supply-chain-related delays and correspondingly have increased, or may seek to increase, their own inventory of the Company’s products on hand which has resulted and may result in less demand for our products in the future. Also, geopolitical uncertainties associated with the ongoing Russia and Ukraine conflict, as well as COVID-19 impacts in China, have created additional supply-chain disruptions on a macro-economic level. Such events may further compound the Company’s supply-chain challenges. Additionally, certain microchip producers have limited the types of microchips that they produce, which will affect our ability to continue to provide lower-cost contact microchips for certain of our customers. This could cause us and affected customers to migrate to more expensive microchip options or to contactless cards at a faster pace than expected, which may be disruptive for the Company and affected customers. While we may be able to pass on some of our increased labor and material costs to our customers, cost inflation has increased at a faster pace than anticipated, and we expect these factors will impact profitability throughout 2023 and beyond. In addition, given that raw materials inventory is recognized on a first-in, first-out basis, we expect the impact of increasing raw materials costs to be realized into our statement of operations throughout 2023 and possibly beyond. +● Our Second Wave ® payment cards feature a core made with recovered ocean-bound plastic (“ROBP”), which we historically have sourced from Haiti and processed using single-source suppliers. Due to political instability and other factors as well as the supply-chain constraints described above, we have faced challenges in obtaining consistent supply of ROBP from Haiti. We recently began sourcing ROBP from Thailand, and the supply chain for this material includes single-source suppliers similar to the materials sourced from Haiti. We have tested this material and believe that cards that incorporate the material meet or exceed applicable quality standards, and we believe we will be able to procure sufficient supply from this new source country. However, if we encounter production challenges with this material or are unable to obtain adequate or consistent supply from the source country, we may not have sufficient supply of ROBP to meet customer demand for our Second Wave cards. The Company continues to actively monitor and manage its supply chain, including compiling buffer stock of materials and evaluating alternative suppliers and sources for ROBP, but it is uncertain how issues in Haiti and other factors in the ROBP supply chain will affect our ability to continue obtaining sufficient ROBP. Additionally, alternative suppliers of ROBP in other source countries may be constrained by local or global geopolitical challenges, instability and unpredictability, and we may be subject to increased shipping and materials costs, which we may not be able to pass through to our customers. +● The Company has been classified as an accelerated filer since 2021 with respect to SEC regulations and filing requirements. As a result, our annual assessment of the effectiveness of our internal control over financial reporting must be audited by our external audit firm in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”). Continued compliance with this requirement has significantly increased our compensation expense, professional fees and other administrative costs during the years ended December 31, 2022 and 2021. We expect certain of these increased costs to continue throughout 2023 and beyond as we continue to maintain compliance. +COVID-19 Update +The COVID-19 pandemic and associated counteracting measures implemented by governments and businesses around the world have impacted, and continue to impact, economies and societies globally, including the locations where we, our customers and our suppliers conduct business. We believe the global impacts from COVID-19, along with other macro-economic factors, have contributed to, among other things certain adverse effects on our supply chain, production lead times, labor availability, employee absenteeism and other costs. Though we have implemented measures to attempt to mitigate the impacts of the challenges described above, we believe that such impacts, and the associated costs, may continue throughout 2023 and beyond. The long-term implications of COVID-19 on our results of operations and overall financial performance remain uncertain. We continue to monitor global developments concerning COVID-19 to anticipate issues that may impact our business and take any necessary action. +37 +Table of Contents +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, included provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. We deferred employer social security payments in 2020 in accordance with the CARES Act, and the first installment repayment was made in the fourth quarter of 2021 and the second and final installment repayment was made in the fourth quarter of 2022. +Segment Overview +Our business consists of the following reportable segments: +● Debit and Credit; +● Prepaid Debit; and +● Other. +Debit and Credit Segment +Our Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services for card-issuing financial institutions and fintechs primarily in the United States. Products produced by this segment primarily include EMV ® and non-EMV Financial Payment Cards, including contact and contactless (dual-interface) cards and plastic and encased metal cards, and Second Wave payment cards featuring a core made with ROBP, and other private label credit cards that are not issued on the networks of the Payment Cards Brands. We also sell Card@Once ® printers and related supplies as part of our proprietary +and patented instant card issuance system. Services provided include a variety of integrated card services, including card personalization and fulfillment services. We also provide print-on-demand services, where we produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, as well as our Card@Once software-as-a-service (SaaS) solution. The Debit and Credit segment operations are each audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +Prepaid Debit Segment +Our Prepaid Debit segment primarily provides integrated prepaid card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid Debit segment operation is audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +Other +Our Other segment includes corporate general and administrative expenses. +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive income. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of Financial Payment Cards, including contact and contactless cards, which includes our eco-focused cards. Contactless EMV cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV cards. We also generate product revenue from the sale of our Card@Once +38 +Table of Contents +instant issuance system and consumables, private label credit cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, including print-on-demand services, tamper-evident security packaging, fulfillment services and SaaS personalization of instant issuance Financial Payment cards. See Part II, Item 8, Financial Statements and Supplementary Data , Note 2 “Summary of Significant Accounting Policies” and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates—Revenue Recognition” in this Annual Report on Form 10-K for further information and timing of revenue recognition for net sales. We include gross shipping and handling revenue in net sales. +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including microchips and antennas for contactless EMV cards, labor costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Product costs also include Card@Once instant issuance printer costs. Services costs include the cost of labor, raw materials in the case of tamper-evident security packaging, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, promotional activity, and employee relations. We include the costs of shipping and handling related to customer sales in cost of sales. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service, human resources, research and development and administrative personnel, including payroll, benefits and stock-based compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and software related fees. Operating expense also includes depreciation and amortization expense and may include impairment charges on tangible and intangible assets, when necessary. +Income from Operations and Operating Margin +Income from operations consists of our gross profit less our net operating expenses. Operating margin is income from operations as a percentage of net sales. +Other Expense, net +Other expense, net consists primarily of interest expense and other non-operating items. +Income Tax Expense +Income tax expense consists of our federal and state income taxes at statutory rates, including the impact of other items such as valuation allowances, tax credits, permanent items, and foreign taxes. +Net Income +Net income consists of our income from operations, less other expense, net, and income taxes. +39 +Table of Contents +Results of Operations +Year Ended December 31, 2022 Compared With Year Ended December 31, 2021 +The table below presents our results of operations for the years ended December 31, 2022 and 2021: +Year Ended December 31, +2022 +2021 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +281,190 +$ +199,586 +$ +81,604 +40.9 +% +Services +194,555 +175,533 +19,022 +10.8 +% +Total net sales +475,745 +375,119 +100,626 +26.8 +% +Cost of sales +299,978 +233,693 +66,285 +28.4 +% +Gross profit +175,767 +141,426 +34,341 +24.3 +% +Operating expenses +96,637 +81,962 +14,675 +17.9 +% +Income from operations +79,130 +59,464 +19,666 +33.1 +% +Other expense, net: +Interest, net +(29,616) +(30,608) +992 +(3.2) +% +Other (expense) income, net +107 +14 +93 +* +Loss on debt extinguishment +(474) +(5,048) +4,574 +* +Income before taxes +49,147 +23,822 +25,325 +* +Income tax expense +(12,607) +(7,881) +(4,726) +* +Net income +$ +36,540 +$ +15,941 +$ +20,599 +129.2 +% +* Not meaningful +Net Sales: +Year Ended December 31, +2022 +2021 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +Debit and Credit +$ +390,559 +$ +296,204 +$ +94,355 +31.9 +% +Prepaid Debit +86,136 +79,213 +6,923 +8.7 +% +Eliminations +(950) +(298) +(652) +* +Total +$ +475,745 +$ +375,119 +$ +100,626 +26.8 +% +Debit and Credit: +Net sales for Debit and Credit increased $94.4 million, or 31.9%, for the year ended December 31, 2022 compared to the prior year. Products net sales increased primarily due to increased volumes from existing customers, including the acquisition of new portfolios by an existing customer and the transition to eco-focused and other contactless cards, and higher Card@Once instant issuance sales. Contactless cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV cards. Services net sales increased due to growth from our print-on-demand solution and card personalization services, as well as higher Card@Once services. +Prepaid Debit: +Net sales for Prepaid Debit increased $6.9 million, or 8.7%, for the year ended December 31, 2022 compared to the prior year, due to new customer acquisitions, overall higher volumes from our existing customer base, and the benefit from price increases. +40 +Table of Contents +Gross Profit and Gross Margin: +Year Ended December 31, +% of +% of +2022 +net sales +2021 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +Debit and Credit +$ +144,214 +36.9 +% +$ +110,006 +37.1 +% +$ +34,208 +31.1 +% +Prepaid Debit +31,553 +36.6 +% +31,420 +39.7 +% +133 +0.4 +% +Total +$ +175,767 +36.9 +% +$ +141,426 +37.7 +% +$ +34,341 +24.3 +% +Debit and Credit: +Gross profit for Debit and Credit increased $34.2 million, or 31.1%, for the year ended December 31, 2022 compared to the prior year, primarily due to the net sales increase described above, partially offset by the inflationary impact on production costs. Gross profit margin decreased to 36.9% during the year ended December 31, 2022, compared to 37.1% in the prior year, primarily due to higher production costs, primarily materials, partially offset by operating leverage from higher sales, including the benefit of price increases . +Prepaid Debit: +Gross profit for Prepaid Debit increased $0.1 million, or 0.4%, for the year ended December 31, 2022 compared to the prior year, primarily due to the net sales increase described above, partially offset by the inflationary impact on production costs. Gross profit margin for Prepaid Debit decreased to 36.6% for the year ended December 31, 2022 compared to 39.7% in the prior year, primarily due to higher production costs, primarily materials, partially offset by operating leverage from higher sales, including the benefit of price increases. +Operating Expenses: +Year Ended December 31, +% of +% of +2022 +net sales +2021 +net sales +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +Debit and Credit +$ +34,169 +8.7 +% +$ +30,537 +10.3 +% +$ +3,632 +11.9 +% +Prepaid Debit +5,976 +6.9 +% +4,510 +5.7 +% +1,466 +32.5 +% +Other +56,492 +* +46,915 +* +9,577 +20.4 +% +Total +$ +96,637 +20.3 +% +$ +81,962 +21.8 +% +$ +14,675 +17.9 +% +Debit and Credit: +Debit and Credit operating expenses increased $3.6 million, or 11.9%, for the year ended December 31, 2022 compared to the prior year, primarily due to a $1.3 million increase in selling and compensation expenses and a $1.0 million increase in professional services fees. +Prepaid Debit: +Prepaid Debit operating expenses increased $1.5 million, or 32.5%, for the year ended December 31, 2022 compared to the prior year, primarily due to increased selling expenses. +Other: +Other operating expenses increased $9.6 million, or 20.4%, for the year ended December 31, 2022 compared to the prior year, primarily due to a $7.2 million increase in compensation expenses as a result of increased employee +41 +Table of Contents +headcount and higher salaries and $2.2 million of increased stock compensation, and a $2.4 million increase in professional services fees, including costs related to compliance with the Sarbanes-Oxley Act. +Income from Operations and Operating Margin: +Year Ended December 31, +% of +% of +2022 +net sales +2021 +net sales +$ Change +% Change +(dollars in thousands) +Income from operations by segment: +Debit and Credit +$ +110,045 +28.2 +% +$ +79,469 +26.8 +% +$ +30,576 +38.5 +% +Prepaid Debit +25,577 +29.7 +% +26,910 +34.0 +% +(1,333) +(5.0) +% +Other +(56,492) +* +(46,915) +* +(9,577) +(20.4) +% +Total +$ +79,130 +16.6 +% +$ +59,464 +15.9 +% +$ +19,666 +33.1 +% +Debit and Credit: +Income from operations for Debit and Credit increased $30.6 million, or 38.5%, for the year ended December 31, 2022 compared to the prior year, primarily due to higher net sales , partially offset by increased production costs and operating expenses. Operating margins increased to 28.2% for the year ended December 31, 2022 compared to 26.8% in the prior year, primarily due to operating leverage from higher net sales, partially offset by higher production costs, primarily materials. +Prepaid Debit: +Income from operations for Prepaid Debit decreased $1.3 million, or 5.0%, for the year ended December 31, 2022 compared to the prior year, primarily due to increased production costs and operating expenses, partially offset by higher sales. Operating margin decreased to 29.7% for the year ended December 31, 2022 compared to 34.0% in the prior year, primarily due to the factors discussed above. +Other: +The loss from operations in Other increased $9.6 million, or 20.4%, for the year ended December 31, 2022 compared to the prior year due to the factors described above under “Operating Expenses.” +Interest, net: +Interest expense decreased to $29.6 million for the year ended December 31, 2022 from $30.6 million in the prior year. Interest expense was higher in 2021 primarily due to $2.6 million of “make-whole” interest premium paid in connection with the termination of our $30.0 million senior credit agreement (the “Senior Credit Facility”) on March 15, 2021. The decrease in interest expense due to the “make-whole” interest premium was partially offset by higher average interest rates on our borrowings during the year ended December 31, 2022, net premium paid of $0.5 million relating to the early retirement of the 8.625% Senior Secured Notes due 2026 (the “Senior Notes”), and interest income received of approximately $0.4 million in 2021 related to income tax refunds. +Loss on Debt Extinguishment: +During the year ended December 31, 2022, we recorded a $0.5 million loss on debt extinguishment relating to the $25.0 million early retirement of the Senior Notes, as we expensed the associated portion of the unamortized deferred financing costs. +During the year ended December 31, 2021, we recorded a $5.0 million loss on debt extinguishment relating to the termination of both our previous Senior Credit Facility and First Lien Term Loan as we expensed the unamortized deferred financing costs and debt discount. This was completed in connection with the issuance of the Senior Notes and entry into our new asset-based, senior secured revolving credit facility (the “ABL Revolver”) on March 15, 2021. +42 +Table of Contents +Income Tax Expense: +Our effective tax rate on pre-tax income was 25.7% and 33.1% for the years ended December 31, 2022 and 2021, respectively. The decrease in our effective tax rate for the year ended December 31, 2022 compared to the prior year was primarily due to a decrease in unrecognized tax benefits due to the lapse of statute of limitations and favorable settlements with state tax authorities. +Net Income: +Net income for the year ended December 31, 2022 was $36.5 million, compared to net income of $15.9 million in the prior year. The increase was primarily due to higher gross profit and a decrease in other expenses due to the impact of debt refinancing costs incurred in the 2021 first quarter, partially offset by increased operating expenses and income tax expense. +Liquidity and Capital Resources +At December 31, 2022, we had $11.0 million of cash and cash equivalents. +Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs. +On March 15, 2021, we entered into a credit agreement with Wells Fargo Bank, National Association providing for an ABL Revolver of up to $50.0 million. On March 3, 2022, we entered into Amendment No. 1 to Credit Agreement, which amended the ABL Revolver, to among other things, increased the available borrowing capacity to $75.0 million, increased the uncommitted accordion feature to $25.0 million and revised the interest rate provisions to replace the LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York. On October 11, 2022, we entered into Amendment No. 2 to the Credit Agreement, which amended the ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory. +Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable interest rate margin. We may select a one, three or six month term SOFR, which is adjusted for a credit spread of 0.10% to 0.30% depending on the term selected. Through March 31, 2023, the applicable interest rate margin ranges from 1.50% to 1.75% depending on the average excess availability of the facility for the most recently completed quarter. The unused portion of the ABL Revolver commitment accrues a monthly unused line fee, 0.50% per annum through March 31, 2023, times the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month. The interest rate margin and unused line fee percentage changes, effective April 1, 2023, to between 1.25% and 1.75% (interest rate margin) and 0.375% and 0.50% (unused commitment fee). +Amounts borrowed and outstanding under the ABL Revolver are required to be repaid in full, together with any accrued and unpaid interest, on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes (and may be subject to earlier mandatory prepayment upon certain events). +The ABL Revolver includes limitations on our ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than $7.5 million. The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments or b) the $75.0 million of available borrowing capacity under the ABL Revolver (“Borrowing Base”). The Borrowing Base is further reduced by credit line reserves, letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below $7.5 million and until such time that borrowing capacity equals or exceeds $7.5 million for 30 consecutive days, we must maintain a fixed charge coverage ratio (as defined in the Credit Agreement for the ABL Revolver) greater than 1.00, calculated for the trailing 12 months in order to borrow under the ABL Revolver. +43 +Table of Contents +On March 15, 2021, we completed a private offering of $310.0 million aggregate principal amount of the Senior Notes and related guarantees at an issue price of 100%. The Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year. +As permitted by the indenture governing the Senior Notes, the Company may from time to time repurchase some or all of the Senior Notes in open market transactions, in privately negotiated transactions or otherwise. Prior to March 15, 2023, the Company may also redeem some or all of the Senior Notes at a “make-whole” redemption price, and on or after March 15, 2023, the Company may redeem some or all of the Senior Notes at a redemption price initially set at 104.313% of the principal amount of the notes to be redeemed, and reducing over time to 100%, in each case plus accrued and unpaid interest. Additionally, prior to March 15, 2023, the Company may redeem, on one or more occasions, up to 40% of the aggregate principal amount of the Senior Notes with the proceeds of certain equity offerings, at a redemption price equal to 108.625% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Furthermore, prior to March 15, 2023, but not more than once during each consecutive twelve-month period, the Company may also redeem up to 10% of the aggregate principal amount of the Senior Notes at a redemption price equal to 103% of the principal amount of the notes being redeemed, plus accrued and unpaid interest. The timing and amount of any such redemptions or repurchases will depend upon market conditions, contractual commitments, the Company’s capital needs and other factors. +The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of the related indenture, with any required payments to be made after the issuance of the Company’s annual financial statements. No such payment was required based on the Company’s 2022 operating results. +On March 11, 2022, we used the available borrowing capacity under the ABL Revolver to fund the redemption of $20.0 million aggregate principal amount of the Senior Notes at a redemption price equal to 103% of the principal amount thereof plus accrued and unpaid interest thereon to the redemption date. +On December 28, 2022 the Company used cash on hand to fund the purchase of $5.0 million aggregate principal amount of the Senior Notes at a purchase price equal to 98.75% of the principal amount thereof plus accrued and unpaid interest thereon to the purchase date. +As of December 31, 2022, the Company had $285.0 million aggregate principal amount outstanding on the Senior Notes and $5.0 million in ABL Revolver borrowings outstanding, plus accrued and unpaid interest. +In connection with the issuance of the Senior Notes and entry into the ABL Revolver, we terminated our previous Senior Credit Facility and previous First Lien Term Loan. Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $15.0 million under the ABL Revolver, were used to pay in full and terminate the Senior Credit Facility and First Lien Term Loan on March 15, 2021, and to pay related fees and expenses. During the three months ended March 31, 2021, prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan. +Operating Activities +Cash provided by operating activities for the year ended December 31, 2022 was $31.3 million compared to cash provided by operating activities of $20.2 million for the year ended December 31, 2021. Cash generated from earnings for the year ended December 31, 2022 was partially offset by working capital increases, including an increase in accounts receivable of $19.7 million due to higher net sales and an increase in inventories of $10.7 million to help mitigate supply-chain constraints. Cash provided by operating activities during the year ended December 31, 2021 benefited from the collection of $9.8 million of income tax refunds. +Investing Activities +Cash used in investing activities for the year ended December 31, 2022 was $17.8 million, compared to $9.9 million during the year ended December 31, 2021. Cash used in investing activities was related primarily to capital expenditures, including investments to support the business, such as machinery and information technology equipment. +44 +Table of Contents +As presented in our supplemental disclosures of non-cash information on the statement of cash flows, finance leases were executed for the acquisition of right-of-use machinery and equipment assets totaling $9.1 million during the year ended December 31, 2022, compared to $1.9 million during the year ended December 31, 2021. +Financing Activities +During the year ended December 31, 2022, cash used in financing activities was $23.2 million. We retired $24.9 million aggregate principal amount of Senior Notes in 2022, net of discount, paid $3.4 million of principal on financing leases, and received $2.1 million under financing leases during the year ended December 31, 2022. Net proceeds from the ABL Revolver were $5.0 million. We also paid $0.9 million in debt related costs. +During the year ended December 31, 2021, cash used in financing activities was $47.2 million. Proceeds from the Senior Notes and ABL Revolver, net of discount, were $310.0 million and $14.8 million, respectively. We paid $9.5 million of debt issuance costs and $2.7 million of debt extinguishment costs, which included an early termination “make-whole” interest premium of $2.6 million on the Senior Credit Facility. We used proceeds from the Senior Notes and initial borrowings under the ABL Revolver, plus cash on hand, to pay in full and terminate the Senior Credit Facility balance of $30.0 million and the First Lien Term Loan balance of $304.7 million on March 15, 2021. Prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the Senior Credit Facility and First Lien Term Loan. We paid $2.2 million of principal on financing leases during the year ended December 31, 2021. +During the second quarter of 2021, we used $15.0 million of cash on hand to pay down the ABL Revolver to zero and had no borrowings outstanding thereunder as of December 31, 2021. +Working Capital +Our working capital as of December 31, 2022 was $99.6 million, compared to $80.9 million as of December 31, 2021. The increase in o ur working capital during the year ended December 31, 2022 was primarily due to an increase in accounts receivable of $19.6 million and increased inventories of $10.4 million, partially offset by a decrease in cash of $9.6 million as described above. Our working capital needs are typically highest in the first and third quarters due to the timing of payments for employee incentives and interest on outstanding borrowings. The majority of our interest payments are due in the first and third quarters. +Material Cash Requirements +Our material cash requirements include interest payments on our long-term debt, operating and finance lease payments, and purchase obligations to support our operations. +Debt Service Requirements +As of December 31, 2022, the total projected principal and interest payments on our borrowings were $377.4 million, primarily related to the Senior Notes, of which $25.2 million of interest is expected to be paid in the next 12 months. The remaining interest payments are expected to be paid over the remaining term of the Senior Notes, which mature in 2026, and the principal is due upon maturity. We have estimated our future interest payments assuming no additional borrowings under the ABL Revolver, no early redemptions of principal on the Senior Notes, no early voluntary or required repayment of the borrowings under the ABL Revolver within the next twelve months, and no debt issuances or renewals upon the maturity dates of our notes. However, we may borrow additional amounts under the ABL Revolver, redeem principal on the Senior Notes early or refinance all or a portion of our borrowings in future periods. +Leases +We lease real property for production and services, in addition to equipment. Refer to Part II, Item 8, Financial Statements and Supplemental Data, Note 9, “Financing and Operating Leases” for details on our leasing arrangements, including future maturities of our operating lease liabilities. +45 +Table of Contents +Purchase Obligations +A purchase obligation is an agreement to purchase goods or services that is enforceable, legally binding, and specifies all significant terms. As of December 31, 2022, we had approximately $221.7 million of outstanding purchase obligations, of which approximately $94.9 million is expected to be paid in the next 12 months. +Included in the above amounts, during 2022, the Company entered into a capacity reservation agreement with one of the Company’s chip suppliers to reserve production supply capacity due to the current global supply shortage environment. Under the agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve capacity to produce a set quantity of chips from 2023 through 2025, subject to certain conditions, and the Company has committed to purchase those chips. The total value of the minimum non-cancellable commitment is $194.9 million over the term of the agreement, $69.6 million of which is expected to be paid in the next 12 months. In the event that the supplier is unable to deliver the specified quantity of chips, it will be subject to liquidated damages of 10% of the price of any non-delivered products. +Cyclical and Seasonal Nature of Business +Financial Payment Cards are generally influenced by broader cyclical changes in the economy, with economic downturns potentially resulting in decreases in the demand for our products and services and economic upturns potentially resulting in increases in demand. In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. Our net sales are also influenced by changes in customer behavior such as altering inventory management practices, Financial Payment Card renewal cycles and demand for new products, such as contactless cards. Additionally, we historically have generated higher net sales in the third and fourth quarters of the year, as our sales of Prepaid Debit Card solutions are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season in the United States and timing related to the production of health insurance and health savings account cards. +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported net sales, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +Revenue Recognition +Products Net Sales: “ Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are produced for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, we estimate net sales by taking actual costs incurred and applying historical margins for similar types of contracts. Margins across each business with similar contracts have been relatively consistent and we have not made changes to our methods and assumptions during 2022. Items included in “Products” net sales are produced Financial Payment Cards, including contact-EMV, contactless EMV, Second Wave, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. +Services Net Sales: Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and SaaS personalization of instant +46 +Table of Contents +issuance debit and credit cards. For work performed but not completed and billed, we estimate revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Margins across each business with similar contracts have been relatively consistent and we have not made changes to our methods and assumptions during 2022. +Customer Contracts: The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. Usually our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. The contract term as defined by ASC 606, Revenue from Contracts with Customers , is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally considered short term in nature. +Income Taxes +We are subject to income taxes in the United States and certain foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies. Changes in the relevant facts can significantly impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. +During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. The company is required to make estimates regarding future compensation for covered individuals to determine the value of its deferred tax asset related to the future deductibility of executive stock compensation which also requires significant judgment. We also establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the current provision for income taxes. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. +The Company’s valuation allowance recorded as of December 31, 2022 relates primarily to a capital loss realized on the sale of a foreign subsidiary whereby the Company does not anticipate a capital gain in the foreseeable future that would allow for the recognition of the capital loss carryover. In addition, the Company has a partial valuation allowance on certain state interest deduction limitations, which the Company estimates may not be fully utilized. Additionally, other changes to the federal and state tax regulations can lead to variability in allowable deductions, which can impact the Company’s valuation allowance. +Recent Accounting Pronouncements +Refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 2, “Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements. +Item 7A. Quantitative and Qualitative Disclosures about Market Ris k +Not required due to smaller reporting company status. +47 +Table of Contents +Item 8. +Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021 +Reports of Independent Registered Public Accounting Firm (KPMG LLP, Denver, CO, Auditor Firm ID: 185 ): +49 +Opinion on the Consolidated Financial Statements +49 +Opinion on Internal Control Over Financial Reporting +51 +Consolidated Balance Sheets +52 +C onsolidated Statements of Operations and Comprehensive Income +53 +Consolidated Statements of Stockholders’ Deficit +54 +Consolidated Statements of Cash Flows +55 +Notes to Consolidated Financial Statements +56 +48 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 8, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +1 Non-deductible excess compensation under IRC Section 162(m) +As discussed in Note 11 to the consolidated financial statements, the Company has recorded compensation for certain covered employees in excess of $1.0 million per year. Under Internal Revenue Code (IRC) Section 162(m), the Company is prohibited from deducting for tax purposes compensation in excess of $1.0 million per year for each +49 +Table of Contents +of these employees. The covered employees are defined as the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and the three next-highest-compensated officers of the Company. The Company considers the impact of the estimated IRC Section 162(m) limitations on the future deductibility of existing temporary differences. +We identified the evaluation of the Company’s assessment of non-deductible excess compensation under IRC Section 162(m) as a critical audit matter. Specifically, the evaluation of the estimated future compensation for each covered employee used to determine the amount of permanently disallowed compensation under IRC Section 162(m) involved subjective auditor judgment. In addition, the evaluation required the involvement of tax professionals with specialized skills and knowledge. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s income tax process, including a control related to estimating future compensation for each covered employee. We evaluated the reasonableness of estimated future compensation included in the Company’s assessment by considering historical compensation figures for each covered employee and the potential impact to the Section 162(m) limitation if compensation increased or decreased in future years. We involved tax professionals with specialized skills and knowledge who assisted in evaluating the Company’s application of IRC Section 162(m) to determine the amount of permanently disallowed compensation under IRC Section 162(m) for United States tax purposes. +/s/ KPMG LLP +We have served as the Company’s auditor since 2014. +Denver, Colorado +March 8, 2023 +50 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited CPI Card Group Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and December 31, 2021, the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements), and our report dated March 8, 2023 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Denver, Colorado +March 8, 2023 +51 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(in thousands, except share and per share amounts) +December 31, +2022 +2021 +Assets +Current assets: +Cash and cash equivalents +$ +11,037 +$ +20,683 +Accounts receivable, net +80,583 +60,953 +Inventories +68,399 +58,009 +Prepaid expenses and other current assets +7,379 +5,522 +Income taxes receivable +172 +534 +Total current assets +167,570 +145,701 +Plant, equipment, leasehold improvements and operating leases right-of-use assets, net +57,178 +47,251 +Intangible assets, net +17,988 +21,854 +Goodwill +47,150 +47,150 +Other assets +6,780 +6,184 +Total assets +$ +296,666 +$ +268,140 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +24,371 +$ +26,443 +Accrued expenses +40,070 +37,150 +Deferred revenue and customer deposits +3,571 +1,182 +Total current liabilities +68,012 +64,775 +Long-term debt +285,522 +303,626 +Deferred income taxes +6,808 +5,253 +Other long-term liabilities +18,401 +15,506 +Total liabilities +378,743 +389,160 +Commitments and contingencies (Note 14) +Series A Preferred Stock; $ 0.001 par value— 100,000 shares authorized; 0 shares issued and outstanding at December 31, 2022 and 2021 +— +— +Stockholders’ deficit: +Common Stock; $ 0.001 par value— 100,000,000 shares authorized; 11,390,355 and 11,255,466 shares issued and outstanding at December 31, 2022 and 2021, respectively +11 +11 +Capital deficiency +( 108,379 ) +( 110,782 ) +Accumulated earnings (loss) +26,291 +( 10,249 ) +Total stockholders’ deficit +( 82,077 ) +( 121,020 ) +Total liabilities and stockholders' deficit +$ +296,666 +$ +268,140 +See accompanying notes to consolidated financial statements +52 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive Income +(in thousands, except share and per share amounts) +Year Ended December 31, +2022 +2021 +Net sales: +Products +$ +281,190 +$ +199,586 +Services +194,555 +175,533 +Total net sales +475,745 +375,119 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +171,017 +121,601 +Services (exclusive of depreciation and amortization shown below) +119,930 +103,255 +Depreciation and amortization +9,031 +8,837 +Total cost of sales +299,978 +233,693 +Gross profit +175,767 +141,426 +Operating expenses: +Selling, general and administrative (exclusive of depreciation and amortization shown below) +90,782 +75,701 +Depreciation and amortization +5,855 +6,261 +Total operating expenses +96,637 +81,962 +Income from operations +79,130 +59,464 +Other expense, net: +Interest, net +( 29,616 ) +( 30,608 ) +Other (expense) income, net +107 +14 +Loss on debt extinguishment +( 474 ) +( 5,048 ) +Total other expense, net +( 29,983 ) +( 35,642 ) +Income before income taxes +49,147 +23,822 +Income tax expense +( 12,607 ) +( 7,881 ) +Net income +$ +36,540 +$ +15,941 +Basic and diluted earnings per share: +Basic earnings per share +$ +3.24 +$ +1.42 +Diluted earnings per share +$ +3.11 +$ +1.36 +Basic weighted-average shares outstanding +11,291,202 +11,239,049 +Diluted weighted-average shares outstanding +11,749,105 +11,763,963 +Comprehensive income: +Net income +$ +36,540 +$ +15,941 +Total comprehensive income +$ +36,540 +$ +15,941 +See accompanying notes to consolidated financial statements +53 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Stockholders’ Deficit +(in thousands, except per share amounts) +Common Stock +Capital +Accumulated +Stockholders +Shares +Amount +deficiency +earnings (loss) +Deficit +December 31, 2020 +11,230,482 +$ +11 +$ +( 111,858 ) +$ +( 26,190 ) +$ +( 138,037 ) +Shares issued under stock-based compensation plans +24,984 +— +( 174 ) +— +( 174 ) +Stock-based compensation +— +— +1,250 +— +1,250 +Components of comprehensive income: +Net income +— +— +— +15,941 +15,941 +December 31, 2021 +11,255,466 +$ +11 +$ +( 110,782 ) +$ +( 10,249 ) +$ +( 121,020 ) +Shares issued under stock-based compensation plans +134,889 +— +( 1,076 ) +— +( 1,076 ) +Stock-based compensation +— +— +3,479 +— +3,479 +Components of comprehensive income: +Net income +— +— +— +36,540 +36,540 +December 31, 2022 +11,390,355 +$ +11 +$ +( 108,379 ) +$ +26,291 +$ +( 82,077 ) +See accompanying notes to consolidated financial statements +54 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(in thousands) +Year Ended December 31, +2022 +2021 +Operating activities +Net income +$ +36,540 +$ +15,941 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation and amortization expense +14,886 +15,098 +Stock-based compensation expense +3,479 +1,250 +Amortization of debt issuance costs and debt discount +1,931 +2,367 +Loss on debt extinguishment +474 +5,048 +Deferred income taxes +1,555 +( 2,156 ) +Other, net +1,094 +213 +Changes in operating assets and liabilities: +Accounts receivable +( 19,745 ) +( 6,361 ) +Inventories +( 10,702 ) +( 33,388 ) +Prepaid expenses and other assets +( 2,700 ) +( 4,062 ) +Income taxes, net +362 +9,977 +Accounts payable +( 453 ) +6,582 +Accrued expenses and other liabilities +2,226 +10,410 +Deferred revenue and customer deposits +2,389 +( 690 ) +Cash provided by operating activities +31,336 +20,229 +Investing activities +Capital expenditures for plant, equipment and leasehold improvements +( 17,867 ) +( 10,074 ) +Other +95 +156 +Cash used in investing activities +( 17,772 ) +( 9,918 ) +Financing activities +Principal payments on First Lien Term Loan +— +( 312,500 ) +Principal payments on Senior Credit Facility +— +( 30,000 ) +Principal payments on Senior Notes +( 24,938 ) +— +Principal payments on ABL Revolver +( 30,000 ) +( 15,000 ) +Proceeds from Senior Notes +— +310,000 +Proceeds from ABL Revolver, net of discount +35,000 +14,750 +Debt issuance costs +( 262 ) +( 9,452 ) +Payments on debt extinguishment and other +( 1,677 ) +( 2,859 ) +Proceeds from finance lease financing +2,074 +— +Payments on finance lease obligations +( 3,360 ) +( 2,171 ) +Cash used in financing activities +( 23,163 ) +( 47,232 ) +Effect of exchange rates on cash +( 47 ) +1 +Net decrease in cash and cash equivalents +( 9,646 ) +( 36,920 ) +Cash and cash equivalents, beginning of period +20,683 +57,603 +Cash and cash equivalents, end of period +$ +11,037 +$ +20,683 +Supplemental disclosures of cash flow information +Cash paid (refunded) during the period for: +Interest +$ +27,714 +$ +22,268 +Income taxes paid +$ +12,584 +$ +9,792 +Income taxes (refunded) +$ +( 451 ) +$ +( 9,846 ) +Right-of-use assets obtained in exchange for lease obligations: +Operating leases +$ +816 +$ +6,932 +Financing leases +$ +9,124 +$ +1,897 +Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements +$ +462 +$ +2,972 +See accompanying notes to consolidated financial statements +55 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(dollars in thousands, except share and per share amounts or as otherwise indicated) +1. Business +CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. CPI is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit, debit and Prepaid Debit Cards issued on the networks of the Payment Card Brands (Visa, Mastercard, American Express and Discover). CPI also offers an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. +CPI serves its customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands. CPI’s network of high-security production facilities allows the Company to optimize its solutions offerings and serve its customers. +The Company’s business consists of the following reportable segments: Debit and Credit, Prepaid Debit and Other. The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing financial institutions primarily in the United States. The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. The Company’s “Other” segment includes corporate expenses. +COVID-19 Update +The COVID-19 pandemic and associated counteracting measures implemented by governments and businesses around the world have impacted, and continue to impact, economies and societies globally, including the locations where CPI, its customers and suppliers conduct business. The Company believes the global impacts from COVID-19, along with other macro-economic factors, have contributed to, among other things certain adverse effects on its supply chain, production lead times, labor availability, employee absenteeism and other costs. Though the Company has implemented measures to attempt to mitigate the impacts of the challenges described above, the Company believes that such impacts, and the associated costs, may continue throughout 2023 and beyond. The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain. +On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, included provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Note 11, “Income Taxes” for a discussion of the CARES Act income tax impacts on the Company. In addition, we deferred employer social security payments in 2020 in accordance with the CARES Act, and the first installment repayment was made in the fourth quarter of 2021, and the second and final installment repayment was made in the fourth quarter of 2022. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +56 +Table of Contents +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. +December 31, +2022 +2021 +Trade accounts receivable +$ +68,886 +$ +50,042 +Unbilled accounts receivable +11,915 +10,997 +80,801 +61,039 +Less allowance for doubtful accounts +( 218 ) +( 86 ) +$ +80,583 +$ +60,953 +The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it is determined collection will not occur. The allowance for bad debt activity for the years ended December 31, 2022 and 2021 is summarized as follows: +Balance as of December 31, 2020 +$ +289 +Write-off of uncollectible accounts +( 203 ) +Balance as of December 31, 2021 +$ +86 +Bad debt expense +115 +Recoveries collected +17 +Balance as of December 31, 2022 +$ +218 +During 2021, the Company wrote-off uncollectible accounts primarily relating to reserves previously established for outstanding receivables from the Company’s Canadian operations that were disposed in 2019. +For the years ended December 31, 2022 and 2021, one customer represented 16 % and 18 %, respectively, of the Company’s consolidated net sales. +Inventories +Inventories consist of raw materials and finished goods, and are measured at the lower of cost or net realizable value (determined on a first-in, first-out or specific identification basis). Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Finished goods inventory represents primarily stock cards and Card@Once printers. The stock cards are not produced for a specific customer, but are ready to be personalized and sold as customer orders are received. The Company monitors inventory for events or circumstances that may indicate the net realizable value is less than the carrying value of inventory, such as negative margins, expiration of material usage, and other forms of obsolescence, and records adjustments to the valuation of inventory, as necessary. +For the year ended December 31, 2022 approximately 97 % of our purchased microchips and antennas came from four main suppliers, and approximately 68 % came from one supplier. Approximately 92 % of our purchased microchips and antennas for the year ended December 31, 2021 came from four main suppliers, and approximately 64 % came from one supplier. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. +57 +Table of Contents +Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required. +Goodwill and Intangible Assets +The Company accounts for its goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350) and the provisions of ASU 2017-04, Simplifying the Test for Goodwill Impairment and tests at least annually or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The Company performs its goodwill impairment test by comparing the fair value of the reporting unit with the carrying amount. If this qualitative assessment indicates it is more likely than not the fair value of a reporting unit is less than the carrying amount, a one-step quantitative test is then performed. Factors management considers in this assessment include macroeconomic, industry and market considerations, overall financial performance (both current and projected), cost increases impacting earnings and cash flows, changes in management and strategy, and changes in the composition or carrying amount of net assets. In the event a reporting unit’s carrying value exceeds its fair value, the Company recognizes an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required. +Sales Tax +The Company records sales tax collected from its customers on a net basis, and therefore excludes it from net sales as defined in ASC 606, Revenue from Contracts with Customers . Cash collected from customers is recorded in accrued expenses on the Company’s consolidated Balance Sheet and then remitted to the proper taxing authority. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made. +The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when the Company believes that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. The Company adjusts uncertain tax positions in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Stock-Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period. +58 +Table of Contents +The Company accounts for forfeitures as they occur and reverses previously recognized expense for the unvested portion of the forfeited shares. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Upon the exercise of stock options, shares of common stock are issued from authorized common shares. Refer to Note 16 “Stock-Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans. +Net Sales +Products Net Sales +“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are produced for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are the design and production of Financial Payment Cards, including contact-EMV, contactless dual-interface EMV, contactless and magnetic stripe cards, CPI’s eco-focused solutions, including Second Wave and Earthwise ® cards made with upcycled plastic, metal cards, private label credit cards and retail gift cards. Card@Once printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales . +EMV ® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMV Co, LLC . +Services Net Sales +Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and SaaS personalization of instant issuance debit cards. As applicable, for work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts +The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606, Revenue from Contracts with Customers , is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +Use of Estimates +The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require management to make assumptions and estimates relating to the reporting of assets and liabilities in its preparation of the consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed and uncertain tax positions. Actual results could differ from those estimates. +Recent Accounting Pronouncements +Recently Issued Accounting Pronouncements +In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a +59 +Table of Contents +loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The effective date of ASU 2016-13 was amended by ASU 2019-10, Credit Losses Effective Dates. Since CPI is a smaller reporting company, adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods therein, with early adoption permitted. The Company elected not to early adopt ASU 2016-13 and adopted as of January 1, 2023. The adoption of the standard did not have a material impact on the Company’s consolidated financial position or results of operations. +3. Net Sales +The Company disaggregates its net sales by major source as follows: +For the year ended December 31, 2022 +Products +Services +Total +Debit and Credit +$ +282,081 +$ +108,478 +$ +390,559 +Prepaid Debit +— +86,136 +86,136 +Intersegment eliminations +( 891 ) +( 59 ) +( 950 ) +Total +$ +281,190 +$ +194,555 +$ +475,745 +For the year ended December 31, 2021 +Products +Services +Total +Debit and Credit +$ +199,825 +$ +96,379 +$ +296,204 +Prepaid Debit +— +79,213 +79,213 +Intersegment eliminations +( 239 ) +( 59 ) +( 298 ) +Total +$ +199,586 +$ +175,533 +$ +375,119 +4. Inventories +Inventories are summarized below: +December 31, +2022 +2021 +Raw materials +$ +61,434 +$ +54,254 +Finished goods +10,300 +6,778 +Inventory reserve +( 3,335 ) +( 3,023 ) +$ +68,399 +$ +58,009 +60 +Table of Contents +5. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets +Plant, equipment, leasehold improvements and operating lease right-of-use assets consisted of the following: +December 31, +2022 +2021 +Machinery and equipment +$ +64,786 +$ +64,051 +Machinery and equipment under financing leases +15,717 +9,088 +Furniture, fixtures and computer equipment +3,072 +4,570 +Leasehold improvements +14,703 +14,142 +Construction in progress +3,304 +5,268 +101,582 +97,119 +Less accumulated depreciation and amortization +( 55,109 ) +( 61,937 ) +Operating lease right-of-use assets, net of accumulated amortization +10,705 +12,069 +$ +57,178 +$ +47,251 +Depreciation expense of plant, equipment and leasehold improvements including depreciation of assets under financing leases was $ 11,020 and $ 10,745 for the years ended December 31, 2022 and 2021, respectively. +Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 9, “Financing and Operating Leases.” +There were no impairments of the Company’s plant, equipment, leasehold improvements and operating leases right-of-use assets for the years ended December 31, 2022 and 2021. +6. Goodwill and Other Intangible Assets +The Company reports all of its goodwill in the Debit and Credit segment at December 31, 2022 and 2021. The Company completed its goodwill impairment testing as of October 1, 2022 and did not identify any goodwill impairment during the years ended December 31, 2022 and 2021. +Intangible assets consist of customer relationships, acquired technology, and trademarks. Intangible amortization expense totaled $ 3,866 and $ 4,353 for the years ended December 31, 2022 and 2021, respectively. There were no impairments of the Company’s amortizable intangible assets for the years ended December 31, 2022 and 2021. +At December 31, 2022 and 2021, intangible assets, excluding goodwill, were comprised of the following: +December 31, 2022 +December 31, 2021 +Weighted Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +17.2 +$ +55,454 +$ +( 38,695 ) +$ +16,759 +$ +55,454 +$ +( 35,419 ) +$ +20,035 +Acquired technology +10 +7,101 +( 6,767 ) +334 +7,101 +( 6,567 ) +534 +Trademarks +8.7 +3,330 +( 2,435 ) +895 +3,330 +( 2,045 ) +1,285 +Intangible assets subject to amortization +$ +65,885 +$ +( 47,897 ) +$ +17,988 +$ +65,885 +$ +( 44,031 ) +$ +21,854 +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2022 was as follows: +2023 +$ +3,867 +2024 +3,630 +2025 +3,440 +2026 +2,471 +2027 +2,313 +Thereafter +2,267 +$ +17,988 +61 +Table of Contents +7. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +● Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +● Level 2 — Observable inputs other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities. +● Level 3 — Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +The Company’s financial assets and liabilities that are not required to be re-measured at fair value in the consolidated balance sheets were as follows: +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2022 +December 31, +December 31, +(Using Fair Value Hierarchy) +2022 +2022 +Level 1 +Level 2 +Level 3 +Liabilities: +Senior Notes +$ +285,000 +$ +281,438 +$ +— +$ +281,438 +$ +— +ABL Revolver +$ +5,000 +$ +5,000 +$ +— +$ +5,000 +$ +— +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2021 +December 31, +December 31, +(Using Fair Value Hierarchy) +2021 +2021 +Level 1 +Level 2 +Level 3 +Liabilities: +Senior Notes +$ +310,000 +$ +327,050 +$ +— +$ +327,050 +$ +— +The aggregate fair value of the Company’s Senior Notes (as defined in Note 10 “Long-Term Debt”) was based on bank quotes. The fair value measurement associated with the ABL Revolver (as defined in Note 10, “Long-Term Debt”) approximates its carrying value as of December 31, 2022, given the applicable variable interest rates and nature of the security interest in Company assets. +The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature. +62 +Table of Contents +8. Accrued Expenses +Accrued expenses consisted of the following: +December 31, +2022 +2021 +Accrued payroll and related employee expenses +$ +7,727 +$ +7,558 +Accrued employee performance bonuses +8,576 +6,900 +Employer payroll taxes, including social security deferral +1,092 +1,910 +Accrued rebates +2,668 +1,423 +Estimated sales tax liability +622 +1,019 +Accrued interest +7,275 +7,955 +Current operating and financing lease liabilities +5,697 +4,114 +Other +6,413 +6,271 +Total accrued expenses +$ +40,070 +$ +37,150 +Other accrued expenses as of December 31, 2022 and 2021 consisted primarily of miscellaneous accruals for invoices not yet received, and other items such as accrued royalties, self-insurance claims that have yet to be reported, and the current portion of uncertain tax position reserves. +9. Financing and Operating Leases +Right-of-use (“ROU”) represents the right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. Certain leases contain escalation provisions and/or renewal options, giving the Company the right to extend the leases by up to 10 years . However, these options are generally not reflected in the calculation of the ROU assets and lease liabilities due to uncertainty surrounding the likelihood of renewal. +The components of operating and finance lease costs were as follows: +Year Ended December 31, +2022 +2021 +Operating lease costs +$ +3,064 +$ +2,258 +Variable lease costs +642 +676 +Short-term operating lease costs +— +416 +Total expense from operating leases +$ +3,706 +$ +3,350 +Finance lease costs: +Right-of-use amortization expense +$ +1,718 +$ +1,009 +Interest on lease liabilities +482 +380 +Total financing lease costs +$ +2,200 +$ +1,389 +63 +Table of Contents +The following table reflects balances for operating and financing leases: +December 31, +2022 +2021 +Operating leases: +Operating lease right-of-use assets, net of amortization +$ +10,705 +$ +12,069 +Current operating lease liabilities +$ +2,355 +$ +1,857 +Non-current operating lease liabilities +8,905 +10,703 +Total operating lease liabilities +$ +11,260 +$ +12,560 +Financing leases: +Property, equipment and leasehold improvements +$ +15,717 +$ +9,088 +Accumulated depreciation +( 3,135 ) +( 2,451 ) +Total financing leases in property, equipment and leasehold improvements, net +$ +12,582 +$ +6,637 +Current financing lease liabilities +$ +3,342 +$ +2,257 +Non-current financing lease liabilities +7,355 +2,668 +Total financing lease liabilities +$ +10,697 +$ +4,925 +Finance and operating lease ROU assets are recorded in “Plant, equipment, leasehold improvements, and +operating lease right-of-use assets, net.” Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term liabilities.” +Components of lease expense were as follows: +December 31, +2022 +2021 +Weighted-average remaining lease term: +Operating leases +5.06 +6.05 +Financing leases +3.60 +2.73 +Weighted-average discount rate: +Operating leases +7.93 % +8.04 % +Financing leases +6.62 % +8.01 % +Cash paid on operating lease liabilities was $ 2,425 and $ 2,007 during the years ended December 31, 2022 and December 31, 2021, respectively. +Future cash payment with respect to lease obligations as of December 31, 2022 were as follows: +Operating +Financing +Lease +Leases +Year Ending +2023 +$ +3,164 +$ +3,953 +2024 +2,896 +3,139 +2025 +2,090 +2,848 +2026 +1,958 +1,488 +2027 +1,907 +557 +Thereafter +1,750 +— +Total lease payments +13,765 +11,985 +Less imputed interest +( 2,505 ) +( 1,288 ) +Total +$ +11,260 +$ +10,697 +64 +Table of Contents +10. Long-Term Debt +At December 31, 2022 and 2021, long-term debt consisted of the following: +Interest +December 31, +Rate (1) +2022 +2021 +Senior Notes +8.625 +% +$ +285,000 +$ +310,000 +ABL Revolver +5.661 +% +5,000 +— +Unamortized deferred financing costs +( 4,478 ) +( 6,374 ) +Total long-term debt +285,522 +303,626 +Less current maturities +— +— +Long-term debt, net of current maturities +$ +285,522 +$ +303,626 +(1) The Senior Notes bear interest at a fixed rate and the ABL Revolver bears interest at a variable rate. +On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc., of $ 310,000 aggregate principal amount of 8.625 % Senior Secured Notes due 2026 (the “Senior Notes”) and related guarantees. The Senior Notes bear interest at a rate of 8.625 % per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year. +On March 15, 2021, the Company and CPI CG Inc., as borrower, entered into a Credit Agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility of up to $ 50,000 (the “ABL Revolver”). The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes. On March 3, 2022, the Company and CPI CG Inc. entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), which amended the ABL Revolver. The Amendment, among other things, increased the available borrowing capacity under the ABL Revolver to $ 75,000 , increased the uncommitted accordion feature to $ 25,000 from $ 15,000 , and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) administered by the Federal Reserve Bank of New York. On October 11, 2022, the Company and CPI CG Inc. entered into Amendment No. 2 to the Credit Agreement, which amended the ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory. +Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable interest rate margin. The Company may select a one, three or six month term SOFR, which is adjusted for a credit spread of 0.10 % to 0.30 % depending on the term selected. Through March 31, 2023, the applicable interest rate margin ranges from 1.50 % to 1.75 % depending on the average excess availability of the facility for the most recently completed quarter. The unused portion of the ABL Revolver commitment accrues a monthly unused line fee, 0.50 % per annum through March 31, 2023, times the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month. Unused line fee expense was $ 246 and $ 182 for the year ended December 31, 2022 and 2021, respectively. The interest rate margin and unused line fee percentage changes, effective April 1, 2023, to between 1.25 % and 1.75 % (interest rate margin) and 0.375 % and 0.50 % (unused commitment fee). +The ABL Revolver includes limitations on the Company’s ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than $ 7,500 . The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments or b) the $ 75,000 of available borrowing capacity under the ABL Revolver (“Borrowing Base”). The Borrowing Base is further reduced by credit line reserves, letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below $ 7,500 and until such time that borrowing capacity equals or exceeds $ 7,500 for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the Credit Agreement for the ABL Revolver) greater than 1.00 , calculated for the trailing 12 months, in order to borrow under the ABL Revolver. +65 +Table of Contents +On March 15, 2021, the Company used net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $ 15,000 under the ABL Revolver, to pay in full and terminate a previous Senior Credit Facility and a previous First Lien Term Loan, and to pay related fees and expenses. Early termination of the Senior Credit Facility required payment of a “make-whole” premium of $ 2,635 as an early termination penalty, which was paid on March 15, 2021, and recorded as interest expense on the consolidated statement of comprehensive income for the year ended December 31, 2021. +On March 11, 2022, the Company used the available borrowing capacity under the ABL Revolver to fund the redemption of $ 20,000 aggregate principal amount of the Senior Notes at a redemption price equal to 103 % of the principal amount thereof plus accrued and unpaid interest thereon to the redemption date. The difference between the par value and the purchase price of $ 600 is recorded in “Interest Expense” on the consolidated statement of comprehensive income for the year ended December 31, 2022. +On December 28, 2022, the Company purchased $ 5,000 aggregate principal amount of the Senior Notes at a purchase price equal to 98.75 % of the principal amount thereof plus accrued and unpaid interest thereon to the purchase date. The difference between the par value and the purchase price of $ 63 is recorded in “Interest, net” on the consolidated statement of comprehensive income for the year ended December 31, 2022. +The Senior Notes are guaranteed by the Company and certain of its current and future wholly-owned domestic subsidiaries (other than CPI CG Inc. as the issuer of the Senior Notes) that guarantee the ABL Revolver. The Senior Notes are secured by substantially all of the assets of CPI CG Inc. and the guarantors, subject to customary exceptions. The ABL Revolver is guaranteed by the Company and its subsidiaries (other than CPI CG Inc. as borrower and excluded subsidiaries), and is secured by substantially all of the assets of CPI CG Inc. and the guarantors, subject to customary exceptions. +The Senior Notes and the ABL Revolver contain covenants limiting the ability of the Company, CPI CG Inc. and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of CPI CG Inc. and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements. +The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among CPI CG Inc., the Company, the subsidiary guarantors and U.S. Bank National Association, as trustee, with any required prepayments to be made after the issuance of the Company’s annual financial statements. No such payment was required to be made in 2022 based on the Company’s operating results for the year ended December 31, 2021. +Deferred Financing Costs and Discount +Certain costs and discounts incurred with borrowings are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. The remaining unamortized debt issuance costs recorded on the Senior Notes were $ 4,557 and is reported as a reduction to the long-term debt balance as of December 31, 2022. The remaining unamortized net discount and debt issuance costs on the ABL Revolver and related Amendment were $ 1,539 and are recorded as other assets (current and long-term) on the consolidated balance sheet as of December 31, 2022. +During the year ended December 31, 2021, the Company recorded a $ 5,048 loss on debt extinguishment relating to the unamortized deferred financing costs and debt discount in connection with the termination of the Senior Credit Facility and First Lien Term Loan, as described earlier. +66 +Table of Contents +11. Income Taxes +Income tax expense and effective income tax rates consist of the following: +December 31, +2022 +2021 +Current taxes: +Domestic +$ +11,047 +$ +10,038 +Foreign +5 +( 1 ) +11,052 +10,037 +Deferred taxes: +Domestic +1,554 +( 2,154 ) +Foreign +1 +( 2 ) +1,555 +( 2,156 ) +Income tax expense +$ +12,607 +$ +7,881 +Income before income taxes: +Domestic income +$ +49,108 +$ +23,761 +Foreign income +39 +61 +Total +$ +49,147 +$ +23,822 +Effective income tax rate +25.7 +% +33.1 +% +The Company’s effective tax rates on pre-tax income were 25.7 % and 33.1 % for the years ended December 31, 2022 and 2021, respectively. The decrease in the Company’s effective tax rate for the year ended December 31, 2022 compared to the prior year was primarily due to a decrease in unrecognized tax benefits due to the lapse of statute of limitations and favorable settlements paid to state tax authorities. +For the years ended December 31, 2022 and 2021, the effective tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2022 +2021 +Tax at federal statutory rate +21.0 +% +21.0 +% +State taxes, net +5.4 +7.4 +Unrecognized tax benefits +( 2.0 ) +1.4 +Tax credits +( 0.1 ) +( 0.2 ) +Permanent items +1.0 +2.4 +Other +0.4 +1.1 +Effective income tax rate +25.7 +% +33.1 +% +For the year ended December 31, 2022 the effective tax rate differs from the federal statutory rate primarily due to state income taxes, which had a tax rate impact of 5.4 %. Other items impacting the effective tax rate in 2022 include unrecognized tax benefits and permanent items. +67 +Table of Contents +The components of the deferred tax assets and liabilities are as follows: +December 31, +2022 +2021 +Deferred tax assets: +Accrued expense +$ +3,830 +$ +3,664 +Net operating loss carryforward +257 +305 +Stock compensation +1,303 +894 +Interest limitation +2,474 +3,693 +Lease liability +2,891 +3,222 +Capital loss carryover +2,135 +2,076 +Research and development costs +1,434 +— +Other +3,609 +2,867 +Total gross deferred tax assets +17,933 +16,721 +Valuation allowance +( 2,791 ) +( 2,832 ) +Net deferred tax assets +15,142 +13,889 +Deferred tax liabilities: +Plant, equipment and leasehold improvements +( 9,510 ) +( 5,773 ) +Intangible assets +( 8,020 ) +( 8,284 ) +Right-of-use assets +( 2,749 ) +( 3,098 ) +Other +( 1,671 ) +( 1,987 ) +Total gross deferred tax liabilities +( 21,950 ) +( 19,142 ) +Net deferred tax liabilities +$ +( 6,808 ) +$ +( 5,253 ) +The valuation allowance as of December 31, 2022, is primarily relating to a capital loss realized on the sale of a foreign subsidiary whereby the Company does not anticipate a capital gain in the foreseeable future that would allow for the recognition of the capital loss carryover. In addition, the Company has a partial valuation allowance on certain state interest deduction limitations, which the Company estimates may not be fully utilized. +Under a provision in the 2017 U.S. Tax Cuts and Jobs Act, beginning in 2022, research and development costs incurred are no longer allowed as an immediate deduction for federal income tax purposes. Rather, these expenditures incurred must be capitalized and amortized over a five-year period for activities conducted in the United States and a 15 year period for activities conducted outside the United States. +The Company has various state and local operating loss carryforwards which will expire at various dates from 2032 to 2038. The Company does expect to be able to utilize these losses prior to expiration. The Company received income tax refunds in 2022 of $ 451 from the State of Tennessee related to a favorable filing position. The Company received income tax refunds in 2021 of $ 9,846 , which were primarily comprised of U.S. federal income tax refund claims attributable to the CARES Act provisions, including alternative minimum tax credits and NOL carrybacks. +The Company has recorded compensation for certain covered employees in excess of $1,000 per year. Under Internal Revenue Code (IRC) Section 162(m), the Company is prohibited from deducting the amount of tax compensation that exceeds $1,000 per year for these employees. The covered employees are defined as the Chief Executive Officer, Chief Financial Officer, and the three next-highest-compensated officers of the Company. The Company considers the impact of the estimated IRC Section 162(m) limitations on the future deductibility of existing temporary differences. +Unrecognized Tax Benefits +Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Accrued expenses” and “Other long-term liabilities” in the Company’s consolidated balance sheets. The Company accounts for +68 +Table of Contents +uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination. +Balance as of December 31, 2021 +$ +2,350 +Increase related to current year tax position +58 +Decrease related to prior year tax position +( 54 ) +Decrease related to settlements with tax authorities, net of federal benefit +( 147 ) +Lapse of statute of limitations +( 812 ) +Balance as of December 31, 2022 +$ +1,395 +The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits for the year ended December 31, 2022 is $ 285 , and was $ 289 for the year ended December 31, 2021. +The Company believes that it is reasonably possible that approximately $ 89 of its unrecognized tax benefits may be recognized by the end of 2023 as a result of settlements with various state taxing authorities, which is reflected in “Accrued expenses” in the Company’s consolidated balance sheet as of December 31, 2022. The Company recognized a decrease of up to $ 965 of its unrecognized tax benefits, including interest and penalties, related to an asset basis tax position and research and development tax credits as a result of a lapse of the statute of limitations. +12. Stockholders’ Deficit +Common Stock +Common Stock has a par value of $ 0.001 per share. Holders of Common Stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders may have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. +13. Earnings per Share +Basic and diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested. For the years ended December 31, 2022 and 2021, 27,813 and 121,993 potentially dilutive securities, respectively, are excluded from the calculation of diluted earnings per share because their inclusions would be anti-dilutive. +The following table sets forth the computation of basic and diluted earnings per share: +Year Ended December 31, +2022 +2021 +Numerator: +Net income +$ +36,540 +$ +15,941 +Denominator: +Basic weighted-average shares outstanding +11,291,202 +11,239,049 +Dilutive shares +457,903 +524,914 +Diluted weighted-average shares outstanding +11,749,105 +11,763,963 +Basic earnings per share +$ +3.24 +$ +1.42 +Diluted earnings per share +$ +3.11 +$ +1.36 +69 +Table of Contents +14. Commitments and Contingencies +Commitments +Refer to Note 9 “Financing and Operating Leases” for details on the Company’s future cash payments with respect to financing and operating leases. During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2023 and 2029 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs. The Company’s financing leases expire at various dates between 2023 and 2027 and contain purchase options which the Company may exercise to keep the machinery in use. +Contingencies +In accordance with applicable accounting guidance, the Company establishes an accrued expense when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued expense and record a corresponding amount of expense. The Company expenses professional fees associated with litigation claims and assessments as incurred. +Smart Packaging Solutions SA v. CPI Card Group Inc. +On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief. In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta. The patents all relate to antenna technology. SPS alleges that the Company incorporates the patented technology into its products that use contactless communication. The Company does not produce antennas; it purchases certain antenna-related components from SPS and a number of other suppliers. The Company’s motion to dismiss the complaint is currently pending. Additionally, a third party, Infineon, has filed requests for Inter Parties Review (“IPR”) proceedings concerning each of the four patents. As a result, the Delaware District Court stayed the case pending resolution of the requests for review. The United States Patent Office has instituted proceedings with respect to all of the IPR requests. The current proceedings in the patent office are scheduled to run through September 2023. Should the patents survive review by the United States Patent Office, the Company intends to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. Due to the stage of this matter, the Company is unable to predict the outcome or the possible loss or range of loss, if any, associated with this matter, and no liability has been recorded as of December 31, 2022. +In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations. +Voluntary Disclosure Program +The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unpaid payable balances. During the second quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance. On August 31, 2022, the Company entered into Delaware’s Voluntary Disclosure Agreement Program in order to voluntarily comply with Delaware’s abandoned property law in exchange for certain protections and benefits. The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program. Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable. +70 +Table of Contents +15. Employee Benefit Plan +The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment options. The Company matches 100 % of the participant’s first 3% of deferrals and 50 % matching on each of the 4 th and 5 th percent contributed by the participant. As the Company operates the plan as a safe harbor 401(k) plan, the Company’s match is 100 % vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $ 1,932 and $ 1,604 for the years ended December 31, 2022 and 2021, respectively. +16. Stock-Based Compensation +CPI Card Group Inc. Omnibus Incentive Plan +In October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity-based incentives may be granted to participating employees, advisors and directors. On May 27, 2021, the Company’s stockholders approved an amendment and restatement of the Omnibus Plan to, among other things, increase the total number of shares of the Company’s Common Stock reserved and available for issuance thereunder by 1,000,000 shares resulting in a total of 2,200,000 shares of Common Stock issuable under the Omnibus Plan. As of December 31, 2022, there were 944,123 shares of Common Stock available for grant under the Omnibus Plan. Options have 7-year terms and are issued with exercise prices equal to the fair market value of the Company’s common stock on the grant date. +The following is a summary of the activity in outstanding stock options under the Omnibus Plan: +Weighted-Average +Weighted-Average +Remaining +Aggregate +Exercise +Contractual Term +Intrinsic +Options +Price +(in Years) +Value +Outstanding as of December 31, 2021 +778,835 +$ +18.02 +5.59 +Granted +44,905 +14.95 +6.27 +Exercised +( 28,752 ) +6.47 +— +Expired +( 1,320 ) +21.75 +— +Forfeited +( 13,045 ) +26.55 +— +Outstanding as of December 31, 2022 +780,623 +$ +18.12 +4.65 +$ +15,902 +Options vested and exercisable as of December 31, 2022 +680,564 +$ +17.34 +4.45 +$ +14,636 +Options vested and expected to vest as of December 31, 2022 +780,623 +$ +18.12 +4.65 +$ +15,902 +The following is a summary of the activity in unvested stock options under the Omnibus Plan: +Weighted-Average +Grant-Date +Number +Fair Value +Unvested as of December 31, 2021 +127,357 +$ +17.42 +Granted +44,905 +8.99 +Vested +( 59,158 ) +17.42 +Forfeited +( 13,045 ) +15.68 +Unvested as of December 31, 2022 +100,059 +$ +6.02 +Unvested stock options of 100,059 as of December 31, 2022 have a seven-year term and are expected to vest ratably over a two-year period on each anniversary of the grant date. The weighted average fair value of options granted during the years ended December 31, 2022 and 2021 was $ 8.99 and $ 17.42 , respectively. The total intrinsic value of +71 +Table of Contents +options exercised during the years ended December 31, 2022 and 2021 was $ 414 and $ 802 , respectively. The total fair value of options vested during the years ended December 31, 2022 and 2021 was $ 1,031 and $ 50 , respectively. +The fair value of the stock option awards granted for the years ended December 31, 2022 and 2021, were determined using a Black-Scholes option-pricing model with the following weighted-average assumptions: +December 31, +2022 +2021 +Expected term in years (1) +4.25 +4.25 +Volatility (2) +77.6 +% +78.6 +% +Risk-free interest rate (3) +2.86 +% +0.71 +% +Dividend yield (4) +— +% +— +% +(1) The Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. +(2) Volatility was based on a weighting of the Company’s historical volatility and its peer group, which is comprised of companies with similar industry, size, and financial leverage. +(3) The risk-free interest rate was determined by using the United States Treasury rate for the period consistent with the expected option term described above. +(4) The Company’s expected annual dividend yield was zero based on current practice. +The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2022 under the Omnibus Plan: +Weighted-Average +Remaining +Weighted-Average +Amortization +Grant-Date +Period +Shares +Fair Value +(in Years) +Outstanding as of December 31, 2021 +261,982 +$ +13.19 +Granted +35,795 +16.87 +Vested +( 179,311 ) +7.47 +Forfeited +( 19,802 ) +11.64 +Outstanding as of December 31, 2022 +98,664 +$ +25.23 +1.08 +The restricted stock unit awards contain conditions associated with continued employment or service. Restricted stock units granted in 2022 are expected to vest ratably over a two-year period on each anniversary of the grant date. On the vesting date, shares of Common Stock will be issued to the award recipients. The weighted average fair value of restricted stock units granted during the years ended December 31, 2022 and 2021 was $ 16.87 and $ 29.61 , respectively. The total fair value of shares vested was during the year ended December 31, 2022 was $ 1,340 and there were no shares vested during the year ended December 31, 2021. +Compensation expense for the Omnibus Plan for the years ended December 31, 2022 and 2021 was $ 3,479 and $ 1,250 , respectively, and the Company realized total tax benefits during the years ended December 31, 2022 and 2021 from stock-based compensation of $ 442 and $ 31 , respectively. As of December 31, 2022, the total unrecognized compensation expense related to unvested options and restricted stock units is $ 1,477 , which the Company expects to recognize over an estimated weighted-average period of approximately 1.05 years. +17. Segment Reporting +The Company has identified reportable segments that represent 10% or more of its net sales, EBITDA (as defined below) or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its Chief Executive Officer, who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures, such as net sales and EBITDA. +EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, “EBITDA” is defined as income before interest expense, income +72 +Table of Contents +taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is useful as a supplement to GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and to identify strategies to improve the allocation of resources amongst segments. +As of December 31, 2022, the Company’s reportable segments were as follows: +● Debit and Credit; +● Prepaid Debit; and +● Other. +Debit and Credit Segment +The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing financial institutions primarily in the United States. Products produced by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless cards, and Earth Elements TM Eco-Focused Cards. The Company also sells Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the Payment Card Brands. The Company provides print-on-demand services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on demand basis for customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The Debit and Credit segment facilities and operations are audited for compliance with the standards of the Payment Card Industry Security Standards Council by multiple Payment Card Brands. +Prepaid Debit Segment +The Prepaid Debit segment primarily provides integrated prepaid card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid Debit segment facilities and operations are audited for compliance with the standards of the Payment Card Industry Security Standards Council by multiple Payment Card Brands. +Other +The Other segment includes corporate expenses. +Performance Measures of Reportable Segments +Net sales and EBITDA of the Company’s reportable segments for the years ended December 31, 2022 and 2021 were as follows: +Net Sales +EBITDA +December 31, +December 31, +2022 +2021 +2022 +2021 +Debit and Credit +$ +390,559 +$ +296,204 +$ +118,478 +$ +87,499 +Prepaid Debit +86,136 +79,213 +27,844 +29,156 +Other +— +— +( 52,673 ) +( 47,127 ) +Intersegment eliminations +( 950 ) +( 298 ) +— +— +Total +$ +475,745 +$ +375,119 +$ +93,649 +$ +69,528 +The following table provides a reconciliation of total segment EBITDA to net income for the years ended December 31, 2022 and 2021: +December 31, +2022 +2021 +73 +Table of Contents +Total segment EBITDA +$ +93,649 +$ +69,528 +Interest, net +( 29,616 ) +( 30,608 ) +Income tax expense +( 12,607 ) +( 7,881 ) +Depreciation and amortization +( 14,886 ) +( 15,098 ) +Net income +$ +36,540 +$ +15,941 +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2022 and 2021 were as follows: +December 31, +2022 +2021 +Debit and Credit +$ +238,610 +$ +210,492 +Prepaid Debit +38,138 +31,480 +Other +19,918 +26,168 +Total assets +$ +296,666 +$ +268,140 +Capital Expenditures of Reportable Segments +Total capital expenditures of the Company’s reportable segments as of December 31, 2022 and 2021 were as follows: +December 31, +2022 +2021 +Debit and Credit +$ +15,283 +$ +6,826 +Prepaid Debit +2,309 +2,774 +Other +275 +474 +Total company capital expenditures +$ +17,867 +$ +10,074 +Net Sales to Geographic Location; Property, Equipment and Leasehold Improvements and Long-Lived assets by Geographic Segments +Each of the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of the United States is insignificant. +Net Sales by Product and Services +Net sales from products and services sold by the Company for the years ended December 31, 2022 and 2021 were as follows: +December 31, +2022 +2021 +Product net sales (1) +$ +281,190 +$ +199,586 +Services net sales (2) +194,555 +175,533 +Total net sales +$ +475,745 +$ +375,119 +(1) “Products” net sales include the design and production of Financial Payment Cards in contact-EMV, contactless EMV, metal, contactless and magnetic stripe card formats. The Company also generates “Products” revenue from the sale of Card@Once printers and consumables, private label credit cards and retail gift cards. +(2) “Services” net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers and SaaS personalization of instant issuance cards. +74 +Table of Contents +(This page has been left blank intentionally.) +75 +Table of Contents +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +Under the supervision of and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15I and 15d-15I under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2022. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specific in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, as discussed below, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by the Annual Report, our disclosure controls and procedures were effective as of December 31, 2022 as a result of the remediation of the material weaknesses discussed below. +Management’s Report on Internal Control over Financial Reporting +Management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. +Based on its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. +Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation, the Company’s management concluded that as of December 31, 2022, the Company’s internal control over financial reporting is effective. The Company’s independent registered public accounting firm audited the consolidated financial statements and related notes in the Annual Report on Form 10-K and have issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Their report appears in this Annual Report on Form 10-K. +Remediation of Previously Disclosed Material Weaknesses in Internal Control over Financial Reporting +As previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021 and on our Forms 10-Q for the quarters ended March 31, June 30, and September 30, 2022, management had then concluded that we identified a material weakness in our risk assessment primarily due to an inadequate complement of personnel with requisite experience in the design and implementation of controls. This resulted in ineffective general information technology controls over user access administration within the revenue system at certain locations, and change management related to the development of customized reports. Due to the general information technology control deficiencies, certain process-level automated controls and manual controls that are dependent on the +76 +Table of Contents +completeness and accuracy of information derived from the affected information technology systems were also ineffective because they could have been adversely impacted. The deficiencies in risk assessment also resulted in ineffective (i) journal entry controls due to inadequate review for segregation of duties on journal entries processed in batches, and (ii) controls over the accuracy of the sales price for sales in certain locations. We also identified ineffective controls over review and authorization of certain transactions in the purchasing process due to inadequate communication and monitoring activities. The material weaknesses did not result in any identified material misstatements to the financial statements and there were no changes to previously reported financial results. +To remediate the material weaknesses referenced above, with the oversight of the Audit Committee and our Board of Directors, we implemented changes to our internal control over financial reporting, whereby we conducted trainings, hired additional qualified resources and engaged a nationally recognized accounting firm to assist with the design and implementation of control procedures to address the identified risks of material misstatements in key process areas. We implemented system controls and manual monitoring activities to ensure appropriate segregation of duties over journal entries processed in batches. We enhanced user access controls over the revenue system at certain locations. We enhanced our change management controls relating to the development and changes to custom reports in certain information technology systems and have been performing additional analysis over source documentation to appropriately support information used, primarily in the purchasing and revenue processes. Management also implemented internal controls requiring appropriate reviews and retention of documentation of those reviews with regard to our revenue process, as well as controls over the accuracy of the sales price within the revenue system at certain locations. Finally, we enhanced our controls requiring appropriate reviews and approvals and retention of documentation with regard to the purchasing process. +We completed documentation of the actions described above, and based on the evidence obtained in validating the design and operating effectiveness of the implemented controls, we have concluded that the previously disclosed material weaknesses were remediated as of December 31, 2022. +Changes in Internal Control over Financial Reporting +Except for the changes in internal control over financial reporting related to the remediation of the material weaknesses described above, there have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. +Other Informatio n +[None] +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +PART II I +Item 10. +Directors, Executiv e Officers and Corporate Governance +The information required by this Item will be included in our definitive Proxy Statement for the 2023 Annual Meeting of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended December 31, 2022 and is incorporated herein by reference. +Item 11. +Executive Compensatio n +Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy Statement. +77 +Table of Contents +Item 12. +Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement. +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. +Item 14. +Principal Accountant Fees and Service s +Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement. +78 +Table of Contents +PART IV +Item 15. +Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Income +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +Exhibit Description +3.1 +Fourth Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2022). +3.2 +Third Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2022). +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +4.2 +Description of Registrant’s Securities (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2022). +4.3 +Indenture, dated as of March 15, 2021, by and among CPI CG Inc., as issuer, CPI Card Group Inc., as a guarantor, the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee and notes collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed March 16, 2021) . +4.4 +Form of 8.625% Senior Secured Notes due 2026 (included as Exhibit A to the Indenture included herewith as Exhibit 4.3) . +10.1 +Guaranty and Security Agreement, dated as of March 15, 2021, among CPI Card Group Inc. and certain of its subsidiaries from time to time party thereto and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed March 16, 2021) . +10.2 +Amendment No. 2 to ABL Credit Agreement, among CPI Card Group Inc., CPI CG Inc., the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and collateral agent (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2022) +10.3 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.4 +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +79 +Table of Contents +10.5 +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6** +CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective May 27, 2021 (incorporated by reference to the Company’s Current Report on Form 8-K filed May 28, 2021) . +10.7 +Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017). +10.8** +Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017) +10.9** +Form of Executive Restricted Stock Unit Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.10** +Form of Executive Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.11** +Form of Executive Restricted Stock Unit Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.12** +Form of Director Restricted Stock Unit Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.13** +Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.14** +Restricted Stock Unit Agreement, dated October 2, 2020, between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.15** +Form of 2020 Executive Short-Term Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.16** +Form of 2022 Executive Short-Term Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 5, 2022). +10.17** +Form of 2022 Employee Short-Term Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 5, 2022). +10.18** +CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017). +10.19** +Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.20** +Offer Letter, dated October 1, 2021 by and between CPI Card Group Inc. and Amintore Schenkel (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.21** +Offer Letter, dated October 1, 2021 by and between CPI Card Group Inc. and John Lowe (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.22** +2020 Executive Retention Agreement, dated September 11, 2019 between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +80 +Table of Contents +10.23** +Form of 2020 Executive Retention Agreement, dated September 11, 2019 for certain Executive Officers (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.24** +Form of Executive Retention Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.25** +2021 Executive Retention Agreement, dated October 2, 2020, between CPI Card Group. Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.26*,** +Employment Agreement, dated December 13, 2022 by and between CPI Card Group Inc. and Lane Dubin . +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH* +Inline XBRL Taxonomy Extension Schema Document. +101.CAL* +Inline XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +Inline XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +Inline XBRL Taxonomy Extension Presentation Linkbase Document. +104* +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). +* +Filed or furnished herewith. +** Management contract or compensatory plan or arrangement. +Item 16. Form 10-K Summary +None. +81 +Table of Contents +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ Amintore Schenkel +Amintore Schenkel +Chief Financial Officer +March 8, 2023 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint Scott Scheirman and Amintore Schenkel and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Scott Scheirman +President, Chief Executive +March 8, 2023 +Scott Scheirman +Officer and Director +(Principal Executive Officer) +/s/ Amintore Schenkel +Chief Financial Officer +March 8, 2023 +Amintore Schenkel +(Principal Financial Officer) +/s/ Donna Abbey +Chief Accounting Officer +March 8, 2023 +Donna Abbey +(Principal Accounting Officer) +/s/ Bradley Seaman +Chairman of the Board +March 8, 2023 +Bradley Seaman +/s/ Thomas Furey +Director +March 8, 2023 +Thomas Furey +/s/ Robert Pearce +Director +March 8, 2023 +Robert Pearce +/s/ Nicholas Peters +Director +March 8, 2023 +Nicholas Peters +/s/ Marc Sheinbaum +Director +March 8, 2023 +Marc Sheinbaum +/s/ Valerie Soranno Keating +Director +March 8, 2023 +Valerie Soranno Keating +82 \ No newline at end of file diff --git a/raw/filings/0001641614/2022/0001558370-23-003082/filing_metadata.csv b/raw/filings/0001641614/2022/0001558370-23-003082/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..d8ae4394e9bf6bcb5a027b7fec5c15901fd31916 --- /dev/null +++ b/raw/filings/0001641614/2022/0001558370-23-003082/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001641614,PMTS,CPI Card Group Inc.,10-K,2023-03-08,2022-12-31,2023-03-08T12:15:44.000Z,0001558370-23-003082,pmts-20221231x10k.htm,10-K,10004691,1,1,https://www.sec.gov/Archives/edgar/data/1641614/000155837023003082/pmts-20221231x10k.htm,https://www.sec.gov/Archives/edgar/data/1641614/000155837023003082/,2022,2022,1 diff --git a/raw/filings/0001641614/2022/0001558370-23-003082/item1.txt b/raw/filings/0001641614/2022/0001558370-23-003082/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e8ca0b6c93bfebecb5c613dd4578ed4d46a353d5 --- /dev/null +++ b/raw/filings/0001641614/2022/0001558370-23-003082/item1.txt @@ -0,0 +1,118 @@ +Item 1. +Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards (as defined below) issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience. +We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships, whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“fintechs”), as well as independent community banks, credit unions and Group Service Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, innovation, and supply-chain management, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, including the largest U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized financial institutions market, which includes independent community banks and credit unions; +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and +● the U.S. fintech market, where we produce and personalize Financial Payment Cards for financial technology companies. +Our business consists of the following reportable segments: +● Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing financial institutions primarily in the United States; +● Prepaid Debit, which primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States; and +● “Other,” which includes corporate expenses. +4 +Table of Contents +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 17 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +● Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We believe these efforts have resulted in CPI gaining estimated overall market share each year from 2018 to 2022. We have long-standing, trust-based relationships with customers and have collaborated with our top 10 customers for more than ten years, on average. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. Our Card@Once ® instant issuance solution provides the necessary on-site equipment and supplies, proprietary software-as-a service (SaaS) capability, customer support and secure data exchange to provide personalized cards on-site and on-demand at bank and credit union branches across the United States. Data is exchanged through either a secure web interface or through integrations of our proprietary software with our customers’ card issuance systems. Integrations provide a more seamless experience for our customers and we believe they foster longer lasting and closer customer relationships. +● Comprehensive End-to-End Card Solutions. The foundation of our strong market position with our small- to mid-sized issuer customers and fintechs is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card design and production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solutions allow our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +● Network of High-Security Facilities. Our high-security facilities are each audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands, forming a network of compliant production facilities in the United States. The Payment Card Brand attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long and complex, and our facilities and systems must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +● Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV ® ”) is a global technical standard, maintained by EMVCo LLC for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We also produce dual-interface EMV cards that have both contact and contactless functionality. +5 +Table of Contents +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. CPI’s Second Wave ® payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”), and Earthwise ® cards made with upcycled plastic address customer demands for more eco-focused card options. We also sell CPI Metals ® , a premium encased metal card. Our offerings also include Card@Once, our proprietary and patented instant card issuance system and SaaS solution. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Solutions market, gives us a competitive advantage. +● Experienced Leadership Team. We have an experienced leadership team that has energized the organization to focus on customers, accountability, innovation and delivering results. +EMV ® is a registered trademark or tradename of EMVCo LLC in the United States and other countries. +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality products, customer service and continuous innovation with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our customers elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality products and customer service, continuous innovation, and market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +Market-Leading Quality Products and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading solutions provider. With a focus on market-leading quality products and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their businesses. We listen to the voices of our customers and focus on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our stockholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. Continuous innovation aims to win new business and help our customers differentiate themselves with distinctive products and solutions, build their brands, and achieve top-of-wallet status. +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We aim to streamline our operations, which enables us to allocate resources focused on providing our +6 +Table of Contents +customers with unmatched solutions, innovation and exceptional service. We have also developed standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We invest in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance, profitability, and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact and Contactless Dual-Interface) +We produce plastic EMV cards, including our eco-focused solutions that we describe further below, and encased metal contact EMV cards. These EMV cards feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology, and we generally refer to all cards we produce with an RFID antenna as ‘contactless’ cards. +Earth Elements TM Eco-Focused Cards +We believe we are a leading provider of eco-focused card solutions in the U.S., having sold more than 90 million eco-focused contactless payment cards since launch in 2019. Our Earth Elements portfolio offers eco-focused solutions, including our Second Wave cards that feature a core made with ROBP and our Earthwise cards made with upcycled plastic. Dependent upon design and card construction, Earth Elements cards incorporate varying types and amounts of upcycled plastic content, including ROBP, recycled PVC and recycled PET-G. Cards in the Earth Elements portfolio are available in all forms of EMV Financial Payment Cards (contact and contactless dual-interface), and have been approved by two of the major Payment Card Brands. These solutions aim to satisfy increasing consumer demand for more eco-focused products and help support our and our customers’ environmental, social and governance (“ESG”) objectives. +Non-EMV Financial Payment Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards that utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, including prepaid debit cards. In 2020 we began producing non-EMV cards for the purpose of government disbursement in the U.S., and have produced non-EMV transit cards and health savings account cards. We also produce retail gift cards that are not issued on the networks of the Payment Card Brands. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact, contactless, and dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven with full color printing and edge-to-edge coverage, and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss or print with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with an inventory of their card stock and fulfillment materials. In addition, we provide EMV data preparation services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We also provide consultation and card design services to further assist customers in card customization. +Print-On-Demand Solution +Through our print-on-demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. We believe our print-on-demand solution further differentiates us with our financial institution and prepaid debit card program manager customers and enables us to access business-to-business and +7 +Table of Contents +business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, government disbursement, benefits and insurance. +Instant Card Issuance Systems and Services +In addition to centralized personalization services performed at our facilities, our customers may also utilize personalization services through Card@Once, our proprietary and patented instant card issuance system and SaaS solution, which provides our customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to encode a magnetic stripe card, a contact EMV card or a contactless dual-interface EMV card, and personalize the card on a desktop printer solution provided by CPI. These processes are audited for PCI data security standards compliance annually. Our instant issuance system generates both initial sales revenue for the printer solution and recurring revenue from card personalization and sales of cards and consumables. We offer multiple Card@Once solutions including our premium Spectrum solution that enables issuers to produce a high resolution payment card with over-the-edge printing capability. +Digital Services +While not currently significant to our financial results, we provide digital services and issuance technologies, including online card ordering, order lifecycle management, customer inventory management, self-service card customization, push provisioning, and other innovative solutions. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Suppliers +While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, one objective of our procurement strategy is not to depend on any single supplier. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the EMV/ contactless microchips and antennas. Our main suppliers of EMV/ contactless microchips and antennas include four leading international producers with locations in Germany, Thailand, South Korea and Singapore, some of which source materials from Taiwan. For the year ended December 31, 2022 approximately 97% of our purchased microchips and antennas came from these four main suppliers, and approximately 68% came from one supplier, with most of our contactless chips being provided from that same supplier. The other key components for our products are substrates and inlays. Additionally, o ur Second Wave payment cards feature a core made with ROBP, which we either have sourced or currently source from suppliers in Haiti and Thailand. +We monitor supply-chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation, resiliency and price. Surges in demand for certain raw materials and components, as well as other factors such as staffing challenges, have continued to strain the global supply-chain network, which has resulted in increased costs of such raw materials and components, increased shipping costs, freight and logistics delays, longer lead times and unpredictability. Although we strive to place orders for materials and components sufficiently in advance to compile buffer stock to mitigate the impacts of freight and logistics delays and to bolster our access to raw materials and components, it is difficult to predict the ability of our suppliers to continue to fulfill such orders, and it is possible that such delays as well as costs to obtain such raw materials and components will continue. If suppliers cannot fulfill our orders this can constrain our ability to support customer demand and negatively impact net sales. To mitigate the supply-chain constraints discussed above, we increased inventory levels in 2022 and entered into a capacity reservation agreement with one of our chip suppliers to reserve production supply capacity. Under the agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve +8 +Table of Contents +capacity to produce a set quantity of chips from 2023 through 2025, subject to certain conditions, and the Company has committed to purchase those chips. The total value of our commitment is $194.9 million over the term of the agreement. +Customers +We categorize our customers as follows: large issuers, small to mid-sized issuers, fintechs, prepaid debit issuers and program managers and Group Service Providers. We consider large issuers to be the top 10 card issuers in the United States based on an average of cards issued during the past three years. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest Prepaid Debit Card program managers in the United States. +The Company had one customer that accounted for 10% or more of its net sales in 2022. Net sales from this customer was approximately 16% of total net sales for the year ended December 31, 2022. We have been serving this customer for more than 10 years. Nearly two-thirds of our net sales for the year ended December 31, 2022 were from our top ten direct customers, which include certain Group Service Providers and we have been serving these top ten direct customers for an average of more than 10 years. In addition, through our direct and indirect customer relationships, a majority of our annual net sales in our Debit and Credit segment are derived from small- to mid-sized issuers and fintechs. Individually, many of these customers, including independent community banks and credit unions, represent minor amounts of our annual net sales. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangement that defines the quantities of products to be delivered or services rendered and other terms specific to the order as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a network of high-security facilities that we leverage to fulfill customer orders, with an array of products and services available to our customers. We have designed our facilities and operating processes to target providing exceptional service to all customers, with capabilities to: +● execute high-volume production runs; +● execute lower-volume production runs of smaller orders, as well as on-demand solutions; and +● meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, through our expertise and capabilities specifically designed for this prepaid retail market. +As of December 31, 2022, we operated facilities comprising approximately 386,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card printer provisioning and fulfillment, card packaging and fulfillment services. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we seek to embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources and create innovative and responsible products. Our key areas of focus in this area include: incorporating environmental sustainability practices as and where feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +9 +Table of Contents +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility and meaningful, innovative products at value-driven pricing. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives, customer relationships and partners that provide a wide geographic reach across the United States to sell and market our solutions. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customers’ individual needs. We use an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. We also strive to meet customer demand for new or enhanced products by innovating through research and development activities. We believe these efforts drive customer retention and satisfaction, and attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation, and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card solutions providers. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. We believe we are in competition with ABCorp, Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA (formerly known as Oberthur Technologies S.A.), Perfect Plastic, Thales (formerly known as Gemalto NV), Travel Tags, and WestRock (Multi Packaging Solutions), among others. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2022, we had 48 U.S. and foreign trademark registrations and applications, 39 existing U.S. patents, 42 existing foreign patents, as well as 45 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 13 years, and our trademarks will be due for renewal for additional ten year periods on an ongoing basis. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information can include names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state +10 +Table of Contents +privacy statutes and regulations, certain of the PCI Security Standards Council’s requirements, and the Health Insurance Portability and Accountability Act (“HIPAA”), each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws, and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council’s requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in achieving and maintaining compliance with the requirements from the Payment Card Brands, and have invested, and will continue to invest, significant capital to achieve and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers like us as well as CFPB supervised banks and nonbanks. The CFPB has in the past +11 +Table of Contents +and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Human Capital +Our leadership team has significant experience in the payments industry, and many of our employees possess career-long expertise and knowledge that is unique to the Financial Payment Card industry. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of the Company’s core values. Health and safety of our employees has remained paramount and the Company has adapted its health and safety procedures and protocols as necessary to foster a safe working environment. Our office-based employees moved to a primarily remote work environment beginning in March 2020. +We are committed to a diverse and inclusive workplace, in which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior, and employees are required to follow these standards and participate in related training. We encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. We also focus on a variety of community initiatives to enhance the lives of people in the communities where we operate through volunteerism, charitable giving and economic support. +As of December 31, 2022, CPI employed approximately 1,375 full-time employees, approximately 55% male and 45% female. Approximately 59% of the employee base identifies as being within a minority category. Approximately 74% of our full-time employees are production and service facility staff. Additionally, we use the services of temporary workers to provide flexibility for our business needs, particularly in our Prepaid Debit Card locations where historically we experienced more seasonality, although this is becoming a less meaningful portion of our workforce. In 2022, we began transitioning positions that were staffed with temporary workers to permanent employee positions, in order to better manage our workforce and operations. None of our employees are represented by labor unions. We believe that our relations with our employees are positive. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127, telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of the Company's website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC by the Company. +CPI Card Group Inc. qualifies as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and has elected to follow certain of the scaled back disclosure accommodations within this Annual +12 +Table of Contents +Report on Form 10-K. Beginning with the year ended December 31, 2021, the Company is classified as an accelerated filer with respect to SEC regulations and filing requirements. \ No newline at end of file diff --git a/raw/filings/0001641614/2022/0001558370-23-003082/item13.txt b/raw/filings/0001641614/2022/0001558370-23-003082/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..60bc230d5aa0d5195d0fdb4eb55264a25997fb56 --- /dev/null +++ b/raw/filings/0001641614/2022/0001558370-23-003082/item13.txt @@ -0,0 +1,3 @@ +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001641614/2022/0001558370-23-003082/item9a.txt b/raw/filings/0001641614/2022/0001558370-23-003082/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..f9085aa78890e4932167b3724ba2527ff23979c7 --- /dev/null +++ b/raw/filings/0001641614/2022/0001558370-23-003082/item9a.txt @@ -0,0 +1,17 @@ +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +Under the supervision of and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15I and 15d-15I under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2022. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specific in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, as discussed below, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by the Annual Report, our disclosure controls and procedures were effective as of December 31, 2022 as a result of the remediation of the material weaknesses discussed below. +Management’s Report on Internal Control over Financial Reporting +Management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. +Based on its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. +Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation, the Company’s management concluded that as of December 31, 2022, the Company’s internal control over financial reporting is effective. The Company’s independent registered public accounting firm audited the consolidated financial statements and related notes in the Annual Report on Form 10-K and have issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Their report appears in this Annual Report on Form 10-K. +Remediation of Previously Disclosed Material Weaknesses in Internal Control over Financial Reporting +As previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021 and on our Forms 10-Q for the quarters ended March 31, June 30, and September 30, 2022, management had then concluded that we identified a material weakness in our risk assessment primarily due to an inadequate complement of personnel with requisite experience in the design and implementation of controls. This resulted in ineffective general information technology controls over user access administration within the revenue system at certain locations, and change management related to the development of customized reports. Due to the general information technology control deficiencies, certain process-level automated controls and manual controls that are dependent on the +76 +Table of Contents +completeness and accuracy of information derived from the affected information technology systems were also ineffective because they could have been adversely impacted. The deficiencies in risk assessment also resulted in ineffective (i) journal entry controls due to inadequate review for segregation of duties on journal entries processed in batches, and (ii) controls over the accuracy of the sales price for sales in certain locations. We also identified ineffective controls over review and authorization of certain transactions in the purchasing process due to inadequate communication and monitoring activities. The material weaknesses did not result in any identified material misstatements to the financial statements and there were no changes to previously reported financial results. +To remediate the material weaknesses referenced above, with the oversight of the Audit Committee and our Board of Directors, we implemented changes to our internal control over financial reporting, whereby we conducted trainings, hired additional qualified resources and engaged a nationally recognized accounting firm to assist with the design and implementation of control procedures to address the identified risks of material misstatements in key process areas. We implemented system controls and manual monitoring activities to ensure appropriate segregation of duties over journal entries processed in batches. We enhanced user access controls over the revenue system at certain locations. We enhanced our change management controls relating to the development and changes to custom reports in certain information technology systems and have been performing additional analysis over source documentation to appropriately support information used, primarily in the purchasing and revenue processes. Management also implemented internal controls requiring appropriate reviews and retention of documentation of those reviews with regard to our revenue process, as well as controls over the accuracy of the sales price within the revenue system at certain locations. Finally, we enhanced our controls requiring appropriate reviews and approvals and retention of documentation with regard to the purchasing process. +We completed documentation of the actions described above, and based on the evidence obtained in validating the design and operating effectiveness of the implemented controls, we have concluded that the previously disclosed material weaknesses were remediated as of December 31, 2022. +Changes in Internal Control over Financial Reporting +Except for the changes in internal control over financial reporting related to the remediation of the material weaknesses described above, there have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001641614/2022/0001558370-23-003082/rp_note.txt b/raw/filings/0001641614/2022/0001558370-23-003082/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001641614/2022/0001558370-23-003082/rpt_disclosure.txt b/raw/filings/0001641614/2022/0001558370-23-003082/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8312f64bf1506ab957e4de4a74b8980b8a5927b1 --- /dev/null +++ b/raw/filings/0001641614/2022/0001558370-23-003082/rpt_disclosure.txt @@ -0,0 +1,10 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2021 to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them had or will have a direct or indirect material interest. +Registration Rights Agreement +In connection with our initial public offering, we entered into a registration rights agreement with the Tricor Funds (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Tricor Funds are entitled to request that we register shares of our Common Stock on a long-form or short-form registration statement on one or more occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. The Tricor Funds also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay the Tricor Funds’ expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our Common Stock held by the Tricor Funds as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the Common Stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization or certain other corporate transactions, and (iii) any shares of our Common Stock owned or acquired following the closing of our initial public offering by the Tricor Funds (collectively, “Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. In September 2021, we filed a registration statement on Form S-3 with respect to the shares of Common Stock held by the Tricor Funds in compliance with our obligations under the Registration Rights Agreement. +Director Nomination Agreement +In connection with our initial public offering, we entered into a Director Nomination Agreement with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our Board for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our Common Stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our Board as the number of shares of Common Stock beneficially owned by the Tricor Funds bears to the total number of shares of Common Stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds shall be entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. In addition, for so long as the Tricor Funds collectively beneficially own 10% or more of the total number of shares of our Common Stock then outstanding, the Tricor Funds shall also have the right to have their designees participate on committees of our Board, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding Common Stock. Nicholas Peters and Bradley Seaman have been designated by the Tricor Funds as nominees for election of directors to our Board commencing in 2016. H. Sanford Riley has been designated by the Tricor Funds to stand as a nominee for the first time at the Annual Meeting. +Policies and Procedures for Related Party Transactions +Our Board has adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving us in which the aggregate amount involved in any calendar year will or may be expected to exceed $100,000 and in which a related person has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). For purposes of this policy, a related person is defined as an executive officer, director, nominee for director, or a greater than 5% beneficial owner of our Common Stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider, among other factors, the related party’s relationship to the Company and interest in the transaction, the material facts of the transaction, the benefits to the Company of the transaction, the availability of other sources of comparable products or services (if applicable), whether the transaction is on terms that are comparable to the terms generally available to an unrelated third party, whether the transaction has the potential to impair director independence and whether the transaction constitutes a conflict of interest. +33 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2023/0001558370-24-002670/filing.txt b/raw/filings/0001641614/2023/0001558370-24-002670/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..63d69da661001bba1f7988b62f546eafdc615060 --- /dev/null +++ b/raw/filings/0001641614/2023/0001558370-24-002670/filing.txt @@ -0,0 +1,2937 @@ +http://www.cpicardgroup.com/20231231#PropertyPlantAndEquipmentAndOperatingLeaseRightOfUseAssetsNet http://www.cpicardgroup.com/20231231#PropertyPlantAndEquipmentAndOperatingLeaseRightOfUseAssetsNet http://fasb.org/us-gaap/2023#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2023#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2023#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2023#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2023#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2023#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2023#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2023#OtherLiabilitiesNoncurrent 0001641614 FY false 11390355 0 0 11446155 2023 P7Y P10Y P10Y P7Y 0.33 0.33 P2Y 0001641614 2022-02-23 2022-02-23 0001641614 pmts:TricorPacificCapitalPartnersFundIvMember 2023-12-06 2023-12-06 0001641614 us-gaap:CommonStockMember 2023-01-01 2023-12-31 0001641614 us-gaap:CommonStockMember 2022-01-01 2022-12-31 0001641614 us-gaap:RetainedEarningsMember 2023-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2023-12-31 0001641614 us-gaap:RetainedEarningsMember 2022-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2022-12-31 0001641614 us-gaap:RetainedEarningsMember 2021-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember pmts:ShareBasedCompensationAwardTrancheFiveMember 2023-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2022-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2022-01-01 2022-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-01-01 2023-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2022-12-31 0001641614 srt:MinimumMember us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-01-01 2023-12-31 0001641614 srt:MaximumMember us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-01-01 2023-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember pmts:ShareBasedCompensationAwardTrancheFiveMember 2023-01-01 2023-12-31 0001641614 pmts:June2023AwardTwoMember 2023-01-01 2023-12-31 0001641614 pmts:June2023AwardOneMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USPrepaidDebitMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USDebitAndCreditMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ProductsMember pmts:USDebitAndCreditMember 2023-01-01 2023-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ServicesMember 2023-01-01 2023-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ProductsMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USPrepaidDebitMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USDebitAndCreditMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ProductsMember pmts:USDebitAndCreditMember 2022-01-01 2022-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ServicesMember 2022-01-01 2022-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ProductsMember 2022-01-01 2022-12-31 0001641614 srt:MinimumMember 2023-12-31 0001641614 us-gaap:RetainedEarningsMember 2023-01-01 2023-12-31 0001641614 us-gaap:RetainedEarningsMember 2022-01-01 2022-12-31 0001641614 srt:MinimumMember pmts:SeniorRevolvingCreditFacilityMember 2023-04-01 2023-04-01 0001641614 srt:MaximumMember pmts:SeniorRevolvingCreditFacilityMember 2023-04-01 2023-04-01 0001641614 srt:MinimumMember pmts:SeniorRevolvingCreditFacilityMember 2023-03-31 2023-03-31 0001641614 srt:MaximumMember pmts:SeniorRevolvingCreditFacilityMember 2023-03-31 2023-03-31 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember 2022-03-03 2022-03-03 0001641614 srt:MaximumMember 2023-12-31 0001641614 us-gaap:TrademarksMember 2023-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2023-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2023-12-31 0001641614 us-gaap:TrademarksMember 2022-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2022-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2022-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2023-01-01 2023-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2023-12-31 0001641614 us-gaap:SeniorNotesMember 2023-01-01 2023-12-31 0001641614 us-gaap:SeniorNotesMember 2022-01-01 2022-12-31 0001641614 pmts:DefinedContributionPlanEmployerMatchOfIncrementalEmployeeDeferral2Member 2023-01-01 2023-12-31 0001641614 pmts:DefinedContributionPlanEmployerMatchOfIncrementalEmployeeDeferral1Member 2023-01-01 2023-12-31 0001641614 pmts:SeniorCreditFacilityMember 2023-12-31 0001641614 us-gaap:FairValueInputsLevel2Member us-gaap:SeniorNotesMember 2023-12-31 0001641614 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SeniorNotesMember 2023-12-31 0001641614 us-gaap:FairValueInputsLevel2Member us-gaap:SeniorNotesMember 2022-12-31 0001641614 us-gaap:FairValueInputsLevel2Member pmts:AblCreditFacilityMember 2022-12-31 0001641614 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SeniorNotesMember 2022-12-31 0001641614 us-gaap:EstimateOfFairValueFairValueDisclosureMember pmts:AblCreditFacilityMember 2022-12-31 0001641614 us-gaap:SeniorNotesMember 2023-12-31 0001641614 us-gaap:SeniorNotesMember 2023-12-31 0001641614 us-gaap:SeniorNotesMember 2022-12-31 0001641614 us-gaap:SeniorNotesMember 2022-12-31 0001641614 pmts:AblCreditFacilityMember 2022-12-31 0001641614 pmts:AblCreditFacilityMember 2022-12-31 0001641614 us-gaap:SeniorNotesMember 2021-03-15 0001641614 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember pmts:SecuredOvernightFinancingRateMember 2023-04-01 2023-04-01 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember pmts:SecuredOvernightFinancingRateMember 2023-04-01 2023-04-01 0001641614 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember pmts:SecuredOvernightFinancingRateMember 2022-03-03 2022-03-03 0001641614 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember pmts:SecuredOvernightFinancingRateMember 2022-03-03 2022-03-03 0001641614 us-gaap:IntersegmentEliminationMember 2023-01-01 2023-12-31 0001641614 us-gaap:IntersegmentEliminationMember 2022-01-01 2022-12-31 0001641614 pmts:ServicesMember 2023-01-01 2023-12-31 0001641614 pmts:ProductsMember 2023-01-01 2023-12-31 0001641614 pmts:ServicesMember 2022-01-01 2022-12-31 0001641614 pmts:ProductsMember 2022-01-01 2022-12-31 0001641614 us-gaap:CommonStockMember 2022-12-31 0001641614 us-gaap:CommonStockMember 2021-12-31 0001641614 2023-11-02 0001641614 2021-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember 2022-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-01-01 2023-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2022-01-01 2022-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2023-01-01 2023-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-12-31 0001641614 us-gaap:TrademarksMember 2023-01-01 2023-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2023-01-01 2023-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2023-01-01 2023-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember 2023-01-01 2023-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember 2023-01-01 2023-12-31 0001641614 pmts:June2023AwardOneMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2023-01-01 2023-12-31 0001641614 pmts:June2023AwardOneMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2023-01-01 2023-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-12-31 0001641614 us-gaap:MachineryAndEquipmentMember 2023-12-31 0001641614 us-gaap:LeaseholdImprovementsMember 2023-12-31 0001641614 us-gaap:FurnitureAndFixturesMember 2023-12-31 0001641614 us-gaap:ConstructionInProgressMember 2023-12-31 0001641614 pmts:OperatingRightOfUseAssetsMember 2023-12-31 0001641614 pmts:MachineryAndEquipmentUnderFinancialLeasesMember 2023-12-31 0001641614 us-gaap:MachineryAndEquipmentMember 2022-12-31 0001641614 us-gaap:LeaseholdImprovementsMember 2022-12-31 0001641614 us-gaap:FurnitureAndFixturesMember 2022-12-31 0001641614 us-gaap:ConstructionInProgressMember 2022-12-31 0001641614 pmts:OperatingRightOfUseAssetsMember 2022-12-31 0001641614 pmts:MachineryAndEquipmentUnderFinancialLeasesMember 2022-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember 2022-03-15 0001641614 us-gaap:RevolvingCreditFacilityMember 2022-03-03 0001641614 pmts:SmartPackagingSolutionsSVCpiCardGroupIncMember us-gaap:PendingLitigationMember 2023-12-31 0001641614 pmts:SmartPackagingSolutionsSVCpiCardGroupIncMember us-gaap:PendingLitigationMember 2021-04-20 0001641614 us-gaap:RevolvingCreditFacilityMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2022-01-01 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2022-01-01 2022-12-31 0001641614 us-gaap:CommonStockMember 2023-12-31 0001641614 2022-01-01 2022-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:OneSupplierMember 2023-01-01 2023-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:FourSuppliersMember 2023-01-01 2023-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:OneSupplierMember 2022-01-01 2022-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:FourSuppliersMember 2022-01-01 2022-12-31 0001641614 pmts:MajorCustomerNumberOneMember us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2023-01-01 2023-12-31 0001641614 pmts:MajorCustomerNumberOneMember us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2022-01-01 2022-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2023-12-31 0001641614 pmts:USPrepaidDebitMember 2023-12-31 0001641614 pmts:USDebitAndCreditMember 2023-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2022-12-31 0001641614 pmts:USPrepaidDebitMember 2022-12-31 0001641614 pmts:USDebitAndCreditMember 2022-12-31 0001641614 us-gaap:RevolvingCreditFacilityMember 2023-12-31 0001641614 pmts:FinanceLeasedAssetsMember 2023-12-31 0001641614 pmts:FinanceLeasedAssetsMember 2022-12-31 0001641614 2023-12-31 0001641614 2022-12-31 0001641614 2023-10-01 2023-12-31 0001641614 2023-06-30 0001641614 2024-02-29 0001641614 2023-01-01 2023-12-31 xbrli:shares iso4217:USD pmts:customer pmts:item xbrli:pure pmts:Vote xbrli:shares iso4217:USD xbrli:shares +Table of Contents +fPrint- +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☑ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31 , 2023 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10368 W. Centennial Road +Littleton , CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code ( 720 ) 681-6304 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value +PMTS +Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐     No ☑ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐     No ☑ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑     No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑     No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☑ +Non-accelerated filer ☐ +Smaller reporting company ☑ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑   +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No ☑ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive o ffi cers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +The aggregate market value of the registrant’s common stock held by non-affiliates was $ 109.3 million on June 30, 2023 computed based on the closing price of the registrant’s common stock of $23.25 as reported on the Nasdaq Global Market on that date. +As of February 29, 2024, the number of shares outstanding of the registrant’s common stock was 11,400,845 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2023 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +4 +Item 1A +Risk Factors +13 +Item 1B +Unresolved Staff Comments +34 +Item 1C +C ybersecurity +34 +Item 2 +Properties +36 +Item 3 +Legal Proceedings +36 +Item 4 +Mine Safety Disclosures +37 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +37 +Item 6 +[Reserved] +38 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +38 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +49 +Item 8 +Financial Statements and Supplementary Data +50 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +78 +Item 9A +Controls and Procedures +78 +Item 9B +Other Information +79 +Item 9C +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +79 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +79 +Item 11 +Executive Compensation +79 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +79 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +79 +Item 14 +Principal Accountant Fees and Services +79 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +80 +Item 16 +Form 10-K Summary +83 +Signatures +84 +1 +Table of Contents +Cautionary Statement Regarding Forward-Looking Information +Certain statements and information in this Annual Report on Form 10-K (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “attempt,” “aim,” “target,” “objective,” “guides,” “seek,” “focus,” “provides guidance,” “provides outlook” or other similar expressions are intended to identify forward-looking statements, which are not historical in nature. These forward-looking statements, including statements about our strategic initiatives and market opportunities, are based on our current expectations and beliefs concerning future developments and their potential effect on us and other information currently available. Such forward-looking statements, because they relate to future events, are by their very nature subject to many important risks and uncertainties that could cause actual results or other events to differ materially from those contemplated . +These risks and uncertainties include, but are not limited to: a deterioration in general economic conditions, including inflationary conditions and resulting in reduced consumer confidence and business spending, and a decline in consumer credit worthiness impacting demand for our products; the unpredictability of our operating results, including an inability to anticipate changes in customer inventory management practices and its impact on our business; a disruption or other failure in our supply chain, including as a result of foreign conflicts and with respect to single source suppliers, or the failure or inability of suppliers to comply with our code of conduct or contractual requirements, or political unrest in countries in which our suppliers operate, or inflationary pressures, resulting in increased costs and inability to pass those costs on to our customers and extended production lead times and difficulty meeting customers’ delivery expectations; our failure to retain our existing customers or identify and attract new customers; our inability to recruit, retain and develop qualified personnel, including key personnel, and implement effective succession processes; adverse conditions in the banking system and financial markets, including the failure of banks and financial institutions; system security risks, data protection breaches and cyber-attacks; interruptions in our operations, including our information technology systems, or in the operations of the third parties that operate computing infrastructure on which we rely; our inability to develop, introduce and commercialize new products and services; the usage, or lack thereof, of artificial intelligence technologies; our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our indebtedness and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our status as an accelerated filer and complying with the Sarbanes-Oxley Act of 2002 and the costs associated with such compliance and implementation of procedures thereunder; our failure to maintain effective internal control over financial reporting; disruptions in production at one or more of our facilities; problems in production quality, materials and process and costs relating to product defects and any related product liability and/or warranty claims; environmental, social and governance (“ESG”) preferences and demands of various stakeholders and our ability to conform to such preferences and demands and to comply with any related regulatory requirements; the effects of climate change, negative perceptions of our products due to the impact of our products and production processes on the environment and other ESG-related risks; damage to our reputation or brand image; disruptions in production due to weather conditions, climate change, political instability or social unrest; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation, infringement claims brought against us and risks related to open source software; defects in our software and computing systems; our limited ability to raise capital; costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state businesses or unclaimed property, as well as potential new U.S. tax legislation increasing the corporate income tax rate and challenges to our income tax positions; our inability to successfully execute on our divestitures or acquisitions; our inability to realize the full value of our long-lived assets; our inability to renew licenses with key technology licensors; the highly competitive, saturated and consolidated nature of our marketplace; costs and potential liabilities associated with compliance or failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security; new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services in a timely manner; our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards; the effects of restrictions, delays or interruptions in our ability to source raw materials and components used in our products from foreign countries; the effects on the global economy of ongoing foreign conflicts; our failure to comply with environmental, health and safety laws and regulations that apply to our products and the raw materials we use in our production processes; risks associated with the majority stockholders’ +2 +Table of Contents +ownership of our stock; potential conflicts of interest that may arise due to our board of directors being comprised in part of directors who are principals of our majority stockholders; the influence of securities analysts over the trading market for and price of our common stock; failure to meet the continued listing standards of the Nasdaq Global Market; the impact of stockholder activism or securities litigation on the trading price and volatility of our common stock; our inability to fully execute on our share repurchase program strategy; certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors; our ability to comply with a wide variety of complex laws and regulations and the exposure to liability for any failure to comply; the effect of legal and regulatory proceedings; and other risks that are described in Part I, Item 1A, Risk Factors in this Annual Report on Form 10-K and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +3 +Table of Contents +PART I +Item 1. +Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payments technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards (as defined below) issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience. +We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships, whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“fintechs”), as well as independent community banks, credit unions and Group Service Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, innovation, and supply-chain management, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, including the largest U.S. Prepaid Debit Card program managers; +● the U.S. small-to mid-sized financial institutions market, which includes independent community banks and credit unions; +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and +● the U.S. fintech market, where we produce and personalize Financial Payment Cards for financial technology companies. +Our business consists of the following reportable segments: +● Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services, including digital services, to card-issuing financial institutions primarily in the United States; +● Prepaid Debit, which primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States; and +● “Other,” which includes corporate expenses. +4 +Table of Contents +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 17 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +● Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality payments solutions and customer service with a market-competitive business model. We believe these efforts have resulted in CPI gaining estimated overall market share since 2017. We have long-standing, trust-based relationships with customers and have collaborated with our top 10 customers for more than ten years, on average. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. Our Card@Once ® instant issuance solution provides the necessary on-site equipment and supplies, proprietary software-as-a-service (SaaS) capability, customer support and secure data exchange to provide personalized cards on-site and on-demand at bank and credit union branches across the United States. Data is exchanged through either a secure web interface or through integrations of our proprietary software with our customers’ card issuance systems. Integrations provide a more seamless experience for our customers and we believe they foster longer lasting and closer customer relationships. +● Comprehensive End-to-End Card Solutions. The foundation of our strong market position with our small- to mid-sized issuer customers and fintechs is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card design and production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solutions allow our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +● Network of High-Security Facilities. Our high-security facilities are each audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands, forming a network of compliant production facilities in the United States. The Payment Card Brands attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long and complex, and our facilities and systems must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +● Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV ® ”) is a global technical standard, maintained by EMVCo LLC for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We also produce dual-interface EMV cards that have both contact and contactless functionality. +5 +Table of Contents +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. CPI’s Second Wave ® payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”) and Earthwise ® cards made with upcycled plastic address customer demands for more eco-focused card options. We also sell CPI Metals ® , a premium encased metal card. Our offerings also include Card@Once, our proprietary and patented instant card issuance system and SaaS solution. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Solutions market, gives us a competitive advantage. +● Experienced Leadership Team. We have an experienced leadership team that has energized the organization to focus on customers, accountability, innovation and delivering results. +EMV ® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMV Co, LLC . +Our Strategy +We are a payments technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality payments solutions, customer service and continuous innovation with a market-competitive business model. We also aim to expand our addressable market over the long-term by adding adjacent product and service offerings, including more digital solutions, for our extensive customer base of thousands of financial institutions. +We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our customers elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality payments solutions and customer service, continuous innovation and a market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +Market-Leading Quality Payments Solutions and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading solutions provider. With a focus on market-leading quality payments solutions and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their businesses. We listen to the voices of our customers and focus on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our stockholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. Continuous innovation aims to win new business and help our customers differentiate themselves with distinctive products and solutions, build their brands and achieve top-of-wallet status. +6 +Table of Contents +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We aim to streamline our operations, which enables us to allocate resources focused on providing our customers with unmatched solutions, innovation and exceptional service. We have also developed standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We invest in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance, profitability and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact and Contactless Dual-Interface) +We produce plastic EMV cards, including our eco-focused solutions that we describe further below, and encased metal contact EMV cards. These EMV cards feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology, and we generally refer to all cards we produce with an RFID antenna as ‘contactless’ cards. +Eco-Focused Cards +We believe we are a leading provider of eco-focused card solutions in the U.S., having sold more than 100 million eco-focused contactless payment cards since launch in 2019. Our eco-focused solutions include our Second Wave cards that feature a core made with ROBP and our Earthwise cards made with upcycled plastic. Dependent upon design and card construction, eco-focused cards incorporate varying types and amounts of upcycled plastic content, including ROBP and recycled PVC. Cards in the eco-focused portfolio have been approved by two of the major Payment Card Brands. These solutions aim to satisfy increasing consumer demand for more eco-focused products and help support our and our customers’ environmental, social and governance (“ESG”) objectives. +Non-EMV Financial Payment Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards that utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, including Prepaid Debit Cards. In 2020 we began producing non-EMV cards for the purpose of government disbursement in the U.S., and have produced non-EMV transit cards and health savings account cards. We also produce retail gift cards that are not issued on the networks of the Payment Card Brands. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact, contactless and dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven with full color printing and edge-to-edge coverage, and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss or print with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with an inventory of their card stock and fulfillment materials. In addition, we provide EMV data preparation services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We also provide consultation and card design services to further assist customers in card customization. +Print-On-Demand Solution +Through our print-on-demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing inventory. Our service offering includes online ordering of a customized payment card through a program manager, with +7 +Table of Contents +direct fulfillment to a consumer. We believe our print-on-demand solution further differentiates us with our financial institution and Prepaid Debit Card program manager customers and enables us to access business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, government disbursement, benefits and insurance. +Instant Card Issuance Systems and Services +In addition to centralized personalization services performed at our facilities, our customers may also utilize personalization services through Card@Once, our proprietary and patented instant card issuance system and SaaS-based solution, which provides our customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to encode a magnetic stripe card, a contact EMV card or a contactless dual-interface EMV card, and personalize the card on a desktop printer solution provided by CPI. These processes are audited for PCI data security standards compliance annually. Our instant issuance system generates both initial sales revenue for the printer solution and recurring revenue from card personalization and sales of cards and consumables. We offer multiple Card@Once solutions including our premium Spectrum solution that enables issuers to produce a high-resolution payment card with over-the-edge printing capability. +Digital Solutions +While not currently significant to our financial results, we provide digital solutions, including push provisioning which allows our customers to facilitate the provisioning of payment credentials to a cardholder’s digital wallet, digital cards which allow our customers to utilize prepaid cards with online merchants, and online front-end ordering and card customization allowing customers to order one-time use physical rewards cards. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Suppliers +While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, one objective of our procurement strategy is to not depend on any single supplier. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the EMV/contactless microchips and antennas. Our main suppliers of EMV/contactless microchips and antennas include four leading international producers with locations in Germany, Thailand, South Korea and Singapore, some of which source materials from Taiwan. For the year ended December 31, 2023 approximately 96% of our purchased microchips and antennas came from these four main suppliers, and approximately 72% came from one supplier, including most of our contactless chips. The other key components for our products are substrates and inlays. Additionally, o ur Second Wave payment cards feature a core made with ROBP, which we either have sourced or currently source from suppliers in Haiti and Thailand. +We monitor supply-chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation, resiliency and price. In 2022, we entered into a capacity reservation agreement with one of our chip suppliers to reserve production supply capacity. Under the agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve capacity to produce a set quantity of chips from 2023 through 2025, subject to certain conditions, and the Company has committed to purchase those chips. The total value of our commitment is $194.9 million over the term of the agreement. As of December 31, 2023, the remaining commitment was $125.3 million. +8 +Table of Contents +Customers +We categorize our customers as follows: large issuers, small- to mid-sized issuers, fintechs, prepaid debit issuers and program managers and Group Service Providers. We consider large issuers to be the top 10 card issuers in the United States based on an average of cards issued during the past three years. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest Prepaid Debit Card program managers in the United States. +The Company had one customer that accounted for 10% or more of its net sales in 2023. Net sales from this customer were approximately 18% of total net sales for the year ended December 31, 2023. We have been serving this customer for more than 10 years. Nearly two-thirds of our net sales for the year ended December 31, 2023 were from our top ten direct customers, which include certain Group Service Providers, and we have been serving these top ten direct customers for an average of more than 10 years. In addition, through our direct and indirect customer relationships, a majority of our annual net sales in our Debit and Credit segment are derived from small- to mid-sized issuers and fintechs. Individually, many of these customers, including independent community banks and credit unions, represent minor amounts of our annual net sales. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangement that defines the quantities of products to be delivered or services rendered and other terms specific to the order as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a network of high-security facilities that we leverage to fulfill customer orders, with an array of products and services available to our customers. We have designed our facilities and operating processes to target providing exceptional service to all customers, with capabilities to: +● execute high - volume production runs; +● execute lower - volume production runs of smaller orders; +● execute on-demand solutions; and +● meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, through our expertise and capabilities specifically designed for the prepaid retail market. +As of December 31, 2023, we operated facilities comprising approximately 402,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card printer provisioning and fulfillment, card packaging and fulfillment services. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we seek to embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources and create innovative and responsible products. Our key areas of focus in this area include: incorporating environmental sustainability practices as and where feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +9 +Table of Contents +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility, and meaningful, innovative products at value-driven pricing. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives, customer relationships and partners that provide a wide geographic reach across the United States to sell and market our solutions. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy is focused on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customers’ individual needs. We use an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. We also strive to meet customer demand for new or enhanced products by innovating through research and development activities. We believe these efforts drive customer retention and satisfaction and attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products, features and capabilities, and price. +Our products and services compete with other card solutions providers. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. We believe we are in competition with ABCorp, Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA (formerly known as Oberthur Technologies S.A.), Perfect Plastic Printing, Thales (formerly known as Gemalto NV), Travel Tags, and WestRock (Multi Packaging Solutions), among others. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2023, we had 70 U.S. and foreign trademark registrations and applications, 42 existing U.S. patents, 51 existing foreign patents, as well as 45 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 12 years, and our trademarks will be due for renewal for additional ten-year periods on an ongoing basis. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a Group Service Provider. Such information can include names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the +10 +Table of Contents +Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy statutes and regulations, certain of the PCI Security Standards Council’s requirements and the Health Insurance Portability and Accountability Act (“HIPAA”), each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws, and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council’s requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in achieving and maintaining compliance with the requirements from the Payment Card Brands, and have invested, and will continue to invest, significant capital to achieve and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has +11 +Table of Contents +defined to include service providers like us as well as CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Human Capital +Our leadership team has significant experience in the payments industry, and many of our employees possess career-long expertise and knowledge that is unique to the Financial Payment Card industry. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of the Company’s core values. Health and safety of our employees has remained paramount and the Company has adapted its health and safety procedures and protocols as necessary to foster a safe working environment. We maintain a combination of on-site and remote employees in our workforce. +We are committed to a diverse and inclusive workplace, in which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior, and employees are required to follow these standards and participate in related training. We encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. We also focus on a variety of community initiatives to enhance the lives of people in the communities where we operate through volunteerism, charitable giving and economic support. +As of December 31, 2023, approximately 1,448 people were employed by CPI, of which nearly half are women and approximately 60% identify as being within a minority category. Approximately 74% of our full-time employees are production and service facility staff. In 2023, we completed the process of transitioning temporary worker positions in our Prepaid Debit Card locations, where historically we experienced more seasonality, to permanent employee positions, in order to better manage our workforce and operations, and significantly reduced our reliance on temporary workers. None of our employees are represented by labor unions. We believe that our relations with our employees are positive. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127, telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of the Company's website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC by the Company. +CPI Card Group Inc. qualifies as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act and has elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. Beginning with the year ended December 31, 2021, the Company is classified as an accelerated filer with respect to SEC regulations and filing requirements. +12 +Table of Contents +Item 1A. Risk Factors +There are many factors that affect our business, financial condition, results of operations and cash flows, some of which are beyond our control. The following is a description of some important factors that may cause our business, financial condition, results of operations and cash flows in future periods to differ materially from those currently expected or desired. Factors not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations and cash flows. You should carefully consider all of these risks described below, together with the other information included in this Annual Report on Form 10-K, before investing in our securities. As a result of any of these risks, known or unknown, you may lose all or part of your investment in our securities. +Risk Factors Summary +Risks Relating to our Business +● A deterioration in general economic conditions, including inflation-related challenges, resulting in reduced consumer confidence and consumer and business spending and decreased demand for our products. +● The unpredictability of our operating results due to the varying cyclicality of the financial card and electronic payment industries, changes in customer inventory management practices, capital requirements, competition, new product developments, technological changes and other factors. +● Disruptions, delays and increased costs and inflationary pressures in our supply chain, including with respect to single-source suppliers, or the failure or inability of our suppliers to comply with our codes of conduct or contractual requirements. +● Failure to retain existing key customers and attract new customers due to competitive products, pricing pressures, extended production lead times, financial health of our customers and macroeconomic conditions affecting our industry or our customers. +● Failure to recruit, retain and develop qualified new and replacement personnel and implement effective succession processes amidst labor shortages and competitive labor markets. +● Adverse conditions in the banking system and financial markets, including bank and financial institution failures. +● A cyber-attack or breach of our information technology systems resulting in losses of our intellectual property and/or sensitive cardholder data, harm to our competitive position and a loss of customer trust and confidence, and, as threats evolve, the necessity to invest in significant additional resources to enhance our information security and controls. +● Any interruption of our information technology systems, including disruptions or failures of our third-party data centers, inhibiting our ability to service our customers. +● Our inability to undertake time-consuming and costly research and development activities in order to develop new or enhanced products and services. +● Our substantial indebtedness and the covenants and restrictions in the agreements governing our indebtedness limiting our ability to use our cash flow in certain areas of our business, capitalize on certain business opportunities and pursue our business strategies, all of which could be further impacted if we incur additional debt. +● An inability to refinance our existing debt on favorable terms or at all. +● Costs associated with being an accelerated filer and compliance with the Sarbanes-Oxley Act of 2002. +● A disruption at any of our production facilities and our inability to recover quickly or otherwise provide continuity of production in order to meet customer requirements. +● Problems in our production processes, including as a result of mechanical or technological failures, which could lead to reduced production capacity and quality. +● Defects in our products that may give rise to products recalls, product liability and warranty claims as well as damage to our reputation. +● The impact of the increasing focus on ESG factors on our ability to access capital, produce our products in conformity with stakeholder preferences, and comply with stakeholder demands as well as comply with any new ESG related regulatory requirements. +● Damage to our reputation or brand image resulting from negative perceptions of our business or those entities or individuals with whom we do business. +● The effects of climate change on our business. +13 +Table of Contents +● Our inability to protect our trade secrets, intellectual property and proprietary software; to obtain additional intellectual property rights in the future; and to ensure our products are not infringing the intellectual property rights of others. +● Defects in our software and computing systems, resulting in errors or delays in the processing of transactions and other interruptions in our business operations. +● The effects of the low trading volume and fluctuating trading price of our common stock as well as terms of our outstanding indebtedness and market conditions on our ability to access capital markets. +● Our exposure to additional tax collection efforts by states, unclaimed property laws, or future increases in U.S. federal or state income taxes, resulting in additional expenses which we may be unable to pass along to our customers. +● Our inability to divest or consolidate certain non-strategic businesses, and our inability to execute successfully on an acquisition strategy. +● A write-down of our long-lived assets, which represent a significant portion of our total assets. +● Our inability to renew licenses with key technology licensors, resulting in our loss of access to certain technologies upon which we rely to develop certain of our products. +Risks Relating to our Industry +● The highly competitive, saturated and consolidated nature of our marketplace. +● Challenges, costs and potential liabilities associated with compliance or failure to comply with existing or future data privacy and security laws, regulations and requirements. +● The widespread adoption of technological changes, new products or industry standards, such as digital payment systems or mobile payments, which may render our products obsolete or irrelevant, and our failure to develop and introduce innovative products to address the evolving needs of our customers. +● Our failure to comply with the standards of the PCI Security Standards Council, including due to an inability to continue to make investments in our facilities necessary to maintain compliance with such standards. +● The effects of delays or interruptions in our ability to source raw materials and components used in our products from foreign countries due to economic downturns or disruptions, including as a result of responses to global health emergencies and tariffs and trade restrictions. +● The effects of ongoing foreign conflicts on the global economy. +● Our failure to comply with environmental, health and safety laws and regulations, including climate change regulations, that apply to our products and the raw materials we use in our production processes. +Risks Relating to Ownership of our Common Stock +● Continued concentrated ownership of our shares by our majority stockholders and their ability to control decisions regarding our business direction and policies as well as the potential conflicts of interest that may arise between our majority stockholders and our other stockholders. +● The influence of securities analysts over the trading market for and price of our common stock, particularly due to the lack of substantial research coverage of our common stock. +● Our failure to maintain our listing on the Nasdaq Global Market (“Nasdaq”) due to failure to comply with Nasdaq listing standards . +● The impact of stockholder activism or securities litigation on the trading price and volatility of our common stock. +● Share repurchase programs may not have the intended effect on long-term stockholder value. +● Certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors. +General Risk Factors +● Our inability to comply with numerous evolving and complex laws and regulations relating to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, labor and health and safety. +● Legal costs, insurance expenses, settlement costs and the risk of an adverse decision related to legal or regulatory proceedings or litigation. +14 +Table of Contents +Risks Relating to our Business +Risks associated with reduced levels of consumer and business spending, inflation-related challenges and the effects of an economic downturn could adversely affect our business, financial condition and results of operations. +Our business depends heavily on the overall level of consumer and business spending. Our revenue is exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. A sustained deterioration in general economic conditions, particularly in the United States, or increases in interest rates may adversely affect our financial performance by reducing the demand for our Financial Payment Card solutions or reducing the purchase of our higher margin products. If an economic downturn occurs, credit card issuers may reduce credit limits, close accounts and become more selective with respect to whom they issue credit cards. Certain of our customers, especially in the fintech space, could be severely impacted by a downturn in economic conditions limiting their spending on cards, or cease to exist altogether. Additionally, an economic downturn or another global health emergency similar to the COVID-19 pandemic could result in extended voluntary or mandated closure of retail locations that sell certain of our products to consumers, including our Prepaid Debit Cards. These and other changes in economic conditions could therefore adversely impact our future revenues and profits and cause a materially adverse effect on our business, financial condition and results of operations. +Inflation, which increased significantly during 2022 and 2023, has adversely affected us by increasing the costs of materials and labor needed to operate our business and could continue to adversely affect us in future periods. In response to inflation, we have increased and may in the future increase, the sales prices of our products and services in order to maintain satisfactory margins. However, such increases may result in customer pushback or attrition and be difficult or impossible in future periods, all of which may have an adverse effect on our financial condition and results of operations. +Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue and profitability or lead to significant variability in our operating results. These factors include the varying cyclicality of the financial card and electronic payment industries, limited visibility into our customers’ anticipated purchasing needs, labor and supply challenges, capital requirements, Payment Card Brands standards and requirements, competition, new product developments, technological changes and other factors. +Furthermore, in periods of industry overcapacity or when our customers encounter difficulties in their end-markets, orders are more exposed to cancellations, reductions, price reductions or postponements, or changes in customer inventory management practices which in turn reduce our management’s ability to forecast the next quarter or full-year production levels, net sales, profits and cash flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations as visibility is reduced. This may have a material adverse effect on our business, financial condition and results of operations. +A disruption or other failure in our supply chain could adversely affect our business and financial results. +As a company engaged in production and distribution, we are subject to the risks inherent in such activities, including product quality control issues, disruptions or delays in our supply chain as well other external factors over which we have no control. Raw materials used in our products may be sourced from a few key suppliers or a single key supplier. Specifically, certain key components for our Financial Payment Card products include EMV microchips, substrates (such as PVC), resin, modules, antennas and inlays, which we source from multiple suppliers located in various countries, primarily on a purchase order basis. Though we obtain the microchips used in our Financial Payment Card products from multiple suppliers, we source the substantial majority of such microchips from one supplier. For the year ended December 31, 2023 approximately 96% of the total value of our purchased microchips and antennas came from four main suppliers, and approximately 72% came from one supplier, including most of our contactless chips. We may enter into agreements with suppliers from time to time which commit us to purchase products at prices less favorable than those available in the market at the time of the order, or in quantities greater than our future needs. If such supplier is unable to fulfill our orders for microchips or is delayed in shipping microchips to us, we could fail to timely fulfill customer orders, which could damage our reputation and result in a loss of customers and customer opportunities and material harm to our financial results. +15 +Table of Contents +Additionally, our Second Wave cards, featuring a core made with ROBP rely on a largely international supply chain to source and provide such plastic in accordance with our defined parameters. It is difficult and costly to monitor suppliers of key components and their compliance with our parameters, our codes of conduct, and applicable laws. Any failure by our suppliers to so comply could adversely affect our ability to produce Financial Payment Cards at all or in a manner consistent with standards agreed upon with our customers, which could adversely affect our business, reputation and customer relationships. Moreover, in certain cases, such as with ROBP, microchip and resin suppliers, we may rely on suppliers for which there are not adequate and immediate replacements, which may result in our inability to continue to produce or a reduction in production of products that use components from these suppliers in the event the suppliers terminate their relationships with us, fail to deliver products or materials in required volumes or in required timeframes, or otherwise fail to meet their obligations to us. We generally do not maintain large volumes of certain types of inventory, which makes us even more susceptible to harm if a supplier fails to deliver products or materials as required. +Changes in the financial or business condition of our suppliers, political instability, social or civil unrest, war or adverse market conditions in a supplier’s country, including any new global health emergency, demand from other customers of such suppliers or failure to comply with our codes of conduct or other contractual requirements, could render our suppliers unable to provide us with, or render us unable or unwilling to accept, the components we need to produce our products and thus subject us to losses or adversely affect our ability to bring products to market. Further, the failure of our suppliers to deliver goods and services in sufficient quantities, in compliance with applicable standards, contract requirements, or laws and regulations, and in a timely manner could adversely affect our customer service levels, our reputation and our overall business. For example, during the COVID-19 pandemic, we experienced delays in the supply of, and increased costs of, materials necessary to operate our business, which made it difficult to produce our products in a timely manner. In addition, any increases in the costs of goods and services for our business, including as a result of inflationary pressures, may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in our operations. If a company in our supply chain engages in illegal, unethical or other questionable conduct, we may not have visibility into these practices, we may in certain circumstances be deemed to have concurrent responsibility with our supplier for such conduct, and we, and our customers, may face legal or reputational harm in addition to interruptions to our supply chain. +Failure to retain our existing customers or identify and attract new customers would have a material adverse effect on our business. +A substantial portion of our net sales is derived from several large customers. The Company had one customer that accounted for approximately 18% of total net sales for the year ended December 31, 2023. We have been serving this customer for more than 10 years. In addition, nearly two-thirds of our net sales for the year ended December 31, 2023 were from our top ten direct customers, which include certain Group Service Providers. We have been serving these top ten direct customers for an average of more than 10 years. If one or more of our key customer relationships ends, it could have a material adverse effect on our business and financial results. Our ability to provide products and services to these customers and our other customers and meet very high-quality standards in a timely manner is critical to our business success. For example, one of the key services that we offer our customers is the prompt and timely production and delivery of replacement debit or credit cards. Orders for replacement debit or credit cards often are placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a high quality and timely manner, our relationships with our customers may be adversely affected and customers may terminate their contracts with us. +In addition, our continued business relationship with our customers may be impacted by several factors beyond our control, including changes in purchasing and inventory management practices by our customers, more attractive product offerings from our competitors, pricing and inflationary pressures, Group Service Providers’ and program managers’ ability to retain existing or gain new customers, the financial health of our customers and macroeconomic conditions affecting the Financial Payment Card industry or our financial institution and other customers. Our business practices may also be subject to periodic audits by customers as part of that customer’s third-party risk management programs, the outcome of which may result in the loss of that customer or may cause us to incur significant costs in order to satisfy the customer’s requirements. Because our contractual arrangements with customers generally do not include exclusivity clauses or commitments to order specified quantities of products on a medium or long-term basis, there is no guarantee that we will receive orders on a consistent basis or on favorable terms, or be able to renew contracts or purchase orders in a given year on favorable terms or at all. Additionally, as a result of labor shortages and supply-chain constraints, the Company has experienced extended production lead times in the past in some areas of the business which resulted in difficulty meeting some customers’ delivery expectations. While we continue to proactively monitor, +16 +Table of Contents +assess and take steps to minimize disruptions and delays in production, these disruptions and delays have caused, and may continue to cause, the Company to lose or delay customer opportunities. +If we experience difficulty attracting and retaining customers, our business, financial condition and results of operations would be materially and adversely affected. +The failure to effectively recruit, retain and develop qualified personnel and implement effective succession processes could adversely affect our success and could have a material adverse effect on our business, financial condition and results of operations. +Our business functions are complex and require wide-ranging expertise and intellectual capital. If we fail to recruit, retain and develop personnel who can provide the needed expertise across the entire spectrum of our operating and intellectual capital needs, including as a result of leadership changes, then the ability of our business to successfully compete and grow may be adversely affected. The market for qualified personnel is highly competitive and we have previously experienced labor availability issues in several of our facilities. This shortage of labor has resulted, and may in the future result, in increased compensation and recruiting expenses which could have a material adverse effect on our profitability, particularly if we are unable to pass all of such expenses on to our customers or are limited in our ability to find suitable workers. +In addition, we rely, in part, on the accumulated knowledge, skills and experience of our key personnel, including our executive officers. The loss of the services of any of our key personnel could have a material adverse effect on our business, financial condition and results of operations, as we may not be able to find suitable individuals to replace such key personnel on a timely basis or without incurring increased costs, or at all. If our key personnel were to leave us without adequate succession plans in place, it may cause a failure to maintain continuity in key business functions. We may not succeed in recruiting sufficient personnel to support our production needs or may fail to effectively replace current personnel who depart with qualified or effective successors. Personnel shortages have resulted, and may in the future result, in extended production lead times and difficulty in meeting customers’ delivery expectations, which could result in the loss of customers and damage to our reputation and have a material adverse effect on our business, financial condition and results of operations. +Conditions in the banking system and financial markets, including the failure of banks and financial institutions, could have an adverse effect on our business, financial condition and results of operations. +Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past led and may in the future lead to market-wide liquidity problems. For example, in March 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank and Signature Bank, after each bank was unable to continue its operations, and assisted with the assumption of First Republic Bank’s deposits and assets by JP Morgan Chase. These events exposed vulnerabilities in the banking sector, including uncertainties, significant volatility and contagion risk, any or all of which could have an adverse effect on our business, financial condition and results of operations. +In addition to the market-wide impacts, our reliance on financial institutions and non-traditional financial service providers such as fintechs as our primary customers exposes us to additional risk from adverse events affecting the industry. Certain financial institutions’ failures, the migration of deposits from smaller financial institutions to larger ones due to reduced confidence in or concerns about the stability of smaller financial institutions or non-traditional financial service providers, as well as consumers opening fewer new accounts at these institutions, may impact the quantity and timing of orders for our products. Additionally, uncertainty in the banking sector, as well as broader economic conditions in general, may cause banks and financial institutions to implement precautionary measures such as reducing spending on card programs or being more selective about issuing or renewing cards to customers. Any of the foregoing events could result in lower demand for our products, which in turn could have a material adverse effect on our business, financial condition and results of operations. +Critical vendors, third-party manufacturers or other third parties on which we rely could also be adversely affected by the liquidity and other risks related to bank failures, which in turn could result in material adverse impacts on our business, financial condition and results of operations. These could include, but may not be limited to, delayed +17 +Table of Contents +access to deposits or other financial assets or the uninsured loss of deposits or other financial assets and difficulty in accessing commercial financing on acceptable terms or at all due to tightening credit markets, unfavorable covenant terms and higher interest rates. Any third-party bankruptcy or insolvency, or any breach or default by a third party on which we rely, or the loss of any significant supplier relationships, could result in material adverse impacts on our business, financial condition and results of operations. +System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, impair customer and vendor relationships, disrupt our internal operations, harm perception of our products and expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and our reputation. +The reliability and security of our IT infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. We have been and may continue to be a target of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, phishing attacks, ransomware attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from unauthorized use of or access to computer systems (including from internal and external sources). Increasing use of artificial intelligence or machine learning capabilities may increase these risks. A breach of our security defenses could result in a loss of our intellectual property, the release of sensitive cardholder information and customer, consumer or employee personal data, or the loss of production capabilities at one or more of our production facilities. We may also be at risk from cyber-attacks on third parties with whom we do business to the extent their compromised systems interact with our systems or employees. For example, our employees, contractors, customers or other users of our systems are from time-to-time subject to fraudulent inducements by parties attempting to gain access to our data. We have no control over the level of response offered by any third party whose systems have been impacted by a cyber-security breach and to the extent we are also impacted by interacting with compromised systems or bad actors, we could also experience system disruptions, financial loss, fines or penalties and potential damage to our reputation. In recent years these types of incidents have become more prevalent and pervasive across industries, including in our industry. +In addition, our encryption systems are at risk of being breached or decoded. We use encryption technology to protect sensitive data while in transit and at rest. Also, smart cards are equipped with keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, whether caused by cyber-attacks, security breaches, internal control failures or otherwise, which could ultimately have a material adverse effect on our business, financial condition and results of operations. +The protective measures we have implemented to protect against data and security breaches and cyber-attacks may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. Our activities and investment in protective measures may not be deployed sufficiently quickly or successfully in order to protect our system or network against disruptions and may not prevent or limit the damage from any future security breaches. In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business and reputation. +Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, including the operation of complex IT systems and production equipment. In addition, a significant portion of the communication between our employees, customers and suppliers depends on our IT systems. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. +18 +Table of Contents +In order to serve our customers and operate certain aspects of our business, we depend on data centers and computing infrastructure that is both our own as well as provided by third party vendors. To the extent applications and data used in our business are hosted by third party vendors at their facilities, we do not control the operation of such facilities or in some cases the hardware and infrastructure within them. Any disruption of, interference with, or inability to keep up with our needs for capacity by our third-party data centers or hosted infrastructure partners could interrupt our business operations. In addition, any problems faced by our third-party data center operations or hosted infrastructure partners with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our ability to service our customers also largely depends on the efficient and uninterrupted operation of our own computer information systems and complex production equipment, much of which relies on computer operating systems, residing at our leased facilities. The proper functioning of such systems can be adversely affected by the increasing age and usage of such systems, among other things. Any interruption in our business applications, systems or networks, including, but not limited to, new system implementations, server downtime, failure to upgrade or patch software, facility issues, natural disasters or energy blackouts, could have a material adverse impact on our operations, sales and operating results. Additionally, we have a limited number of employees with the expertise required to operate such internal applications, systems and networks as well as remediate them in the event of a failure, and thus the attrition of such employees could result in our inability to quickly and effectively resolve future IT issues that may arise. +Not only could we suffer damage to our brand and reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements require the payment of penalties if our systems do not meet certain operating standards, and failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of compliance of our facilities, any of which could have a material adverse effect on our business. +In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Protective measures we have established for continuation of core business operations in the event of a catastrophic event may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results of operations. +Our future success depends upon our ability to develop, introduce and commercialize new products and services which can be a lengthy and complex process. We may be unable to commercialize new or improved products and services we may develop on a timely basis or at all. +The development of new or enhanced products and services is a complex and uncertain process requiring the accurate anticipation of technological, market and industry trends, as well as precise technical execution, all of which could adversely affect our ability to meet customer demand for new or enhanced products. The successful development of new products and services may require us to undertake time-consuming and costly research and development activities, and we may experience difficulties or challenging market conditions that could delay or prevent the successful development, commercialization and marketing of these new products and services, including, for example, limited or delayed market acceptance of dual-interface EMV technology or eco-focused card solutions in the United States. Before we can commercialize any new products and services, we may need to expend significant funds in order to conduct substantial research and development. Additionally, we have limited research and development resources as compared to many of our competitors, which may result in an immature product development process and lengthy product roll-outs. If we have difficulty producing innovative products, there could be a material adverse effect on our revenue, results of operations, reputation and business. New or enhanced product and service offerings may also expose us to additional risks, such as new sources of supplies, increased regulation or reputational harm. +As we develop products and services, we may need to make significant investments in product development and new technology, as well as sales and marketing resources. Furthermore, if we are unable to develop and introduce new and innovative products in a cost-effective and timely manner, our product and service offerings could be rendered obsolete. In addition, competitors may be able to develop and commercialize competing products more quickly and efficiently. Artificial intelligence and machine learning technologies have rapidly developed and if we cannot successfully integrate these technologies into our internal business processes and product and service offerings in a timely, cost-effective, compliant and responsible manner, we may be at a competitive disadvantage. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. +19 +Table of Contents +The covenants and restrictions contained in agreements governing our indebtedness may adversely affect our business and results of operations, may restrict our ability to grow and could make it difficult or impossible to timely make our debt service payments or refinance our debt when it comes due. +We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our business. The agreements governing our indebtedness do not fully prohibit us or our subsidiaries from incurring additional indebtedness in the future, and to the extent that we incur additional indebtedness, the risks associated with our substantial indebtedness described below, including our possible inability to service our debt, may increase. Our substantial indebtedness and interest expense could have important consequences to us, including: +● limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, research and development, expanding our infrastructure, capital expenditures and other general business activities and investment opportunities in our company, because we must dedicate a substantial portion of these funds to pay interest, make principal payments and/or otherwise service our debt; +● impacting our cash flows, results of operations and financial condition when interest rates rise, because the interest rate on our revolving credit facility is a floating rate that varies depending on market interest rates and issuance or refinancing of other debt in the future may be incurred at higher interest rates than current debt; +● limiting our ability to retain or attract customers and our ability to attract or retain qualified employees due to our significant amount of debt and the related implications of such debt for the Company’s long-term financial condition; +● limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; +● limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +● limiting our ability to timely make our debt service payments or to satisfy our other obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +● limiting our ability, or increasing the costs, to refinance indebtedness prior to maturity dates; +● increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; and +● placing us at a competitive disadvantage as compared to our competitors that are less leveraged. +Additionally, the terms of the agreements governing our indebtedness restrict, and any additional indebtedness we may incur in the future could similarly restrict, our ability to operate our business and to pursue our business strategies. Among other things, these agreements restrict our ability to: +● incur additional indebtedness; +● create liens or use assets as security in other transactions; +● enter into certain asset sale transactions or other dispositions of assets; +● declare or pay dividends, repurchase or redeem stock, or make other distributions to stockholders; +● make investments in other businesses or joint ventures; +● merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; and +● enter into transactions with affiliates. +We may not be able to refinance our existing long-term debt if necessary, or we may only be able to do so at a higher interest rate or on other less favorable terms. +We may be unable to refinance or renew our existing long-term debt and our failure to repay all amounts due on the maturity date would cause a default under the long-term debt agreement as well as our credit agreement. Amounts borrowed and outstanding under our long-term debt agreement and senior secured revolving credit facility are required to be repaid in full, together with any accrued and unpaid interest, no later than March 15, 2026 (and may be subject to earlier mandatory prepayment upon certain events). Alternatively, any renewal or refinancing may occur on less favorable terms for both the long-term debt and the credit facility. If we refinance on terms that are less favorable to us than the terms of our existing debt and credit facility, our interest expense may increase significantly, which could impact our results of operations and impair our ability to use our funds for other purposes. +20 +Table of Contents +We are considered an accelerated filer and are required to comply with the Sarbanes-Oxley Act of 2002, and our inability to maintain effective internal control over financial reporting in the future could result in investors losing confidence in the accuracy and completeness of our financial reports and negatively affect the market price of our common stock. +As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires our independent registered public accounting firm to attest to the effectiveness of our internal control over financial reporting. The costs associated with compliance with these and future laws and related rules and interpretations could have a material impact on our results of operations. +Management has assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). See Item 9A – Controls and Procedures – Management’s Report on Internal Control over Financial Reporting. We have identified material weaknesses and significant deficiencies in our internal controls in the past and we may identify additional material weaknesses or significant deficiencies in our internal controls in the future. If any such control deficiencies occur in the future, we may not detect errors on a timely basis, our financial statements may be materially misstated, investors may lose confidence in the accuracy and completeness of our financial reports and we may be unable to timely produce our financial reports. Any of the foregoing could negatively affect the market price of our common stock, perhaps significantly. In addition, we could become subject to investigations by any stock exchange on which our securities are listed, the SEC or other regulatory authorities, or litigation or disputes with stockholders, which could require additional financial and management resources and result in more costly directors’ and officers’ insurance, which could have an adverse impact on our business. +Disruptions in production at one or more of our facilities may have a material adverse impact on our business, results of operations and/or financial condition. +Any serious disruption at any of our facilities, including as a result of public health emergencies, severe weather conditions, climate change, natural disasters, hostilities, political instability, social unrest, network outages or terrorist activities, could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. In the event of a disruption in production at one of our facilities, our other facilities may not have sufficient capacity, may not have the specialized equipment necessary, may have higher production costs, may take significant time to increase production or may fail to meet our customers’ requirements, any of which could negatively impact our business, results of operations and financial condition. Production disruptions may cause our customers to seek alternative supply, which could further adversely affect our profitability. +A significant amount of certain specialized production capacity is also concentrated in single-site locations. Due to the specialized nature of the assets used in the production process at each location, in the event a particular facility experiences disruption, it may not be possible to find replacement capacity quickly or substitute production from our other facilities. Accordingly, disruption at a single-site production operation could significantly impact our ability to supply our customers and could have a severe impact on us. +Additionally, all of our production facilities are currently leased, and we are subject to risks associated with our current and future real estate leases for such facilities. As each lease expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, we may be unable to find replacement locations with adequate capacity for our unique equipment and both current and future operational needs, and we may experience disruption or significant cost in relocating, any of which could have an adverse effect on our operations, customer relationships and financial performance. Moreover, the lease at our Fort Wayne, Indiana production facility expires in January 2026 with no current option to renew and we are taking steps to relocate the operations at this facility to a new location. We may not be able to successfully relocate our operations in a timely manner or do so without experiencing business interruption. Our other production facilities may not have the ability to support the production needs serviced by this facility, and we do not have contractual arrangements with any other manufacturers in the event this facility ceases to be available to us for any reason. Also, a substantial investment in improvements and equipment will be necessary to facilitate the relocation of these operations. These costs may exceed our expectations or we may face delays for the relocation of the facility, which could have an adverse effect on our operations, customer relationships and financial performance. +21 +Table of Contents +Our business could suffer from problems in production quality, materials and process, which could reduce, delay or interrupt production of our products, resulting in adverse impacts to our business and financial results. +We produce our products using processes that are highly complex, require complex and costly equipment and must continually be modified to improve yields and performance. Difficulties in the production process can reduce product yields, reduce product quality or interrupt production altogether. We may not have adequate replacements for failing or malfunctioning machinery available in a timely fashion. Additionally, we have experienced malfunctions and errors, including human error, relating to the operation of certain machinery and systems used in our production process that, in some instances, have resulted in the delivery to our customers of products that did not meet their standards or specifications or failed to function in the marketplace. Such problems have in the past resulted, and may in the future result, in our inability to properly fulfill customer orders and/or our obligation or election to replace products at our cost and expense, provide credit to or reimburse customers for related damages. We may also be subject to claims relating to such issues. The occurrence of any of these risks could damage our reputation and result in the loss of business, which could have an adverse impact on our business, financial condition and results of operations. +As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our production processes at the market rate, we may experience a lower production quality than the market standard. We may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures, human or other errors, or as a result of external factors beyond our control, such as delay of, or quality issues with, materials provided by suppliers, interruption of our electrical service or a natural disaster. We may also risk non-compliance with certain industry standards if we experience failure of certain required operations or processes, such as those related to facility security, which may impede our ability to deliver products to our customers. Any such event could have a material adverse effect on our business, financial condition and results of operations. +Costs relating to product defects, and any related product liability and warranty claims may materially adversely affect our business. +We offer highly complex services and products and, accordingly, from time to time, defects have occurred. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory, the loss of potential sales and claims by third parties. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we sell defective products into the market, our reputation could suffer, and we may lose sales opportunities and incur liability for damages, including damages claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations. +Expectations of stakeholders relating to environmental, social and governance matters may impose additional costs and expose us to new risks as well as have an adverse effect on our business, financial condition, results of operations, and cash flows. +There is an increasing focus from certain investors, regulators, customers, employees and other stakeholders concerning corporate responsibility, specifically related to ESG matters. Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in the Company if they believe our practices relating to ESG are inadequate, which may hinder the Company’s access to capital. In addition, certain investment funds specialize in companies that perform well in such assessments, and some major institutional investors have publicly emphasized the importance of such ESG measures to their investment decisions. In addition to the topics typically considered in such assessments, for businesses in the card production industry, issues of emissions and plastic waste are of particular importance. For example, increased attention to conservation measures and negative consumer attitudes about plastic products or other components in our products could have an adverse impact on demand for our products, which could adversely impact our business and results of operations. +22 +Table of Contents +There have also been changing consumer concerns and perceptions (whether accurate or inaccurate) regarding the potentially adverse environmental effects of substances present in certain consumer products, including substances and components the Company uses in its products, including PVC plastic. Potential consumer concerns may also extend to the sourcing of certain materials and labor and other conditions in those locations. We may be unable to produce or procure our products in conformity with these preferences and concerns, or doing so may require significant research and development costs as well as increased costs associated with procuring alternative raw materials and components. We also may need to make changes to our operations that could require additional capital expenditures. This would adversely affect our financial condition, results of operations and cash flows. +Furthermore, customer, investor and consumer expectations in ESG areas have been varied, rapidly evolving and increasing. Specifically, certain customers are beginning to request that the Company provide information on its plans relating to certain environmental related matters such as greenhouse gas emissions, waste sent to landfills and energy usage. The enhanced stakeholder focus on ESG issues requires the continuous monitoring of various and evolving standards, which is time consuming and costly. In addition, in the event that we communicate certain initiatives or goals regarding ESG matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. A failure to adequately meet these various stakeholder expectations and standards may result in reputational damage, the loss of business, diluted market valuation, an inability to attract customers or an inability to attract and retain top talent. +Additionally, the potential for future ESG and climate risk reporting requirements may result in additional costs to monitor, track and report sustainability measures. We have implemented or are considering implementing ESG strategies, including efforts to offer more eco-focused solutions to our customers. Our customers may request that changes be made to our products or operations, as well as other aspects of our production processes. These strategies and customer requests could increase our operating costs and may require the investment of capital. The failure to implement ESG strategies, meet our ESG goals or evolving stakeholder expectations or standards or comply with any new ESG related regulations could adversely affect our reputation and our relationships with customers, which in turn could adversely affect our business, financial condition, results of operations and cash flows. +Damage to our reputation or brand image can adversely affect our business. +Our reputation forms the foundation of our relationships with key stakeholders and other constituencies, including employees, consumers, customers and suppliers, and maintaining a positive reputation globally is critical to the successful operation of our business. Negative publicity surrounding us, our activities, our personnel or our business partners, consumer perception of our response to political and social issues or catastrophic events, and campaigns by activists, whether or not warranted, connecting us, our personnel, our supply chain or our business partners to a failure to maintain high ethical, business and environmental, social and governance practices, including with respect to human rights, workplace conditions and employee health and safety, whether actual or perceived, could adversely impact our reputation and brand image and may decrease demand for our products, thereby adversely affecting our business, results of operations, cash flows or financial condition. +Climate change may adversely affect our operations and financial performance. +There is continuing concern from members of the scientific community and the general public that emissions of greenhouse gases (“GHG”) and other human activities have caused or will cause significant changes in weather patterns and increase the frequency and severity of extreme weather events, including, without limitation, droughts, wildfires, hurricanes and flooding. Extreme weather events have and may continue to adversely affect us because of their impact on the availability and cost of raw materials and components we need to produce our products and that we source from locations in the United States and internationally that have experienced and may continue to experience such events. In addition, extreme weather events could have an adverse impact on, among other things, our customers’ demand for our products and services due to impacts of such events on them as well as decreased consumer demand and spending power as a result of such events, and also on our insurance premiums, operating costs and ability to timely fulfill customer orders in the event of damage or disruption to one of our facilities resulting from such an event. +23 +Table of Contents +We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or infringement, which may have a material adverse effect on our business. +Our ability to protect our intellectual property is important to our business. We depend on patents and other intellectual property rights to protect our products, proprietary designs and technological processes against misappropriation by others. Our existing or future patents may be challenged, invalidated or circumvented. Our patents have been and may in the future be challenged as invalid. Furthermore, we may have difficulty obtaining additional patents and other intellectual property protections in the future. The patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Moreover, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which we provide services or sell or license products. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. We actively seek to protect our proprietary rights and trade secrets by engaging in litigation and by entering into confidentiality agreements with our employees, consultants, and strategic partners and controlling access to and distribution of our technologies, documentation and other proprietary information. Nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary and may use such information to interfere with our business. Enforcing our intellectual property rights has in the past caused and may in the future cause us to incur significant costs. These costs and other consequences from the unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. +Companies in our industry aggressively protect their intellectual property rights. Our products often contain technology provided to us by other parties such as suppliers or customers, and we compete in an industry that is highly active in generating intellectual property. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. From time to time, we receive notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights or that challenge the validity of our patents. In addition to the costs and distraction that result from intellectual property litigation and infringement claims, an adverse outcome in these types of disputes could prevent us from offering some of our products and services or from enforcing our intellectual property rights. Settlements can involve royalty or other payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our suppliers, customers and licensors may not be required to fully indemnify us for the costs of defending against infringement claims. In addition, we may be required to indemnify some customers and strategic partners related to allegations, regardless of merit, that our products infringe on the intellectual property rights of others. +We also face risks related to open source software. Certain of our software is derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property and we may incur additional costs to the extent we use open source software that is subject to licensing. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. Usage of open source software can lead to greater risks than the use of third party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software or remedies against the licensors. Many of the risks associated with open source software cannot be eliminated and could have a material adverse effect on our business, financial condition and results of operations. +In addition, the rise of artificial intelligence and machine learning technologies may expose us to increasing risk with regard to both protecting of our intellectual property and defending against misappropriation claims. Such technologies are imperfect and the use of artificial intelligence or machine learning technologies by us, our customers or parties with whom we conduct business, and by unrelated third parties could inadvertently cause us to infringe upon other parties’ intellectual property ownership or rights, or could alternatively infringe upon our intellectual property rights. As a result, we may be subject to claims we have infringed upon, misappropriated or misused other parties’ intellectual property. We may also have to resort to litigation to enforce our intellectual property rights, either of which could result in substantial costs and diversion of our resources. +24 +Table of Contents +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +Our services are based on sophisticated software and computing systems, and the software underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our customers. Defects in our software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of customers, negative publicity or exposure to liability claims. +Our ability to raise capital in the future may be limited, which could lead to delays in innovation and abandonment of our strategic initiatives. +In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. The terms of our outstanding indebtedness and the low trading volume and fluctuating trading price of our common stock may adversely affect our ability to access capital markets and any such financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. We may be unable to access capital due to unfavorable market conditions or other market factors outside of our control, and we may not be able to raise additional capital when needed. Any failure to achieve adequate funding will delay our products and services innovation and development and could lead to abandonment of one or more of our strategic initiatives. Any of these events could materially harm our business, financial condition and prospects. +We may become subject to additional tax collection obligations, claims for uncollected amounts, and assessments from unclaimed property audits, new U.S. tax legislation could expose us to additional liabilities and our income tax positions or unclaimed property practices may be challenged by relevant authorities, all of which could adversely affect our cash flows and financial results. +Several states have adopted legislation requiring out-of-state sellers to collect and remit sales tax on sales transactions into those states where they have no physical presence. States seeking to expand applicability of sales tax “nexus” laws could result in additional tax expenses in the event we are unable to pass these expenses along to our customers and additional administrative burden to collect and remit sales tax in such jurisdictions. +In addition, we are subject to U.S. federal and state income taxes. Our tax receivables may not be realized, and o ur tax expense and the tax positions included in our financial statements, which are subject to estimates, could be impacted by changes in rules or interpretations of existing tax laws and changes in U.S. federal and state tax legislation and tax rates. New legislation may be enacted which could increase income tax rates in jurisdictions where we operate or have nexus and materially impact our tax provision, cash tax liability and effective tax rate. Additionally, o ur income tax positions may be challenged by relevant tax authorities and we may not be successful in defending against any such challenge, which may adversely affect our future cash flows and financial results. +We are also subject to unclaimed property (escheat) laws in various states which require us to turn over to certain government authorities the property of others held by us that has been unclaimed for a specified period of time. We are subject to audit by individual U.S. states with regard to our escheatment practices. Such audits may cause us to incur significant costs related to outside professional fees and divert management’s time away from business operations. Additionally, we may be subject to assessments, penalties or fines that could adversely affect our financial results. The legislation and regulations related to tax and unclaimed property matters tend to be complex and subject to varying interpretations by both government authorities and taxpayers. +We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer meet with our strategy or that should be consolidated, and we may not be able to execute on an acquisition strategy or integrate acquisitions successfully. +In executing our strategy, we have consolidated certain of our facilities and divested certain of our businesses. We will continue to evaluate such opportunities. Any such consolidation or divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position. +25 +Table of Contents +We may not be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of operations or closure, may not be available to us or may be more costly than anticipated. +We intend to continue to seek additional acquisition opportunities to potentially expand into new markets and to enhance our position in existing markets. We cannot assure we will be able to successfully identify suitable acquisition opportunities, prevail against competing potential acquirers, negotiate appropriate acquisition terms, obtain financing that may be needed to consummate such acquisitions, complete proposed acquisitions, successfully integrate acquired businesses into our existing operations or expand into new markets. In addition, any acquisition, once successfully integrated, may not perform as planned, be accretive to earnings or prove to be beneficial to our operations and cash flow. +Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value. +Our long-lived assets recorded as of December 31, 2023 include $63.1 million of plant, equipment, leasehold improvements and operating lease right-of-use assets, $14.1 million of net intangible assets, and $47.2 million of goodwill. +We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we were to conclude that a future write-down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write-down of our long-lived assets may result from, among other things, deterioration in our performance and a decline in expected future cash flows and could have a material adverse effect on our business, financial condition and results of operations. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. +Many of our products integrate third-party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with, among other benefits, access to technology owned by third parties. For example, we license card technology for use in certain of our products, including in EMV cards. This card technology provides a secure environment for applications on smart cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements with the licensors of such technology for the continued use of these platforms. These licensors may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross-licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios. We also may seek to enter into additional cross-licensing arrangements with certain competitors as we pursue additional growth initiatives. If we are unable to enter into new cross-licensing agreements or continue to successfully renew existing cross-licensing agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products and or be forced to cease or delay certain growth initiatives, which could have a material adverse effect on our business. +26 +Table of Contents +Risks Relating to our Industry +We face competition that may result in a loss of our market share and/or a decline in our profitability. +Our marketplace is highly competitive, relatively saturated and increasingly consolidated. We expect these market dynamics to continue for new product innovations, and as competitors develop lower-cost production processes, competitors consolidate and other competitors attempt to enter the markets in which we operate. +Some of our competitors have larger global customer bases and significantly greater financial, sales and marketing, production, distribution, technical and other capabilities than we do. These competitors may be able to adapt more quickly to new technological requirements and changes in customer and/or regulatory requirements to leverage their scale to lower production costs and prices, and utilize their global footprint to win certain customers with card needs in multiple markets and by producing cards in lower cost geographies. In addition, some competitors are non-public companies, and are therefore not subject to the public company requirements and related expenses that we are. We also face competition from newly established competitors, suppliers of products and customers who choose to develop their own products and services. +Existing or new competitors may develop products, technologies or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. As the technological sophistication of our competitors and the size of the market increases, competing low-cost producers could emerge and grow stronger. These dynamics could result in declining average selling prices and reduced gross margins in our businesses. If we cannot sufficiently reduce our production costs or develop new products, technologies or services, we may not be able to compete successfully, and we may lose market share, which could have a material adverse effect on our business, financial condition and results of operations. +Current and prospective regulations, changes in our product offerings and customer contractual requirements addressing consumer privacy and data use and security could increase our costs of operations, which could adversely affect our operations, results of operations and financial condition. +In operating a Financial Payment Card business, we manage large amounts of personally identifiable information of cardholders, including cardholder names, account numbers, healthcare provider names and health savings account numbers, and similar information and are thus subject to laws and requirements relating to data privacy and security, which continue to evolve and may become increasingly difficult to comply with. For example, the California Consumer Privacy Act and the California Privacy Rights Act generally require companies like ours, which process consumer personal information on behalf of their customers, to use, retain or disclose consumer personal information solely for certain limited purposes, including to provide services to our customers according to the terms of our customer contracts. Other states have enacted similar data privacy laws and regulations and/or amended their existing data privacy laws and regulations. Furthermore, to the extent these laws apply to our customers, our customers have imposed, and may continue to impose additional, privacy related contractual obligations on us, adherence to which may require additional investment in resources and internal processes. Additionally, as we continue to innovate our products and services offerings, including potentially leveraging the use of artificial intelligence and machine learning capabilities, and expand into new lines of business, and as the number of jurisdictions enacting privacy and related laws increases and the scope of these laws and enforcement efforts expand, we have and may continue to become subject to additional data privacy and security legal requirements and regulations such as HIPAA. New products and services we develop may also require that we obtain and retain more personally identifiable information for a longer period of time than we have done historically. We have incurred significant expenses to meet the obligations of current privacy-related laws and requirements, and we expect to continue to incur these as well as additional expenses if we become subject to additional privacy-related laws and regulations, which will continue to necessitate us making changes to our internal processes, procedures and systems. Failure to comply with existing or future data privacy and security laws, regulations and requirements to which we are or become subject could result in fines, sanctions, penalties, civil lawsuits or other adverse consequences as well as loss of customer and consumer confidence, which could materially adversely affect our results of operations, overall business and reputation. The legal, political and business environments in these areas are rapidly changing, and subsequent legislation, regulation, litigation, court rulings or other events could expose the Company to increased program costs, liability and reputational damage. +27 +Table of Contents +New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected. +The markets for our products and services are subject to technological changes, frequent introductions of new products and services, evolving industry standards and changing customer preferences and demands. In particular, the rise in the adoption in digital payment systems or mobile payments may make physical cards less attractive as a method of payment. Certain merchants are also increasingly offering “buy now pay later” installment programs directly to consumers which may eliminate the use of a payment card to complete a transaction. Mobile payments, biometric payments and direct installment payment programs offer consumers an alternative method to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and developing technology solutions and products, including artificial intelligence and machine learning capabilities, could make our existing technology solutions and products obsolete or irrelevant. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services, or our new services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. If we do not complete or gain market acceptance of new products, services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or attract new ones. For example, one of our growth opportunities is the continued transition to dual-interface EMV cards by U.S. card issuing banks. Banks may be delayed in transitioning to the issuance of dual-interface EMV cards due to increased costs and other factors. If these entities do not deploy dual-interface EMV technology or do so less quickly and/or completely than we expect, our ability to grow could be affected which could have a material adverse effect on our business, financial condition and results of operations. +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +● effectively identify and capitalize upon opportunities in new and emerging product markets; +● invest resources in innovation and research and development; +● complete and introduce new products and integrated services solutions in a timely manner; +● license any required third-party technology or intellectual property rights; +● qualify for and obtain required industry compliance for our products; +● effectively manage the supply chain and related risks; +● comply with applicable data protection regulations; and +● retain and hire personnel experienced in developing new products and services. +Additionally, opportunities to combine or package products and service offerings and the ability to cross-sell products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross-sell our products and services, this may have a material adverse effect on our business, financial condition and results of operations. +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brands compliance standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and producers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated, or customers may cease doing business with us, if we fail to comply with these standards and criteria. +28 +Table of Contents +We make significant investments in our network of high-security facilities in order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have constituted in the past an important part of our revenue and profitability. For the year ended December 31, 2023, the vast majority of the products we produced and services we provided were subject to compliance with the standards of one or more of the Payment Card Brands. If we were to lose compliance with one or more of the standards of the Payment Card Brands or of the PCI Security Standards Council for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the networks of the Payment Card Brands. Additionally, certain of our facilities operate under variances of certain of these standards. If such variances are not granted in the future or if we are required to move or alter a facility in order to maintain compliance, we may incur significant costs and delays, or may lose our ability to offer services in that facility, which would be disruptive to our business and have an adverse effect on our customer relationships and financial results. If, as a result of noncompliance with standards of the PCI Security Standards Council or other standards of the Payment Card Brands, we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations. +Delays or interruptions in our ability to source raw materials and components used in our products from foreign countries, as well as trade restrictions on goods imported into the United States, could materially harm our business, financial condition and results of operations. +Most of our microchips, as well as certain other raw materials used in our products, are imported from suppliers located outside of the United States. We have experienced and may in the future experience delays and interruptions in our ability to obtain materials imported into the United States due to global economic downturns and trade disruptions, including related to global health crises. We may also experience such delays and interruptions in our supply chain due to political instability, civil unrest or war in countries from which we directly or indirectly source raw materials and components used in our products. Additionally, the U.S. government has imposed tariffs on imports from certain countries, including countries in which our suppliers are located, and may impose further tariffs and/or trade restrictions. The future status of certain existing international trade agreements to which the United States is party is also uncertain, and such trade agreements could be terminated or replaced. Any of these factors could depress economic activity, restrict our access to suppliers and have a material adverse effect on our business, financial condition and results of operations. +Existing tariffs are also subject to a number of uncertainties as they are implemented, including future adjustments and changes to the products covered by additional tariffs and to the countries included or excluded from such tariffs. Changes in U.S. trade policy have resulted in one or more foreign governments, including China, adopting responsive trade policies that make it more difficult or costly for us to import our products, or to purchase products which include components, from those countries. Additional trade restrictions may lead to increased prices to our customers, which may reduce demand, or, if we are unable to achieve increased prices, result in lowering our margin on products sold and adversely affecting on our business, financial condition and results of operations. +We cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions on the import or export of goods in the future, nor can we predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers and the U.S. economy, which in turn could have a material adverse effect on our business, financial condition and results of operations. +Prolonged military action in foreign conflicts has impacted and may continue to have adverse effects on the global economy, and such effects could materially adversely affect our business, operations, operating results and financial condition. +In early 2022, Russian forces launched significant military action against Ukraine, and the region has since experienced sustained conflict and disruption, which may continue in 2023 and beyond. Governments in the United States, United Kingdom and European Union have each imposed export controls on certain products and financial and +29 +Table of Contents +economic sanctions on certain industry sectors and parties in Russia. Additionally, conflicts have developed recently in the Middle East. These actions and conflicts have not had a material impact on the Company's financial condition or results of operations; however, the continuation or escalation of geopolitical tensions or military action related to the conflict and the imposition of additional economic sanctions could continue to adversely affect the global economy and financial markets, disrupt trade and accelerate inflationary pressures, among other things, which could negatively affect the demand for our products and further intensify problems in the global supply chain. Although we do not have any operations in the affected areas, we believe we have experienced shortages in raw materials and increased costs for transportation and energy due in part to the negative impact of the foreign military conflicts on the global economy, which impacts may persist or worsen as these conflicts continue or escalate. Such conflicts also increase the risk of retaliatory acts impacting U.S. companies, which may include disruptions to our or our customers’ or suppliers’ technology infrastructure, including through cyberattack, ransom attack or cyber-intrusion. The extent and duration of any military action, sanctions and resulting market and economic disruptions are impossible to predict but could be substantial. +Environmental, health and safety laws and regulations, including climate change regulations, expose us to liability and any such liability may have a material adverse effect on our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, the handling of certain materials and equipment we use in our production processes is subject to health and safety and environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or lease real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liabilities on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +The increasing concern over climate change has resulted in a broad range of proposed and promulgated federal, state and local regulations aimed at mitigating the effects of climate change, including regulating emission of carbon dioxide, methane and other GHG emissions, mandating recycling of plastic materials, imposing energy or carbon or other waste taxes and effectuating other governmental charges and mandates. Because we use materials in many of our products and engage in production processes that may be the subject of certain of these regulations, if enacted, such regulations could result in additional costs and adverse effects on our business in the form of (i) additional taxes, (ii) potential fines for noncompliance, (iii) restrictions on output, (iv) additional expenditures to either purchase new, or modify existing, equipment or processes, (v) required acquisition or trading of emission allowances and/or (vi) increased costs in the price of energy and/or in procuring alternative or additional raw materials from our suppliers. +Climate change regulation continues to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such regulation could have a material adverse effect on our business, results of operations, financial position, capital expenditures and reputation. +These developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in health and safety or environmental regulations could increase our production costs, which could have a material adverse effect on our business, financial condition and results of operations. +30 +Table of Contents +Risks Relating to Ownership of our Common Stock +Our majority stockholders have the ability to control significant corporate activities, which may result in the Company taking actions that other stockholders did not approve, and their ownership of a significant percentage of our outstanding common stock may adversely impact the liquidity and trading price of our stock. +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital), own approximately 57% of our common stock, in the aggregate, as of December 31, 2023. Continuation of this concentrated ownership could result in a limited number of shares being available to be traded in the market, resulting in reduced liquidity. Additionally, the price of our common stock has experienced volatility due to the limited number of shares available to trade on the open market. +Also, as a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of all stockholders and, through our board of directors, the ability to control decision-making with respect to our business direction and policies. Matters over which the Tricor Funds, directly or indirectly, exercise control include: +● election of directors; +● mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; +● other acquisitions or dispositions of businesses or assets; +● incurrence of indebtedness and the issuance of equity securities; +● repurchases of stock and payment of dividends; and +● the issuance of shares to management under our incentive plans and other executive compensation matters. +The shares of our common stock held by the Tricor Funds are registered for resale, which means that they may be offered and sold to the public now or in the future without regard to the volume limitations under Rule 144 of the Securities Act. If and when some or all of these shares are sold by the Tricor Funds or the participants in their funds, either through sale on the open market, through privately negotiated transactions or through a distribution to the participants in their funds, or if it is perceived that they will be sold, the market price of our common stock could decline. +Conflicts of interest may arise because directors who are principals of or who were nominated by our majority stockholders serve on our board of directors. +Nicholas Peters, who is an officer of Parallel49 Equity (and its predecessor), serves on our board of directors. H. Sanford Riley was nominated to serve on our board of directors by the Tricor Funds, our majority stockholders pursuant to the Director Nomination Agreement (defined below). The Tricor Funds are funds controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49 Equity, on the one hand, and of our other stockholders, on the other hand, arise, such directors may not be disinterested. Although our directors and officers have a duty of loyalty to the Company under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to offer any transaction opportunity of which such person becomes aware to us and could take any such opportunity for himself, herself or itself or offer such opportunity to other companies in which such person has an investment, unless such opportunity is offered to such person solely in his, her or its capacity as one of our directors. +31 +Table of Contents +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +The trading market for our common stock could be influenced to some extent by the research and reports that industry or financial analysts publish about the Company and our business. We do not control these analysts. Historically, we have not attracted substantial research coverage, and the analysts who publish information about our common stock may have relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain additional securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +If we fail to meet the continued listing standards of the Nasdaq Global Market, our common stock may be delisted, which may adversely affect the market price and liquidity of our common stock. +Our common stock is currently traded on the Nasdaq Global Market. In order to maintain our listing on Nasdaq, we must maintain certain financial and share distribution targets, including maintaining a minimum number of public stockholders, a minimum number of publicly held shares, a minimum market value of publicly held shares and a minimum bid price, in addition to meeting certain corporate governance requirements. We may not be able to maintain compliance with the requirements for continued listing of our common stock on Nasdaq. If our common stock is delisted and we are unable to list our common stock on another U.S. national securities exchange, we expect our securities would be quoted on an over-the-counter market. Any delisting from Nasdaq could result in significant material adverse consequences for our stockholders, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Other consequences could include a loss of confidence by investors, customers, suppliers and employees, and an adverse effect on our ability to obtain financing to continue operations. +Our business and operations could be negatively affected by stockholder activism and securities litigation. +Stockholder activism, which could take many forms or arise in a variety of situations, has become increasingly prevalent in recent years. Previously, a stockholder in the Company publicly expressed criticism regarding the Company’s strategic direction, capital allocation priorities and corporate governance in connection with an attempt to nominate a director candidate at our 2023 annual meeting of stockholders. We could also face similar criticism from others, as well as criticism for risks associated with Parallel49 Equity’s controlling ownership interest in the Company. We could become more prone to stockholder activist demands in the event Parallel49 Equity reduces its ownership in the Company. Additionally, we have in the past been subject to securities litigation following volatility in the price of our common stock, and may again be subject to securities litigation, including as a result of the volatility in the price of our common stock, related to stockholder activism, or otherwise. +Stockholder activism, including potential proxy contests and advance stockholder proposals, and securities litigation could result in substantial costs and divert management’s and our board of directors’ attention and resources from our business. Additionally, stockholder activism or securities litigation could give rise to perceived uncertainties as to our future, adversely affect our relationships with customers and make it more difficult to attract and retain qualified personnel. These matters could also hinder the execution of our business and growth strategies or constrain our capital deployment opportunities. Further, the price of our common stock could be subject to significant fluctuation or otherwise be adversely affected. Any adverse determination in litigation could also subject us to significant liabilities. +We cannot guarantee that our share repurchase program will be fully implemented or that it will enhance long-term stockholder value. +In November 2023, our board of directors approved a share repurchase program authorizing the repurchase of up to $20 million of our common stock through December 31, 2024. We are not obligated to repurchase a specified number or dollar value of shares on any particular timetable or at all. We may not repurchase stock at favorable prices. The share repurchase program could affect the price of our common stock, increase volatility, reduce the market liquidity for our shares and diminish our cash reserves. The repurchase program may be suspended or terminated at any time and, even if fully implemented, may not enhance long-term stockholder value. +32 +Table of Contents +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +● the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +● following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors; +● advance notice procedures and information and disclosure requirements for nominating candidates to our board of directors or presenting matters at stockholder meetings; and +● allowing only our board of directors to fill vacancies on our board of directors. +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate when the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti-takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of the Company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, the potential issuance of preferred stock may delay or prevent a change in control of us or discourage bids for our common stock at a premium over the market price. It may also adversely affect the market price and the voting and other rights of the holders of our common stock as it could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +33 +Table of Contents +General Risk Factors +We are required to comply with complex laws and regulations in the United States and other countries and are exposed to business risks associated with our international business. +We are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, unclaimed property, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. Though we currently have limited international operations, the expansion thereof in the future may increasingly expose us to risks associated with international business operations, including political instability (e.g., the threat of or actual war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect our employees, reputation, business or financial results as well as our ability to meet our objectives. +We may not be in full compliance at all times with the laws and regulations to which we are subject and we may not have obtained the permits, authorizations or licenses that we need. Any failure to comply with applicable laws or regulations could result in fines or sanctions. In such a case, or if any of these international business risks were to materialize, there could be a material adverse effect on our business, financial condition and results of operations. +Our business and financial results may be materially adversely affected by various legal and regulatory proceedings. +We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our business, operating results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any liability that may be imposed on us. +Item 1B. +Unresolved Staff Comment s +None. +Item 1C. Cybersecurity +Cyber threat actors and the types of threats posed are becoming more sophisticated and effective and are increasingly targeting commercial companies. In an attempt to mitigate these cyber threats to our business, we take a comprehensive approach to cybersecurity risk management and make securing the data, customers and other stakeholders entrust to us, a top priority. The board of directors and our management are actively involved in the oversight of our risk management program, which includes cybersecurity. We have established policies, standards, processes and practices for assessing, identifying and managing material risks from cybersecurity threats. There may be instances where our policies and procedures are not properly followed or where such policies and procedures prove to be ineffective. As of the date hereof, we are not aware of any material risk from cybersecurity threats that has materially affected the Company, including our business strategy, results of operations or financial condition. We can provide no assurance that there will not be incidents in the future or that such incidents will not materially affect us, including our business strategy, results of operations, or financial condition. For more information regarding risks related to system security risks, data protection breaches and cyber-attacks, see the risk factor entitled “System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, impair customer and vendor relationships, disrupt our internal operations, harm perception of our products and expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and our reputation” included as part of our risk factor disclosures at Item 1A of this Annual Report on Form 10-K. +Risk Management and Strategy +Our policies and processes for assessing, identifying and managing material risks from cybersecurity threats are integrated into our overall risk management program and are based on the frameworks established by the National +34 +Table of Contents +Institute of Standards and Technology (“NIST”) and other applicable industry standards. Our cybersecurity program in particular focuses on the following key areas: +Collaboration +We work to identify and address our cybersecurity risks through a comprehensive, cross-functional approach. Key security, risk and compliance stakeholders meet regularly to develop strategies for preserving the confidentiality, integrity and availability of Company and customer information, identifying, preventing and mitigating cybersecurity threats and effectively responding to cybersecurity incidents. We maintain controls and procedures that are designed to encourage prompt escalation of certain cybersecurity incidents so that decisions regarding customer disclosure, public disclosure and reporting of such incidents can be made by management and the board of directors in a timely manner. +Risk Assessment +Annually, the Security Committee (defined below) conducts a cybersecurity risk assessment that takes into account information from internal stakeholders, known information security vulnerabilities and information from external sources (e.g., reported security incidents that have impacted other companies, industry trends and evaluations by third parties and consultants). The results of the assessment are used to drive alignment on, and prioritization of, initiatives to enhance our security controls, make recommendations to improve processes and inform a broader enterprise-level risk assessment that is analyzed by the Security Committee and presented to the board of directors, Audit Committee and members of management. +Technical Safeguards +The Company’s cybersecurity program evaluates new threats to learn new attacker techniques, adopt defenses and implement new safeguards to protect our information systems from cybersecurity threats. These safeguards are evaluated and improved based on vulnerability assessments, cybersecurity threat intelligence and incident response experience. Independent assessments of the safeguards by external third-party consultants, which also include the detection of threats, are evaluated and improvements to systems are incorporated. +Incident Response and Recovery Planning +In an effort to effectively respond to a security event, we follow a comprehensive cybersecurity incident response plan. We regularly review, test and evaluate the plan for effectiveness. +Third-Party Risk Management +We have implemented controls designed to identify and mitigate cybersecurity threats associated with our use of third-party service providers. Such providers are subject to security risk assessments at the time of onboarding, contract renewal and upon detection of an increase in risk profile. We use a variety of inputs in such risk assessments, including information supplied by providers and third parties. In addition, we require our providers to meet appropriate security requirements, controls and responsibilities and investigate security incidents that have impacted our third-party providers, as appropriate. +Education and Awareness +Our Company policies require our employees to assist in the protection of our customers’ data. We have various training programs, conducted frequently, designed to heighten employees' awareness of current threats, educate them on effective mitigations and reinforce the importance of handling and safeguarding customer and employee data in accordance with our established security protocols. To evaluate the effectiveness of these training programs and monitor the effectiveness of our security controls, we have implemented mock testing practices. Annual incident response training is conducted for administrative personnel that would be expected to be involved with, and respond to, a security incident. +35 +Table of Contents +External Assessments +Our cybersecurity policies, standards, processes and practices are regularly assessed by consultants and external auditors. These assessments include a variety of activities including information security maturity assessments, audits and independent reviews of our information security control environment and operating effectiveness. We conduct regular independent cyber audits to assess our controls and alignment against the NIST Cybersecurity Framework, compromise assessments to baseline and assess if a current or past compromise had occurred within our infrastructure, and maintain industry certifications and attestations that demonstrate our dedication to protecting customer data. The results of significant assessments are reported to management, the board of directors and Audit Committee. Cybersecurity processes are adjusted based on the information provided from these assessments. +Governance +Board Oversight +The board of directors, in coordination with the Audit Committee, oversees our management of cybersecurity risk. They receive regular reports from management about the prevention, detection, mitigation and remediation of cybersecurity incidents, including material security risks and information security vulnerabilities. Our Audit Committee, as part of its risk oversight function, is responsible for overseeing our cybersecurity program. The Audit Committee receives regular updates from management on cybersecurity risk resulting from risk assessments, progress of risk reduction initiatives, external auditor feedback, control maturity assessments and relevant internal and industry cybersecurity incidents. +Management’s Role +Our chief information security officer (“CISO”), chief technology officer (“CTO”), Chief Legal and Compliance Officer (“CLCO”) and Director Information and Cybersecurity (“DC”) have primary responsibility for assessing and managing material cybersecurity risks and are members of an internal committee that reviews issues and initiatives related to data security and privacy (the “Security Committee”), which drives alignment on security decisions across the Company. The CISO has over 20 years of experience in various roles related to information security and related technology, including roles specific to managing security requirements related to organizations operating in the payment card industry. The CTO and DC also each have over 20 years of experience serving in various roles in information technology fields; the CTO has been with the Company since 2014 and the DC previously served as the Chief Information Security Officer at an IT services and consulting company. The CLCO has over 10 years of experience managing risks, including risks arising from cybersecurity threats, at publicly traded companies. The Security Committee meets at least quarterly to review security performance metrics, identify security risks and assess the status of approved security enhancements. The Security Committee also considers and makes recommendations to the Audit Committee on security policies and procedures, security service requirements and risk mitigation strategies. +Item 2. +Propertie s +Information regarding each of our facilities, which may include multiple leases at each location, is set forth below. +Square +Owned/ +Location +Operations +Footage +Leased +Littleton, Colorado +Financial Payment Card production, corporate facility +65,000 +Leased +Roseville, Minnesota +Financial Payment Card production, card personalization services, card packaging services, fulfillment +227,000 +Leased +Fort Wayne, Indiana +Financial Payment Card production +45,000 +Leased +Nashville, Tennessee +Financial Payment Card personalization services, instant issuance, fulfillment +65,000 +Leased +Item 3. +Legal Proceeding s +Smart Packaging Solutions SA v. CPI Card Group Inc. +36 +Table of Contents +On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief. In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta. The patents all relate to antenna technology. SPS alleges that the Company incorporates the patented technology into its products that use contactless communication. The Company does not produce antennas; it purchases certain antenna-related components from SPS and a number of other suppliers. The Company’s motion to dismiss the complaint is currently pending. Additionally, a third party, Infineon, filed requests for Inter Parties Review (“IPR”) proceedings concerning each of the four patents. As a result, the Delaware District Court stayed the case pending resolution of the requests for review. The United States Patent Office has instituted proceedings with respect to all of the IPR requests; three of the patents have been invalidated in the IPR proceedings and one remains under review. The patent owner, Feinics AmaTech Teoranta, initially appealed the invalidation of the three patents and subsequently elected to dismiss those appeals. Should the remaining patent survive review by the United States Patent Office, the Company intends to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. +In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations . +Item 4. +Mine Safety Disclosure s +Not applicable. +PART I I +Item 5. +Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market +Our common stock trades on the Nasdaq Global Market under the symbol “PMTS”. +Holders +There were twenty-three stockholders of record as of February 29, 2024. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. +Dividends +We do not currently expect that any cash or other dividends will be paid to holders of our common stock in the near future. Any future cash dividend or other dividend declarations are subject to the determination of the Company’s board of directors. +Repurchases +On November 2, 2023, the Company's board of directors approved a share repurchase plan authorizing the Company to repurchase up to $20.0 million of the Company's common stock, par value $0.001 per share. This authorization expires on December 31, 2024. Under the share repurchase plan, the Company may purchase shares through privately negotiated transactions or through open market purchases, including through plans complying with Rule 10b5-1 under the Exchange Act. The extent and timing of repurchases will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by the Company. +37 +Table of Contents +On December 6, 2023, the Company entered into a Stock Repurchase Agreement with Tricor Pacific Capital Partners (Fund IV) US, LP (“Parallel49”), which is one of the Company’s majority stockholders. Pursuant to this agreement, the Company has agreed to purchase from Parallel49, and Parallel49 has agreed to sell to the Company, three times the number of shares of the Company’s common stock acquired by the Company in the open market from time to time from non-Parallel49 holders during the period commencing from the date of this agreement and ending on March 31, 2024, up to a maximum of 325,000 shares. Such open market purchases will be made pursuant to the Company’s stock repurchase plan. The repurchase price for any shares acquired by the Company from Parallel49 pursuant to this agreement will be 98% of the volume weighted average purchase price paid by the Company for all other shares acquired by the Company in the open market during such period. The repurchase from Parallel49 will take place in early April 2024 and will be part of the share repurchase plan authorization levels. In the event that the Company enters into any other privately negotiated repurchase transaction prior to March 31, 2024, the Agreement also gives Parallel49 the option to sell to the Company a number of shares equal to three times the number of shares acquired by the Company in such privately negotiated repurchase transaction, at the same price. The Company may enter into similar arrangements with Parallel49 in the future. +The following table sets forth share repurchases for each of the three months of the quarter ended December 31, 2023: +Period +Total Number of +Shares Purchased +Average Price +Paid per Share +Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) +Approximate Dollar +Value of Shares that +May Yet Be Purchased +Under the Plans or +Programs (in thousands) (b) +October 1 - 31 +— +$ +— +— +$ +— +November 1 - 30 +— +$ +— +— +$ +— +December 1 - 31 +13,180 +$ +18.93 +13,180 +$ +19,017 +Total +13,180 +$ +18.93 +13,180 +(a) Reflects shares repurchased and retired under the 2023 repurchase authorization. +(b) Reflects the $20.0 million repurchase authorization less completed open market purchases and $0.7 million owed to Parallel49, in accordance with the Stock Repurchase Agreement entered into on December 6, 2023. +Item 6. +[Reserved] +Item 7. +Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K . This discussion and analysis contains forward - looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward - looking statements as a result of certain factors, some of which are not within our control. See "Risk Factors" and “Cautionary Statement Regarding Forward - Looking Statements.” +Company Overview +We are a payments technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards (as defined below) issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience. +We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the +38 +Table of Contents +largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“fintechs”), as well as independent community banks, credit unions and Group Service Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, including the largest U.S. Prepaid Debit Card program managers; +● the U.S. small to mid-sized financial institutions market, which includes independent community banks and credit unions; +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and +● the U.S. fintech market, where we produce and personalize Financial Payment Cards for financial technology companies. +Trends and Key Factors Affecting our Financial Performance +We believe the following key factors may have a meaningful impact on our business performance and may negatively influence our financial and operating results: +We believe some customers have reduced demand for our products and services and we may experience reduced demand from customers in the future due to the following: +● +Some large banks point toward the possibility that the U.S. economy may experience an economic slowdown in the near future, which we believe has caused, and may continue to cause, some of our customers, particularly in the banking and financial services industry, to have concerns about the broader economic environment and therefore reduce overall spending, delay spending into future periods, or request pricing concessions, including on card programs or other products and services we offer. +● Some of our customers have anticipated supply-chain-related delays and have correspondingly increased their own inventory of the Company’s products on hand during 2022. As supply-chain lead times have improved and given the economic concerns noted above, we believe some customers have become and continue to remain more focused on reducing their inventory levels. +● Certain banks have experienced negative liquidity events, including takeover by industry regulators and deposit outflows, which have had the effect of deteriorating share prices and limiting access to capital, leading to cautionary signals and uncertainty in the financial services industry. Following these events, we experienced reduced demand in the Debit and Credit segment. +39 +Table of Contents +Segment Overview +Our business consists of the following reportable segments: +● Debit and Credit; +● Prepaid Debit; and +● Other. +Debit and Credit Segment +Our Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services, including digital services, for card-issuing financial institutions and fintechs primarily in the United States. Products produced by this segment primarily include EMV ® and non-EMV Financial Payment Cards, including contact and contactless (dual-interface) cards and plastic and encased metal cards, and Second Wave payment cards featuring a core made with ROBP, and other private label credit cards that are not issued on the networks of the Payment Cards Brands. We also sell Card@Once ® printers and related supplies as part of our proprietary and patented instant card issuance system. Services provided include a variety of integrated card services, including card personalization and fulfillment services. We also provide print-on-demand services, where we produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, as well as our Card@Once software-as-a-service (SaaS) solution. The Debit and Credit segment operations are each audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +Prepaid Debit Segment +Our Prepaid Debit segment primarily provides integrated prepaid card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid Debit segment operation is audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +Other +Our Other segment includes corporate general and administrative expenses. +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive income. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of Financial Payment Cards, including contact and contactless cards, which includes our eco-focused cards. Contactless EMV cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV cards. We also generate product revenue from the sale of our Card@Once instant issuance system and consumables, private label credit cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, including print-on-demand services, tamper-evident security packaging, fulfillment services and SaaS personalization of instant issuance Financial Payment cards. See Part II, Item 8, Financial Statements and Supplementary Data , Note 2 “Summary of Significant Accounting Policies” and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates—Revenue Recognition” in this Annual Report on Form 10-K for further information and timing of revenue recognition for net sales. We include gross shipping and handling revenue in net sales. +40 +Table of Contents +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including microchips for all EMV cards and antennas for contactless EMV cards, labor costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Product costs also include Card@Once instant issuance printer and consumable product costs. Services costs include the cost of labor, raw materials in the case of tamper-evident security packaging, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, promotional activity, and employee relations. We include the costs of shipping and handling related to customer sales in cost of sales. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal and compliance, information technology, procurement, customer service, human resources, research and development and administrative personnel, including payroll, benefits and stock-based compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and software related fees. Operating expense also includes depreciation and amortization expense and may include impairment charges on tangible and intangible assets, when necessary. +Income from Operations and Operating Margin +Income from operations consists of our gross profit less our net operating expenses. Operating margin is income from operations as a percentage of net sales. +Other Expense, net +Other expense, net consists primarily of interest expense and other non-operating items. +Income Tax Expense +Income tax expense consists of our federal and state income taxes at statutory rates, including the impact of other items such as valuation allowances, tax credits, permanent items, and foreign taxes. +Net Income +Net income consists of our income from operations, less other expense, net, and income taxes. +41 +Table of Contents +Results of Operations +Year Ended December 31, 2023 Compared With Year Ended December 31, 2022 +The following table presents the components of our consolidated statements of operations for each of the periods presented: +Year Ended December 31, +2023 +2022 +$ Change +% Change +(dollars in thousands) +Net sales: (1) +Products +$ +249,354 +$ +281,190 +$ +(31,836) +(11.3) +% +Services +195,193 +194,555 +638 +0.3 +% +Total net sales +444,547 +475,745 +(31,198) +(6.6) +% +Cost of sales (1) +289,058 +299,978 +(10,920) +(3.6) +% +Gross profit +155,489 +175,767 +(20,278) +(11.5) +% +Operating expenses +93,899 +96,637 +(2,738) +(2.8) +% +Income from operations +61,590 +79,130 +(17,540) +(22.2) +% +Other expense, net: +Interest, net +(26,913) +(29,616) +2,703 +(9.1) +% +Other expense, net +(215) +(367) +152 +* +Income before taxes +34,462 +49,147 +(14,685) +(29.9) +% +Income tax expense +(10,477) +(12,607) +2,130 +(16.9) +% +Net income +$ +23,985 +$ +36,540 +$ +(12,555) +(34.4) +% +Gross profit margin +35.0% +36.9% +* Calculation not meaningful +(1) For the years ended December 31, 2023 and 2022, net sales and cost of sales each include $0.7 million and $1.0 million of intersegment eliminations, respectively. +The following discussion of our consolidated results of operations and segment results refers to the year ended December 31, 2023, compared to the corresponding period in the prior year. The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the Consolidated Statements of Income. +Net Sales: +Net sales decreased for the year ended December 31, 2023, primarily due to decreased Products net sales in our Debit and Credit segment, driven by lower volumes, partially offset by increased Card@Once services . Net sales also benefited from price increases, which were primarily implemented in 2022. +Gross Profit and Gross Profit Margin: +Gross profit and gross profit margin decreased for the year ended December 31, 2023, primarily due to lower net sales and higher materials costs. +Operating Expenses: +Operating expenses decreased for the year ended December 31, 2023, primarily due to decreases in professional services in our Other segment and operating expenses in our Prepaid Debit segment, partially offset by an increase in compensation expenses. Compensation expenses increased due to the impacts of compensation related to an executive retention agreement and increased employee headcount and salary increases, partially offset by lower employee short-term incentive compensation. +42 +Table of Contents +Interest, net : +Interest expense decreased for the year ended December 31, 2023, primarily due to lower outstanding principal balances on our borrowings. For the year ended December 31, 2022, interest expense included a $0.6 million premium paid relating to the $20.0 million early redemption of the 8.625% Senior Secured Notes due 2026 (the “Senior Notes”). +Other Expense, net: +Other expense, net was relatively consistent for the years ended December 31, 2023, and 2022. +Income Tax Expense: +Our effective tax rate on pre-tax income was 30.4% and 25.7% for the years ended December 31, 2023, and 2022, respectively. The increase in the effective tax rate for the year ended December 31, 2023, was primarily due to tax deductibility limitations on executive compensation and a decrease in unrecognized tax benefits liabilities during the year ended December 31, 2022 due to the lapse of the statute of limitations. +Segment Discussion +Debit and Credit: +Year Ended December 31, +2023 +2022 +$ Change +% Change +(dollars in thousands) +Net sales +$ +361,057 +$ +390,559 +$ +(29,502) +(7.6) +% +Gross profit +$ +126,776 +$ +144,214 +$ +(17,438) +(12.1) +% +Income from operations +$ +94,906 +$ +110,045 +$ +(15,139) +(13.8) +% +Gross profit margin +35.1% +36.9% +Net Sales: +Net sales for Debit and Credit decreased for the year ended December 31, 2023, primarily due to a decrease in Products net sales, driven by volume declines in eco-focused cards compared to 2022, which benefited from the acquisition of a new portfolio by an existing customer, and EMV cards, partially offset by increased sales of other contactless cards. This decrease was partially offset by an increase in Services net sales due to higher Card@Once services, driven by a higher printer installation base. Net sales also benefited from price increases, which were primarily implemented in 2022. +Gross Profit and Gross Profit Margin: +Gross profit and gross profit margin for Debit and Credit decreased for the year ended December 31, 2023, primarily due to lower net sales and higher materials costs. +Income from Operations: +The changes in income from operations for Debit and Credit for the year ended December 31, 2023 were primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above and decreases in operating expenses related to compensation related expenses and professional services. +43 +Table of Contents +Prepaid Debit: +Year Ended December 31, +2023 +2022 +$ Change +% Change +(dollars in thousands) +Net sales +$ +84,237 +$ +86,136 +$ +(1,899) +(2.2) +% +Gross profit +$ +28,713 +$ +31,553 +$ +(2,840) +(9.0) +% +Income from operations +$ +24,927 +$ +25,577 +$ +(650) +(2.5) +% +Gross profit margin +34.1% +36.6% +Net Sales: +Net sales for Prepaid Debit decreased for the year ended December 31, 2023, primarily due to decreased volumes from existing customers, partially offset by sales to new customers. +Gross Profit and Gross Profit Margin: +Gross profit and gross profit margin for Prepaid Debit decreased for the year ended December 31, 2023, primarily due to lower net sales, as well as increased labor costs and other expenses related to implementation of a change in our production staffing model where we completed the transition of temporary worker positions to permanent employee positions. +Income from Operations: +Income from operations for Prepaid Debit decreased for the year ended December 31, 2023 , primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above, partially offset by lower operating expenses. +Other: +As the Other segment is comprised entirely of corporate expenses, income from operations for Other consists of operating expenses shown below. +Year Ended December 31, +2023 +2022 +$ Change +% Change +(dollars in thousands) +Operating expenses +$ +58,243 +$ +56,492 +$ +1,751 +3.1 +% +Operating Expenses: +Other operating expenses increased for the year ended December 31, 2023, primarily due to increased compensation expenses as a result of $7.0 million of compensation related to an executive retention agreement and increased employee headcount and salary increases, partially offset by decreases in employee short-term incentive compensation and professional services. +Liquidity and Capital Resources +At December 31, 2023, we had $12.4 million of cash and cash equivalents. Our primary source of liquidity has been cash generated from our operating activities, which has been driven from net income and fluctuations in working capital. Our working capital fluctuates primarily due to the timing of tax payments, timing of receipts from customers, inventory levels, payments of employee incentive programs and interest payments on our Senior Notes, with the interest payments being due in the first and third quarters of the year. +Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, depends on our ability to generate excess operating cash flows through our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, +44 +Table of Contents +combined with our current cash levels, and our senior secured revolving credit facility (the “ABL Revolver”) with available borrowing capacity of $74.7 million as of December 31, 2023, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, share repurchases and working capital needs. Our future cash flows could be impacted by a variety of factors, some of which are beyond our control. These factors include, but are not limited to, changes in economic conditions, especially those impacting our customers, and the pricing, terms and availability of goods and services that we purchase, and financings that we enter into. +Cash Flow from Operating Activities +Cash provided by operating activities increased for the year ended December 31, 2023 to $34.0 million from $31.3 million for the year ended December 31, 2022, primarily due to collections on outstanding receivables from the prior year end and a decrease in inventory purchases in 2023. These positive cash flow impacts were partially offset by lower net income and higher employee performance incentive compensation payments in 2023 related to 2022 performance. Cash flow from operating activities is expected to be negatively impacted in the first quarter of 2024 due to a $5.0 million payment pursuant to an agreement entered into on June 2, 2023 with the Company’s prior Chief Executive Officer, who departed in the first quarter of 2024. Additionally, we anticipate inventory levels to increase in 2024 as a result of the capacity reservation agreement we entered into with one of our suppliers in 2022, which will be in effect through 2025. +Financing +As of December 31, 2023, we had the following outstanding borrowings: +December 31, +2023 +2022 +(dollars in thousands) +Senior Notes +$ +267,897 +$ +285,000 +ABL Revolver +— +5,000 +Unamortized deferred financing costs +(2,900) +(4,478) +Total long-term debt +$ +264,997 +$ +285,522 +Senior Notes +On March 15, 2021, we completed an offering of $310.0 million aggregate principal amount of Senior Notes and related guarantees at an issue price of 100%. The Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year. +As permitted by the indenture governing the Senior Notes, we may also from time to time repurchase some or all of the Senior Notes in open market transactions, in privately negotiated transactions or otherwise. During the year ended December 31, 2023, we repurchased $17.1 million of our Senior Notes in open market transactions. We may redeem some or all of the Senior Notes in 2024, subject to market and other conditions. Pursuant to the terms of the indenture, redemptions would be priced at 104.313% of the principal amount of any notes to be redeemed through March 15, 2024, 102.156% from March 16, 2024 through March 15, 2025, and reducing to 100% thereafter, in each case plus accrued and unpaid interest. The timing and amount of any such redemptions or repurchases will depend upon market conditions, contractual commitments, our capital needs and other factors. +ABL Revolver +On March 15, 2021, we entered into a Credit Agreement with Wells Fargo Bank, National Association providing for an ABL Revolver. On March 3, 2022, we entered into Amendment No. 1 to the Credit Agreement, which amended the ABL Revolver. The amendment, among other things, increased the available borrowing capacity to $75.0 million, increased the uncommitted accordion feature to $25.0 million and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York. On October 11, 2022, we entered into Amendment No. 2 to the Credit Agreement, which amended the ABL Revolver to adjust certain monthly document delivery terms and to clarify +45 +Table of Contents +the treatment of certain inventory. We primarily utilize our ABL Revolver to provide general liquidity and to support shorter term financing requirements. +Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable interest rate margin. We may select a one, three or six-month term SOFR, which is adjusted for a credit spread of 0.10% to 0.30% depending on the term selected. The applicable interest rate margin ranges from 1.25% to 1.75% depending on the average excess availability of the facility for the most recently completed quarter. The unused portion of the ABL Revolver commitment accrues a monthly unused line fee, between 0.375% to 0.50% per annum, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month. +Amounts borrowed and outstanding under the ABL Revolver are required to be repaid in full, together with any accrued and unpaid interest, on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes (and may be subject to earlier mandatory prepayment upon certain events). +Credit Ratings and Debt Covenants +The credit ratings on our debt are an important consideration in our overall business, managing our financing costs and facilitating access to additional capital on favorable terms. Factors that we believe are important in assessing our credit ratings include earnings, cash flow generation, leverage, available liquidity and the overall business. +We have obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined based on an adjusted net income calculation pursuant to the terms of the indenture, and varies based on our annual net leverage ratio. We are required to offer to pay 50% of excess cash flow if the net leverage ratio exceeds 4.5 to 1; 25% if the net leverage ratio is between 4 to 1 and 4.5 to 1, and 0% if the net leverage ratio is less than or equal to 4 to 1. Any required prepayments are to be made within 125 days after the issuance of our annual financial statements. No such payment was required to be made in either 2024 or 2023 based on our operating results for the years ended December 31, 2023 and 2022, respectively. +The Senior Notes and the ABL Revolver contain covenants limiting our ability, and the ability of CPI CG Inc. and our restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of CPI CG Inc. and our restricted subsidiaries to pay dividends to us or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements. +The ABL Revolver includes limitations on our ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than $7.5 million. The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments or b) the $75.0 million of available borrowing capacity under the ABL Revolver (“Borrowing Base”). The Borrowing Base is further reduced by credit line reserves, letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below $7.5 million and until such time that borrowing capacity equals or exceeds $7.5 million for 30 consecutive days, we must maintain a fixed charge coverage ratio (as defined in the Credit Agreement for the ABL Revolver) greater than 1.00, calculated for the trailing 12 months in order to borrow under the ABL Revolver. +Cash Priorities +Capital Expenditures +We primarily use cash in investing activities for capital expenditures. During the year ended December 31, 2023, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $6.4 million. We acquired $11.3 million of additional machinery and equipment utilizing financing lease arrangements in 2023, which has been reflected as a non-cash investing activity in the statement of cash flows. +46 +Table of Contents +During 2023, we commenced work on relocating and modernizing our production facility in Indiana. We anticipate this project will extend into 2025. Total capital expenditures, net for this project are anticipated to increase cash used in investing activities and assets acquired under lease arrangements in both 2024 and 2025. +Share Repurchase Authorization and Activity +On November 2, 2023, our board of directors approved a share repurchase plan authorizing us to repurchase up to $20.0 million of our common stock, par value $0.001 per share. This authorization expires on December 31, 2024. +During the year ended December 31, 2023, we repurchased 13,180 shares, on a trade date basis, of our common stock at an average price of $18.93 per share excluding commissions, or $0.3 million in aggregate. In accordance with the Stock Repurchase Agreement entered into on December 6, 2023, we are obligated to purchase 39,540 shares from Parallel49, at an average price of $18.55 per share, payment for which, along with any obligations incurred connected to shares repurchased in the first quarter of 2024, is due in the second quarter of 2024. +We had $19.0 million remaining in our share repurchase authorization as of December 31, 2023. We may purchase shares through open market purchases or through privately negotiated transactions, the extent and timing of which will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by us. +Material Cash Requirements +Our material cash requirements include interest payments on our long-term debt, operating and finance lease payments, and purchase obligations to support our operations. +Debt Service Requirements +As of December 31, 2023, the total projected principal and interest payments on our borrowings were $326.4 million, primarily related to the Senior Notes, of which $23.5 million of interest is expected to be paid in the next 12 months. The remaining interest payments are expected to be paid over the remaining term of the Senior Notes, which mature in 2026, and the principal is due upon maturity. We have estimated our future interest payments assuming no additional borrowings under the ABL Revolver, no early redemptions of principal on the Senior Notes, and no debt issuances or renewals upon the maturity dates of our notes. However, we may borrow additional amounts under the ABL Revolver, redeem principal on the Senior Notes early or refinance all or a portion of our borrowings in future periods. +Leases +We lease real property for production and services, in addition to equipment. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 9, “Financing and Operating Leases” for details on our leasing arrangements, including future maturities of our operating lease liabilities, as of December 31, 2023. +In February 2024, we entered into a build-to-suit lease agreement to relocate and modernize our operations at our Fort Wayne, Indiana production facility, which is set to commence the later of: the landlord’s delivery of exclusive possession of the premises; and March 1, 2025. Under this lease agreement, we will pay an annual base rent of $0.9 million subject to an annual rent increase of 2.0%. The lease is for ten years and includes two consecutive options to extend the term of the lease by five years for each such option. +Purchase Obligations +A purchase obligation is an agreement to purchase goods or services that is enforceable, legally binding, and specifies all significant terms. As of December 31, 2023, we had approximately $138.0 million of outstanding purchase obligations, of which approximately $89.4 million is expected to be paid in the next 12 months. +Included in the above amounts, during 2022, we entered into a capacity reservation agreement with one of our chip suppliers to reserve production supply capacity due to the current global supply shortage environment. Under the +47 +Table of Contents +agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve capacity to produce a set quantity of chips from 2023 through 2025, subject to certain conditions, and we have committed to purchase those chips. The total value of the minimum non-cancellable commitment is $194.9 million over the term of the agreement. As of December 31, 2023, the remaining commitment was $125.3 million, of which $77.0 million is expected to be paid in the next 12 months. In the event that the supplier is unable to deliver the specified quantity of chips, it will be subject to liquidated damages of 10% of the price of any non-delivered products. +Cyclical and Seasonal Nature of Business +Financial Payment Cards are generally influenced by broader cyclical changes in the economy, with economic downturns potentially resulting in decreases in the demand for our products and services and economic upturns potentially resulting in increases in demand. In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. Our net sales are also influenced by changes in customer behavior such as altering inventory management practices, Financial Payment Card renewal cycles and demand for new products, such as contactless cards. Additionally, we historically have generated higher net sales in the third and fourth quarters of the year, as our sales of Prepaid Debit Card solutions are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season in the United States and timing related to the production of health insurance and health savings account cards. +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported net sales, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +Revenue Recognition +Products Net Sales: “ Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are produced for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, we estimate net sales by taking actual costs incurred and applying historical margins for similar types of contracts. Margins across each business with similar contracts have been relatively consistent and we have not made changes to our methods and assumptions during 2023. Items included in “Products” net sales are produced Financial Payment Cards, including contact-EMV, contactless EMV, Second Wave, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. +Services Net Sales: Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and SaaS personalization of instant issuance debit and credit cards. For work performed but not completed and billed, we estimate revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Margins across each business with similar contracts have been relatively consistent and we have not made changes to our methods and assumptions during 2023. +Customer Contracts: The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. Usually our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a +48 +Table of Contents +medium or long-term basis. The contract term as defined by ASC 606, Revenue from Contracts with Customers , is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally considered short term in nature. +Income Taxes +We are subject to income taxes in the United States and certain foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of the reversal of taxable temporary differences and the impact of tax planning strategies. Changes in the relevant facts can significantly impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. +During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. The company is required to make estimates regarding future compensation for covered individuals to determine the value of its deferred tax assets related to the future deductibility of executive stock compensation and accrued incentive compensation, which also requires significant judgment. We also establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the current provision for income taxes. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. +The Company’s valuation allowance recorded as of December 31, 2023, relates primarily to a capital loss realized on the sale of a foreign subsidiary whereby the Company does not anticipate a capital gain in the foreseeable future that would allow for the recognition of the capital loss carryover. In addition, the Company has a partial valuation allowance on certain state interest deduction limitations and net operating losses, which the Company estimates may not be fully utilized. Additionally, other changes to the federal and state tax regulations can lead to variability in allowable deductions, which can impact the Company’s valuation allowance. +Recent Accounting Pronouncements +Refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 2, “Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements. +Item 7A. +Quantitative and Qualitative Disclosures about Market Ris k +Not required due to smaller reporting company status. +49 +Table of Contents +Item 8. +Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 2023 and 2022 and for the years ended December 31, 2023 and 2022 +Report of Independent Registered Public Accounting Firm (KPMG LLP, Denver, CO, Auditor Firm ID: 185 ) +51 +Consolidated Balance Sheets +53 +C onsolidated Statements of Operations and Comprehensive Income +54 +Consolidated Statements of Stockholders’ Deficit +55 +Consolidated Statements of Cash Flows +56 +Notes to Consolidated Financial Statements +57 +50 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +Basis for Opinions +The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of +51 +Table of Contents +management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +1 Non-deductible excess compensation under IRC Section 162(m) +As discussed in Note 11 to the consolidated financial statements, the Company has recorded compensation for certain covered employees in excess of $1.0 million per year. Under Internal Revenue Code (IRC) Section 162(m), the Company is prohibited from deducting for tax purposes compensation in excess of $1.0 million per year for each of these employees. The covered employees are defined as the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and the three next-highest-compensated officers of the Company. The Company considers the impact of the estimated IRC Section 162(m) limitations on the future deductibility of existing temporary differences. +We identified the evaluation of the Company’s assessment of non-deductible excess compensation under IRC Section 162(m) as a critical audit matter. Specifically, the evaluation of the estimated future compensation for each covered employee used to determine the amount of permanently disallowed compensation under IRC Section 162(m) involved subjective auditor judgment. In addition, the evaluation required the involvement of tax professionals with specialized skills and knowledge. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s income tax process, including a control related to estimating future compensation for each covered employee. We evaluated the reasonableness of estimated future compensation included in the Company’s assessment by considering historical compensation figures for each covered employee and the potential impact to the Section 162(m) limitation if compensation increased or decreased in future years. We involved tax professionals with specialized skills and knowledge who assisted in evaluating the Company’s application of IRC Section 162(m) to determine the amount of permanently disallowed compensation under IRC Section 162(m) for United States tax purposes. +/s/ KPMG LLP +We have served as the Company’s auditor since 2014. +Denver, Colorado +March 7, 2024 +52 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(in thousands, except share and per share amounts) +December 31, +2023 +2022 +Assets +Current assets: +Cash and cash equivalents +$ +12,413 +$ +11,037 +Accounts receivable, net +73,724 +80,583 +Inventories, net +70,594 +68,399 +Prepaid expenses and other current assets +8,647 +7,551 +Total current assets +165,378 +167,570 +Plant, equipment, leasehold improvements and operating lease right-of-use assets, net +63,053 +57,178 +Intangible assets, net +14,122 +17,988 +Goodwill +47,150 +47,150 +Other assets +3,980 +6,780 +Total assets +$ +293,683 +$ +296,666 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +12,802 +$ +24,371 +Accrued expenses +35,803 +40,070 +Deferred revenue and customer deposits +840 +3,571 +Total current liabilities +49,445 +68,012 +Long-term debt +264,997 +285,522 +Deferred income taxes +7,139 +6,808 +Other long-term liabilities +24,038 +18,401 +Total liabilities +345,619 +378,743 +Commitments and contingencies (Note 14) +Series A Preferred Stock; $ 0.001 par value— 100,000 shares authorized; 0 shares issued and outstanding at December 31, 2023 and 2022 +— +— +Stockholders’ deficit: +Common Stock; $ 0.001 par value— 100,000,000 shares authorized; 11,446,155 and 11,390,355 shares issued and outstanding at December 31, 2023 and 2022, respectively +11 +11 +Capital deficiency +( 102,223 ) +( 108,379 ) +Accumulated earnings +50,276 +26,291 +Total stockholders’ deficit +( 51,936 ) +( 82,077 ) +Total liabilities and stockholders’ deficit +$ +293,683 +$ +296,666 +See accompanying notes to consolidated financial statements +53 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive Income +(in thousands, except share and per share amounts) +Year Ended December 31, +2023 +2022 +Net sales: +Products +$ +249,354 +$ +281,190 +Services +195,193 +194,555 +Total net sales +444,547 +475,745 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +161,374 +171,017 +Services (exclusive of depreciation and amortization shown below) +117,397 +119,930 +Depreciation and amortization +10,287 +9,031 +Total cost of sales +289,058 +299,978 +Gross profit +155,489 +175,767 +Operating expenses: +Selling, general and administrative (exclusive of depreciation and amortization shown below) +88,255 +90,782 +Depreciation and amortization +5,644 +5,855 +Total operating expenses +93,899 +96,637 +Income from operations +61,590 +79,130 +Other expense, net: +Interest, net +( 26,913 ) +( 29,616 ) +Other expense, net +( 215 ) +( 367 ) +Total other expense, net +( 27,128 ) +( 29,983 ) +Income before income taxes +34,462 +49,147 +Income tax expense +( 10,477 ) +( 12,607 ) +Net income +$ +23,985 +$ +36,540 +Basic and diluted earnings per share: +Basic earnings per share +$ +2.10 +$ +3.24 +Diluted earnings per share +$ +2.01 +$ +3.11 +Basic weighted-average shares outstanding +11,426,124 +11,291,202 +Diluted weighted-average shares outstanding +11,917,556 +11,749,105 +Comprehensive income: +Net income +$ +23,985 +$ +36,540 +Total comprehensive income +$ +23,985 +$ +36,540 +See accompanying notes to consolidated financial statements +54 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Stockholders’ Deficit +(in thousands, except per share amounts) +Common Stock +Capital +Accumulated +Stockholders +Shares +Amount +deficiency +earnings (loss) +Deficit +December 31, 2021 +11,255,466 +$ +11 +$ +( 110,782 ) +$ +( 10,249 ) +$ +( 121,020 ) +Shares issued under stock-based compensation plans +134,889 +— +( 1,076 ) +— +( 1,076 ) +Stock-based compensation +— +— +3,479 +— +3,479 +Components of comprehensive income: +Net income +— +— +— +36,540 +36,540 +December 31, 2022 +11,390,355 +$ +11 +$ +( 108,379 ) +$ +26,291 +$ +( 82,077 ) +Shares issued under stock-based compensation plans +68,980 +— +( 368 ) +— +( 368 ) +Stock-based compensation +— +— +7,507 +— +7,507 +Repurchase and retirement of common shares +( 13,180 ) +— +( 983 ) +— +( 983 ) +Components of comprehensive income: +Net income +— +— +— +23,985 +23,985 +December 31, 2023 +11,446,155 +$ +11 +$ +( 102,223 ) +$ +50,276 +$ +( 51,936 ) +See accompanying notes to consolidated financial statements +55 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(in thousands) +Year Ended December 31, +2023 +2022 +Operating activities +Net income +$ +23,985 +$ +36,540 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation expense +12,065 +11,020 +Amortization expense +3,866 +3,866 +Stock-based compensation expense +7,507 +3,479 +Amortization of debt issuance costs and debt discount +1,855 +1,931 +Loss on debt extinguishment +243 +474 +Deferred income taxes +331 +1,555 +Other, net +( 655 ) +1,094 +Changes in operating assets and liabilities: +Accounts receivable, net +6,795 +( 19,745 ) +Inventories +( 1,638 ) +( 10,702 ) +Prepaid expenses and other assets +2,346 +( 2,700 ) +Income taxes, net +( 1,162 ) +362 +Accounts payable +( 11,260 ) +( 453 ) +Accrued expenses and other liabilities +( 7,506 ) +2,226 +Deferred revenue and customer deposits +( 2,731 ) +2,389 +Cash provided by operating activities +34,041 +31,336 +Investing activities +Capital expenditures for plant, equipment and leasehold improvements, net +( 6,405 ) +( 17,867 ) +Other +183 +95 +Cash used in investing activities +( 6,222 ) +( 17,772 ) +Financing activities +Principal payments on Senior Notes +( 16,954 ) +( 24,938 ) +Principal payments on ABL Revolver +( 18,000 ) +( 30,000 ) +Proceeds from ABL Revolver +13,000 +35,000 +Payments on debt extinguishment and other +( 368 ) +( 1,939 ) +Proceeds from finance lease financing +— +2,074 +Payments on finance lease obligations +( 3,871 ) +( 3,360 ) +Common stock repurchased +( 250 ) +— +Cash used in financing activities +( 26,443 ) +( 23,163 ) +Effect of exchange rates on cash +— +( 47 ) +Net increase (decrease) in cash and cash equivalents +1,376 +( 9,646 ) +Cash and cash equivalents, beginning of period +11,037 +20,683 +Cash and cash equivalents, end of period +$ +12,413 +$ +11,037 +Supplemental disclosures of cash flow information +Cash paid (refunded) during the period for: +Interest +$ +25,738 +$ +27,714 +Income taxes paid +$ +10,462 +$ +12,584 +Income taxes refunded +$ +( 86 ) +$ +( 451 ) +Right-of-use assets obtained in exchange for lease obligations: +Operating leases +$ +3,091 +$ +816 +Financing leases +$ +11,285 +$ +9,124 +Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements +$ +102 +$ +462 +See accompanying notes to consolidated financial statements +56 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(dollars in thousands, except share and per share amounts or as otherwise indicated) +1. Business +CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payments technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. CPI is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit, debit and Prepaid Debit Cards issued on the networks of the Payment Card Brands (Visa, Mastercard, American Express and Discover). CPI also offers an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. +CPI serves its customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (“PCI Security Standards Council”) by one or more of the Payment Card Brands. CPI’s network of high-security production facilities allows the Company to optimize its solutions offerings and serve its customers. +The Company’s business consists of the following reportable segments: Debit and Credit, Prepaid Debit and Other. The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing financial institutions primarily in the United States. The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. The Company’s “Other” segment includes corporate expenses. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. +December 31, +2023 +2022 +Trade accounts receivable +$ +69,245 +$ +68,886 +Unbilled accounts receivable +4,725 +11,915 +73,970 +80,801 +Less allowance +( 246 ) +( 218 ) +$ +73,724 +$ +80,583 +The Company maintains an allowance for potential credit losses based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it is determined collection will not occur. The provision for credit losses was immaterial for both the years ended December 31, 2023 and 2022. +57 +Table of Contents +For the years ended December 31, 2023 and 2022, one customer represented 18 % and 16 %, respectively, of the Company’s consolidated net sales. +Inventories +Inventories consist of raw materials and finished goods, and are measured at the lower of cost or net realizable value (determined on a first-in, first-out or specific identification basis). Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Finished goods inventory represents primarily stock cards and Card@Once printers. The stock cards are not produced for a specific customer, but are ready to be personalized and sold as customer orders are received. The Company monitors inventory for events or circumstances that may indicate the net realizable value is less than the carrying value of inventory, such as negative margins, expiration of material usage and other forms of obsolescence, and records adjustments to the valuation of inventory, as necessary. +For the year ended December 31, 2023 approximately 96 % of the total value of our purchased microchips and antennas came from four main suppliers, and approximately 72 % came from one supplier. Approximately 97 % of the total value of our purchased microchips and antennas for the year ended December 31, 2022 came from four main suppliers, and approximately 68 % came from one supplier. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. Capital expenditures are presented net of lessor reimbursements on the consolidated statement of cash flows for assets acquired when corresponding financing leases were contemplated to be executed at the asset purchase date and such financing leases are entered into shortly after asset acquisition. Any financing leases executed for the acquisition of right-of-use machinery and equipment assets are presented in the supplemental disclosures of non-cash information on the statement of cash flows. Financing leases are further described in Note 9, “Financing and Operating Leases.” +Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required. +Goodwill and Intangible Assets +The Company accounts for its goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350) and the provisions of ASU 2017-04, Simplifying the Test for Goodwill Impairment and tests at least annually or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The Company performs its goodwill impairment test by comparing the fair value of the reporting unit with the carrying amount. If this qualitative assessment indicates it is more likely than not the fair value of a reporting unit is less than the carrying amount, a one-step quantitative test is then performed. Factors management considers in this assessment include macroeconomic, industry and market considerations, overall financial performance (both current and projected), cost increases impacting earnings and cash flows, changes in management and strategy, and changes in the composition or carrying amount of net assets. In the event a reporting unit’s carrying value exceeds its fair value, the Company recognizes an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required. +58 +Table of Contents +Sales Tax +The Company records sales tax collected from its customers on a net basis, and therefore excludes it from net sales as defined in ASC 606, Revenue from Contracts with Customers . Cash collected from customers is recorded in accrued expenses on the Company’s consolidated Balance Sheet and then remitted to the proper taxing authority. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made. +The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when the Company believes that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. The Company adjusts uncertain tax positions in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Stock - Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation is required to be measured at fair value and expensed over the requisite service period. The Company accounts for forfeitures as they occur and reverses previously recognized expense for the unvested portion of the forfeited shares. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Upon the exercise of stock options, shares of common stock are issued from authorized common shares. Refer to Note 16 “Stock-Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans. +Net Sales +Products Net Sales +“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are produced for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are the design and production of Financial Payment Cards, including contact-EMV, contactless dual-interface EMV, contactless and magnetic stripe cards, CPI’s eco-focused solutions, including Second Wave and Earthwise cards made with upcycled plastic, metal cards, private label credit cards and retail gift cards. Card@Once printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales . +Europay, Mastercard and Visa (“EMV®”) is a global technical standard maintained by EMV Co, LLC. EMV ® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMV Co, LLC . +59 +Table of Contents +Services Net Sales +Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and SaaS personalization of instant issuance debit cards. As applicable, for work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts +The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606, Revenue from Contracts with Customers , is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +Use of Estimates +The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require management to make assumptions and estimates relating to the reporting of assets and liabilities in its preparation of the consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed and uncertain tax positions. Actual results could differ from those estimates. +Recent Accounting Pronouncements +Recently Adopted Accounting Pronouncements +In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the criteria under which credit losses on financial instruments (such as the Company’s trade receivables) are measured. The ASU introduces a new credit reserve model known as the Current Expected Credit Loss (“CECL”) model, which replaces the incurred loss impairment methodology previously used under GAAP with an expected loss methodology. Effective January 1, 2023, the Company adopted the CECL model. The adoption of the model did not have a material impact on the Company’s consolidated financial position or results of operations. +Recently Issued Accounting Pronouncements +In November 2023, the Financial Accounting Standards Board issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will require enhanced segment disclosures. Adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2023. The Company has elected not to early adopt this accounting standard in 2023. The Company is evaluating the impact of adoption of this standard and does not anticipate that the application of ASU 2023-07 will change which segments are currently reported or will have a material impact on the Company’s consolidated financial position and results of operations. +In December 2023, the Financial Accounting Standards Board issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures which will require a disaggregated rate reconciliation disclosure as well as additional information regarding taxes paid. Adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2024. The Company has elected not to early adopt this accounting standard in 2023. The Company is evaluating the impact of adoption of this standard and does not anticipate that the application of ASU 2023-09 will have a material impact on the Company’s consolidated financial position and results of operations. +60 +Table of Contents +3. Net Sales +The Company disaggregates its net sales by major source as follows: +For the year ended December 31, 2023 +Products +Services +Total +Debit and Credit +$ +250,047 +$ +111,010 +$ +361,057 +Prepaid Debit +— +84,237 +84,237 +Intersegment eliminations +( 693 ) +( 54 ) +( 747 ) +Total +$ +249,354 +$ +195,193 +$ +444,547 +For the year ended December 31, 2022 +Products +Services +Total +Debit and Credit +$ +282,081 +$ +108,478 +$ +390,559 +Prepaid Debit +— +86,136 +86,136 +Intersegment eliminations +( 891 ) +( 59 ) +( 950 ) +Total +$ +281,190 +$ +194,555 +$ +475,745 +4. Inventories +Inventories are summarized below: +December 31, +2023 +2022 +Raw materials +$ +66,210 +$ +61,434 +Finished goods +7,162 +10,300 +Inventory reserve +( 2,778 ) +( 3,335 ) +$ +70,594 +$ +68,399 +5. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets +Plant, equipment, leasehold improvements and operating lease right-of-use assets consisted of the following: +December 31, +2023 +2022 +Machinery and equipment +$ +67,506 +$ +64,786 +Machinery and equipment under financing leases +23,774 +15,717 +Furniture, fixtures and computer equipment +107 +3,072 +Leasehold improvements +16,335 +14,703 +Construction in progress +1,778 +3,304 +Operating lease right-of-use assets +19,989 +17,518 +129,489 +119,100 +Less accumulated depreciation and amortization +( 66,436 ) +( 61,922 ) +$ +63,053 +$ +57,178 +Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 9, “Financing and Operating Leases.” +There were no impairments of the Company’s plant, equipment, leasehold improvements and operating leases right-of-use assets for the years ended December 31, 2023 and 2022. +61 +Table of Contents +6. Goodwill and Other Intangible Assets +The Company reports all of its goodwill in the Debit and Credit segment at December 31, 2023 and 2022. The Company completed its goodwill impairment testing as of October 1, 2023 and did no t identify any goodwill impairment during the years ended December 31, 2023 and 2022. +Intangible assets consist of customer relationships, acquired technology, and trademarks. There were no impairments of the Company’s amortizable intangible assets for the years ended December 31, 2023 and 2022. +At December 31, 2023 and 2022, intangible assets, excluding goodwill, were comprised of the following: +December 31, 2023 +December 31, 2022 +Weighted Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +17.2 +$ +55,454 +$ +( 41,971 ) +$ +13,483 +$ +55,454 +$ +( 38,695 ) +$ +16,759 +Acquired technology +10.0 +7,101 +( 6,967 ) +134 +7,101 +( 6,767 ) +334 +Trademarks +8.7 +3,330 +( 2,825 ) +505 +3,330 +( 2,435 ) +895 +Intangible assets subject to amortization +$ +65,885 +$ +( 51,763 ) +$ +14,122 +$ +65,885 +$ +( 47,897 ) +$ +17,988 +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2023 was as follows: +2024 +$ +3,630 +2025 +3,440 +2026 +2,471 +2027 +1,947 +2028 +1,580 +Thereafter +1,054 +$ +14,122 +7. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +● Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +● Level 2 — Observable inputs other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities. +● Level 3 — Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +62 +Table of Contents +The Company’s financial assets and liabilities that are not required to be re-measured at fair value in the consolidated balance sheets were as follows: +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2023 +December 31, +December 31, +(Using Fair Value Hierarchy) +2023 +2023 +Level 1 +Level 2 +Level 3 +Liabilities: +Senior Notes +$ +267,897 +$ +261,834 +$ +— +$ +261,834 +$ +— +ABL Revolver +$ +— +$ +— +$ +— +$ +— +$ +— +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2022 +December 31, +December 31, +(Using Fair Value Hierarchy) +2022 +2022 +Level 1 +Level 2 +Level 3 +Liabilities: +Senior Notes +$ +285,000 +$ +281,438 +$ +— +$ +281,438 +$ +— +ABL Revolver +$ +5,000 +$ +5,000 +$ +— +$ +5,000 +$ +— +The aggregate fair value of the Company’s Senior Notes (as defined in Note 10, “Long-Term Debt”) was based on bank quotes. The fair value measurement associated with the ABL Revolver (as defined in Note 10, “Long-Term Debt”) approximates its carrying value as of December 31, 2023, given the applicable variable interest rates and nature of the security interest in Company assets. +The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature. +8. Accrued Expenses +Accrued expenses consisted of the following: +December 31, +2023 +2022 +Accrued payroll and related employee expenses +$ +11,431 +$ +7,727 +Accrued employee performance bonuses +667 +8,576 +Employer payroll taxes +298 +1,092 +Accrued rebates +2,919 +2,668 +Estimated sales tax liability +351 +622 +Accrued interest +6,830 +7,275 +Current operating and financing lease liabilities +7,318 +5,697 +Other +5,989 +6,413 +Total accrued expenses +$ +35,803 +$ +40,070 +Other accrued expenses as of December 31, 2023 and 2022 consisted primarily of federal income tax accruals, self-insurance claims that have yet to be reported, and the current portion of uncertain tax position reserves. +9. Financing and Operating Leases +Right-of-use (“ROU”) represents the right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. Certain leases contain escalation provisions and/or renewal options, giving the Company +63 +Table of Contents +the right to extend the leases by up to 10 years . However, these options are generally not reflected in the calculation of the ROU assets and lease liabilities due to uncertainty surrounding the likelihood of renewal. +The components of operating and finance lease costs were as follows: +Year Ended December 31, +2023 +2022 +Operating lease costs +$ +3,191 +$ +3,064 +Variable lease costs +741 +642 +Total expense from operating leases +$ +3,932 +$ +3,706 +Finance lease costs: +Right-of-use amortization expense +$ +2,314 +$ +1,718 +Interest on lease liabilities +784 +482 +Total financing lease costs +$ +3,098 +$ +2,200 +The following table reflects balances for operating and financing leases: +December 31, +2023 +2022 +Operating leases: +Operating lease right-of-use assets, net of amortization +$ +11,234 +$ +10,705 +Current operating lease liabilities +$ +2,539 +$ +2,355 +Non-current operating lease liabilities +9,384 +8,905 +Total operating lease liabilities +$ +11,923 +$ +11,260 +Financing leases: +Property, equipment and leasehold improvements +$ +23,774 +$ +15,717 +Accumulated depreciation +( 3,335 ) +( 3,135 ) +Total financing leases in property, equipment and leasehold improvements, net +$ +20,439 +$ +12,582 +Current financing lease liabilities +$ +4,779 +$ +3,342 +Non-current financing lease liabilities +13,327 +7,355 +Total financing lease liabilities +$ +18,106 +$ +10,697 +Finance and operating lease ROU assets are recorded in “Plant, equipment, leasehold improvements, and +operating lease right-of-use assets, net.” Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term liabilities.” +Components of lease expense were as follows: +December 31, +2023 +2022 +Weighted-average remaining lease term: +Operating leases +4.70 +5.06 +Financing leases +3.98 +3.60 +Weighted-average discount rate: +Operating leases +7.19 % +7.93 % +Financing leases +6.28 % +6.62 % +Cash paid on operating lease liabilities was $ 2.4 million during the years ended December 31, 2023 and 2022, respectively. +64 +Table of Contents +Future cash payment with respect to lease obligations as of December 31, 2023 were as follows: +Operating +Financing +Lease +Leases +Year Ending +2024 +$ +3,310 +$ +5,777 +2025 +2,851 +5,472 +2026 +2,684 +4,111 +2027 +2,518 +3,180 +2028 +2,185 +1,919 +Thereafter +574 +— +Total lease payments +14,122 +20,459 +Less imputed interest +( 2,199 ) +( 2,353 ) +Total +$ +11,923 +$ +18,106 +10. Long - Term Debt +At December 31, 2023 and 2022, long-term debt consisted of the following: +December 31, +2023 +2022 +Senior Notes (1) +$ +267,897 +$ +285,000 +ABL Revolver +— +5,000 +Unamortized deferred financing costs +( 2,900 ) +( 4,478 ) +Total long-term debt +264,997 +285,522 +Less current maturities +— +— +Long-term debt, net of current maturities +$ +264,997 +$ +285,522 +(1) The Senior Notes bear interest at a fixed rate of 8.625 % . +Senior Notes +On March 15, 2021, the Company completed an offering by its wholly-owned subsidiary, CPI CG Inc., of $ 310.0 million aggregate principal amount of 8.625 % Senior Secured Notes due 2026 (the “Senior Notes”) and related guarantees. The Senior Notes bear interest at a rate of 8.625 % per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year. +The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among CPI CG Inc., the Company, the subsidiary guarantors and U.S. Bank National Association, as trustee, with any required prepayments to be made after the issuance of the Company’s annual financial statements. No such payment is required to be made in 2024 and was not required to be made in 2023 based on the Company’s operating results for the years ended December 31, 2023 and 2022, respectively. +During the year ended December 31, 2023, the Company used cash on hand and available borrowing capacity under the Company’s asset-based, senior secured revolving credit facility (described in more detail below, the “ABL Revolver”) to retire a portion of the Senior Notes totaling $ 17.1 million of the principal amount thereof plus accrued and unpaid interest thereon to the retirement dates. +During the year ended December 31, 2022, the Company used cash on hand and available borrowing capacity under the ABL Revolver to fund the redemption and purchase of a portion of the Senior Notes totaling $ 25.0 million of the principal amount thereof plus accrued and unpaid interest thereon to the retirement dates. The difference between the par value and the purchase price of $ 0.5 million is recorded in “Interest, net” on the consolidated statement of comprehensive income for the year ended December 31, 2022. +65 +Table of Contents +The Senior Notes are guaranteed by the Company and certain of its current and future wholly-owned domestic subsidiaries (other than CPI CG Inc. as the issuer of the Senior Notes) that guarantee the ABL Revolver. The Senior Notes are secured by substantially all of the assets of CPI CG Inc. and the guarantors, subject to customary exceptions. The ABL Revolver is guaranteed by the Company and its subsidiaries (other than CPI CG Inc. as borrower and excluded subsidiaries), and is secured by substantially all of the assets of CPI CG Inc. and the guarantors, subject to customary exceptions. +The Senior Notes and the ABL Revolver contain covenants limiting the ability of the Company, CPI CG Inc. and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of CPI CG Inc. and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements. +ABL Revolver +On March 15, 2021, the Company and CPI CG Inc., as borrower, entered into a Credit Agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for the ABL Revolver with revolving credit. The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes. On March 3, 2022, the Company and CPI CG Inc. entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), which amended the ABL Revolver. The Amendment, among other things, increased the available borrowing capacity under the ABL Revolver to $ 75.0 million, increased the uncommitted accordion feature to $ 25.0 million from $ 15.0 million, and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York. On October 11, 2022, the Company and CPI CG Inc. entered into Amendment No. 2 to the Credit Agreement, which amended the ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory. +Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable interest rate margin. The Company may select a one, three or six month term SOFR, which is adjusted for a credit spread of 0.10 % to 0.30 % depending on the term selected. Through March 31, 2023, the applicable interest rate margin ranged from 1.50 % to 1.75 % depending on the average excess availability of the facility for the most recently completed quarter. The unused portion of the ABL Revolver commitment accrued a monthly unused line fee, 0.50 % per annum through March 31, 2023, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month. The interest rate margin and unused line fee percentage changed, effective April 1, 2023, to between 1.25 % and 1.75 % (interest rate margin) and 0.375 % and 0.50 % (unused line fee). +The ABL Revolver includes limitations on the Company’s ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than $ 7.5 million. The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments or b) the $ 75.0 million of available borrowing capacity under the ABL Revolver (“Borrowing Base”). The Borrowing Base is further reduced by credit line reserves, letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below $ 7.5 million and until such time that borrowing capacity equals or exceeds $ 7.5 million for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the Credit Agreement for the ABL Revolver) greater than 1.00 , calculated for the trailing 12 months, in order to borrow under the ABL Revolver. +Deferred Financing Costs and Discount +Certain costs and discounts incurred with borrowings are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. The remaining unamortized debt issuance costs recorded on the Senior Notes were $ 2.9 million and are reported as a reduction to the long-term debt balance as of December 31, 2023. The remaining unamortized net discount +66 +Table of Contents +and debt issuance costs on the ABL Revolver and related Amendment were $ 1.0 million and are recorded as other assets (current and long-term) on the consolidated balance sheet as of December 31, 2023. +11. Income Taxes +Income tax expense and effective income tax rates consist of the following: +December 31, +2023 +2022 +Current taxes: +Domestic +$ +10,126 +$ +11,047 +Foreign +20 +5 +10,146 +11,052 +Deferred taxes: +Domestic +331 +1,554 +Foreign +— +1 +331 +1,555 +Income tax expense +$ +10,477 +$ +12,607 +Income before income taxes: +Domestic income +$ +34,400 +$ +49,108 +Foreign income +62 +39 +Total +$ +34,462 +$ +49,147 +Effective income tax rate +30.4 +% +25.7 +% +The Company’s effective tax rates on pre-tax income were 30.4 % and 25.7 % for the years ended December 31, 2023 and 2022, respectively. The increase in the Company’s effective tax rate for the year ended December 31, 2023, compared to the prior year was primarily due to tax deductibility limitations on executive compensation and a decrease in unrecognized tax benefits liabilities during the year ended December 31, 2022 due to the lapse of the statute of limitations. +For the year ended December 31, 2023 and 2022, the effective tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2023 +2022 +Tax at federal statutory rate +21.0 +% +21.0 +% +State taxes, net +4.4 +5.4 +Unrecognized tax benefits +0.1 +( 2.0 ) +Deductibility limitations on excess compensation +3.3 +0.4 +Tax credits +( 0.5 ) +( 0.1 ) +Permanent items +2.0 +1.0 +Other +0.1 +— +Effective income tax rate +30.4 +% +25.7 +% +For the year ended December 31, 2023, the effective tax rate differs from the federal statutory rate primarily due to state income taxes, which had a tax rate impact of 4.4 %. Other items impacting the effective tax rate in 2023 include tax deductibility limitations on executive compensation and permanent items. For the year ended December 31, 2022, the effective tax rate differs from the federal statutory rate primarily due to state income taxes, which had a tax rate impact of 5.4 %, and a decrease in unrecognized tax benefits primarily relating to an asset basis tax position and research and development tax credits as a result of a lapse of the statute of limitations. +67 +Table of Contents +The components of the deferred tax assets and liabilities are as follows: +December 31, +2023 +2022 +Deferred tax assets: +Accrued expense +$ +1,928 +$ +3,830 +Net operating loss carryforward +130 +257 +Stock compensation +1,798 +1,303 +Interest limitation +1,689 +2,474 +Lease liability +3,026 +2,891 +Capital loss carryover +2,110 +2,135 +Research and development costs +1,350 +1,434 +Other +3,244 +3,609 +Total gross deferred tax assets +15,275 +17,933 +Valuation allowance +( 2,616 ) +( 2,791 ) +Net deferred tax assets +12,659 +15,142 +Deferred tax liabilities: +Plant, equipment and leasehold improvements +( 8,825 ) +( 9,510 ) +Intangible assets +( 6,745 ) +( 8,020 ) +Right-of-use assets +( 2,851 ) +( 2,749 ) +Other +( 1,377 ) +( 1,671 ) +Total gross deferred tax liabilities +( 19,798 ) +( 21,950 ) +Net deferred tax liabilities +$ +( 7,139 ) +$ +( 6,808 ) +The valuation allowance as of December 31, 2023, is primarily relating to a capital loss realized on the sale of a foreign subsidiary whereby the Company does not anticipate a capital gain in the foreseeable future that would allow for the recognition of the capital loss carryover. In addition, the Company has a partial valuation allowance on certain state interest deduction limitations, which the Company estimates may not be fully utilized. +Under a provision in the 2017 U.S. Tax Cuts and Jobs Act, beginning in 2022, research and development costs incurred are no longer allowed as an immediate deduction for federal income tax purposes. Rather, these expenditures incurred must be capitalized and amortized over a five-year period for activities conducted in the United States and a 15 year period for activities conducted outside the United States. +The Company has a minimal amount of state and local operating loss carryforwards which will expire at various dates from 2032 to 2038. The Company does expect to be able to utilize these losses prior to expiration. +The Company has recorded compensation for certain covered employees in excess of $ 1.0 million per year. Under Internal Revenue Code (IRC) Section 162(m), the Company is prohibited from deducting the amount of tax compensation that exceeds $ 1.0 million per year for these employees. The covered employees are defined as the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and the three next-highest-compensated officers of the Company. The Company considers the impact of the estimated IRC Section 162(m) limitations on the future deductibility of existing temporary differences. +Unrecognized Tax Benefits +Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Accrued expenses” and “Other long-term liabilities” in the Company’s consolidated balance sheets. The Company accounts for +68 +Table of Contents +uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination. +Balance as of December 31, 2022 +$ +1,395 +Increase related to current year tax position +42 +Increase related to prior year tax position +22 +Decrease related to prior year tax position +( 62 ) +Decrease related to settlements with tax authorities, net of federal benefit +( 80 ) +Balance as of December 31, 2023 +$ +1,317 +The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits was $ 0.3 million for the years ended December 31, 2023 and 2022, respectively. +The Company believes that it is reasonably possible that approximately $ 0.9 million of its unrecognized tax benefits may be recognized by the end of 2024 as a result of a lapse of the statute of limitations, which is reflected in “Accrued expenses” in the Company’s consolidated balance sheet as of December 31, 2023. +12. Stockholders’ Deficit +Common Stock +Common Stock has a par value of $ 0.001 per share. Holders of Common Stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders may have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. +Share Repurchases +On November 2, 2023, the Company's board of directors approved a share repurchase plan authorizing the Company to repurchase up to $ 20.0 million of the Company's common stock, par value $ 0.001 per share. This authorization expires on December 31, 2024. +During the year ended December 31, 2023, the Company repurchased 13,180 shares, on a trade date basis, of its common stock at an average price of $ 18.93 per share, excluding commissions, or $ 0.3 million in aggregate. In accordance with the Stock Repurchase Agreement entered into on December 6, 2023, the Company is obligated to purchase 39,540 shares from Tricor Pacific Capital Partners (Fund IV) US, LP, which is one of the Company’s majority stockholders and affiliated with Parallel49 Equity, at an average price of $ 18.55 per share as of December 31, 2023, payment for which is due in the second quarter of 2024. +13. Earnings per Share +Basic and diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested. For the years +69 +Table of Contents +ended December 31, 2023 and 2022, 72,049 and 27,813 potentially dilutive securities, respectively, are excluded from the calculation of diluted earnings per share because their inclusion would be anti-dilutive. +The following table sets forth the computation of basic and diluted earnings per share: +Year Ended December 31, +2023 +2022 +Numerator: +Net income +$ +23,985 +$ +36,540 +Denominator: +Basic weighted-average common shares outstanding +11,426,124 +11,291,202 +Dilutive shares +491,432 +457,903 +Diluted weighted-average common shares outstanding +11,917,556 +11,749,105 +Basic earnings per share +$ +2.10 +$ +3.24 +Diluted earnings per share +$ +2.01 +$ +3.11 +14. Commitments and Contingencies +Commitments +Refer to Note 9 “Financing and Operating Leases” for details on the Company’s future cash payments with respect to financing and operating leases. During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2024 and 2029 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs. The Company’s financing leases expire at various dates between 2024 and 2028 and contain purchase options which the Company may exercise to keep the machinery in use. +Contingencies +In accordance with applicable accounting guidance, the Company establishes an accrued expense when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued expense and record a corresponding amount of expense. The Company expenses professional fees associated with litigation claims and assessments as incurred. +Smart Packaging Solutions SA v. CPI Card Group Inc. +On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief. In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta. The patents all relate to antenna technology. SPS alleges that the Company incorporates the patented technology into its products that use contactless communication. The Company does not produce antennas; it purchases certain antenna-related components from SPS and a number of other suppliers. The Company’s motion to dismiss the complaint is currently pending. Additionally, a third party, Infineon, filed requests for Inter Parties Review (“IPR”) proceedings concerning each of the four patents. As a result, the Delaware District Court stayed the case pending resolution of the requests for review. The United States Patent Office has instituted proceedings with respect to all of the IPR requests; three of the patents have been invalidated in the IPR proceedings and one remains under review. The patent owner, Feinics AmaTech Teoranta, initially appealed the invalidation of the three patents but subsequently elected to dismiss those appeals. Should the remaining patent survive review by the United States Patent Office, the Company intends to defend the suit vigorously. However, no assurance can be given that this matter will be +70 +Table of Contents +resolved favorably. Due to the stage of this matter, the Company is unable to predict the outcome or the possible loss or range of loss, if any, associated with this matter, and no liability has been recorded as of December 31, 2023. +In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations. +Voluntary Disclosure Program +The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unpaid payable balances. During the second quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance. On August 31, 2022, the Company entered into Delaware’s Voluntary Disclosure Agreement Program in order to voluntarily comply with Delaware’s abandoned property law in exchange for certain protections and benefits. The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program. Any potential loss, or range of loss, that may result from these matters is not currently reasonably estimable. +15. Employee Benefit Plan +The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment options. The Company matches 100 % of the participant’s first 3% of deferrals and 50 % matching on each of the 4 th and 5 th percent contributed by the participant. As the Company operates the plan as a safe harbor 401(k) plan, the Company’s match is 100 % vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $ 2.1 million and $ 1.9 million for the years ended December 31, 2023 and 2022, respectively. +16. Stock-Based Compensation +CPI Card Group Inc. Omnibus Incentive Plan +In October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (as amended and supplemented, the “Omnibus Plan”) pursuant to which cash and equity-based incentives may be granted to participating employees, advisors and directors. As of December 31, 2023, there were 2,200,000 shares issuable under the Omnibus Plan, and there were 111,737 shares of Common Stock available for grant under the Omnibus Plan. Options have 7-year terms and are issued with exercise prices equal to the fair market value of the Company’s common stock on the grant date. +71 +Table of Contents +The following is a summary of the activity in outstanding stock options under the Omnibus Plan: +Weighted-Average +Weighted-Average +Remaining +Aggregate +Exercise +Contractual Term +Intrinsic +Options +Price +(in Years) +Value +Outstanding as of December 31, 2022 +780,623 +$ +18.12 +4.65 +$ +15,902 +Granted +139,648 +22.23 +6.26 +Exercised +( 8,295 ) +12.36 +— +Expired +( 1,409 ) +23.72 +— +Forfeited +( 1,129 ) +20.09 +— +Outstanding as of December 31, 2023 +909,438 +$ +18.79 +4.06 +$ +6,482 +Options vested and exercisable as of December 31, 2023 +749,317 +$ +18.26 +3.62 +$ +6,326 +Options vested and expected to vest as of December 31, 2023 +909,438 +$ +18.79 +4.06 +$ +6,482 +The following is a summary of the activity in unvested stock options under the Omnibus Plan: +Weighted-Average +Grant-Date +Number +Fair Value +Unvested as of December 31, 2022 +100,059 +$ +6.02 +Granted +139,648 +11.21 +Vested +( 78,457 ) +15.19 +Forfeited +( 1,129 ) +12.09 +Unvested as of December 31, 2023 +160,121 +$ +10.92 +Unvested stock options of 160,121 as of December 31, 2023 have a seven-year term and are expected to vest ratably over a two-year period on each anniversary of the grant date. The weighted average fair value of options granted during the years ended December 31, 2023 and 2022 was $ 11.21 and $ 8.99 , respectively. The total fair value of options vested during the years ended December 31, 2023 and 2022 was $ 1.2 million and $ 1.0 million, respectively. +The fair value of the stock option awards granted for the years ended December 31, 2023, were determined using a Black-Scholes option-pricing model with the following weighted-average assumptions: +December 31, +2023 +2022 +Expected term in years (1) +2.90 +4.25 +Volatility (2) +73.16 +% +77.58 +% +Risk-free interest rate (3) +4.46 +% +2.86 +% +Dividend yield (4) +— +% +— +% +(1) The Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method,” as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. +(2) Volatility was based on a weighting of the Company’s historical volatility and its peer group, which is comprised of companies with similar industry, size and financial leverage. +(3) The risk-free interest rate was determined by using the United States Treasury rate for the period consistent with the expected option term described above. +(4) The Company’s expected annual dividend yield was zero based on current practice. +72 +Table of Contents +The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2023 under the Omnibus Plan: +Weighted-Average +Remaining +Weighted-Average +Amortization +Grant-Date +Period +Shares +Fair Value +(in Years) +Outstanding as of December 31, 2022 +98,664 +$ +25.23 +Granted +699,281 +21.39 +Vested +( 80,580 ) +27.07 +Forfeited +( 4,005 ) +26.85 +Outstanding as of December 31, 2023 +713,360 +$ +21.25 +2.18 +The restricted stock unit awards contain conditions associated with continued employment or service. Restricted stock units granted in 2023 are expected to vest ratably over a two or three-year period on each anniversary of the grant date. On the vesting date, shares of Common Stock will be issued to the award recipients. The weighted average fair value of restricted stock units granted during the years ended December 31, 2023 and 2022 was $ 21.39 and $ 16.87 , respectively. The total fair value of shares vested during the year ended December 31, 2023 and 2022 was $ 2.2 million and $ 1.3 million, respectively. +Beginning in the first quarter of 2023, the Company’s employees that participate in the Company’s long-term incentive program received a quarterly grant comprising one-fourth of the annual equity-based incentive component of their total compensation. Executive awards are awarded as a mix of restricted stock units and nonqualified stock options, and other employee awards are comprised solely of restricted stock units. The number of shares awarded will be determined based on the grant-date fair value for nonqualified stock options and on a value tied to the monthly average closing price of the Company’s common stock for restricted stock units. +In June 2023, the Company implemented an additional long-term incentive program under the Omnibus Plan, independent of the quarterly awards described above, designed to retain and incentivize executive officers and certain key employees, excluding the Company’s President and CEO, comprised of restricted stock units. The first tranche was awarded in June 2023, the second tranche was awarded in August 2023, and the third and final tranche was awarded in November 2023. The awards vest ratably over a three-year period, subject to continued employment. +In June 2023, the Company also announced an award comprised of 25 % nonqualified stock options and 75 % restricted stock units to its CEO as an incentive to remain employed by the Company through February 28, 2024. The first one -third of the awards was granted in June 2023, the second one -third was granted in August 2023, and the remainder was granted in November 2023. All of these awards will vest ratably over a two-year period irrespective of employment status with expense related to these awards to be recognized by the Company through February 28, 2024. As part of the CEO’s incentive package, the requisite service and exercise periods for his awards granted in 2023 prior to June 2023 were also modified with expense related to the modification being recognized in June 2023 through February 2024. +Compensation expense for the Omnibus Plan for the years ended December 31, 2023 and 2022 was $ 7.5 million and $ 3.5 million, respectively. As of December 31, 2023, the total unrecognized compensation expense related to unvested options and restricted stock units was $ 10.2 million, which the Company expects to recognize over an estimated weighted-average period of approximately 2.0 years. +17. Segment Reporting +The Company has identified reportable segments that represent 10% or more of its net sales, EBITDA (as defined below) or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its CEO, who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures, such as net sales and EBITDA. +73 +Table of Contents +EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, “EBITDA” is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is useful as a supplement to GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and to identify strategies to improve the allocation of resources amongst segments. +As of December 31, 2023, the Company’s reportable segments were as follows: +● Debit and Credit; +● Prepaid Debit; +● Other. +Debit and Credit Segment +The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services, including digital services, for card-issuing financial institutions primarily in the United States. Products produced by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless cards, and eco-focused cards. The Company also sells Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the Payment Card Brands. The Company provides print-on-demand services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on demand basis for customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The Debit and Credit segment facilities and operations are audited for compliance with the standards of the PCI Security Standards Council by multiple Payment Card Brands. +Prepaid Debit Segment +The Prepaid Debit segment primarily provides integrated prepaid card services to Prepaid Debit Card providers primarily in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid Debit segment facilities and operations are audited for compliance with the standards of the PCI Security Standards Council by multiple Payment Card Brands. +Other +The Other segment includes corporate expenses. +74 +Table of Contents +Performance Measures of Reportable Segments +Net sales and EBITDA of the Company’s reportable segments, as well as a reconciliation of total segment EBITDA to income from operations and net income for the year ended December 31, 2023 and 2022, were as follows: +Year Ended December 31, 2023 +Debit and Credit +Prepaid Debit +Other +Intersegment Eliminations +Total +Net sales +$ +361,057 +$ +84,237 +$ +— +$ +( 747 ) +$ +444,547 +Cost of sales +234,281 +55,524 +— +( 747 ) +289,058 +Gross profit +126,776 +28,713 +— +— +155,489 +Operating expenses +31,870 +3,786 +58,243 +— +93,899 +Income (loss) from operations +$ +94,906 +$ +24,927 +$ +( 58,243 ) +$ +— +$ +61,590 +EBITDA by segment: +Income (loss) from operations +$ +94,906 +$ +24,927 +$ +( 58,243 ) +$ +— +$ +61,590 +Depreciation and amortization +9,025 +2,860 +4,046 +— +15,931 +Other income (expenses) +29 +( 1 ) +( 243 ) +— +( 215 ) +EBITDA +$ +103,960 +$ +27,786 +$ +( 54,440 ) +$ +— +$ +77,306 +Year Ended December 31, 2022 +Debit and Credit +Prepaid Debit +Other +Intersegment Eliminations +Total +Net sales +$ +390,559 +$ +86,136 +$ +— +$ +( 950 ) +$ +475,745 +Cost of sales +246,345 +54,583 +— +( 950 ) +299,978 +Gross profit +144,214 +31,553 +— +— +175,767 +Operating expenses +34,169 +5,976 +56,492 +— +96,637 +Income (loss) from operations +$ +110,045 +$ +25,577 +$ +( 56,492 ) +$ +— +$ +79,130 +EBITDA by segment: +Income (loss) from operations +$ +110,045 +$ +25,577 +$ +( 56,492 ) +$ +— +$ +79,130 +Depreciation and amortization +8,440 +2,310 +4,136 +— +14,886 +Other income (expenses) +( 7 ) +( 43 ) +( 317 ) +— +( 367 ) +EBITDA +$ +118,478 +$ +27,844 +$ +( 52,673 ) +$ +— +$ +93,649 +December 31, +2023 +2022 +Net income +$ +23,985 +$ +36,540 +Interest, net +26,913 +29,616 +Income tax expense +10,477 +12,607 +Depreciation and amortization +15,931 +14,886 +EBITDA +$ +77,306 +$ +93,649 +75 +Table of Contents +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2023 and 2022 were as follows: +December 31, +2023 +2022 +Debit and Credit +$ +235,680 +$ +238,610 +Prepaid Debit +38,265 +38,138 +Other +19,738 +19,918 +Total assets +$ +293,683 +$ +296,666 +Capital Expenditures of Reportable Segments +Total capital expenditures of the Company’s reportable segments as of December 31, 2023 and 2022 were as follows: +December 31, +2023 +2022 +Debit and Credit +$ +5,116 +$ +15,283 +Prepaid Debit +963 +2,309 +Other +326 +275 +Total company capital expenditures +$ +6,405 +$ +17,867 +Net Sales by Product and Services +Net sales from products and services sold by the Company for the years ended December 31, 2023 and 2022 were as follows: +December 31, +2023 +2022 +Product net sales (1) +$ +249,354 +$ +281,190 +Services net sales (2) +195,193 +194,555 +Total net sales +$ +444,547 +$ +475,745 +(1) “Products” net sales include the design and production of Financial Payment Cards in contact-EMV, contactless EMV, metal, contactless and magnetic stripe card formats. The Company also generates “Products” revenue from the sale of Card@Once printers and consumables, private label credit cards and retail gift cards. +(2) “Services” net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers and SaaS personalization of instant issuance cards. +76 +Table of Contents +(This page has been left blank intentionally.) +77 +Table of Contents +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +Under the supervision of and with the participation of our management, including our CEO and our CFO, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2023. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, as discussed below, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective as of December 31, 2023. +Management’s Report on Internal Control over Financial Reporting +Management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. +Based on its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. +Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation, the Company’s management concluded that as of December 31, 2023, the Company’s internal control over financial reporting is effective. The Company’s independent registered public accounting firm audited the consolidated financial statements and related notes in the Annual Report on Form 10-K and have issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Their report appears in this Annual Report on Form 10-K. +78 +Table of Contents +Changes in Internal Control over Financial Reporting +There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. +Other Informatio n +During the three months ended December 31, 2023, no directors or officers of the Company adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (each as defined in Item 408(a) of Regulation S-K). +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +PART II I +Item 10. +Directors, Executiv e Officers and Corporate Governance +The information required by this Item will be included in our definitive Proxy Statement for the 2024 Annual Meeting of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended December 31, 2023 and is incorporated herein by reference. +Item 11. +Executive Compensatio n +Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy Statement. +Item 12. +Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement. +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. +Item 14. +Principal Accountant Fees and Service s +Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement. +79 +Table of Contents +PART IV +Item 15. +Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Income +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +Exhibit Description +3.1 +Fourth Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2022). +3.1.1 +Amendment to Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed on May 31, 2023). +3.2 +Third Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2022). +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +4.2 +Description of Registrant’s Securities (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2022). +4.3 +Indenture, dated as of March 15, 2021, by and among CPI CG Inc., as issuer, CPI Card Group Inc., as a guarantor, the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee and notes collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed March 16, 2021) . +4.4 +Form of 8.625% Senior Secured Notes due 2026 (included as Exhibit A to the Indenture included herewith as Exhibit 4.3) . +10.1 +Guaranty and Security Agreement, dated as of March 15, 2021, among CPI Card Group Inc. and certain of its subsidiaries from time to time party thereto and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed March 16, 2021) . +10.2 +Amendment No. 2 to ABL Credit Agreement, among CPI Card Group Inc., CPI CG Inc., the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and collateral agent (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2022) . +10.3 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +80 +Table of Contents +10.4 +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.5 +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6*,** +CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective January 30, 2024. +10.7** +Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017). +10.8** +Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017) . +10.9** +Form of Executive Restricted Stock Unit Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.10** +Form of Executive Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.11** +Form of Executive Restricted Stock Unit Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021). +10.12** +Form of Director Restricted Stock Unit Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.13** +Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.14** +Restricted Stock Unit Agreement, dated October 2, 2020, between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.15** +Form of 2020 Executive Short-Term Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.16** +Form of 2022 Executive Short-Term Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 5, 2022). +10.17** +Form of 2022 Employee Short-Term Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 5, 2022). +10.18** +CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017). +10.19** +Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.20** +Offer Letter, dated May 3, 2023 by and between CPI Card Group Inc. and Jeffrey Hochstadt (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 9, 2023). +10.21*,** +Employment Agreement, dated January 25, 2024 by and between CPI Card Group Inc. and John Lowe. +81 +Table of Contents +10.22** +2020 Executive Retention Agreement, dated September 11, 2019 between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.23** +Form of 2020 Executive Retention Agreement, dated September 11, 2019 for certain Executive Officers (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.24** +Form of Executive Retention Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.25** +2021 Executive Retention Agreement, dated October 2, 2020, between CPI Card Group. Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.26** +Employment Agreement, dated December 13, 2022 by and between CPI Card Group Inc. and Lane Dubin (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2023). +10.27** +Form of Nonqualified Stock Option Agreement by and between CPI Card Group Inc. and Lane Dubin (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 9, 2023). +10.28** +Form of Restricted Stock Unit Agreement by and between CPI Card Group Inc. and Lane Dubin (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 9, 2023). +10.29** +Form of Restricted Stock Unit Agreement by and between CPI Card Group Inc. and Lane Dubin (incorporated by reference to the Company’s Current Report on Form 8-K filed June 5, 2023). +10.30** +Letter Agreement between Scott Scheirman and the Company dated June 2, 2023 (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 5, 2023). +10.31 +Stock Repurchase Agreement, dated as of December 6, 2023, by and between Tricor Pacific Capital Partners (Fund IV) US, LP and CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed on December 7, 2023). +10.32*,** +Form of Restricted Stock Unit Agreement by and between CPI Card Group Inc. and John Lowe. +10.33*,** +Form of Performance Stock Unit Agreement by and between CPI Card Group Inc. and John Lowe. +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +97.1* +Amended and Restated Clawback Policy of CPI Card Group Inc. +101.INS* +XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH* +Inline XBRL Taxonomy Extension Schema Document. +101.CAL* +Inline XBRL Taxonomy Extension Calculation Linkbase Document. +82 +Table of Contents +101.DEF* +Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +Inline XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +Inline XBRL Taxonomy Extension Presentation Linkbase Document. +104* +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). +* +Filed or furnished herewith. +** Management contract or compensatory plan or arrangement. +Item 16. Form 10-K Summary +None. +83 +Table of Contents +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ Jeffrey Hochstadt +Jeffrey Hochstadt +Chief Financial Officer +March 7, 2024 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint John Lowe and Jeffrey Hochstadt and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ John Lowe +President, Chief Executive +March 7, 2024 +John Lowe +Officer and Director +(Principal Executive Officer) +/s/ Jeffrey Hochstadt +Chief Financial Officer +March 7, 2024 +Jeffrey Hochstadt +(Principal Financial Officer) +/s/ Donna Abbey Carmignani +Chief Accounting Officer +March 7, 2024 +Donna Abbey Carmignani +(Principal Accounting Officer) +/s/ Hugh Sanford Riley +Chairman of the Board +March 7, 2024 +Hugh Sanford Riley +/s/ Thomas Furey +Director +March 7, 2024 +Thomas Furey +/s/ Ravi Mallela +Director +March 7, 2024 +Ravi Mallela +/s/ Nicholas Peters +Director +March 7, 2024 +Nicholas Peters +/s/ Marc Sheinbaum +Director +March 7, 2024 +Marc Sheinbaum +/s/ Valerie Soranno Keating +Director +March 7, 2024 +Valerie Soranno Keating +84 \ No newline at end of file diff --git a/raw/filings/0001641614/2023/0001558370-24-002670/filing_metadata.csv b/raw/filings/0001641614/2023/0001558370-24-002670/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..2a23e702dcebf001beac644998d51c0642b424c4 --- /dev/null +++ b/raw/filings/0001641614/2023/0001558370-24-002670/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001641614,PMTS,CPI Card Group Inc.,10-K,2024-03-07,2023-12-31,2024-03-07T12:30:48.000Z,0001558370-24-002670,pmts-20231231x10k.htm,10-K,11872384,1,1,https://www.sec.gov/Archives/edgar/data/1641614/000155837024002670/pmts-20231231x10k.htm,https://www.sec.gov/Archives/edgar/data/1641614/000155837024002670/,2023,2023,1 diff --git a/raw/filings/0001641614/2023/0001558370-24-002670/item1.txt b/raw/filings/0001641614/2023/0001558370-24-002670/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..0aaed2e1dfa274495b4b07f51e9fefeb7fc119eb --- /dev/null +++ b/raw/filings/0001641614/2023/0001558370-24-002670/item1.txt @@ -0,0 +1,117 @@ +Item 1. +Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payments technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards (as defined below) issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience. +We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships, whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“fintechs”), as well as independent community banks, credit unions and Group Service Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services. +We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, innovation, and supply-chain management, we believe we have strong positions in the following markets: +● the U.S. prepaid debit market, including the largest U.S. Prepaid Debit Card program managers; +● the U.S. small-to mid-sized financial institutions market, which includes independent community banks and credit unions; +● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and +● the U.S. fintech market, where we produce and personalize Financial Payment Cards for financial technology companies. +Our business consists of the following reportable segments: +● Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services, including digital services, to card-issuing financial institutions primarily in the United States; +● Prepaid Debit, which primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States; and +● “Other,” which includes corporate expenses. +4 +Table of Contents +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 17 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +● Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality payments solutions and customer service with a market-competitive business model. We believe these efforts have resulted in CPI gaining estimated overall market share since 2017. We have long-standing, trust-based relationships with customers and have collaborated with our top 10 customers for more than ten years, on average. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. Our Card@Once ® instant issuance solution provides the necessary on-site equipment and supplies, proprietary software-as-a-service (SaaS) capability, customer support and secure data exchange to provide personalized cards on-site and on-demand at bank and credit union branches across the United States. Data is exchanged through either a secure web interface or through integrations of our proprietary software with our customers’ card issuance systems. Integrations provide a more seamless experience for our customers and we believe they foster longer lasting and closer customer relationships. +● Comprehensive End-to-End Card Solutions. The foundation of our strong market position with our small- to mid-sized issuer customers and fintechs is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card design and production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solutions allow our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +● Network of High-Security Facilities. Our high-security facilities are each audited for compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card Brands, forming a network of compliant production facilities in the United States. The Payment Card Brands attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long and complex, and our facilities and systems must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +● Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV ® ”) is a global technical standard, maintained by EMVCo LLC for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We also produce dual-interface EMV cards that have both contact and contactless functionality. +5 +Table of Contents +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. CPI’s Second Wave ® payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”) and Earthwise ® cards made with upcycled plastic address customer demands for more eco-focused card options. We also sell CPI Metals ® , a premium encased metal card. Our offerings also include Card@Once, our proprietary and patented instant card issuance system and SaaS solution. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Solutions market, gives us a competitive advantage. +● Experienced Leadership Team. We have an experienced leadership team that has energized the organization to focus on customers, accountability, innovation and delivering results. +EMV ® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMV Co, LLC . +Our Strategy +We are a payments technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality payments solutions, customer service and continuous innovation with a market-competitive business model. We also aim to expand our addressable market over the long-term by adding adjacent product and service offerings, including more digital solutions, for our extensive customer base of thousands of financial institutions. +We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our customers elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality payments solutions and customer service, continuous innovation and a market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +Market-Leading Quality Payments Solutions and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading solutions provider. With a focus on market-leading quality payments solutions and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their businesses. We listen to the voices of our customers and focus on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our stockholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed customers’ expectations. Continuous innovation aims to win new business and help our customers differentiate themselves with distinctive products and solutions, build their brands and achieve top-of-wallet status. +6 +Table of Contents +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We aim to streamline our operations, which enables us to allocate resources focused on providing our customers with unmatched solutions, innovation and exceptional service. We have also developed standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We invest in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance, profitability and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact and Contactless Dual-Interface) +We produce plastic EMV cards, including our eco-focused solutions that we describe further below, and encased metal contact EMV cards. These EMV cards feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology, and we generally refer to all cards we produce with an RFID antenna as ‘contactless’ cards. +Eco-Focused Cards +We believe we are a leading provider of eco-focused card solutions in the U.S., having sold more than 100 million eco-focused contactless payment cards since launch in 2019. Our eco-focused solutions include our Second Wave cards that feature a core made with ROBP and our Earthwise cards made with upcycled plastic. Dependent upon design and card construction, eco-focused cards incorporate varying types and amounts of upcycled plastic content, including ROBP and recycled PVC. Cards in the eco-focused portfolio have been approved by two of the major Payment Card Brands. These solutions aim to satisfy increasing consumer demand for more eco-focused products and help support our and our customers’ environmental, social and governance (“ESG”) objectives. +Non-EMV Financial Payment Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards that utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, including Prepaid Debit Cards. In 2020 we began producing non-EMV cards for the purpose of government disbursement in the U.S., and have produced non-EMV transit cards and health savings account cards. We also produce retail gift cards that are not issued on the networks of the Payment Card Brands. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact, contactless and dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven with full color printing and edge-to-edge coverage, and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss or print with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with an inventory of their card stock and fulfillment materials. In addition, we provide EMV data preparation services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We also provide consultation and card design services to further assist customers in card customization. +Print-On-Demand Solution +Through our print-on-demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing inventory. Our service offering includes online ordering of a customized payment card through a program manager, with +7 +Table of Contents +direct fulfillment to a consumer. We believe our print-on-demand solution further differentiates us with our financial institution and Prepaid Debit Card program manager customers and enables us to access business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, government disbursement, benefits and insurance. +Instant Card Issuance Systems and Services +In addition to centralized personalization services performed at our facilities, our customers may also utilize personalization services through Card@Once, our proprietary and patented instant card issuance system and SaaS-based solution, which provides our customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to encode a magnetic stripe card, a contact EMV card or a contactless dual-interface EMV card, and personalize the card on a desktop printer solution provided by CPI. These processes are audited for PCI data security standards compliance annually. Our instant issuance system generates both initial sales revenue for the printer solution and recurring revenue from card personalization and sales of cards and consumables. We offer multiple Card@Once solutions including our premium Spectrum solution that enables issuers to produce a high-resolution payment card with over-the-edge printing capability. +Digital Solutions +While not currently significant to our financial results, we provide digital solutions, including push provisioning which allows our customers to facilitate the provisioning of payment credentials to a cardholder’s digital wallet, digital cards which allow our customers to utilize prepaid cards with online merchants, and online front-end ordering and card customization allowing customers to order one-time use physical rewards cards. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Suppliers +While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, one objective of our procurement strategy is to not depend on any single supplier. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the EMV/contactless microchips and antennas. Our main suppliers of EMV/contactless microchips and antennas include four leading international producers with locations in Germany, Thailand, South Korea and Singapore, some of which source materials from Taiwan. For the year ended December 31, 2023 approximately 96% of our purchased microchips and antennas came from these four main suppliers, and approximately 72% came from one supplier, including most of our contactless chips. The other key components for our products are substrates and inlays. Additionally, o ur Second Wave payment cards feature a core made with ROBP, which we either have sourced or currently source from suppliers in Haiti and Thailand. +We monitor supply-chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation, resiliency and price. In 2022, we entered into a capacity reservation agreement with one of our chip suppliers to reserve production supply capacity. Under the agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve capacity to produce a set quantity of chips from 2023 through 2025, subject to certain conditions, and the Company has committed to purchase those chips. The total value of our commitment is $194.9 million over the term of the agreement. As of December 31, 2023, the remaining commitment was $125.3 million. +8 +Table of Contents +Customers +We categorize our customers as follows: large issuers, small- to mid-sized issuers, fintechs, prepaid debit issuers and program managers and Group Service Providers. We consider large issuers to be the top 10 card issuers in the United States based on an average of cards issued during the past three years. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the largest Prepaid Debit Card program managers in the United States. +The Company had one customer that accounted for 10% or more of its net sales in 2023. Net sales from this customer were approximately 18% of total net sales for the year ended December 31, 2023. We have been serving this customer for more than 10 years. Nearly two-thirds of our net sales for the year ended December 31, 2023 were from our top ten direct customers, which include certain Group Service Providers, and we have been serving these top ten direct customers for an average of more than 10 years. In addition, through our direct and indirect customer relationships, a majority of our annual net sales in our Debit and Credit segment are derived from small- to mid-sized issuers and fintechs. Individually, many of these customers, including independent community banks and credit unions, represent minor amounts of our annual net sales. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangement that defines the quantities of products to be delivered or services rendered and other terms specific to the order as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a network of high-security facilities that we leverage to fulfill customer orders, with an array of products and services available to our customers. We have designed our facilities and operating processes to target providing exceptional service to all customers, with capabilities to: +● execute high - volume production runs; +● execute lower - volume production runs of smaller orders; +● execute on-demand solutions; and +● meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, through our expertise and capabilities specifically designed for the prepaid retail market. +As of December 31, 2023, we operated facilities comprising approximately 402,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card printer provisioning and fulfillment, card packaging and fulfillment services. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we seek to embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources and create innovative and responsible products. Our key areas of focus in this area include: incorporating environmental sustainability practices as and where feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +9 +Table of Contents +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility, and meaningful, innovative products at value-driven pricing. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives, customer relationships and partners that provide a wide geographic reach across the United States to sell and market our solutions. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy is focused on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customers’ individual needs. We use an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. We also strive to meet customer demand for new or enhanced products by innovating through research and development activities. We believe these efforts drive customer retention and satisfaction and attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products, features and capabilities, and price. +Our products and services compete with other card solutions providers. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. We believe we are in competition with ABCorp, Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA (formerly known as Oberthur Technologies S.A.), Perfect Plastic Printing, Thales (formerly known as Gemalto NV), Travel Tags, and WestRock (Multi Packaging Solutions), among others. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2023, we had 70 U.S. and foreign trademark registrations and applications, 42 existing U.S. patents, 51 existing foreign patents, as well as 45 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 12 years, and our trademarks will be due for renewal for additional ten-year periods on an ongoing basis. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a Group Service Provider. Such information can include names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the +10 +Table of Contents +Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy statutes and regulations, certain of the PCI Security Standards Council’s requirements and the Health Insurance Portability and Accountability Act (“HIPAA”), each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws, and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council’s requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in achieving and maintaining compliance with the requirements from the Payment Card Brands, and have invested, and will continue to invest, significant capital to achieve and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has +11 +Table of Contents +defined to include service providers like us as well as CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Human Capital +Our leadership team has significant experience in the payments industry, and many of our employees possess career-long expertise and knowledge that is unique to the Financial Payment Card industry. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of the Company’s core values. Health and safety of our employees has remained paramount and the Company has adapted its health and safety procedures and protocols as necessary to foster a safe working environment. We maintain a combination of on-site and remote employees in our workforce. +We are committed to a diverse and inclusive workplace, in which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior, and employees are required to follow these standards and participate in related training. We encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. We also focus on a variety of community initiatives to enhance the lives of people in the communities where we operate through volunteerism, charitable giving and economic support. +As of December 31, 2023, approximately 1,448 people were employed by CPI, of which nearly half are women and approximately 60% identify as being within a minority category. Approximately 74% of our full-time employees are production and service facility staff. In 2023, we completed the process of transitioning temporary worker positions in our Prepaid Debit Card locations, where historically we experienced more seasonality, to permanent employee positions, in order to better manage our workforce and operations, and significantly reduced our reliance on temporary workers. None of our employees are represented by labor unions. We believe that our relations with our employees are positive. +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127, telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of the Company's website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC by the Company. +CPI Card Group Inc. qualifies as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act and has elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. Beginning with the year ended December 31, 2021, the Company is classified as an accelerated filer with respect to SEC regulations and filing requirements. +12 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2023/0001558370-24-002670/item13.txt b/raw/filings/0001641614/2023/0001558370-24-002670/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..60bc230d5aa0d5195d0fdb4eb55264a25997fb56 --- /dev/null +++ b/raw/filings/0001641614/2023/0001558370-24-002670/item13.txt @@ -0,0 +1,3 @@ +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001641614/2023/0001558370-24-002670/item9a.txt b/raw/filings/0001641614/2023/0001558370-24-002670/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..73322c503d95a818c16f20034ec66cfe9db44193 --- /dev/null +++ b/raw/filings/0001641614/2023/0001558370-24-002670/item9a.txt @@ -0,0 +1,12 @@ +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +Under the supervision of and with the participation of our management, including our CEO and our CFO, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2023. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, as discussed below, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective as of December 31, 2023. +Management’s Report on Internal Control over Financial Reporting +Management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. +Based on its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. +Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation, the Company’s management concluded that as of December 31, 2023, the Company’s internal control over financial reporting is effective. The Company’s independent registered public accounting firm audited the consolidated financial statements and related notes in the Annual Report on Form 10-K and have issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Their report appears in this Annual Report on Form 10-K. +78 +Table of Contents +Changes in Internal Control over Financial Reporting +There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001641614/2023/0001558370-24-002670/rp_note.txt b/raw/filings/0001641614/2023/0001558370-24-002670/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001641614/2023/0001558370-24-002670/rpt_disclosure.txt b/raw/filings/0001641614/2023/0001558370-24-002670/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b67b673b7ef3b2b6824056b816f3e2a03ada22df --- /dev/null +++ b/raw/filings/0001641614/2023/0001558370-24-002670/rpt_disclosure.txt @@ -0,0 +1,15 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2022 to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them had or will have a direct or indirect material interest. +Registration Rights Agreement +In connection with our initial public offering, we entered into a registration rights agreement with the Tricor Funds (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Tricor Funds are entitled to request that we register shares of our Common Stock on a long-form or short-form registration statement on one or more occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. The Tricor Funds also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay the Tricor Funds’ expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our Common Stock held by the Tricor Funds as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the Common Stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization or certain other corporate transactions, and (iii) any shares of our Common Stock owned or acquired following the closing of our initial public offering by the Tricor Funds (collectively, “Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. In September 2021, we filed a registration statement on Form S-3 with respect to the shares of Common Stock held by the Tricor Funds in compliance with our obligations under the Registration Rights Agreement. +Director Nomination Agreement +In connection with our initial public offering, we entered into the Director Nomination Agreement with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our Board for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our Common Stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our Board as the number of shares of Common Stock beneficially owned by the Tricor Funds bears to the total number of shares of Common Stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds shall be entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. In addition, for so long as the Tricor Funds collectively beneficially own 10% or more of the total number of shares of our Common Stock then outstanding, the Tricor Funds shall also have the right to have their designees participate on committees of our Board, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding Common Stock. Nicholas Peters and Bradley Seaman were each designated by the Tricor Funds as nominees to the Board in 2016. Sandy Riley was designated by the Tricor Funds as a nominee in 2023. Lisa Oleson has been designated by the Tricor Funds to stand as a nominee for the first time at the Annual Meeting. +Share Repurchase Agreement +In November 2023, the Company approved a share repurchase program (the “Share Repurchase Program”) to purchase up to $20 million of its Common Stock in open market and privately negotiated transactions. On December 6, 2023, the Company entered into a Stock Repurchase Agreement (the “Initial Agreement”) with Tricor Pacific Capital Partners (Fund IV) US, LP (the “Fund”), pursuant to which the Company has agreed to purchase three times the number of shares of the Company’s Common Stock acquired by the Company in the open market from time to time from non-Fund holders during the period commencing on December 6, 2023 and ending on March 31, 2024, up to a maximum of 325,000 shares of Common Stock. The Initial Agreement provides that such open market purchases will be made pursuant to the Share Purchase Program. Additionally, the Initial Agreement provides that the repurchase price for any shares acquired by the Company from the Fund will be 98% of the volume weighted average purchase price paid by the Company for all other shares acquired by the Company in the open market pursuant to the Share Purchase Program during such period. The repurchase from the Fund took place on April 5, 2024 and will be part of the Share Purchase Program authorization levels. The Initial Agreement was approved by the Audit Committee. Additional information can be found in our Current Report on Form 8-K, dated December 6, 2023, which was filed with the SEC. +35 +Table of Contents +On March 14, 2024, the Company entered into a Stock Repurchase Agreement dated March 11, 2024 (the “Second Agreement”) with the Fund, pursuant to which the Company has agreed to purchase three times the number of shares of the Company’s Common Stock acquired by the Company in the open market from time to time from non-Fund holders during the period commencing on April 1, 2024 and ending on June 30, 2024, up to a maximum of 325,000 shares of Common Stock. The Second Agreement provides that such open market purchases will be made pursuant to the Share Repurchase Program. Additionally, the Second Agreement provides that the repurchase price for any shares acquired by the Company from the Fund will be 98% of the volume weighted average purchase price paid by the Company for all other shares acquired by the Company in the open market pursuant to the Share Purchase Program during such period. It is anticipated that the repurchase from the Fund will take place in early July 2024 and will be part of the Share Purchase Program authorization levels. In the event that the Company enters into any other privately negotiated repurchase transaction with another party prior to June 30, 2024, the Second Agreement also gives the Fund the option to sell to the Company a number of shares equal to three times the number of shares acquired by the Company in such privately negotiated repurchase transaction, at the same price. The Second Agreement was approved by the Audit Committee. Additional information can be found in our Current Report on Form 8-K, dated March 14, 2024, which was filed with the SEC. +Policies and Procedures for Related Party Transactions +Our Board has adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving us in which the aggregate amount involved in any calendar year will or may be expected to exceed $100,000 and in which a related person has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). For purposes of this policy, a related person is defined as an executive officer, director, nominee for director, or a greater than 5% beneficial owner of our Common Stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider, among other factors, the related party’s relationship to the Company and interest in the transaction, the material facts of the transaction, the benefits to the Company of the transaction, the availability of other sources of comparable products or services (if applicable), whether the transaction is on terms that are comparable to the terms generally available to an unrelated third party, whether the transaction has the potential to impair director independence and whether the transaction constitutes a conflict of interest. +36 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2024/0001558370-25-002098/filing.txt b/raw/filings/0001641614/2024/0001558370-25-002098/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..2193986d7faefdad55311f468282ead74cd9dd40 --- /dev/null +++ b/raw/filings/0001641614/2024/0001558370-25-002098/filing.txt @@ -0,0 +1,2976 @@ +CPI Card Group Inc._December 31, 2024 +0 0 http://www.cpicardgroup.com/20241231#PropertyPlantAndEquipmentAndOperatingLeaseRightOfUseAssetsNet http://fasb.org/us-gaap/2024#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2024#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2024#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2024#OtherLiabilitiesNoncurrent 11240507 11446155 P10Y P10Y http://www.cpicardgroup.com/20241231#PropertyPlantAndEquipmentAndOperatingLeaseRightOfUseAssetsNet http://fasb.org/us-gaap/2024#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2024#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2024#AccruedLiabilitiesCurrent http://fasb.org/us-gaap/2024#OtherLiabilitiesNoncurrent http://fasb.org/us-gaap/2024#SecuredOvernightFinancingRateSofrMember P1Y 0.2500 0.3300 0.3300 0.3300 P90D P1Y3M19D 0001641614 2024 FY false 0001641614 pmts:TricorPacificCapitalPartnersFundIvMember 2024-01-01 2024-12-31 0001641614 us-gaap:CommonStockMember 2024-01-01 2024-12-31 0001641614 us-gaap:CommonStockMember 2023-01-01 2023-12-31 0001641614 us-gaap:RetainedEarningsMember 2024-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2024-12-31 0001641614 us-gaap:RetainedEarningsMember 2023-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2023-12-31 0001641614 us-gaap:RetainedEarningsMember 2022-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2022-12-31 0001641614 srt:MinimumMember srt:ChiefExecutiveOfficerMember us-gaap:PerformanceSharesMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2024-01-31 0001641614 srt:MinimumMember srt:ChiefExecutiveOfficerMember us-gaap:PerformanceSharesMember us-gaap:ShareBasedCompensationAwardTrancheThreeMember 2024-01-31 0001641614 srt:MinimumMember srt:ChiefExecutiveOfficerMember us-gaap:PerformanceSharesMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2024-01-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember pmts:ShareBasedCompensationAwardTrancheFiveMember 2024-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2024-01-30 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2024-01-30 2024-01-30 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-01-01 2023-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2024-01-01 2024-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2024-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2023-01-01 2023-12-31 0001641614 us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2024-01-01 2024-12-31 0001641614 srt:ChiefExecutiveOfficerMember us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-12-31 0001641614 srt:MinimumMember us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2024-01-01 2024-12-31 0001641614 srt:MaximumMember us-gaap:RestrictedStockUnitsRSUMember pmts:CPICardGroupInc.OmnibusPlanMember 2024-01-01 2024-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember pmts:ShareBasedCompensationAwardTrancheFiveMember 2024-01-01 2024-12-31 0001641614 pmts:June2023AwardTwoMember 2024-01-01 2024-12-31 0001641614 srt:ChiefExecutiveOfficerMember us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-01-31 0001641614 srt:MinimumMember 2024-12-31 0001641614 us-gaap:RetainedEarningsMember 2024-01-01 2024-12-31 0001641614 us-gaap:RetainedEarningsMember 2023-01-01 2023-12-31 0001641614 us-gaap:StandbyLettersOfCreditMember 2024-07-11 0001641614 pmts:AblRevolvingCreditFacility2026Member 2024-07-11 0001641614 srt:MaximumMember 2024-12-31 0001641614 pmts:AblRevolvingCreditFacility2026Member 2024-01-01 2024-12-31 0001641614 us-gaap:TrademarksMember 2024-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2024-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2024-12-31 0001641614 us-gaap:TrademarksMember 2023-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2023-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2023-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2024-01-01 2024-12-31 0001641614 pmts:CPICardGroupInc.OmnibusPlanMember 2024-12-31 0001641614 pmts:DefinedContributionPlanEmployerMatchOfIncrementalEmployeeDeferral2Member 2024-01-01 2024-12-31 0001641614 pmts:DefinedContributionPlanEmployerMatchOfIncrementalEmployeeDeferral1Member 2024-01-01 2024-12-31 0001641614 pmts:SeniorNotesDue2026Member 2024-07-11 2024-07-11 0001641614 pmts:SeniorNotesDue2029Member us-gaap:FairValueInputsLevel2Member 2024-12-31 0001641614 pmts:SeniorNotesDue2029Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2024-12-31 0001641614 pmts:SeniorNotesDue2026Member us-gaap:FairValueInputsLevel2Member 2023-12-31 0001641614 pmts:SeniorNotesDue2026Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2023-12-31 0001641614 pmts:SeniorNotesDue2029Member 2024-12-31 0001641614 pmts:SeniorNotesDue2026Member 2024-07-11 0001641614 pmts:SeniorNotesDue2026Member 2023-12-31 0001641614 srt:MinimumMember pmts:AblRevolvingCreditFacility2029Member 2024-07-11 2024-07-11 0001641614 srt:MaximumMember pmts:AblRevolvingCreditFacility2029Member 2024-07-11 2024-07-11 0001641614 us-gaap:IntersegmentEliminationMember 2024-01-01 2024-12-31 0001641614 us-gaap:IntersegmentEliminationMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USPrepaidDebitMember 2024-01-01 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USDebitAndCreditMember 2024-01-01 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ProductsMember pmts:USDebitAndCreditMember 2024-01-01 2024-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ServicesMember 2024-01-01 2024-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ProductsMember 2024-01-01 2024-12-31 0001641614 pmts:ServicesMember 2024-01-01 2024-12-31 0001641614 pmts:ProductsMember 2024-01-01 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USPrepaidDebitMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ServicesMember pmts:USDebitAndCreditMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:ProductsMember pmts:USDebitAndCreditMember 2023-01-01 2023-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ServicesMember 2023-01-01 2023-12-31 0001641614 us-gaap:IntersegmentEliminationMember pmts:ProductsMember 2023-01-01 2023-12-31 0001641614 pmts:ServicesMember 2023-01-01 2023-12-31 0001641614 pmts:ProductsMember 2023-01-01 2023-12-31 0001641614 us-gaap:CommonStockMember 2023-12-31 0001641614 us-gaap:CommonStockMember 2022-12-31 0001641614 2022-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember 2023-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2024-01-01 2024-12-31 0001641614 us-gaap:AdditionalPaidInCapitalMember 2023-01-01 2023-12-31 0001641614 us-gaap:TrademarksMember 2024-01-01 2024-12-31 0001641614 us-gaap:CustomerRelationshipsMember 2024-01-01 2024-12-31 0001641614 pmts:TechnologyAndSoftwareMember 2024-01-01 2024-12-31 0001641614 2023-11-02 0001641614 us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-12-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember 2024-01-01 2024-12-31 0001641614 pmts:June2023AwardOneMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2024-01-01 2024-12-31 0001641614 pmts:June2023AwardOneMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2024-01-01 2024-12-31 0001641614 srt:ChiefExecutiveOfficerMember us-gaap:PerformanceSharesMember 2024-01-01 2024-01-31 0001641614 pmts:StockOptionsEmployeesDirectorsConsultantsMember pmts:CPICardGroupInc.OmnibusPlanMember 2024-12-31 0001641614 us-gaap:OverAllotmentOptionMember 2024-10-02 0001641614 us-gaap:MachineryAndEquipmentMember 2024-12-31 0001641614 us-gaap:LeaseholdImprovementsMember 2024-12-31 0001641614 us-gaap:FurnitureAndFixturesMember 2024-12-31 0001641614 us-gaap:ConstructionInProgressMember 2024-12-31 0001641614 pmts:OperatingRightOfUseAssetsMember 2024-12-31 0001641614 pmts:MachineryAndEquipmentUnderFinancialLeasesMember 2024-12-31 0001641614 us-gaap:MachineryAndEquipmentMember 2023-12-31 0001641614 us-gaap:LeaseholdImprovementsMember 2023-12-31 0001641614 us-gaap:FurnitureAndFixturesMember 2023-12-31 0001641614 us-gaap:ConstructionInProgressMember 2023-12-31 0001641614 pmts:OperatingRightOfUseAssetsMember 2023-12-31 0001641614 pmts:MachineryAndEquipmentUnderFinancialLeasesMember 2023-12-31 0001641614 pmts:AblRevolvingCreditFacility2029Member 2024-07-11 0001641614 pmts:AblRevolvingCreditFacility2029Member 2024-01-01 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2024-01-01 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2023-01-01 2023-12-31 0001641614 us-gaap:CommonStockMember 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2024-01-01 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2024-01-01 2024-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USPrepaidDebitMember 2023-01-01 2023-12-31 0001641614 us-gaap:OperatingSegmentsMember pmts:USDebitAndCreditMember 2023-01-01 2023-12-31 0001641614 pmts:SeniorNotesDue2029Member 2024-07-11 2024-07-11 0001641614 pmts:SeniorNotesDue2029Member 2024-07-11 0001641614 pmts:AblRevolvingCreditFacility2029Member 2024-07-11 2024-07-11 0001641614 2023-01-01 2023-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:ThreeSuppliersMember 2024-01-01 2024-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:OneSupplierMember 2024-01-01 2024-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:OneSupplierMember 2023-01-01 2023-12-31 0001641614 us-gaap:CostOfGoodsTotalMember us-gaap:SupplierConcentrationRiskMember pmts:FourSuppliersMember 2023-01-01 2023-12-31 0001641614 pmts:MajorCustomerNumberOneMember us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2024-01-01 2024-12-31 0001641614 pmts:MajorCustomerNumberOneMember us-gaap:RevenueFromContractWithCustomerMember us-gaap:CustomerConcentrationRiskMember 2023-01-01 2023-12-31 0001641614 us-gaap:OverAllotmentOptionMember 2024-09-30 0001641614 us-gaap:AllOtherSegmentsMember 2024-12-31 0001641614 pmts:USPrepaidDebitMember 2024-12-31 0001641614 pmts:USDebitAndCreditMember 2024-12-31 0001641614 us-gaap:AllOtherSegmentsMember 2023-12-31 0001641614 pmts:USPrepaidDebitMember 2023-12-31 0001641614 pmts:USDebitAndCreditMember 2023-12-31 0001641614 pmts:AblRevolvingCreditFacility2029Member 2024-12-31 0001641614 pmts:FinanceLeasedAssetsMember 2024-12-31 0001641614 pmts:FinanceLeasedAssetsMember 2023-12-31 0001641614 2023-12-31 0001641614 2024-12-31 0001641614 2024-10-01 2024-12-31 0001641614 2024-06-30 0001641614 2025-02-27 0001641614 2024-01-01 2024-12-31 xbrli:shares iso4217:USD pmts:customer pmts:item xbrli:pure pmts:D pmts:Vote xbrli:shares iso4217:USD xbrli:shares +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☑ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31 , 2024 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10368 W. Centennial Road +Littleton , CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code ( 720 ) 681-6304 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value +PMTS +Nasdaq Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐     No ☑ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐     No ☑ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑     No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑     No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☐ +Accelerated filer ☑ +Non-accelerated filer ☐ +Smaller reporting company ☑ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑   +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No ☑ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive o ffi cers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +The aggregate market value of the registrant’s common stock held by non-affiliates was $ 129.2 million on June 30, 2024 computed based on the closing price of the registrant’s common stock of $27.25 as reported on the Nasdaq Global Market on that date. +As of February 27, 2025, the number of shares outstanding of the registrant’s common stock was 11,240,507 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2025 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +4 +Item 1A +Risk Factors +13 +Item 1B +Unresolved Staff Comments +33 +Item 1C +C ybersecurity +33 +Item 2 +Properties +35 +Item 3 +Legal Proceedings +36 +Item 4 +Mine Safety Disclosures +36 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +36 +Item 6 +[Reserved] +37 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +37 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +47 +Item 8 +Financial Statements and Supplementary Data +47 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +74 +Item 9A +Controls and Procedures +74 +Item 9B +Other Information +75 +Item 9C +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +75 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +75 +Item 11 +Executive Compensation +75 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +75 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +75 +Item 14 +Principal Accountant Fees and Services +75 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +76 +Item 16 +Form 10-K Summary +78 +Signatures +79 +1 +Table of Contents +Cautionary Statement Regarding Forward-Looking Information +Certain statements and information in this Annual Report on Form 10-K (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “affirm,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “attempt,” “aim,” “target,” “objective,” “guides,” “seek,” “focus,” “provides guidance,” “provides outlook” or other similar expressions are intended to identify forward-looking statements, which are not historical in nature. These forward-looking statements, including statements about our strategic initiatives and market opportunities, are based on our current expectations and beliefs concerning future developments and their potential effect on us and other information currently available. Such forward-looking statements, because they relate to future events, are by their very nature subject to many important risks and uncertainties that could cause actual results or other events to differ materially from those contemplated . +These risks and uncertainties include, but are not limited to: (i) risks relating to our business and industry, such as a deterioration in general economic conditions, including due to inflationary conditions, resulting in reduced consumer confidence and business spending, and a decline in consumer credit worthiness impacting demand for our products; the unpredictability of our operating results, including an inability to anticipate changes in customer inventory management practices and its impact on our business; our failure to retain our existing key customers or identify and attract new customers; the highly competitive, saturated and consolidated nature of our marketplace; our inability to develop, introduce and commercialize new products and services, including due to our inability to undertake research and development activities; new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services in a timely manner or at all; system security risks, data protection breaches and cyber-attacks; the usage, or lack thereof, of artificial intelligence technologies; disruptions, delays or other failures in our supply chain, including as a result of inflationary pressures, single-source suppliers, failure or inability of suppliers to comply with our code of conduct or contractual requirements, trade restrictions, tariffs, foreign conflicts or political unrest in countries in which our suppliers operate, and our inability to pass related costs on to our customers or difficulty meeting customers’ delivery expectations due to extended lead times; interruptions in our operations, including our information technology systems, or in the operations of the third parties that operate computing infrastructure on which we rely; defects in our software and computing systems; disruptions in production at one or more of our facilities due to weather conditions, climate change, political instability, or social unrest; problems in production quality, materials and process and costs relating to product defects and any related product liability and/or warranty claims and damage to our reputation; our inability to recruit, retain and develop qualified personnel, including key personnel, and implement effective succession processes; our substantial indebtedness, including the restrictive terms of our indebtedness and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our inability to make debt service payments or refinance such indebtedness; our inability to successfully execute on acquisitions or divestitures or strategic relationships; our status as an accelerated filer and complying with the Sarbanes-Oxley Act of 2002 and the costs associated with such compliance and implementation of procedures thereunder; our failure to maintain effective internal control over financial reporting and risks relating to investor confidence in our financial reporting; environmental, social and governance (“ESG”) preferences and demands of various stakeholders and the related impact on our ability to access capital, produce our products in conformity with stakeholder preferences, comply with stakeholder demands and comply with any related legal or regulatory requirements or restrictions; negative perceptions of our products due to the impact of our products and production processes on the environment and other ESG-related risks; damage to our reputation or brand image; the effects of climate change on our business; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation, infringement claims brought against us and risks related to open source software; our inability to renew licenses with key technology licensors; our limited ability to raise capital, which may lead to delays in innovation or the abandonment of our strategic initiatives; costs and impacts related to additional tax collection efforts by states, unclaimed property laws, or future increases in U.S. federal or state income taxes, resulting in additional expenses which we may be unable to pass along to our customers; our inability to realize the full value of our long-lived assets; costs and potential liabilities associated with compliance or failure to comply with laws and regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security; our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards; the effects of trade restrictions, delays or interruptions in our ability to source raw materials and components used in our products from +2 +Table of Contents +foreign countries; the effects ongoing foreign conflicts on the global economy; adverse conditions in the banking system and financial markets, including the failure of banks and financial institutions; our failure to comply with environmental, health and safety laws and regulations that apply to our products and the raw materials we use in our production processes; (ii) risks relating to ownership of our common stock, such as those associated with concentrated ownership of our stock by our significant stockholders and potential conflicts of interests with other stockholders; the impact of concentrated ownership of our common stock and the sale or perceived sale of a substantial amount of common stock on the trading volume and market price of our common stock; potential conflicts of interest that may arise due to our board of directors being comprised in part of directors who are principals of or were nominated by our significant stockholders; the influence of securities analysts over the trading market for and price of our common stock, particularly due to the lack of substantial research coverage of our common stock; the impact of stockholder activism or securities litigation on the trading price and volatility of our common stock; certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our significant stockholders to change the composition of our board of directors; and (iii) general risks, such as relating to our ability to comply with a wide variety of complex evolving laws and regulations and the exposure to liability for any failure to comply; the effect of legal and regulatory proceedings and the adequacy of our insurance policies; and other risks that are described in Part I, Item 1A, Risk Factors in this Annual Report on Form 10-K and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +3 +Table of Contents +PART I +Item 1. +Busines s +As used herein, “CPI,” “the Company,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +CPI is a payments technology company providing a comprehensive range of payment cards and related digital solutions. We are a leader in several areas of the U.S. payment card solutions market, including debit and credit card production, personalization, and Software-as-a-Service-based (“SaaS-based”) instant issuance services. We are also a market leader in the production of “Prepaid Debit Cards,” which we define as debit cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ) but not linked to a traditional bank account, and related secure packaging solutions. We serve thousands of customers through direct and indirect sales channels and have maintained long-standing relationships with our top customers. +The foundation of our strong market position is our focus on customer service, quality and innovation and our comprehensive offering of payment card solutions. Our solutions provide a full suite of products and services required to produce, personalize and fulfill payment cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing design and production with an end-to-end offering of data personalization and services that are integrated within our customers’ operations and require process and/or technology integration, such as secure data links to transfer highly sensitive cardholder information. These services are important to many of our customers not just for the payment cards themselves but as an essential element in utilizing them as part of their overall branding and marketing initiatives. +The U.S. payment card solutions market in which we operate has experienced growth in cards-in-circulation over a long-term period, driven by new account openings by legacy issuers and new entrants to the payment card market, such as financial technology companies (“fintechs”) and others. The U.S. payment card solutions market is characterized by users (primarily U.S. consumers) maintaining multiple payment cards and by historically stable and recurring revenue driven by the continuous reissuance of debit and credit cards due to card expiration, re-branding, and card replacement activity, and by U.S. consumers switching from one financial institution to another. +Our revenues are primarily generated from the production of and services related to secure debit and credit cards that are issued on the networks of the Payment Card Brands, including Prepaid Debit Cards. Our business consists of the following reportable segments: +● Debit and Credit: primarily produces secure debit and credit cards and provides card services for U.S. card-issuing financial institutions. Services include personalization; instant issuance, which provides customers the ability to issue an instant personalized debit or credit card on-demand within a customer location; and other payment solutions such as digital push provisioning for mobile wallets; +● Prepaid Debit: primarily provides secure packaging solutions, Prepaid Debit Cards, and other integrated prepaid card services to prepaid program managers in the U.S.; and +● Other: primarily corporate expenses. +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 17 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Strategy +Our vision is to be the most trusted partner for innovative payments technology solutions. We aim to expand our addressable market over the long term through diversification by adding adjacent product and service offerings, including additional digital solutions, for our extensive customer base, and by leveraging our existing solutions for new +4 +Table of Contents +customer verticals. We have initiated the expansion of our offerings to customers in non-traditional industry verticals, such as the sale of our card solutions to the healthcare and gig economy verticals, which has already expanded our addressable markets. We also believe our digital SaaS-based instant card issuance solution could be utilized by certain businesses outside of the financial services industry. +To achieve our objectives, we aim to prioritize four strategic pillars: +● Customer Focus: Listen to the voice of our customers and provide outstanding support and partnership; +● Quality and Efficiency: Deliver high-quality solutions and drive continuous improvement; +● Innovation and Diversification: Develop innovative, market-leading differentiated solutions that create competitive advantages for our customers and diversify our offerings to accelerate growth and balance risk; and +● People and Culture: Promote a values-driven work environment to ensure our people are safe, productive and empowered to serve our customers and each other. +By helping our customers elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next-generation solutions that build brands and enhance people’s everyday lives. For both our traditional business and our market expansion opportunities, we believe we are well-positioned for success given our history of innovation and ability to evolve with the needs and expectations of our customers. +Our Solutions +Debit and Credit Payment and Other Cards +We differentiate from other providers by focusing on high-quality, innovative payment cards. For many customers, we pair card design and production with an end-to-end offering of data personalization and services that are integrated within our customers’ operations. In addition to providing payment solutions to typical financial institution and fintech payment card issuers, we also produce payment and other cards for healthcare payments, entertainment venues, government disbursements, transit services, and other industries. +We primarily produce contact and contactless cards that are issued on the networks of the Payment Card Brands. Contact cards feature an integrated circuit that interfaces with a payment terminal over a contact plate on the surface of the card when inserted into an enabled payment terminal. We also produce contactless cards (also known as dual interface cards), which share the functionality of a contact card but also have a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Contactless cards have increased as a percentage of sales versus contact cards for both CPI and the wider U.S. industry. +We believe we are a leading provider of eco-focused card solutions in the U.S. payments market. Dependent upon design and card construction, our Second Wave ® and Earthwise ® eco-focused cards incorporate various types and amounts of upcycled material, including recycled ocean-bound plastic (“ROBP”) and recycled PVC. Cards in our eco-focused portfolio have been approved by two of the major Payment Card Brands. These solutions aim to satisfy increasing U.S. cardholder demand for more environmentally friendly products and help support our and our customers’ environmental objectives. We also have a variety of metal card offerings that we produce as contact or contactless depending on the needs of our customers. +We also produce non-chip cards that only utilize magnetic stripes, contactless payment and non-payment cards that utilize NFC technology, and cards that include both magnetic stripes and NFC technology. +Card Data Personalization and Fulfillment +We facilitate the issuance and distribution of payment cards to consumers for the majority of our U.S. customers. We offer a variety of data personalization and mailing solutions for both daily and bulk mail programs. +5 +Table of Contents +Our customers provide us with data, in many cases through technology integrations, that we use to personalize payment cards to individual consumers. We provide data preparation and personalization solutions for debit, credit and Prepaid Debit Cards. Our technology-driven personalization services provide a wide range of customization options using advanced processes to encode, program, and emboss or print data, such as the cardholder’s name and account number. In addition, we provide data preparation services related to the embedded chips within payment cards. +In certain cases, we prepare customized mailers to deliver cards to individual cardholders. We are also able to personalize payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings in an expedited manner. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. +We believe our breadth, quality, and speed of personalization solutions further differentiates us with our financial institution and prepaid program manager customers and enables us to access additional business-to-business and business-to-consumer verticals such as healthcare, gig economy payment, corporate incentives, government disbursement, benefits, insurance, tax refund, transit, payroll and others. +SaaS-based Instant Card Issuance and Other Digital Solutions +We provide a comprehensive solution that makes it easy for our customers to issue payment cards in a customer location and on-demand. Our proprietary and patented SaaS-based Card@Once® instant issuance system and personalization solution offers a faster delivery of payment cards by our customers to their consumers, typically within a few minutes. +Our Card@Once software solution transfers data from our servers to encode a contact or contactless card and personalizes the card on a hardware solution placed in our customer’s location. This process results in the issuance of a completely personalized, permanent debit or credit card to individual cardholders within a customer’s location. These processes are audited for Payment Card Industry (“PCI”) Security Standards Council data security standards compliance annually. Our Card@Once solution generates both initial sales revenue for the hardware and recurring revenue from the sale of cards, card personalization and consumables. We have increased installations of our instant issuance solution from approximately 11,000 customer locations in 2019 to more than 16,000 in 2024. +We also have the ability to provide other digital solutions, including digital push provisioning, which allows our customers to push card credentials to a cardholder’s mobile wallet, and digital cards. Although revenues for these additional digital solutions have been insignificant to date, we believe these solutions have the opportunity to grow in the future. In 2024, we expanded our digital solution offerings by entering into a strategic relationship with a third-party to resell credit and debit card fraud prevention services. We believe we are well positioned to expand our digital solutions offerings to our customers through technology integrations with certain financial institution platform providers, card processors, core banking systems, and mobile banking app providers. Many of these integrations have been developed over time to support the reselling of personalization services through our digital SaaS-based instant issuance solution. We believe these technology integrations could enable us to provide additional digital solutions to our customers, including our digital push provisioning service as a complement to physical cards. Digital solutions often require upfront investment and additional integration but have the potential to deliver incremental revenue and increased margins over time. +Prepaid Debit Cards and Related Tamper-Evident Secure Packaging Solutions +CPI is a trusted and significant supplier of Prepaid Debit Cards and related secure packaging solutions in the U.S. We believe our solutions in this market are differentiated by our capabilities to provide custom solutions related to features such as security, aesthetics, and the use of eco-focused materials, and by our large volume capacities. We also offer specialized and innovative tamper-evident secure packaging solutions aimed at reducing fraud. +Our customers include some of the largest prepaid program managers in the U.S., with whom we have built joint processes over many years, utilizing technology in certain instances, to facilitate the exchange of critical data such as information used to print and encode card number, expiration, and security codes. Prepaid program managers sell the cards and related packages we produce to retail channels, including national big box, grocery, and convenience/gas retailers, and others in various industries. For prepaid cards sold through retail, the relationships and processes we +6 +Table of Contents +developed allow us to provide activation data, including information printed on the packaging which transacts with the retailer’s point of sale system to activate cards for use. In certain cases, we also manage the fulfillment of fully completed Prepaid Debit Card packages to retail locations on behalf of our customers. +Our prepaid solutions include open-loop general purpose reloadable cards that are issued on the networks of the Payment Card Brands, retail gift cards that can be utilized for purchases on an open or closed-loop network, and Restricted Authorization Network prepaid cards designed for a unique set of merchants. These cards typically utilize magnetic stripes to facilitate payment transactions, but in certain instances cards may use bar codes and contact chips. The cards we produce are offered in a variety of treatments, substrates, finishes, and packaging options focused on both security features and card and package design, and we have teams that consult regularly with our customers to create advanced solutions to address their needs. +Our Competitive Strengths +● Strong Market Position. Our vision is to be our customers’ partner of choice by providing market-leading, high-quality payment solutions and customer service and delivering continuous innovation. We believe these efforts have resulted in CPI gaining estimated overall U.S. market share over the last several years. We believe our long-term customer relationships, comprehensive end-to-end card solutions, including eco-focused solutions, and capabilities such as our Card@Once instant issuance solution have contributed to these gains with issuers of secure credit and debit cards in the United States. We have also established a leading market position in the U.S. prepaid debit market, built on high-quality services, innovative tamper-evident secure packaging solutions aimed at reducing fraud and driving shelf appeal, and reliable delivery to our customers. +● Long-Term Customer Relationships . We have long-standing, trust-based relationships with customers and have collaborated with our top 10 customers for more than 10 years, on average. We strive to put our customers at the center of everything we do. Our customer relationships generally involve the handling of sensitive information and require process and/or technology integration. As a result, our customers often view CPI as a partner they can trust and that can deliver the highest quality products and customer service. +● Comprehensive End-to-End Card Solutions. The foundation of our strong market position with our small to mid-sized financial institution and fintech customers is our comprehensive end-to-end payment card solutions. Our solutions provide a full suite of products and services required to produce, personalize and fulfill payment cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing design and production with an end-to-end offering of data personalization and services that are integrated within our customers’ operations and in certain cases utilize data links to transfer highly sensitive cardholder information. Such services are important to many of our customers not just for the payment cards themselves but as an essential element in utilizing them as part of their overall branding and marketing initiatives. We believe that our comprehensive solutions allow many of our customers to choose a single, trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +● Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry, including expertise with respect to complying with global technical standards for smart payment cards. We continuously work to enhance our offerings and to create and deliver next-generation products and solutions that meet the demands of the marketplace and our customers. Our eco-focused cards, including Second Wave cards featuring a core made with recovered ocean-bound plastic and Earthwise cards made with upcycled plastic, address customer demands for more eco-focused card options. Our expanding digital offerings include Card@Once, a proprietary and patented instant card issuance system and SaaS-based solution. We believe that our technological and operational capabilities, combined with our continuous innovation, gives us a competitive advantage. +● Integrations with the U.S. Payments Eco-system . We have developed and continue to expand technology integrations with certain financial institution platform providers, card processors, core banking systems, and mobile banking app providers. We have been implementing these integrations for more than 10 years to support the reselling of personalization services through our digital SaaS-based instant issuance solution. We believe +7 +Table of Contents +these technology integrations could enable us to provide additional digital services to customers, including our digital push provisioning service as a complement to physical cards. +● Network of High-Security Facilities. Each of our high-security facilities is audited for compliance with the PCI Security Standards Council by one or more of the Payment Card Brands, forming a network of compliant facilities in the United States. The Payment Card Brands’ attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our customers. These audit processes are long and complex, and our facilities and systems must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations serves as a barrier to new entrants into our market. +● Experienced Leadership Team. We have an experienced leadership team focused on serving customers, driving innovation, generating efficient production and services processes, ensuring accountability, delivering timely and high-quality results, and generating long-term value for our stockholders. +Customers +We have developed long-lasting relationships with our customers by working together to enhance payment card programs and by providing innovative, high-quality solutions and customer service. We primarily sell in the U.S. market and our diverse customer base includes some of the largest issuers of secure credit and debit cards, the largest prepaid program managers, major financial institution platform providers and card processor organizations, leading fintechs, thousands of small to mid-sized financial institutions, and others. +Solutions for customer segments in our traditional markets include: +● Large card issuers (defined as the top 10 card issuers in the United States based on an average of cards issued during the past three years): secure debit and credit cards; +● Small to mid-sized financial institutions: secure debit and credit cards, card personalization services, instant card issuance, and other payment solutions including digital solutions. The small to mid-sized financial institutions market segment includes regional banks, independent community banks, credit unions, and others and is often served by us through Resellers. We define “Resellers” as financial institution platform providers and card processor organizations that assist financial institutions with their core banking operations, including management of their credit and debit card programs; +● Fintechs: secure debit and credit cards and card personalization services; +● Prepaid program managers: Prepaid Debit Cards, secure packaging solutions and other integrated prepaid card services. These prepaid program managers resell to their customer base which represents a significant number of U.S. distribution points, such as retail channels including national big box, grocery, and convenience/gas retailers, and others in various industries, and assist with the management and operations of their customers’ Prepaid Debit Cards programs; and +● Other: payment and non-payment cards for healthcare providers, entertainment venues, government disbursements, transit services and others. +CPI had one customer that accounted for 10% or more of its net sales in 2024. Net sales from this customer were approximately 18% of total net sales for the year ended December 31, 2024, and we have been serving this customer for nearly 20 years. Although our direct relationship is with this customer, this customer resells our services to a large number of indirect customers. Nearly two-thirds of our net sales for the year ended December 31, 2024 were from our top 10 customers, whom we have been serving for an average of more than 10 years. The majority of these sales are from Resellers, who provide our products and services to thousands of indirect customers. Through our direct and indirect customer relationships, a majority of our annual net sales in our Debit and Credit segment are derived from small to mid-sized financial institutions and fintechs. Individually, many of these customers, including independent community banks and credit unions, represent minor amounts of our annual net sales. +8 +Table of Contents +We typically enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangement that defines the quantities of products to be delivered or services rendered and other terms specific to the order, as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production +We have a network of high-security facilities that we leverage to fulfill customer orders, with an array of products and services available to our customers. We have attempted to design our facilities and operating processes to provide exceptional service to all customers, with capabilities to execute high-volume and lower-volume production runs and on-demand solutions. +As of December 31, 2024, we operated facilities comprising approximately 400,000 square feet in the United States, with the majority of the space dedicated to payment card production, personalization services, card packaging and fulfillment services. We are also in the process of constructing a new facility in Fort Wayne, Indiana, pursuant to a build-to-suit lease agreement, to which we intend to relocate our current Indiana operations. This new facility is intended to modernize our operations, increase efficiencies and provide additional capacity and capabilities to accommodate future growth. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and air freight to deliver finished products to our customers. Due to the high-security nature of the payment card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we seek to embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources and create innovative and responsible products. Our key areas of focus in this area include incorporating environmental sustainability practices when feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility, and meaningful, innovative products at value-driven pricing. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives, customer relationships and partners that provide a wide geographic reach across the United States to sell and market our solutions. Our sales representatives offer complete end-to-end solutions that incorporate the full spectrum of our products and services from concept to delivery. +Our sales and marketing strategy is focused on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. Our marketing efforts focus on the needs of our specific types of customers and leverage the strength of our full-service offerings to attract new customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customers’ individual needs. We use an array of marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. We also strive to develop new or enhanced products by innovating through research and development activities. We believe these efforts drive customer retention and satisfaction and attract new customers. +9 +Table of Contents +Competition +The market for products and services in the payment card industry is highly competitive. Competitive factors for our business include product quality, customer service, innovation, product line comprehensiveness and integration, timely introduction of new products, features and capabilities, and price. Although our company is smaller in size than the corporations that own some of our key competitors, we believe that our size and payment card related focus allow us to be more flexible and responsive to our customers’ needs. +We believe we are in competition with other card producers, card personalization service providers, card packaging providers, and others that provide technology and digital solutions related to payment cards, such as ABCorp, Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA, Perfect Plastic Printing, Thales, Travel Tags, and WestRock (Multi Packaging Solutions), among others. +Certain of these competitors are global conglomerates that possess substantially greater financial, sales and marketing resources than we do and can offer additional integrated products and solutions. +In addition, certain existing and potential customers have the ability to produce and/or personalize debit and credit payment cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. +Suppliers +Our general procurement philosophy is to prevent or avoid being dependent on a single-source supplier. We believe we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the microchips and antennas for our card products. Our main suppliers of microchips and antennas include three leading international producers with locations in Germany, Thailand, and Singapore, some of which source materials from Taiwan. For the year ended December 31, 2024, approximately 95% of our purchased microchips and antennas came from these three main suppliers, and approximately 78% came from one supplier, including most of our contactless chips. The other key components for our products are substrates and inlays. Our Second Wave payment cards feature a core made with ROBP, which we either have sourced or currently source from suppliers in Haiti and Thailand. +We monitor supply-chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation, resiliency and price. In 2022 in order to fulfill the demands of our customers and to mitigate the impact of supply chain shortages, we entered into a capacity reservation agreement with one of our chip suppliers to reserve production supply capacity. Under the agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve capacity to produce a set quantity of chips from 2023 through 2026, subject to certain conditions, and we have committed to purchase those chips. The total value of our commitment is approximately $190.0 million over the term of the agreement. As of December 31, 2024, the remaining commitment was $62.0 million. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements we consider necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2024, we had 66 U.S. and foreign trademark registrations and applications, 63 existing U.S. patents, 50 existing foreign patents, as well as 34 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 12 years, and our trademarks will be due for renewal for additional ten-year periods on an ongoing basis. +10 +Table of Contents +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a Reseller. Such information can include names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy statutes and regulations, certain of the PCI Security Standards Council’s requirements and the Health Insurance Portability and Accountability Act (“HIPAA”), each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws, and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council’s requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize debit and credit cards issued on the Payment Cards Brands’ networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our utilization and digital storage of cardholder data. We believe that we have developed significant expertise in achieving and maintaining compliance with the requirements from the Payment Card Brands, and have invested, and will continue to invest, significant capital to achieve and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +11 +Table of Contents +The Dodd-Frank Wall Street Reform and Protection Act (the “Dodd-Frank Act”) set forth substantial reforms to the supervision and operation of the financial services industry, including the establishment of the Consumer Financial Protection Bureau (“CFPB”), which has broad supervisory, enforcement and rulemaking authority over consumer financial products and services. In certain circumstances, the CFPB has examination and supervision powers with respect to service providers who provide a material service to a covered financial institution offering consumer financial products and services, including service providers like us. Any new rules or regulations implemented by the CFPB or pursuant to the Dodd-Frank Act that are applicable to us or our customers’ businesses, or any adverse changes thereto, could increase our cost of doing business, require us to implement new or modified compliance processes or procedures or limit our current offerings. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Human Capital +Our leadership team has significant experience in the payment card industry, and many of our employees possess specialized career-long expertise and knowledge. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of our core values. The health and safety of our employees has remained paramount, and we have adapted our health and safety procedures and protocols as necessary to foster a safe working environment. We maintain a combination of on-site and remote employees in our workforce. +We are committed to equal employment opportunity, inclusion and belonging, through which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior, and employees are required to follow these standards and participate in related training. We encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. We also focus on a variety of community initiatives to enhance the lives of people in the communities where we operate through volunteerism, charitable giving and economic support. +As of December 31, 2024, approximately 1,500 people were employed by CPI, of which nearly half are women and approximately 60% identify as being within a minority category. Approximately 73% of our full-time employees are production and service facility staff. None of our employees are represented by labor unions. We believe that our relations with our employees are positive. +Available Information +We are a Delaware corporation and were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127, telephone (720) 681-6304. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of our website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC. +We qualify as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act and have elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. +12 +Table of Contents +Item 1A. Risk Factors +There are many factors that affect our business, financial condition, results of operations and cash flows, some of which are beyond our control. The following is a description of some important factors that may cause our business, financial condition, results of operations and cash flows in future periods to differ materially from those currently expected or desired. Factors not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations and cash flows. You should carefully consider all of these risks described below, together with the other information included in this Annual Report on Form 10-K, before investing in our securities. As a result of any of these risks, known or unknown, you may lose all or part of your investment in our securities. +Risk Factors Summary +Risks Relating to our Business and Industry +● A deterioration in general economic conditions, including due to inflation-related challenges, resulting in reduced consumer confidence and consumer and business spending and decreased demand for our products. +● The unpredictability of our operating results due to the varying cyclicality of the financial card and electronic payment industries, changes in customer inventory management practices, capital requirements, competition, new product developments, technological changes and other factors. +● Failure to retain existing key customers and attract new customers due to competitive products, pricing pressures, extended production lead times, financial health of our customers and macroeconomic conditions affecting our industry or our customers. +● The highly competitive, saturated and consolidated nature of our marketplace. +● Our inability to develop new or enhanced products and services, including due to our inability to undertake time-consuming and costly research and development activities. +● The widespread adoption of technological changes, new products or industry standards, such as digital payment systems or mobile payments, which may render our products obsolete or irrelevant, and our failure to develop, introduce and commercialize innovative products to address the evolving needs of our customers in a timely manner or at all. +● A cyber-attack or breach of our information technology systems resulting in losses of our intellectual property and/or sensitive cardholder data, harm to our competitive position and a loss of customer trust and confidence, and, as threats evolve, the necessity to invest in significant additional resources to enhance our information security and controls. +● The usage, or lack thereof, of artificial intelligence technologies. +● Disruptions, delays or other failures in our supply chain, including due to increased costs and inflationary pressures in our supply chain, single-source suppliers, or the failure or inability of our suppliers to comply with our codes of conduct or contractual requirements , trade restrictions, tariffs, foreign conflicts or political unrest in countries in which our suppliers operate, and our inability to pass related costs on to our customers or difficulty meeting customers’ delivery expectations due to extended lead times . +● Any interruption of our information technology systems, including disruptions or failures of our third-party data centers, inhibiting our ability to serve our customers. +● Defects in our software and computing systems, resulting in errors or delays in the processing of transactions and other interruptions in our business operations. +● A disruption at any of our production facilities due to weather conditions, climate change, political instability, or social unrest and our inability to recover quickly or otherwise provide continuity of production to meet customer requirements. +● Problems in our production processes, including as a result of mechanical or technological failures, which could lead to reduced production capacity and quality. +● Defects in our products that may give rise to products recalls, product liability and warranty claims as well as damage to our reputation. +● Failure to recruit, retain and develop qualified new and replacement personnel and implement effective succession processes amidst labor shortages and competitive labor markets. +● Our substantial indebtedness and the covenants and restrictions in the agreements governing our indebtedness limiting our ability to use our cash flow in certain areas of our business, capitalize on certain business opportunities and pursue our business strategies, all of which could be further impacted if we incur additional debt and could impact our ability to make debt service payments. +13 +Table of Contents +● Our inability to make debt service payments and an inability to refinance our existing debt on favorable terms or at all. +● Our inability to execute successfully on an acquisition strategy or strategic relationships. +● Our inability to divest or consolidate certain non-strategic businesses. +● Our potential failure to comply with the Sarbanes-Oxley Act of 2002, including maintaining effective control over financial reporting and risks relating to investor confidence in our financial reports. +● The impact of the increasing focus on ESG factors on our ability to access capital, produce our products in conformity with stakeholder preferences, and comply with stakeholder demands as well as comply with any new ESG-related legal or regulatory requirements or restrictions, and negative perceptions of our products due to the impact of our products and production processes on the environment and other ESG-related risks. +● Damage to our reputation or brand image resulting from negative perceptions of our business or those entities or individuals with whom we do business. +● The effects of climate change on our business. +● Our inability to protect our trade secrets, intellectual property and proprietary software; to obtain additional intellectual property rights in the future; and to ensure our products are not infringing the intellectual property rights of others. +● Our inability to renew licenses with key technology licensors, resulting in our loss of access to certain technologies upon which we rely to develop certain of our products. +● Our inability to successfully access capital markets due to the effects of the low trading volume and fluctuating trading price of our common stock as well as terms of our outstanding indebtedness and unfavorable market conditions, which may lead to delays in innovation or the abandonment of our strategic initiatives. +● Our exposure to additional tax collection efforts by states, unclaimed property laws, or future increases in U.S. federal or state income taxes, resulting in additional expenses which we may be unable to pass along to our customers. +● Our inability to realize the full value of our long-lived assets, which represent a significant portion of our total assets. +● Challenges, costs and potential liabilities associated with compliance or failure to comply with existing or future data privacy and security laws, regulations and other requirements, including customer contractual requirements. +● Our failure to comply with the standards of the PCI Security Standards Council and other industry standards, including due to an inability to continue to make investments in our facilities necessary to maintain compliance with such standards. +● The effects of delays or interruptions in our ability to source raw materials and components used in our products from foreign countries due to economic downturns or disruptions, including as a result of responses to global health emergencies and tariffs and trade restrictions. +● The effects of ongoing foreign conflicts on the global economy. +● Adverse conditions in the banking system and financial markets, including bank and financial institution failures. +● Our failure to comply with environmental, health and safety laws and regulations, including climate change regulations, that apply to our products and the raw materials we use in our production processes. +Risks Relating to Ownership of our Common Stock +● Continued concentrated ownership of our shares by our significant stockholders and their ability to control decisions regarding our business direction and policies as well as the potential conflicts of interest that may arise between our significant stockholders and our other stockholders. +● The impact of concentrated ownership of our common stock and the sale or perceived sale of a substantial amount of common stock on the trading volume and market price of our common stock. +● Potential conflicts of interest for certain individuals serving on our board of directors due to their relationships with our significant stockholders. +● The influence of securities analysts over the trading market for and price of our common stock, particularly due to the lack of substantial research coverage of our common stock. +● The impact of stockholder activism or securities litigation on the trading price and volatility of our common stock. +14 +Table of Contents +● Certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our significant stockholders to change the composition of our board of directors. +General Risk Factors +● Our inability to comply with numerous evolving and complex laws and regulations relating to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, labor and health and safety. +● Legal costs, the adequacy of our insurance policies, settlement costs and the risk of an adverse decision related to legal or regulatory proceedings or litigation. +Risks Relating to our Business and Industry +Risks associated with reduced levels of consumer and business spending, inflation-related challenges and the effects of an economic downturn could adversely affect our business, financial condition and results of operations. +Our business depends heavily on consumer and business spending. Our revenue is exposed to general economic conditions that affect consumer confidence, spending, discretionary income or purchasing habits. A sustained deterioration in general economic conditions, particularly in the United States, or increases in interest rates may adversely affect our financial performance by reducing the demand for our payment card solutions or reducing the purchase of our higher margin products. If an economic downturn occurs, credit card issuers may reduce credit limits, close accounts and become more selective in issuing credit cards. Certain of our customers, especially in the fintech space, could be severely impacted by a downturn in economic conditions limiting credit card spending, or cease to exist altogether. Additionally, an economic downturn or another global health emergency similar to the COVID-19 pandemic could result in extended voluntary or mandated closure of retail locations that sell certain of our products to consumers, including our Prepaid Debit Cards. These and other changes in economic conditions could therefore adversely impact our future revenues and profits and cause a materially adverse effect on our business, financial condition and results of operations. +Inflation, which increased significantly during 2022 and 2023, has adversely affected us by increasing the costs of materials and labor needed to operate our business and could continue to adversely affect us in future periods. In response to inflation, we have increased and may in the future increase, the sales prices of our products and services in order to maintain satisfactory margins. However, such increases or maintaining such increases may result in customer pushback or attrition and be difficult or impossible in future periods, all of which may have an adverse effect on our financial condition and results of operations. +Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue and profitability or lead to significant variability in our operating results. These factors include the varying cyclicality of the financial card and electronic payment industries, limited visibility into our customers’ anticipated purchasing needs, labor and supply challenges, capital requirements, Payment Card Brands standards and requirements, competition, new product developments, technological changes and other factors. +Furthermore, in periods of industry overcapacity or when our customers encounter difficulties, orders are more exposed to cancellations, reductions, price reductions or postponements, or changes in customer inventory management practices which in turn reduce our ability to forecast the next quarter or full-year production levels, net sales, profits and cash flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations. This may have a material adverse effect on our business, financial condition and results of operations. +Failure to retain our existing customers or identify and attract new customers would have a material adverse effect on our business. +15 +Table of Contents +A substantial portion of our net sales is derived from several large customers. The Company had one customer that accounted for approximately 18% of total net sales for the year ended December 31, 2024. We have been serving this customer for nearly 20 years. In addition, nearly two-thirds of our net sales for the year ended December 31, 2024 were from our top 10 direct customers, which include certain Resellers. We have been serving these top 10 direct customers for an average of more than 10 years. If one or more of our key customer relationships ends, it could have a material adverse effect on our business and financial results. Our ability to provide products and services to these and other customers and meet very high-quality standards in a timely manner is critical to our success. For example, one of our key services is the prompt and timely production and delivery of replacement debit or credit cards. Orders for these replacement cards often are placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a high quality and timely manner, our relationships with our customers may be adversely affected and customers may terminate their contracts with us. +In addition, our continued business relationship with our customers may be impacted by several factors beyond our control, including changes in customer purchasing and inventory management practices, more attractive product offerings from our competitors, pricing and inflationary pressures, Resellers’ and program managers’ ability to retain existing or gain new customers, the financial health of our customers and macroeconomic conditions affecting the payment card industry or our customers. Our business practices may also be subject to periodic audits by customers as part of their third-party risk management programs, the outcome of which may result in customer loss or cause us to incur significant costs to satisfy customer requirements. Because our contractual arrangements with customers generally do not include exclusivity clauses or commitments to order specified quantities of products on a medium or long-term basis, there is no guarantee that we will receive orders on a consistent basis or on favorable terms, or be able to renew contracts or purchase orders in a given year on favorable terms or at all. Additionally, as a result of labor shortages and supply-chain constraints, the Company has in the past experienced, and may in the future experience, extended production lead times which may result in difficulty meeting some customers’ delivery expectations . While we continue to proactively monitor, assess and take steps to minimize disruptions and delays in production, these disruptions and delays have caused, and may continue to cause, the Company to lose or delay customer opportunities. +If we experience difficulty attracting and retaining customers, particularly our key customers, our business, financial condition and results of operations would be materially and adversely affected. +We face competition that may result in a loss of our market share and/or a decline in our profitability. +Our marketplace is highly competitive, relatively saturated and increasingly consolidated. We expect these market dynamics to continue for new product innovations, and as competitors develop lower-cost production, competitors consolidate and other competitors attempt to enter the markets in which we operate. +Some of our competitors have larger global customer bases and significantly greater financial, sales and marketing, production, distribution, technical and other capabilities than we do. These competitors may be able to adapt more quickly to new technological requirements and changes in customer and/or regulatory requirements to lower production costs and prices, and utilize their global footprint to win customers with card needs in multiple markets and by producing cards in lower cost geographies. In addition, some competitors are non-public companies and are not subject to the public company requirements and related expenses that we are. We also face competition from newly established competitors, suppliers of products and customers who develop their own products and services. +Existing or new competitors may develop products, technologies or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. As the technological sophistication of our competitors and the size of the market increases, competing low-cost producers could emerge and grow stronger. These dynamics could result in declining average selling prices and reduced gross margins in our businesses. If we cannot sufficiently reduce our production costs or develop new products, technologies or services, we may not be able to compete successfully, and we may lose or fail to maintain market share, which could have a material adverse effect on our business, financial condition and results of operations. +16 +Table of Contents +Our future success depends upon our ability to develop, introduce and commercialize new products and services which can be a lengthy and complex process. New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant. We may be unable to commercialize new or improved products and services we may develop on a timely basis or at all. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, gaining market acceptance of, marketing or selling new or enhanced products and services that meet these changing demands in a timely manner or at all. Our failure to do so would likely have a material adverse effect on our ability to retain existing customers or attract new ones. +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +● effectively identify and capitalize upon opportunities in new and emerging product markets; +● invest resources in innovation and research and development; +● complete and introduce new products and integrated services solutions in a timely manner; +● license any required third-party technology or intellectual property rights; +● qualify for and obtain required industry compliance for our products; +● effectively manage the supply chain and related risks; +● comply with applicable data protection regulations; +● execute on our strategy to diversify our products by adding adjacent product and service offerings, including digital solutions; and +● retain and hire personnel experienced in developing new products and services. +The research and development of new or enhanced products and services is a complex, time-consuming, costly and uncertain process requiring the accurate anticipation of technological, market and industry trends, as well as precise technical execution, and all such challenges could adversely affect our ability to meet customer demand for new or enhanced products. We have limited research and development resources compared to many of our competitors, which may result in an immature product development process and lengthy product roll-outs, and competitors may be able to develop and commercialize competing products more quickly and efficiently. Artificial intelligence and machine learning technologies have rapidly developed and if we cannot successfully integrate these technologies into our internal business processes and product and service offerings in a timely, cost-effective, compliant and responsible manner, we may be at a competitive disadvantage. New or enhanced product and service offerings may also expose us to additional risks, such as new sources of supplies, increased regulation or reputational harm. If we have difficulty producing innovative products, there could be a material adverse effect on our revenue, results of operations, reputation and business. +Additionally, opportunities to combine or package products and service offerings and the ability to cross-sell products and services or expand into new customer verticals or markets are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services, including digital solutions, that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross-sell our products and services or successfully leverage our offerings to new customer verticals or markets, this may have a material adverse effect on our business, financial condition and results of operations. +Further, the markets for our products and services are subject to technological changes, frequent introductions of new products and services, evolving industry standards and changing customer preferences and demands, and our product and service offerings could be rendered obsolete. In particular, the rise in the adoption in digital payment systems or mobile payments may make physical cards less attractive as a method of payment. Certain merchants are also increasingly offering “buy now pay later” installment programs directly to consumers which may eliminate the use of a payment card to complete a transaction. Mobile payments, biometric payments and direct installment payment programs allow consumers to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of debit and credit cards issued to consumers. In addition, other new and developing technology solutions and products, including artificial intelligence and machine learning capabilities, could make our existing technology solutions and products obsolete or irrelevant. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. +17 +Table of Contents +System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, impair customer and vendor relationships, disrupt our internal operations, harm perception of our products and expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and our reputation. +The reliability and security of our information technology (“IT”) infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. We have been and may continue to be a target of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, phishing attacks, ransomware attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from unauthorized use of or access to computer systems (including from internal and external sources). In addition, increased attention on and use of artificial intelligence increases the risk of cyber-attacks and data breaches, which can occur more quickly and evolve more rapidly when artificial intelligence is used. A breach of our security defenses could result in a loss of our intellectual property, the release of sensitive cardholder information and customer, consumer or employee personal data, or the loss of production capabilities at one or more of our production facilities. Further, use of artificial intelligence by our employees, whether authorized or unauthorized, increases the risk that our intellectual property and other proprietary information will be unintentionally disclosed. We may also be at risk from cyber-attacks on third parties with whom we do business to the extent their compromised systems interact with our systems or employees. For example, our employees, contractors, customers or other users of our systems are from time-to-time subject to fraudulent inducements by parties attempting to gain access to our data. We have no control over the level of response offered by any third party whose systems have been impacted by a cyber-security breach and to the extent we are also impacted by interacting with compromised systems or bad actors, we could also experience system disruptions, financial loss, fines or penalties and potential damage to our reputation. In recent years these types of incidents have become more prevalent and pervasive across industries, including in our industry. +In addition, our encryption systems are at risk of being breached or decoded. We use encryption technology to protect sensitive data while in transit and at rest. Also, smart cards are equipped with keys that encrypt and decode messages to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, which could ultimately have a material adverse effect on our business, financial condition and results of operations. +The protective measures we have implemented may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. Our activities and investment in protective measures may not be deployed sufficiently quickly or successfully to protect our system or network against disruptions and may not prevent or limit the damage from any future security breaches. In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +A disruption or other failure in our supply chain could adversely affect our business and financial results. +We are subject to the risks inherent in production and distribution activities, including product quality control issues, disruptions or delays in our supply chain and other external factors over which we have no control. Raw materials used in our products may be sourced from a few key suppliers or a single key supplier. Specifically, certain key components for our payment card products include microchips, substrates (such as PVC), resin, modules, antennas and inlays, which we source from multiple suppliers located in various countries, primarily on a purchase order basis. For the year ended December 31, 2024 approximately 95% of the total value of our purchased microchips and antennas came from three main suppliers, and approximately 78% came from one supplier, including most of our contactless chips. We may enter into supplier agreements from time to time which commit us to purchase products at prices less favorable than those available in the market at the time of the order, or in quantities greater than our future needs. If such supplier is unable or delayed in fulfilling our microchip orders, we could fail to timely fulfill customer orders, which could damage our reputation and result in a loss of customers and customer opportunities and material harm to our financial results. +18 +Table of Contents +Additionally, our Second Wave cards featuring a core made with ROBP, rely on a largely international supply chain to provide such plastic in accordance with our parameters. It is difficult and costly to monitor supplier compliance with our parameters, our codes of conduct, and applicable laws. Any failure by our suppliers to so comply could adversely affect our ability to produce payment cards at all or in a manner consistent with standards agreed upon with our customers, which could adversely affect our business, reputation and customer relationships. Moreover, in certain cases, such as with ROBP, microchip and resin suppliers, we may rely on suppliers for which there are not adequate and immediate replacements. If these suppliers terminate their relationships with us, fail to timely deliver required products or materials or at all, or otherwise fail to meet their obligations to us, we may be unable or delayed in our ability to produce products using components from these suppliers. We generally do not maintain large volumes of certain types of inventory, which makes us even more susceptible to harm if a supplier fails to deliver products or materials as required. +Changes in the financial or business condition of our suppliers, political instability, social or civil unrest, war or adverse market conditions in a supplier’s country, including any new global health emergency, demand from other customers of such suppliers or failure to comply with our codes of conduct or other contractual requirements, could render our suppliers unable to provide us with, or render us unable or unwilling to accept, the components we need and thus subject us to losses or adversely affect our ability to bring products to market. Further, the failure of our suppliers to deliver goods and services in sufficient quantities, in compliance with applicable standards, contract requirements, or laws and regulations, and in a timely manner could adversely affect our customer service levels, our reputation and our overall business. For example, during the COVID-19 pandemic, we experienced delays in the supply of, and increased costs of, materials necessary to operate our business, which made it difficult to produce our products in a timely manner. In addition, any increases in the costs of goods and services for our business, including because of inflationary pressures or tariffs, may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve operational cost efficiencies. If a supplier engages in illegal, unethical or other questionable conduct, we may not have visibility into these practices, we may in certain circumstances be deemed to have concurrent responsibility with our supplier for such conduct, and we, and our customers, may face legal or reputational harm in addition to interruptions to our supply chain. +Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business and reputation. +Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, including the operation of complex IT systems and production equipment. In addition, a significant portion of the communication between our employees, customers and suppliers depends on our IT systems. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. +To serve our customers and operate certain aspects of our business, we depend on data centers and computing infrastructure that is both our own and provided by third party vendors. To the extent applications and data used in our business are hosted by third party vendors at their facilities, we do not control the operation of such facilities or in some cases the hardware and infrastructure within them. Any disruption of, interference with, or inability to keep up with our capacity needs by our third-party data centers or hosted infrastructure partners could interrupt our business operations. In addition, any problems faced by our third-party data center operations or hosted infrastructure partners with their or our telecommunications network providers, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our ability to serve our customers also largely depends on the efficient and uninterrupted operation of our own computer information systems and complex production equipment, much of which relies on computer operating systems, residing at our leased facilities. The proper functioning of such systems can be adversely affected by the increasing age and usage of such systems, among other things. Any interruption in our business applications, systems or networks, including due to new system implementations, server downtime, failure to upgrade or patch software, facility issues, natural disasters or energy disruptions, could have a material adverse impact on our operations, sales and operating results. Additionally, we have a limited number of employees with the expertise required to operate such internal applications, systems and networks as well as remediate them in the event of a failure, and thus the attrition of such employees could result in our inability to quickly and effectively resolve future IT issues. +We could suffer damage to our brand and reputation in the event of a system outage or data loss or interruption and also be liable to third parties, including our customers. Some of our contractual agreements require the payment of +19 +Table of Contents +penalties if our systems do not meet certain operating standards, and failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of compliance of our facilities, any of which could have a material adverse effect on our business. +In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Protective measures we have established for continuation of core business operations in the event of a catastrophic event may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results of operations. +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +The sophisticated software and computing systems underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our customers. Defects in our software, errors or delays in the processing of digital transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of customers, negative publicity or exposure to liability claims, any of which could have a material adverse effect on our business, financial condition and results of operations. +Disruptions in production at one or more of our facilities may have a material adverse impact on our business, results of operations and/or financial condition. +Any serious disruption at any of our facilities, including as a result of public health emergencies, severe weather conditions, climate change, natural disasters, hostilities, political instability, social unrest, network outages, terrorist activities, or our inability to successfully relocate our Fort Wayne, Indiana operations to a new location as anticipated could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs. In the event of a disruption at one of our facilities, our other facilities may not have sufficient capacity or necessary specialized equipment, may have higher production costs, may take significant time to increase production or may fail to meet our customers’ requirements, any of which could negatively impact our business, results of operations and financial condition. Production disruptions may cause our customers to seek alternative supply, which could further adversely affect our profitability. +Significant specialized production capacity is also concentrated in single-site locations and therefore if a facility experiences disruption, it may not be possible to find replacement capacity quickly or substitute production from our other facilities. Accordingly, disruption at a single-site production operation could significantly impact our ability to supply our customers and could have a severe impact on us. +Additionally, all of our production facilities are currently leased, and we are subject to risks associated with our current and future real estate leases. As each lease expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, we may be unable to find replacement locations with adequate capacity for our unique equipment and both current and future operational needs, and we may experience disruption or significant cost in relocating, any of which could have an adverse effect on our operations, customer relationships and financial performance. Moreover, we are working to relocate the operations at our Fort Wayne, Indiana facility to a new location. We may not be able to successfully relocate our operations in a timely manner or do so without experiencing business interruption. Our other production facilities may not have the ability to support the production needs serviced by this facility, and we do not have contractual arrangements with any other manufacturers in the event this facility ceases to be available to us for any reason. Also, a substantial investment in improvements and equipment is necessary to facilitate the relocation. These costs may exceed our expectations or we may face delays for the relocation of the facility, which could have an adverse effect on our operations, customer relationships and financial performance. +20 +Table of Contents +Our business could suffer from problems in production quality, materials and process, which could reduce, delay or interrupt production of our products, resulting in adverse impacts to our business and financial results. +Our production processes are highly complex, require complex and costly equipment and must continually be modified to improve yields and performance. We may experience production difficulties due to machinery or technology failures, human or other errors, or because of external factors beyond our control, such as delay of, or quality issues with, materials provided by suppliers, interruption of our electrical service or a natural disaster, any of which can reduce product yields or quality, or interrupt production. We may not have adequate and timely replacements for failing or malfunctioning machinery available. Additionally, we have experienced malfunctions and errors, including human error, relating to the operation of certain production machinery and systems that, in some instances, have resulted in the delivery to our customers of products that did not meet their standards or specifications or failed to function in the marketplace. Such problems have resulted, and may in the future result, in our inability to properly fulfill customer orders and/or our obligation or election to replace products at our cost and expense, provide credit to or reimburse customers for related damages. We may also be subject to claims relating to such issues. +As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our production processes at the market rate, we may experience lower production quality than the market standard. We may also risk non-compliance with certain industry standards if we experience failure of certain required operations or processes, such as those related to facility security, which may impede our ability to deliver products to our customers. The occurrence of any of these risks could damage our reputation and result in the loss of business, which could have an adverse impact on our business, financial condition and results of operations. +Costs relating to product defects, and any related product liability and warranty claims may materially adversely affect our business. +We offer highly complex services and products and, accordingly, from time to time, defects have occurred. Such defects can give rise to significant costs, including relating to recalling products, replacing defective items, writing down defective inventory, the loss of potential sales and claims by third parties, and our reputation could suffer. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages. We may also incur liability for damages claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their products if they are defective or make compensatory payments in accordance with industry or business practice or to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, there could be a material adverse effect on our business, financial condition and results of operations. +The failure to effectively recruit, retain and develop qualified personnel and implement effective succession processes could adversely affect our success and could have a material adverse effect on our business, financial condition and results of operations. +Our business functions are complex and require wide-ranging expertise and intellectual capital. If we fail to recruit, retain and develop personnel who can provide the needed expertise across the entire spectrum of our operating and intellectual capital needs, including due to leadership changes, then the ability of our business to successfully compete and grow may be adversely affected. The market for qualified personnel is highly competitive and we have previously experienced labor availability issues in several of our facilities. This shortage of labor has resulted, and may in the future result, in increased compensation and recruiting expenses which could have a material adverse effect on our profitability, particularly if we are unable to pass all such expenses on to our customers or are limited in our ability to find suitable workers. +In addition, we rely, in part, on the accumulated knowledge, skills and experience of our key personnel, including our executive officers. The loss of the services of any of our key personnel could have a material adverse effect on our business, financial condition and results of operations because we may not be able to replace them on a timely basis or without incurring increased costs, or at all. If our key personnel were to leave us without adequate succession plans in place we may be unable to maintain continuity in key business functions. We may not succeed in recruiting sufficient personnel to support our production needs or may fail to effectively replace current personnel who depart with qualified or effective successors. Personnel shortages have resulted, and may in the future result, in extended +21 +Table of Contents +production lead times and difficulty in meeting customers’ delivery expectations, which could result in the loss of customers and damage to our reputation and have a material adverse effect on our business, financial condition and results of operations. +The covenants and restrictions contained in agreements governing our indebtedness may adversely affect our business and results of operations, may restrict our ability to grow and could make it difficult or impossible to timely make our debt service payments or refinance our debt when it comes due. +We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our business. The agreements governing our indebtedness do not fully prohibit us or our subsidiaries from incurring additional indebtedness in the future, and to the extent that we incur additional indebtedness, the risks associated with our substantial indebtedness described below, including our possible inability to service our debt, may increase. Our substantial indebtedness and interest expense could have important consequences to us, including: +● limiting our ability to use significant cash flow from operations in other areas of our business, including for working capital, research and development, expanding our infrastructure, capital expenditures and other general business activities and investment opportunities in our company, because we must dedicate a substantial portion of these funds to pay interest, make principal payments and/or otherwise service our debt; +● impacting our cash flows, results of operations and financial condition when interest rates rise, because the interest rate on our revolving credit facility is a floating rate that varies depending on market interest rates and issuance or refinancing of other debt in the future may be incurred at higher interest rates than current debt; +● limiting our ability to retain or attract customers and our ability to attract or retain qualified employees due to our significant amount of debt and the related implications of such debt for the Company’s long-term financial condition; +● limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; +● limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +● limiting our ability to timely make our debt service payments or to satisfy our other obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +● limiting our ability, or increasing the costs, to refinance indebtedness prior to maturity dates; +● increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; and +● placing us at a competitive disadvantage as compared to our competitors that are less leveraged. +Additionally, the terms of the agreements governing our indebtedness restrict, and any additional indebtedness we may incur in the future could similarly restrict, our ability to operate our business and to pursue our business strategies. Among other things, these agreements restrict our ability to do the following (in each case, subject to a number of important exceptions and qualifications as set forth in the respective agreements): +● incur additional indebtedness; +● create liens or use assets as security in other transactions; +● enter into certain asset sale transactions or other dispositions of assets; +● declare or pay dividends, repurchase or redeem stock, or make other distributions to stockholders; +● make investments in other businesses or joint ventures; +● merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; and +● enter into transactions with affiliates. +We may not be able to refinance our existing long-term debt if necessary, or we may only be able to do so at a higher interest rate or on other less favorable terms. +In 2024, we refinanced our existing indebtedness that was due to mature in March 2026, and extended our maturity dates for both our long-term debt and senior secured revolving credit facility to July 2029. We may be unable to refinance or renew our existing long-term debt and our failure to repay all amounts due on the maturity date would cause +22 +Table of Contents +a default under the long-term debt and our credit facility. Amounts borrowed and outstanding under our long-term debt agreement and credit facility are required to be repaid in full, together with any accrued and unpaid interest, no later than July 15, 2029 (and may be subject to earlier mandatory prepayment upon certain events). Alternatively, any renewal or refinancing may occur on less favorable terms for both the long-term debt and credit facility. If we refinance on terms less favorable to us than the current terms, our interest expense may increase significantly, which could impact our results of operations and impair our ability to use our funds for other purposes. +We may not be able to successfully execute our acquisition strategy or integrate acquisitions successfully, or successfully enter into, maintain and leverage business relationships, which could adversely affect our financial condition and results of operations. +We have sought and intend to continue to seek acquisition opportunities and business relationships to potentially expand into new markets and to enhance our position in existing markets. We may not be able to successfully identify suitable acquisition or relationship opportunities, prevail against competing potential acquirers or business partners, negotiate appropriate acquisition terms, obtain financing that may be needed, extend our product or service offerings into areas in which we have limited experience, enter into new geographic markets, complete proposed acquisitions or successfully integrate acquired businesses into our existing operations. Regularly considering strategic acquisitions or relationships can also divert management’s attention from other business concerns and lead to significant negotiation, due diligence and other expenses, regardless of whether we pursue or consummate any transaction or arrangement. Even if an acquisition or business partnership is successfully integrated, it could result in unforeseen liabilities, cause us to lose key employees or other business relationships or may not otherwise perform as planned. If any of these or other factors limit our ability to achieve the anticipated benefits of a transaction or relationship, or if we encounter other unexpected costs and liabilities in connection with the foregoing, our business, financial condition and results of operations could be materially and adversely affected. +We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer are aligned with our strategy or that should be consolidated. +In executing our strategy, we have consolidated certain of our facilities and divested certain of our businesses. We will continue to evaluate such opportunities. +We may not be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of operations or closure, may not be available to us or may be more costly than anticipated. Any such consolidation or divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position. +We are considered an accelerated filer and are required to comply with the Sarbanes-Oxley Act of 2002, and our inability to maintain effective internal control over financial reporting in the future could result in investors losing confidence in the accuracy and completeness of our financial reports and negatively affect the market price of our common stock. +As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires our independent registered public accounting firm to attest to the effectiveness of our internal control over financial reporting. The costs associated with compliance with these and future laws and related rules and interpretations could have a material impact on our results of operations. +Management has assessed the effectiveness of the Company’s internal control over financial reporting. See Item 9A – Controls and Procedures – Management’s Report on Internal Control over Financial Reporting. We have identified material weaknesses and significant deficiencies in our internal controls in the past and we may identify additional material weaknesses or significant deficiencies in the future. If any such control deficiencies occur in the future, we may not detect errors on a timely basis, our financial statements may be materially misstated, investors may lose confidence in the accuracy and completeness of our financial reports and we may be unable to timely produce our financial reports. Any of the foregoing could negatively affect the market price of our common stock, perhaps significantly. In addition, we could become subject to investigations by any stock exchange on which our securities are listed, the SEC or other regulatory authorities, or litigation or disputes with stockholders, which could require additional financial and +23 +Table of Contents +management resources and result in more costly directors’ and officers’ insurance, which could have an adverse impact on our business. +Expectations of stakeholders relating to environmental, social and governance matters may impose additional costs and expose us to new risks as well as have an adverse effect on our business, financial condition, results of operations, and cash flows. +Many investors, regulators, customers, employees and other stakeholders are increasingly focused on corporate responsibility and ESG matters. Some investors may use these factors to guide their investment strategies and may choose not to invest in the Company if they believe our ESG practices or assessment performance are inadequate, which may hinder our access to capital. In addition to the topics typically considered in such assessments, for card production companies, issues of emissions and plastic waste are of particular importance. For example, increased attention to conservation measures and negative consumer attitudes about plastic products or other components in our products could have an adverse impact on demand for our products. +There have also been changing consumer concerns and perceptions (whether accurate or inaccurate) regarding the potentially adverse environmental effects of certain substances and components the Company uses in its products, including PVC plastic. Potential consumer concerns may also extend to the sourcing of certain materials and labor and other conditions in those locations. Further, our customers may request that changes be made to our products, operations, or production processes. We may be unable to produce or procure our products in conformity with these preferences and concerns, or doing so may require significant research and development costs, increased costs to procure alternative raw materials and components, and additional capital expenditures. +Furthermore, customer, investor and consumer ESG expectations have been varied, rapidly evolving and increasing. Specifically, certain customers are beginning to request that the Company provide information on its plans relating to certain environmental related matters such as greenhouse gas emissions, waste sent to landfills and energy usage. The enhanced stakeholder focus on ESG issues requires the continuous monitoring of various and evolving standards, which is time consuming and costly. In addition, if we communicate certain ESG initiatives or goals, we could fail, or be perceived to fail, to meet them, or we could be criticized for the scope of such initiatives or goals or our approach to meeting those goals. A failure to adequately meet various stakeholder expectations and standards may result in reputational damage, the loss of business, diluted market valuation, an inability to attract customers or an inability to attract and retain top talent. +Additionally, future ESG and climate risk reporting requirements may result in additional costs to monitor, track and report sustainability measures. The failure to implement ESG strategies, meet our ESG goals or evolving stakeholder expectations or standards or comply with any new ESG-related laws, regulations or restrictions could adversely affect our business, financial condition, results of operations and cash flows. +Damage to our reputation or brand image can adversely affect our business. +Our reputation forms the foundation of our relationships with key stakeholders and other constituencies, including employees, consumers, customers and suppliers, and maintaining a positive reputation globally is critical to the successful operation of our business. Negative publicity surrounding us, our activities, our personnel or our business partners, consumer perception of our response to political and social issues or catastrophic events, and campaigns by activists, whether or not warranted, connecting us, our personnel, our supply chain or our business partners to a failure to maintain high ethical, business and environmental, social and governance practices, including with respect to human rights, workplace conditions and employee health and safety, whether actual or perceived, could adversely impact our reputation and brand image and may decrease demand for our products, thereby adversely affecting our business, results of operations, cash flows or financial condition. +Climate change may adversely affect our operations and financial performance. +There is continuing concern from the scientific community and the general public that emissions of greenhouse gases (“GHG”) and other human activities have caused or will cause significant changes in weather patterns and increase the frequency and severity of extreme weather events, including, droughts, wildfires, hurricanes and flooding. Extreme weather events have and may continue to adversely affect us because of their impact on the availability and cost of raw materials and components we need to produce our products and that we source from locations in the United States and +24 +Table of Contents +internationally that have experienced and may continue to experience such events. In addition, extreme weather events could have an adverse impact on our customers’ demand for our products and services due to impacts on their, or general, consumer demand and spending power, and also on our insurance premiums, operating costs and ability to timely fulfill customer orders in the event of damage or disruption to one of our facilities. +We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or infringement, which may have a material adverse effect on our business. +Our ability to protect our intellectual property is important to our business. We depend on patents and other intellectual property rights to protect our products, proprietary designs and technological processes against misappropriation by others. Our existing or future patents may be challenged, invalidated or circumvented. Our patents have been and may in the future be challenged as invalid. Furthermore, we may have difficulty obtaining additional patents and other intellectual property protections in the future. The patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Moreover, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which we provide services or sell or license products. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. We actively seek to protect our proprietary rights and trade secrets by engaging in litigation and by entering into confidentiality agreements with our employees, consultants, and strategic partners and controlling access to and distribution of our technologies, documentation and other proprietary information. Nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary and may use such information to interfere with our business. Enforcing our intellectual property rights has in the past caused and may in the future cause us to incur significant costs. These costs and other consequences from the unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. +Companies in our industry aggressively protect their intellectual property rights. Our products often contain technology provided to us by other parties such as suppliers or customers, and we compete in an industry that is highly active in generating intellectual property. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. From time to time, we receive notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights or that challenge the validity of our patents. In addition to the costs and distraction that result from intellectual property litigation and infringement claims, an adverse outcome in these types of disputes could prevent us from offering some of our products and services or from enforcing our intellectual property rights. Settlements can involve royalty or other payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our suppliers, customers and licensors may not be required to fully indemnify us for the costs of defending against infringement claims. In addition, we may be required to indemnify some customers and strategic partners related to allegations, regardless of merit, that our products infringe on the intellectual property rights of others. +We also face risks related to open source software. Certain of our software is derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property and we may incur additional costs to the extent we use open source software that is subject to licensing. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. Usage of open source software can lead to greater risks than the use of third party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software or remedies against the licensors. Many of the risks associated with open source software cannot be eliminated and could have a material adverse effect on our business, financial condition and results of operations. +In addition, the rise of artificial intelligence and machine learning technologies may expose us to increasing risk with regard to both protecting of our intellectual property and defending against misappropriation claims. Such technologies are imperfect and the use of artificial intelligence or machine learning technologies by us, our customers or +25 +Table of Contents +parties with whom we conduct business, and by unrelated third parties could inadvertently cause us to infringe upon other parties’ intellectual property ownership or rights, or could alternatively infringe upon our intellectual property rights. As a result, we may be subject to claims we have infringed upon, misappropriated or misused other parties’ intellectual property. We may also have to resort to litigation to enforce our intellectual property rights, either of which could result in substantial costs and diversion of our resources. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. +Many of our products integrate third-party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with access to technology owned by third parties. For example, we license card technology for use in certain of our products, and we rely on our commercial arrangements with the licensors of such technology for the continued use of these platforms. These licensors may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross-licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios, and we continue to do so as we pursue additional growth initiatives. If we are unable to enter into new cross-licensing agreements or continue to successfully renew existing cross-licensing agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products and or be forced to cease or delay certain growth initiatives, which could have a material adverse effect on our business. +Our ability to raise capital in the future may be limited, which could lead to delays in innovation and abandonment of our strategic initiatives. +In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. The terms of our outstanding indebtedness and the low trading volume and fluctuating trading price of our common stock may adversely affect our ability to access capital markets and any such financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. We may be unable to access capital due to unfavorable market conditions or other market factors outside of our control, and we may not be able to raise additional capital when needed. Any failure to achieve adequate funding will delay our products and services innovation and development and could lead to abandonment of one or more of our strategic initiatives. Any of these events could materially harm our business, financial condition and prospects. +We may become subject to additional tax collection obligations, claims for uncollected amounts, and assessments from unclaimed property audits, new U.S. tax legislation could expose us to additional liabilities and our income tax positions or unclaimed property practices may be challenged by relevant authorities, all of which could adversely affect our cash flows and financial results. +Several states have adopted legislation requiring out-of-state sellers to collect and remit sales tax on sales transactions into those states where they have no physical presence. States seeking to expand applicability of sales tax “nexus” laws could result in additional tax expenses in the event we are unable to pass these expenses along to our customers and additional administrative burden to collect and remit sales tax in such jurisdictions. +In addition, we are subject to U.S. federal and state income taxes. Our tax receivables may not be realized, and o ur tax expense and the tax positions included in our financial statements, which are subject to estimates, could be impacted by changes in rules or interpretations of existing tax laws and changes in U.S. federal and state tax legislation and tax rates. New legislation may be enacted which could increase income tax rates in jurisdictions where we operate or have nexus and materially impact our tax provision, cash tax liability and effective tax rate. Additionally, o ur income tax positions may be challenged by relevant tax authorities and we may not be successful in defending against any such challenge, which may adversely affect our future cash flows and financial results. +We are also subject to unclaimed property (escheat) laws in various states which require us to turn over to certain government authorities the property of others held by us that has been unclaimed for a specified period of time. We are subject to audit by individual U.S. states with regard to our escheatment practices. Such audits may cause us to incur significant costs related to outside professional fees and divert management’s time away from business operations. +26 +Table of Contents +Additionally, we may be subject to assessments, penalties or fines that could adversely affect our financial results. The legislation and regulations related to tax and unclaimed property matters tend to be complex and subject to varying interpretations by both government authorities and taxpayers. +Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value. +Our long-lived assets recorded as of December 31, 2024 include $68.6 million of plant, equipment, leasehold improvements and operating lease right-of-use assets, $10.5 million of net intangible assets, and $47.2 million of goodwill. +We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we were to conclude that a future write-down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write-down of our long-lived assets may result from, among other things, deterioration in our performance and a decline in expected future cash flows and could have a material adverse effect on our business, financial condition and results of operations. +Current and prospective regulations, changes in our product offerings and customer contractual requirements addressing consumer privacy and data use and security could increase our costs of operations, which could adversely affect our operations, results of operations and financial condition. +In operating a payment card business, we manage large amounts of personally identifiable information of cardholders, including cardholder names, account numbers, healthcare provider names and health savings account numbers, and similar information and are thus subject to laws and requirements relating to data privacy and security, which continue to evolve and may become increasingly difficult to comply with. For example, the California Consumer Privacy Act and the California Privacy Rights Act generally require companies like ours, which process consumer personal information on behalf of their customers, to use, retain or disclose consumer personal information solely for certain limited purposes, including to provide services to our customers according to the terms of our customer contracts. Other states have enacted or amended similar data privacy laws and regulations. Furthermore, to the extent these laws apply to our customers, our customers have imposed, and may continue to impose additional, privacy related contractual obligations on us, adherence to which may require additional investment in resources and internal processes. Additionally, as we continue to innovate our products and services offerings, including potentially leveraging the use of artificial intelligence and machine learning capabilities, and expand into new lines of business, and as the number of jurisdictions enacting privacy and related laws increases and the scope of these laws and enforcement efforts expand, we have and may continue to become subject to additional data privacy and security legal requirements and regulations such as HIPAA. The legal, political and business environments in these areas are rapidly changing, and subsequent legislation, regulation, litigation, court rulings or other events could expose the Company to increased program costs, liability and reputational damage. New products and services we develop may also require that we obtain and retain more personally identifiable information for a longer period of time than we have done historically. We have incurred significant expenses to meet the obligations of current privacy-related laws and requirements, and we expect to continue to incur these as well as additional expenses if we become subject to additional privacy-related laws and regulations, which will continue to necessitate us making changes to our internal processes, procedures and systems. Failure to comply with existing or future data privacy and security laws, regulations and requirements could result in fines, sanctions, penalties, civil lawsuits or other adverse consequences as well as loss of customer and consumer confidence, which could materially adversely affect our results of operations, overall business and reputation. +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brands compliance standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and producers’ facilities, products and physical and logical security which we must satisfy to be eligible to supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated, or customers may cease doing business with us, if we fail to comply with these standards and criteria. +27 +Table of Contents +We make significant investments in our high-security facilities to meet these standards and criteria and changes in them. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have been an important part of our revenue and profitability. For the year ended December 31, 2024, the vast majority of our products and services were subject to compliance with the standards of one or more of the Payment Card Brands. If we fail to comply with one or more of the standards of the Payment Card Brands or of the PCI Security Standards Council for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the Payment Card Brand networks. Additionally, certain of our facilities operate under variances of certain of these standards. If such variances are not granted in the future or if we are required to move or alter a facility in order to maintain compliance, we may incur significant costs and delays, or may lose our ability to offer services in that facility, which would be disruptive to our business and have an adverse effect on our customer relationships and financial results. If, as a result of noncompliance with standards of the PCI Security Standards Council or the Payment Card Brands, we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations. +Delays or interruptions in our ability to source raw materials and components used in our products from foreign countries, as well as trade restrictions on goods imported into the United States, could materially harm our business, financial condition and results of operations. +Most of our microchips, as well as certain other raw materials used in our products, are imported from suppliers located outside of the United States. We have experienced and may in the future experience delays and interruptions in our ability to obtain materials imported into the United States due to global economic downturns and trade disruptions, including related to global health crises. We may also experience such delays and interruptions in our supply chain due to political instability, civil unrest or war in countries from which we directly or indirectly source raw materials and components used in our products. Additionally, the U.S. government has imposed tariffs on imports from certain countries, including countries in which our suppliers are located. The new presidential administration has imposed, and may continue imposing, substantial additional new or increased tariffs and/or trade restrictions. The future status of certain existing international trade agreements to which the United States is party is also uncertain, and such trade agreements could be terminated or replaced. +Additional tariffs or trade restrictions may lead to increased prices to our customers, which may reduce demand, or, if we are unable to achieve increased prices, result in lowering our margin on products sold. Any of these factors could depress economic activity, restrict our access to suppliers and have a material adverse effect on our business, financial condition and results of operations. +We cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions or related retaliatory responses on the import or export of goods in the future, nor can we predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers and the U.S. economy, which in turn could have a material adverse effect on our business, financial condition and results of operations. +Prolonged military action in foreign conflicts has impacted and may continue to have adverse effects on the global economy, and such effects could materially adversely affect our business, operations, operating results and financial condition. +In early 2022, Russian forces launched significant military action against Ukraine, and the region has since experienced sustained conflict and disruption, which may continue in 2025 and beyond. Governments in the United States, United Kingdom and European Union have each imposed export controls on certain products and financial and economic sanctions on certain industry sectors and parties in Russia. Additionally, hostilities in several parts of the Middle East are ongoing and could develop to have a more widespread economic and geopolitical effect in the Middle East, Europe or other regions, and could result in economic sanctions between or among countries. The continuation or escalation of geopolitical tensions or military action related to the conflict and the imposition of additional economic sanctions could continue to adversely affect the global economy and financial markets, disrupt trade and accelerate +28 +Table of Contents +inflationary pressures, among other things, which could negatively affect the demand for our products and further intensify problems in the global supply chain. Although we do not have any operations in the affected areas, we believe we have experienced shortages in raw materials and increased costs for transportation and energy due in part to the negative impact of the foreign military conflicts on the global economy, which impacts may persist or worsen as these conflicts continue or escalate. Such conflicts also increase the risk of retaliatory acts impacting U.S. companies, which may include disruptions to our or our customers’ or suppliers’ technology infrastructure, including through cyberattack, ransom attack or cyber-intrusion. The extent and duration of any military action, sanctions and resulting market and economic disruptions are impossible to predict but could be substantial. +Conditions in the banking system and financial markets, including the failure of banks and financial institutions, could have an adverse effect on our business, financial condition and results of operations. +Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past led and may in the future lead to market-wide liquidity problems. For example, in March 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank and Signature Bank, after each bank was unable to continue its operations. These events exposed vulnerabilities in the banking sector, including uncertainties, significant volatility and contagion risk, any or all of which could have an adverse effect on our business, financial condition and results of operations. +In addition to the market-wide impacts, our reliance on financial institutions and non-traditional financial service providers such as fintechs as our primary customers exposes us to additional risk from adverse events affecting the industry. Certain financial institutions’ failures, the migration of deposits from smaller financial institutions to larger ones due to reduced confidence in or concerns about the stability of smaller financial institutions or non-traditional financial service providers, as well as consumers opening fewer new accounts at these institutions, may impact the quantity and timing of orders for our products. Additionally, uncertainty in the banking sector, as well as broader economic conditions in general, may cause banks and financial institutions to implement precautionary measures such as reducing spending on card programs or being more selective about issuing or renewing cards to customers. Any of the foregoing events could result in lower demand for our products, which in turn could have a material adverse effect on our business, financial condition and results of operations. +Critical vendors, third-party manufacturers or other third parties on which we rely could also be adversely affected by the liquidity and other risks related to bank failures. These could include delayed access to, or the uninsured loss of, deposits or other financial assets and difficulty in accessing commercial financing on acceptable terms or at all due to tightening credit markets, unfavorable covenant terms and higher interest rates. Any third-party bankruptcy or insolvency, or any breach or default by a third party on which we rely, or the loss of any significant supplier relationships, could result in material adverse impacts on our business, financial condition and results of operations. +Environmental, health and safety laws and regulations, including climate change regulations, expose us to liability and any such liability may have a material adverse effect on our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, the handling of certain materials and equipment we use in our production processes is subject to health and safety and environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or lease real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liabilities on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future +29 +Table of Contents +releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +The increasing concern over climate change has resulted in a broad range of proposed and promulgated federal, state and local regulations aimed at mitigating the effects of climate change. Because we use materials in many of our products and engage in production processes that may be the subject of certain of these regulations, if enacted, such regulations could result in additional costs and adverse effects on our business in the form of (i) additional taxes, (ii) potential fines for noncompliance, (iii) restrictions on output, (iv) additional expenditures to either purchase new, or modify existing, equipment or processes, (v) required acquisition or trading of emission allowances and/or (vi) increased costs in the price of energy and/or in procuring alternative or additional raw materials from our suppliers. These developments and further legislation that may be enacted could negatively affect our operations and increase our production costs. Climate change regulation continues to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such regulation could have a material adverse effect on our business, results of operations, financial position, capital expenditures and reputation. +Risks Relating to Ownership of our Common Stock +Our former controlling stockholders continue to own a significant percentage of our common stock, and such stockholders may influence major corporate decisions of the Company and our interests may conflict with the interests of other holders of our common stock. +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital) (“Parallel49”), were formerly our controlling stockholders and own approximately 43% of our common stock, in the aggregate, as of December 31, 2024. +As a result of their ownership, the Tricor Funds, may have the ability to influence the outcome of matters submitted to a vote of all stockholders and, through our board of directors, the ability to influence decision-making with respect to our business direction and policies. Matters over which the Tricor Funds, directly or indirectly, exercise influence include the election of directors, approval of business combinations or dispositions and other extraordinary transactions. The Tricor Funds may also have interests that differ from the interests of other holders of our securities and may vote in a way that may be adverse to other stockholders’ interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of the Company which could materially and adversely affect the market price of our securities. +The concentration of ownership by our significant stockholders and the sale or availability for sale of substantial amounts of our common stock may adversely impact the market price and liquidity of our common stock. +Although our former controlling stockholders, the Tricor Funds, reduced their ownership in our common stock from 56% as of September 30, 2024 to 43% as of December 31, 2024, they continue to maintain a significant ownership position in the Company. Continued concentrated ownership could result in a limited number of shares being available to be traded in the market, resulting in reduced liquidity, and historically the price of our common stock has experienced volatility due to the limited number of shares available to trade on the open market. +Additionally, sales of substantial amounts of our common stock in the public market, including sales by our significant stockholders, or the perception that these sales could occur, could adversely affect the market price of our common stock and could materially impair our ability to raise capital through equity offerings in the future. The shares of our common stock held by the Tricor Funds are registered for resale, which means that they may be offered and sold to the public now or in the future without regard to the volume limitations under Rule 144 of the Securities Act, and the Tricor Funds sold a portion of these shares through an underwriter in 2024. If some or all of the remaining shares are sold by the Tricor Funds or the participants in their funds, either through sale on the open market, through privately negotiated transactions or through a distribution to the participants in their funds, or if it is perceived that they will be sold, the market price of our common stock could decline. +30 +Table of Contents +Conflicts of interest may arise because directors who are principals of or who were nominated by our significant stockholders serve on our board of directors. +Nicholas Peters, who is an officer of Parallel49 (and its predecessor), serves on our board of directors. H. Sanford Riley and Lisa Oleson each were nominated to serve on our board of directors by the Tricor Funds, our significant stockholders pursuant to the Director Nomination Agreement (defined below). The Tricor Funds are controlled by Parallel49 and its affiliates. Parallel49 and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49, on the one hand, and of our other stockholders, on the other hand, arise, such directors may not be disinterested. Although our directors and officers have a duty of loyalty to the Company under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 or any entity that controls, is controlled by or under common control with Parallel49 (other than any company that is controlled by us) or any investment funds managed by Parallel49 will not be required to offer any transaction opportunity of which such person becomes aware to us and could take any such opportunity for himself, herself or itself or offer such opportunity to other companies in which such person has an investment, unless such opportunity is offered to such person solely in his, her or its capacity as one of our directors. +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +The trading market for our common stock could be influenced to some extent by the research and reports that industry or financial analysts publish about the Company and our business. We do not control these analysts. Historically, we have not attracted substantial research coverage, and the current or future analysts who publish information about our common stock may have relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. If one or more of these analysts provide inaccurate or unfavorable research, issue an adverse opinion regarding our stock price, cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +Our business and operations could be negatively affected by stockholder activism and securities litigation. +Stockholder activism, which could take many forms or arise in a variety of situations, has become increasingly prevalent in recent years. Previously, a stockholder in the Company publicly expressed criticism regarding the Company’s strategic direction, capital allocation priorities and corporate governance in connection with an attempt to nominate a director candidate at our 2023 annual meeting of stockholders. We could also face similar criticism from others, as well as criticism for risks associated with Parallel49’s significant ownership interest in the Company and may be more prone to stockholder activist demands as Parallel49’s has reduced, and may continue to reduce, its ownership in the Company. Additionally, we have in the past been subject to securities litigation following volatility in the price of our common stock, and may again be subject to securities litigation, including as a result of the volatility in the price of our common stock, related to stockholder activism, or otherwise. +Stockholder activism, including potential proxy contests and advance stockholder proposals, and securities litigation could result in substantial costs and divert management’s and our board of directors’ attention and resources from our business. Additionally, stockholder activism or securities litigation could give rise to perceived uncertainties as to our future, adversely affect our relationships with customers and make it more difficult to attract and retain qualified personnel. These matters could also hinder the execution of our business and growth strategies or constrain our capital deployment opportunities. Further, the price of our common stock could be subject to significant fluctuation or otherwise be adversely affected. Any adverse determination in litigation could also subject us to significant liabilities. +31 +Table of Contents +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +● the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +● stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors; +● advance notice procedures and information and disclosure requirements for nominating candidates to our board of directors or presenting matters at stockholder meetings; and +● allowing only our board of directors to fill vacancies on our board of directors. +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate when the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti-takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of the Company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, the potential issuance of preferred stock may delay or prevent a change in control of us or discourage bids for our common stock at a premium over the market price. It may also adversely affect the market price and the voting and other rights of the holders of our common stock as it could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +32 +Table of Contents +General Risk Factors +We are required to comply with complex laws and regulations in the United States and other countries and are exposed to business risks associated with our international business. Moreover, changes in such laws could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against. +We are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, unclaimed property, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. Though we currently have limited international operations, the expansion thereof in the future may increasingly expose us to risks associated with international business operations, including political instability (e.g., the threat of or actual war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. We may not be in full compliance at all times with the laws and regulations to which we are subject and we may not have obtained the permits, authorizations or licenses that we need. Any failure to comply with applicable laws or regulations could result in fines or sanctions. In such a case, or if any of these international business risks were to materialize, there could be a material adverse effect on our business, financial condition and results of operations. +Our business and financial results may be materially adversely affected by various legal and regulatory proceedings. +We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our business, operating results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any liability that may be imposed on us. +Item 1B. +Unresolved Staff Comment s +None. +Item 1C. Cybersecurity +Cyber threat actors and the types of threats posed are becoming more sophisticated and effective and are increasingly targeting commercial companies. In seeking to mitigate these cyber threats to our business, we take a comprehensive approach to cybersecurity risk management and make securing the data, customers and other stakeholders entrusted to us, a top priority. The board of directors and our management are actively involved in the oversight of our risk management program, which includes cybersecurity. We have established policies, standards, processes and practices for assessing, identifying and managing material risks from cybersecurity threats. There may be instances where our policies and procedures are not properly followed or where such policies and procedures prove to be ineffective. As of the date hereof, we are not aware of any material risk from cybersecurity threats that has materially affected the Company , including our business strategy, results of operations or financial condition. We can provide no assurance that there will not be incidents in the future or that such incidents will not materially affect us, including our business strategy, results of operations, or financial condition. For more information regarding risks related to system security risks, data protection breaches and cyber-attacks, see the risk factor entitled “System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, impair customer and vendor relationships, disrupt our internal operations, harm perception of our products and expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and our reputation” included as part of our risk factor disclosures at Item 1A of this Annual Report on Form 10-K. +Risk Management and Strategy +Our policies and processes for assessing, identifying and managing material risks from cybersecurity threats are integrated into our overall risk management program and are based on the frameworks established by the National Institute of Standards and Technology (“NIST”) and other applicable industry standards. Our cybersecurity program in particular focuses on the following key areas: +33 +Table of Contents +Collaboration +We work to identify and address our cybersecurity risks through a comprehensive, cross-functional approach. Key security, risk and compliance stakeholders meet regularly to develop strategies for preserving the confidentiality, integrity and availability of Company and customer information, identifying, preventing and mitigating cybersecurity threats and effectively responding to cybersecurity incidents. We maintain controls and procedures that are designed to encourage prompt escalation of certain cybersecurity incidents so that decisions regarding customer and supplier disclosure, public disclosure and reporting of such incidents can be made by management and the board of directors in a timely manner. +Risk Assessment +Annually, the Security Committee (defined below) conducts a cybersecurity risk assessment that takes into account information from internal stakeholders, known information security vulnerabilities and information from external sources (e.g., reported security incidents that have impacted other companies, industry trends and evaluations by third parties and consultants). The results of the assessment are used to drive alignment on, and prioritization of, initiatives to enhance our security controls, make recommendations to improve processes and inform a broader enterprise-level risk assessment that is analyzed by the Security Committee and presented to the board of directors, Audit Committee and members of management. +Technical Safeguards +The Company’s cybersecurity program evaluates new threats to learn new attacker techniques, adopt defenses and implement new safeguards to protect our information systems from cybersecurity threats. These safeguards are evaluated and improved based on vulnerability assessments, cybersecurity threat intelligence and incident response experience. Independent assessments of the safeguards by external third-party consultants, which also include the detection of threats, are evaluated and improvements to systems are incorporated. +Incident Response and Recovery Planning +In an effort to effectively respond to a security event, we follow a comprehensive cybersecurity incident response plan. We regularly review, test and evaluate the plan for effectiveness. +Third-Party Risk Management +We have implemented controls designed to identify and mitigate cybersecurity threats associated with our use of third-party service providers. Such providers are subject to security risk assessments at the time of onboarding, contract renewal and upon detection of an increase in risk profile. We use a variety of inputs in such risk assessments, including information supplied by providers and third parties . In addition, we require our providers to meet appropriate security requirements, controls and responsibilities and investigate security incidents that have impacted our third-party providers, as appropriate. +Education and Awareness +Our Company policies require our employees to assist in the protection of our customers’ data. We have various training programs, conducted frequently, designed to heighten employees' awareness of current threats, educate them on effective mitigation strategies and reinforce the importance of handling and safeguarding customer and employee data in accordance with our established security protocols. To evaluate the effectiveness of these training programs and monitor the effectiveness of our security controls, we have implemented mock testing practices. Annual incident response training is conducted for administrative personnel that would be expected to be involved with, and respond to, a security incident. +External Assessments +Our cybersecurity policies, standards, processes and practices are regularly assessed by consultants and external auditors. These assessments include a variety of activities including information security maturity assessments, audits +34 +Table of Contents +and independent reviews of our information security control environment and operating effectiveness. We conduct regular independent cyber audits to assess our controls and alignment against the NIST Cybersecurity Framework, compromise assessments to baseline and assess if a current or past compromise had occurred within our infrastructure, and maintain industry certifications and attestations that demonstrate our dedication to protecting customer data. The results of significant assessments are reported to management, the board of directors and Audit Committee. Cybersecurity processes are adjusted based on the information provided from these assessments. +Governance +Board Oversight +The board of directors, in coordination with the Audit Committee, oversees our management of cybersecurity risk. They receive regular reports from management about the prevention, detection, mitigation and remediation of cybersecurity incidents, including material security risks and information security vulnerabilities. Our Audit Committee, as part of its risk oversight function, is responsible for overseeing our cybersecurity program. The Audit Committee receives regular updates from management on cybersecurity risk resulting from risk assessments, progress of risk reduction initiatives, external auditor feedback, control maturity assessments and relevant internal and industry cybersecurity incidents. +Management’s Role +Our Chief Information Security Officer (“CISO”), Chief Information Officer (“CIO”), Chief Technology Officer (“CTO”), Chief Legal and Compliance Officer (“CLCO”) and Director of Information and Cybersecurity (“DC”) have primary responsibility for assessing and managing material cybersecurity risks and are members of an internal committee that reviews issues and initiatives related to data security and privacy (the “Security Committee”), which drives alignment on security decisions across the Company. The CISO has over 20 years of experience in various roles related to information security and related technology, including roles specific to managing security requirements related to organizations operating in the payment card industry. The CIO, CTO and DC also each have over 20 years of experience serving in various roles in information technology fields; the CIO has over 25 years of global technology leadership across fintech, software, and payments industries, leading technology, product, and engineering organizations for multinational companies, with extensive experience in implementing software solutions and managing risk across the entire technology lifecycle. The CTO has been with the Company since 2014 and the DC previously served as the Chief Information Security Officer at an IT services and consulting company. The CLCO has over 20 years of experience managing risks and related disclosure requirements, including risks arising from cybersecurity threats, at publicly traded companies. The Security Committee meets at least quarterly to evaluate security performance metrics, prioritize risks identified through threat intelligence, vulnerability and risk assessments, external audits, and incident response insights, and review the progress of approved security enhancements. The Security Committee also considers and makes recommendations to the Audit Committee on security policies and procedures, security service requirements and risk mitigation strategies . +Item 2. +Propertie s +Information regarding each of our facilities, which may include multiple leases at each location, is set forth below. +Location +Operations +Square +Footage +Owned/ +Leased +Littleton, Colorado +Debit and Credit card production, corporate facility +65,000 +Leased +Roseville, Minnesota +Debit and Credit card production and personalization services; and Prepaid Debit card packaging services, fulfillment +227,000 +Leased +Fort Wayne, Indiana (1) +Debit and Credit card production +45,000 +Leased +Nashville, Tennessee +Debit and Credit card personalization services, instant issuance, fulfillment +65,000 +Leased +(1) In 2025, we intend to relocate our current Indiana operations to a new build-to-suit leased facility. This new facility will be located in Fort Wayne, Indiana and will be approximately 80,000 square feet. +35 +Table of Contents +Item 3. +Legal Proceeding s +The Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations . +Item 4. +Mine Safety Disclosure s +Not applicable. +PART I I +Item 5. +Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market +Our common stock trades on the Nasdaq Global Market under the symbol “PMTS”. +Holders +There were 19 stockholders of record as of February 27, 2025. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. +Dividends +We do not currently expect that any cash or other dividends will be paid to holders of our common stock in the near future. Any future cash dividend or other dividend declarations are subject to the determination of the Company’s board of directors. +Repurchases +On November 2, 2023, the Company's board of directors approved a share repurchase plan authorizing the Company to repurchase up to $20.0 million of the Company's common stock, par value $0.001 per share. This authorization expired on December 31, 2024 with a remaining unused authorized amount of $11.2 million . +In connection with the share repurchase plan, the Company entered into stock repurchase agreements with Parallel49, which was one of the Company’s majority stockholders. The Company agreed to purchase from Parallel49, and Parallel49 agreed to sell to the Company, three times the number of shares of the Company’s common stock acquired by the Company in the open market from time to time from non-Parallel49 holders up to a maximum of 650,000 shares in total. Pursuant to these agreements, the Company repurchased 364,848 shares from Parallel49 at an average price of $18.09 per share during the year ended December 31, 2024. The agreements with Parallel49 expired on June 30, 2024. +The following table sets forth share repurchases activity for each of the three months of the quarter ended December 31, 2024: +Period +Total Number of +Shares Purchased +Average Price +Paid per Share +Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs +Approximate Dollar +Value of Shares that +May Yet Be Purchased +Under the Plans or +Programs (in thousands) +October 1 - 31 +— +$ +— +— +$ +11,154 +November 1 - 30 +— +$ +— +— +$ +11,154 +December 1 - 31 +— +$ +— +— +$ +— +Total +— +$ +— +— +36 +Table of Contents +Item 6. +[Reserved] +Item 7. +Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K . This discussion and analysis contains forward - looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward - looking statements as a result of certain factors, some of which are not within our control. See "Risk Factors" and “Cautionary Statement Regarding Forward - Looking Statements.” +Company Overview +CPI is a payments technology company providing a comprehensive range of payment cards and related digital solutions. We are a leader in several areas of the U.S. payment card solutions market, including debit and credit card production, personalization, and Software-as-a-Service-based (“SaaS-based”) instant issuance services. We are also a market leader in the production of “Prepaid Debit Cards,” which we define as debit cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ) but not linked to a traditional bank account, and related secure packaging solutions. We serve thousands of customers through direct and indirect sales channels and have maintained long-standing relationships with our top customers. +Our revenues are primarily generated from the production of and services related to secure debit and credit cards that are issued on the networks of the Payment Card Brands, including Prepaid Debit Cards. +Segment Overview +Our business consists of the following reportable segments: Debit and Credit, Prepaid Debit, and Other. +Debit and Credit Segment +Our Debit and Credit segment primarily produces secure debit and credit cards and provides card services for U.S. card-issuing financial institutions. Services include personalization; instant issuance, which provides customers the ability to issue an instant personalized debit or credit card on-demand within a customer location; and other payment solutions such as digital push provisioning for mobile wallets. +Prepaid Debit Segment +Our Prepaid Debit segment primarily provides secure packaging solutions, Prepaid Debit Cards, and other integrated prepaid card services to prepaid program managers in the U.S. +Other +Our Other segment includes corporate expenses. +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive income. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of payment cards, including contact and contactless cards, which includes our eco-focused cards. Contactless cards have additional technology to process contactless transactions and generally have a higher selling price +37 +Table of Contents +than contact-only cards. We also generate product revenue from the sale of our Card@Once ® instant issuance system and consumables, private label credit cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of payment cards, tamper-evident secure packaging, fulfillment services, SaaS-based personalization of instant issuance payment cards and other digital offerings. See Part II, Item 8, Financial Statements and Supplementary Data , Note 2 “Summary of Significant Accounting Policies” and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates—Revenue Recognition” in this Annual Report on Form 10-K for further information and timing of revenue recognition for net sales. We include gross shipping and handling revenue in net sales. +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including microchips for all applicable cards and antennas for contactless cards, labor costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and transport costs. Product costs also include Card@Once instant issuance hardware and consumable product costs. Services costs include the cost of labor, raw materials in the case of tamper-evident secure packaging, equipment and facilities costs, operation overhead, depreciation and amortization, leases and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, promotional activity, and employee relations. We include the costs of shipping and handling related to customer sales in cost of sales. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal and compliance, information technology, procurement, customer service, human resources, research and development and administrative personnel, including payroll, benefits and stock-based compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and software related fees. Operating expense also includes depreciation and amortization expense and may include impairment charges on tangible and intangible assets, when necessary. +Income from Operations and Operating Margin +Income from operations consists of our gross profit less our net operating expenses. Operating margin is income from operations as a percentage of net sales. +Other (Expense) Income, net +Other (expense) income, net consists primarily of interest expense and other non-operating items. +Income Tax Expense +Income tax expense consists of our federal and state income taxes at statutory rates, including the impact of other items such as valuation allowances, tax credits, permanent items, and foreign taxes. +Net Income +Net income consists of our income from operations, less other expense, net, and income taxes. +38 +Table of Contents +Results of Operations +Year Ended December 31, 2024 Compared With Year Ended December 31, 2023 +The following table presents the components of our consolidated statements of operations and comprehensive income for each of the periods presented: +Year Ended December 31, +2024 +2023 +$ Change +% Change +(dollars in thousands) +Net sales: (1) +Products +$ +250,008 +$ +249,354 +$ +654 +0.3 +% +Services +230,593 +195,193 +35,400 +18.1 +% +Total net sales +480,601 +444,547 +36,054 +8.1 +% +Cost of sales (1) +309,382 +289,058 +20,324 +7.0 +% +Gross profit +171,219 +155,489 +15,730 +10.1 +% +Operating expenses +108,427 +93,899 +14,528 +15.5 +% +Income from operations +62,792 +61,590 +1,202 +2.0 +% +Other expense, net: +Interest, net +(34,087) +(26,913) +(7,174) +26.7 +% +Loss on debt extinguishment +(2,987) +(243) +(2,744) +* +Other (expense) income, net +(691) +28 +(719) +* +Income before taxes +25,027 +34,462 +(9,435) +(27.4) +% +Income tax expense +(5,506) +(10,477) +4,971 +(47.4) +% +Net income +$ +19,521 +$ +23,985 +$ +(4,464) +(18.6) +% +Gross profit margin +35.6% +35.0% +* Calculation not meaningful. +(1) For the years ended December 31, 2024 and 2023, net sales and cost of sales each include $1.2 million and $0.7 million of intersegment eliminations, respectively. +The following discussion of our consolidated results of operations and segment results refers to the year ended December 31, 2024 compared to the corresponding prior year period. The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the consolidated statements of operations and comprehensive income. +Net Sales: +Net sales increased for the year ended December 31, 2024, primarily due to higher Services net sales in our Prepaid Debit segment and higher personalization services net sales in our Debit and Credit segment. +Net sales were negatively impacted by reduced demand from some of our customers for debit and credit card products during 2023 and the first half of 2024, which we believe was the result of economic concerns and supply chain-related purchase timing, whereby certain customers increased their inventory of our products during 2022 amid product availability concerns and then focused on reducing their inventory levels in subsequent periods. +Gross Profit and Gross Profit Margin: +Gross profit and gross profit margin increased for the year ended December 31, 2024, primarily due to higher net sales described above and the resulting operating leverage. +Operating Expenses: +Operating expenses increased for the year ended December 31, 2024, primarily due to increased compensation-related expenses, including employee performance-based incentive compensation related to stronger 2024 company performance compared to 2023 and salary expenses. +39 +Table of Contents +Interest, net : +Interest expense increased for the year ended December 31, 2024, primarily due to payment of an early redemption premium of $5.8 million related to the redemption of the $267.9 million 8.625% Senior Secured Notes due 2026 (the “2026 Senior Notes”), as well as impacts from higher interest rates on the 10.000% Senior Secured Notes due 2029 (defined below) entered into on July 11, 2024. +Loss on Debt Extinguishment: +During the year ended December 31, 2024, we recorded a loss on debt extinguishment relating to unamortized deferred financing costs in connection with the redemption of the 2026 Senior Notes and the refinancing of our ABL Revolver Credit Agreement in July 2024. +Other (Expense) Income, net: +Other (expense) income, net increased for the year ended December 31, 2024, primarily due to expenses incurred related to a secondary offering of our common stock. See Part II, Item 8, Financial Statements and Supplementary Data , Note 12, “Stockholders’ Deficit” of the consolidated financial statements for further information. +Income Tax Expense: +Our effective tax rates on pre-tax income were 22.0% and 30.4% for the years ended December 31, 2024 and 2023, respectively. The effective tax rate for the year ended December 31, 2024 benefited from increased deductibility of stock-based compensation realized upon certain stock option exercises and restricted stock unit vesting, and benefits recognized due to the lapse of the statute of limitations related to specific uncertain tax benefit positions. The effective tax rate for the year ended December 31, 2023 was impacted by limitation of executive compensation deductibility related to the former Chief Executive Officer’s (“CEO’s”) retention agreement. +Segment Discussion +Debit and Credit: +Year Ended December 31, +2024 +2023 +$ Change +% Change +(dollars in thousands) +Net sales +$ +375,261 +$ +361,057 +$ +14,204 +3.9 +% +Gross profit +$ +128,095 +$ +126,776 +$ +1,319 +1.0 +% +Income from operations +$ +92,856 +$ +94,906 +$ +(2,050) +(2.2) +% +Gross profit margin +34.1% +35.1% +Net Sales: +Net sales for Debit and Credit increased for the year ended December 31, 2024, primarily due to increased Services net sales. The increase in Services net sales was driven by higher personalization and Card@Once services. Products net sales were relatively consistent, as higher volumes of contactless cards were offset by volume declines in contact-only and other cards. +Gross Profit and Gross Profit Margin: +Gross profit for Debit and Credit was relatively consistent and gross profit margin decreased for the year ended December 31, 2024 as the increase in net sales was offset by a higher volume of lower margin products sold compared to the prior year period. +40 +Table of Contents +Income from Operations: +Income from operations for Debit and Credit decreased for the year ended December 31, 2024, primarily due to increased employee performance-based incentive compensation related to stronger 2024 company performance compared to 2023 and salary expenses. +Prepaid Debit: +Year Ended December 31, +2024 +2023 +$ Change +% Change +(dollars in thousands) +Net sales +$ +106,541 +$ +84,237 +$ +22,304 +26.5 +% +Gross profit +$ +43,124 +$ +28,713 +$ +14,411 +50.2 +% +Income from operations +$ +37,201 +$ +24,927 +$ +12,274 +49.2 +% +Gross profit margin +40.5% +34.1% +Net Sales: +Net sales for Prepaid Debit increased for the year ended December 31, 2024, primarily due to increased sales to existing customers of higher-priced packaging solutions and healthcare payment cards. +Gross Profit and Gross Profit Margin: +Gross profit and gross profit margin for Prepaid Debit increased for the year ended December 31, 2024, primarily due to higher net sales discussed above and the resulting operating leverage. +Income from Operations: +Income from operations for Prepaid Debit increased for the year ended December 31, 2024, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above, partially offset by increased employee performance-based incentive compensation related to stronger 2024 company performance compared to 2023 and salary expenses. +Other: +As the Other segment is comprised entirely of corporate expenses, income from operations for Other consists of operating expenses shown below. +Year Ended December 31, +2024 +2023 +$ Change +% Change +(dollars in thousands) +Operating expenses +$ +67,265 +$ +58,243 +$ +9,022 +15.5 +% +Operating Expenses: +Other operating expenses increased for the year ended December 31, 2024, primarily due to an increase in compensation-related expenses, including the factors discussed in consolidated “Operating Expenses” above. +41 +Table of Contents +Liquidity and Capital Resources +At December 31, 2024, we had $33.5 million of cash and cash equivalents. Our primary source of liquidity has been cash generated from our operating activities, which has been driven from net income and fluctuations in working capital. Our working capital fluctuates primarily due to the timing of tax payments, timing of receipts from customers, inventory purchases, payments of employee incentive programs and interest payments on our outstanding Senior Notes, with the interest payments being due in the first and third quarters of the year. +Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, depends on our ability to generate excess operating cash flows through our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, and our senior secured revolving credit facility (the “2029 ABL Revolver”) with available borrowing capacity of $72.8 million as of December 31, 2024, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, and working capital needs. Our future cash flows could be impacted by a variety of factors, some of which are beyond our control. Factors include, but are not limited to, demand from some of our customers for certain products and services, changes in economic conditions, especially those impacting our customers, and the pricing, terms and availability of goods and services that we purchase, and financings that we enter into. +Cash Flows from Operating Activities +Cash provided by operating activities for the year ended December 31, 2024 increased to $43.3 million from $34.0 million for the year ended December 31, 2023, primarily due to higher net income excluding debt refinancing costs and changes in working capital. Working capital changes included lower employee performance-based incentive compensation payments in 2024 related to 2023 performance as compared to those made in 2023 related to 2022 performance and lower cash paid for interest on our Senior Notes due to the timing of the refinancing, partially offset by payments for incentives related to a customer contract entered into in the first quarter of 2024, a $5.0 million payment pursuant to an agreement entered into on June 2, 2023 with the Company’s prior CEO, and deposits made on machinery and equipment yet to be placed in service. Working capital was also significantly impacted in 2024 by the timing of collections from customers and payments to our vendors. +Financing +As of December 31, 2024 and 2023, we had the following outstanding borrowings: +December 31, +2024 +2023 +(dollars in thousands) +2029 Senior Notes +$ +285,000 +$ +— +2026 Senior Notes +— +267,897 +Unamortized deferred financing costs +(4,595) +(2,900) +Total long-term debt +$ +280,405 +$ +264,997 +2029 Senior Notes +On July 11, 2024 (the “Closing Date”), we completed a private offering by our wholly-owned subsidiary, CPI CG Inc. (the “Issuer”), of $285.0 million aggregate principal amount of 10.000% Senior Secured Notes due 2029 (the “2029 Senior Notes”) and related guarantees at an issue price of 100%. The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended, to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S. persons in compliance with Regulation S under the Securities Act. +Net proceeds from the 2029 Senior Notes, together with cash on hand, were used to redeem the entire principal balance of $267.9 million on the 2026 Senior Notes as of the Closing Date, and to pay related fees, an early redemption premium of 2.156%, and other expenses. The early redemption premium paid is recorded in “Interest, net” on the consolidated statement of operations and comprehensive income for the year ended December 31, 2024. +42 +Table of Contents +The 2029 Senior Notes mature on July 15, 2029. Interest is payable on the 2029 Senior Notes on January 15 and July 15 of each year, beginning on January 15, 2025. The 2029 Senior Notes are guaranteed by us and our domestic subsidiaries (other than the Issuer), and are secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. We may be required to make an offer to repurchase the 2029 Senior Notes, upon the occurrence of certain events including a change of control or certain asset sales. +2029 ABL Revolver +On the Closing Date, the Company and CPI CG Inc. as borrower (the “Borrower”), entered into a credit agreement (the “ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility (the “2029 ABL Revolver”) of up to $75.0 million (the “Maximum Revolver Amount”). The 2029 ABL Revolver is guaranteed by us and our subsidiaries (other than excluded subsidiaries (as defined in the ABL Credit Agreement)), and is secured by substantially all of the assets of the Company, the Borrower and their subsidiaries, (other than excluded subsidiaries (as defined in the ABL Credit Agreement)). +The 2029 ABL Revolver consists of revolving loans, letters of credit and swing line loans provided by lenders, with a sublimit on letters of credit outstanding at any time of $10.0 million. The 2029 ABL Revolver also includes an uncommitted accordion feature whereby the Borrower may increase the 2029 ABL Revolver commitment by an aggregate amount not to exceed $25.0 million, subject to certain conditions. The 2029 ABL Revolver matures on the earliest to occur of July 11, 2029 and the date that is 91 days prior to the maturity of the 2029 Senior Notes. +As of the Closing Date, the Borrower had $4.0 million of outstanding borrowings under a prior Credit Agreement with Wells Fargo Bank, N.A. entered into in March 2021 (the “2026 ABL Revolver”). The Company used initial borrowings under the 2029 ABL Revolver, together with cash on hand and proceeds under the notes, to repay in full and terminate the 2026 ABL Revolver and to pay related fees and expenses, and will use future borrowings for general corporate purposes. +Borrowings under the 2029 ABL Revolver bear interest at a rate per annum that ranges based on the applicable term secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York plus 1.50% to 1.75% (subject, in each case, to a credit spread adjustment of 0.10%), based on the average daily borrowing capacity under the 2029 ABL Revolver over the most recently completed month. The unused portion of the 2029 ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily excess availability under the 2029 ABL Revolver over the immediately preceding month. +As of December 31, 2024, there were no outstanding borrowings on the 2029 ABL Revolver. +Credit Ratings and Debt Covenants +The credit ratings on our debt are an important consideration in our overall business, managing our financing costs and facilitating access to additional capital on favorable terms. Factors that we believe are important in assessing our credit ratings include earnings, cash flow generation, leverage, available liquidity and the overall health of the business. +The 2029 Senior Notes and the 2029 ABL Revolver contain covenants limiting the ability of the Company, the Borrower and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Borrower and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the indenture governing the 2029 Senior Notes and the ABL Credit Agreement. +The 2029 ABL Revolver includes limitations on the Borrower’s ability to borrow in certain situations, including limitations based on the calculation of borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than the greater of $7.5 million and 10% of the Maximum Revolver Amount. The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments (the “Borrowing Base”) and b) the Maximum Revolver Amount. The +43 +Table of Contents +Borrowing Base is further reduced by credit line reserves and letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below the greater of $7.5 million and 10% of the Maximum Revolver Amount and until such time that borrowing capacity equals or exceeds the greater of $7.5 million and 10% of the Maximum Revolver Amount for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the ABL Credit Agreement) of at least 1.00 to 1.00, calculated for the trailing 12 months, in order to borrow under the ABL Revolver. +Cash Priorities +Capital Expenditures +We primarily use cash in investing activities for capital expenditures. During the year ended December 31, 2024, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $9.3 million. +During 2023, we commenced work on relocating and modernizing our production facility in Indiana. Capital expenditures, net for this project are anticipated to increase cash used in investing activities and assets acquired under lease arrangements in 2025. +Share Repurchase Authorization and Activity +On November 2, 2023, our board of directors approved a share repurchase plan authorizing us to repurchase up to $20.0 million of our common stock, par value $0.001 per share. This authorization expired on December 31, 2024 with a remaining unused authorized amount of $11.2 million . +During the year ended December 31, 2024, we repurchased 473,284 shares of our common stock at an average price of $18.16 per share, excluding commissions, or $8.6 million in aggregate, on a trade date basis. This amount includes 364,848 shares purchased from one of our significant stockholders at an average price of $18.09 per share, in accordance with the stock repurchase agreements entered into with Tricor Pacific Capital Partners (Fund IV) US, LP (“Parallel49”). +Material Cash Requirements +Our material cash requirements include interest payments on our long-term debt, operating and finance lease payments, and purchase obligations to support our operations. +Debt Service Requirements +As of December 31, 2024, the total projected principal and interest payments on our borrowings are $429.7 million, primarily related to the 2029 Senior Notes, of which $29.2 million of interest is expected to be paid in the next 12 months. +The remaining interest payments are expected to be paid over the remaining term of the 2029 Senior Notes, which mature in 2029, and the principal is due upon maturity. We have estimated our future interest payments assuming no additional borrowings under the 2029 ABL Revolver, no early redemptions of principal on the 2029 Senior Notes, and no debt issuances or renewals upon the maturity dates of our notes. However, we may borrow additional amounts under the 2029 ABL Revolver, redeem principal on the 2029 Senior Notes early or refinance all or a portion of our borrowings in future periods. +Leases +We lease equipment and real property for production and services. Refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 9, “Financing and Operating Leases,” for details on our leasing arrangements, including future maturities of our operating lease liabilities, as of December 31, 2024. +In February 2024, we entered into a build-to-suit lease agreement to relocate and modernize our operations at our Fort Wayne, Indiana production facility, which is set to commence the later of: (i) the landlord’s delivery of +44 +Table of Contents +exclusive possession of the premises and (ii) March 1, 2025. Under this lease agreement, we will pay an annual base rent of $0.9 million subject to an annual rent increase of 2.0%. The lease is for 10 years and includes two consecutive options to extend the term of the lease by five years for each such option. +Purchase Obligations +A purchase obligation is an agreement to purchase goods or services that is enforceable, legally binding, and specifies all significant terms. As of December 31, 2024, we had approximately $78.9 million of outstanding purchase obligations, of which approximately $66.5 million is expected to be paid in the next 12 months. +Included in the above amounts, during 2023, we entered into a capacity reservation agreement with one of our chip suppliers to reserve production supply capacity due to the current global supply shortage environment. Under the agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve capacity to produce a set quantity of chips from 2023 through 2026, subject to certain conditions, and we have committed to purchase those chips. The total value of the minimum non-cancellable commitment is approximately $190.0 million over the term of the agreement. As of December 31, 2024, the remaining commitment was $62.0 million, of which $49.9 million is expected to be paid in the next 12 months. In the event that the supplier is unable to deliver the specified quantity of chips, it will be subject to liquidated damages of 10% of the price of any non-delivered products. +Cyclical and Seasonal Nature of Business +Payment cards are generally influenced by broader cyclical changes in the economy, with economic downturns potentially resulting in decreases in the demand for our products and services and economic upturns potentially resulting in increases in demand. In particular, prolonged economic downturns typically have resulted in significant reductions in the production demand for general purpose credit cards due to tightening credit conditions. Our net sales are also influenced by changes in customer behavior such as altering inventory management practices, payment card renewal cycles and demand for new products, such as contactless cards. Additionally, we historically have generated higher net sales in the third and fourth quarters of the year, as our sales of Prepaid Debit Card solutions are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season in the United States and timing related to the production of health insurance and health savings account cards. +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported net sales, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +Revenue Recognition +Products Net Sales: “ Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are produced for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, we estimate net sales by taking actual costs incurred and applying historical margins for similar types of contracts. Margins across each business with similar contracts have been relatively consistent and we have not made changes to our methods and assumptions during 2024. Items included in “Products” net sales are produced payment cards, including contact, contactless, eco-focused, and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once hardware and consumables are also included in “Products” n et sales, and their associated revenues are recognized at the time of shipping. +45 +Table of Contents +Serv ices Net Sales: Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of payment cards, providing tamper-evident secure packaging and fulfillment services to prepaid program managers, and SaaS-based personalization of instant issuance debit and credit cards. For work performed but not completed and billed, we estimate revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Margins across each business with similar contracts have been relatively consistent and we have not made changes to our methods and assumptions during 2024. +Customer Contracts: The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. Usually our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. The contract term as defined by the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers , is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +Costs to Obtain a Contract with a Customer: Costs to obtain a contract (“contract costs”) include only those costs incurred to obtain a contract that the Company would not have incurred if the contract had not been obtained. For contracts where the term is greater than one year, these costs are recorded as an asset and amortized consistent with the timing of the related revenue over the life of the contract. To do so, we estimate the amount of the contract costs over the term of the contract as well as the timing of future revenue over the term of the contract to determine the amortization of such costs. The current portion of the asset is included in “Prepaid expenses and other current assets” and the noncurrent portion is included in “Other assets” on the Company's consolidated balance sheets. Contract costs incurred but unpaid are included in “Accrued expenses” on the Company's consolidated balance sheets. Contract costs are expensed as incurred when the amortization period is one year or less. +Income Taxes +We are subject to income taxes in the United States and certain foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of the reversal of taxable temporary differences and the impact of tax planning strategies. Changes in the relevant facts can significantly impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. +During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. The company is required to make estimates regarding future compensation for covered individuals to determine the value of its deferred tax assets related to the future deductibility of executive stock-based compensation and accrued incentive compensation, which also requires significant judgment. We also establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the current provision for income taxes. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. +46 +Table of Contents +The Company’s valuation allowance recorded as of December 31, 2024, relates to certain state net operating losses, which the Company estimates may not be fully utilized. Additionally, other changes to the federal and state tax regulations can lead to variability in allowable deductions, which can impact the Company’s valuation allowance. +Recent Accounting Pronouncements +Refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 2, “Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements. +Item 7A. +Quantitative and Qualitative Disclosures about Market Ris k +Not required due to smaller reporting company status. +Item 8. +Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 2024 and 2023 and for the years ended December 31, 2024 and 2023 +Report of Independent Registered Public Accounting Firm (KPMG LLP, Denver, CO, Auditor Firm ID: 185 ) +48 +Consolidated Balance Sheets +50 +C onsolidated Statements of Operations and Comprehensive Income +51 +Consolidated Statements of Stockholders’ Deficit +52 +Consolidated Statements of Cash Flows +53 +Notes to Consolidated Financial Statements +54 +47 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +Basis for Opinions +The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of +48 +Table of Contents +management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Assessment of impairment indicators from certain contracts with customers +As discussed in Note 2 to the financial statements, the Company records costs to obtain a contract with a term greater than one year as an asset and amortizes the costs consistent with the timing of the related revenue over the life of the contract. The asset is amortized as a reduction of the transaction price over the period of expected cash flows. The Company estimates the timing of future revenue to determine the amortization of such costs and assesses the asset for impairment. The current portion of the asset is included in prepaid expenses and other current assets and the noncurrent portion is included in other assets on the Company’s consolidated balance sheet. As of December 31, 2024, the Company recorded $11.3 million in prepaid expenses and other current assets and $20.3 million in other assets, a portion of which related to these contract costs. +We identified the assessment of any indicators of impairment of the costs to obtain certain contracts with a term greater than one year as a critical audit matter. Subjective auditor judgment was required to assess any indicators of impairment due to the nature of available evidence. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of an internal control related to the Company’s assessment of any indicators of impairment. We compared actual revenue recorded to the terms of certain contracts with customers to determine if any indicators of impairment existed. +/s/ KPMG LLP +We have served as the Company’s auditor since 2014. +Denver, Colorado +March 4, 2025 +49 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(in thousands, except share and per share amounts) +December 31, +2024 +2023 +Assets +Current assets: +Cash and cash equivalents +$ +33,544 +$ +12,413 +Accounts receivable, net +85,491 +73,724 +Inventories, net +72,660 +70,594 +Prepaid expenses and other current assets +11,347 +8,647 +Total current assets +203,042 +165,378 +Plant, equipment, leasehold improvements and operating lease right-of-use assets, net +68,648 +63,053 +Intangible assets, net +10,492 +14,122 +Goodwill +47,150 +47,150 +Other assets +20,325 +3,980 +Total assets +$ +349,657 +$ +293,683 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +16,123 +$ +12,802 +Accrued expenses +57,979 +35,803 +Deferred revenue and customer deposits +1,485 +840 +Total current liabilities +75,587 +49,445 +Long-term debt +280,405 +264,997 +Deferred income taxes +3,318 +7,139 +Other long-term liabilities +25,968 +24,038 +Total liabilities +385,278 +345,619 +Commitments and contingencies (Note 14) +Series A Preferred Stock; $ 0.001 par value— 100,000 shares authorized; 0 shares issued and outstanding at December 31, 2024 and 2023 +— +— +Stockholders’ deficit: +Common stock; $ 0.001 par value— 100,000,000 shares authorized; 11,240,507 and 11,446,155 shares issued and outstanding at December 31, 2024 and 2023, respectively +11 +11 +Capital deficiency +( 105,429 ) +( 102,223 ) +Accumulated earnings +69,797 +50,276 +Total stockholders’ deficit +( 35,621 ) +( 51,936 ) +Total liabilities and stockholders’ deficit +$ +349,657 +$ +293,683 +See accompanying notes to consolidated financial statements +50 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive Income +(in thousands, except share and per share amounts) +Year Ended December 31, +2024 +2023 +Net sales: +Products +$ +250,008 +$ +249,354 +Services +230,593 +195,193 +Total net sales +480,601 +444,547 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +166,036 +161,374 +Services (exclusive of depreciation and amortization shown below) +131,952 +117,397 +Depreciation and amortization +11,394 +10,287 +Total cost of sales +309,382 +289,058 +Gross profit +171,219 +155,489 +Operating expenses: +Selling, general and administrative (exclusive of depreciation and amortization shown below) +103,401 +88,255 +Depreciation and amortization +5,026 +5,644 +Total operating expenses +108,427 +93,899 +Income from operations +62,792 +61,590 +Other expense, net: +Interest, net +( 34,087 ) +( 26,913 ) +Loss on debt extinguishment +( 2,987 ) +( 243 ) +Other (expense) income, net +( 691 ) +28 +Total other expense, net +( 37,765 ) +( 27,128 ) +Income before income taxes +25,027 +34,462 +Income tax expense +( 5,506 ) +( 10,477 ) +Net income +$ +19,521 +$ +23,985 +Basic and diluted earnings per share: +Basic earnings per share +$ +1.75 +$ +2.10 +Diluted earnings per share +$ +1.64 +$ +2.01 +Basic weighted-average shares outstanding +11,152,648 +11,426,124 +Diluted weighted-average shares outstanding +11,878,076 +11,917,556 +Comprehensive income: +Net income +$ +19,521 +$ +23,985 +Total comprehensive income +$ +19,521 +$ +23,985 +See accompanying notes to consolidated financial statements +51 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Stockholders’ Deficit +(in thousands, except per share amounts) +Common Stock +Capital +Accumulated +Stockholders +Shares +Amount +deficiency +earnings (loss) +Deficit +December 31, 2022 +11,390,355 +$ +11 +$ +( 108,379 ) +$ +26,291 +$ +( 82,077 ) +Shares issued under stock-based compensation plans +68,980 +— +( 368 ) +— +( 368 ) +Stock-based compensation +— +— +7,507 +— +7,507 +Repurchase and retirement of common shares +( 13,180 ) +— +( 983 ) +— +( 983 ) +Components of comprehensive income: +Net income +— +— +— +23,985 +23,985 +December 31, 2023 +11,446,155 +$ +11 +$ +( 102,223 ) +$ +50,276 +$ +( 51,936 ) +Shares issued under stock-based compensation plans +267,636 +— +( 3,806 ) +— +( 3,806 ) +Stock-based compensation +— +— +8,545 +— +8,545 +Repurchase and retirement of common shares +( 473,284 ) +— +( 7,945 ) +— +( 7,945 ) +Components of comprehensive income: +Net income +— +— +— +19,521 +19,521 +December 31, 2024 +11,240,507 +$ +11 +$ +( 105,429 ) +$ +69,797 +$ +( 35,621 ) +See accompanying notes to consolidated financial statements +52 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(in thousands) +Year Ended December 31, +2024 +2023 +Operating activities +Net income +$ +19,521 +$ +23,985 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation expense +12,790 +12,065 +Amortization expense +3,630 +3,866 +Stock-based compensation expense +8,545 +7,507 +Amortization of debt issuance costs +1,536 +1,855 +Loss on early extinguishment of debt +8,763 +243 +Deferred income taxes and other, net +( 3,935 ) +( 324 ) +Changes in operating assets and liabilities: +Accounts receivable, net +( 11,786 ) +6,795 +Inventories +( 1,990 ) +( 1,638 ) +Prepaid expenses and other assets +( 19,665 ) +2,346 +Income taxes, net +985 +( 1,162 ) +Accounts payable +2,762 +( 11,260 ) +Accrued expenses and other liabilities +21,512 +( 7,506 ) +Deferred revenue and customer deposits +645 +( 2,731 ) +Cash provided by operating activities +43,313 +34,041 +Investing activities +Capital expenditures for plant, equipment and leasehold improvements, net +( 9,257 ) +( 6,405 ) +Other +36 +183 +Cash used in investing activities +( 9,221 ) +( 6,222 ) +Financing activities +Principal payments on 2026 Senior Notes +( 267,897 ) +( 16,954 ) +Proceeds from 2029 Senior Notes +285,000 +— +Net proceeds from ABL Revolver +— +( 5,000 ) +Payments on finance lease obligations +( 5,221 ) +( 3,871 ) +Common stock repurchased +( 8,678 ) +( 250 ) +Debt issuance costs +( 6,583 ) +— +Payment for debt early redemption premium +( 5,776 ) +— +Taxes withheld and paid on stock-based compensation awards +( 3,806 ) +( 368 ) +Cash used in financing activities +( 12,961 ) +( 26,443 ) +Effect of exchange rates on cash +— +— +Net increase in cash and cash equivalents +21,131 +1,376 +Cash and cash equivalents, beginning of period +12,413 +11,037 +Cash and cash equivalents, end of period +$ +33,544 +$ +12,413 +Supplemental disclosures of cash flow information +Cash paid (refunded) during the period for: +Interest +$ +26,319 +$ +25,738 +Income taxes paid +$ +9,760 +$ +10,462 +Income taxes refunded +$ +( 475 ) +$ +( 86 ) +Right-of-use assets obtained in exchange for lease obligations: +Operating leases +$ +1,292 +$ +3,091 +Financing leases +$ +9,929 +$ +11,285 +Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements +$ +662 +$ +102 +See accompanying notes to consolidated financial statements +53 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(dollars in thousands, except share and per share amounts or as otherwise indicated) +1. Business +CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payments technology company providing a comprehensive range of payment cards and related digital solutions. CPI is a leader in several areas of the U.S. payment card solutions market, including debit and credit card production, personalization, and SaaS-based instant issuance services. CPI is also a market leader in the production of Prepaid Debit Cards and related secure packaging solutions. +CPI’s revenues are primarily generated from the production of and services related to secure debit and credit cards that are issued on the networks of the Payment Card Brands (Visa, Mastercard, American Express, and Discover), including Prepaid Debit Cards. The Company’s business consists of the following reportable segments: +● Debit and Credit: primarily produces secure debit and credit cards and provides card services for U.S. card-issuing financial institutions. Services include personalization; instant issuance, which provides customers the ability to issue an instant personalized debit or credit card on-demand within a customer location; and other payment solutions such as digital push provisioning for mobile wallets; +● Prepaid Debit: primarily provides secure packaging solutions, Prepaid Debit Cards, and other integrated prepaid card services, to prepaid program managers in the U.S.; and +● Other: primarily corporate expenses. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying consolidated financial statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +Use of Estimates +The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require management to make assumptions and estimates relating to the reporting of assets and liabilities in its preparation of the consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed, recognition of amounts and timing of contract costs and uncertain tax positions. Actual results could differ from those estimates. +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +54 +Table of Contents +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. +December 31, +2024 +2023 +Trade accounts receivable +$ +78,464 +$ +69,245 +Unbilled accounts receivable +7,213 +4,725 +85,677 +73,970 +Less allowance for credit losses +( 186 ) +( 246 ) +Total accounts receivable, net +$ +85,491 +$ +73,724 +The Company maintains an allowance for potential credit losses based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it is determined collection will not occur. The provision for credit losses was immaterial for both the years ended December 31, 2024 and 2023. +For both years ended December 31, 2024 and 2023, one customer represented 18 % of the Company’s consolidated net sales. +Inventories +Inventories consist of raw materials and finished goods, and are measured at the lower of cost or net realizable value (determined on a first-in, first-out or specific identification basis). Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Finished goods inventory represents primarily stock cards and Card@Once hardware. The stock cards are not produced for a specific customer, but are ready to be personalized and sold as customer orders are received. The Company monitors inventory for events or circumstances that may indicate the net realizable value is less than the carrying value of inventory, such as negative margins, expiration of material usage and other forms of obsolescence, and records adjustments to the valuation of inventory, as necessary. +For the year ended December 31, 2024 approximately 95 % of the total value of purchased microchips and antennas came from three main suppliers, and approximately 78 % came from one supplier. Approximately 96 % of the total value of purchased microchips and antennas for the year ended December 31, 2023 came from four main suppliers, and approximately 72 % came from one supplier. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. Capital expenditures are presented net of lessor reimbursements on the consolidated statement of cash flows for assets acquired when corresponding financing leases were contemplated to be executed at the asset purchase date and such financing leases are entered into shortly after asset acquisition. Any financing leases executed for the acquisition of right-of-use machinery and equipment assets are presented in the supplemental disclosures of non-cash information on the statement of cash flows. Financing leases are further described in Note 9, “Financing and Operating Leases.” +Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required. +55 +Table of Contents +Goodwill and Intangible Assets +The Company accounts for its goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350) and tests at least annually or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The Company performs its goodwill impairment test by comparing the fair value of the reporting unit with the carrying amount. If this qualitative assessment indicates it is more likely than not the fair value of a reporting unit is less than the carrying amount, a one-step quantitative test is then performed. Factors management considers in this assessment include macroeconomic, industry and market considerations, overall financial performance (both current and projected), cost increases impacting earnings and cash flows, changes in management and strategy, and changes in the composition or carrying amount of net assets. In the event a reporting unit’s carrying value exceeds its fair value, the Company recognizes an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required. +Sales Tax +The Company records sales tax collected from its customers on a net basis, and therefore excludes it from net sales as defined in ASC 606, Revenue from Contracts with Customers . Cash collected from customers is recorded in “Accrued expenses” on the Company’s consolidated balance sheets and then remitted to the proper taxing authority. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made. +The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when the Company believes that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. The Company adjusts uncertain tax positions in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Stock - Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation is required to be measured at fair value and expensed over the requisite service period. The Company accounts for forfeitures as they occur and reverses previously recognized expense for the unvested portion of the forfeited shares. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Upon the exercise of stock options, shares of common stock are issued from authorized common shares. Refer to Note 16 “Stock-Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans. +56 +Table of Contents +Net Sales +Products Net Sales +“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are produced for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are the design and production of payment cards, including contact, contactless, eco-focused, and magnetic stripe cards, CPI’s eco-focused solutions, including cards made with upcycled plastic, metal cards, private label credit cards and retail gift cards. Card@Once hardware and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales . +Services Net Sales +Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of payment cards, providing tamper-evident secure packaging and fulfillment services to prepaid program managers, and SaaS-based personalization of instant issuance debit and credit cards. As applicable, for work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts +The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606, Revenue from Contracts with Customers , is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +Costs to Obtain a Contract with a Customer +Costs to obtain a contract (“contract costs”) include only those costs incurred to obtain a contract that the Company would not have incurred if the contract had not been obtained. For contracts where the term is greater than one year, these costs are recorded as an asset and amortized consistent with the timing of the related revenue over the life of the contract. The current portion of the asset is included in “Prepaid expenses and other current assets” and the noncurrent portion is included in “Other assets” on the Company's consolidated balance sheets. Contract costs incurred but unpaid are included in “Accrued expenses” on the Company's consolidated balance sheets. Contract costs are expensed as incurred when the amortization period is one year or less. +Recent Accounting Pronouncements +Recently Adopted Accounting Pronouncements +In November 2023, the Financial Accounting Standards Board issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will require enhanced segment disclosures. Adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2023. The application of ASU 2023-07 did not change which segments are currently reported but did result in additional disclosure in the notes to the financial statements. +Recently Issued Accounting Pronouncements +In December 2023, the Financial Accounting Standards Board issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which will require a disaggregated rate reconciliation disclosure as well as additional information regarding taxes paid. Adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2024. The Company has elected not to early adopt this accounting standard. +57 +Table of Contents +The adoption of this standard will result in additional income tax disclosures; however, the Company does not anticipate that it will have a material impact on the Company’s consolidated financial position and results of operations. +In November 2024, the Financial Accounting Standards Board issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which will require disclosure of disaggregated information about certain expense captions presented in the income statement. Adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2026, and interim periods beginning after December 15, 2027. The requirements should be applied on a prospective basis while retrospective application is permitted. The Company is evaluating the impact of adoption of this standard and does not anticipate that it will have a material impact on the Company’s consolidated financial position and results of operations. +3. Net Sales +The Company disaggregates its net sales by major source as follows: +For the year ended December 31, 2024 +Products +Services +Total +Debit and Credit +$ +251,146 +$ +124,115 +$ +375,261 +Prepaid Debit +— +106,541 +106,541 +Intersegment eliminations +( 1,138 ) +( 63 ) +( 1,201 ) +Total +$ +250,008 +$ +230,593 +$ +480,601 +For the year ended December 31, 2023 +Products +Services +Total +Debit and Credit +$ +250,047 +$ +111,010 +$ +361,057 +Prepaid Debit +— +84,237 +84,237 +Intersegment eliminations +( 693 ) +( 54 ) +( 747 ) +Total +$ +249,354 +$ +195,193 +$ +444,547 +4. Inventories +Inventories consisted of the following: +December 31, +2024 +2023 +Raw materials +$ +64,818 +$ +64,056 +Finished goods +7,842 +6,538 +Total inventories, net +$ +72,660 +$ +70,594 +5. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets +Plant, equipment, leasehold improvements and operating lease right-of-use assets consisted of the following: +December 31, +2024 +2023 +Machinery and equipment +$ +71,781 +$ +67,506 +Machinery and equipment under financing leases +32,272 +23,774 +Furniture, fixtures and computer equipment +1,123 +107 +Leasehold improvements +18,875 +16,335 +Construction in progress +5,141 +1,778 +Operating lease right-of-use assets +15,090 +19,989 +144,282 +129,489 +Less accumulated depreciation and amortization +( 75,634 ) +( 66,436 ) +Total plant, equipment, leasehold improvements and operating lease right-of-use assets, net +$ +68,648 +$ +63,053 +58 +Table of Contents +Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 9, “Financing and Operating Leases.” +There were no impairments of the Company’s plant, equipment, leasehold improvements and operating leases right-of-use assets for the years ended December 31, 2024 and 2023. +6. Goodwill and Other Intangible Assets +The Company reports all of its goodwill in the Debit and Credit segment at December 31, 2024 and 2023. The Company completed its goodwill impairment testing as of October 1, 2024 and did no t identify any goodwill impairment during the years ended December 31, 2024 and 2023. +Intangible assets consist of customer relationships, acquired technology, and trademarks. There were no impairments of the Company’s amortizable intangible assets for the years ended December 31, 2024 and 2023. +At December 31, 2024 and 2023, intangible assets, excluding goodwill, were comprised of the following: +December 31, 2024 +December 31, 2023 +Weighted Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +17.2 +$ +55,454 +$ +( 45,248 ) +$ +10,206 +$ +55,454 +$ +( 41,971 ) +$ +13,483 +Acquired technology +10.0 +7,101 +( 7,101 ) +— +7,101 +( 6,967 ) +134 +Trademarks +8.7 +3,330 +( 3,044 ) +286 +3,330 +( 2,825 ) +505 +Intangible assets subject to amortization +$ +65,885 +$ +( 55,393 ) +$ +10,492 +$ +65,885 +$ +( 51,763 ) +$ +14,122 +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2024 was as follows: +2025 +$ +3,440 +2026 +2,471 +2027 +1,947 +2028 +1,580 +2029 +1,054 +$ +10,492 +7. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +● Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +● Level 2 — Observable inputs other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities. +● Level 3 — Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +59 +Table of Contents +The Company’s financial assets and liabilities that are not required to be re-measured at fair value in the consolidated balance sheets were as follows: +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2024 +December 31, +December 31, +(Using Fair Value Hierarchy) +2024 +2024 +Level 1 +Level 2 +Level 3 +Liabilities: +2029 Senior Notes +$ +285,000 +$ +304,571 +$ +— +$ +304,571 +$ +— +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2023 +December 31, +December 31, +(Using Fair Value Hierarchy) +2023 +2023 +Level 1 +Level 2 +Level 3 +Liabilities: +2026 Senior Notes +$ +267,897 +$ +261,834 +$ +— +$ +261,834 +$ +— +The aggregate fair value of the Company’s 2029 Senior Notes and 2026 Senior Notes (each as defined in Note 10, “Long-Term Debt”) was based on quoted prices for identical or similar liabilities in markets that are not active and, as a result, they are classified as Level 2 inputs. +The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature. +8. Accrued Expenses +Accrued expenses consisted of the following: +December 31, +2024 +2023 +Accrued payroll and related employee expenses +$ +9,493 +$ +11,431 +Accrued employee performance-based incentive compensation +4,664 +667 +Employer payroll taxes +868 +298 +Accrued rebates +3,956 +2,919 +Capitalized contract costs payable +8,000 +— +Accrued interest +13,506 +6,830 +Current operating and financing lease liabilities +9,065 +7,318 +Accrued share repurchases +— +733 +Other +8,427 +5,607 +Total accrued expenses +$ +57,979 +$ +35,803 +Other accrued expenses as of December 31, 2024 and 2023 consisted primarily of miscellaneous accruals for invoices not yet received , executive retention and severance, and self-insurance claims incurred but have yet to be reported. +9. Financing and Operating Leases +Right-of-use (“ROU”) represents the right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. Certain leases contain escalation provisions and/or renewal options, giving the Company the right to extend the leases by up to 10 years . However, these options are generally not reflected in the calculation of the ROU assets and lease liabilities due to uncertainty surrounding the likelihood of renewal. +60 +Table of Contents +The components of operating and finance lease costs were as follows: +Year Ended December 31, +2024 +2023 +Operating lease costs +$ +3,278 +$ +3,191 +Short-term and variable lease costs +1,009 +741 +Total expense from operating leases +$ +4,287 +$ +3,932 +Finance lease costs: +Right-of-use amortization expense +$ +3,198 +$ +2,314 +Interest on lease liabilities +1,104 +784 +Total financing lease costs +$ +4,302 +$ +3,098 +The following table reflects balances for operating and financing leases: +December 31, +2024 +2023 +Operating leases: +Operating lease right-of-use assets, net of amortization +$ +9,853 +$ +11,234 +Current operating lease liabilities +$ +2,468 +$ +2,539 +Non-current operating lease liabilities +8,242 +9,384 +Total operating lease liabilities +$ +10,710 +$ +11,923 +Financing leases: +Plant, equipment and leasehold improvements +$ +32,272 +$ +23,774 +Accumulated depreciation +( 6,533 ) +( 3,335 ) +Total financing leases in plant, equipment and leasehold improvements, net +$ +25,739 +$ +20,439 +Current financing lease liabilities +$ +6,597 +$ +4,779 +Non-current financing lease liabilities +16,204 +13,327 +Total financing lease liabilities +$ +22,801 +$ +18,106 +Finance and operating lease ROU assets are recorded in “Plant, equipment, leasehold improvements, and +operating lease right-of-use assets, net” on the Company's consolidated balance sheets. Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term liabilities” on the Company's consolidated balance sheets. As of December 31, 2024, the Company had additional operating lease payment obligations, related to buildings and office space, of approximately $ 8.0 million which had not yet commenced. These leases are expected to commence in 2025 and have lease terms of up to 10 years . +Components of lease expense were as follows: +December 31, +2024 +2023 +Weighted-average remaining lease term: +Operating leases +4.06 +4.70 +Financing leases +3.84 +3.98 +Weighted-average discount rate: +Operating leases +7.04 % +7.19 % +Financing leases +6.23 % +6.28 % +Cash paid on operating lease liabilities was $ 2.5 million and $ 2.4 million during the years ended December 31, 2024 and 2023, respectively. +61 +Table of Contents +Future cash payment with respect to lease obligations as of December 31, 2024 were as follows: +Operating +Financing +Lease +Leases +Year Ending +2025 +$ +3,142 +$ +7,831 +2026 +2,987 +6,416 +2027 +2,833 +5,485 +2028 +2,513 +4,224 +2029 +886 +1,707 +Total lease payments +12,361 +25,663 +Less imputed interest +( 1,651 ) +( 2,862 ) +Total +$ +10,710 +$ +22,801 +10. Long - Term Debt +As of December 31, 2024 and 2023, long-term debt consisted of the following: +December 31, +2024 +2023 +2029 Senior Notes +$ +285,000 +$ +— +2026 Senior Notes +— +267,897 +Unamortized deferred financing costs +( 4,595 ) +( 2,900 ) +Total long-term debt +280,405 +264,997 +Less current maturities +— +— +Long-term debt, net of current maturities +$ +280,405 +$ +264,997 +2029 Senior Notes +On July 11, 2024 (the “Closing Date”), the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc. (the “Issuer”), of $ 285.0 million aggregate principal amount of 10.000 % Senior Secured Notes due 2029 (the “2029 Senior Notes”) and related guarantees at an issue price of 100 %. The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended, to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S. persons in compliance with Regulation S under the Securities Act. +Net proceeds from the 2029 Senior Notes, together with cash on hand, were used to redeem the entire principal balance of $ 267.9 million of the 8.625 % Senior Secured Notes due 2026 (the “2026 Senior Notes”) as of the Closing Date, and to pay related fees, an early redemption premium of 2.156 %, and other expenses. The early redemption premium paid is recorded in “Interest, net” on the consolidated statement of operations and comprehensive income for the year ended December 31, 2024. +The 2029 Senior Notes mature on July 15, 2029. Interest is payable on the 2029 Senior Notes on January 15 and July 15 of each year, beginning on January 15, 2025. The 2029 Senior Notes are guaranteed by the Company and its domestic subsidiaries (other than the Issuer), and are secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. The Company may be required to make an offer to repurchase the 2029 Senior Notes, upon the occurrence of certain events including a change of control or certain asset sales. The 2029 Senior Notes also require the Company to comply with certain covenants limiting the ability of the Company and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Company’s restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the indenture governing the 2029 Senior Notes. +62 +Table of Contents +2029 ABL Revolver +On the Closing Date, the Company and CPI CG Inc. as borrower (the “Borrower”), entered into a credit agreement (the “ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility (the “2029 ABL Revolver”) of up to $ 75.0 million (the “Maximum Revolver Amount”). The 2029 ABL Revolver is guaranteed by the Company and its subsidiaries (other than excluded subsidiaries (as defined in the ABL Credit Agreement)), and is secured by substantially all of the assets of the Company, the Borrower and their subsidiaries (other than excluded subsidiaries (as defined in the ABL Credit Agreement)). +The 2029 ABL Revolver consists of revolving loans, letters of credit and swing line loans provided by lenders, with a sublimit on letters of credit outstanding at any time of $ 10.0 million. The 2029 ABL Revolver also includes an uncommitted accordion feature whereby the Borrower may increase the 2029 ABL Revolver commitment by an aggregate amount not to exceed $ 25.0 million, subject to certain conditions. The 2029 ABL Revolver matures on the earliest to occur of July 11, 2029 and the date that is 91 days prior to the maturity of the 2029 Senior Notes. +As of the Closing Date, the Borrower had $ 4.0 million of outstanding borrowings under a prior Credit Agreement with Wells Fargo Bank, N.A. entered into in March 2021 (the “2026 ABL Revolver”). The Company used initial borrowings under the 2029 ABL Revolver, together with cash on hand and proceeds under the notes, to repay in full and terminate the 2026 ABL Revolver and to pay related fees and expenses, and will use future borrowings for general corporate purposes. +Borrowings under the 2029 ABL Revolver bear interest at a rate per annum that ranges based on the applicable term secured overnight financing rate (“SOFR ”) as administered by the Federal Reserve Bank of New York plus 1.50 % to 1.75 % (subject, in each case, to a credit spread adjustment of 0.10 % ), based on the average daily borrowing capacity under the 2029 ABL Revolver over the most recently completed month. The unused portion of the 2029 ABL Revolver commitment accrues a commitment fee, which ranges from 0.375 % to 0.50 % per annum, based on the average daily excess availability under the 2029 ABL Revolver over the immediately preceding month. +The 2029 ABL Revolver includes limitations on the Borrower’s ability to borrow in certain situations, including limitations based on the calculation of borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than the greater of $ 7.5 million and 10 % of the Maximum Revolver Amount. The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments (the “Borrowing Base”) and b) the Maximum Revolver Amount. The Borrowing Base is further reduced by credit line reserves and letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below the greater of $ 7.5 million and 10 % of the Maximum Revolver Amount and until such time that borrowing capacity equals or exceeds the greater of $ 7.5 million and 10 % of the Maximum Revolver Amount for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the ABL Credit Agreement) of at least 1.00 to 1.00, calculated for the trailing 12 months, in order to borrow under the ABL Revolver. +The 2029 ABL Revolver contains covenants limiting the ability of the Company, the Borrower and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Borrower and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the ABL Credit Agreement. +As of December 31, 2024, there were no outstanding borrowings on the 2029 ABL Revolver. +Deferred Financing Costs +Certain costs incurred with borrowings are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. As of December 31, 2024, the remaining unamortized debt issuance costs recorded on the 2029 Senior Notes were $ 4.6 million and are reported as a reduction to the long-term debt balance. The remaining unamortized debt issuance +63 +Table of Contents +costs on the 2029 ABL Revolver were $ 1.4 million and are recorded as other assets (current and long-term) on the consolidated balance sheet as of December 31, 2024. +During the year ended December 31, 2024, the Company recorded a $ 3.0 million loss on debt extinguishment relating to the unamortized deferred financing costs in connection with the redemption of the 2026 Senior Notes and the termination of the 2026 ABL Revolver. +11. Income Taxes +Income tax expense and effective income tax rates consist of the following: +December 31, +2024 +2023 +Current taxes: +Domestic +$ +9,318 +$ +10,126 +Foreign +9 +20 +9,327 +10,146 +Deferred taxes: +Domestic +( 3,821 ) +331 +Foreign +— +— +( 3,821 ) +331 +Income tax expense +$ +5,506 +$ +10,477 +Income before income taxes: +Domestic income +$ +24,987 +$ +34,400 +Foreign income +40 +62 +Total +$ +25,027 +$ +34,462 +Effective income tax rate +22.0 +% +30.4 +% +The Company’s effective tax rates on pre-tax income were 22.0 % and 30.4 % for the years ended December 31, 2024 and 2023, respectively. The decrease in the Company’s effective tax rate for the year ended December 31, 2024 compared to the prior year related to increased deductibility of stock-based compensation realized upon certain stock option exercises and restricted stock unit vesting, and a decrease in unrecognized tax benefits due to the lapse of statute of limitations. The effective tax rate for the year ended December 31, 2023 was impacted by limitation of executive compensation deductibility related to the former CEO’s retention agreement. +For the years ended December 31, 2024 and 2023, the effective tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2024 +2023 +Tax at federal statutory rate +21.0 +% +21.0 +% +State taxes, net +5.4 +4.4 +Expiration of capital loss carryover +7.1 +— +Valuation allowance +( 7.1 ) +— +Unrecognized tax benefits +( 2.8 ) +0.1 +Tax credits +( 1.4 ) +( 0.5 ) +Permanent items (1) +( 0.2 ) +5.3 +Other +— +0.1 +Effective income tax rate +22.0 +% +30.4 +% +(1) Includes the deductibility limitations on excess compensation. +For the year ended December 31, 2024, the effective tax rate differs from the federal statutory rate primarily due to state income taxes, which had a tax rate impact of 5.4 %. Other items impacting the effective tax rate in 2024 include unrecognized tax benefits, tax deductibility limitations on executive compensation and permanent items. For the year ended December 31, 2023, the effective tax rate differs from the federal statutory rate primarily due to state income +64 +Table of Contents +taxes, which had a tax rate impact of 4.4 %. Other items impacting the effective tax rate in 2023 include tax deductibility limitations on executive compensation and permanent items. +The components of the deferred tax assets and liabilities are as follows: +December 31, +2024 +2023 +Deferred tax assets: +Accrued expense +$ +3,414 +$ +1,928 +Net operating loss carryforward +133 +130 +Stock-based compensation +2,400 +1,798 +Interest limitation +2,424 +1,689 +Lease liability +2,730 +3,026 +Capital loss carryover +— +2,110 +Research and development costs +2,070 +1,350 +Other +2,772 +3,244 +Total gross deferred tax assets +15,943 +15,275 +Valuation allowance +( 872 ) +( 2,616 ) +Net deferred tax assets +15,071 +12,659 +Deferred tax liabilities: +Plant, equipment and leasehold improvements +( 8,552 ) +( 8,825 ) +Intangible assets +( 6,075 ) +( 6,745 ) +Right-of-use assets +( 2,511 ) +( 2,851 ) +Other +( 1,251 ) +( 1,377 ) +Total gross deferred tax liabilities +( 18,389 ) +( 19,798 ) +Net deferred tax liabilities +$ +( 3,318 ) +$ +( 7,139 ) +The valuation allowance as of December 31, 2024, is primarily relating to the use of state interest deductions that may generate future state net operating losses, which may not be fully recognized. The valuation allowance as of December 31, 2023 related to a capital loss realized on the sale of a foreign subsidiary whereby the Company did not anticipate a capital gain in the foreseeable future that would allow for the recognition of the capital loss carryover. The capital loss carryover expired after five years , which was December 31, 2024. +Under a provision in the 2017 U.S. Tax Cuts and Jobs Act, beginning in 2022, research and development costs incurred are no longer allowed as an immediate deduction for federal income tax purposes. Rather, these expenditures incurred must be capitalized and amortized over a five-year period for activities conducted in the United States and a 15 year period for activities conducted outside the United States. +The Company has a minimal amount of state and local operating loss carryforwards which will expire at various dates from 2033 to 2038. The Company does expect to be able to utilize these losses prior to expiration. +The Company has recorded compensation for certain covered employees in excess of $ 1.0 million per year. Under Internal Revenue Code (IRC) Section 162(m), the Company is prohibited from deducting the amount of tax compensation that exceeds $ 1.0 million per year for these employees. The covered employees are defined as the CEO, Chief Financial Officer (“CFO”), and the three next-highest-compensated officers of the Company. The Company considers the impact of the estimated IRC Section 162(m) limitations on the future deductibility of existing temporary differences. +Unrecognized Tax Benefits +Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Accrued expenses” and “Other long-term liabilities” on the Company’s consolidated balance sheets. The Company accounts for +65 +Table of Contents +uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination. +Balance as of December 31, 2023 +$ +1,317 +Increase related to current year tax position +82 +Increase related to prior year tax position +37 +Decrease related to lapse of statute of limitations +( 767 ) +Balance as of December 31, 2024 +$ +669 +The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits was $ 0.1 million and $ 0.3 million for the years ended December 31, 2024 and 2023, respectively. +The Company believes that it is reasonably possible that approximately $ 0.5 million of its unrecognized tax benefits may be recognized by the end of 2025 as a result of a lapse of the statute of limitations, which is reflected in “Accrued expenses” on the Company’s consolidated balance sheets as of December 31, 2024. +12. Stockholders’ Deficit +Common Stock +Common stock has a par value of $ 0.001 per share. Holders of common stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders may have prior rights as to dividends pursuant to the rights of any series of preferred stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of common stock. Holders of common stock are entitled to one vote per share. +Share Repurchases +On November 2, 2023, the Company's board of directors approved a share repurchase plan authorizing the Company to repurchase up to $ 20.0 million of the Company's common stock, par value $ 0.001 per share. This authorization expired on December 31, 2024 with a remaining unused authorized amount of $ 11.2 million . +During the year ended December 31, 2024, the Company repurchased 473,284 shares of its common stock at an average price of $ 18.16 per share, excluding commissions, or $ 8.6 million in aggregate, on a trade date basis. This amount includes 364,848 shares purchased from one of the Company’s significant stockholders at an average price of $ 18.09 per share, in accordance with the stock repurchase agreements entered into with Tricor Pacific Capital Partners (Fund IV) US, LP (“Parallel49”). +Secondary Offering +On September 30, 2024, significant stockholders Tricor Pacific Capital Partners (Fund IV), LP and Tricor Pacific Capital Partners (Fund IV) US, LP entered into an underwriting agreement for the sale of an aggregate of 1,380,000 shares of CPI common stock in a public offering. In conjunction with the Company’s initial public offering in October 2015, the Company entered into a registration rights agreement with its significant stockholders whereby the Company is required to pay expenses incurred in an offering of shares of CPI common stock by the Company’s significant stockholders other than underwriters’ fees, discounts, commissions, and certain transfer taxes. +The offering contemplated in the underwriting agreement closed on October 2, 2024, and total expenses paid by the Company on behalf of the significant stockholders pursuant to the registration rights agreement for the offering were approximately $ 0.5 million. The Company did not sell any securities in the offering and did not receive any proceeds from the sale of the shares offered by the significant stockholders. +66 +Table of Contents +13. Earnings per Share +Basic and diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested. For the years ended December 31, 2024 and 2023, 36,826 and 72,049 potentially dilutive securities, respectively, are excluded from the calculation of diluted earnings per share. The effect of these shares was anti-dilutive under the treasury stock method, as the assumed proceeds of the options and restricted stock per unit were above our average share price during the periods. +The following table sets forth the computation of basic and diluted earnings per share: +Year Ended December 31, +2024 +2023 +Numerator: +Net income +$ +19,521 +$ +23,985 +Denominator: +Basic weighted-average common shares outstanding +11,152,648 +11,426,124 +Dilutive shares +725,428 +491,432 +Diluted weighted-average common shares outstanding +11,878,076 +11,917,556 +Basic earnings per share +$ +1.75 +$ +2.10 +Diluted earnings per share +$ +1.64 +$ +2.01 +14. Commitments and Contingencies +Commitments +During 2023, the Company entered into a capacity reservation agreement with one of its chip suppliers to reserve production supply capacity due to the current global supply shortage environment. Under the agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve capacity to produce a set quantity of chips from 2023 through 2026, subject to certain conditions, and we have committed to purchase those chips. As of December 31, 2024, the remaining commitment was $ 62.0 million, of which $ 49.9 million is expected to be paid in the next 12 months with the remaining expected to be paid in 2026. The Company's total purchases under this commitment were $ 68.4 million and $ 60.8 million during the years ended December 31, 2024 and 2023, respectively. +Refer to Note 9 “Financing and Operating Leases” for details on the Company’s future cash payments with respect to financing and operating leases. During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2026 and 2029 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs. The Company’s financing leases expire at various dates between 2025 and 2029 and contain purchase options which the Company may exercise to keep the machinery in use. +Contingencies +In accordance with applicable accounting guidance, the Company establishes an accrued expense when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued expense and record a corresponding amount of expense. The Company expenses professional fees associated with litigation claims and assessments as incurred. The Company is subject to routine legal proceedings in the ordinary course of business. The +67 +Table of Contents +Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations. +Voluntary Disclosure Program +The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unpaid payable balances. During the second quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance. On August 31, 2022, the Company entered into Delaware’s Voluntary Disclosure Agreement Program in order to voluntarily comply with Delaware’s abandoned property law in exchange for certain protections and benefits. The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program. Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable. +15. Employee Benefit Plan +The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment options. The Company matches 100 % of the participant’s first 3% of deferrals and 50 % matching on each of the 4 th and 5 th percent contributed by the participant. As the Company operates the plan as a safe harbor 401(k) plan, the Company’s match is 100 % vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $ 2.4 million and $ 2.1 million for the years ended December 31, 2024 and 2023, respectively. +16. Stock-Based Compensation +CPI Card Group Inc. Omnibus Incentive Plan +In October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (as amended and supplemented, the “Omnibus Plan”) pursuant to which cash and equity-based incentives may be granted to participating employees, advisors and directors. Effective January 30, 2024, the Company’s stockholders approved an amendment to the Omnibus Plan to increase the total number of shares of the Company’s common stock reserved and available for issuance thereunder by 1,000,000 shares, resulting in a total of 3,200,000 shares issuable under the Omnibus Plan. +As of December 31, 2024, there were 866,564 shares of common stock available for grant under the Omnibus Plan. Options have seven-year terms and are issued with exercise prices equal to the fair market value of the Company’s common stock on the grant date. +The following is a summary of the activity in outstanding stock options under the Omnibus Plan: +Weighted-Average +Remaining +Weighted-Average +Contractual +Aggregate +Exercise +Term +Intrinsic +Options +Price +(in Years) +Value +Outstanding as of December 31, 2023 +909,438 +$ +18.79 +4.06 +$ +6,482 +Exercised +( 125,144 ) +5.98 +— +Expired +( 1,459 ) +24.71 +— +Forfeited +( 1,572 ) +18.01 +— +Outstanding as of December 31, 2024 +781,263 +$ +20.84 +2.67 +$ +9,925 +Options vested and exercisable as of December 31, 2024 +711,979 +$ +20.70 +2.52 +$ +9,333 +68 +Table of Contents +Options vested and expected to vest as of December 31, 2024 +781,263 +$ +20.84 +2.67 +$ +9,925 +The following is a summary of the activity in unvested stock options under the Omnibus Plan: +Weighted-Average +Grant-Date +Number +Fair Value +Unvested as of December 31, 2023 +160,121 +$ +10.92 +Vested +( 89,265 ) +10.69 +Forfeited +( 1,572 ) +11.12 +Unvested as of December 31, 2024 +69,284 +$ +11.21 +Unvested stock options of 69,284 as of December 31, 2024 have a seven-year term and are expected to vest ratably over a two-year period on each anniversary of the grant date. No options were granted during the year ended December 31, 2024. The weighted average fair value of options granted during the year ended December 31, 2023 was $ 11.21 . The total fair value of options vested during the years ended December 31, 2024 and 2023 was $ 1.0 million and $ 1.2 million, respectively. +The fair value of the stock option awards granted for the year ended December 31, 2023 was determined using a Black-Scholes option-pricing model with the following weighted-average assumptions: +December 31, +2024 +2023 +Expected term in years (1) +— +2.90 +Volatility (2) +— +% +73.16 +% +Risk-free interest rate (3) +— +% +4.46 +% +Dividend yield (4) +— +% +— +% +(1) The Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method,” as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. +(2) Volatility was based on a weighting of the Company’s historical volatility and a representative peer group, which is comprised of companies with similar industry, size and financial leverage. +(3) The risk-free interest rate was determined by using the United States Treasury rate for the period consistent with the expected term described above. +(4) The Company’s expected annual dividend yield was zero based on current practice. +The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2024 under the Omnibus Plan: +Weighted-Average +Remaining +Weighted-Average +Amortization +Grant-Date +Period +Shares +Fair Value +(in Years) +Outstanding as of December 31, 2023 +713,360 +$ +21.25 +Granted +226,739 +23.90 +Vested +( 305,348 ) +21.57 +Forfeited +( 38,535 ) +20.30 +Outstanding as of December 31, 2024 +596,216 +$ +22.15 +1.25 +The restricted stock unit awards contain conditions associated with continued employment or service. Restricted stock units granted in 2024 are expected to vest ratably over a one or three-year period on each anniversary of the grant date. Shares of common stock will be issued to the award recipients on the vesting date. The weighted average fair value of restricted stock units granted during the years ended December 31, 2024 and 2023 was $ 23.90 and $ 21.39 , respectively. The total fair value of shares vested during the years ended December 31, 2024 and 2023 was $ 6.6 million and $ 2.2 million, respectively. +69 +Table of Contents +During 2024, executives received a quarterly restricted stock unit grant comprising one -fourth of the annual equity-based incentive component of their total compensation. The number of shares awarded will be determined based on a value tied to the monthly average closing price of the Company’s common stock. +In June 2023, the Company announced an award comprised of 25 % nonqualified stock options and 75 % restricted stock units to its CEO at the time as an incentive to remain employed by the Company through February 28, 2024. The first one -third of the awards was granted in June 2023, the second one -third was granted in August 2023, and the remainder was granted in November 2023. All of these awards will vest ratably over a two-year period irrespective of employment status with expense related to these awards to be recognized by the Company through February 28, 2024. As part of the CEO’s incentive package, the requisite service and exercise periods for his awards granted in 2023 prior to June 2023 were also modified with expense related to the modification being recognized in June 2023 through February 2024. +In January 2024, the Company granted 60,000 performance stock units (PSU) in connection with the appointment of its CEO, with a grant date fair value of $ 0.9 million using a Monte Carlo simulation model. The PSU award will vest, subject to continued employment, in equal one -third increments upon the attainment of the rolling weighted average closing price of the Company’s common stock equaling or exceeding each of $ 35.00 , $ 50.00 , and $ 65.00 , in each case, for at least 90 consecutive trading days during the five-year performance period commencing on the grant date. Additionally, the Company granted its CEO 40,000 restricted stock units which will vest entirely at the end of the four year service period. +As of December 31, 2024, the total unrecognized compensation expense related to unvested options and restricted stock units was $ 7.1 million, which the Company expects to recognize over an estimated weighted-average period of approximately 1.3 years. +17. Segment Reporting +The Company’s chief operating decision maker is its CEO, who is charged with management of the Company and is responsible for the evaluation of operating performance and decision-making about the allocation of resources to operating segments based on the measures of net sales and EBITDA. +As the Company uses the term, “EBITDA” is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is useful as a supplement to GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and to identify strategies to improve the allocation of resources amongst segments. +As of December 31, 2024, the Company’s reportable segments were as follows: +● Debit and Credit; +● Prepaid Debit; and +● Other. +Debit and Credit Segment +The Debit and Credit segment primarily produces secure debit and credit cards and provides card services, including digital services, for U.S. card-issuing financial institutions. Products produced by this segment primarily include payment cards, including contact, contactless, eco-focused, and magnetic stripe cards. This segment also provides personalization services; instant issuance solutions, which provides customers the ability to issue an instant personalized debit or credit card on-demand within a customer location; and other payment solutions such as digital push provisioning. +70 +Table of Contents +Prepaid Debit Segment +The Prepaid Debit segment primarily provides integrated prepaid card services to prepaid program managers primarily in the U.S., including tamper-evident secure packaging. This segment also produces payment cards issued on the networks of the Payment Card Brands that are included in the tamper-evident secure packages. +Other +The Other segment includes corporate expenses. +Performance Measures of Reportable Segments +Net sales and EBITDA of the Company’s reportable segments, as well as a reconciliation of total segment EBITDA to income from operations and net income for the years ended December 31, 2024 and 2023, were as follows: +Year Ended December 31, 2024 +Debit and Credit +Prepaid Debit +Other +Intersegment Eliminations +Total +Net sales +Products +$ +251,146 +$ +— +$ +— +$ +( 1,138 ) +$ +250,008 +Services +124,115 +106,541 +— +( 63 ) +230,593 +Total net sales +375,261 +106,541 +— +( 1,201 ) +480,601 +Cost of sales +Products (1) +167,174 +— +— +( 1,138 ) +166,036 +Services (1) +72,255 +59,760 +— +( 63 ) +131,952 +Depreciation and amortization +7,737 +3,657 +— +— +11,394 +Total cost of sales +247,166 +63,417 +— +( 1,201 ) +309,382 +Gross profit +128,095 +43,124 +— +— +171,219 +Operating expenses +35,239 +5,923 +67,265 +— +108,427 +Income (loss) from operations +$ +92,856 +$ +37,201 +$ +( 67,265 ) +$ +— +$ +62,792 +EBITDA by segment: +Income (loss) from operations +$ +92,856 +$ +37,201 +$ +( 67,265 ) +$ +— +$ +62,792 +Depreciation and amortization +8,854 +3,896 +3,670 +— +16,420 +Other income (expense) +( 82 ) +( 10 ) +( 3,586 ) +— +( 3,678 ) +EBITDA +$ +101,628 +$ +41,087 +$ +( 67,181 ) +$ +— +$ +75,534 +Gross profit margin +34.1 % +40.5 % +* +* +35.6 % +EBITDA margin +27.1 % +38.6 % +* +* +15.7 % +* +Calculation not meaningful. +(1) +Exclusive of depreciation and amortization. +71 +Table of Contents +Year Ended December 31, 2023 +Debit and Credit +Prepaid Debit +Other +Intersegment Eliminations +Total +Net sales +Products +$ +250,047 +$ +— +$ +— +$ +( 693 ) +$ +249,354 +Services +111,010 +84,237 +— +( 54 ) +195,193 +Total net sales +361,057 +84,237 +— +( 747 ) +444,547 +Cost of sales +Products (1) +162,067 +— +— +( 693 ) +161,374 +Services (1) +64,461 +52,990 +— +( 54 ) +117,397 +Depreciation and amortization +7,753 +2,534 +— +— +10,287 +Total cost of sales +234,281 +55,524 +— +( 747 ) +289,058 +Gross profit +126,776 +28,713 +— +— +155,489 +Operating expenses +31,870 +3,786 +58,243 +— +93,899 +Income (loss) from operations +$ +94,906 +$ +24,927 +$ +( 58,243 ) +$ +— +$ +61,590 +EBITDA by segment: +Income (loss) from operations +$ +94,906 +$ +24,927 +$ +( 58,243 ) +$ +— +$ +61,590 +Depreciation and amortization +9,025 +2,860 +4,046 +— +15,931 +Other income (expense) +29 +( 1 ) +( 243 ) +— +( 215 ) +EBITDA +$ +103,960 +$ +27,786 +$ +( 54,440 ) +$ +— +$ +77,306 +Gross profit margin +35.1 % +34.1 % +* +* +35.0 % +EBITDA margin +28.8 % +33.0 % +* +* +17.4 % +* +Calculation not meaningful. +(1) +Exclusive of depreciation and amortization. +December 31, +2024 +2023 +Net income +$ +19,521 +$ +23,985 +Interest, net +34,087 +26,913 +Income tax expense +5,506 +10,477 +Depreciation and amortization +16,420 +15,931 +EBITDA +$ +75,534 +$ +77,306 +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2024 and 2023 were as follows: +December 31, +2024 +2023 +Debit and Credit +$ +248,970 +$ +235,680 +Prepaid Debit +60,621 +38,265 +Other +40,066 +19,738 +Total assets +$ +349,657 +$ +293,683 +Capital Expenditures of Reportable Segments +Total capital expenditures of the Company’s reportable segments as of December 31, 2024 and 2023 were as follows: +December 31, +2024 +2023 +Debit and Credit +$ +6,921 +$ +5,116 +Prepaid Debit +2,319 +963 +Other +17 +326 +Total capital expenditures +$ +9,257 +$ +6,405 +72 +Table of Contents +(This page has been left blank intentionally.) +73 +Table of Contents +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +Under the supervision of and with the participation of our management, including our CEO and our CFO, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2024. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, as discussed below, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective as of December 31, 2024. +Management’s Report on Internal Control over Financial Reporting +Management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. +Based on its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. +Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation, the Company’s management concluded that as of December 31, 2024, the Company’s internal control over financial reporting is effective. The Company’s independent registered public accounting firm audited the consolidated financial statements and related notes in the Annual Report on Form 10-K and have issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Their report appears in this Annual Report on Form 10-K. +Changes in Internal Control over Financial Reporting +There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our fourth quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting . +74 +Table of Contents +Item 9B. +Other Informatio n +During the three months ended December 31, 2024, no directors or officers of the Company adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (each as defined in Item 408(a) of Regulation S-K). +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +PART II I +Item 10. +Directors, Executiv e Officers and Corporate Governance +The information required by this Item 10 is incorporated herein by reference to the discussion in “Proposal No. 1—Election of Directors,” “Directors and Corporate Governance,” and “Executive Officers” of our definitive proxy statement for the 2025 annual meeting of stockholders. +Code of Business Conduct and Ethics +The Company’s Code of Business Conduct and Ethics and Code of Conduct for Financial Officers that are applicable to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, are available on our website at investor.cpicardgroup.com or in printed form upon request by writing to the attention of: Investor Relations, CPI Card Group Inc. at 10368 West Centennial Road, Littleton, Colorado 80127. +Insider Trading Policy +We have adopted an Insider Trading Policy governing the purchase, sale, and/or other dispositions of our securities by directors, officers, employees, agents and consultants, as well as the Company itself, that is designed to promote compliance with insider trading laws, rules and regulations, and applicable listing standards. A copy of our Insider Trading Policy is filed with this Annual Report on Form 10-K as Exhibit 19.1. +Item 11. +Executive Compensatio n +The information required by this Item 11 is incorporated herein by reference to the discussion in “Executive Compensation,” and “Directors and Corporate Governance” of our definitive proxy statement for the 2025 annual meeting of stockholders. +Item 12. +Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +The information required by this Item 12 is incorporated herein by reference to the discussion in “Security Ownership of Certain Beneficial Owners, Directors and Management,” and “Equity Compensation Plan Information Table” of our definitive proxy statement for the 2025 annual meeting of stockholders. +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +The information required by this Item 13 is incorporated herein by reference to the discussion of “Directors and Corporate Governance” and “Certain Relationships and Related Party Transactions” of our definitive proxy statement for the 2025 annual meeting of stockholders. +Item 14. +Principal Accountant Fees and Service s +The information required by this Item 14 is incorporated herein by reference to the discussion in “Fees Paid to Independent Registered Public Accounting Firm” of our definitive proxy statement for the 2025 annual meeting of stockholders. +75 +Table of Contents +PART IV +Item 15. +Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Income +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +Exhibit Description +3.1 +Fourth Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2022). +3.1.1 +Amendment to Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed on May 31, 2023). +3.2 +Fourth Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed December 13, 2024). +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +4.2 +Description of Registrant’s Securities (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2022). +4.3 +Indenture, dated as of July 11, 2024, by and among CPI CG Inc., as issuer, CPI Card Group Inc., as a guarantor, the subsidiary guarantors party thereto, and U.S. Bank Trust Company, National Association, as trustee and notes collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed July 11, 2024). +4.4 +Form of 10.000% Senior Secured Notes due 2029 (included as Exhibit A to the Indenture included herewith as Exhibit 4.3). +10.1 +Guaranty and Security Agreement, dated as of July 11, 2024, among CPI Card Group Inc. and certain of its subsidiaries from time to time party thereto and JPMorgan Chase Bank N.A., as collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed July 11, 2024). +10.2 +Credit Agreement, dated as of July 11, 2024, among CPI Card Group Inc., CPI CG Inc., the lenders from time to time party thereto and JPMorgan Chase Bank N.A., as administrative agent and collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed July 11, 2024). +10.3 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +76 +Table of Contents +10.4 +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.5 +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6** +CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective January 30, 2024 (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 7, 2024). +10.7** +Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017) . +10.8** +Form of Executive Restricted Stock Unit Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 3, 2020). +10.9** +Form of Executive Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.10** +Form of Executive Restricted Stock Unit Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021). +10.11** +Form of Director Restricted Stock Unit Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 5, 2021) . +10.12** +Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.13*,** +Form of Performance-Based Award Agreement under the CPI Card Group Inc. Omnibus Incentive Plan. +10.14*,** +Form of 2024 Executive Short-Term Incentive Plan. +10.15** +CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017). +10.16** +Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.17** +Offer Letter, dated May 3, 2023 by and between CPI Card Group Inc. and Jeffrey Hochstadt (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 9, 2023). +10.18** +Employment Agreement, dated January 25, 2024 by and between CPI Card Group Inc. and John Lowe (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 7, 2024). +10.19** +Employment Agreement, dated December 13, 2022 by and between CPI Card Group Inc. and Lane Dubin (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2023). +10.20** +Form of Nonqualified Stock Option Agreement by and between CPI Card Group Inc. and Lane Dubin (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 9, 2023). +10.21** +Form of Restricted Stock Unit Agreement by and between CPI Card Group Inc. and Lane Dubin (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 9, 2023). +10.22** +Form of Restricted Stock Unit Agreement by and between CPI Card Group Inc. and Lane Dubin (incorporated by reference to the Company’s Current Report on Form 8-K filed June 5, 2023). +77 +Table of Contents +10.23** +Letter Agreement between Scott Scheirman and the Company dated June 2, 2023 (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 5, 2023). +10.24** +Form of Restricted Stock Unit Agreement by and between CPI Card Group Inc. and John Lowe (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 7, 2024). +10.25** +Form of Performance Stock Unit Agreement by and between CPI Card Group Inc. and John Lowe (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 7, 2024). +10.26*,** +Transition and Separation Agreement effective January 25, 2024 by and between CPI Card Group Inc. and Sarah Kilgore . +10.27 +Stock Repurchase Agreement, dated as of December 6, 2023, by and between Tricor Pacific Capital Partners (Fund IV) US, LP and CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed on December 7, 2023). +10.28 +Stock Repurchase Agreement, dated as of March 11, 2024, by and between Tricor Pacific Capital Partners (Fund IV) US, LP and CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed on March 15, 2024). +19.1* +Insider Trading Policy of CPI Card Group, Inc. +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +97.1 +Amended and Restated Clawback Policy of CPI Card Group Inc. (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 7, 2024). +101.INS* +XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH* +Inline XBRL Taxonomy Extension Schema Document. +101.CAL* +Inline XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +Inline XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +Inline XBRL Taxonomy Extension Presentation Linkbase Document. +104* +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). +* +Filed or furnished herewith. +** Management contract or compensatory plan or arrangement. +78 +Table of Contents +Item 16. Form 10-K Summary +None. +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ Jeffrey Hochstadt +Jeffrey Hochstadt +Chief Financial Officer +March 4, 2025 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint John Lowe and Jeffrey Hochstadt and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ John Lowe +President, Chief Executive +March 4, 2025 +John Lowe +Officer and Director +(Principal Executive Officer) +/s/ Jeffrey Hochstadt +Chief Financial Officer +March 4, 2025 +Jeffrey Hochstadt +(Principal Financial Officer) +/s/ Donna Abbey Carmignani +Chief Accounting Officer +March 4, 2025 +Donna Abbey Carmignani +(Principal Accounting Officer) +/s/ Hugh Sanford Riley +Chairman of the Board +March 4, 2025 +Hugh Sanford Riley +/s/ Thomas Furey +Director +March 4, 2025 +Thomas Furey +/s/ Ravi Mallela +Director +March 4, 2025 +Ravi Mallela +/s/ Nicholas Peters +Director +March 4, 2025 +Nicholas Peters +/s/ Marc Sheinbaum +Director +March 4, 2025 +Marc Sheinbaum +79 +Table of Contents +/s/ Valerie Soranno Keating +Director +March 4, 2025 +Valerie Soranno Keating +/s/ Lisa Oleson +Director +March 4, 2025 +Lisa Oleson +80 \ No newline at end of file diff --git a/raw/filings/0001641614/2024/0001558370-25-002098/filing_metadata.csv b/raw/filings/0001641614/2024/0001558370-25-002098/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..f457127cf5f973bd46317e54c49ae43bf6302cf9 --- /dev/null +++ b/raw/filings/0001641614/2024/0001558370-25-002098/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001641614,PMTS,CPI Card Group Inc.,10-K,2025-03-04,2024-12-31,2025-03-04T12:05:49.000Z,0001558370-25-002098,pmts-20241231x10k.htm,10-K,11732663,1,1,https://www.sec.gov/Archives/edgar/data/1641614/000155837025002098/pmts-20241231x10k.htm,https://www.sec.gov/Archives/edgar/data/1641614/000155837025002098/,2024,2024,1 diff --git a/raw/filings/0001641614/2024/0001558370-25-002098/item1.txt b/raw/filings/0001641614/2024/0001558370-25-002098/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..f4ae5269f494e55aebd4f48fa678e580819ac052 --- /dev/null +++ b/raw/filings/0001641614/2024/0001558370-25-002098/item1.txt @@ -0,0 +1,116 @@ +Item 1. +Busines s +As used herein, “CPI,” “the Company,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +CPI is a payments technology company providing a comprehensive range of payment cards and related digital solutions. We are a leader in several areas of the U.S. payment card solutions market, including debit and credit card production, personalization, and Software-as-a-Service-based (“SaaS-based”) instant issuance services. We are also a market leader in the production of “Prepaid Debit Cards,” which we define as debit cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ) but not linked to a traditional bank account, and related secure packaging solutions. We serve thousands of customers through direct and indirect sales channels and have maintained long-standing relationships with our top customers. +The foundation of our strong market position is our focus on customer service, quality and innovation and our comprehensive offering of payment card solutions. Our solutions provide a full suite of products and services required to produce, personalize and fulfill payment cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing design and production with an end-to-end offering of data personalization and services that are integrated within our customers’ operations and require process and/or technology integration, such as secure data links to transfer highly sensitive cardholder information. These services are important to many of our customers not just for the payment cards themselves but as an essential element in utilizing them as part of their overall branding and marketing initiatives. +The U.S. payment card solutions market in which we operate has experienced growth in cards-in-circulation over a long-term period, driven by new account openings by legacy issuers and new entrants to the payment card market, such as financial technology companies (“fintechs”) and others. The U.S. payment card solutions market is characterized by users (primarily U.S. consumers) maintaining multiple payment cards and by historically stable and recurring revenue driven by the continuous reissuance of debit and credit cards due to card expiration, re-branding, and card replacement activity, and by U.S. consumers switching from one financial institution to another. +Our revenues are primarily generated from the production of and services related to secure debit and credit cards that are issued on the networks of the Payment Card Brands, including Prepaid Debit Cards. Our business consists of the following reportable segments: +● Debit and Credit: primarily produces secure debit and credit cards and provides card services for U.S. card-issuing financial institutions. Services include personalization; instant issuance, which provides customers the ability to issue an instant personalized debit or credit card on-demand within a customer location; and other payment solutions such as digital push provisioning for mobile wallets; +● Prepaid Debit: primarily provides secure packaging solutions, Prepaid Debit Cards, and other integrated prepaid card services to prepaid program managers in the U.S.; and +● Other: primarily corporate expenses. +For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 17 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Strategy +Our vision is to be the most trusted partner for innovative payments technology solutions. We aim to expand our addressable market over the long term through diversification by adding adjacent product and service offerings, including additional digital solutions, for our extensive customer base, and by leveraging our existing solutions for new +4 +Table of Contents +customer verticals. We have initiated the expansion of our offerings to customers in non-traditional industry verticals, such as the sale of our card solutions to the healthcare and gig economy verticals, which has already expanded our addressable markets. We also believe our digital SaaS-based instant card issuance solution could be utilized by certain businesses outside of the financial services industry. +To achieve our objectives, we aim to prioritize four strategic pillars: +● Customer Focus: Listen to the voice of our customers and provide outstanding support and partnership; +● Quality and Efficiency: Deliver high-quality solutions and drive continuous improvement; +● Innovation and Diversification: Develop innovative, market-leading differentiated solutions that create competitive advantages for our customers and diversify our offerings to accelerate growth and balance risk; and +● People and Culture: Promote a values-driven work environment to ensure our people are safe, productive and empowered to serve our customers and each other. +By helping our customers elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next-generation solutions that build brands and enhance people’s everyday lives. For both our traditional business and our market expansion opportunities, we believe we are well-positioned for success given our history of innovation and ability to evolve with the needs and expectations of our customers. +Our Solutions +Debit and Credit Payment and Other Cards +We differentiate from other providers by focusing on high-quality, innovative payment cards. For many customers, we pair card design and production with an end-to-end offering of data personalization and services that are integrated within our customers’ operations. In addition to providing payment solutions to typical financial institution and fintech payment card issuers, we also produce payment and other cards for healthcare payments, entertainment venues, government disbursements, transit services, and other industries. +We primarily produce contact and contactless cards that are issued on the networks of the Payment Card Brands. Contact cards feature an integrated circuit that interfaces with a payment terminal over a contact plate on the surface of the card when inserted into an enabled payment terminal. We also produce contactless cards (also known as dual interface cards), which share the functionality of a contact card but also have a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Contactless cards have increased as a percentage of sales versus contact cards for both CPI and the wider U.S. industry. +We believe we are a leading provider of eco-focused card solutions in the U.S. payments market. Dependent upon design and card construction, our Second Wave ® and Earthwise ® eco-focused cards incorporate various types and amounts of upcycled material, including recycled ocean-bound plastic (“ROBP”) and recycled PVC. Cards in our eco-focused portfolio have been approved by two of the major Payment Card Brands. These solutions aim to satisfy increasing U.S. cardholder demand for more environmentally friendly products and help support our and our customers’ environmental objectives. We also have a variety of metal card offerings that we produce as contact or contactless depending on the needs of our customers. +We also produce non-chip cards that only utilize magnetic stripes, contactless payment and non-payment cards that utilize NFC technology, and cards that include both magnetic stripes and NFC technology. +Card Data Personalization and Fulfillment +We facilitate the issuance and distribution of payment cards to consumers for the majority of our U.S. customers. We offer a variety of data personalization and mailing solutions for both daily and bulk mail programs. +5 +Table of Contents +Our customers provide us with data, in many cases through technology integrations, that we use to personalize payment cards to individual consumers. We provide data preparation and personalization solutions for debit, credit and Prepaid Debit Cards. Our technology-driven personalization services provide a wide range of customization options using advanced processes to encode, program, and emboss or print data, such as the cardholder’s name and account number. In addition, we provide data preparation services related to the embedded chips within payment cards. +In certain cases, we prepare customized mailers to deliver cards to individual cardholders. We are also able to personalize payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings in an expedited manner. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. +We believe our breadth, quality, and speed of personalization solutions further differentiates us with our financial institution and prepaid program manager customers and enables us to access additional business-to-business and business-to-consumer verticals such as healthcare, gig economy payment, corporate incentives, government disbursement, benefits, insurance, tax refund, transit, payroll and others. +SaaS-based Instant Card Issuance and Other Digital Solutions +We provide a comprehensive solution that makes it easy for our customers to issue payment cards in a customer location and on-demand. Our proprietary and patented SaaS-based Card@Once® instant issuance system and personalization solution offers a faster delivery of payment cards by our customers to their consumers, typically within a few minutes. +Our Card@Once software solution transfers data from our servers to encode a contact or contactless card and personalizes the card on a hardware solution placed in our customer’s location. This process results in the issuance of a completely personalized, permanent debit or credit card to individual cardholders within a customer’s location. These processes are audited for Payment Card Industry (“PCI”) Security Standards Council data security standards compliance annually. Our Card@Once solution generates both initial sales revenue for the hardware and recurring revenue from the sale of cards, card personalization and consumables. We have increased installations of our instant issuance solution from approximately 11,000 customer locations in 2019 to more than 16,000 in 2024. +We also have the ability to provide other digital solutions, including digital push provisioning, which allows our customers to push card credentials to a cardholder’s mobile wallet, and digital cards. Although revenues for these additional digital solutions have been insignificant to date, we believe these solutions have the opportunity to grow in the future. In 2024, we expanded our digital solution offerings by entering into a strategic relationship with a third-party to resell credit and debit card fraud prevention services. We believe we are well positioned to expand our digital solutions offerings to our customers through technology integrations with certain financial institution platform providers, card processors, core banking systems, and mobile banking app providers. Many of these integrations have been developed over time to support the reselling of personalization services through our digital SaaS-based instant issuance solution. We believe these technology integrations could enable us to provide additional digital solutions to our customers, including our digital push provisioning service as a complement to physical cards. Digital solutions often require upfront investment and additional integration but have the potential to deliver incremental revenue and increased margins over time. +Prepaid Debit Cards and Related Tamper-Evident Secure Packaging Solutions +CPI is a trusted and significant supplier of Prepaid Debit Cards and related secure packaging solutions in the U.S. We believe our solutions in this market are differentiated by our capabilities to provide custom solutions related to features such as security, aesthetics, and the use of eco-focused materials, and by our large volume capacities. We also offer specialized and innovative tamper-evident secure packaging solutions aimed at reducing fraud. +Our customers include some of the largest prepaid program managers in the U.S., with whom we have built joint processes over many years, utilizing technology in certain instances, to facilitate the exchange of critical data such as information used to print and encode card number, expiration, and security codes. Prepaid program managers sell the cards and related packages we produce to retail channels, including national big box, grocery, and convenience/gas retailers, and others in various industries. For prepaid cards sold through retail, the relationships and processes we +6 +Table of Contents +developed allow us to provide activation data, including information printed on the packaging which transacts with the retailer’s point of sale system to activate cards for use. In certain cases, we also manage the fulfillment of fully completed Prepaid Debit Card packages to retail locations on behalf of our customers. +Our prepaid solutions include open-loop general purpose reloadable cards that are issued on the networks of the Payment Card Brands, retail gift cards that can be utilized for purchases on an open or closed-loop network, and Restricted Authorization Network prepaid cards designed for a unique set of merchants. These cards typically utilize magnetic stripes to facilitate payment transactions, but in certain instances cards may use bar codes and contact chips. The cards we produce are offered in a variety of treatments, substrates, finishes, and packaging options focused on both security features and card and package design, and we have teams that consult regularly with our customers to create advanced solutions to address their needs. +Our Competitive Strengths +● Strong Market Position. Our vision is to be our customers’ partner of choice by providing market-leading, high-quality payment solutions and customer service and delivering continuous innovation. We believe these efforts have resulted in CPI gaining estimated overall U.S. market share over the last several years. We believe our long-term customer relationships, comprehensive end-to-end card solutions, including eco-focused solutions, and capabilities such as our Card@Once instant issuance solution have contributed to these gains with issuers of secure credit and debit cards in the United States. We have also established a leading market position in the U.S. prepaid debit market, built on high-quality services, innovative tamper-evident secure packaging solutions aimed at reducing fraud and driving shelf appeal, and reliable delivery to our customers. +● Long-Term Customer Relationships . We have long-standing, trust-based relationships with customers and have collaborated with our top 10 customers for more than 10 years, on average. We strive to put our customers at the center of everything we do. Our customer relationships generally involve the handling of sensitive information and require process and/or technology integration. As a result, our customers often view CPI as a partner they can trust and that can deliver the highest quality products and customer service. +● Comprehensive End-to-End Card Solutions. The foundation of our strong market position with our small to mid-sized financial institution and fintech customers is our comprehensive end-to-end payment card solutions. Our solutions provide a full suite of products and services required to produce, personalize and fulfill payment cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing design and production with an end-to-end offering of data personalization and services that are integrated within our customers’ operations and in certain cases utilize data links to transfer highly sensitive cardholder information. Such services are important to many of our customers not just for the payment cards themselves but as an essential element in utilizing them as part of their overall branding and marketing initiatives. We believe that our comprehensive solutions allow many of our customers to choose a single, trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +● Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry, including expertise with respect to complying with global technical standards for smart payment cards. We continuously work to enhance our offerings and to create and deliver next-generation products and solutions that meet the demands of the marketplace and our customers. Our eco-focused cards, including Second Wave cards featuring a core made with recovered ocean-bound plastic and Earthwise cards made with upcycled plastic, address customer demands for more eco-focused card options. Our expanding digital offerings include Card@Once, a proprietary and patented instant card issuance system and SaaS-based solution. We believe that our technological and operational capabilities, combined with our continuous innovation, gives us a competitive advantage. +● Integrations with the U.S. Payments Eco-system . We have developed and continue to expand technology integrations with certain financial institution platform providers, card processors, core banking systems, and mobile banking app providers. We have been implementing these integrations for more than 10 years to support the reselling of personalization services through our digital SaaS-based instant issuance solution. We believe +7 +Table of Contents +these technology integrations could enable us to provide additional digital services to customers, including our digital push provisioning service as a complement to physical cards. +● Network of High-Security Facilities. Each of our high-security facilities is audited for compliance with the PCI Security Standards Council by one or more of the Payment Card Brands, forming a network of compliant facilities in the United States. The Payment Card Brands’ attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our customers. These audit processes are long and complex, and our facilities and systems must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the complexity and investment needed to obtain and retain these compliance designations serves as a barrier to new entrants into our market. +● Experienced Leadership Team. We have an experienced leadership team focused on serving customers, driving innovation, generating efficient production and services processes, ensuring accountability, delivering timely and high-quality results, and generating long-term value for our stockholders. +Customers +We have developed long-lasting relationships with our customers by working together to enhance payment card programs and by providing innovative, high-quality solutions and customer service. We primarily sell in the U.S. market and our diverse customer base includes some of the largest issuers of secure credit and debit cards, the largest prepaid program managers, major financial institution platform providers and card processor organizations, leading fintechs, thousands of small to mid-sized financial institutions, and others. +Solutions for customer segments in our traditional markets include: +● Large card issuers (defined as the top 10 card issuers in the United States based on an average of cards issued during the past three years): secure debit and credit cards; +● Small to mid-sized financial institutions: secure debit and credit cards, card personalization services, instant card issuance, and other payment solutions including digital solutions. The small to mid-sized financial institutions market segment includes regional banks, independent community banks, credit unions, and others and is often served by us through Resellers. We define “Resellers” as financial institution platform providers and card processor organizations that assist financial institutions with their core banking operations, including management of their credit and debit card programs; +● Fintechs: secure debit and credit cards and card personalization services; +● Prepaid program managers: Prepaid Debit Cards, secure packaging solutions and other integrated prepaid card services. These prepaid program managers resell to their customer base which represents a significant number of U.S. distribution points, such as retail channels including national big box, grocery, and convenience/gas retailers, and others in various industries, and assist with the management and operations of their customers’ Prepaid Debit Cards programs; and +● Other: payment and non-payment cards for healthcare providers, entertainment venues, government disbursements, transit services and others. +CPI had one customer that accounted for 10% or more of its net sales in 2024. Net sales from this customer were approximately 18% of total net sales for the year ended December 31, 2024, and we have been serving this customer for nearly 20 years. Although our direct relationship is with this customer, this customer resells our services to a large number of indirect customers. Nearly two-thirds of our net sales for the year ended December 31, 2024 were from our top 10 customers, whom we have been serving for an average of more than 10 years. The majority of these sales are from Resellers, who provide our products and services to thousands of indirect customers. Through our direct and indirect customer relationships, a majority of our annual net sales in our Debit and Credit segment are derived from small to mid-sized financial institutions and fintechs. Individually, many of these customers, including independent community banks and credit unions, represent minor amounts of our annual net sales. +8 +Table of Contents +We typically enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangement that defines the quantities of products to be delivered or services rendered and other terms specific to the order, as appropriate. In most cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production +We have a network of high-security facilities that we leverage to fulfill customer orders, with an array of products and services available to our customers. We have attempted to design our facilities and operating processes to provide exceptional service to all customers, with capabilities to execute high-volume and lower-volume production runs and on-demand solutions. +As of December 31, 2024, we operated facilities comprising approximately 400,000 square feet in the United States, with the majority of the space dedicated to payment card production, personalization services, card packaging and fulfillment services. We are also in the process of constructing a new facility in Fort Wayne, Indiana, pursuant to a build-to-suit lease agreement, to which we intend to relocate our current Indiana operations. This new facility is intended to modernize our operations, increase efficiencies and provide additional capacity and capabilities to accommodate future growth. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and air freight to deliver finished products to our customers. Due to the high-security nature of the payment card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground and air freight. +In addition, we seek to embrace practices and solutions at our facilities designed to limit our impact on the environment, preserve natural resources and create innovative and responsible products. Our key areas of focus in this area include incorporating environmental sustainability practices when feasible in alignment with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more sustainable practices and products. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility, and meaningful, innovative products at value-driven pricing. We strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives, customer relationships and partners that provide a wide geographic reach across the United States to sell and market our solutions. Our sales representatives offer complete end-to-end solutions that incorporate the full spectrum of our products and services from concept to delivery. +Our sales and marketing strategy is focused on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. Our marketing efforts focus on the needs of our specific types of customers and leverage the strength of our full-service offerings to attract new customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet our customers’ individual needs. We use an array of marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. We also strive to develop new or enhanced products by innovating through research and development activities. We believe these efforts drive customer retention and satisfaction and attract new customers. +9 +Table of Contents +Competition +The market for products and services in the payment card industry is highly competitive. Competitive factors for our business include product quality, customer service, innovation, product line comprehensiveness and integration, timely introduction of new products, features and capabilities, and price. Although our company is smaller in size than the corporations that own some of our key competitors, we believe that our size and payment card related focus allow us to be more flexible and responsive to our customers’ needs. +We believe we are in competition with other card producers, card personalization service providers, card packaging providers, and others that provide technology and digital solutions related to payment cards, such as ABCorp, Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv, Giesecke & Devrient GmbH, HID Global, IDEMIA, Perfect Plastic Printing, Thales, Travel Tags, and WestRock (Multi Packaging Solutions), among others. +Certain of these competitors are global conglomerates that possess substantially greater financial, sales and marketing resources than we do and can offer additional integrated products and solutions. +In addition, certain existing and potential customers have the ability to produce and/or personalize debit and credit payment cards in-house. Accordingly, we compete with certain of our customers, including those that offer transaction processing products and services to financial institutions. +Suppliers +Our general procurement philosophy is to prevent or avoid being dependent on a single-source supplier. We believe we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them. However, certain components are only available from a single supplier, or substituting a component from a different supplier may require additional time and investment. Some of the most important components of our products include the microchips and antennas for our card products. Our main suppliers of microchips and antennas include three leading international producers with locations in Germany, Thailand, and Singapore, some of which source materials from Taiwan. For the year ended December 31, 2024, approximately 95% of our purchased microchips and antennas came from these three main suppliers, and approximately 78% came from one supplier, including most of our contactless chips. The other key components for our products are substrates and inlays. Our Second Wave payment cards feature a core made with ROBP, which we either have sourced or currently source from suppliers in Haiti and Thailand. +We monitor supply-chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation, resiliency and price. In 2022 in order to fulfill the demands of our customers and to mitigate the impact of supply chain shortages, we entered into a capacity reservation agreement with one of our chip suppliers to reserve production supply capacity. Under the agreement, we agreed to pay certain fees in exchange for the supplier’s commitment to reserve capacity to produce a set quantity of chips from 2023 through 2026, subject to certain conditions, and we have committed to purchase those chips. The total value of our commitment is approximately $190.0 million over the term of the agreement. As of December 31, 2024, the remaining commitment was $62.0 million. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements we consider necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to protect our intellectual property throughout the world. As of December 31, 2024, we had 66 U.S. and foreign trademark registrations and applications, 63 existing U.S. patents, 50 existing foreign patents, as well as 34 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 12 years, and our trademarks will be due for renewal for additional ten-year periods on an ongoing basis. +10 +Table of Contents +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a Reseller. Such information can include names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy statutes and regulations, certain of the PCI Security Standards Council’s requirements and the Health Insurance Portability and Accountability Act (“HIPAA”), each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws, and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +Under the PCI Security Standards Council’s requirements, we must meet certain security standards in order to achieve compliance that allows us to produce and personalize debit and credit cards issued on the Payment Cards Brands’ networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our utilization and digital storage of cardholder data. We believe that we have developed significant expertise in achieving and maintaining compliance with the requirements from the Payment Card Brands, and have invested, and will continue to invest, significant capital to achieve and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our market. +The status and interpretation of pending and existing laws and regulations is evolving and these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain aspects of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +11 +Table of Contents +The Dodd-Frank Wall Street Reform and Protection Act (the “Dodd-Frank Act”) set forth substantial reforms to the supervision and operation of the financial services industry, including the establishment of the Consumer Financial Protection Bureau (“CFPB”), which has broad supervisory, enforcement and rulemaking authority over consumer financial products and services. In certain circumstances, the CFPB has examination and supervision powers with respect to service providers who provide a material service to a covered financial institution offering consumer financial products and services, including service providers like us. Any new rules or regulations implemented by the CFPB or pursuant to the Dodd-Frank Act that are applicable to us or our customers’ businesses, or any adverse changes thereto, could increase our cost of doing business, require us to implement new or modified compliance processes or procedures or limit our current offerings. +Environmental Protection +Our operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Human Capital +Our leadership team has significant experience in the payment card industry, and many of our employees possess specialized career-long expertise and knowledge. Our compensation programs are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct employee surveys to measure employee engagement and identify areas of focus. +Employee health and safety in the workplace is one of our core values. The health and safety of our employees has remained paramount, and we have adapted our health and safety procedures and protocols as necessary to foster a safe working environment. We maintain a combination of on-site and remote employees in our workforce. +We are committed to equal employment opportunity, inclusion and belonging, through which we promote honest, ethical and respectful conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior, and employees are required to follow these standards and participate in related training. We encourage employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay. We also focus on a variety of community initiatives to enhance the lives of people in the communities where we operate through volunteerism, charitable giving and economic support. +As of December 31, 2024, approximately 1,500 people were employed by CPI, of which nearly half are women and approximately 60% identify as being within a minority category. Approximately 73% of our full-time employees are production and service facility staff. None of our employees are represented by labor unions. We believe that our relations with our employees are positive. +Available Information +We are a Delaware corporation and were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West Centennial Road, Littleton, CO 80127, telephone (720) 681-6304. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of our website (www.cpicardgroup.com), as soon as reasonably practical after they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which contains reports and information statements, and other information filed electronically with the SEC. +We qualify as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act and have elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. +12 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2024/0001558370-25-002098/item13.txt b/raw/filings/0001641614/2024/0001558370-25-002098/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..f6265212649297280225a8ef2dbb615fd39179c4 --- /dev/null +++ b/raw/filings/0001641614/2024/0001558370-25-002098/item13.txt @@ -0,0 +1,3 @@ +Item 13. +Certain Relationship s and Related Transactions, and Director Independence +The information required by this Item 13 is incorporated herein by reference to the discussion of “Directors and Corporate Governance” and “Certain Relationships and Related Party Transactions” of our definitive proxy statement for the 2025 annual meeting of stockholders. \ No newline at end of file diff --git a/raw/filings/0001641614/2024/0001558370-25-002098/item9a.txt b/raw/filings/0001641614/2024/0001558370-25-002098/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..d75a9afe367f8adbf95214a383e6c9ba2809f233 --- /dev/null +++ b/raw/filings/0001641614/2024/0001558370-25-002098/item9a.txt @@ -0,0 +1,12 @@ +Item 9A. +Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +Under the supervision of and with the participation of our management, including our CEO and our CFO, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2024. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, as discussed below, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective as of December 31, 2024. +Management’s Report on Internal Control over Financial Reporting +Management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. +Based on its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. +Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation, the Company’s management concluded that as of December 31, 2024, the Company’s internal control over financial reporting is effective. The Company’s independent registered public accounting firm audited the consolidated financial statements and related notes in the Annual Report on Form 10-K and have issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Their report appears in this Annual Report on Form 10-K. +Changes in Internal Control over Financial Reporting +There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our fourth quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting . +74 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2024/0001558370-25-002098/rp_note.txt b/raw/filings/0001641614/2024/0001558370-25-002098/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001641614/2024/0001558370-25-002098/rpt_disclosure.txt b/raw/filings/0001641614/2024/0001558370-25-002098/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..7bb2204ae1febd3a785efa1c3b64941ea0981087 --- /dev/null +++ b/raw/filings/0001641614/2024/0001558370-25-002098/rpt_disclosure.txt @@ -0,0 +1,13 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2024 to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them (each, a “Related Party”) had or will have a direct or indirect material interest. +Our related party transaction policies and procedures require Related Parties to disclose to our Chief Financial Officer any “interested transaction” (defined as any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships in which (1) the aggregate amount involved in any calendar year will or may be expected to exceed the lesser of (i) $120,000 or (ii) one percent of the average of the Company’s total assets at year end for the last two completed fiscal years, (2) the Company is, was or will be a participant, and (3) any Related Party has, had or will have a direct or indirect material interest) and all material facts with respect thereto. Our Chief Financial Officer will then communicate that information to our Audit Committee. No interested transaction entered into will be executed without the approval or ratification of our Audit Committee. +Registration Rights Agreement +On October 15, 2015, we entered into a registration rights agreement with Parallel49 (the “Parallel49 Registration Rights Agreement”) and on December 4, 2025, we entered into a Registration Rights Agreement Joinder with the Tricor Family Office (the “Joinder” and together with Parallel49 Registration Rights Agreement, the “Registration Rights Agreement”). Parallel49 and the Tricor Family Office are each beneficial holders of more than 5% of our capital stock. Under the Registration Rights Agreement, Parallel49 and the Tricor Family Office are entitled to request that we register shares of our Common Stock on a long-form or short-form registration statement on one or more occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. Parallel49 and the Tricor Family Office also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay Parallel49’s and the Tricor Family Office’s expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our Common Stock held by Parallel49 as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the Common Stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization or certain other corporate transactions, and (iii) any shares of our Common Stock owned or acquired following the closing of our initial public offering by Parallel49 (collectively, “Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. In September 2021, we filed a registration statement on Form S-3 with respect to the shares of Common Stock held by Parallel49 in compliance with our obligations under the Registration Rights Agreement. +Director Nomination Agreements +On October 15, 2015, we entered into the Parallel49 Director Nomination Agreement that provides Parallel49 the right to designate nominees for election to our Board for so long as Parallel49 collectively beneficially owns 5% or more of the total number of shares of our Common Stock then outstanding. On December 4, 2025, we entered into the Tricor Family Office Director Nomination Agreement that provides the Tricor Family Office the right to nominate individuals for election to our Board for so long as the Tricor Family Office beneficially owns 10% or more of the total number of shares of our Common Stock then outstanding. The number of nominees that Parallel49 is entitled to designate under the Parallel49 Director Nomination Agreement bears the same proportion to the total number of members of our Board as the number of shares of Common Stock beneficially owned by Parallel49 bears to the total number of shares of Common Stock outstanding, rounded up to the nearest whole number. The number of directors that the Tricor Family Office is entitled to nominate under the Tricor Family Office Director Nomination Agreement is based on the percentage of the outstanding Common Stock over which the Tricor Family Office and Parallel49 collectively have direct voting control in relation to the total number of directors then serving on our Board, limited by the greater of the number of directors that Parallel49 is then entitled to nominate or have serving on our Board pursuant to the Parallel49 Director Nomination Rights Agreement. In addition, Parallel49 and the Tricor Family Office are entitled to designate or nominate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term. Parallel49 and the Tricor Family Office, subject to certain limitations, also have the right to have their designees participate on committees of our Board, subject to compliance with applicable law and stock exchange rules. +36 +Table of Contents +Share Repurchase Agreements +In November 2023, the Company approved a share repurchase program (the “Share Repurchase Program”) to purchase up to $20 million of its Common Stock in open market and privately negotiated transactions. Subsequently, the Company entered into two agreements to repurchase Common Stock held by Tricor Pacific Capital Partners (Fund IV) US, LP (“Tricor US”), pursuant to which the Company agreed to purchase three times the number of shares of the Company’s Common Stock acquired by the Company in the open market from time to time from non-Tricor US holders during the periods commencing on December 6, 2023 and ending March 31, 2024 and commencing April 1, 2024 and ending June 30, 2024, up to an aggregate of 650,000 shares of Common Stock in total (the “Repurchase Agreements”). The Repurchase Agreements provided that such open market purchases would be made pursuant to the Share Repurchase Program. Additionally, the Repurchase Agreements provided that the repurchase price for any shares acquired by the Company from Tricor US would be 98% of the volume weighted average purchase price paid by the Company for all other shares acquired by the Company in the open market pursuant to the Share Repurchase Program during such fiscal quarter. The repurchases from Tricor US took place on April 5, 2024 and July 3, 2024 and were part of the Share Repurchase Program authorization levels. The Repurchase Agreements were approved by the Audit Committee. Additional information can be found in our Current Reports on Form 8-K, dated December 7, 2023 and March 15, 2024, and in our Form 10-K for the year-ended December 31, 2024 filed with the SEC. +Policies and Procedures for Related Party Transactions +Our Board has adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving the Company in which (1) the aggregate amount involved in any calendar year will or may be expected to exceed the lesser of (i) $120,000, or (ii) one percent (1%) of the average of the Company’s total assets at year end for the last two completed fiscal years, (2) the Company (including any of its subsidiaries(is, was or will be a participant, and (3) any related person has, had or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). For purposes of this policy, a related person is defined as an executive officer, director, nominee for director, or a greater than 5% beneficial owner of our Common Stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider, among other factors, the related party’s relationship to the Company and interest in the transaction, the material facts of the transaction, the benefits to the Company of the transaction, the availability of other sources of comparable products or services (if applicable), whether the transaction is on terms that are comparable to the terms generally available to an unrelated third party, whether the transaction has the potential to impair director independence and whether the transaction constitutes a conflict of interest. \ No newline at end of file